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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 March 31, 2004
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission file number 001-16179
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ENERGY PARTNERS, LTD.
(Exact name of registrant as specified in its charter)
Delaware 72-1409562
(State or other jurisdiction (I.R.S. employer
of incorporation or organization) identification number)
201 St. Charles Avenue, Suite 3400
New Orleans, Louisiana 70170
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code: (504) 569-1875
--------------------------------
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 by check mark whether the registrant is an accelerated filer (as
defined by Rule 12b-2 of the Exchange Act). Yes [X] No [ ]
As of April 30, 2004, there were 32,906,902 shares of the Registrant's
Common Stock, par value $0.01 per share, outstanding.
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-1-
TABLE OF CONTENTS
Page
----
PART I FINANCIAL STATEMENTS
Item 1. Financial Statements:
Consolidated Balance Sheets as of March 31, 2004 and
December 31, 2003......................................................... 3
Consolidated Statements of Operations for the three months ended
March 31, 2004 and 2003................................................... 4
Consolidated Statements of Cash Flows for the three months ended
March 31, 2004 and 2003................................................... 5
Notes to Consolidated Financial Statements ........................................... 6
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations..................................................... 16
Item 3. Quantitative and Qualitative Disclosures about Market Risk.......................... 21
Item 4. Controls and Procedures............................................................. 22
PART II OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.................................................... 23
-2-
ITEM 1. FINANCIAL STATEMENTS
ENERGY PARTNERS, LTD. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
March 31, December 31,
2004 2003
--------- ------------
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents ................................................ $ 95,327 $ 104,392
Trade accounts receivable ................................................ 48,710 35,315
Deferred tax assets ...................................................... 2,401 2,939
Prepaid expenses ......................................................... 2,513 2,106
--------- ---------
Total current assets .............................................. 148,951 144,752
Property and equipment, at cost under the successful efforts
method of accounting for oil and gas properties .......................... 636,584 598,101
Less accumulated depreciation, depletion and amortization ....................... (234,785) (210,013)
--------- ---------
Net property and equipment ........................................ 401,799 388,088
Other assets .................................................................... 6,488 6,575
Deferred financing costs -- net of accumulated amortization
of $3,496 in 2004 and $3,267 in 2003 ..................................... 4,544 4,766
--------- ---------
$ 561,782 $ 544,181
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable ......................................................... $ 16,972 $ 14,650
Accrued expenses ......................................................... 44,375 42,487
Fair value of commodity derivative instruments ........................... 5,809 3,814
Current maturities of long-term debt ..................................... 101 99
--------- ---------
Total current liabilities ......................................... 67,257 61,050
Long-term debt .................................................................. 150,191 150,317
Deferred tax liabilities ........................................................ 32,016 29,584
Asset retirement obligation ..................................................... 40,006 40,577
Other ........................................................................... 1,613 1,168
--------- ---------
291,083 282,696
Stockholders' equity:
Preferred stock, $1 par value. Authorized 1,700,000 shares;
issued and outstanding: 2004 - 346,443 shares; 2003 - 368,076
shares. Aggregate liquidation value: 2004 - $34,644; 2003 - $36,808.. 33,053 34,894
Common stock, par value $0.01 per share. Authorized
50,000,000 shares; issued and outstanding:
2004 - 32,804,459 shares; 2003 - 32,241,981
shares .............................................................. 328 323
Additional paid-in capital ............................................... 233,713 228,511
Accumulated other comprehensive loss -- net of deferred taxes of
$2,091 in 2004 and $1,373 in 2003 ................................... (3,717) (2,441)
Retained earnings ........................................................ 7,322 198
--------- ---------
Total stockholders' equity ........................................ 270,699 261,485
Commitments and contingencies.............................................
--------- ---------
$ 561,782 $ 544,181
========= =========
See accompanying notes to consolidated financial statements.
-3-
ENERGY PARTNERS, LTD.
CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 2004 AND 2003
(Unaudited)
(In thousands, except per share data)
2004 2003
-------- --------
Revenue:
Oil and natural gas ........................................... $ 63,419 $ 56,954
Other ......................................................... 53 283
-------- --------
63,472 57,237
-------- --------
Costs and expenses:
Lease operating ............................................... 9,774 8,017
Taxes, other than on earnings ................................. 2,242 2,371
Exploration expenditures and dry hole costs ................... 9,465 1,307
Depreciation, depletion and amortization ...................... 18,737 17,572
General and administrative:
Stock-based compensation ................................... 857 126
Other general and administrative ........................... 7,316 7,439
-------- --------
Total costs and expenses ............................... 48,391 36,832
-------- --------
Income from operations ........................................... 15,081 20,405
-------- --------
Other income (expense):
Interest income ............................................... 242 21
Interest expense .............................................. (3,574) (1,821)
-------- --------
(3,332) (1,800)
-------- --------
Income before income taxes and cumulative effect
of change in accounting principle .................... 11,749 18,605
Income taxes ..................................................... (4,303) (6,691)
-------- --------
Net income before cumulative effect of change in
accounting principle ................................. 7,446 11,914
Cumulative effect of change in accounting principle,
net of income taxes of $1,276 ................................. - 2,268
-------- --------
Net income ............................................. 7,446 14,182
Less dividends earned on preferred stock
and accretion of discount ..................................... (929) (855)
-------- --------
Net income available to common stockholders ............ $ 6,517 $ 13,327
======== ========
Earnings per share:
Basic:
Before cumulative effect of change in accounting principle .... $ 0.20 $ 0.40
Cumulative effect of change in accounting principle ........... - 0.08
-------- --------
Basic earnings per share ...................................... $ 0.20 $ 0.48
======== ========
Diluted:
Before cumulative effect of change in accounting principle .... $ 0.20 $ 0.37
Cumulative effect of change in accounting principle ........... - 0.07
-------- --------
Diluted earnings per share .................................... $ 0.20 $ 0.44
======== ========
Weighted average common shares used in
Computing earnings per share:
Basic ...................................................... 32,428 27,651
Incremental common shares .................................. 5,279 4,850
-------- --------
Diluted .................................................... 37,707 32,501
======== ========
See accompanying notes to consolidated financial statements.
-4-
ENERGY PARTNERS, LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED MARCH 31, 2004 AND 2003
(Unaudited)
(In thousands)
2004 2003
--------- ---------
Cash flows from operating activities:
Net income .................................................................. $ 7,446 $ 14,182
Adjustments to reconcile net income to net cash
provided by operating activities:
Cummulative effect of change in accounting principle, net of tax.. - (2,268)
Depreciation, depletion and amortization ......................... 18,737 17,572
Gain on sale of oil and gas assets ............................... - (207)
Non-cash compensation ............................................ 906 126
Deferred income taxes ............................................ 4,303 6,691
Exploration expenditures ......................................... 7,810 311
Amortization of deferred financing costs ......................... 229 86
Other ............................................................ 53 50
Changes in operating assets and liabilities:
Trade accounts receivable ................................... (14,298) (20,708)
Prepaid expenses ............................................ (407) 703
Other assets ................................................ 87 (598)
Accounts payable and accrued expenses ....................... (3,985) 8,996
Other liabilities ........................................... (247) (144)
--------- ---------
Net cash provided by operating activities .............. 20,634 24,792
--------- ---------
Cash flows used in investing activities:
Acquisition of business ..................................................... (2,166) (850)
Property acquisitions ....................................................... (608) (883)
Exploration and development expenditures .................................... (28,175) (35,493)
Other property and equipment additions ...................................... (229) (95)
Proceeds from sale of oil and gas assets .................................... - 238
--------- ---------
Net cash used in investing activities .................. (31,178) (37,083)
--------- ---------
Cash flows from financing activities:
Deferred financing costs .................................................... (7) -
Repayments of long-term debt ................................................ (124) (22)
Proceeds from long-term debt ................................................ - 15,000
Exercise of stock options and warrants ...................................... 1,610 80
--------- ---------
Net cash provided by financing activities .............. 1,479 15,058
--------- ---------
Net increase (decrease) in cash and
cash equivalents ................................. (9,065) 2,767
Cash and cash equivalents at beginning of period .................................. 104,392 116
--------- ---------
Cash and cash equivalents at end of period ........................................ $ 95,327 $ 2,883
========= =========
See accompanying notes to consolidated financial statements.
