UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 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, 2002
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from __________________ to _________________
Commission file number: 1-10671
THE MERIDIAN RESOURCE CORPORATION
(Exact name of registrant as specified in its charter)
TEXAS 76-0319553
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
1401 ENCLAVE PARKWAY, SUITE 300, HOUSTON, TEXAS 77077
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: 281-597-7000
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 and 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
--- ---
Number of shares of common stock outstanding at May 3, 2002 49,915,343
Page 1 of 19
THE MERIDIAN RESOURCE CORPORATION
QUARTERLY REPORT ON FORM 10-Q
INDEX
Page
Number
------
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Statements of Operations (unaudited) for the
Three Months Ended March 31, 2002 and 2001 3
Consolidated Balance Sheets as of March 31, 2002 (unaudited)
and December 31, 2001 4
Consolidated Statements of Cash Flows (unaudited) for the
Three Months Ended March 31, 2002 and 2001 6
Notes to Consolidated Financial Statements (unaudited) 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 10
Item 3. Quantitative and Qualitative Disclosures about Market Risk 17
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 18
Item 6. Exhibits and Reports on Form 8-K 18
SIGNATURES 19
2
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
THE MERIDIAN RESOURCE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(thousands of dollars, except per share information)
(unaudited)
THREE MONTHS ENDED
MARCH 31,
------------------------
2002 2001
-------- --------
REVENUES:
Oil and natural gas $ 24,609 $ 69,334
Price risk management activities (805) --
Interest and other 44 735
-------- --------
23,848 70,069
-------- --------
OPERATING COSTS AND EXPENSES:
Oil and natural gas operating 3,089 4,812
Severance and ad valorem taxes 2,717 3,675
Depletion and depreciation 13,361 17,186
General and administrative 3,258 4,981
-------- --------
22,425 30,654
-------- --------
EARNINGS BEFORE INTEREST
AND INCOME TAXES 1,423 39,415
OTHER EXPENSES:
Interest expense 3,900 6,418
Taxes on income (900) 12,900
-------- --------
3,000 19,318
-------- --------
NET EARNINGS (LOSS) (1,577) 20,097
DIVIDENDS ON PREFERRED STOCK -- 429
-------- --------
NET EARNINGS (LOSS) APPLICABLE
TO COMMON STOCKHOLDERS $ (1,577) $ 19,668
======== ========
NET EARNINGS (LOSS) PER SHARE:
Basic $ (0.03) $ 0.40
======== ========
Diluted $ (0.03) $ 0.34
======== ========
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES:
Basic 49,182 49,699
======== ========
Diluted 49,182 60,881
======== ========
See notes to consolidated financial statements.
3
THE MERIDIAN RESOURCE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(thousands of dollars)
(unaudited)
MARCH 31, DECEMBER 31,
2002 2001
---------- ------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 9,577 $ 14,340
Accounts receivable, less allowance for doubtful
accounts $891 [2002 and 2001] 45,339 23,875
Due from affiliates 2,352 844
Prepaid expenses and other 1,602 1,825
---------- ----------
Total current assets 58,870 40,884
---------- ----------
PROPERTY AND EQUIPMENT:
Oil and natural gas properties, full cost method
(including $30,887 [2002] and
$30,247 [2001] not subject to depletion) 1,096,976 1,085,656
Land 478 478
Equipment 9,625 9,578
---------- ----------
1,107,079 1,095,712
Accumulated depletion and depreciation 645,120 631,758
---------- ----------
461,959 463,954
---------- ----------
OTHER ASSETS 3,678 2,828
---------- ----------
$ 524,507 $ 507,666
========== ==========
See notes to consolidated financial statements.
