-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, RmABzuu4zeP4oujP5lcEksIY0M3J1ovIN3sJBY8jBfwNWNK0GJ+prIhIuZGmrOcf ipamju7kSTsH1/8i4TO2tQ== 0000899243-98-002111.txt : 19981116 0000899243-98-002111.hdr.sgml : 19981116 ACCESSION NUMBER: 0000899243-98-002111 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19980930 FILED AS OF DATE: 19981113 FILER: COMPANY DATA: COMPANY CONFORMED NAME: BELLWETHER EXPLORATION CO CENTRAL INDEX KEY: 0000319459 STANDARD INDUSTRIAL CLASSIFICATION: CRUDE PETROLEUM & NATURAL GAS [1311] IRS NUMBER: 760437769 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-09498 FILM NUMBER: 98746563 BUSINESS ADDRESS: STREET 1: 1331 LAMAR STREET 2: SUITE 1455 CITY: HOUSTON STATE: TX ZIP: 77010 BUSINESS PHONE: 7136501025 MAIL ADDRESS: STREET 1: 1221 LAMAR STREET 2: STE 1600 CITY: HOUSTON STATE: TX ZIP: 77010-3039 10-Q 1 FORM 10-Q SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ______________ FORM 10-Q (Mark One) X Quarterly Report Pursuant to Section 13 or 15(d) of the --------------- Securities Exchange Act of 1934 FOR THE QUARTER ENDED SEPTEMBER 30, 1998 or _______________ Transition Report Pursuant to Section 13 or 15 (d) of the Securities Exchange Act of 1934 For the Transition Period From __________ to __________ Commission file number 0-9498 BELLWETHER EXPLORATION COMPANY (Exact name of registrant as specified in its charter) Delaware 74-0437769 (State of incorporation) (IRS Employer Identification Number) 1331 Lamar, Suite 1455 Houston, Texas 77010-3039 (Address of principal executive offices) (ZIP Code) Registrant's telephone number, including area code: (713) 650-1025 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes X No --- --- As of November 5, 1998, 14,138,824 shares of common stock of Bellwether Exploration Company were outstanding. 1 BELLWETHER EXPLORATION COMPANY INDEX
PART I. FINANCIAL INFORMATION Page # ITEM 1. Financial Statements Condensed Consolidated Balance Sheets: September 30, 1998 (Unaudited) and December 31, 1997.................... 3 Condensed Consolidated Statements of Operations (Unaudited): Three and nine months ended September 30, 1998 and September 30, 1997... 5 Condensed Consolidated Statements of Cash Flows (Unaudited): Nine months ended September 30, 1998 and September 30, 1997............. 6 Notes to Condensed Consolidated Financial Statements (Unaudited)............. 8 ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations....................................... 12 PART II. OTHER INFORMATION........................................................... 20
2 PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS BELLWETHER EXPLORATION COMPANY CONDENSED CONSOLIDATED BALANCE SHEETS (Amounts in thousands) ASSETS
September 30, December 31, 1998 1997 ------------------- ------------------- (Unaudited) CURRENT ASSETS: Cash and cash equivalents....................................... $ 7,767 $ 2,699 Accounts receivable and accrued revenues........................ 10,904 18,293 Due from related parties........................................ 238 4,645 Prepaid expenses and other...................................... 3,385 3,240 ------------------- ------------------- Total current assets........................................... 22,294 28,877 ------------------- ------------------- PROPERTY AND EQUIPMENT, AT COST: Oil and gas properties (full cost method)....................... 282,047 249,271 Gas plant facilities............................................ 16,742 16,717 ------------------- ------------------- 298,789 265,988 Accumulated depreciation, depletion and amortization............ (111,490) (85,855) ------------------- ------------------- 187,299 180,133 ------------------- ------------------- OTHER ASSETS.................................................... 5,331 5,747 ------------------- ------------------- $ 214,924 $214,757 =================== ===================
See accompanying notes to condensed consolidated financial statements 3 BELLWETHER EXPLORATION COMPANY CONDENSED CONSOLIDATED BALANCE SHEETS (Amounts in thousands, except share information) LIABILITIES AND STOCKHOLDERS' EQUITY
September 30, December 31, 1998 1997 -------------------- -------------------- (Unaudited) CURRENT LIABILITIES: Accounts payable and accrued liabilities....................... $ 15,664 $ 14,241 Due to related parties......................................... 1,228 672 -------------------- -------------------- Total current liabilities..................................... 16,892 14,913 -------------------- -------------------- LONG-TERM DEBT................................................. 100,000 100,000 DEFERRED INCOME TAXES.......................................... 6,036 7,106 OTHER LIABILITIES.............................................. 200 1,069 STOCKHOLDERS' EQUITY: Preferred stock, $0.01 par value, 1,000,000 shares authorized; none issued or outstanding at September 30, 1998 and December 31, 1997............................................. --- --- Common stock, $0.01 par value, 30,000,000 shares authorized, 14,138,791 and 13,891,465 shares issued at September 30, 1998 and December 31, 1997, respectively September 30, 1998 141 139 and December 31, 1997, respectively.......................... Additional paid-in capital..................................... 80,285 78,470 Retained earnings.............................................. 12,728 13,060 Treasury stock, at cost, 220,800 shares........................ (1,358) --- -------------------- -------------------- Total stockholders' equity................................... 91,796 91,669 -------------------- -------------------- $214,924 $214,757 ==================== ====================