-5-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(1) BASIS OF PRESENTATION
Certain information and footnote disclosures normally in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted pursuant to rules and regulations of the
Securities and Exchange Commission; however, management believes the disclosures
which are made are adequate to make the information presented not misleading.
These financial statements and footnotes should be read in conjunction with the
financial statements and notes thereto included in Energy Partners, Ltd.'s (the
Company) Annual Report on Form 10-K for the year ended December 31, 2003 and
Management's Discussion and Analysis of Financial Condition and Results of
Operations. The Company maintains a website at www.eplweb.com which contains
information about the Company including links to the Company's Annual Report on
Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and all
related amendments. The Company's website and the information contained in it
and connected to it shall not be deemed incorporated by reference into this
Report on Form 10-Q.
The financial information as of March 31, 2004 and for the three-month
periods ended March 31, 2004 and 2003 has not been audited. However, in the
opinion of management, all adjustments (which include only normal recurring
adjustments) necessary to present fairly the results of operations for the
periods presented have been included therein. The results of operations for the
first three months of the year are not necessarily indicative of the results of
operations which might be expected for the entire year.
(2) STOCK-BASED COMPENSATION
The Company has two stock award plans, the Amended and Restated 2000
Long Term Stock Incentive Plan and the 2000 Stock Option Plan for Non-Employee
Directors (the Plans). The Company accounts for its stock-based compensation in
accordance with Accounting Principles Board's Opinion No. 25, "Accounting For
Stock Issued to Employees" (Opinion No. 25). Statement of Financial Accounting
Standards No. 123 (Statement 123), "Accounting For Stock-Based Compensation" and
Statement of Financial Accounting Standards No. 148, "Accounting For Stock-Based
Compensation - Transition and Disclosure," (Statement 148) permit the continued
use of the intrinsic value-based method prescribed by Opinion No. 25, but
require additional disclosures, including pro-forma calculations of earnings and
net earnings per share as if the fair value method of accounting prescribed by
Statement 123 had been applied. If compensation expense for the Plans had been
determined using the fair-value method in Statement 123, the Company's net
income and earnings per share would have been as shown in the pro forma amounts
below (in thousands, except per share amounts):
THREE MONTHS ENDED
MARCH 31,
2004 2003
---------- ----------
Net income available to common stockholders:
As reported .................................... $ 6,517 $ 13,327
Pro forma ...................................... $ 6,466 $ 13,046
Basic earnings per share:
As reported .................................... $ 0.20 $ 0.48
Pro forma ...................................... $ 0.20 $ 0.47
Diluted earnings per share:
As reported .................................... $ 0.20 $ 0.44
Pro forma ...................................... $ 0.20 $ 0.43
Stock-option based employee compensation cost,
net of tax, included in net income as reported... $ 340 $ 28
-6-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(3) BUSINESS COMBINATION
In connection with a business combination in 2002, the Company issued
among other things, $38.4 million liquidation preference of newly authorized and
issued Series D Exchangeable Convertible Preferred Stock (the Series D Preferred
Stock), with an issue date fair value of $34.7 million discounted to give effect
to the increasing dividend rate and $38.4 million of 11% Senior Subordinated
Notes (the Notes) due 2009 (immediately callable at par). The Company also
issued warrants to purchase four million shares of the Company's common stock.
Of the warrants, one million had a strike price of $9.00 and three million had a
strike price of $11.00 per share. The warrants had a fair value of approximately
$3.0 million based on a third party valuation and are exercisable beginning
January 15, 2003 and expiring on January 15, 2007.
In addition, former preferred stockholders of the acquired company have
the right to receive contingent consideration based upon a percentage of the
amount by which the before tax net present value of proved reserves related, in
general, to exploratory prospect acreage held by the acquired company as of the
closing date of the acquisition (the Ring-Fenced Properties) exceeds the net
present value discounted at 30%. The potential consideration is determined
annually beginning March 3, 2003 and ending March 1, 2007. The cumulative
percentage remitted to the participants was 20% for March 3, 2003 and 30% for
March 1, 2004 and is 35% for March 1, 2005, 40% for March 1, 2006 and 50% for
March 1, 2007. The contingent consideration, if any, may be paid in the
Company's common stock or cash at the Company's option (with a minimum of 20% in
cash) and in no event will exceed a value of $50 million. On March 15, 2004 and
March 17, 2003, the Company capitalized, as additional purchase price, and paid
additional consideration of $2.2 million and $0.9 million related to the March
1, 2004 and the March 3, 2003 contingent consideration payment dates,
respectively. Due to the uncertainty inherent in estimating the value of future
contingent consideration which includes annual revaluations based upon, among
other things, drilling results from the date of the prior revaluation, and
development, operating and abandonment costs and production revenues (actual
historical and future projected, as contractually defined, as of each
revaluation date) for the Ring-Fenced Properties, total final consideration will
not be determined until March 1, 2007. All additional contingent consideration
will be capitalized as additional purchase price.
(4) EARNINGS PER SHARE
Basic earnings per share are computed by dividing income available to
common stockholders by the weighted average number of common shares outstanding
during the period. Diluted earnings per share reflect the potential dilution
that could occur if the Company's convertible preferred stock, options and
warrants were converted to common stock.
The following table reconciles the net earnings and common shares
outstanding used in the calculations of basic and diluted earnings per share for
the three month periods ended March 31, 2004 and 2003.
WEIGHTED
NET INCOME AVERAGE
AVAILABLE COMMON
TO COMMON SHARES EARNINGS
STOCKHOLDERS OUTSTANDING PER SHARE
------------ ----------- ---------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Three months ended March 31, 2004:
Basic................................................ $ 6,517 32,428 $ 0.20
Effect of dilutive securities:
Preferred stock................................ 929 4,057
Stock options.................................. -- 370
Warrants....................................... -- 852
------- ------
Diluted.............................................. $ 7,446 37,707 $ 0.20
------- ------
-7-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
WEIGHTED
NET INCOME AVERAGE
AVAILABLE COMMON
TO COMMON SHARES EARNINGS
STOCKHOLDERS OUTSTANDING PER SHARE
------------ ----------- ---------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Three months ended March 31, 2003:
Basic..................................................... $ 13,327 27,651 $ 0.48
Effect of dilutive securities:
Preferred stock..................................... 855 4,375
Stock options....................................... -- 321
Warrants............................................ -- 154
------------ ------
Diluted................................................... $ 14,182 32,501 $ 0.44
------------ ------
(5) HEDGING ACTIVITIES
The Company enters into hedging transactions with major financial
institutions to reduce exposure to fluctuations in the price of oil and natural
gas. Any gains or losses resulting from these hedging transactions are recorded
in other revenue in the statements of operations. Crude oil hedges are settled
based on the average of the reported settlement prices for West Texas
Intermediate crude on the New York Mercantile Exchange (NYMEX) for each month.
Natural gas hedges are settled based on the average of the last three days of
trading of the NYMEX Henry Hub natural gas contract for each month. The Company
also uses financially-settled crude oil and natural gas swaps, zero-cost collars
and options that provide floor prices with varying upside price participation.