4
THE MERIDIAN RESOURCE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (continued)
(thousands of dollars)
(unaudited)
MARCH 31, DECEMBER 31,
2002 2001
--------- ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 36,095 $ 35,952
Revenues and royalties payable 9,360 9,562
Notes payable 10,255 25,763
Accrued liabilities 9,866 15,895
Oil and natural gas hedging derivatives 805 --
Current income taxes payable 173 (27)
--------- ---------
Total current liabilities 66,554 87,145
--------- ---------
LONG-TERM DEBT 205,000 190,000
--------- ---------
9 1/2% CONVERTIBLE SUBORDINATED NOTES 20,000 20,000
--------- ---------
DEFERRED INCOME TAXES 21,400 22,300
--------- ---------
REDEEMABLE PREFERRED STOCK:
Preferred stock, $1.00 par value (1,500,000 shares
authorized, 245,000 [2002]
shares of Series C Redeemable
Convertible Preferred Stock issued at stated value) 24,500 --
--------- ---------
STOCKHOLDERS' EQUITY:
Common stock, $0.01 par value (200,000,000 shares
authorized, 53,866,694 [2002] and [2001] issued) 554 553
Additional paid-in capital 378,094 393,280
Accumulated deficit (159,303) (157,726)
Unrealized loss on securities held for resale (185) (185)
Unamortized deferred compensation (378) (386)
--------- ---------
218,782 235,536
Less treasury stock, at cost (3,951,351 [2002] and
5,892,342 [2001] shares) 31,729 47,315
--------- ---------
Total stockholders' equity 187,053 188,221
--------- ---------
$ 524,507 $ 507,666
========= =========
See notes to consolidated financial statements.
5
THE MERIDIAN RESOURCE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(thousands of dollars)
(unaudited)
THREE MONTHS ENDED
MARCH 31,
----------------------
2002 2001
--------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings (loss) $ (1,577) $ 20,097
Adjustments to reconcile net earnings (loss) to net cash
provided by operating activities:
Depletion and depreciation 13,361 17,186
Amortization of other assets 520 515
Non-cash compensation 409 402
Non-cash price risk management activities 805 --
Deferred income taxes (900) 10,600
Changes in assets and liabilities:
Accounts receivable 3,036 1,620
Due from affiliates (1,508) 35
Prepaid expenses and other 223 (565)
Accounts payable 143 5,850
Revenues and royalties payable (202) 1,322
Notes payable (508) 24,746
Accrued liabilities and other (5,829) 6,757
--------- ---------
Net cash provided by operating activities 7,973 88,565
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property and equipment (11,485) (34,553)
Sale of property and equipment 119 --
--------- ---------
Net cash used in investing activities (11,366) (34,553)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repurchase of stock -- (114,000)
Issuance of stock/exercise of options -- 462
Preferred dividends -- (3,129)
Additions to deferred loan costs (1,370) (468)
--------- ---------
Net cash used by financing activities (1,370) (117,135)
--------- ---------
NET CHANGE IN CASH AND CASH EQUIVALENTS (4,763) (63,123)
Cash and cash equivalents at beginning of period 14,340 95,122
--------- ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 9,577 $ 31,999
========= =========
See notes to consolidated financial statements.
6
THE MERIDIAN RESOURCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
1. BASIS OF PRESENTATION
The consolidated financial statements reflect the accounts of The Meridian
Resource Corporation and its subsidiaries (the "Company") after elimination of
all significant intercompany transactions and balances. The financial statements
should be read in conjunction with the consolidated financial statements and
notes thereto included in the Company's Annual Report on Form 10-K for the year
ended December 31, 2001, as filed with the Securities and Exchange Commission.
The financial statements included herein as of March 31, 2002, and for the three
month periods ended March 31, 2002 and 2001, are unaudited, and in the opinion
of management, the information furnished reflects all material adjustments,
consisting of normal recurring adjustments, necessary for a fair statement of
the results for the interim periods presented.
2. NOTES PAYABLE
SHORT-TERM NOTE AGREEMENT
The Company extended and amended the short-term subordinated credit agreement
with Fortis Capital Corporation for $25 million on April 5, 2002. The interest
rate is the London interbank offered rate ("LIBOR") plus 4.5% through December
31, 2002, LIBOR plus 5.5% from January 1, 2003, through August 31, 2003, and
LIBOR plus 6.5% from September 1, 2003, through December 31, 2004. Note payments
of $5 million each are due on September 30, 2002, December 31, 2002, August 31,
2003 and April 30, 2004, with the remaining $5 million payable on December 31,
2004.