See accompanying notes to condensed consolidated financial statements 4 BELLWETHER EXPLORATION COMPANY CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED) (Amounts in thousands, except per share information)
Three Months Ended Nine Months Ended September 30, September 30, -------------------------- -------------------------- 1998 1997 1998 1997 ----------- ----------- ----------- ----------- REVENUES: Oil and gas revenues............................. $18,299 $20,526 $58,029 $49,747 Gas plant operations, net........................ 371 394 918 1,672 Interest and other income........................ 364 257 877 567 ----------- ----------- ----------- ----------- 19,034 21,177 59,824 51,986 ----------- ----------- ----------- ----------- COST AND EXPENSES: Production expenses.............................. 6,277 6,628 19,170 15,004 Depreciation, depletion and amortization......... 8,057 8,357 25,616 19,764 General and administrative expenses.............. 2,032 1,811 6,640 4,401 Interest expense................................. 2,951 3,006 8,906 6,963 ----------- ----------- ----------- ----------- 19,317 19,802 60,332 46,132 ----------- ----------- ----------- ----------- Income (loss) before income taxes................. (283) 1,375 (508) 5,854 Provision (benefit) for income taxes.............. (96) 518 (176) 2,085 ----------- ----------- ----------- ----------- NET INCOME (LOSS)................................. $ (187) $ 857 $ (332) $ 3,769 =========== =========== =========== =========== Net income (loss) per share....................... $(0.01) $0.06 $(0.02) $0.31 =========== =========== =========== =========== Net income (loss) per share-diluted............... $(0.01) $0.06 $(0.02) $0.30 =========== =========== =========== =========== Weighted average common shares outstanding...................................... 14,121 13,864 14,103 12,166 =========== =========== =========== =========== Weighted average common shares outstanding-diluted.............................. 14,121 14,419 14,103 12,456 =========== =========== =========== ===========
See accompanying notes to condensed consolidated financial statements 5 BELLWETHER EXPLORATION COMPANY CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (Amounts in thousands)
Nine Months Ended September 30, ----------------------------------------------- 1998 1997 ----------------------------------------------- CASH FLOWS FROM OPERATING ACTIVITIES: NET INCOME (LOSS).................................................... $ (332) $ 3,769 Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depreciation, depletion and amortization........................ 26,256 20,264 Deferred income taxes........................................... (787) 2,099 -------------------- -------------------- 25,137 26,132 Change in assets and liabilities: Accounts receivable and accrued revenue............................. 7,390 7,043 Accounts payable and other liabilities.............................. 1,454 2,865 Due from related parties............................................ 4,963 6,825 Other............................................................... (1,724) (8,136) -------------------- -------------------- NET CASH FLOWS PROVIDED BY OPERATING ACTIVITIES..................... 37,220 34,729 -------------------- -------------------- CASH FLOWS FROM INVESTING ACTIVITIES: Acquisitions of oil and gas properties, including working capital acquired................................................. --- (149,914) Additions to properties and facilities.............................. (32,874) (21,964) Proceeds from sales of properties................................... 578 21,004 -------------------- -------------------- NET CASH FLOWS USED IN INVESTING ACTIVITIES......................... (32,296) (150,874) -------------------- -------------------- CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from borrowings............................................ --- 144,300 Net proceeds from issuance of common stock.......................... --- 34,839 Payments of long-term debt.......................................... --- (55,300) Exercise of stock options........................................... 1,502 --- Purchase of treasury shares......................................... (1,358) --- -------------------- -------------------- NET CASH FLOWS PROVIDED BY FINANCING ACTIVITIES..................... 144 123,839 -------------------- -------------------- Net increase in cash and cash equivalents........................... 5,068 7,694 Cash and cash equivalents at beginning of period.................... 2,699 450 -------------------- -------------------- CASH AND CASH EQUIVALENTS AT END OF PERIOD........................... $ 7,767 $ 8,144 ==================== ====================
See accompanying notes to condensed consolidated financial statements 6 BELLWETHER EXPLORATION COMPANY CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (continued) (UNAUDITED) (Amounts in thousands)
