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: September 30, 2001
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 November 2, 2001 47,948,770
Page 1 of 20
THE MERIDIAN RESOURCE CORPORATION
QUARTERLY REPORT ON FORM 10-Q
1
INDEX
Page
Number
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Statements of Operations (unaudited) for the
Three Months and Nine Months Ended September 30, 2001 and 2000 3
Consolidated Balance Sheets as of September 30, 2001 (unaudited)
and December 31, 2000 4
Consolidated Statements of Cash Flows (unaudited) for the
Nine Months Ended September 30, 2001 and 2000 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 18
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 19
Item 6. Exhibits and Reports on Form 8-K 19
SIGNATURES 20
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 NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
----------------------- -----------------------
REVENUES: 2001 2000 2001 2000
---------- ---------- ---------- ----------
Oil and natural gas $ 33,582 $ 61,953 $ 148,617 $ 161,427
Interest and other 176 828 1,236 1,305
---------- ---------- ---------- ----------
33,758 62,781 149,853 162,732
---------- ---------- ---------- ----------
OPERATING COSTS AND EXPENSES:
Oil and natural gas operating 3,723 4,355 12,943 13,069
Severance and ad valorem taxes 3,022 4,066 9,322 11,959
Depletion and depreciation 18,017 16,845 51,765 52,477
General and administrative 2,779 4,320 12,151 12,348
---------- ---------- ---------- ----------
27,541 29,586 86,181 89,853
---------- ---------- ---------- ----------
EARNINGS BEFORE INTEREST
AND INCOME TAXES 6,217 33,195 63,672 72,879
OTHER EXPENSES:
Interest expense 4,284 6,472 16,151 19,256
Taxes on income 700 -- 18,500 --
---------- ---------- ---------- ----------
4,984 6,472 34,651 19,256
---------- ---------- ---------- ----------
NET EARNINGS 1,233 26,723 29,021 53,623
DIVIDENDS ON PREFERRED STOCK -- 1,350 429 4,050
---------- ---------- ---------- ----------
NET EARNINGS APPLICABLE
TO COMMON STOCKHOLDERS $ 1,233 $ 25,373 $ 28,592 $ 49,573
========== ========== ========== ==========
NET EARNINGS PER SHARE:
Basic $ 0.03 $ 0.53 $ 0.59 $ 1.06
========== ========== ========== ==========
Diluted $ 0.03 $ 0.41 $ 0.53 $ 0.83
========== ========== ========== ==========
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES:
Basic 47,904 47,664 48,485 46,932
========== ========== ========== ==========
Diluted 54,009 66,959 56,622 65,430
========== ========== ========== ==========
See notes to consolidated financial statements.
3
THE MERIDIAN RESOURCE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(thousands of dollars)
(unaudited)
SEPTEMBER 30, DECEMBER 31,
2001 2000
------------- -------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 12,898 $ 95,122
Accounts receivable, less allowance for doubtful
accounts $891 [2001 and 2000] 33,167 36,073
Due from affiliates 2,138 --
Prepaid expenses and other 3,859 1,103
------------- -------------
Total current assets 52,062 132,298
------------- -------------
PROPERTY AND EQUIPMENT:
Oil and natural gas properties, full cost method
(including $36,100 [2001] and
$47,027 [2000] not subject to depletion) 1,054,291 982,566
Land 478 478
Equipment 9,520 10,283
------------- -------------
1,064,289 993,327
Accumulated depletion and depreciation 609,493 558,843
------------- -------------
454,796 434,484
------------- -------------
OTHER ASSETS 3,103 4,139
------------- -------------
$ 509,961 $ 570,921
============= =============
See notes to consolidated financial statements.