3. DEBT
LONG-TERM DEBT
In May 1998, the Company amended and restated its credit facility with The Chase
Manhattan Bank as Administrative Agent (the "Credit Facility") to provide for
maximum borrowings, subject to borrowing base limitations, of up to $250
million. Under the amendment to our credit facility, our lenders agreed to
maintain our borrowing base at $190 million until May 31, 2002. If our lenders
do not unanimously agree upon a new borrowing base redetermination by that date,
the borrowing base will be automatically redetermined to equal $180 million
until a new borrowing base has been agreed upon by all of the lenders.
9 1/2% CONVERTIBLE SUBORDINATED NOTES
During March 2002, the Company and the holders of the Notes amended the
conversion price to $5.00 per share. The conversion price is subject to
customary anti-dilution provisions. The holders of the Notes have been granted
registration rights with respect to the shares of Common Stock that would be
issued upon conversion of the Notes.
7
4. REDEEMABLE CONVERTIBLE PREFERRED STOCK
As of March 31, 2002, the Company had received contractual agreements to
purchase the private placement of $24.5 million of 8.5% redeemable convertible
preferred stock. The remainder of this private placement was completed during
early May 2002, for a total of $67 million. The preferred stock is convertible
into shares of the Company's Common Stock at a conversion price of $4.75 per
share. Dividends are payable semi-annually in cash. At the option of the
Company, one-third of the preferred shares can be forced to convert to Common
Stock if the closing price of the Company's Common Stock exceeds 150% of the
conversion price for 30 out of 40 consecutive trading days on the New York Stock
Exchange. Based on the above conversion criteria, the Company can elect to
convert up to one-third of the original issue provided that the conversion
occurs no sooner than twelve months from the most recent conversion. The
preferred stock is subject to redemption at the option of the Company after
March 2005, and mandatory redemption on March 31, 2009. The holders of the
preferred stock have been granted registration rights with respect to the shares
of Common Stock issued upon conversion of the preferred stock. Proceeds from the
preferred offering are going to be used to accelerate the Company's development
of the recently acquired Biloxi Marshlands acreage position as well as to
accelerate the drilling of the Company's inventory of exploratory and
development projects. In addition, the Company plans to use a portion of the
proceeds to further improve working capital and reduce outstanding long-term
debt.
5. COMMITMENTS AND CONTINGENCIES
LITIGATION
There are no material legal proceedings to which Meridian or any of its
subsidiaries or partnerships is a party or by which any of its property is
subject, other than ordinary and routine litigation incidental to the business
of producing and exploring for crude oil and natural gas.
8
6. EARNINGS PER SHARE
(in thousands, except per share)
The following tables set forth the computation of basic and diluted net earnings
(loss) per share:
THREE MONTHS ENDED
MARCH 31,
------------------
2002 2001
------- -------
Numerator:
Net earnings (loss) applicable to common stockholders $(1,577) $19,668
Plus income impact of assumed conversions:
Preferred stock dividends -- 429
Interest on convertible subordinated notes 309 309
Net earnings (loss) applicable to common stockholders
plus assumed conversions $(1,268) $20,406
Denominator:
Denominator for basic net earnings (loss) per
share - weighted-average shares outstanding 49,182 49,699
Effect of potentially dilutive common shares:
Convertible preferred stock -- 3,994
Convertible subordinated notes N/A 2,857
Employee and director stock options N/A 1,850
Warrants N/A 2,481
------- -------
Denominator for diluted net earnings (loss) per
share - weighted-average shares outstanding
and assumed conversions 49,182 60,881
======= =======
Basic net earnings (loss) per share $ (0.03) $ 0.40
======= =======
Diluted net earnings (loss) per share $ (0.03) $ 0.34
======= =======
7. ISSUANCE OF STOCK GRANTS
In December 2001, an offer was made to repurchase and terminate certain
interests in the Well Bonus Plans from current and former employees in exchange
for the issuance of Common Stock. The offering was for a total of 1,940,991
shares of our Common Stock. The Common Stock was issued on February 4, 2002, at
the last reported sales price of $3.48 per share. The Board of Directors and the
individuals involved agreed to have the effective date of this transaction to be
December 31, 2001.
