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 September 30, 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 October 29, 2004, there were 33,063,025 shares of the Registrant's
Common Stock, par value $0.01 per share, outstanding.
================================================================================
-1-
TABLE OF CONTENTS
Page
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PART I FINANCIAL STATEMENTS
Item 1. Financial Statements:
Consolidated Balance Sheets as of September 30, 2004 and
December 31, 2003.......................................................... 3
Consolidated Statements of Operations for the three and nine months ended
September 30, 2004 and 2003................................................ 4
Consolidated Statements of Cash Flows for the nine months ended
September 30, 2004 and 2003................................................ 5
Notes to Consolidated Financial Statements .................................. 6
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations...................................................... 15
Item 3. Quantitative and Qualitative Disclosures about Market Risk................... 20
Item 4. Controls and Procedures...................................................... 21
PART II OTHER INFORMATION
Item 6. Exhibits.................................................................... 22
-2-
ITEM 1. FINANCIAL STATEMENTS
ENERGY PARTNERS, LTD. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
September 30, December 31,
2004 2003
--------------- ----------------
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents........................................ $ 104,248 $ 104,392
Trade accounts receivable........................................ 40,009 35,315
Other receivables ............................................... 7,251 -
Deferred tax assets ............................................. 4,190 2,939
Prepaid expenses ................................................ 3,213 2,106
--------------- ----------------
Total current assets ..................................... 158,911 144,752
Property and equipment, at cost under the successful efforts
method of accounting for oil and natural gas properties ......... 728,206 598,101
Less accumulated depreciation, depletion and amortization ............ (280,597) (210,013)
--------------- ----------------
Net property and equipment ............................... 447,609 388,088
Other assets ......................................................... 7,341 6,575
Deferred financing costs -- net of accumulated amortization
of $3,949 in 2004 and $3,267 in 2003 ............................ 4,918 4,766
--------------- ----------------
$ 618,779 $ 544,181
=============== ================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable ................................................ $ 17,972 $ 14,650
Accrued expenses ................................................ 57,336 42,487
Fair value of commodity derivative instruments .................. 9,361 3,814
Current maturities of long-term debt ............................ 106 99
--------------- ----------------
Total current liabilities ................................ 84,775 61,050
Long-term debt ....................................................... 150,137 150,317
Deferred tax liabilities ............................................. 45,346 29,584
Asset retirement obligation .......................................... 41,854 40,577
Other ................................................................ 2,044 1,168
--------------- ----------------
324,156 282,696
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 ...................................................... 33,485 34,894
Common stock, par value $0.01 per share. Authorized 50,000,000
shares; issued and outstanding: 2004 - 33,042,864 shares;
2003 - 32,241,981 shares ..................................... 330 323
Additional paid-in capital ...................................... 237,241 228,511
Accumulated other comprehensive loss -- net of deferred taxes of
$3,564 in 2004 and $1,373 in 2003............................. (6,335) (2,441)
Retained earnings ............................................... 29,902 198
--------------- ----------------
Total stockholders' equity ............................... 294,623 261,485
Commitments and contingencies ...................................
--------------- ----------------
$ 618,779 $ 544,181
=============== ================
See accompanying notes to consolidated financial statements.