With a financially-settled swap, the counterparty is required to make a
payment to the Company if the settlement price for any settlement period is
below the hedged price for the transaction, and the Company is required to make
a payment to the counterparty if the settlement price for any settlement period
is above the hedged price for the transaction. With a zero-cost collar, the
counterparty is required to make a payment to the Company if the settlement
price for any settlement period is below the floor price of the collar, and the
Company is required to make a payment to the counterparty if the settlement
price for any settlement period is above the cap price for the collar. In some
hedges, we may modify our collar to provide full upside participation after a
limited non-participation range.
The Company had the following hedging contracts as of March 31, 2004:
NATURAL GAS POSITIONS
---------------------------------------------------------------------------------------------------------------------------
VOLUME (Mmbtu)
--------------
REMAINING CONTRACT TERM CONTRACT TYPE STRIKE PRICE ($/Mmbtu) DAILY TOTAL
----------------------- ------------- ---------------------- ----- -----
04/04 - 6/04....................... Collar $4.00/$7.00 10,000 910,000
04/04 - 12/04...................... Collar $4.00/$6.50 10,000 2,750,000
04/04 - 12/04...................... Collar $3.50/$8.00 10,000 2,750,000
CRUDE OIL POSITIONS
---------------------------------------------------------------------------------------------------------------------------
VOLUME (Bbls)
-------------
REMAINING CONTRACT TERM CONTRACT TYPE STRIKE PRICE ($/Bbl) DAILY TOTAL
----------------------- ------------- -------------------- ----- -----
04/04 - 12/04...................... Swap $26.84 1,500 412,500
04/04 - 06/04...................... Collar $25.00/$30.00 1,500 136,500
07/04 - 09/04...................... Collar $24.00/$29.00 1,500 138,000
10/04 - 12/04...................... Collar $24.00/$28.75 1,500 138,000
-8-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Hedging activities reduced natural gas and crude oil revenues by $1.7
million in the three month period ended March 31, 2004 and reduced natural gas
and crude oil revenues by $7.4 million in the three month period ended March 31,
2003.
The following table reconciles the change in accumulated other
comprehensive income for the three month periods ending March 31, 2004 and 2003.
THREE MONTHS ENDED
MARCH 31, 2003
------------------
(IN THOUSANDS)
Accumulated other comprehensive loss as of December 31, 2003 $ (2,441)
Net income...................................................................... $ 7,446
Other comprehensive loss - net of tax
Hedging activities
Reclassification adjustments for settled contracts............. 1,115
Changes in fair value of outstanding hedging positions......... (2,391)
-----------
Total other comprehensive loss........................ (1,276) (1,276)
----------- ---------
Comprehensive income............................................................ $ 6,170
===========
Accumulated other comprehensive loss as of March 31, 2004....................... $ (3,717)
=========
THREE MONTHS ENDED
MARCH 31, 2003
------------------
(IN THOUSANDS)
Accumulated other comprehensive loss as of December 31, 2002 $ (2,171)
Net income...................................................................... $ 14,182
Other comprehensive income - net of tax
Hedging activities
Reclassification adjustments for settled contracts............. 4,744
Changes in fair value of outstanding hedging positions......... (4,378)
-----------
Total other comprehensive income...................... 366 366
----------- ---------
Comprehensive income............................................................ $ 14,548
===========
Accumulated other comprehensive loss as of March 31, 2003....................... $ (1,805)
=========
Based upon current prices, the Company expects to transfer approximately
$5.8 million of net deferred losses in accumulated other comprehensive loss as
of March 31, 2004 to earnings during the next twelve months when the forecasted
transactions actually occur.
(6) ASSET RETIREMENT OBLIGATION
In 2001, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards No. 143, "Accounting for Asset Retirement
Obligations" (Statement 143). Statement 143 requires entities to record the fair
value of a liability for an asset retirement obligation in the period in which
it is incurred, a corresponding increase in the carrying amount of the related
long-lived asset and is effective for fiscal years beginning after June 15,
2002. The Company adopted Statement 143 effective January 1, 2003, using the
cumulative effect approach to recognize transition amounts for asset retirement
obligations, asset retirement costs and accumulated depreciation. The Company
previously recorded estimated costs of dismantlement, removal, site restoration
and similar activities as part of its depreciation, depletion and amortization
for oil and natural gas properties and recorded a separate liability for such
amounts in other liabilities. The effect of adopting Statement 143 on the
Company's results of operations and financial condition included a net increase
in long-term liabilities of $14.2 million; an increase in net property, plant
and equipment of $17.8 million; and a cumulative effect of adoption income of
$2.3 million, net of deferred income taxes of $1.3 million.
-9-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
The following table reconciles the beginning and ending aggregate recorded
amount of the asset retirement obligation for the three months ended March 31,
2004.
THREE MONTHS
ENDED
MARCH 31, 2004
--------------
(IN THOUSANDS)
December 31, 2003 ...................... $ 40,577
Accretion expense ................... 899
Liabilities incurred ................ --
Liabilities settled ................. (162)
Revisions in estimated cash flows.... (1,308)
--------
March 31, 2004 ......................... $ 40,006
========
(7) NEW ACCOUNTING PRONOUNCEMENTS
In December 2003, the FASB issued FASB Interpretation 46 (Revised December
2003), "Consolidation of Variable Interest Entities," (FIN 46R) which addresses
how a business enterprise should evaluate whether it has a controlling financial
interest in an entity through means other than voting rights and accordingly
should consolidate the entity. FIN 46R replaces FASB Interpretation 46,
"Consolidation of Variable Interest Entities," which was issued in January 2003.
The Company was required to apply FIN 46R to variable interests in variable
interest entities (VIEs) by March 31, 2004. The Company has adopted FIN 46R,
which does not currently have an impact on the financial position, results of
operations or cash flows of the Company.
On April 30, 2003, the FASB issued Statement of Financial Accounting
Standards No. 149, "Amendment of Statement 133 on Derivative Instruments and
Hedging Activities" (Statement 149). Statement 149 amends and clarifies the
accounting guidance on (1) derivative instruments (including certain derivative
instruments embedded in other contracts) and (2) hedging activities that fall
within the scope of FASB Statement No. 133, "Accounting for Derivative
Instruments and Hedging Activities" (Statement 133). Statement 149 also amends
certain other existing pronouncements, which will result in more consistent
reporting of contracts that are derivatives in their entirety or that contain
embedded derivatives that warrant separate accounting. Statement 149 was
effective (1) for contracts entered into or modified after June 30, 2003, with
certain exceptions, and (2) for hedging relationships designated after June 30,
2003. The guidance is to be applied prospectively. The Company has adopted
Statement 149, which did not have an impact on its financial position, results
of operations or cash flows.
In May 2003, the FASB issued Statement of Financial Accounting Standards
No. 150, "Accounting for Certain Financial Instruments with Characteristics of
both Liabilities and Equity" (Statement 150). Statement 150 establishes
standards for how an issuer classifies and measures in its statement of
financial position certain financial instruments with characteristics of both
liabilities and equity. In accordance with the standard, financial instruments
that embody obligations for the issuer are required to be classified as
liabilities. Statement 150 was effective for financial instruments entered into
or modified after May 31, 2003, and otherwise shall be effective at the
beginning of the first interim period beginning
-10-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
after June 15, 2003. The Company has adopted Statement 150, which did not have
an impact on its financial position, results of operations or cash flows.
Statement of Financial Accounting Standards No. 141, "Business
Combinations," (Statement 141) and No. 142, "Goodwill and Intangible Assets,"
(Statement 142) became effective for the Company on July 1, 2001 and January 1,
2002, respectively. Statement 141 requires all business combinations initiated
after June 30, 2001, to be accounted for using the purchase method.
Additionally, Statement 141 requires companies to disaggregate and report
separately from goodwill and certain other intangible assets. Under Statement
142, goodwill and certain other intangible assets are not amortized, but rather
are reviewed annually for impairment. The appropriate application of Statement
141 and 142 to oil and natural gas mineral rights held under lease and other
contractual arrangements representing the right to extract such reserves is
unclear. Depending on how the accounting and disclosure literature is clarified,
these oil and natural gas mineral rights held under lease and other contractual
arrangements representing the right to extract such reserves for both
undeveloped and developed leaseholds may be classified separately from oil and
natural gas properties, as intangible assets on the Company's balance sheets.