Nine Months Ended September 30, -------------------------------------- 1998 1997 ----------------- ---------------- SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Cash paid during the period for: Interest.................................................... $5,639 $1,272 Income taxes................................................ $1,412 $ 144
See accompanying notes to condensed consolidated financial statements 7 BELLWETHER EXPLORATION COMPANY Notes to Condensed Consolidated Financial Statements (Unaudited) 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with instructions to Form 10-Q and, therefore, do not include all disclosures required by generally accepted accounting principles. However, in the opinion of management, these statements include all adjustments, which are of a normal recurring nature, necessary to present fairly the financial position at September 30, 1998 and December 31, 1997, and the results of operations and changes in cash flows for the periods ended September 30, 1998 and 1997. These financial statements should be read in conjunction with the consolidated financial statements and notes to the consolidated financial statements in the December 31, 1997 Form 10-K of Bellwether Exploration Company ("the Company") that was filed with the Securities and Exchange Commission on March 27, 1998. Certain reclassifications of prior period statements have been made to conform with current reporting practices. In order to prepare these financial statements in conformity with generally accepted accounting principles, management of the Company has made a number of estimates and assumptions relating to the reporting of assets and liabilities, the disclosure of contingent assets and liabilities, and reserve information. Actual results could differ from those estimates. 2. ACQUISITIONS On April 9 and 15, 1997, the Company closed acquisitions of oil and gas properties (the "Partnership Transactions"), totaling $145.2 million (inclusive of working capital acquired of $13.9 million), from certain partnerships and other entities managed or sponsored by Torch Energy Advisors Incorporated ("Torch"). The acquisitions were financed by the sale of 4.4 million shares of common stock, the sale of $100.0 million of 10-7/8% senior subordinated notes due in 2007 and borrowings under the Company's senior unsecured revolving credit facility. The following table presents the unaudited pro forma results of operations as if the Partnership Transactions had occurred on January 1, 1997. The Partnership Transactions were accounted for as purchases, and their results of operations are included in the Company's results of operations from the date of acquisition. The Company's pro forma results are based on assumptions and estimates and are not necessarily indicative of the Company's results of operations in the future or such results had the transaction occurred as of January 1, 1997 (in thousands, except earnings per share). 8 BELLWETHER EXPLORATION COMPANY Notes to Condensed Consolidated Financial Statements (Continued) (Unaudited)
(UNAUDITED) ----------------------------- NINE MONTHS ENDED SEPTEMBER 30, 1997 ----------------------------- Revenues.............................................................. $78,250 Expenses.............................................................. 61,210 -------------------- Income before income taxes............................................ 17,040 Income taxes.......................................................... 6,224 -------------------- Net earnings.......................................................... $10,816 ==================== Net earnings per common share......................................... $ 0.78 ==================== Net earnings per common share-diluted................................. $ 0.77 ====================
3. STOCKHOLDERS' EQUITY In accordance with SFAS No. 128, the Company retroactively restated all prior period EPS data (including interim EPS) included in these financial statements and footnotes. The impact of adopting SFAS 128 is immaterial. SFAS No. 128 also requires a reconciliation of the numerator and denominator of the basic EPS computation to the numerator and denominator of the diluted EPS computation. For the nine months ended September 30, 1998, diluted earnings per common share are not calculated below since the issuance or conversion of additional securities would have an anti-dilutive effect. SFAS NO. 128 RECONCILIATION (AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS):
For the Nine Months Ended For the Nine Months Ended September 30, 1998 September 30, 1997 ----------------------------------------------- ----------------------------------------------- Income Shares Per Share Income Shares Per Share (Numerator) (Denominator) Amount (Numerator) (Denominator) Amount ------------- ------------- ------------- ------------- ------------- ------------- EARNINGS (LOSS) PER COMMON SHARE: Income (loss) available to common stockholders................... $(332) 14,103 $(0.02) $3,769 12,166 $0.31 ============= ============= EFFECT OF DILUTIVE SECURITIES: Options and Warrants............ $ --- --- $ --- 290 ------------- ------------- ------------- ------------- EARNINGS (LOSS) PER COMMON SHARE-DILUTED: Income (loss) available to common stockholders and assumed conversions.................... $(332) 14,103 $(0.02) $3,769 12,456 $0.30 ============= ============= ============= ============= ============= =============