-3-
ENERGY PARTNERS, LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(In thousands, except per share data)
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------- --------------------------
2004 2003 2004 2003
----------- ----------- ------------ ------------
Revenue:
Oil and natural gas ........................................... $ 73,997 $ 58,811 $ 212,393 $ 169,911
Other ......................................................... 120 68 263 424
----------- ----------- ------------ ------------
74,117 58,879 212,656 170,335
----------- ----------- ------------ ------------
Costs and expenses:
Lease operating ............................................... 10,609 10,671 30,185 28,115
Taxes, other than on earnings ................................. 2,129 1,768 6,449 5,919
Exploration expenditures and dry hole costs ................... 9,998 3,999 26,930 9,235
Depreciation, depletion and amortization ...................... 25,309 22,341 66,261 59,445
General and administrative:
Stock-based compensation ................................... 1,035 340 2,554 819
Other general and administrative ........................... 6,656 6,174 20,406 19,164
----------- ----------- ------------ ------------
Total costs and expenses ............................ 55,736 45,293 152,785 122,697
----------- ----------- ------------ ------------
Income from operations ............................................. 18,381 13,586 59,871 47,638
----------- ----------- ------------ ------------
Other income (expense):
Interest income ............................................... 322 133 785 179
Interest expense .............................................. (3,602) (3,120) (10,762) (6,549)
----------- ----------- ------------ ------------
(3,280) (2,987) (9,977) (6,370)
----------- ----------- ------------ ------------
Income before income taxes and cumulative effect
of change in accounting principle ................ 15,101 10,599 49,894 41,268
Income taxes ....................................................... (5,532) (3,875) (18,223) (15,066)
----------- ----------- ------------ ------------
Income before cumulative effect of change in
accounting principle ............................. 9,569 6,724 31,671 26,202
Cumulative effect of change in accounting principle,
net of income taxes of $1,276 ................................. - - - 2,268
----------- ----------- ------------ ------------
Net income .......................................... 9,569 6,724 31,671 28,470
Less dividends earned on preferred stock and accretion of
discount and issuance costs ................................... (823) (883) (2,573) (2,691)
----------- ----------- ------------ ------------
Net income available to common stockholders ......... $ 8,746 $ 5,841 $ 29,098 $ 25,779
=========== =========== ============ ============
Earnings per share:
Basic:
Before cumulative effect of change in accounting principle ... $ 0.27 $ 0.18 $ 0.89 $ 0.77
Cumulative effect of change in accounting principle .......... $ - $ - $ - $ 0.08
----------- ----------- ------------ ------------
Basic earnings per share ..................................... $ 0.27 $ 0.18 $ 0.89 $ 0.85
=========== =========== ============ ============
Diluted:
Before cumulative effect of change in accounting principle ... $ 0.25 $ 0.18 $ 0.82 $ 0.75
Cumulative effect of change in accounting principle .......... $ - $ - $ - $ 0.06
----------- ----------- ------------ ------------
Diluted earnings per share ................................... $ 0.25 $ 0.18 $ 0.82 $ 0.81
=========== =========== ============ ============
Weighted average common shares used in
Computing income per share:
Basic ...................................................... 32,992 32,101 32,788 30,364
Incremental common shares .................................. 5,912 4,806 5,653 4,792
----------- ----------- ------------ ------------
Diluted .................................................... 38,904 36,907 38,441 35,156
=========== =========== ============ ============
See accompanying notes to consolidated financial statements.
-4-
ENERGY PARTNERS, LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
Nine Months Ended
September 30,
--------------------------------
2004 2003
--------------- ---------------
Cash flows from operating activities:
Net income ................................................................ $ 31,671 $ 28,470
Adjustments to reconcile net income to net cash
provided by operating activities:
Cumulative effect of change in accounting principle, net of tax .... - (2,268)
Depreciation, depletion and amortization ........................... 66,261 59,445
Gain on sale of oil and natural gas assets ......................... - (207)
Stock-based compensation ........................................... 2,603 819
Deferred income taxes .............................................. 18,072 15,266
Exploration expenditures ........................................... 19,540 6,120
Amortization of deferred financing costs ........................... 682 670
Other .............................................................. 104 233
Changes in operating assets and liabilities:
Trade accounts receivable ....................................... (5,599) (4,326)
Other receivables ............................................... (7,251) -
Prepaid expenses................................................. (1,107) (14)
Other assets..................................................... (682) (2,688)
Accounts payable and accrued expenses............................ 2,658 767
Other liabilities................................................ (2,065) (663)
--------------- ---------------
Net cash provided by operating activities .................... 124,887 101,624
--------------- ---------------
Cash flows used in investing activities:
Acquisition of business, net of cash acquired ............................. (2,166) (850)
Property acquisitions ..................................................... (6,076) (4,365)
Exploration and development expenditures .................................. (117,329) (86,224)
Other property and equipment additions .................................... (444) (534)
Proceeds from sale of oil and natural gas assets .......................... - 579
--------------- ---------------
Net cash used in investing activities ........................ (126,015) (91,394)
--------------- ---------------
Cash flows provided by financing activities:
Repayments of long-term debt .............................................. (173) (118,338)
Deferred financing costs .................................................. (725) (4,392)
Equity offering costs ..................................................... - (479)
Proceeds from public offering, net of commissions ......................... - 38,000
Proceeds from senior notes offering ....................................... - 150,000
Proceeds from long-term debt .............................................. - 15,000
Dividends paid ................................................ (1,212) (1,304)
Exercise of stock options and warrants .................................... 3,094 706
--------------- ---------------
Net cash provided by financing activities .................... 984 79,193
--------------- ---------------
Net increase (decrease) in cash and cash equivalents ......... (144) 89,423
Cash and cash equivalents at beginning of period ............................... 104,392 116
--------------- ---------------
Cash and cash equivalents at end of period ..................................... $ 104,248 $ 89,539
=============== ===============
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 September 30, 2004 and for the three and
nine month periods ended September 30, 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 nine 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 NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
2004 2003 2004 2003
--------- -------- --------- --------
Net income available to common stockholders:
As reported................................ $ 8,746 $ 5,841 $ 29,098 $ 25,779
Pro forma.................................. $ 7,779 $ 5,414 $ 27,761 $ 24,780
Basic earnings per share:
As reported................................ $ 0.27 $ 0.18 $ 0.89 $ 0.85
Pro forma.................................. $ 0.24 $ 0.17 $ 0.85 $ 0.82
Diluted earnings per share:
As reported................................ $ 0.25 $ 0.18 $ 0.82 $ 0.81
Pro forma.................................. $ 0.22 $ 0.17 $ 0.79 $ 0.78
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 became exercisable on January
15, 2003 and expire on January 15, 2007. At September 30, 2004 there were
867,777 warrants outstanding with a strike price of $9.00 per share and
2,725,805 warrants outstanding with a strike price of $11.00 per share.