4
THE MERIDIAN RESOURCE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (continued)
(thousands of dollars)
(unaudited)
SEPTEMBER 30, DECEMBER 31,
2001 2000
------------- ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 35,752 $ 17,833
Revenues and royalties payable 6,838 1,453
Due to affiliates -- 756
Notes payable 26,594 383
Accrued liabilities 16,494 19,774
Current income taxes payable 143 1,900
----------- -----------
Total current liabilities 85,821 42,099
----------- -----------
LONG-TERM DEBT 190,000 230,000
----------- -----------
9 1/2% CONVERTIBLE SUBORDINATED NOTES 20,000 20,000
----------- -----------
DEFERRED INCOME TAXES 27,157 8,500
----------- -----------
STOCKHOLDERS' EQUITY:
Preferred stock, $1.00 par value (25,000,000 shares
authorized, 3,982,906 [2000]
shares of Series A Cumulative
Convertible Preferred Stock issued at stated value) -- 135,000
Common stock, $0.01 par value (200,000,000 shares
authorized, 47,946,994 [2001] and
53,763,285 [2000] issued) 552 550
Additional paid-in capital 386,218 315,603
Accumulated deficit (151,685) (180,277)
Unrealized loss on securities held for resale (185) (185)
Unamortized deferred compensation (382) (369)
----------- -----------
234,518 270,322
Less treasury stock, at cost 47,535 --
----------- -----------
Total stockholders' equity 186,983 270,322
----------- -----------
$ 509,961 $ 570,921
=========== ===========
See notes to consolidated financial statements.
5
THE MERIDIAN RESOURCE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(thousands of dollars)
(unaudited)
NINE MONTHS ENDED
SEPTEMBER 30,
--------------------------
2001 2000
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings $ 29,021 $ 53,623
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Depletion and depreciation 51,765 52,477
Amortization of other assets 1,545 961
Non-cash compensation 1,493 2,205
Deferred income taxes 17,400 --
Changes in assets and liabilities:
Accounts receivable 2,906 (44,400)
Due from affiliates (2,894) (1,973)
Prepaid expenses and other (2,756) 423
Accounts payable 17,919 (11,627)
Revenues and royalties payable 5,385 (590)
Notes payable 26,210 --
Accrued liabilities and other (1,080) 4,525
----------- -----------
Net cash provided by operating activities 146,914 55,624
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property and equipment (101,350) (70,670)
Sale of property and equipment 29,273 37,339
----------- -----------
Net cash used in investing activities (72,077) (33,331)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from long-term debt -- 2,000
Reductions in long-term debt (40,000) (21,500)
Repurchase of stock (114,000) --
Issuance of stock/exercise of options 576 38,579
Preferred dividends (3,129) (2,700)
Additions to deferred loan costs (508) 57
----------- -----------
Net cash provided (used) in financing activities (157,061) 16,436
----------- -----------
NET CHANGE IN CASH AND CASH EQUIVALENTS (82,224) 38,729
Cash and cash equivalents at beginning of period 95,122 6,617
----------- -----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 12,898 $ 45,346
=========== ===========
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, 2000, as filed with the Securities and Exchange Commission.
The financial statements included herein as of September 30, 2001, and for the
nine month periods ended September 30, 2001 and 2000, 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. Certain minor
reclassifications of prior period statements have been made to conform to
current reporting practices.
2. NOTES PAYABLE
SHORT-TERM NOTE AGREEMENT
The Company entered into a short-term subordinated credit agreement with Fortis
Capital Corporation for $25 million, effective January 5, 2001. The interest
rate is the London interbank offered rate ("LIBOR") plus 3.5%, with interest
payments due on the last day of March, June, September and December. The note
matures on December 31, 2001.
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. The borrowing base on September 30, 2001, was $190 million and is
presently being renegotiated. The next scheduled redetermination is set for
March 31, 2002.
4. COMMITMENTS AND CONTINGENCIES
LITIGATION
There are no material legal proceedings to which the Company 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.