8. OIL AND NATURAL GAS HEDGING ACTIVITIES
During March 2002, the Company entered into derivative agreements to hedge a
portion of its oil and gas production volumes through the typically volatile
summer months. Through the use of costless collars the Company hedged
approximately 55% of its gas production and 27% of its oil production, for a six
month period from April 1, 2002 through September 30, 2002, establishing average
floors of $2.25 per MMBTU and $20.00 per barrel and average ceilings of $3.98
per MMBTU and $29.18 per barrel. As of March 31, 2002, the Company had an
unrealized non-cash loss of $805,000 due to the mark-to-market valuation of the
derivative agreements.
9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following is a discussion of Meridian's financial operations for the three
months ended March 31, 2002 and 2001. The notes to the Company's consolidated
financial statements included in this report, as well as our Annual Report on
Form 10-K for the year ended December 31, 2001 (and the notes attached thereto),
should be read in conjunction with this discussion.
GENERAL
BUSINESS ACTIVITIES. During the first quarter of 2002, Meridian's drilling
activities have been focused in the Company's East Lake Arthur and Lakeside
Fields. We anticipate drilling activities in these areas, as well as the Biloxi
Marshlands acreage and the Kent Bayou Field, will comprise the majority of our
capital budget for 2002, currently set at $70 million.
Current activities are as follows:
During March 2002, the Company commenced drilling operations on the East Lake
Arthur - Hughes #2 well in Jefferson Davis Parish, Louisiana. The well is a
replacement well for the Hughes #1 that experienced cementing problems during
the completion phase and was subsequently abandoned. The well is currently
drilling at approximately 14,100 feet with an objective depth of approximately
19,000 feet. During the drilling of the Hughes #1 well, the Company logged an
apparent 100' of net pay in the Bol Mex 3-6 sands and detected no water levels.
The Company owns a 96% working interest and a 68% net revenue interest in the
field. If the Hughes #2 well confirms the results of the Hughes #1 well, the
Company expects to drill additional wells in the field.
During April 2002, the Company began drilling the Lakeside - Lacassane #1 well
located in Cameron Parish, Louisiana. The well is being drilled to test an updip
location to the Lakeside - SL 15223 #1 well that discovered in excess of 100' of
productive sands in the Marg Howei and Camerina intervals. The Company is
operator of the well and has a 73% working interest and a 42% net revenue
interest.
During June 2002, the Company expects to commence operations on its Biloxi
Marshlands acreage. The first well on the new exploratory acreage will be
drilled to test a 3-D seismic-defined amplitude which has known production on
adjacent acreage. The Company has applied for and received a unit designation
for the drilling location. The Company will own an approximate 54% working
interest and an approximate 39% net revenue interest in the initial well based
on the current unit designation. After development of production facilities a
second well is scheduled to drill to test an additional 3-D seismic-defined
amplitude. The Company will own an approximate 72% working interest and an
approximate 51% net revenue interest in the second well. Two additional
exploratory wells located outside the unit boundaries of the first two wells are
planned for the third and fourth quarters of 2002. The Company anticipates
having an average 94% working interest and an average 70% net revenue interest
in the majority of the wells drilled subsequent to the first two unit wells.
Additionally, the Company is in the process of underwriting a large-scale
proprietary 3-D seismic survey that will image approximately 500 square miles in
three phases over the next three years. The first phase of the seismic survey is
anticipated to commence during the second quarter of 2002 and cover
approximately 170 square miles. Based on 2-D and 3-D seismic acquired over a
small portion of the acreage to date, the Company's geologists have begun
initial mapping of more than a dozen prospect leads. The Biloxi Marshlands
project focuses on relatively shallow, normal pressured horizons. As a result,
the project will blend with the Company's traditional deep plays, providing
lower costs, reduced mechanical risks and an expected high probability of
success.