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 from March 3, 2003 until March 1, 2007. The cumulative percentage
remitted to the participants was 20% for the March 3, 2003 and 30% for the March
1, 2004 determination dates and is 35% for the March 1, 2005, 40% for the March
1, 2006 and 50% for the March 1, 2007 determination dates. 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 in
cash, of $2.2 million and $0.9 million related to the March 1, 2004 and the
March 3, 2003 contingent consideration determination 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 tables reconcile the net earnings and common shares
outstanding used in the calculations of basic and diluted earnings per share for
the three and nine month periods ended September 30, 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 September 30, 2004:
Basic............................ $ 8,746 32,992 $ 0.27
Effect of dilutive securities:
Preferred stock............ 823 4,057
Stock options.............. -- 671
Warrants................... -- 1,141
Restricted units........... -- 43
------- --------
Diluted.......................... $ 9,569 38,904 $ 0.25
------- --------
-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 September 30, 2003:
Basic............................ $ 5,841 32,101 $ 0.18
Effect of dilutive securities:
Preferred stock............ 883 4,310
Stock options.............. -- 330
Warrants................... -- 166
------- --------
Diluted.......................... $ 6,724 36,907 $ 0.18
------- --------
WEIGHTED
NET INCOME AVERAGE
AVAILABLE COMMON
TO COMMON SHARES EARNINGS
STOCKHOLDERS OUTSTANDING PER SHARE
------------ ----------- ---------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Nine months ended September 30, 2004:
Basic............................ $ 29,098 32,788 $ 0.89
Effect of dilutive securities:
Preferred stock............ 2,573 4,056
Stock options.............. -- 571
Warrants................... -- 990
Restricted units........... -- 36
--------- --------
Diluted.......................... $ 31,671 38,441 $ 0.82
--------- --------
WEIGHTED
NET INCOME AVERAGE
AVAILABLE COMMON
TO COMMON SHARES EARNINGS
STOCKHOLDERS OUTSTANDING PER SHARE
------------ ----------- ---------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Nine months ended September 30, 2003:
Basic............................ $ 25,779 30,364 $ 0.85
Effect of dilutive securities:
Preferred stock............ 2,691 4,310
Stock options.............. -- 323
Warrants................... -- 159
--------- --------
Diluted.......................... $ 28,470 35,156 $ 0.81
--------- --------
(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 the change in fair value from hedging
transactions that are determined to be ineffective are recorded in other
revenue, whereas gains and losses from the settlement of hedging contracts are
recorded in oil and natural gas 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.