9 BELLWETHER EXPLORATION COMPANY Notes to Condensed Consolidated Financial Statements (Continued) (Unaudited) Securities that could potentially dilute basic earnings per share in the future, that were not included in the computation of diluted earnings per share because to do so would have been antidilutive are as follows: For the Nine Months Ended September 30, 1998 (Shares) --------------------------- Options and Warrants 254,000 ======= In September 1998, the Company's Board of Directors authorized the repurchase of up to $5 million of the Company's common stock. As of September 30, 1998, 220,800 shares had been acquired at an aggregate price of $1,358,000. These treasury shares are reported at cost as a reduction to Stockholders' Equity. 4. LONG TERM DEBT In April 1997, the Company entered into a senior unsecured revolving credit facility ("Senior Credit Facility") in an amount up to $90.0 million, with an initial borrowing base of $90.0 million to be redetermined annually, and a maturity date of March 31, 2002. The Company may elect an interest rate based either on a margin plus LIBOR or the higher of the prime rate or the sum of 1/2 of 1% plus the Federal Funds Rate. For LIBOR borrowings, the interest rate will vary from LIBOR plus 0.875% to LIBOR plus 1.25% based upon the borrowing base usage. In connection with the acquisition of oil and gas properties, $33.3 million was drawn under this facility ($22 million of which was used to retire outstandings under the previous bank credit facility). As of September 30, 1998 the borrowing base was $75 million and there were no balances outstanding under the Senior Credit Facility. The Senior Credit Facility contains various covenants including certain required financial measurements for current ratio, consolidated tangible net worth and interest coverage ratio. In addition, the Senior Credit Facility includes certain limitations on restricted payments, dividends, incurrence of additional funded indebtedness and asset sales. In April 1997, the Company issued $100.0 million of 10-7/8% senior subordinated notes ("Notes") that mature April 1, 2007. Interest on the Notes is payable semi-annually on April 1 and October 1. The Notes are guaranteed by the Company's wholly-owned subsidiaries, Odyssey Petroleum Company, Black Hawk Oil Company and 1989-I TEAI Limited Partnership. The Notes contain certain covenants, including limitations on indebtedness, liens, dividends and other payment restrictions affecting restricted subsidiaries, issuance and sales of restricted subsidiary stock, dispositions of proceeds of asset sales and restrictions on mergers and consolidations or sales of assets. Effective September 22, 1998, the Company entered into an eight and a half year interest rate swap agreement with a notional value of $80 million. Under the agreement, the Company receives a fixed interest rate and pays a floating interest rate based on the simple average of three foreign LIBOR 10 BELLWETHER EXPLORATION COMPANY Notes to Condensed Consolidated Financial Statements (Continued) (Unaudited) rates. Floating rates are redetermined for a six month period each April 1 and October 1. The floating rate for the period from inception to April 1, 1999 is 9.73%. Through April 1, 2002 the floating rate is capped at 10.875% and capped at 12.375% thereafter. 5. NEW ACCOUNTING PRONOUNCEMENTS In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities." This statement establishes standards of accounting for and disclosures of derivative instruments and hedging activities. This statement is effective for fiscal years beginning after June 15, 1999. The Company has not yet determined the impact of this statement on the Company's financial condition or results of operations. 6. NATURAL GAS AND CRUDE OIL HEDGING Commodity derivatives utilized as hedges include swap contracts. In order to qualify as a hedge, price movements in the underlying commodity derivative must be sufficiently correlated with the hedged commodity. Settlement of gains and losses on price swap contracts are realized monthly, generally based upon the difference between the contract price for a given month and the average closing New York Mercantile Exchange ("NYMEX") price for such month and are reported as a component of oil and gas revenues and operating cash flows in the period realized. Gains and losses attributable to the termination of a swap contract are deferred on the balance sheet and recognized in revenue when the hedged crude oil and natural gas is sold. There were no such deferred gains or losses at September 30, 1998 or 1997. Oil and gas revenues increased $1,877,000 and $2,840,000, in the three and nine months ended September 30, 1998, respectively, and decreased by $656,000 and $646,000 in the three and nine month periods in 1997, respectively, as a result of such hedging activity. 