7
5. EARNINGS PER SHARE
(in thousands, except per share)
The following tables set forth the computation of basic and diluted net earnings
per share:
THREE MONTHS ENDED SEPTEMBER 30,
2001 2000
---------- ----------
Numerator:
Net earnings applicable to common stockholders $ 1,233 $ 25,373
Plus income impact of assumed conversions:
Preferred stock dividends -- 1,350
Interest on convertible subordinated notes 316 486
Net earnings applicable to common stockholders
plus assumed conversions $ 1,549 $ 27,209
Denominator:
Denominator for basic net earnings per
share - weighted-average shares outstanding 47,904 47,664
Effect of potentially dilutive common shares:
Convertible preferred stock -- 12,837
Convertible subordinated notes 2,857 2,857
Employee and director stock options 986 1,424
Warrants 2,262 2,176
---------- ----------
Denominator for diluted net earnings per
share - weighted-average shares outstanding
and assumed conversions 54,009 66,959
========== ==========
Basic net earnings per share $ 0.03 $ 0.53
========== ==========
Diluted net earnings per share $ 0.03 $ 0.41
========== ==========
NINE MONTHS ENDED SEPTEMBER 30,
2001 2000
----------- -----------
Numerator:
Net earnings applicable to common stockholders $ 28,592 $ 49,573
Plus income impact of assumed conversions:
Preferred stock dividends 429 4,050
Interest on convertible subordinated notes 937 1,446
Net earnings applicable to common stockholders
plus assumed conversions $ 29,958 $ 55,069
Denominator:
Denominator for basic net earnings per
share - weighted-average shares outstanding 48,485 46,932
Effect of potentially dilutive common shares:
Convertible preferred stock 1,317 12,837
Convertible subordinated notes 2,857 2,857
Employee and director stock options 1,551 866
Warrants 2,412 1,938
----------- -----------
Denominator for diluted net earnings per
share - weighted-average shares outstanding
and assumed conversions 56,622 65,430
=========== ===========
Basic net earnings per share $ 0.59 $ 1.06
=========== ===========
Diluted net earnings per share $ 0.53 $ 0.83
=========== ===========
8
6. STOCKHOLDERS' EQUITY
Pursuant to the Option and Standstill Agreement, on January 29, 2001, the
Company completed the repurchase of all of the outstanding Preferred Stock
(convertible into 12.8 million shares of Common Stock) and six million shares of
Common Stock from Shell for $114 million. Cash to complete the $114 million
stock buyback was generated using a balanced financing structure including $38.7
million in net proceeds from the issuance of Common Stock at $6 5/8 per share;
$25 million in subordinated debt; and $50.3 million of available cash flow and
proceeds from the sale of non-core properties. Shell remains Meridian's largest
common shareholder, with approximately 7.1 million shares of Common Stock.
7. SALE OF PROPERTIES
On May 17, 2001, the Company sold certain non-strategic oil and gas properties
located in south Louisiana and the Texas Gulf Coast for approximately $33
million. The sale was comprised of approximately 25.1 Bcfe proved developed
reserves and 20.5 Bcfe of undeveloped reserves.
8. IMPAIRMENT OF LONG-LIVED ASSETS
Unamortized costs of proved oil and natural gas properties are subject to a
ceiling which limits such costs to the estimated future net cash flows from
proved oil and natural gas properties, net of related income tax effects,
discounted at 10 percent. If the unamortized costs are greater than this
ceiling, any excess will be charged to depletion expense.
No ceiling write-down was taken during the third quarter of 2001 based on oil
and natural gas equivalent prices for the Company's production increasing
subsequent to September 30, 2001. Otherwise, utilizing index prices on September
30, 2001, of $1.895 per Mcf of natural gas and $23.43 per Bbl of oil, without
giving effect to the subsequent price increases, the Company would have
recognized an impairment charge during the third quarter of 2001 of $76.5
million ($49.3 million net after tax).
Due to the potential volatility in oil and natural gas prices and their impact
on the carrying value of the Company's proved oil and natural gas reserves,
there can be no assurance that future write-downs will not be required as a
result of factors that may negatively affect the present value of proved oil and
natural gas reserves and the carrying value of oil and natural gas properties,
including volatile oil and natural gas prices, downward revisions in estimated
proved oil and natural gas reserve quantities and unsuccessful drilling
activities.
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 and nine months ended September 30, 2001 and 2000. 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, 2000 (and the
notes attached thereto), should be read in conjunction with this discussion.
