-----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, WywGEcznn3TrlP2lHLjifPlwhbUg0K1nLm4m6jRyASYedw22BvvrbkMPtU3e4qoW ZQSIRKJJbBM23XtcG7Ym0A== 0001047469-98-031056.txt : 19980814 0001047469-98-031056.hdr.sgml : 19980814 ACCESSION NUMBER: 0001047469-98-031056 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19980630 FILED AS OF DATE: 19980813 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: BASIN EXPLORATION INC CENTRAL INDEX KEY: 0000827795 STANDARD INDUSTRIAL CLASSIFICATION: CRUDE PETROLEUM & NATURAL GAS [1311] IRS NUMBER: 841143307 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-20125 FILM NUMBER: 98685633 BUSINESS ADDRESS: STREET 1: 370 SEVENTEENTH ST STE 1800 CITY: DENVER STATE: CO ZIP: 80202 BUSINESS PHONE: 3036858000 MAIL ADDRESS: STREET 2: 370 SEVENTEENTH STREET SUITE 1800 CITY: DENVER STATE: CO ZIP: 80202 10-Q 1 FORM 10-Q UNITED STATES 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 quarterly period ended June 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 0-20125 BASIN EXPLORATION, INC. (Exact name of registrant as specified in its charter) DELAWARE 84-1143307 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 370 17TH STREET, SUITE 3400, DENVER, CO 80202 (Address of principal executive offices) (Zip Code) (303) 685-8000 (Registrant's telephone number, including area code) 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 --- --- Indicate the number of shares outstanding of each of the issuer's classes of Common stock, as of the latest practicable date. Outstanding at Class July 31, 1998 ---------------------------- ----------------- Common stock, $.01 par value 13,881,000 shares BASIN EXPLORATION, INC. INDEX PART I. FINANCIAL INFORMATION PAGE Item 1. Consolidated Financial Statements Consolidated Balance Sheets as of December 31, 1997 and June 30, 1998. . . . . . . . . . . . . . 3 Consolidated Statements of Operations for the three and six months ended June 30, 1997 and 1998. . . . . . . 5 Consolidated Statements of Changes in Stockholders' Equity . . . . . . . . . . . . . . . . . . . . . 6 Consolidated Statements of Cash Flows for the six months ended June 30, 1997 and 1998. . . . . . . . . . . . 7 Notes to Consolidated Financial Statements . . . . . . . . . . 8 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations. . . . . . . . . . . . . . 10 PART II. OTHER INFORMATION Item 4. Submission of Matters to a Vote of Security Holders. . . . . . 20 Item 6. Exhibits and Reports on Form 8-K . . . . . . . . . . . . . . . 20 SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23 2 BASIN EXPLORATION, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS DECEMBER 31, 1997 AND JUNE 30, 1998 ASSETS
(In thousands) December 31, June 30, 1997 1998 ------------ -------- CURRENT ASSETS Cash and equivalents $ 531 $ 1,464 Accounts receivable 8,348 8,043 Prepaids and other 3,805 4,707 -------- -------- 12,684 14,214 -------- -------- PROPERTY AND EQUIPMENT, at cost: Oil and gas properties, under the full cost method of accounting Proved 177,704 213,508 Unproved 15,669 35,891 Less accumulated depreciation, depletion and amortization (46,284) (58,532) -------- -------- 147,089 190,867 Furniture and equipment, net 2,086 1,907 -------- -------- 149,175 192,774 -------- -------- OTHER ASSETS 100 38 -------- -------- $161,959 $207,026 -------- -------- -------- --------
The accompanying notes are an integral part of these consolidated financial statements. 3 BASIN EXPLORATION, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS DECEMBER 31, 1997 AND JUNE 30, 1998 LIABILITIES AND STOCKHOLDERS' EQUITY
(In thousands, except share data) December 31, June 30, 1997 1998 ------------ -------- CURRENT LIABILITIES: Accounts payable $ 8,087 $ 5,130 Accrued liabilities 12,067 12,605 Accrued ad valorem taxes 2,394 2,057 Income taxes payable 19 -- Current portion of long-term debt 153 131 -------- -------- 22,720 19,923 -------- -------- LONG-TERM DEBT, net of current portion 11,053 56,500 OTHER LONG-TERM OBLIGATIONS 266 424 DEFERRED INCOME TAXES 6,555 6,986 STOCKHOLDERS' EQUITY: Preferred stock, par value $.01 per share; 10,000,000 shares authorized, no shares issued and outstanding -- -- Common stock, par value $.01 per share, 50,000,000 shares authorized, 13,833,000 and 14,064,000 shares issued, respectively 138 141 Additional paid-in capital 110,627 112,595 Retained earnings 12,012 12,997 Common stock held in treasury, at cost, 120,000 and 183,000 shares, respectively (1,412) (2,540) -------- -------- Total stockholders' equity 121,365 123,193 -------- -------- $161,959 $207,026 -------- -------- -------- --------
The accompanying notes are an integral part of these consolidated financial statements. 4 BASIN EXPLORATION, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS
For the Three Months Ended For the Six Months Ended June 30, June 30, (In thousands, except per share data) 1997 1998 1997 1998 ------ ------ ------ ------- REVENUE: Oil sales $1,828 $ 2,697 $3,983 $ 5,387 Gas sales 689 9,219 1,771 16,764 Interest and other, net 49 (8) 224 13 ------ ------ ------ ------- 2,566 11,908 5,978 22,164 ------ ------ ------ ------- COSTS AND EXPENSES: Lease operating expenses 977 2,450 2,036 4,593 Production taxes 271 204 635 438 Depreciation, depletion and Amortization 1,236 6,741 2,396 12,727 General and administrative, net 817 990 1,603 2,102 Interest expense 142 375 171 788 ------ ------ ------ ------- 3,443 10,760 6,841 20,648 ------ ------ ------ ------- INCOME (LOSS) BEFORE INCOME TAXES (877) 1,148 (863) 1,516 Income tax benefit (provision) 307 (402) 302 (531) ------ ------ ------ ------- NET INCOME (LOSS) $ (570) $746 (561) $ 985 ------ ------ ------ ------- ------ ------ ------ ------- EARNINGS (LOSS) PER SHARE: Basic $(0.05) $0.05 $(0.05) $ 0.07 ------ ------ ------ ------- ------ ------ ------ ------- Diluted $(0.05) $0.05 $(0.05) $ 0.07 ------ ------ ------ ------- ------ ------ ------ ------- WEIGHTED AVERAGE COMMON SHARES OUTSTANDING: Basic 10,701 13,845 10,701 13,814 Diluted 10,701 14,524 10,731 14,381
