1
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: June 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 August 7, 2001 47,890,915
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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 and Six Months Ended June 30, 2001 and 2000 3
Consolidated Balance Sheets as of June 30, 2001 (unaudited)
and December 31, 2000 4
Consolidated Statements of Cash Flows (unaudited) for the
Six Months Ended June 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 4. Submission of Matters to a Vote of Security Holders 19
Item 6. Exhibits and Reports on Form 8-K 19
SIGNATURES 20
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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 SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------------------ ----------------------------
REVENUES: 2001 2000 2001 2000
------------- ------------- ------------ -------------
Oil and natural gas $ 45,701 $ 51,544 $ 115,035 $ 99,474
Interest and other 325 346 1,060 477
------------- ------------- ------------ -------------
46,026 51,890 116,095 99,951
------------- ------------- ------------ -------------
OPERATING COSTS AND EXPENSES:
Oil and natural gas operating 4,408 4,289 9,220 8,714
Severance and ad valorem taxes 2,625 3,653 6,300 7,893
Depletion and depreciation 16,562 17,332 33,748 35,632
General and administrative 4,391 4,115 9,372 8,028
------------- ------------- ------------ -------------
27,986 29,389 58,640 60,267
------------- ------------- ------------ -------------
EARNINGS BEFORE INTEREST
AND INCOME TAXES 18,040 22,501 57,455 39,684
OTHER EXPENSES:
Interest expense 5,449 6,452 11,867 12,784
Taxes on income 4,900 -- 17,800 --
------------- ------------- ------------ -------------
10,349 6,452 29,667 12,784
------------- ------------- ------------ -------------
NET EARNINGS 7,691 16,049 27,788 26,900
DIVIDENDS ON PREFERRED STOCK -- 1,350 429 2,700
------------- ------------- ------------ -------------
NET EARNINGS APPLICABLE
TO COMMON STOCKHOLDERS $ 7,691 $ 14,699 $ 27,359 $ 24,200
============= ============= ============ =============
NET EARNINGS PER SHARE:
Basic $ 0.16 $ 0.31 $ 0.56 $ 0.52
============= ============= ============ =============
Diluted $ 0.15 $ 0.25 $ 0.49 $ 0.43
============= ============= ============ =============
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES:
Basic 47,872 46,668 48,781 46,562
============= ============= ============ =============
Diluted 55,038 65,204 57,943 64,662
============= ============= ============ =============
See notes to consolidated financial statements.
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THE MERIDIAN RESOURCE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(thousands of dollars)
(unaudited)
JUNE 30, DECEMBER 31,
2001 2000
---------- -------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 20,673 $ 95,122
Accounts receivable, less allowance for doubtful
accounts $891 [2001 and 2000] 29,061 36,073
Due from affiliates 1,086 --
Prepaid expenses and other 4,873 1,103
---------- -------------
Total current assets 55,693 132,298
---------- -------------
PROPERTY AND EQUIPMENT:
Oil and natural gas properties, full cost method
(including $37,277 [2001] and
$47,027 [2000] not subject to depletion) 1,019,820 982,566
Land 478 478
Equipment 10,505 10,283
---------- -------------
1,030,803 993,327
Accumulated depletion and depreciation 592,543 558,843
---------- -------------
438,260 434,484
---------- -------------
OTHER ASSETS 3,618 4,139
---------- -------------
$ 497,571 $ 570,921
========== =============
See notes to consolidated financial statements.
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THE MERIDIAN RESOURCE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (continued)
(thousands of dollars)
(unaudited)
JUNE 30, DECEMBER 31,
2001 2000
--------- -------------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 23,554 $ 17,833
Revenues and royalties payable 4,125 1,453
Due to affiliates -- 756
Notes payable 27,231 383
Accrued liabilities 22,174 19,774
Current income taxes payable 2,243 1,900
--------- -------------
Total current liabilities 79,327 42,099
--------- -------------
LONG-TERM DEBT 190,000 230,000
--------- -------------
9 1/2% CONVERTIBLE SUBORDINATED NOTES 20,000 20,000
--------- -------------
DEFERRED INCOME TAXES 23,100 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, 47,889,790 [2001] and
53,763,285 [2000] issued) 551 550
Additional paid-in capital 386,068 315,603
Accumulated deficit (152,918) (180,277)
Unrealized loss on securities held for resale (185) (185)
Unamortized deferred compensation (378) (369)
--------- -------------
233,138 270,322
Less treasury stock, at cost (47,994) --
--------- -------------
Total stockholders' equity 185,144 270,322
--------- -------------
$ 497,571 $ 570,921
========= =============
See notes to consolidated financial statements.