-8-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
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 September 30, 2004:
NATURAL GAS POSITIONS
-------------------------------------------------------------------------------
VOLUME (Mmbtu)
-----------------
REMAINING CONTRACT TERM CONTRACT TYPE STRIKE PRICE($/Mmbtu) DAILY TOTAL
----------------------- ------------- --------------------- ------ ---------
10/04 - 12/04.......... Collar $4.00/ $6.50 10,000 920,000
10/04 - 12/04.......... Collar $3.50/ $8.00 10,000 920,000
01/05 - 12/05.......... Collar $4.50/$10.75 20,000 7,300,000
CRUDE OIL POSITIONS
------------------------------------------------------------------------------
VOLUME (Bbls)
----------------
REMAINING CONTRACT TERM CONTRACT TYPE STRIKE PRICE($/Bbl) DAILY TOTAL
----------------------- ------------- ------------------- ------ -------
10/04 - 12/04.......... Swap $ 26.17 1,500 138,000
10/04 - 12/04.......... Collar $24.00/$28.75 1,500 138,000
01/05 - 12/05.......... Collar $31.00/$44.05 2,000 730,000
Settlements of hedging contracts reduced natural gas and crude oil
revenues by $4.4 million and $8.8 million in the three and nine month periods
ended September 30, 2004 and reduced natural gas and crude oil revenues by $1.2
million and $10.0 million in the three and nine month periods ended September
30, 2003.
The following tables reconcile the change in accumulated other
comprehensive income for the nine month periods ending September 30, 2004 and
2003.
NINE MONTHS ENDED
SEPTEMBER 30, 2004
------------------------
(IN THOUSANDS)
Accumulated other comprehensive loss as of December 31, 2003 ......... $ (2,441)
Net income ........................................................... $ 31,671
Other comprehensive loss - net of tax
Hedging activities
Reclassification adjustments for settled contracts ......... 5,640
Changes in fair value of outstanding hedging positions ..... (9,534)
----------
Total other comprehensive loss ........................ (3,894) (3,894)
---------- ----------
Comprehensive income ................................................. $ 27,777
==========
Accumulated other comprehensive loss as of September 30, 2004 ........ $ (6,335)
==========
-9-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NINE MONTHS ENDED
SEPTEMBER 30, 2003
------------------------
(IN THOUSANDS)
Accumulated other comprehensive loss as of December 31, 2002 ......... $ (2,171)
Net income............................................................ $ 28,470
Other comprehensive income - net of tax
Hedging activities
Reclassification adjustments for settled contracts.......... 6,416
Changes in fair value of outstanding hedging positions...... (4,634)
----------
Total other comprehensive income....................... 1,782 1,782
---------- ----------
Comprehensive income.................................................. $ 30,252
==========
Accumulated other comprehensive loss as of September 30, 2003......... $ (389)
==========
Based upon current prices, the Company expects to transfer approximately
$9.4 million of net deferred losses in accumulated other comprehensive loss as
of September 30, 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 and 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.
The following table reconciles the beginning and ending aggregate recorded
amount of the asset retirement obligation for the nine months ended September
30, 2004.
NINE MONTHS ENDED
SEPTEMBER 30, 2004
------------------
(IN THOUSANDS)
December 31, 2003.......................................... $ 40,577
Accretion expense....................................... 2,665
Liabilities incurred.................................... 1,902
Liabilities settled..................................... (1,982)
Revisions in estimated
cash flows............................................. (1,308)
------------
September 30, 2004......................................... $ 41,854
============
(7) NEW ACCOUNTING PRONOUNCEMENT
In December 2003, the FASB issued FASB Interpretation 46R, "Consolidation
of Variable Interest Entities (revised December 2003) - an interpretation of ARB
No. 51," (FIN 46R) which addresses how a business enterprise should evaluate
whether it has a controlling financial interest in an entity through
-10-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
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.
(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.
On July 16, 2004, the Company filed a universal shelf registration
statement (the Registration Statement) which will allow the Company to issue an
aggregate of $300 million in common stock, preferred stock, senior debt and
subordinated debt in one or more separate offerings with the size, price and
terms to be determined at the time of the sale. The Registration Statement was
declared effective on October 12, 2004.
(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 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 August 3, 2004, the Company amended and extended to August 3, 2008 its
bank credit facility. Under the amendment the initial borrowing base remains $60
million. The borrowing base remains subject to redetermination based on the
proved reserves of the Company's 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
-11-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
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.