The accompanying notes are an integral part of these consolidated financial statements 5 BASIN EXPLORATION, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY FOR THE PERIOD FROM JANUARY 1, 1997 THROUGH JUNE 30, 1998
ADDITIONAL TOTAL COMMON STOCK PAID-IN TREASURY STOCK RETAINED STOCKHOLDERS (In thousands) SHARES AMOUNT CAPITAL SHARES AMOUNT EARNINGS EQUITY - ------------------------------------------------------------------------------------------------------- BALANCES, January 1, 1997 10,757 $108 $ 59,219 (56) $ (132) $ 9,556 $ 68,751 Issuance of common stock 3,001 30 51,340 - - - 51,370 Common stock offering costs - - (499) - - - (499) Purchase of treasury stock - - - (64) (1,280) - (1,280) Issuance and vesting of restricted stock 75 - 567 - - - 567 Net income - - - - - 2,456 2,456 ------------------------------------------------------------------------ BALANCES, December 31, 1997 13,833 138 110,627 (120) (1,412) 12,012 121,365 Issuance of common stock 62 1 305 - - - 306 Purchase of treasury stock - - - (1) (20) - (20) Issuance and vesting of restricted stock 90 1 556 - - - 557 Exercise of warrants for common stock 79 1 1,107 (62) (1,108) - - Net income - - - - - 985 985 ------------------------------------------------------------------------- BALANCES, June 30, 1998 14,064 $141 $112,595 (183) $(2,540) $12,997 $123,193 ------------------------------------------------------------------------- -------------------------------------------------------------------------
The accompanying notes are an integral part of these consolidated financial statements. 6 BASIN EXPLORATION, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Six Months Ended June 30, (In thousands) 1997 1998 --------- --------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss) $ (561) $ 985 Adjustments to reconcile net income to net cash provided by operating activities - Depreciation, depletion and amortization 2,396 12,727 Deferred income tax provision (benefit) (302) 431 Stock compensation expense 127 319 Other (4) 16 Changes in operating assets and liabilities - Decrease (increase) in Receivables (2,142) 299 Prepaids and other (1,136) (839) (Decrease) increase in - Accounts payable and accrued liabilities 746 (663) Ad valorem taxes and other 591 (179) Income taxes payable (958) (19) -------- -------- Net cash provided by (used in) operating activities (1,243) 13,077 -------- -------- CASH FLOWS FROM INVESTING ACTIVITIES: Capital additions (34,200) (57,877) Proceeds from sale of property and equipment 195 22 -------- -------- Net cash used in investing activities (34,005) (57,855) -------- -------- CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from notes payable and long-term debt 14,500 56,000 Principle payments on notes payable and long-term debt (646) (10,575) Issuance of common stock - 312 Purchase of treasury stock - (20) Other (4) (6) -------- -------- Net cash provided by financing activities 13,850 45,711 -------- -------- INCREASE (DECREASE) IN CASH AND EQUIVALENTS (21,398) 933 CASH AND EQUIVALENTS, beginning of period 22,023 531 -------- -------- CASH AND EQUIVALENTS, end of period $ 625 $ 1,464 -------- -------- -------- -------- SUPPLEMENTAL CASH FLOW INFORMATION: Cash paid for interest, net of amounts capitalized $ 56 $ 546 -------- -------- -------- -------- Cash paid for income taxes $ 958 $ 119 -------- -------- -------- --------
The accompanying notes are an integral part of these consolidated financial statements. 7 BASIN EXPLORATION, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (1) UNAUDITED FINANCIAL STATEMENTS In the opinion of management, the accompanying unaudited consolidated financial statements contain all adjustments (consisting only of normal recurring items) necessary to present fairly the financial position of Basin Exploration, Inc. and its wholly-owned subsidiaries (collectively, "Basin" or the "Company") as of June 30, 1998, and the results of operations and cash flows for the three and six month periods presented. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to the Securities and Exchange Commission's rules and regulations. The results of operations for the periods presented are not necessarily indicative of the results to be expected for the full year. Management believes the disclosures made are adequate to ensure that the information is not misleading and suggests that these financial statements be read in conjunction with the Company's Annual Report on Form 10-K for the year ended December 31, 1997. (2) ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 133, Accounting for Derivative Instruments and Hedging Activities. The Statement establishes accounting and reporting standards requiring that every derivative instrument (including certain derivative instruments embedded in other contracts) be recorded in the balance sheet as either an asset or liability measured at its fair value. The Statement requires that changes in the derivative's fair value be recognized currently in earnings unless specific hedge accounting criteria are met. Special accounting for qualifying hedges allows a derivative's gains and losses to offset related results on the hedged item in the income statement, and requires that a company must formally document, designate, and assess the effectiveness of transactions that receive hedge accounting. The Company is required to adopt the Statement as of January 1, 2000. The Company may also implement the Statement as of the beginning of any fiscal quarter prior to that date. Statement 133 cannot be applied retroactively. The Company has not yet quantified the impacts of adopting Statement 133 on its financial statements and has not determined the timing or method of adoption of Statement 133. (3) ACCOUNTING FOR OIL AND GAS PROPERTIES The Company follows the full cost method of accounting for oil and gas properties. Under this method, all costs associated with the development, exploration and acquisition of oil and gas properties are capitalized. If capitalized costs, net of amortization and related deferred taxes, exceed the full cost ceiling, the excess would be expensed in the period such excess occurs. Calculation of the full cost ceiling includes an estimate of the discounted value of future net revenue attributable to proved reserves using various assumptions and parameters consistent with promulgations of the Securities and Exchange Commission, and such calculation is sensitive to changes in prevailing oil and gas sales prices. Oil and gas prices utilized in this calculation were 8 BASIN EXPLORATION, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS approximately 11% lower on an equivalent unit basis at June 30, 1998 than at December 31, 1997. Oil and natural gas prices have declined further subsequent to June 30, 1998. If prices remain at or below these levels, the Company may be required to recognize an impairment expense in a future period. 