11 BELLWETHER EXPLORATION COMPANY ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL Condition and Results of Operations Liquidity and Capital Resources The Company strives to maximize long-term shareholder value through growth in reserves and cash flow using advanced technologies, implementation of a low cost structure and maintenance of a capital structure supportive of growth. The Company employs an integrated interdisciplinary team approach to a balanced program of strategic acquisitions of producing oil and gas properties and technology driven development and exploration activities. The funding of these activities has historically been provided by operating cash flows, bank financing, equity placements and sale of non-core assets. The Company invested $32.9 million in oil and gas properties for the nine months ended September 30, 1998 versus $22.0 million in 1997. Cash flows from operations before changes in assets and liabilities were $25.1 million for the nine months ended September 30, 1998 compared to $26.1 million provided by operating activities in the same period of 1997. At September 30, 1998, the Company had $75 million of available debt capacity under the Senior Credit Facility. Partnership Transactions In April 1997, the Company purchased oil and gas properties and $13.9 million of working capital from affiliates of Torch for an adjusted purchase price of $145.2 million. The acquisitions were recorded effective April 1, 1997 and the operations of the Company include the Partnership Transactions from that date. The Partnership Transactions were financed with $34.1 million of the net of proceeds of a Common Stock offering, $97.0 million from the net proceeds of 10 7/8% Senior Subordinated Notes due 2007 (the "Offerings") and borrowings under the Senior Credit Facility. In addition, for advisory services rendered in connection with the Partnership Transactions, Torch was issued 150,000 shares of the Company's common stock and a warrant to purchase an additional 100,000 shares at $9.90 per share. The warrant and shares were valued at $1.5 million and recorded as a cost of the Partnership Transactions. Change in Fiscal Year Effective July 1, 1997 the Company changed its fiscal year to the calendar year. As a result, the Company reported a six month transition period ended December 31, 1997. Fiscal 1998 Capital Expenditures During fiscal 1998, the Company anticipates investing approximately $44.0 million, primarily for development and exploratory drilling activities and leasehold and seismic acquisitions. The Company believes its cash flow provided by operating activities and the proceeds from credit facilities will be sufficient to meet these projected capital investments (See Notes 2 and 4 of the Notes to Condensed Consolidated Financial Statements). The Company continues to seek acquisition opportunities and the consummation of such a transaction will directly impact anticipated capital expenditures. 12 BELLWETHER EXPLORATION COMPANY Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) Derivative Financial Instruments The Company periodically uses derivative financial instruments to manage oil and gas price risk. The Company has current contracts to hedge a total of 2,941 MMBTU of gas during the months of October through November 1998 at a weighted average NYMEX quoted price of $2.28 per MMBTU. In addition, the Company has sold calls options on 1,000 barrels of oil per day for the months of October through December 1998 at a strike price of $18.50 for a premium of $1.00 per barrel. Such call options do not qualify as hedges for accounting purposes and, therefore, are marked to market. Oil and Gas Property Accounting The Company utilizes the full cost method of accounting for its investment in oil and gas properties. Under this method of accounting, all costs of acquisition, exploration and development of oil and gas reserves are capitalized as incurred. To the extent that capitalized costs of oil and gas properties, net of accumulated depreciation, depletion and amortization, exceed the discounted future net revenues of proved oil and gas reserves net of deferred taxes, such excess capitalized costs would be charged to operations. While no such charges to operations were required during the nine month periods ending September 30, 1998 or 1997, the continuing decline in oil prices could result in discounted future net revenues below the capitalized costs of the Company's oil and gas properties. In such event, a provision for impairment of oil and gas properties could be required. 13 BELLWETHER EXPLORATION COMPANY Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) Results of Operations The following table sets forth certain operating information of the Company for the periods presented:
Three Months Ended Nine Months Ended September 30, September 30, -------------------------------- --------------------------------- 1998 1997 1998 1997 ------------- -------------- -------------- -------------- Production: Oil and condensate (MBBLs)...................... 583 614 1,760 1,325 Natural gas (MMCF).............................. 5,109 5,458 16,865 13,196 Average sales price: /(1)/ Oil and condensate (per BBL).................... $11.52 $15.45 $ 11.80 $ 16.02 Natural gas (per MCF).......................... $ 1.90 $ 2.14 $ 2.04 $ 2.21 Average costs: Production expenses (per BOE)................... $ 4.38 $ 4.35 $ 4.20 $ 4.26 General and administrative expense (per BOE).................................... $ 1.42 $ 1.19 $ 1.45 $ 1.25 Depreciation, depletion and amortization (per BOE)/(3)/............................... $ 5.42 $ 5.34 $ 5.42 $ 5.42