GENERAL
BUSINESS ACTIVITIES. During the third quarter of 2001, Meridian's drilling
activities have been focused in the Company's East Lake Arthur, North Turtle
Bayou/Ramos, Weeks Island and Thornwell Fields. We anticipate drilling
activities in these areas will comprise the majority of our anticipated capital
expenditures for 2001.
Current drilling activities are as follows:
East Lake Arthur Prospect Area: The Hughes No. 1 well in the East Lake Arthur
Field, in Jefferson Davis Parish, Louisiana, has completed the sidetrack
operations and is preparing the well for completion in the lower Bol Mex 5 sand
package. Electric logging operations have confirmed the original reports on the
discovery well. The well's production facilities have been constructed and it is
anticipated that the well will be placed on production in the near future.
Meridian holds leases over approximately 2,300 acres in this highly prospective
area. Additional wells in this area are anticipated to be drilled to develop the
Bol Mex sands beginning in 2002. Meridian is the operator and owns an
approximately 90% working interest and a 65.5% net revenue interest in the well.
Southwest Donner Prospect: The Williams Land Company No. 1 well, in Assumption
Parish, Louisiana, was drilled to a depth of 18,650 feet and encountered
approximately 55 gross feet of oil pay (28 net feet) in a Rob-L sand at
approximately 14,900 feet. The well has been completed and tested at a rate of
1,534 barrels of oil per day (BOPD) plus 887 thousand cubic feet of gas per day
(Mcf/d) on a 12/64th inch choke with a flowing tubing pressure of 5,654 pounds
per square inch (psi). Shut in tubing pressure was measured at 6,102 psi. The
Company is presently installing surface equipment in anticipation of first sales
during November 2001. Meridian is the operator of the well and owns an
approximately 90% working interest in this well.
Thornwell/Lakeside Prospect Area: The SL 15223 No. 2 well in the Lakeside area
in Cameron Parish, Louisiana, has been drilled to a total depth of 17,757 feet
and failed to encounter the Camerina sands found productive in the Lakeside No.
1 well due to fault and stratigraphic complications associated with the well's
crestal position on the structure. Restrictions on operations in the waterfowl
refuge during the fall and winter seasons have resulted in the Company
suspending operations on the site until March 2002. Meridian and its partners
are currently evaluating two additional locations north of the No. 2 well, which
are outside of the wildlife refuge area and off the crestal area, for additional
exploration and development sites. Drilling operations on the first of these
land locations are expected in the first quarter 2002. Targeted sands for the
wells include the Marg Howeii, Camerina and Miogyp sands. Meridian holds a 65.5%
working interest in the field and is the operator.
REPURCHASE OF STOCK. Pursuant to the Option and Standstill Agreement (the
"Option Agreement"), on January 29, 2001, the Company completed the repurchase
of all of the outstanding Preferred Stock (convertible into 12.8 million shares
of Common Stock) and six million shares of Common Stock from Shell for $114
million. The $114 million stock buyback price was generated through a balanced
financing structure including $38.7 million in net proceeds from the issuance of
Common Stock at $6 5/8 per share; $25 million in subordinated debt; and $50.3
million of cash flow and proceeds from the sale of non-core properties. The
repurchase of these shares resulted in an immediate reduction in the fully
diluted share count of more than 25%. Shell remains Meridian's largest
shareholder, with approximately 7.1 million shares of Common Stock.
10
The six million shares of Common Stock were repurchased into the Company's
Treasury Stock account at a value of $48.2 million (using the closing price of
Meridian's Common Stock on the transaction date). In addition, the buyback of
the six million common shares along with the retirement of the Preferred Stock
resulted in an immediate reduction in the fully diluted share count of more than
25%. Finally, since the face value of the Preferred Stock was $135 million, the
repurchase at a discounted price of $114 million provided an immediate $21.0
million benefit to the equity of all common stockholders.