9 BASIN EXPLORATION, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion should be read in conjunction with the Consolidated Financial Statements and the Notes thereto. Basin Exploration, Inc. ("Basin" or the "Company") is a domestic independent oil and gas company that conducts exploration in the shallow waters of the Gulf of Mexico ("GOM") and acquisition and exploitation operations in the GOM and selected areas onshore. Basin's revenue and results of operations are significantly affected by oil and gas prices. Assuming level production, the Company's revenues would generally be higher in the first and fourth quarters due to typically higher natural gas prices resulting from greater demand during colder months. The Company commenced operations in 1981 and primarily acquired, developed and exploited properties in the Denver-Julesberg ("D-J") Basin in eastern Colorado through 1991. In 1992, the Company began expanding into other areas within the Rocky Mountain region and initiated exploration activities. In 1996, the Company sold its D-J Basin properties for $123.5 million (the "D-J Sales") and initiated operations in the GOM. The Company began GOM activities in 1996 with no initial property base in the region and early investments related primarily to acquisitions of three- dimensional seismic data and exploratory leasehold interests. The Company's first significant discovery in the GOM was the Eugene Island Block 65 #1 well, which was drilling at the end of 1996 and completed in 1997. First production from GOM assets was realized in August 1997 when the Company brought two wells drilled on Eugene Island Block 65 on-line. The Company added other proved properties in the GOM in 1997 through both exploratory drilling and acquisitions and at the beginning of the current year it owned interests in five producing properties and had nine wells under development on eight lease blocks. During the first half of 1998, five of these wells established initial production and produced for portions of the period. The Company participated in drilling nine GOM exploratory wells during the first half of 1998, of which six were apparent discoveries and three were dry holes. RESULTS OF OPERATIONS The following operating and financial data is provided to assist in understanding results of operations for the periods presented. 10 BASIN EXPLORATION, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Three Months Ended Six Months Ended June 30 June 30 - --------------------------------------------------------------------------------- 1997 1998 1997 1998 - --------------------------------------------------------------------------------- PRODUCTION: Oil (MBbl) 103 189 209 372 Gas (MMcf) 399 3,936 802 7,336 Total gas equivalents (MMcfe) 1,017 5,070 2,056 9,568 REVENUE (IN THOUSANDS): Oil sales $1,828 $ 2,697 $3,983 $ 5,387 Gas sales $ 689 $ 9,219 $1,771 $16,764 Total oil and gas sales $2,517 $11,916 $5,754 $22,151 AVERAGE SALES PRICE: Oil (PER Bbl) $17.73 $ 14.26 $19.09 $ 14.47 Gas (PER Mcf) $ 1.73 $ 2.34 $ 2.21 $ 2.29 Total gas equivalents (PER Mcfe) $ 2.47 $ 2.35 $ 2.80 $ 2.31 EXPENSES (PER Mcfe): Lease operating expenses $ 0.96 $ 0.48 $ 0.99 $ 0.48 Production taxes $ 0.27 $ 0.04 $ 0.31 $ 0.05 Depreciation, depletion and amortization $ 1.21 $ 1.33 $ 1.17 $ 1.33 General and administrative, net $ 0.80 $ 0.20 $ 0.78 $ 0.22
REVENUE. Oil and gas sales for the three months ended June 30, 1998 totaled $11,916,000, representing an increase of $9,399,000, or 373%, compared to the second quarter of 1997. A 399% increase in net oil and gas production was partially offset by a 5% decline in unit prices, based on net equivalent unit measures. Oil and gas sales for the six months ended June 30, 1998 totaled $22,151,000, representing an increase of $16,397,000, or 285%, compared to the first half of 1997. A 365% increase in net oil and gas production was partially offset by an 18% decline in unit prices, based on net equivalent unit measures. The significant increases in oil and gas production are attributable to contributions in 1998 from GOM properties. As noted above, the Company's first GOM production was realized in August 1997. Due to the addition of GOM production, which is predominantly natural gas, gas increased from 39% of net equivalent units produced in the first half of 1997 to 77% of the Company's total oil and gas production in the first half of 1998. See "Liquidity and Capital Resources" for additional discussion of oil and gas production. LEASE OPERATING EXPENSES. Due to increased production levels, lease operating expenses for the three and six months ended June 30, 1998 increased by $1,473,000, or 151%, and $2,557,000, or 126%, respectively, from the amounts reported for the comparable periods in the prior year. However, lease operating costs per Mcfe produced have declined by approximately 50% from 1997 to $0.48 during the three and six months ended June 30, 1998, because of inclusion in the current period of production from GOM wells, which typically have significantly lower average unit operating costs than the Company's Rocky Mountain properties. 