10
INDUSTRY CONDITIONS. Revenues, profitability and future growth rates of Meridian
are substantially dependent upon prevailing prices for oil and natural gas. Oil
and natural gas prices have been extremely volatile in recent years and are
affected by many factors outside of our control. Our average oil price for the
three months ended March 31, 2002, was $20.62 per barrel compared to $28.97 per
barrel for the three months ended March 31, 2001, and $18.98 per barrel for the
three months ended December 31, 2001. Our average natural gas price for the
three months ended March 31, 2002, was $2.51 per Mcf compared to $7.78 per Mcf
for the three months ended March 31, 2001, and $2.53 per Mcf for the three
months ended December 31, 2001. Fluctuations in prevailing prices for oil and
natural gas have several important consequences to us, including affecting the
level of cash flow received from our producing properties, the timing of
exploration of certain prospects and our access to capital markets, which could
impact our revenues, profitability and ability to maintain or increase our
exploration and development program.
11
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 2002 COMPARED TO THREE MONTHS ENDED MARCH 31, 2001
OPERATING REVENUES. First quarter 2002 oil and natural gas revenues decreased
$44.7 million as compared to first quarter 2001 revenues, primarily due to a 21%
decrease in production volumes and a 55% decrease in average commodity prices,
both on a natural gas equivalent basis. The decrease in production was a result
of the property sales during 2001 and natural production declines, partially
offset by new discoveries placed on line at varying times during 2001.
The following table summarizes the Company's operating revenues, production
volumes and average sales prices for the three months ended March 31, 2002 and
2001:
THREE MONTHS ENDED
MARCH 31,
-------------------- INCREASE
2002 2001 (DECREASE)
------- ------- ----------
Production Volumes:
Oil (Mbbl) 633 779 (19%)
Natural gas (MMcf) 4,596 6,010 (24%)
MMcfe 8,395 10,684 (21%)
Average Sales Prices:
Oil (per Bbl) $ 20.62 $ 28.97 (29%)
Natural gas (per Mcf) $ 2.51 $ 7.78 (68%)
MMcfe $ 2.93 $ 6.49 (55%)
Operating Revenues (000's):
Oil $13,054 $22,568 (42%)
Natural gas 11,555 46,766 (75%)
------- -------
Total Operating Revenues $24,609 $69,334 (65%)
======= =======
OPERATING EXPENSES. Oil and natural gas operating expenses decreased $1.7
million (36%) to $3.1 million for the three months ended March 31, 2002,
compared to $4.8 million for the same period in 2001. On an equivalent unit of
production basis, lease operating expenses decreased from $0.45 per MCFE for the
first quarter 2001 to $0.37 per MCFE for the 2002 period. This decrease was
primarily due to the sale of high cost, non-core properties during mid 2001 and
the reorganization of field operations during 2001 resulting in greater
efficiencies. In addition, the Company undertook an expanded workover program
during 2001 in order to benefit from the higher commodity prices being realized
at the time.
SEVERANCE AND AD VALOREM TAXES. Severance and ad valorem taxes decreased $1.0
million (26%) to $2.7 million for the first quarter of 2002, compared to $3.7
million during the same period in 2001. Meridian's oil and natural gas
production is primarily from southern Louisiana, and is therefore subject to
Louisiana severance tax. The severance tax rates for Louisiana are 12.5% of
gross oil revenues and $0.199 per Mcf for natural gas, an increase from $0.097
per Mcf effective in July 2001. Our decrease was primarily due to the decrease
in oil and natural gas production and the decrease in oil prices from the same
period in 2001 partially offset by the increase in the natural gas tax rate.
DEPLETION AND DEPRECIATION. Depletion and depreciation expense decreased $3.8
million (22%) during the first quarter of 2002 to $13.4 million from $17.2
million for the same period of 2001. This was primarily a result of the decrease
in production volumes in 2002 from 2001 levels.