Additionally, disclosures required by Statements 141 and 142 would be included
in the notes to financial statements. Historically, the Company, like many other
oil and natural gas companies, have included these oil and gas mineral rights
held under lease and other contractual arrangements representing the right to
extract such reserves as part of the oil and natural gas properties, even after
Statements 141 and 142 became effective.
This interpretation of Statements 141 and 142 would affect only the
Company's balance sheet classification of oil and natural gas leaseholds. The
results of operations and cash flows would not be affected, since these oil and
natural gas mineral rights held under lease and other contractual arrangements
representing the right to extract such reserves would continue to be amortized
in accordance with accounting rules for oil and natural gas companies provided
in Statement of Financial Accounting Standards No. 19 "Financial Accounting and
Reporting by Oil and Gas Producing Companies."
At March 31, 2004, the Company had unproved and proved leaseholds of
approximately $5 million and $100 million that would have been classified on the
balance sheet as unproved intangible oil and natural gas properties and
intangible acquired proved leaseholds, respectively, if the Company had applied
the interpretation currently being deliberated by the Emerging Issues Task Force
(EITF). At the March 2004 meeting the EITF reached a consensus that mineral
rights for mining companies should be accounted for as tangible assets. However,
the consensus does not address this topic as it relates to oil and natural gas
leaseholds. The Company will continue to classify oil and natural gas leaseholds
as oil and natural gas properties until further guidance is provided.
(8) COMMON STOCK
On April 16, 2003, the Company completed the public offering of
approximately 6.8 million shares of its common stock (the Equity Offering),
which was priced at $9.50 per share. The Equity Offering included 4.2 million
shares offered by the Company, 1.7 million shares offered by the Company's then
principal stockholder, Evercore Capital Partners L.P. and certain of its
affiliates, and 0.9 million shares offered by Energy Income Fund, L.P. In
addition, the underwriters exercised their option to purchase 1.0 million
additional shares to cover over-allotments, the proceeds from which went to
selling shareholders and not to the Company. After payment of underwriting
discounts and commissions, the offering generated net proceeds to the Company of
approximately $38.0 million. After expenses of approximately $0.5 million, the
proceeds were used to repay a portion of outstanding borrowings under the
Company's bank credit facility.
(9) INDEBTEDNESS
On August 5, 2003, the Company issued $150 million of 8.75% Senior Notes
Due 2010 (the Senior Notes) in a Rule 144A private offering (the Debt Offering)
which allows unregistered transactions with qualified institutional buyers. In
October 2003, the Company consummated an exchange offer pursuant to which it
exchanged registered Senior Notes having substantially identical terms as the
Senior Notes for the privately placed Senior Notes. After discounts and
commissions and estimated offering expenses, the
-11-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Company received $145.3 million, which was used to redeem all of the outstanding
11% Senior Subordinated Notes Due 2009, that had been issued in connection with
a business combination in 2002, and to repay substantially all of the borrowings
outstanding under the Company's bank credit facility. The remainder of the net
proceeds will be used for general corporate purposes, including acquisitions.
The Senior Notes mature on August 1, 2010 with interest payable each
February 1 and August 1, commencing February 1, 2004. The indenture relating to
the Senior Notes contains certain restrictions on the Company's ability to incur
additional debt, pay dividends on its common stock, make investments, create
liens on its assets, engage in transactions with its affiliates, transfer or
sell assets and consolidate or merge substantially all of its assets. The Senior
Notes are not subject to any sinking fund requirements.
On July 28, 2003 the Company amended its bank credit facility in
connection with the Debt Offering. The amendment reduced the borrowing base
under the bank credit facility to $60 million upon consummation of the Debt
Offering. The borrowing base will remain subject to redetermination based on the
proved reserves of the oil and natural gas properties.
(10) SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL INFORMATION
In connection with the Debt Offering, discussed above, all of the
Company's current active subsidiaries (the Guarantor Subsidiaries) jointly,
severally and unconditionally guaranteed the payment obligations under the Debt
Offering. The following supplemental financial information sets forth, on a
consolidating basis, the balance sheet, statement of operations and cash flow
information for Energy Partners, Ltd. (Parent Company Only) and for the
Guarantor Subsidiaries. The Company has not presented separate financial
statements and other disclosures concerning the Guarantor Subsidiaries because
management has determined that such information is not material to investors.
The supplemental condensed consolidating financial information has been
prepared pursuant to the rules and regulations for condensed financial
information and does not include all disclosures included in annual financial
statements, although the Company believes that the disclosures made are adequate
to make the information presented not misleading. Certain reclassifications were
made to conform all of the financial information to the financial presentation
on a consolidated basis. The principal eliminating entries eliminate investments
in subsidiaries, intercompany balances and intercompany revenues and expenses.
-12-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
SUPPLEMENTAL CONDENSED CONSOLIDATING BALANCE SHEET
AS OF MARCH 31, 2004
(IN THOUSANDS)
PARENT
COMPANY GUARANTOR
ONLY SUBSIDIARIES ELIMINATIONS CONSOLIDATED
--------- ------------ ------------ ------------
ASSETS
Current assets:
Cash and cash equivalents ............................... $ 95,327 $ -- $ -- $ 95,327
Trade accounts receivable ............................... 49,621 (911) -- 48,710
Other current assets .................................... 4,914 -- -- 4,914
--------- --------- --------- ---------
Total current assets .............................. 149,862 (911) -- 148,951
Property and equipment ..................................... 451,564 185,020 -- 636,584
Less accumulated depreciation, depletion
and amortization ........................................ (164,681) (70,104) -- (234,785)
--------- --------- --------- ---------
Net property and equipment ........................ 286,883 114,916 -- 401,799
Investment in affiliates ................................... 77,922 -- (77,922) --
Notes receivable, long-term ................................ -- 69,000 (69,000) --
Other assets ............................................... 11,093 (61) -- 11,032
--------- --------- --------- ---------
$ 525,760 $ 182,944 $(146,922) $ 561,782
========= ========= ========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses ................... $ 60,520 $ 827 $ -- $ 61,347
Fair value of commodity derivative
instruments .......................................... 5,809 -- -- 5,809
Current maturities of long-term debt .................... -- 101 -- 101
--------- --------- --------- ---------
Total current liabilities ......................... 66,329 928 -- 67,257
Long-term debt ............................................. 150,000 69,191 (69,000) 150,191
Other liabilities .......................................... 38,732 34,903 -- 73,635
--------- --------- --------- ---------
255,061 105,022 (69,000) 291,083
Stockholders' equity
Preferred stock ......................................... 33,053 -- -- 33,053
Common stock ............................................ 328 -- -- 328
Additional paid-in capital .............................. 233,713 -- -- 233,713
Accumulated other comprehensive loss .................... (3,717) -- -- (3,717)
Retained earnings ....................................... 7,322 77,922 (77,922) 7,322
--------- --------- --------- ---------
Total stockholders' equity ........................ 270,699 77,922 (77,922) 270,699
--------- --------- --------- ---------
$ 525,760 $ 182,944 $(146,922) $ 561,782
========= ========= ========= =========
-13-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 2004
(IN THOUSANDS)
PARENT
COMPANY GUARANTOR
ONLY SUBSIDIARIES ELIMINATIONS CONSOLIDATED
---- ------------ ------------ ------------
Revenue:
Oil and natural gas ...................... $ 47,522 $ 15,897 $ -- $ 63,419