(1) Average sales prices exclude the effect of hedges, which increased revenues by $1,877,000 and $2,840,000 in the three and nine month periods in 1998, respectively, and decreased revenues by $656,000 and $646,000 in the three and nine month periods in 1997, respectively. (2) Excludes depreciation, depletion and amortization on gas plants of $283,000 and $844,000 in the three and nine month periods in 1998, respectively and of $221,000 and $663,000 in the three and nine months periods in 1997, respectively. Three Months Ended September 30, 1998 and 1997 Net income (or loss) for the quarters ended September 30, 1998 and 1997 was ($.2) million or ($.01) per share, assuming dilution and $.9 million or $.06 per share, assuming dilution, respectively. The loss is primarily due to the decline in oil prices. Oil and gas revenues for the three months ended September 30, 1998 were $18.3 million, as compared to $20.5 million for the respective period in 1997. The 11% decrease in oil and gas revenues is primarily due to the decline in oil prices. Oil prices averaged $11.52 per barrel in the three month period ended September 30, 1998 as compared to $15.45 per barrel in the comparable period of 1997. This represents a 25% decline in oil prices and translates into a $2.3 million decrease in oil revenues. Partially offsetting such decline is a favorable gas price variance due to hedging activities. Approximately 83% of the current quarter's gas production was hedged at a weighted average Nymex price of $2.35 per MMBTU, resulting in a $.7 million favorable gas price variance. 14 BELLWETHER EXPLORATION COMPANY Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) Production volumes reflect a temporary decline due to four tropical storms and other non-recurring events. Oil production was down 5% compared to the same quarter of 1997 with 583,000 and 614,000 barrels for the three month periods ended September 30, 1998 and 1997, respectively. Gas production was down 6% compared to the same quarter of 1997 with 5,109,000 and 5,458,000 million cubic feet (Mcf) for the three month periods ended September 30, 1998 and 1997, respectively. Net gas plant operating profit was $371,000 in the three months ended September 30, 1998 and $394,000 in the same period of 1997. Throughput was lower than anticipated due to reduced production volumes from the North SACROC Unit. Tertiary recovery projects which have been expanded to increase such North SACROC Unit production have begun to increase the Snyder gas plant throughput. Production expenses for the three months ended September 30, 1998 totaled $6.3 million, or 5% below the $6.6 million for the three months ended September 30, 1997. This savings is directly related to the December 1997 auction of lower margin properties. On a per BOE basis production expenses have increased slightly for the three months ended September 30, 1998 as compared to the comparable period of 1997. This results from the temporary volume decrease from the tropical storms and other non-recurring events mentioned above. For the quarter ended September 30, 1998, production expenses per BOE would have been $.33 less had the temporary volume decreases not occurred. Depreciation, depletion and amortization was $8.1 million for the three months ended September 30, 1998 and $8.4 million for the three month period ended September 30, 1997. The decline is due to the volume decrease mentioned above. General and administrative expenses totaled $2.0 million in the three months ended September 30, 1998 as compared to $1.8 million for the comparable period of fiscal 1997. Interest expense remained flat at $3.0 million for the three months ended September 30, 1998 and $3.0 million in the same period of 1997. The provision for federal and state income taxes for the three months ended September 30, 1998 and 1997 are based upon a 34%, and 38% effective tax rate, respectively. Nine Months Ended September 30, 1998 and 1997 Net income or (loss) for the nine months ended September 30, 1998 and 1997 was ($.3) million or ($.02) per share, assuming dilution, and $3.8 million or $.30 per share, assuming dilution, respectively. The nine-month period ended September 30, 1998 includes the Partnership Transaction for the full nine months while the nine months ended September 30, 1997 includes the Partnership Transaction since April 1997, six months of activity. Due to the decline in oil prices, the increased revenues from the Partnership Transactions 15 BELLWETHER EXPLORATION COMPANY Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) are less than the increased production expenses, general and administrative, depreciation, depletion and amortization and interest expense for the nine-month period ended September 30, 1998. Oil and gas revenues for the nine months ended September 30, 1998 were $58.0 million, as compared to $49.7 million for the respective period in 1997. Oil prices have declined 26% from $16.02 per barrel in the nine months ended September 30, 1997 to $11.80 per barrel in the current period which translate into a $7.4 million unfavorable oil price variance. Natural gas prices declined 8% from $2.21 per Mcf in the nine months ended September 30, 1997 to $2.04 per Mcf for the nine months ended September 30, 1998. The unfavorable gas price variance was essentially offset by hedging activities since approximately 78% of the nine-month periods' production was hedged at an average Nymex price of 2.21 per MMBTU. Partially offsetting such unfavorable price variance were favorable volume variances resulting from the Partnership Transaction. Net gas plant operating profit was $918,000 in the nine months ended September 30, 1998 and $1,672,000 in the same period of 1997. The Snyder gas plant was temporarily shut in 5 days in January for work