SUPPLEMENTAL CONDENSED CONSOLIDATING BALANCE SHEET
AS OF SEPTEMBER 30, 2004
(IN THOUSANDS)
PARENT
COMPANY GUARANTOR
ONLY SUBSIDIARIES ELIMINATIONS CONSOLIDATED
----------- ------------ ------------ ------------
ASSETS
Current assets:
Cash and cash equivalents ...................................... $ 104,248 $ -- $ -- $ 104,248
Trade accounts receivable ...................................... 45,135 2,125 -- 47,260
Other current assets ........................................... 7,403 -- -- 7,403
----------- ----------- ----------- -----------
Total current assets............................... 156,786 2,125 -- 158,911
Property and equipment .............................................. 533,231 194,975 -- 728,206
Less accumulated depreciation, depletion and amortization ........... (203,244) (77,353) -- (280,597)
----------- ----------- ----------- -----------
Net property and equipment .......................................... 329,987 117,622 -- 447,609
Investment in affiliates ............................................ 83,241 -- (83,241) --
Notes receivable, long-term ......................................... -- 69,000 (69,000) --
Other assets ........................................................ 12,308 (49) -- 12,259
----------- ----------- ----------- -----------
$ 582,322 $ 188,698 $ (152,241) $ 618,779
=========== =========== =========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses .......................... $ 74,743 $ 565 $ -- $ 75,308
Fair value of commodity derivative
instruments .................................................. 9,361 -- -- 9,361
Current maturities of long-term debt ........................... -- 106 -- 106
----------- ----------- ----------- -----------
Total current liabilities .................................... 84,104 671 -- 84,775
Long-term debt ...................................................... 150,000 69,137 (69,000) 150,137
Other liabilities ................................................... 53,595 35,649 -- 89,244
----------- ----------- ----------- -----------
287,699 105,457 (69,000) 324,156
Stockholders' equity
Preferred stock ................................................ 33,485 -- -- 33,485
Common stock ................................................... 330 -- -- 330
Additional paid-in capital ..................................... 237,241 -- -- 237,241
Accumulated other comprehensive loss ........................... (6,335) -- -- (6,335)
Retained earnings .............................................. 29,902 83,241 (83,241) 29,902
----------- ----------- ----------- -----------
Total stockholders' equity ................................... 294,623 83,241 (83,241) 294,623
----------- ----------- ----------- -----------
$ 582,322 $ 188,698 $ (152,241) $ 618,779
=========== =========== =========== ===========
-12-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 2004
(IN THOUSANDS)
PARENT
COMPANY GUARANTOR
ONLY SUBSIDIARIES ELIMINATIONS CONSOLIDATED
-------- ------------ ------------ ------------
Revenue:
Oil and natural gas.................. $163,014 $ 49,379 $ -- $ 212,393
Other................................ 17,644 251 (17,632) 263
-------- -------- -------- --------
180,658 49,630 (17,632) 212,656
Costs and expenses:
Lease operating expenses............. 17,061 13,124 -- 30,185
Taxes, other than on earnings........ 1,565 4,884 -- 6,449
Exploration expenditures............. 25,596 1,334 -- 26,930
Depreciation, depletion and
amortization...................... 53,993 12,268 -- 66,261
General and administrative........... 22,589 11,621 (11,250) 22,960
-------- -------- -------- --------
Total costs and expenses......... 120,804 43,231 (11,250) 152,785
Income from operations................. 59,854 6,399 (6,382) 59,871
Interest expense, net.................. (9,960) (17) -- (9,977)
Income before income taxes............. 49,894 6,382 (6,382) 49,894
Income taxes........................... (18,223) -- -- (18,223)
-------- -------- -------- --------
Net income............................. $ 31,671 $ 6,382 $ (6,382) $ 31,671
======== ======== ======== ========
-13-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 30, 2004
(IN THOUSANDS)
PARENT
COMPANY GUARANTOR
ONLY SUBSIDIARIES ELIMINATIONS CONSOLIDATED
------------ ------------ ------------ ------------
Net cash provided by operating
activities ............................................... $ 108,350 $ 16,537 $ -- $ 124,887
Cash flows used in investing activities:
Acquisition of business, net of cash acquired ............ (2,166) -- -- (2,166)
Property acquisitions .................................... (3,564) (2,512) -- (6,076)
Exploration and development expenditures ................. (103,304) (14,025) -- (117,329)
Other property and equipment additions ................... (444) -- -- (444)
------------ ----------- ------------ ------------
Net cash used in investing activities ...................... (109,478) (16,537) -- (126,015)
------------ ----------- ------------ ------------
Cash flows provided by financing activities:
Repayments of long-term debt ............................. (173) -- -- (173)
Deferred financing costs ................................. (725) -- -- (725)
Dividends paid ........................................... (1,212) -- -- (1,212)
Exercise of stock options and warrants ................... 3,094 -- -- 3,094
------------ ----------- ------------ ------------
Net cash provided by financing
activities .............................................. 984 -- -- 984
------------ ----------- ------------ ------------
Net increase in cash and cash equivalents .................. (144) -- -- (144)
Cash and cash equivalents at beginning of
period .................................................. 104,392 -- -- 104,392
------------ ----------- ------------ ------------
Cash and cash equivalents at end of period ................. $ 104,248 $ -- $ -- $ 104,248
============ =========== ============ ============
(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.