Other..................................... 4,814 52 (4,813) 53
-------- -------- -------- --------
52,336 15,949 (4,813) 63,472
Costs and expenses:
Lease operating expenses ................. 4,996 4,778 -- 9,774
Taxes, other than on earnings ............ 281 1,961 -- 2,242
Exploration expenditures ................. 9,227 238 -- 9,465
Depreciation, depletion and amortization . 14,729 4,008 -- 18,737
General and administrative ............... 8,027 3,896 (3,750) 8,173
-------- -------- -------- --------
Total costs and expenses ........... 37,260 14,881 (3,750) 48,391
Income from operations ...................... 15,076 1,068 (1,063) 15,081
Interest expense, net ....................... (3,327) (5) -- (3,332)
Income before income taxes .................. 11,749 1,063 (1,063) 11,749
Income taxes ................................ (4,303) -- -- (4,303)
-------- -------- -------- --------
Net income .................................. $ 7,446 $ 1,063 $ (1,063) $ 7,446
======== ======== ======== ========
-14-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
THREE MONTHS ENDED MARCH 31, 2004
(IN THOUSANDS)
PARENT
COMPANY GUARANTOR
ONLY SUBSIDIARIES ELIMINATIONS CONSOLIDATED
---- ------------ ------------ ------------
Net cash provided by operating activities ............ $ 14,070 $ 6,564 $ -- $ 20,634
Cash flows used in investing activities:
Acquisition of business, net of cash
acquired ....................................... (2,166) -- -- (2,166)
Property acquisitions ............................. (608) -- -- (608)
Exploration and development
expenditures ................................... (21,635) (6,540) -- (28,175)
Other property and equipment
additions ...................................... (229) -- -- (229)
--------- --------- -------- ---------
Net cash used in investing activities ................ (24,638) (6,540) -- (31,178)
Cash flows provided by (used in) financing activities:
Deferred financing costs .......................... (7) -- -- (7)
Repayments of long-term debt ...................... (100) (24) -- (124)
Exercise of stock options and warrants ............ 1,610 -- -- 1,610
--------- --------- -------- ---------
Net cash provided by (used in) financing
activities ........................................ 1,503 (24) -- 1,479
--------- --------- -------- ---------
Net increase in cash and cash equivalents ............ (9,065) -- -- (9,065)
Cash and cash equivalents at the beginning of the
period ............................................ 104,392 -- -- 104,392
--------- --------- -------- ---------
Cash and cash equivalents at the end of the
period ............................................ $ 95,327 $ -- $ -- $ 95,327
========= ========= ======== =========
(11) CONTINGENCIES
In the ordinary course of business, the Company is a defendant in various
legal proceedings. The Company does not expect its exposure in these
proceedings, individually or in the aggregate, to have a material adverse effect
on the financial position, results of operations or liquidity of the Company.
(12) RECLASSIFICATIONS
Certain reclassifications have been made to the prior period financial
statements in order to conform to the classification adopted for reporting in
fiscal 2004.
-15-
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
We were incorporated in January 1998 and operate in a single segment as an
independent oil and natural gas exploration and production company. Our
operations are concentrated in the shallow to moderate depth waters of the Gulf
of Mexico Shelf.
During the first quarter of 2004 we reported another period of growth and
progress in implementing our strategy. Our strong cash flow provided us the
flexibility to make necessary and appropriate investments to continue our
long-term growth strategy. Our long-term strategy is to increase our oil and
natural gas reserves and production while keeping our finding and development
costs and operating costs competitive with our industry peers. We will implement
this strategy through drilling exploratory and development wells from our
inventory of available prospects that we have evaluated for geologic and
mechanical risk and future reserve or resource potential and by making
acquisitions with a focus in our core area of operations. Our drilling program
contains some higher risk, higher reserve potential opportunities as well as
some lower risk, lower reserve potential opportunities, in order to achieve a
balanced program of reserve and production growth.
We use the successful efforts method of accounting for our investment in
oil and natural gas properties. Under this method, we capitalize lease
acquisition costs, costs to drill and complete exploration wells in which proven
reserves are discovered and costs to drill and complete development wells.
Seismic, geological and geophysical and delay rental expenditures are expensed
as incurred. We conduct many of our exploration and development activities
jointly with others and, accordingly, recorded amounts for our oil and natural
gas properties reflect only our proportionate interest in such activities. Our
annual report on Form 10-K for the fiscal year ended December 31, 2003, includes
a discussion of our critical accounting policies, which have not changed
significantly.
On April 16, 2003, we completed the public offering of approximately 4.2
million shares of our common stock. The shares were priced at $9.50 per share.
The equity offering also included shares offered by our then principal
stockholder, Evercore Capital Partners, L.P. and certain of its affiliates
("Evercore") and by Energy Income Fund, L.P. After payment of underwriting
discounts and commissions, the offering generated net proceeds to us of
approximately $38.0 million. After expenses of approximately $0.5 million, the
proceeds were used to repay a portion of outstanding borrowings under our bank
credit facility.
On August 5, 2003, we issued $150 million of 8.75% Senior Notes Due 2010
(the "Senior Notes") in a Rule 144A private offering (the "Debt Offering") which
allows unregistered transactions with qualified institutional buyers. In October
2003, we consummated an exchange offer pursuant to which we exchanged registered
Senior Notes having substantially identical terms as the Senior Notes for the
privately placed Senior Notes. After discounts and commissions and estimated
offering expenses, we received $145.3 million, which was used to redeem all of
our outstanding 11% Senior Subordinated Notes Due 2009 (the "Notes"), which were
issued in connection with a business combination in 2002, and to repay
substantially all of the borrowings outstanding under our bank credit facility.
The remainder of the net proceeds will be used for general corporate purposes,
including acquisitions.
We amended our bank credit facility in connection with the Debt Offering.
The amendment reduced the borrowing base under our bank credit facility to $60
million upon consummation of the Debt Offering. The borrowing base will remain
subject to redetermination based on the proved reserves of the oil and natural
gas properties.
During 2003, Evercore on two occasions exercised a contractual right to
request us to register with the SEC the possible public sale of our common stock
held by it. Subsequent to each of these requests Evercore priced two public
offerings to sell shares of our common stock. These offerings completed the sale
of its interest in our company. We did not sell any shares in either of these
two offerings and did not receive any proceeds from the shares offered by
Evercore.
-16-
Our revenue, profitability and future growth rate depend substantially on
factors beyond our control, such as economic, political and regulatory
developments and competition from other sources of energy. Oil and natural gas
prices historically have been volatile and may fluctuate widely in the future.
Sustained periods of low prices for oil and natural gas could materially and
adversely affect our financial position, our results of operations, the
quantities of oil and natural gas reserves that we can economically produce and
our access to capital.
We currently have an extensive inventory of drillable prospects in-house,
we are generating more internally and we are exploring new opportunities through
relationships with industry partners. Despite our expanded budget in 2004,
strong commodity prices together with growing production volumes should enable
us to adhere to our policy of funding our exploration and development
expenditures with internally generated cash flow. This strategy allows us to
preserve our strong balance sheet to finance acquisitions. We believe this year
will provide us a number of opportunities to acquire targeted properties with a
focus in our core area of operations.
RESULTS OF OPERATIONS
The following table presents information about our oil and natural gas
operations.