SALE OF PROPERTIES. On May 17, 2001, the Company sold certain non-strategic oil
and gas properties located in south Louisiana and the Texas Gulf Coast for
approximately $33 million. The sale was comprised of 25.1 Bcfe proved developed
reserves and 20.5 Bcfe of undeveloped reserves. Benefits of the sale include the
reduction of total debt by an additional $30 million resulting in an immediate
savings in interest costs on the Company's senior bank debt, the elimination of
$9.5 million in future capital expenditures associated with the properties, and
the elimination of over $5 million in annual Lease Operating Expenses (LOE),
which represented approximately 28% of our total LOE for the year 2000.
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 September 30, 2001, was $25.80 per barrel compared to $27.16
per barrel for the three months ended June 30, 2001, and $29.92 per barrel for
the three months ended September 30, 2000. Our average oil price for the nine
months ended September 30, 2001, was $27.39 per barrel compared to $26.01 per
barrel for the nine months ended September 30, 2000. Our average natural gas
price for the three months ended September 30, 2001, was $2.92 per Mcf compared
to $5.12 per Mcf for the three months ended June 30, 2001, and $4.83 per Mcf for
the three months ended September 30, 2000. Our average natural gas price for the
nine months ended September 30, 2001, was $5.35 per Mcf compared to $3.67 per
Mcf for the nine months ended September 30, 2000. 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 SEPTEMBER 30, 2001 COMPARED TO THREE MONTHS ENDED SEPTEMBER
30, 2000
OPERATING REVENUES. Third quarter 2001 oil and natural gas revenues decreased
$28.4 million as compared to third quarter 2000 revenues, primarily due to a 24%
decrease in production volumes and a 28% decrease in average commodity prices,
both on a natural gas equivalent basis. The decrease in production is a result
of the property sales during 2000 and 2001 and natural production declines,
partially offset by new wells brought on.
The following table summarizes the Company's operating revenues, production
volumes and average sales prices for the three months ended September 30, 2001
and 2000:
THREE MONTHS ENDED
SEPTEMBER 30,
----------------------- INCREASE
2001 2000 (DECREASE)
---------- ---------- ----------
Production Volumes:
Oil (Mbbl) 683 958 (29%)
Natural gas (MMcf) 5,471 6,899 (21%)
MMcfe 9,569 12,647 (24%)
Average Sales Prices:
Oil (per Bbl) $ 25.80 $ 29.92 (14%)
Natural gas (per Mcf) $ 2.92 $ 4.83 (40%)
MMcfe $ 3.51 $ 4.90 (28%)
Operating Revenues (000's):
Oil $ 17,621 $ 28,662 (39%)
Natural gas 15,961 33,291 (52%)
---------- ----------
Total Operating Revenues $ 33,582 $ 61,953 (46%)
========== ==========
OPERATING EXPENSES. Oil and natural gas operating expenses decreased $0.7
million to $3.7 million for the three months ended September 30, 2001, compared
to $4.4 million for the same period in 2000. This decrease was primarily due to
the decrease in the number of wells from the sale of non-core properties,
partially offset by the non-recurring expenses from an expanded well workover
program and higher lifting costs on marginal wells.
SEVERANCE AND AD VALOREM TAXES. Severance and ad valorem taxes decreased $1.1
million to $3.0 million for the third quarter of 2001, compared to $4.1 million
during the same period in 2000. 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 third quarter decrease was primarily due to the
decrease in oil and natural gas production over the same period in 2000 and the
14% decrease in the average sales price of oil from 2000, partially offset by
the increase in the natural gas tax rate.
DEPLETION AND DEPRECIATION. Depletion and depreciation expense increased $1.2
million during the third quarter of 2001 to $18.0 million from $16.8 million for
the same period of 2000. This was primarily a result of an increase in the
depletion rate, reflecting the sale of non-core properties and completion delays
of new wells for which reserves have not yet been booked, partially offset by a
decrease in production volumes in 2001 from 2000 levels.