attributable to a small accident in an adjacent plant and 3 days in February to tie in new equipment. In addition, throughput was lower than anticipated due to reduced production volumes from the North SACROC Unit. Tertiary recovery projects which have been expanded to increase such North SACROC Unit production have begun to increase the Snyder gas plant throughput. Interest and other income increased to $.9 million in the nine months ended September 30, 1998 from $.6 million in the comparable period of 1997. Increased tax credit revenue and interest income resulting from the Partnership Transaction caused the favorable variance. Production expenses for the nine months ended September 30, 1998 totaled $19.1 million, or 27% over the $15.0 million for the nine months ended September 30, 1997, due primarily to the effect of the Partnership Transactions. Depreciation, depletion and amortization was $25.6 million and $19.8 million for the nine months ended September 30, 1998 and 1997, respectively. The increase resulted from a 30% increase in oil and gas production primarily attributable to the Partnership Transactions. General and administrative expenses totaled $6.6 million in the nine months ended September 30, 1998 as compared to $4.4 million for the comparable period of fiscal 1997 reflecting higher management fees and fixed costs resulting from the increase in assets and cash flows. In addition, $.3 million of costs were incurred in March 1998 as a result of the Company closing its Dallas exploration office. Interest expense increased to $8.9 million for the nine months ended September 30, 1998 from $7.0 million in the same period of 1997 due to debt incurred in financing of the Partnership Transactions in April 1997. The provision (benefit) for federal and state income taxes for the nine months ended September 30, 1998 and 1997 are based upon a 35% and 36% effective tax rate, respectively. 16 BELLWETHER EXPLORATION COMPANY Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) Year 2000 The Year 2000 problem refers to the inability of computer and other information technology systems to properly process date and time information. The problem was caused, in part, by the programming practice of using two digits rather than four to represent the year in a date. The consequence of the Year 2000 problem is that information technology and embedded processing systems are at risk of malfunction, particularly during the transition between 1999 to 2000. For purposes of its Year 2000 compliance program, the Company has divided its computer systems into information technology ("IT systems") and embedded chip technology. IT systems include the Company's mainframe and personal computer systems used for financial analysis, oil and gas reserve estimates, seismic analysis, reservoir management, oil and gas marketing, payroll and similar applications. Embedded chips refer to the systems which monitor and control the Company's field operations, primarily its drilling and production activities. The Company's field operations are highly automated and rely on hundreds of embedded chips to monitor and control rates of production, temperature, pressure and similar factors. The Company outsources a substantial portion of its information technology and field operations to Torch Energy Advisors, Inc. ("Torch"). The Company and Torch have jointly developed a plan to address the Company's Year 2000 issues. (As used in the remainder of this discussion, references to the Company include the Torch employees assisting the Company in its Year 2000 compliance program.) The Company's Year 2000 compliance program is divided into four parts, documentation, testing, upgrading and contingency planning, as summarized in the following table: DOCUMENTATION: IT Systems Identify and document all IT systems which rely on date and time information. Research the procedures used by these systems to handle date and time information. Gather information relating to Year 2000 compliance from the manufacturers and designers of the systems. Categorize systems from essential to non-essential. EMBEDDED CHIPS Locate all embedded chip technology used in field operations. Gather documentation for embedded technology, including procedures used to handle date and time information.
17 BELLWETHER EXPLORATION COMPANY Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) TESTING: IT Systems Determine which systems are mission critical to the business and test date handling, based on level of risk and available, acceptable workarounds. EMBEDDED CHIPS Assemble a list of assets to be tested, considering each asset's risk to 1) issues of health and safety, 2) environmental concerns, 3) economic factors, and 4) other business risks as appropriate. UPGRADING: IT Systems Hardware and software that fail testing will be updated with available vendor patches or replaced. EMBEDDED CHIPS Exposures and possible remediation efforts will be reviewed with regard to risk in 1) issues of health and safety, 2) environmental concerns, 3) economic factors, and 4) other business risks, with consideration of potential workarounds and contingency plans. Remediation effort is targeted to be complete by June 30, 1999. CONTINGENCY For each business function, the respective functional PLANNING: management will develop contingency plans to carry on business. Such plans are targeted for completion by June 30, 1999.