THREE MONTHS ENDED
MARCH 31,
-------------------------
2004 2003
---------- ----------
Net production (per day):
Oil (Bbls) ................................... 7,989 8,012
Natural gas (Mcf) ............................ 77,134 70,007
Total barrels of oil equivalent (Boe)..... 20,845 19,680
Oil and natural gas revenues (in thousands):
Oil .......................................... $ 23,171 $ 21,803
Natural gas .................................. 40,248 35,151
Total .................................... 63,419 56,954
Average sales prices (1):
Oil (per Bbl) ................................ $ 31.87 $ 30.24
Natural gas (per Mcf) ........................ 5.73 5.58
Total (per Boe) .......................... 33.43 32.16
Average costs (per Boe):
Lease operating expense ...................... $ 5.15 $ 4.53
Taxes, other than on earnings ................ 1.18 1.34
Depreciation, depletion and amortization ..... 9.88 9.92
Increase (decrease) in oil and natural gas revenues
(net of hedging) due to:
Changes in prices of oil...................... $ 1,179
Changes in production volumes of oil.......... 189
Total increase in oil sales............... 1,368
Changes in prices of natural gas.............. $ 952
Changes in production volumes of natural gas.. 4,145
Total increase in natural gas sales....... 5,097
(1) Net of the effect of hedging transactions, which reduced oil price
realizations by $1.63 and $2.45 per Bbl for the first quarter of 2004 and
2003, respectively, and reduced natural gas realizations by $0.08 and
$0.90 per Mcf for the first quarter of 2004 and 2003, respectively.
REVENUES AND NET INCOME
Our oil and natural gas revenues increased to $63.4 million in the first
quarter of 2004 from $57.0 million in the first quarter of 2003. The increase
for this period is the result of increased natural gas and oil prices and an
increase in natural gas production from nine new natural gas wells brought on
production since the end of the first quarter of 2003. This increase was
partially offset by natural reservoir declines and the absence of new
significant oil production.
-17-
We recognized net income of $7.4 million in the first quarter of 2004
compared to net income of $14.2 million in the first quarter of 2003. The
decrease was primarily a result of increased exploration costs in 2004 discussed
below and the adoption of Financial Standards Boards' Statement 143, "Accounting
for Asset Retirement Obligations" ("Statement 143"), which increased net income
for the first quarter of 2003, as discussed below. These decreases were
partially offset by an increase in oil and natural gas revenues as discussed
above. Statement 143 had the following impact on our net income in the first
quarter of 2003 and affects the comparability of the results of operations for
the period:
- In January 2003, we adopted Statement 143, using the cumulative effect
approach to recognize transition amounts for asset retirement
obligations, asset retirement costs and accumulated depreciation. We
previously recorded estimated costs of dismantlement, removal, site
restoration and similar activities as part of our depreciation,
depletion and amortization for oil and natural gas properties and
recorded a separate liability for such amounts in other liabilities. The
effect of adopting Statement 143 on the results of operations for the
three months ended March 31, 2003 included a cumulative effect of
adoption income of $2.3 million net of deferred income taxes.
OPERATING EXPENSES
Operating expenses during the three month periods ended March 31, 2004 and 2003
were affected by the following:
- Lease operating expense increased to $9.8 million in the first quarter
of 2004 from $8.0 million in the first quarter of 2003. This is a result
of the general increase in production combined with the fact that the
increase is primarily from new fields, whereas the majority of our
production in the past was primarily from our larger fields with
existing infrastructure and lower variable cost.
- Taxes, other than on earnings decreased to $2.2 million in the first
quarter of 2004 from $2.4 million in the first quarter of 2003. The
decrease was due to a change in the mix in our production. Our new
production is primarily from federal leases, which are not subject to
severance taxes. These taxes are expected to fluctuate from period to
period depending on our production volume from state leases and the
commodity prices received.
- Exploration expenditures, including dry hole costs and property
impairment costs, increased to $9.5 million in 2004 from $1.3 million in
2003. The expense in 2004 is comprised of $0.9 million of costs for
exploratory wells, which were found to be not commercially productive,
$6.9 million of proved property impairments at our East Cameron 378
field, which is a geologic success that encountered cost overruns due to
mechanical problems during drilling. The remainder of the 2004 cost is
delay rentals and seismic expenditures. Our exploration expenditures,
including dry hole charges will vary depending on the amount of our
capital budget dedicated to exploration activities and the level of
success we achieve in exploratory drilling activities.
- Depreciation, depletion and amortization increased to $18.7 million in
the first quarter of 2004 from $17.6 million in the first quarter of
2003. The increase was due to the continued growth in our depreciable
asset base combined with higher production. However, due to a shift in
the production contribution from our various fields, our expense per Boe
has decreased from $9.92 to $9.88. Some fields carry a higher
depreciation burden than others; therefore, changes in the location of
our production will directly impact this expense.
- Other general and administrative expenses decreased slightly to $7.3
million in the first quarter of 2004 from $7.4 million in the first
quarter of 2003. The change was primarily due to a decrease in personnel
cost of $0.3 million, a decrease in technology costs of $0.1 million and
an offsetting increase in insurance costs of $0.3 million.
- Non-cash stock-based compensation expense of $0.9 million was recognized
in the first quarter of 2004 compared to $0.1 million in the first
quarter of 2003. The expense relates to restricted stock and performance
share awards made to employees.
OTHER INCOME AND EXPENSE
INTEREST. Interest expense increased to $3.6 million in the first quarter
of 2004 from $1.8 million in the first quarter of 2003. The increase was a
result of interest expense on the 8.75% Senior Notes issued in August 2003
partially offset by the interest savings from the redemption of the Notes and
the repayment of the bank credit facility.
LIQUIDITY AND CAPITAL RESOURCES
The trend of increased revenues we have experienced from 2003 and into the
first quarter of 2004 has continued to provide strong cash flows from operations
which totaled $20.6 million in the first quarter of 2004. We intend to fund our
exploration and development expenditures from internally generated cash
-18-
flow, which we define as cash flow from operations before consideration of
changes in working capital plus total exploration expenditures. Our cash on hand
at March 31, 2004 was $95.3 million. Our future internally generated cash flows
will depend on our ability to maintain and increase production through our
development and exploratory drilling program, as well as the prices we receive
for oil and natural gas. We may, from time to time, use the availability of our
bank credit facility for working capital needs.
Our bank credit facility, as amended on July 28, 2003, consists of a
revolving line of credit with a group of banks available through March 30, 2005
(the "bank credit facility"). The bank credit facility currently has a borrowing
base of $60 million that is subject to redetermination based on the proved
reserves of the oil and natural gas properties that serve as collateral for the
bank credit facility as set out in the reserve report delivered to the banks
each April 1 and October 1. The bank credit facility permits both prime rate
based borrowings and London interbank offered rate ("LIBOR") borrowings plus a
floating spread. The spread will float up or down based on our utilization of
the bank credit facility. The spread can range from 1.50% to 2.25% above LIBOR
and 0% to 0.75% above prime. The borrowing base under the bank credit facility
is secured by substantially all of our assets. At May 4, 2004, we did not have
an outstanding balance leaving $60.0 million of credit capacity available under
the bank credit facility. In addition, we pay an annual fee on the unused
portion of the bank credit facility ranging between 0.375% to 0.5% based on
utilization. The bank credit facility contains customary events of default and
various financial covenants, which require us to: (i) maintain a minimum current
ratio of 1.1, (ii) maintain a minimum EBITDAX to interest ratio of 5.0 times,
and (iii) maintain a minimum tangible net worth as calculated in accordance with
the agreement. We were in compliance with these covenants as of March 31, 2004.
On August 5, 2003, we issued, in a private placement, $150 million of
8.75% Senior Notes due 2010. In October 2003, the Company consummated an
exchange offer pursuant to which it exchanged registered Senior Notes having
substantially identical terms as the Senior Notes for the privately placed
Senior Notes. The Senior Notes bear interest at a rate of 8.75% per annum with
interest payable semi-annually on February 1 and August 1, beginning February 1,
2004. We may redeem the notes at our option, in whole or in part, at any time on
or after August 1, 2007 at a price equal to 100% of the principal amount plus
accrued and unpaid interest, if any, plus a specified premium which decreases
yearly from 4.375% in 2007 to 0% in 2009 and thereafter. In addition, at any
time prior to August 1, 2006, we may redeem up to a maximum of 35% of the
aggregate principal amount with the net proceeds of certain equity offerings at
a price equal to 108.75% of the principal amount, plus accrued and unpaid
interest. The notes are unsecured obligations and rank equal in right of payment
to all existing and future senior debt, including the bank credit facility, and
will rank senior or equal in right of payment to all existing and future
subordinated indebtedness. The indenture relating to the Senior Notes contains
certain restrictions on our ability to incur additional debt, pay dividends on
our common stock, make investments, create liens on our assets, engage in
transactions with our affiliates, transfer or sell assets and consolidate or
merge substantially all of our assets. The Senior Notes are not subject to any
sinking fund requirements.