12
GENERAL AND ADMINISTRATIVE EXPENSE. General and administrative expense decreased
by $1.7 million (35%) to $3.3 million for three months ended March 31, 2002,
compared to $5.0 million during the comparable period last year. On an
equivalent unit of production basis, general and administrative expenses
decreased to $0.39 per MCFE for the first quarter of 2002 from $0.47 per MCFE in
the first quarter of 2001. This reduction is partially due to the savings
realized from staff reductions during 2001 and the purchase and termination of
certain outstanding well bonus plan interests.
INTEREST EXPENSE. Interest expense decreased $2.5 million (39%) to $3.9 million
for the first quarter of 2002 in comparison to the first quarter of 2001. The
decrease is primarily a result of a decrease in the balance outstanding for the
revolving credit line and a decrease in the interest rates.
13
LIQUIDITY AND CAPITAL RESOURCES
WORKING CAPITAL. During the first quarter of 2002, Meridian's capital
expenditures were internally financed with cash from operations. As of March 31,
2002, we had a cash balance of $9.6 million and a working capital deficit of
$7.7 million, including $10 million short-term notes payable. Our strategy is to
grow the Company prudently, taking advantage of the strong asset base built over
the years to add reserves through the drill bit while maintaining a disciplined
approach to costs. Where appropriate, we will allocate excess cash above capital
expenditures to reduce leverage.
CREDIT FACILITY. We entered into an amended and restated credit facility with
The Chase Manhattan Bank as Administrative Agent (the "Credit Facility") to
provide for maximum borrowings, subject to borrowing base limitations, of up to
$250 million. Under the amendment to our credit facility, our lenders agreed to
maintain our borrowing base at $190 million until May 31, 2002. If our lenders
do not unanimously agree upon a new borrowing base redetermination by that date,
the borrowing base will be automatically redetermined to equal $180 million
until a new borrowing base has been agreed upon by all of the lenders.
Under the Credit Facility, as amended, the Company may secure either (i) an
alternative base rate loan that bears interest at a rate per annum equal to the
greater of the administrative agent's prime rate, a certificate of deposit-based
rate or a federal funds-based rate plus 0.25% to 1.0% or (ii) a Eurodollar base
rate loan that bears interest, generally, at a rate per annum equal to the
London interbank offered rate ("LIBOR") plus 1.25% to 2.75%, depending on the
ratio of the aggregate outstanding loans and letters of credit to the borrowing
base. The Credit Facility also provides for commitment fees ranging from 0.3% to
0.5% per annum.
SHORT-TERM NOTE AGREEMENT. The Company extended and amended the short-term
subordinated credit agreement with Fortis Capital Corporation for $25 million on
April 5, 2002. The interest rate is LIBOR plus 4.5% through December 31, 2002,
LIBOR plus 5.5% from January 1, 2003, through August 31, 2003, and LIBOR plus
6.5% from September 1, 2003, through December 31, 2004. Note payments of $5
million each are due on September 30, 2002, December 31, 2002, August 31, 2003
and April 30, 2004, with the remaining $5 million payable on December 31, 2004.
9 1/2% CONVERTIBLE SUBORDINATED NOTES. During March 2002, the Company and the
holders of the Notes amended the conversion price to $5.00 per share. The
conversion price is subject to customary anti-dilution provisions. The holders
of the Notes have been granted registration rights with respect to the shares of
Common Stock that would be issued upon conversion of the Notes.
REDEEMABLE CONVERTIBLE PREFERRED STOCK. During May 2002, the Company completed
the private placement of $67 million of 8.5% redeemable convertible preferred
stock. See Note 4 of the Notes to Consolidated Financial Statements.