12
GENERAL AND ADMINISTRATIVE EXPENSE. General and administrative expense decreased
by $1.5 million to $2.8 million for three months ended September 30, 2001,
compared to $4.3 million during the comparable period last year. The decrease
was primarily a result of decreases in salaries, wages, and other compensation
related to the provisions of the 1998 net profits and well bonus plans. The
plans provide for bonus payments to employees, which are calculated using a
formula derived from the actual net profits on each well in the plan for the
previous year. The formula has remained unchanged, however, decreased payouts
have resulted due to decreased commodity prices and decreased production
volumes.
INTEREST EXPENSE. Interest expense decreased $2.2 million to $4.3 million for
the third quarter of 2001 in comparison to the third quarter of 2000. The
decrease is primarily a result of a decrease in the average interest rate
charged on the revolving credit as compared to the third quarter of 2000, and a
decrease in the balance outstanding for the revolving credit line, partially
offset by the issuance of the short-term notes payable issued in January 2001.
13
NINE MONTHS ENDED SEPTEMBER 30, 2001, COMPARED TO NINE MONTHS ENDED SEPTEMBER
30, 2000
OPERATING REVENUES. Oil and natural gas revenues during the nine months ended
September 30, 2001, decreased $12.8 million as compared to revenues during the
nine months ended September 30, 2000, due to production volumes decreasing 27%
partially offset by an increase in average sales prices of 26%, both on a
natural gas equivalent basis. The production decrease is primarily a result of
the property sales in 2000 and 2001 and natural production declines, partially
offset by new wells brought on.
The following table summarizes production volumes, average sales prices and
gross revenues for the nine months ended September 30, 2001 and 2000.
NINE MONTHS ENDED
SEPTEMBER 30,
----------------------- INCREASE
2001 2000 (DECREASE)
---------- ---------- ----------
Production Volumes:
Oil (Mbbl) 2,149 3,116 (31%)
Natural gas (MMcf) 16,766 21,923 (24%)
MMcfe 29,658 40,618 (27%)
Average Sales Prices:
Oil (Bbl) $ 27.39 $ 26.01 5%
Natural gas (Mcf) $ 5.35 $ 3.67 46%
MMcfe $ 5.01 $ 3.97 26%
Gross Revenues (000's):
Oil $ 58,845 $ 81,046 (27%)
Natural gas 89,772 80,381 12%
---------- ----------
Total $ 148,617 $ 161,427 (8%)
========== ==========
OPERATING EXPENSES. Oil and natural gas operating expenses decreased $0.2
million to $12.9 million for the nine months ended September 30, 2001, compared
to $13.1 million for the nine months ended September 30, 2000. This decrease was
primarily due to the decrease in the number of wells from the sale of non-core
properties, partially offset by non-recurring expenses from an expanded well
workover program and higher lifting costs on marginal wells.
SEVERANCE AND AD VALOREM TAXES. Severance and ad valorem taxes decreased $2.7
million to $9.3 million for the nine months ended September 30, 2001, compared
to $12.0 million for the nine months ended September 30, 2000. This decrease is
largely attributable to the decrease in production from the same period in 2000
partially offset by an increase in the tax rate for natural gas. Meridian's
production is primarily from southern Louisiana, and, therefore, is subject to a
current tax rate of 12.5% of gross oil revenues and $0.199 per Mcf for natural
gas. The tax rate for natural gas for the first half of 2000 was $0.078 per Mcf
and from July 2000 through June 2001 was $0.097 per mcf.
DEPLETION AND DEPRECIATION. Depletion and depreciation expense decreased $0.7
million to $51.8 million during the first nine months of 2001 from $52.5 million
for the same period last year. This decrease was primarily a result of the 27%
decrease in production on an Mcfe basis from the comparable period in 2000,
partially offset by an increase in the depletion rate, reflecting the sale of
low-priced non-core properties and completion delays of new wells for which
reserves have not yet been booked.
14
GENERAL AND ADMINISTRATIVE EXPENSE. General and administrative expense decreased
$0.1 million to $12.2 million for the first nine months of 2001 compared to
$12.3 million during the first nine months of 2000. This decrease was primarily
a result of decreases in salaries, wages, and other compensation related to the
provisions of the 1998 net profits and well bonus plans. The plans provide for
bonus payments to employees, which are calculated using a formula derived from
the actual net profits on each well in the plan for the previous year. The
formula has remained unchanged, however, decreased payouts have resulted
primarily due to decreased production volumes.