Upon closing on the Senior Notes on August 5, 2003, we called our $38.4
million 11% notes due 2009 for redemption. The redemption of the Notes in
aggregate principal and accrued interest was funded with a portion of the
proceeds received from the Senior Notes and was completed in August 2003. The
Notes were issued in 2002 as part of a business combination. In addition, $39.9
million of the proceeds from the Senior Notes were used to pay substantially all
of the borrowings under the bank credit facility. As a result of the issuance of
the Senior Notes, our bank credit facility borrowing base was reduced from $100
million to $60 million.
Net cash of $31.2 million used in investing activities in the first
quarter of 2004 consisted primarily of oil and natural gas property capital and
exploration expenditures. Dry hole costs resulting from exploration expenditures
are excluded from operating cash flows and included in investing activities.
During the first quarter of 2004, we completed five drilling projects, three of
which were successful and three recompletion/workover projects, all of which
were successful. During the first quarter of 2003, we completed two drilling
projects and nine recompletion/workover projects, eight of which were
successful.
Our 2004 capital exploration and development budget is focused on
exploration, exploitation and development activities on our proved properties
combined with moderate risk and higher risk exploratory activities on
undeveloped leases and does not include acquisitions. We currently intend to
allocate approximately 60% of our budget on an annual basis to low risk
development and exploitation activities, approximately 25% to moderate risk
exploration opportunities and approximately 15% to higher risk, higher potential
exploration opportunities. Our exploration and development budget for 2004 is
-19-
approximately $125 million. During the first three months of 2004, capital
expenditures were approximately $40.6 million. The level of our capital
expenditure budget is based on many factors, including results of our drilling
program, oil and natural gas prices, industry conditions, participation by other
working interest owners and the costs and availability of drilling rigs and
other oilfield goods and services. Should actual conditions differ materially
from expectations, some projects may be accelerated or deferred and,
consequently, may increase or decrease total 2004 capital expenditures.
We have experienced and expect to continue to experience substantial
working capital requirements, primarily due to our active capital expenditure
program. We believe that internally generated cash flows will be sufficient to
meet our capital requirements for at least the next twelve months. Availability
under the bank credit facility may be used to balance short-term fluctuations in
working capital requirements. However, additional financing may be required in
the future to fund our growth.
Our annual report on Form 10-K for the year ended December 31, 2003
included a discussion of our contractual obligations. There have been no
material changes to that disclosure during the three months ended March 31,
2004. In addition, we do not maintain any off balance sheet transactions,
arrangements, obligations or other relationships with unconsolidated entities or
others that are reasonably likely to have a material current or future effect on
our financial condition, changes in financial condition, revenues and expenses,
results of operations, liquidity, capital expenditures or capital resources.
NEW ACCOUNTING PRONOUNCEMENTS
In December 2003, the FASB issued FASB Interpretation 46 (Revised December
2003), "Consolidation of Variable Interest Entities," ("FIN 46R") which
addresses how a business enterprise should evaluate whether it has a controlling
financial interest in an entity through means other than voting rights and
accordingly should consolidate the entity. FIN 46R replaces FASB Interpretation
46, "Consolidation of Variable Interest Entities," which was issued in January
2003. We were required to apply FIN 46R to variable interests in variable
interest entities ("VIEs") by March 31, 2004. We have adopted FIN 46R, which
does not currently have an impact on our financial position, results of
operations or cash flows.
On April 30, 2003, the FASB issued Statement of Financial Accounting
Standards No. 149, "Amendment of Statement 133 on Derivative Instruments and
Hedging Activities" ("Statement 149"). Statement 149 amends and clarifies the
accounting guidance on (1) derivative instruments (including certain derivative
instruments embedded in other contracts) and (2) hedging activities that fall
within the scope of FASB Statement No. 133, "Accounting for Derivative
Instruments and Hedging Activities" ("Statement 133"). Statement 149 also amends
certain other existing pronouncements, which will result in more consistent
reporting of contracts that are derivatives in their entirety or that contain
embedded derivatives that warrant separate accounting. Statement 149 was
effective (1) for contracts entered into or modified after June 30, 2003, with
certain exceptions, and (2) for hedging relationships designated after June 30,
2003. The guidance is to be applied prospectively. We have adopted Statement
149, which did not have an impact on our financial position, results of
operations or cash flows.
In May 2003, the FASB issued Statement of Financial Accounting Standards
No. 150, "Accounting for Certain Financial Instruments with Characteristics of
both Liabilities and Equity" ("Statement 150"). Statement 150 establishes
standards for how an issuer classifies and measures in its statement of
financial position certain financial instruments with characteristics of both
liabilities and equity. In accordance with the standard, financial instruments
that embody obligations for the issuer are required to be classified as
liabilities. Statement 150 was effective for financial instruments entered into
or modified after May 31, 2003, and otherwise shall be effective at the
beginning of the first interim period beginning after June 15, 2003. We have
adopted Statement 150, which did not have an impact on our financial position,
results of operations or cash flows.
Statement of Financial Accounting Standards No. 141, "Business
Combinations," ("Statement 141") and No. 142, "Goodwill and Intangible Assets,"
("Statement 142") became effective for us on July 1, 2001 and January 1, 2002,
respectively. Statement 141 requires all business combinations initiated after
June 30, 2001, to be accounted for using the purchase method. Additionally,
Statement 141 requires companies to disaggregate and report separately from
goodwill and certain other intangible assets. Under Statement 142, goodwill and
certain other intangible assets are not amortized, but rather are reviewed
-20-
annually for impairment. The appropriate application of Statement 141 and 142 to
oil and natural gas mineral rights held under lease and other contractual
arrangements representing the right to extract such reserves is unclear.
Depending on how the accounting and disclosure literature is clarified, these
oil and natural gas mineral rights held under lease and other contractual
arrangements representing the right to extract such reserves for both
undeveloped and developed leaseholds may be classified separately from oil and
natural gas properties, as intangible assets on our balance sheets.
Additionally, disclosures required by Statements 141 and 142 would be included
in the notes to financial statements. Historically, we, like many other oil and
natural gas companies, have included these oil and gas mineral rights held under
lease and other contractual arrangements representing the right to extract such
reserves as part of the oil and natural gas properties, even after Statements
141 and 142 became effective.
This interpretation of Statements 141 and 142 would affect only our
balance sheet classification of oil and natural gas leaseholds. The results of
operations and cash flows would not be affected, since these oil and natural gas
mineral rights held under lease and other contractual arrangements representing
the right to extract such reserves would continue to be amortized in accordance
with accounting rules for oil and natural gas companies provided in Statement of
Financial Accounting Standards No. 19 "Financial Accounting and Reporting by Oil
and Gas Producing Companies."
At March 31, 2004, we had unproved and proved leaseholds of approximately
$5 million and $100 million that would have been classified on the balance sheet
as unproved intangible oil and natural gas properties and intangible acquired
proved leaseholds, respectively, if we had applied the interpretation currently
being deliberated by the Emerging Issues Task Force ("EITF"). At the March 2004
meeting, the EITF reached a consensus that mineral rights for mining companies
should be accounted for as tangible assets. However, the consensus does not
address this topic as it relates to oil and natural gas leaseholds. We will
continue to classify oil and natural gas leaseholds as oil and natural gas
properties until further guidance is provided.