11 BASIN EXPLORATION, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS PRODUCTION TAXES. Production taxes for the three and six months ended June 30, 1998 were $204,000, and $438,000, representing decreases of $67,000, or 25%, and $197,000, or 31%, respectively, from amounts reported for the comparable periods in 1997. These declines were due to reduced revenues from onshore properties caused primarily by lower oil and gas prices. Production taxes as a percent of oil and gas sales for the three and six months ended June 30, 1998 were 1.7 % and 2.0%, compared to 10.8% and 11.0%, respectively in 1997, due to inclusion of sales in 1998 from properties in federal waters offshore, which are generally not subject to production taxes. DEPRECIATION, DEPLETION AND AMORTIZATION. Depreciation, depletion and amortization expense for the three and six months ended June 30, 1998 was $6,741,000 and $12,727,000, representing increases of $5,505,000, or 445%, and $10,331,000, or 431%, respectively, compared to 1997. The increases were largely attributable to the nearly 400% increases in production volumes from 1997 to 1998. In addition, the depletion rate of $1.28 per Mcfe produced in the six months ended June 30, 1998 represented a 35% increase from the $0.95 per Mcfe average depletion rate during the first half of 1997. The higher rate is due to proved reserves added at a higher average unit cost than the Company's previous historical average and to the unfavorable impact on estimated proved reserve quantities of using lower assumed future oil and gas prices at June 30, 1998 than those used one year earlier. The increased unit cost of additions reflects the substantial portion of the Company's investments and reserve additions during the past year that relate to the GOM, where higher unit costs are generally associated with reserves having a higher value per unit than the Company's onshore properties due to typically faster recovery rates, lower production costs, and higher average realizable gas prices. GENERAL AND ADMINISTRATIVE, NET. General and administrative expenses for the three and six months ended June 30, 1998 were $990,000 and $2,102,000, reflecting increases of $173,000, or 21%, and $499,000, or 31%, respectively, as compared to 1997. The increases resulted primarily from greater stock-based incentive compensation accruals, reflecting, in part, increases in the price of the Company's common stock. Percentage increases in general and administrative expenses were much smaller than increases in production, resulting in declines in general and administrative expenses per Mcfe produced, from $0.80 and $0.78 during the three and six month periods ended June 30, 1997, to $0.20 and $0.22, respectively, in the three and six month periods ended June 30, 1998. INTEREST EXPENSE. Interest expense for the three and six months ended June 30, 1998 totaled $375,000 and $788,000, representing increases of $233,000, or 164%, and $617,000, or 361%, respectively, as compared to 1997. The increases were attributable to higher average borrowings partially offset by lower average interest rates and the capitalization of $377,000 of interest to unproved property costs in the second quarter of 1998, in accordance with Statement of Financial Accounting Standard No. 34. Average borrowings and applicable interest rates for the comparable periods are summarized below: 12 BASIN EXPLORATION, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, ------------------ ----------------- 1997 1998 1997 1998 Average borrowings (in thousands) $7,000 $46,600 $3,700 $34,600 Average interest rate on borrowings 6.8% 6.5% 6.8% 6.7%
INCOME TAX BENEFIT (PROVISION). The income tax benefits (provisions) for 1997 and 1998 approximate the amounts that would be calculated by applying statutory income tax rates to income before income taxes. LIQUIDITY AND CAPITAL RESOURCES Historically, the Company's principal sources of capital have been cash flow from operations, a revolving line of credit established with a group of banks (the "Credit Facility"), proceeds from asset sales, and proceeds from sales of common stock. The Company's principal uses of capital have been for exploration, acquisition, development and exploitation of oil and gas properties. The Company's accrual-basis capital expenditures during the first six months of 1998 totaled approximately $56.4 million. Net cash provided by operations before changes in working capital totaled $14.5 million during the recent six- month period. Other funds for investments during the period came from borrowings under the Credit Facility, which was also utilized during the period to increase net working capital by approximately $4.3 million. The Company closed the first half of 1998 with a working capital deficit of approximately $5.7 million, long-term debt of $56.5 million, and stockholders' equity of $123.2 million. The borrowing base under the Credit Facility was increased from $45 million to $75 million effective as of May 1, 1998, in conjunction with a regular semi- annual redetermination review. The next regular borrowing base redetermination review is scheduled to be completed as of November 1, 1998. However, the Company has requested an interim redetermination to incorporate recent additions to its proved reserves base and its higher production levels. The Company anticipates that this review will result in a further increase in its borrowing base during August 1998, and that the adjusted level will apply until the regularly scheduled borrowing base review to be completed effective November 1, 1998. The Company has established a budget of $80 million for anticipated exploration and development activities in 1998. Acquisitions of properties with proved and probable reserves are also pursued as an integral part of the Company's overall business strategy, but are not budgeted. The Company periodically considers changes to its budget to reflect changes in the general business environment, variances from assumptions, or specific business opportunities. As more fully described below, the Company is currently considering an increase to its 1998 budget. 