-14-
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 current
operations are concentrated in the shallow to moderate depth waters of the Gulf
of Mexico Shelf.
During the first nine months of 2004, we reported another period of growth
and progress in implementing our long-term growth strategy. Our strong cash flow
provided us the flexibility to make necessary and appropriate investments to
continue our 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. 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 they are 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 since the end of the fiscal year.
On April 16, 2003, we completed the public offering of approximately 4.2
million shares of our common stock, 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
8.75% Senior Notes Due 2010 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 (i)
redeem all of our outstanding 11% Senior Subordinated Notes Due 2009 (the
"Notes"), which had been issued in connection with a business combination in
2002, and (ii) 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 potential acquisitions.
During 2003, Evercore on two occasions exercised a contractual right to
request us to register with the SEC the possible public sale of shares of our
common stock owned by Evercore. 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.
On July 16, 2004, we filed a universal shelf registration statement (the
"Registration Statement") which will allow us to issue an aggregate of $300
million in common stock, preferred stock, senior debt and subordinated debt in
one or more separate offerings with the size, price and terms to be determined
at the time of the sale. The Registration Statement was declared effective on
October 12, 2004.
-15-
On August 3, 2004, we amended and extended to August 3, 2008 our bank
credit facility. Under the amendment our initial borrowing base remains $60
million. The borrowing base remains subject to redetermination based on the
proved reserves of our oil and natural gas properties.
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 prospects 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
continue to seek opportunities to acquire targeted properties with a focus in
our core area of operations and look for opportunities to diversify our reserve
and production base beyond the Gulf of Mexico Shelf.
RESULTS OF OPERATIONS
The following table presents information about our oil and natural gas
operations.
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------------ ------------------------------
2004 2003 2004 2003
------------- ------------- ------------- -------------
Net production (per day):
Oil (Bbls) ......................................... 8,893 7,841 8,433 7,778
Natural gas (Mcf) .................................. 86,050 86,301 83,422 76,698
Total barrels of oil equivalent (Boe) ........... 23,235 22,225 22,337 20,561
Oil and natural gas revenues (in thousands):
Oil ................................................ $ 28,154 $ 19,364 $ 76,737 $ 59,441
Natural gas ........................................ 45,843 39,447 135,656 110,470
Total ........................................... 73,997 58,811 212,393 169,911
Average sales prices, net of hedging:
Oil (per Bbl) ...................................... $ 34.41 $ 26.84 $ 33.21 $ 27.99
Natural gas (per Mcf) .............................. 5.79 4.97 5.93 5.28
Total (per Boe) ................................. 34.62 28.76 34.70 30.27
Impact of hedging:
Oil (per Bbl) ...................................... $ (5.39) $ (1.55) $ (3.55) $ (1.59)
Natural gas (per Mcf) .............................. -- (0.02) (0.03) (0.32)
Average costs (per Boe):
Lease operating expense ............................ $ 4.96 $ 5.22 $ 4.93 $ 5.01
Taxes, other than on earnings ...................... 1.00 0.86 1.05 1.05
Depreciation, depletion and amortization ........... 11.84 10.93 10.83 10.59
Increase in oil and natural gas revenues between
Periods presented (net of hedging) due to:
Changes in prices of oil .......................... $ 5,363 $ 11,080
Changes in production volumes of oil .............. 3,427 6,216
Total increase in oil sales ..................... 8,790 17,296
Changes in prices of natural gas .................. $ 6,530 $ 13,717
Changes in production volumes of natural gas ...... (134) 11,469
Total increase in natural gas sales ............. 6,396 25,186
-16-
REVENUES AND NET INCOME
Our oil and natural gas revenues increased to $74.0 million in the third
quarter of 2004 from $58.8 million in the third quarter of 2003. Our oil and
natural gas revenues increased to $212.4 million in the first nine months of
2004 from $169.9 million in the first nine months of 2003. The increase for
these periods is the result of sharply increased natural gas and oil prices
combined with an increase in production from seventeen new natural gas wells and
six new oil wells brought on production since the end of the third quarter of
2003. The increased production in 2004 from the new wells was partially offset
by downtime due to hurricane Ivan of approximately 1,500 Boe per day and by
natural reservoir declines.