Status and Cost of Year 2000 Compliance Project For its IT systems, the Company has substantially completed the documentation of all of the systems believed to be necessary for its operations. The Company anticipates that testing of its IT systems will be completed by the end of February 1999, and that any necessary upgrading of these systems will be completed in the first half of 1999. Expenditures to make its IT systems Year 2000 compliant are expected to be nominal because a substantial portion of its systems and information technology is outsourced to Torch. With respect to embedded chips, the Company has substantially completed the documentation of its known embedded chips. The cost of this documentation was not material to the Company. Testing and upgrading embedded chips, however, presents significant challenges to the Company, primarily because of the number of embedded chips which control the Company's production facilities. In addition, multiple embedded chips are frequently connected in systems which may exchange date and time information, making it necessary to insure that each of the embedded chips included in the system treats the Year 2000 problem in a manner 18 BELLWETHER EXPLORATION COMPANY Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) allowing the system to properly function. It is also possible that the procedures used to test embedded chips will damage the chips resulting in interruptions of production. The Company does not expect the cost of testing and upgrading its embedded chips to be material. This belief is based, however, on the assumption that the number of date related failures in the Company's embedded systems will not exceed that which has generally been documented in the industry, and that the testing of embedded chips will not result in destruction of the systems tested and the consequent interruptions in production. If these assumptions are incorrect, the Company may incur material costs in connection with testing and remedying Year 2000 problems. In addition, if the Company is not successful and ultimately experiences Year 2000 related failures, the costs attributable to lost production, damages to facilities and environmental damages may be material. "Food Chain" Problems Year 2000 failures affecting the Company's vendors and service providers could negatively impact the Company. The Company's primary customers are refiner's and natural gas marketers and pipelines. These customers are heavily dependent upon embedded chip technology. Although the Company has sent letters to its major customers requesting information about Year 2000 readiness, the Company does not have the ability to require responses to such letters or to independently verify their accuracy. The Company plans to continually review the Year 2000 readiness of its material customers. Year 2000 related failures of the Company's customers may have a material adverse effect on the Company. Forward Looking Statements This Form 10-Q contains "forward looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended and Section 21E of the Securities Exchange Act of 1934, as amended. All statements other than statements of historical facts included herein, including without limitation, statements under "Management's Discussion and Analysis of Financial Condition and Results of Operations" and in the notes to the financial statements regarding the Company's financial position, capital budget, intent to acquire oil and gas properties, estimated quantities and net present values of reserves, business strategy, plans and objectives of management of the Company for future operations, and the Year 2000 problem, are forward-looking statements. There can be no assurances that such forward looking statements will prove to have been correct. Important factors that could cause actual results to differ materially from the Company's expectations ("Cautionary Statements") include the volatility of oil and gas prices, operating hazards, government regulations, exploration risks and other factors described in the Company's Form 10-K filed with the Securities and Exchange Commission. All subsequent written and oral forward-looking statements attributable to the Company or persons acting on its behalf are expressly qualified by the Cautionary Statements. 19 BELLWETHER EXPLORATION COMPANY PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS None. ITEM 2. CHANGES IN SECURITIES None. ITEM 3. DEFAULTS UPON SENIOR SECURITIES None. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. ITEM 5. OTHER INFORMATION None. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K a. Exhibits The following exhibits are filed with this Form 10-Q and they are identified by the number indicated. 27 Financial Data Schedule b. Reports on Form 8-K. None. 20 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. BELLWETHER EXPLORATION COMPANY ------------------------------ (Registrant) Date: November 13, 1998 By:/s/ J. Darby Sere' ------------------------ ------------------ J. Darby Sere' Chairman and Chief Executive Officer Date: November 13, 1998 By:/s/ William C. Rankin ------------------------ --------------------- William C. Rankin Senior Vice President and Chief Financial Officer 21 EX-27 2 FINANCIAL DATA SCHEDULE
5 1,000 3-MOS DEC-31-1998 JUL-01-1998 SEP-30-1998 7,767 0 11,142 0 0 22,294 298,789 (111,490) 214,924 16,892 100,000 0 0 141 91,655 214,924 58,029 59,824 44,786 60,332 6,640 0 8,906 (508) (176) (332) 0 0 0 (332) $(0.02) $(0.02)
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