13 BASIN EXPLORATION, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Factoring in its projections of net oil and gas production and price realizations, and assuming that the Company receives increases in the borrowing base under the Credit Facility at levels requested, management believes that cash flow from operations and borrowing capacity under the Credit Facility will be sufficient to fund the Company's operations and capital expenditures through the end of 1998 unless the Company consummates a substantial acquisition during the period. Sufficiency of these resources to fund capital expenditures at desired levels in 1999 will depend on a number of factors including, among others, the Company's future drilling success, oil and gas prices, and the production performance of the Company's properties (including recent discoveries currently under development). Each of these factors can significantly influence both cash flow and the level of the borrowing base established under the Credit Facility. The majority of the Company's planned capital expenditures are related to Company-operated properties, enabling the Company, to a considerable degree, to control the character and schedule of operations. PRODUCTION AND CASH FLOW In each of the four fiscal quarters following the D-J Sales (covering the period from July 1, 1996 through June 30, 1997), the Company's net oil and gas production was approximately 1,020 MMcfe, or an average of 11.2 MMcfe per day. During this period, net cash provided by operations before working capital changes ranged from $0.4 million to $2.2 million per quarter and averaged $1.3 million per quarter, varying primarily with oil and gas price levels. The flat oil and gas production during this period reflected modest capital expenditures on Rocky Mountain exploitation projects that offset natural declines on producing properties. During this period, the Company also made more significant investments in GOM exploration, development, and acquisition activities that did not begin to impact production and cash flow until the middle of the third quarter of 1997. During the third quarter of 1997, the Company's average daily net production increased to 28.0 MMcfe and cash flow from operations increased to $5.0 million, due to commencement of production in August from two wells on Eugene Island Block 65 that the Company drilled and completed earlier in the year. Average daily net production increased to 43.8 MMcfe in the fourth quarter of 1997, as the result of a full period's contribution from Eugene Island Block 65 and a partial period's contribution from four productive GOM properties acquired in late-November 1997 from the bankruptcy trustee for Midcon Offshore, Inc. ("Midcon"). Cash flow from operations increased to $8.7 million in the final quarter of 1997, reflecting this increase in production and higher average unit prices attributable to strength in natural gas markets. 14 BASIN EXPLORATION, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The Company's average daily net production increased in the first quarter of 1998 to approximately 50.0 MMcfe. This overall 14% increase over the prior quarter reflected an increased contribution from the Midcon properties and initial production from a 1997 discovery well on Eugene Island Block 83, partially offset by a decline in production from Eugene Island Block 65 caused by natural depletion and mechanical impediments that have since been partially remediated. The Company's average daily net production increased to approximately 55.7 MMcfe in the second quarter of 1998. The overall 13% increase over the first quarter of 1998 primarily reflected initial contributions from discoveries on West Cameron Block 56 and Galveston Block 213. Based on year-end 1997 reserve report estimations and recent developments, the Company's average daily net production is expected to increase further in 1998. The primary sources of increases are expected to be initial contributions from GOM wells with proved nonproducing reserves at the end of June 1998 and increased contributions from GOM wells that produced for only a portion of the recent quarter, partially offset by depletion-related declines on existing producing wells. The Company had three relatively significant GOM wells on-line for only a portion of the second quarter of 1998 and closed the period with interests in eight additional GOM wells with proved nonproducing reserves that were yet to establish sustained initial production, including five apparent discovery wells drilled during 1998. Production was initiated during July 1998 on two of these properties, South Timbalier Block 146 and Eugene Island Block 49. The Company does not anticipate initial production from any of the other properties presently under development during the quarter ending September 30, 1998. The Company expects that its future net cash flow will be determined substantially by production levels and oil and gas prices. Certain costs per unit of production have significantly improved as the Company has added production from GOM wells and are expected to continue to improve as scheduled increases in GOM production occur. These include: (i) production taxes, which are not applicable to properties in federal waters; (ii) lease operating expenses which tend to be significantly lower per unit in the GOM than for the Company's Rocky Mountain properties, especially for flush production from relatively new GOM wells; and (iii) general and administrative expenses, which are not expected to increase proportionately as GOM production increases. As a result, net cash provided by operations is expected to increase by a greater percentage than production volumes, given an assumption of constant or rising oil and gas prices. MARKETING AND HEDGING TRANSACTIONS The Company's production is generally sold under month-to-month contracts at prevailing prices. From time to time, however, as conditions are deemed to warrant, Basin has entered into hedging transactions or fixed price sales contracts for a portion of its oil and gas production. The purposes of these transactions are to limit the Company's exposure to future oil and gas price declines and achieve a more predictable cash flow, or to seek to enhance profitability through improved net price 15 BASIN EXPLORATION, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS realizations. However, such contracts may limit the benefits the Company would realize if prices increase or expose the Company to losses having the effect of reducing net price realizations. Through August 11, 1998, Basin had entered into the following crude oil and natural gas price swap or collar arrangements covering the period beginning July 1, 1998:
Average Bbls or Mcf Average Price Product Per Day Or Collar Range Time Period - ------------------------------------------------------------------------------ Crude Oil 333 $ 21.30 7/98-10/98 Crude Oil 1,000 $17.80-19.85 7/98-8/98 Natural Gas 35,000 $ 2.37 7/98-9/98 Natural Gas 30,000 $ 2.49 10/98 Natural Gas 10,000 $ 2.15 1/99-12/01
In addition the Company periodically enters into spread trades or options transactions related to oil or natural gas futures markets. Under a spread trade, fixed prices under a hedging contract are determined in the future by reference to the price of an underlying contract. Such positions may enable the Company to lock in favorable fixed prices for future hedging positions, but can also result in unfavorable fixed price contracts if the reference price represented by the underlying contract declines. As of August 11, 1998, the Company had entered into spread trades for natural gas providing for a fixed price for 40,000 Mcf per day for calendar 1999 to be established in the future upon an election by the Company by reference to the underlying NYMEX January 1999 contract price less $0.275. The Company also had sold call options for 10,000 Mcf of natural gas per day for the period from January 1999 through December 2001 that have an average strike price of $2.50 per Mcf. CREDIT FACILITY The Credit Facility with a bank group led by NationsBank of Texas, N.A. provides for the interest rate on the Company's borrowings to be determined by reference to either NationsBank's prime rate or LIBOR, at the Company's election. A varying spread of 0% to 0.5% is added to the prime rate, or 0.625% to 1.25% is applied to LIBOR, based upon the Company's debt-to-capitalization ratio at the time. The Credit Facility provides for borrowings to be revolving loans through October 31, 2001, at which time the outstanding balance will be converted into a four-year amortizing term loan unless the Credit Facility has been amended to extend the revolving period. The borrowing base under the Credit Facility, established at $75 million as of May 1, 1998, is scheduled to be redetermined as of November 1, 1998 and generally at six-month intervals thereafter until converted into a term loan. As noted above, an interim borrowing base redetermination has been initiated, with the expectation that the borrowing base will be increased from the current level of $75 million during August 1998. 16 BASIN EXPLORATION, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS At June 30, 1998, the principal balance outstanding under the facility was $56.5 million, with a weighted average interest rate of 6.4%. The Credit Facility contains various covenants, including ones that could limit the Company's ability to incur other debt, dispose of assets, pay dividends, or repurchase stock. Pursuant to the agreement governing the Credit Facility, certain of the Company's onshore properties are subject to mortgages in favor of the banks and the Company's remaining properties are subject to a negative pledge and the bank's right to secure mortgages in certain circumstances. CAPITAL EXPENDITURES Since the beginning of 1996, Basin has focused its exploration activities in the shallow waters of the GOM, primarily off the coast of Louisiana. The Company's acquisition, development, and exploitation activities target opportunities in the vicinity of the Company's GOM exploration operations, in the Rocky Mountain region where Basin has a substantial existing base of proved reserves and producing wells, and in certain other major domestic producing basins where Basin believes significant upside potential exists. The Company's capital expenditures are generally discretionary and activity levels are determined by a number of factors, including oil and gas prices, availability of funds, quantity and character of identified investment projects, availability of service providers, and competition. The Company's budget for anticipated capital expenditures for exploration and development in 1998 is currently established at approximately $80 million. This budget primarily provides for: participation in an estimated 15 to 20 (nine net) exploratory wells in the GOM; development of six GOM prospect discoveries made in the second half of 1997; exploitation and development of five GOM properties acquired last year, including two wells drilled in 1997 that were under development at year-end; development of projected 1998 prospect discoveries; and investments in prospect leaseholds and seismic data. During the first half of 1998, the Company's accrual-basis capital expenditures totaled approximately $56.4 million, including $34.6 million for exploration and development, $20.6 million for acquisition of 12 (11.25 net) leases through the March 1998 Central Gulf of Mexico lease sale and $1.2 million for acquisitions of proved property interests. The expenditures on exploration and development were primarily for participation in nine (4.0 net) GOM exploratory wells, related completion costs on six (2.8 net) of these, development of several GOM properties acquired or discovered during the prior year, and acquisitions of additional GOM three-dimensional seismic data and leasehold interests. During the first half of 1998, the Company participated in six (2.8 net) apparent exploratory discoveries. The Company's drilling success rate and the average size of these discoveries were