FORWARD LOOKING INFORMATION
All statements other than statements of historical fact contained in this
Report on Form 10-Q ("Report") and other periodic reports filed by us under the
Securities Exchange Act of 1934 and other written or oral statements made by us
or on our behalf, are forward-looking statements. When used herein, the words
"anticipates", "expects", "believes", "goals", "intends", "plans", or "projects"
and similar expressions are intended to identify forward-looking statements. It
is important to note that forward-looking statements are based on a number of
assumptions about future events and are subject to various risks, uncertainties
and other factors that may cause our actual results to differ materially from
the views, beliefs and estimates expressed or implied in such forward-looking
statements. We refer you specifically to the section "Additional Factors
Affecting Business" in Items 1 and 2 of our Annual Report on Form 10-K for the
year ended December 31, 2003. Although we believe that the assumptions on which
any forward-looking statements in this Report and other periodic reports filed
by us are reasonable, no assurance can be given that such assumptions will prove
correct. All forward-looking statements in this document are expressly qualified
in their entirety by the cautionary statements in this paragraph.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
INTEREST RATE RISK
We are exposed to changes in interest rates. Changes in interest rates
affect the interest earned on our cash and cash equivalents and the interest
rate paid on borrowings under our bank facility. Currently, we do not use
interest rate derivative instruments to manage exposure to interest rate
changes. At March 31, 2004, none of our long-term debt had variable interest
rates; therefore an increase in the variable interest rate would not have a
material impact on net income.
COMMODITY PRICE RISK
Our revenues, profitability and future growth depend substantially on
prevailing prices for oil and natural gas. Prices also affect the amount of cash
flow available for capital expenditures and our ability to borrow and raise
additional capital. The amount we can borrow under the bank credit facility is
subject to periodic redetermination based in part on changing expectations of
future prices. Lower prices may also reduce the amount of oil and natural gas
that we can economically produce. We currently sell all of our oil and natural
gas production under price sensitive or market price contracts.
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We use derivative commodity instruments to manage commodity price risks
associated with future oil and natural gas production. As of March 31, 2004, we
had the following contracts in place:
NATURAL GAS POSITIONS
--------------------------------------------------------------------------------------------------------------------
VOLUME (Mmbtu)
--------------
REMAINING CONTRACT TERM CONTRACT TYPE STRIKE PRICE ($/Mmbtu) DAILY TOTAL
----------------------- ------------- ---------------------- ----- -----
04/04 - 6/04....................... Collar $4.00/$7.00 10,000 910,000
04/04 - 12/04...................... Collar $4.00/$6.50 10,000 2,750,000
04/04 - 12/04...................... Collar $3.50/$8.00 10,000 2,750,000
CRUDE OIL POSITIONS
--------------------------------------------------------------------------------------------------------------------
VOLUME (Bbls)
-------------
REMAINING CONTRACT TERM CONTRACT TYPE STRIKE PRICE ($/Bbl) DAILY TOTAL
----------------------- ------------- -------------------- ----- -----
04/04 - 12/04...................... Swap $26.84 1,500 412,500
04/04 - 06/04...................... Collar $25.00/$30.00 1,500 136,500
07/04 - 09/04...................... Collar $24.00/$29.00 1,500 138,000
10/04 - 12/04...................... Collar $24.00/$28.75 1,500 138,000
Our hedged volume as of March 31, 2004 approximated 32% of our estimated
production from proved reserves for the balance of the terms of the contracts.
Had these contracts been terminated at March 31, 2004, we estimate the loss
would have been $5.8 million.
We use a sensitivity analysis technique to evaluate the hypothetical
effect that changes in the market value of crude oil and natural gas may have on
the fair value of our derivative instruments. At March 31, 2004, the potential
change in the fair value of commodity derivative instruments assuming a 10%
increase in the underlying commodity price was a $3.4 million increase in the
combined estimated loss.
For purposes of calculating the hypothetical change in fair value, the
relevant variables are the type of commodity (crude oil or natural gas), the
commodities futures prices and volatility of commodity prices. The hypothetical
fair value is calculated by multiplying the difference between the hypothetical
price and the contractual price by the contractual volumes.
ITEM 4. CONTROLS AND PROCEDURES
Under the supervision and with the participation of certain members of our
management, including the Chief Executive Officer and Chief Financial Officer,
we completed an evaluation of the effectiveness of our disclosure controls and
procedures (as defined in Rules 13a-15(e) and 15d-15(e) to the Securities
Exchange Act of 1934, as amended). Based on this evaluation, our Chief Executive
Officer and Chief Financial Officer believe that the disclosure controls and
procedures were effective as of the end of the period covered by this Report
with respect to timely communication to them and other members of management
responsible for preparing periodic reports and all material information required
to be disclosed in this Report as it relates to our Company and its consolidated
subsidiaries. There was no change in our internal control over financial
reporting during the quarter ended March 31, 2004 that has materially affected,
or is reasonably likely to materially affect, our internal control over
financial reporting.
Our management, including the Chief Executive Officer and Chief Financial
Officer, does not expect that our disclosure controls and procedures or our
internal controls will prevent all errors and all fraud. A control system, no
matter how well conceived and operated, can provide only reasonable, not
absolute, assurance that the objectives of the control system are met. Further,
the design of a control system must reflect the fact that there are resource
constraints, and the benefits of controls must be considered relative to their
costs. Because of the inherent limitations in all control systems, no evaluation
of controls can provide absolute assurance that all control issues and instances
of fraud, if any, within the company have been detected. These inherent
limitations include the realities that judgments in decision-making can be
faulty, and that breakdowns can occur because of simple error or mistake.
Additionally, controls can be circumvented by the individual acts of some
persons or by collusion of two or more people. The design of any system of
controls also is based in part upon certain assumptions about the likelihood of
future events, and there can be no assurance that any design will succeed in
achieving its stated goals under all potential future conditions; over time,
controls may become inadequate because of changes in conditions, or the degree
of compliance with the policies or procedures may deteriorate. Because of the
inherent limitations in a cost-effective control system, misstatements due to
error or fraud may occur and not be detected. Accordingly, our disclosure
controls and procedures are designed to provide reasonable,
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not absolute, assurance that the objectives of our disclosure control system are
met and, as set forth above, our Chief Executive Officer and Chief Financial
Officer have concluded, based on their evaluation as of the end of the period,
that our disclosure controls and procedures were sufficiently effective to
provide reasonable assurance that the objectives of our disclosure control
system were met.
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
31.1 Rule 13a-14(a)/15d-14(a) Certification of Chairman, President, and
Chief Executive Officer of Energy Partners, Ltd.
31.2 Rule 13a-14(a)/15d-14(a) Certification of Executive Vice President
and Chief Financial Officer of Energy Partners, Ltd.
32.0 Section 1350 Certifications.
(b) Reports on Form 8-K:
On March 19, 2004 the Company filed a current report on Form 8-K,
reporting, under Item 5, the Company and Bruce R. Sidner entered
into an amendment to Mr. Sidner's Employment and Stock Ownership
Agreement.
On March 23, 2004 the Company filed a current report on Form 8-K,
reporting, under Item 5, Gary L. Hall was resigning as Vice Chairman
and Director of the Company to pursue other personal interests.
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SIGNATURE
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.
ENERGY PARTNERS, LTD.
Date: May 6, 2004 By: /s/ Suzanne V. Baer
----------------------------
Suzanne V. Baer
Executive Vice President and
Chief Financial Officer
(Authorized Officer and
Principal Financial Officer)
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EXHIBIT INDEX
Exhibit
Number Description of Exhibit
------- ----------------------
31.1 Rule 13a-14(a)/15d-14(a) Certification of Chairman, President, and
Chief Executive Officer of Energy Partners, Ltd.
31.2 Rule 13a-14(a)/15d-14(a) Certification of Executive Vice President
and Chief Financial Officer of Energy Partners, Ltd.
32.0 Section 1350 Certifications.
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