We recognized net income of $9.6 million in the third quarter of 2004
compared to net income of $6.7 million in the third quarter of 2003. We
recognized net income of $31.7 million in the first nine months of 2004 compared
to net income of $28.5 million in the first nine months of 2003. The increase
was primarily a result of the increase in oil and natural gas revenues discussed
above partially offset by increased costs discussed below. In addition, the
following item had a significant impact on our net income in the first nine
months 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 nine months ended September 30, 2003 included a cumulative
effect of adoption income of $2.3 million net of deferred income
taxes.
OPERATING EXPENSES
Operating expenses during the three and nine month periods ended September
30, 2004 and 2003 were affected by the following:
- Lease operating expense remained constant in the third quarter of
2004 at $10.6 million compared to $10.7 million in the third quarter
of 2003. Lease operating expense in the current quarter includes
$0.5 million related to the uninsured portion of repairs due to
Hurricane Ivan. Lease operating expense increased to $30.2 million
in the first nine months of 2004 from $28.1 million in the first
nine months of 2003. The increase in the year to date period is a
result of the increase in production, which is primarily from newer
fields with lower fixed costs than our previously existing
production. As a result we have been able to reduce our costs on a
barrel equivalent basis for both periods in the current year.
- Taxes, other than on earnings, increased to $2.1 million in the
third quarter of 2004 from $1.8 million in the third quarter of
2003. Taxes, other than on earnings, increased to $6.4 million in
the first nine months of 2004 from $5.9 million in the first nine
months of 2003. The increase was due to the increase in commodity
prices. These taxes are expected to fluctuate from period to period
depending on our production volumes from non-federal leases and the
commodity prices received.
- Exploration expenditures, including dry hole costs, increased to
$10.0 million in the third quarter of 2004 from $4.0 million in the
third quarter of 2003. The expense in the third quarter of 2004 is
comprised of $7.4 million of costs for exploratory wells which were
found to be not commercially productive and $2.6 million of seismic
expenditures and delay rentals, whereas the expense in the third
quarter of 2003 is comprised of $1.4 million of costs for
exploratory wells which were found to be not commercially
productive, $1.7 million of proved property impairments at our Ship
Shoal 133 field and $0.9 million of seismic expenditures and delay
rentals.
Exploration expenditures, including dry hole costs and property
impairment costs, increased to $26.9 million in the first nine
months of 2004 from $9.2 million in the first nine months of 2003.
The expense in 2004 is comprised of $13.8 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 and $6.2 million of seismic expenditures and delay
rentals, whereas the expense in the first nine months of 2003 is
comprised of $4.4 million of costs for exploratory wells which were
found to
-17-
be not commercially productive, $1.7 million of proved property
impairments at our Ship Shoal 133 field and $3.1 million of seismic
expenditures and delay rentals.
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 $25.3 million
in the third quarter of 2004 from $22.3 million in the third quarter
of 2003. The increase was due to higher production and a shift in
the production contribution from our various fields. In addition,
the shift in the production contribution from our various fields
also increased our expense per Boe. Some fields carry a higher
depreciation burden than others; therefore, changes in the location
of our production will directly impact this expense.
Depreciation, depletion and amortization increased to $66.3 million
in the first nine months of 2004 from $59.4 million in the first
nine months of 2003. The increase was due to higher production and a
shift in the production contribution from our various fields. In
addition, consistent with the quarter activity, the shift in the
production contribution from our various fields also increased our
expense per Boe from the first nine months of 2003.
- Other general and administrative expenses increased to $6.7 million
in the third quarter of 2004 from $6.2 million in the third quarter
of 2003. The change was due to increased personnel costs of $0.3
million and consulting costs of $0.7 million offset by a decrease in
casualty insurance of $0.5 million.
Other general and administrative expenses increased to $20.4 million
in the first nine months of 2004 from $19.2 million in the first
nine months of 2003. The change was primarily due to increased
personnel costs of $0.5 million and consulting costs of $1.2 million
offset by a decrease in casualty insurance of $0.4 million.
- Non-cash stock-based compensation expense of $1.0 million was
recognized in the third quarter of 2004 compared to $0.3 million in
the third quarter of 2003. Non-cash stock-based compensation expense
of $2.6 million was recognized in the first nine months of 2004
compared to $0.8 million in the first nine months of 2003. The
increased expense relates to new restricted stock and performance
share awards made to employees.