INTEREST EXPENSE. Interest expense decreased $3.1 million to $16.2 million
during the first nine months of 2001 compared to $19.3 million during the
comparable period of 2000. The decrease is primarily a result of the overall
reduction in debt and the Federal Reserve Bank's decrease in overall interest
rates which has lead to a decrease in the average interest rate on the credit
facility.
LIQUIDITY AND CAPITAL RESOURCES
WORKING CAPITAL. During the third quarter of 2001, Meridian's capital
expenditures were internally financed with cash from operations. As of September
30, 2001, we had a cash balance of $12.9 million and a working capital deficit
of $33.8 million, including the $25 million short-term note payable.
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. The borrowing base on September 30, 2001, was $190 million and is
presently being renegotiated. The next scheduled redetermination is set for
March 31, 2002.
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 2.5%, 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 entered into a short-term subordinated
credit agreement with Fortis Capital Corporation for $25 million, effective
January 5, 2001. The interest rate is LIBOR plus 3.5%, and interest payments are
due on the last day of March, June, September and December. The note matures on
December 31, 2001, and the Company expects that adequate resources will be
available to meet the obligation.
9 1/2% CONVERTIBLE SUBORDINATED NOTES. During June 1999, the Company completed
private placements of an aggregate of $20 million of its 9 1/2% Convertible
Subordinated Notes due June 18, 2005 (the "Notes"). The Notes are unsecured and
contain customary events of default, but do not contain any maintenance or other
restrictive covenants. Interest is payable on a quarterly basis.
The Notes are convertible at any time by the holders of the Notes into shares of
our common stock, $.01 par value ("Common Stock"), utilizing a conversion price
of $7.00 per share (the "Conversion Price"). 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 are issued
upon conversion of the Notes.
CAPITAL EXPENDITURES. To date, Meridian's drilling activities have been focused
in the Company's East Lake Arthur, North Turtle Bayou/Ramos, Weeks Island and
Thornwell Fields. We anticipate drilling activities in these areas will comprise
the majority of our capital expenditures for 2001.
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DIVIDENDS. It is Company policy to retain its cash for reinvestment in its
business, and therefore, it does not anticipate that dividends will be paid in
the foreseeable future. The Preferred Stock held by Shell accrued dividends on a
pro-rata basis up until the exercise of the option on January 29, 2001, of
$429,010. All outstanding obligations of dividends payable have been paid and no
additional amounts are to be accrued on the preferred stock.
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 and natural-gas-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 against 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.
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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.
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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 $7.00 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) Exhibits.
4.1 Termination Agreement, dated January 29, 2001, by and between
the Company and Shell Louisiana Onshore Properties Inc.
(incorporated by reference from the Company's Current Report
on Form 8-K, dated January 29, 2001).
4.2 Registration Rights Agreement, dated January 29, 2001, by and
between the Company and Shell Louisiana Onshore Properties
Inc. (incorporated by reference from the Company's Current
Report on Form 8-K, dated January 29, 2001).
4.3 Amendment No. 1, dated as of January 29, 2001, to Rights
Agreement, dated as of May 5, 1999, by and between the Company
and American Stock Transfer & Trust Co., as rights agent
(incorporated by reference from the Company's Current Report
on Form 8-K, dated January 29, 2001).
(b) The Company filed a Current Report on Form 8-K, dated January 29, 2001,
regarding the exercise by the Company of the option to purchase from an
affiliate of Shell Oil Company all of the Company's outstanding
preferred stock and six million shares of the Company's common stock.
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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
(Registrant)
Date: November 6, 2001 By: LLOYD V. DELANO
------------------------------------------
Lloyd V. DeLano
Vice President
Chief Accounting Officer
By: JAMES H. SHONSEY
--------------------------------------------
James H. Shonsey
Vice President - Finance and Capital Markets
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