greater than assumed early in the year for purposes of budget preparation. Primarily to provide 17 BASIN EXPLORATION, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS additional development capital for these discoveries, the Company is presently considering an increase in its budget. Such increase may also provide for a modest increase in exploratory drilling activity to take advantage of recent declines in drilling rig rates and other service sector costs. In addition to these budgeted capital expenditures, the Company intends to continue to pursue acquisitions of properties with proved and probable reserves as an integral part of its overall business strategy, with the expectation that such efforts will periodically result in significant investment activity. The amount and allocation of the Company's future capital expenditures will depend on a number of factors that are not entirely within the Company's control or ability to forecast, including drilling results, scheduling of activities by other operators, availability of service providers, success in acquiring prospect leaseholds, and success in consummating acquisitions of proved properties. As a result, actual capital expenditures may vary significantly from current expectations. Under certain circumstances, in order to prudently fund its planned investments, the Company may consider raising additional capital through issuance of debt and/or equity securities. 18 BASIN EXPLORATION, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS CERTAIN FACTORS THAT MAY AFFECT FUTURE RESULTS Statements that are not historical facts contained in this report are forward-looking statements that involve risks and uncertainties that could cause actual results to differ from projected results. Such statements address activities, events or developments that the Company expects, believes, projects, intends or anticipates will or may occur, including such matters as future accessibility of capital, development and exploration expenditures (including the amount, nature and timing thereof), drilling of wells, timing and amount of future production of oil and gas, business strategies, cash flow and anticipated liquidity, borrowing base increases, prospect development and property acquisition, marketing of oil and gas, and the impact on the Company of Year 2000 compliance requirements both internally and externally. Factors that could cause actual results to differ materially ("Cautionary Disclosures") are described, among other places, in the Company's prospectus dated October 2, 1997 and prospectus supplement dated October 24, 1997 and in the Marketing, Competition, and Regulation sections of the Company's Annual Report on Form 10-K for the year ended December 31, 1997, all as filed with the Securities and Exchange Commission, and under the caption "Management's Discussion and Analysis of Financial Condition and Results of Operations" included herewith. Without limiting the Cautionary Disclosures so described, Cautionary Disclosures include, among others: general economic conditions, the market price of oil and gas, the risks associated with exploration, the Company's ability to find, acquire, market, develop and produce new properties, operating hazards attendant to the oil and gas business especially in the harsh operating environment of the Gulf of Mexico, downhole drilling and completion risks that are generally not recoverable from third parties or insurance, the Company's relative inexperience in the GOM, uncertainties in the estimation of proved reserves and in the projection of future rates of production and timing of development expenditures, potential mechanical failure or underperformance of individually significant productive wells, the strength and financial resources of the Company's competitors, the Company's ability to find and retain skilled personnel, climatic conditions, labor relations, availability and cost of material and equipment, delays in anticipated start-up dates, environmental risks, the results of financing efforts, actions or inactions of third-party operators of the Company's properties, regulatory developments, and third-party Year 2000 compliance actions. All written and oral forward-looking statements attributable to the Company or persons acting on its behalf are expressly qualified in their entirety by the Cautionary Disclosures. The Company disclaims any obligation to update or revise any forward-looking statement to reflect events or circumstances occurring hereafter or to reflect the occurrence of anticipated or unanticipated events. 19 BASIN EXPLORATION, INC. AND SUBSIDIARIES PART II OTHER INFORMATION ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS Proxies for the Company's annual meeting of shareholders held on May 5, 1998, were solicited pursuant to Regulation 14A during the quarter ended June 30, 1998. There was no solicitation in opposition to the nominees listed in the proxy statement and all such nominees were elected. The following is a summary of the matters voted upon at such meeting and the number of votes cast for, against and absententions:
Number of Votes Cast --------------------------------------- For Against Abstain --------- --------- ------- Election of Directors Donald H. Anderson 9,961,723 - 636,808 Michael S. Smith 9,961,723 - 636,808 Larry D. Unruh 9,961,723 - 636,808 Amend Equity Incentive Plan 7,104,045 3,489,230 5,256 Ratify selection of Arthur Andersen LLP as auditors 10,574,018 21,457 3,056