OTHER INCOME AND EXPENSE
INTEREST. Interest expense increased to $3.6 million in the third quarter
of 2004 from $3.1 million in the third quarter of 2003. Interest expense for the
year to date period increased to $10.8 million in 2004 from $6.5 million in
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 nine months of 2004 has continued to provide strong cash flows from
operations which totaled $124.9 million in the first nine months of 2004. We
intend to fund our exploration and development expenditures from internally
generated cash flow, which we define as cash flow from operations before changes
in working capital plus total exploration expenditures. Our cash on hand at
September 30, 2004 was $104.2 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 to fund working capital needs.
Our bank credit facility, as amended on August 3, 2004, consists of a
revolving line of credit with a group of banks available through August 3, 2008
(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
-18-
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 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 1.25% to 2.00% above LIBOR. The borrowing base under the bank credit
facility is secured by substantially all of our assets. At November 1, 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 1.0, and (ii) maintain a minimum EBITDAX to interest
ratio of 3.5 times. We were in compliance with the bank credit facility
covenants as of September 30, 2004.
On August 5, 2003, we issued, in a private placement, $150 million of our
Senior Notes (the 8.75% Senior Notes due 2010). In October 2003, we consummated
an exchange offer pursuant to which we exchanged registered 8.75% Senior Notes
due 2010 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 of the Notes (the 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 down
substantially all of the borrowings under our 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 $126.0 million used in investing activities in the first nine
months of 2004 consisted primarily of oil and natural gas property capital and
exploration and development expenditures. Dry hole costs resulting from
exploration expenditures are excluded from operating cash flows and included in
investing activities. During the first nine months of 2004, we completed 21
drilling projects, 15 of which were successful and 17 recompletion/workover
projects, 13 of which were successful. During the first nine months of 2003, we
completed 11 drilling projects, eight of which were successful and 26
recompletion/workover projects, 23 of which were successful.
Our 2004 capital exploration and development budget is focused on
exploitation and development activities on our proved properties combined with
moderate risk and higher risk exploratory activities on undeveloped leases and
our proved properties, 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
approximately $190 million. During the first nine months of 2004, capital and
exploration expenditures were approximately $145.3 million inclusive of a $2.2
million contingent consideration payment resulting from an acquisition during
2002. The level of our capital and exploration 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.
-19-
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 nine months ended September 30,
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 PRONOUNCEMENT
In December 2003, the FASB issued FASB Interpretation 46R, "Consolidation
of Variable Interest Entities (revised December 2003) - an interpretation of ARB
No. 51," ("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.
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 credit facility. Currently, we do not use
interest rate derivative instruments to manage exposure to interest rate
changes. At September 30, 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 our bank credit facility is
subject to periodic redetermination based in part on changing expectations of
future prices. Lower prices may also
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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.
We use derivative commodity instruments to manage commodity price risks
associated with future oil and natural gas production. As of September 30, 2004,
we had the following contracts in place:
NATURAL GAS POSITIONS
---------------------------------------------------------------------------------
VOLUME (Mmbtu)
-----------------
REMAINING CONTRACT TERM CONTRACT TYPE STRIKE PRICE ($/Mmbtu) DAILY TOTAL
----------------------- ------------- ---------------------- ------ ---------
10/04 - 12/04.......... Collar $ 4.00/$6.50 10,000 920,000
10/04 - 12/04.......... Collar $ 3.50/$8.00 10,000 920,000
01/05 - 12/05.......... Collar $4.50/$10.75 20,000 7,300,000
CRUDE OIL POSITIONS
---------------------------------------------------------------------------------
VOLUME (Bbls)
------------------
REMAINING CONTRACT TERM CONTRACT TYPE STRIKE PRICE ($/Bbl) DAILY TOTAL
----------------------- ------------- -------------------- ----- ----------
10/04 - 12/04.......... Swap $26.17 1,500 138,000
10/04 - 12/04.......... Collar $24.00/$28.75 1,500 138,000
01/05 - 12/05.......... Collar $31.00/$44.05 2,000 730,000
Our hedged volume as of September 30, 2004 approximated 22% of our
estimated production from proved reserves for the balance of the terms of the
contracts. Had these contracts been terminated at September 30, 2004, we
estimate the pre-tax loss would have been $9.9 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 September 30, 2004, the
potential change in the fair value of commodity derivative instruments assuming
a 10% increase in the underlying commodity price was a $3.8 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 of 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 September 30, 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
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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, 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
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.
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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: November 4, 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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