OIL AND NATURAL GAS HEDGING ACTIVITIES. During March 2002, the Company entered
into derivative agreements hedging a portion of its oil and gas production
volumes through the typically volatile summer months. Through the use of
costless collars the Company hedged approximately 55% of the its gas production
and 27% of its oil production, for a six month period from April 1, 2002,
through September 30, 2002, establishing average floors of $2.25 per MMBTU and
$20.00 per barrel and average ceilings of $3.98 per MMBTU and $29.18 per barrel.
CAPITAL EXPENDITURES. In the first quarter of 2002, Meridian's drilling
activities have been focused in the Company's East Lake Arthur and Lakeside
Fields. We anticipate drilling activities in these areas, as well as the Biloxi
Marshlands acreage and the Kent Bayou Field, will comprise the majority of our
2002 capital budget of $70 million.
14
DIVIDENDS. It is our policy to retain existing cash for reinvestment in our
business, and therefore, we do not anticipate that dividends will be paid with
respect to the Common Stock in the foreseeable future. During May 2002, the
Company completed the private placement of $67 million of 8.5% redeemable
convertible preferred stock and dividends are payable semi-annually.
FORWARD-LOOKING INFORMATION
From time to time, we may make certain statements that contain "forward-looking"
information as defined in the Private Securities Litigation Reform Act of 1995
and that involve risk and uncertainty. These forward-looking statements may
include, but are not limited to exploration and seismic acquisition plans,
anticipated results from current and future exploration prospects, future
capital expenditure plans, anticipated results from third party disputes and
litigation, expectations regarding compliance with our credit facility, the
anticipated results of wells based on logging data and production tests, future
sales of production, earnings, margins, production levels and costs, market
trends in the oil and natural gas industry and the exploration and development
sector thereof, environmental and other expenditures and various business
trends. Forward-looking statements may be made by management orally or in
writing including, but not limited to, the Management's Discussion and Analysis
of Financial Condition and Results of Operations section and other sections of
our filings with the Securities and Exchange Commission under the Securities Act
of 1933, as amended, and the Securities Exchange Act of 1934, as amended.
Actual results and trends in the future may differ materially depending on a
variety of factors including, but not limited to the following:
Changes in the price of oil and natural gas. The prices we receive for our oil
and natural gas production and the level of such production are subject to wide
fluctuations and depend on numerous factors that we do not control, including
seasonality, worldwide economic conditions, the condition of the United States
economy (particularly the manufacturing sector), foreign imports, political
conditions in other oil-producing countries, the actions of the Organization of
Petroleum Exporting Countries and domestic government regulation, legislation
and policies. Material declines in the prices received for oil and natural gas
could make the actual results differ from those reflected in our forward-looking
statements.
Operating Risks. The occurrence of a significant event for which we are not
fully insured could have a material adverse effect on our financial position and
results of operations. Our operations are subject to all of the risks normally
incident to the exploration for and the production of oil and natural gas,
including uncontrollable flows of oil, natural gas, brine or well fluids into
the environment (including groundwater and shoreline contamination), blowouts,
cratering, mechanical difficulties, fires, explosions, unusual or unexpected
formation pressures, pollution and environmental hazards, each of which could
result in damage to or destruction of oil and natural gas wells, production
facilities or other property, or injury to persons. In addition, we are subject
to other operating and production risks such as title problems, weather
conditions, compliance with government permitting requirements, shortages of or
delays in obtaining equipment, reductions in product prices, limitations in the
market for products, litigation and disputes in the ordinary course of business.
Although we maintain insurance coverage considered to be customary in the
industry, we are not fully insured against certain of these risks either because
such insurance is not available or because of high premium costs. We cannot
predict if or when any such risks could affect our operations. The occurrence of
a significant event for which we are not adequately insured could cause our
actual results to differ from those reflected in our forward-looking statements.
15
Drilling Risks. Our decision to purchase, explore, develop or otherwise exploit
a prospect or property will depend in part on the evaluation of data obtained
through geophysical and geological analysis, production data and engineering
studies, which are inherently imprecise. Therefore, we cannot assure you that
all of our drilling activities will be successful or that we will not drill
uneconomical wells. The occurrence of unexpected drilling results could cause
the actual results to differ from those reflected in our forward-looking
statements.