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits EXHIBIT NUMBER DESCRIPTION OF EXHIBITS - ------- ----------------------- 2.1 -- Agreement and Plan of Merger between Sterling Energy Corporation, Basin Energy, Inc. and Basin Exploration, Inc. dated October 13, 1994(5) 2.2 -- Plan of Merger between Basin Sterling, Inc. and Basin Exploration, Inc. dated November 22, 1994(5) 2.3 -- Plan of Merger between Basin Operating Company and Basin Exploration, Inc. dated December 14, 1994(8) 3.1 -- Restated Certificate of Incorporation of Basin.(2) 3.2 -- Restated Bylaws of Basin.(2) 4.1 -- Common Stock Certificate of Basin.(2) 10.1 -- Equity Incentive Plan as amended February 2, 1998.(17) 10.3 -- Key Employee Participation Plan.(2) 10.4 -- Employment Agreement dated March 31, 1992 by and between Basin and Michael S. Smith.(3) 10.5 -- Gulf Coast Geoscientist Overriding Royalty Interest Plan dated November 30, 1995.(10) 10.6 -- Form of Rights Agreement dated as of February 24, 1996, between Basin Exploration, Inc. and Corporate Stock Transfer, Inc. as Rights Agent.(9) 10.7 -- Performance Shares Plan approved February 4, 1997.(12) 10.8 -- Change of Control Employment Agreement dated October 13, 1995 between Basin Exploration, Inc. and Howard L. Boigon.(10) 10.9 -- Employment Agreement dated August 28, 1995 between Basin Exploration, Inc. and Samuel D. Winegrad.(10) 10.10 -- Employment Agreement dated June 28, 1995 between Basin Exploration, Inc. and Neil L. Stenbuck.(10) 20 10.11 -- Employment Agreement dated November 10, 1995 between Basin Exploration, Inc. and David A. Pustka.(10) 10.12 -- Employment Agreement dated February 23, 1996 between Basin Exploration, Inc. and Thomas J. Corley.(12) 10.13 -- Assignment and Assumption of Lease dated December 18, 1995 by and between Team, Inc., as original Tenant, Basin Exploration, Inc., as New Tenant, and FC Tower Property Partners, L.P., as Landlord.(9) 10.16 -- Agreement for Purchase and Sale of Assets (Monetization) dated February 24, 1996 by and between Basin Exploration, Inc., HS Resources, Inc. and Orion Acquisition, Inc.(7) 10.17 -- Agreement for Purchase and Sale of Assets (Wattenberg), dated February 24, 1996 by and between Basin Exploration, Inc., HS Resources, Inc. and Orion Acquisition, Inc.(7) 10.18 -- Lease of Office Space dated September 25, 1992, between Brookfield Republic Inc. and Basin Operating Company, as amended(4)(#) 10.19 -- First Lease of Additional Office Space dated as of December 1, 1994, between Brookfield Republic, Inc. and Basin Operating Company.(6)(#) 10.20 -- Amended and Restated Credit Agreement dated August 6, 1996 between the Company and Colorado National Bank, Union Bank of California, N.A. and NationsBank of Texas, N.A.(11) 10.21 -- Purchase and Sale Agreement dated February 13, 1997, between Hall-Houston Oil Company et al as Sellers and Basin Exploration, Inc. as Buyer.(12)(#) 10.22 -- First Amendment of Amended and Restated Credit Agreement dated August 6, 1996 between the Company and Colorado National Bank, Union Bank of California, N.A. and NationsBank of Texas, N.A. dated June 11, 1997(14) 10.23 -- Order of the United States Bankruptcy Court for the Southern District of Texas Corpus Christi Division, dated November 18, 1997, with exhibits, including the Agreement of Purchase and Sale.(15) 10.24 -- Second Amendment of Amended and Restated Credit Agreement dated August 6, 1996 between the Company and Colorado National Bank, Union Bank of California, N.A. and NationsBank of Texas, N.A. dated November 1, 1997(16) 10.25 -- Third Amendment of Amended and Restated Credit Agreement dated August 6, 1996 between the Company and U.S. Bank National Association, Union Bank of California, N.A. and NationsBank of Texas, N.A. dated April 30, 1998(17). 21 -- Subsidiaries.(16) 27 -- Financial Data Schedule(1) - ------------ (1) Filed herewith. (2) Filed as an Exhibit to Basin's Registration Statement on Form S-1 as filed on March 17, 1992, Registration No. 33-46486, and incorporated herein by reference. (3) Filed as an Exhibit to Amendment No. 1 to Basin's Registration Statement on Form S-1 as filed on April 21, 1992, Registration No. 33-46486, and incorporated herein by reference. (4) Filed as an Exhibit to Basin's Registration Statement on Form S-1 as filed on October 25, 1993, Registration No. 33-70802, and incorporated herein by reference. (5) Filed as an Exhibit to Form 8-K filed on December 10, 1994, and incorporated herein by reference. (6) Filed as an Exhibit to Form 10-K/A-1 filed on June 26, 1995 and incorporated herein by reference. (7) Filed as an Exhibit to Form 8-K filed on March 6, 1996, and incorporated herein by reference. (8) Filed as an Exhibit to Form 10-K filed on March 28, 1995, and incorporated herein by reference. (9) Filed as an Exhibit to Form 8-K filed on February 26, 1996, and incorporated herein by reference. (10) Filed as an Exhibit to Form 10-K filed on March 28, 1996, and incorporated herein by reference. (11) Filed as an Exhibit to Form 10-Q filed on August 14, 1996, and incorporated herein by reference. (12) Filed as an Exhibit to Form 10-K filed on March 31, 1997, and incorporated herein by reference. 21 (13) Filed as an Exhibit to Form 10-Q filed on May 15, 1997, and incorporated herein by reference. (14) Filed as an Exhibit to Form 10-Q filed on August 12, 1997, and incorporated herein by reference. (15) Filed as an Exhibit to Form 8-K filed on December 11, 1997, and incorporated herein by reference. (16) Filed as an Exhibit to Form 10-K filed on March 31, 1998, and incorporated herein by reference. (17) Filed as an Exhibit to Form 10-Q filed on May 14, 1998, and incorporated herein by reference. (#) Confidential treatment has been granted for portions of these Exhibits. (b) Reports on Form 8-K None 22 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. BASIN EXPLORATION, INC. (Registrant) Date: August 11, 1998 By: /s/ Neil L. Stenbuck ------------------------------------ Neil L. Stenbuck Chief Financial Officer Date: August 11, 1998 By: /s/ James A Tuell ------------------------------------ James A. Tuell Controller (Principal Accounting Officer) EX-27 2 EXHIBIT 27
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE COMPANY'S UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS FOR THE SIX MONTHS ENDED JUNE 30, 1998, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 6-MOS DEC-31-1998 JAN-01-1998 JUN-30-1998 1,464 0 8,043 0 458 14,214 255,677 62,903 207,026 19,923 56,500 0 0 141 123,052 207,026 22,151 22,164 5,031 19,860 0 0 788 1,516 531 985 0 0 0 985 .07 .07
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