Uncertainties in Estimating Reserves and Future Net Cash Flows. Reserve
engineering is a subjective process of estimating the recovery from underground
accumulations of oil and natural gas that cannot be measured in an exact manner,
and the accuracy of any reserve estimate is a function of the quality of
available data and of engineering and geological interpretation and judgement.
Reserve estimates are inherently imprecise and may be expected to change as
additional information becomes available. There are numerous uncertainties
inherent in estimating quantities and values of proved reserves and in
projecting future rates of production and timing of development expenditures,
including many factors beyond our control. Because all reserve estimates are to
some degree speculative, the quantities of oil and natural gas that we
ultimately recover, production and operating costs, the amount and timing of
future development expenditures and future oil and natural gas sales prices may
differ from those assumed in these estimates. Significant downward revisions to
our existing reserve estimates could cause the actual results to differ from
those reflected in our forward-looking statements.
16
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is currently exposed to market risk from hedging contracts changes
and changes in interest rates. A discussion of the market risk exposure in
financial instruments follows.
INTEREST RATES
We are subject to interest rate risk on our long-term fixed interest rate debt
and variable interest rate borrowings. Our long-term borrowings primarily
consist of borrowings under the Credit Facility and the $20 million principal of
9 1/2% Convertible Subordinated Notes due June 18, 2005. Since interest charged
borrowings under the Credit Facility floats with prevailing interest rates
(except for the applicable interest period for Eurodollar loans), the carrying
value of borrowings under the Credit Facility should approximate the fair market
value of such debt. Changes in interest rates, however, will change the cost of
borrowing. Assuming $190 million remains borrowed under the Credit Facility, we
estimate our annual interest expense will change by $1.9 million for each 100
basis point change in the applicable interest rates utilized under the Credit
Facility. Changes in interest rates would, assuming all other things being
equal, cause the fair market value of debt with a fixed interest rate, such as
the Notes, to increase or decrease, and thus increase or decrease the amount
required to refinance the debt. The fair value of the Notes is dependent on
prevailing interest rates and our current stock price as it relates to the
conversion price of $5.00 per share of our Common Stock.
HEDGING CONTRACTS
Meridian may address market risk by selecting instruments whose value
fluctuations correlate strongly with the underlying commodity being hedged. From
time to time, we may enter into swaps and other derivative contracts to hedge
the price risks associated with a portion of anticipated future oil and gas
production. While the use of hedging arrangements limits the downside risk of
adverse price movements, it may also limit future gains from favorable
movements. Under these agreements, payments are received or made based on the
differential between a fixed and a variable product price. These agreements are
settled in cash at or prior to expiration or exchanged for physical delivery
contracts. Meridian does not obtain collateral to support the agreements, but
monitors the financial viability of counter-parties and believes its credit risk
is minimal on these transactions. In the event of nonperformance, we would be
exposed to price risk. Meridian has some risk of accounting loss since the price
received for the product at the actual physical delivery point may differ from
the prevailing price at the delivery point required for settlement of the
hedging transaction.
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PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
There are no material legal proceedings to which Meridian or any of its
subsidiaries or partnerships is a party or by which any of its property is
subject, other than ordinary and routine litigation incidental to the business
of producing and exploring for crude oil and natural gas.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) 3.1 Certificate of Designation for Series C Redeemable Convertible
Preferred Stock dated March 28, 2002.
(b) The Company filed no reports on Form 8-K during the first quarter of 2002.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
THE MERIDIAN RESOURCE CORPORATION AND SUBSIDIARIES
(Registrant)
Date: May 14, 2002 By: /s/ LLOYD V. DELANO
-------------------------------------
Lloyd V. DeLano
Vice President
Chief Accounting Officer
By: /s/ JAMES H. SHONSEY
-------------------------------------
James H. Shonsey
Vice President
Finance and Capital Markets
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EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION
------- -----------
3.1 Certificate of Designation for Series C Redeemable Convertible
Preferred Stock dated March 28, 2002.