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THE MERIDIAN RESOURCE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(thousands of dollars)
(unaudited)
SIX MONTHS ENDED
JUNE 30,
------------------------
2001 2000
---------- ----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings $ 27,788 $ 26,900
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Depletion and depreciation 33,748 35,632
Amortization of other assets 1,030 646
Non-cash compensation 1,010 1,796
Deferred income taxes 14,600 --
Changes in assets and liabilities:
Accounts receivable 7,012 (4,075)
Due from affiliates (1,842) (715)
Prepaid expenses and other (3,770) 273
Accounts payable 5,721 (5,884)
Revenues and royalties payable 2,672 1,353
Notes payable 26,848 1,775
Accrued liabilities and other 5,441 165
---------- ----------
Net cash provided by operating activities 120,258 57,866
---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property and equipment (67,342) (42,315)
Sale of property and equipment 29,817 25,145
---------- ----------
Net cash used in investing activities (37,525) (17,170)
---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from long-term debt -- 2,000
Reductions in long-term debt (40,000) (13,000)
Repurchase of stock (114,000) --
Issuance of stock/exercise of options 455 --
Preferred dividends (3,129) (2,700)
Additions to deferred loan costs (508) 57
---------- ----------
Net cash provided (used) in financing activities (157,182) (13,643)
---------- ----------
NET CHANGE IN CASH AND CASH EQUIVALENTS (74,449) 27,053
Cash and cash equivalents at beginning of period 95,122 6,617
---------- ----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 20,673 $ 33,670
========== ==========
See notes to consolidated financial statements.
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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 June 30, 2001, and for the six
month periods ended June 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 March 31, 2001, was set at $230 million;
subsequently, a $40 million payment was made reducing the borrowing base to $190
million. The next scheduled redetermination is set for September 30, 2001.
4. 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.
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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
JUNE 30,
-----------------------
2001 2000
-------- --------
Numerator:
Net earnings applicable to common stockholders $ 7,691 $ 14,699
Plus income impact of assumed conversions:
Preferred stock dividends -- 1,350
Interest on convertible subordinated notes 312 480
Net earnings applicable to common stockholders
plus assumed conversions $ 8,003 $ 16,529
Denominator:
Denominator for basic net earnings per
share - weighted-average shares outstanding 47,872 46,668
Effect of potentially dilutive common shares:
Convertible preferred stock -- 12,837
Convertible subordinated notes 2,857 2,857
Employee and director stock options 1,817 949
Warrants 2,492 1,893
-------- --------
Denominator for diluted net earnings per
share - weighted-average shares outstanding
and assumed conversions 55,038 65,204
======== ========
Basic net earnings per share $ 0.16 $ 0.31
======== ========
Diluted net earnings per share $ 0.15 $ 0.25
======== ========
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SIX MONTHS ENDED
JUNE 30,
---------------------------
2001 2000
------------ ------------
Numerator:
Net earnings applicable to common stockholders $ 27,359 $ 24,200
Plus income impact of assumed conversions:
Preferred stock dividends 429 2,700
Interest on convertible subordinated notes 621 960
Net earnings applicable to common stockholders
plus assumed conversions $ 28,409 $ 27,860
Denominator:
Denominator for basic net earnings per
share - weighted-average shares outstanding 48,781 46,562
Effect of potentially dilutive common shares:
Convertible preferred stock 1,986 12,837
Convertible subordinated notes 2,857 2,857
Employee and director stock options 1,833 587
Warrants 2,486 1,819
------------ ------------
Denominator for diluted net earnings per
share - weighted-average shares outstanding
and assumed conversions 57,943 64,662
============ ============
Basic net earnings per share $ 0.56 $ 0.52
============ ============
Diluted net earnings per share $ 0.49 $ 0.43
============ ============
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 25.1 Bcfe proved developed reserves and 20.5
Bcfe of undeveloped reserves.
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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 six months ended June 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 second 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 capital expenditure
budget for 2001, currently set at $100 million.
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 completion operations presently
underway. Initially, the well was perforated in the lower of Bol Mex 6 sand
interval and tested at 2.5 Mmcfe/d with a flowing tubing pressure of 6,500
pounds per square inch for approximately six hours until the well experienced an
obstruction in the tubing. Workover operations were delayed for approximately
six weeks awaiting a rig and are now underway to correct the obstruction and
place the well back on test. The well's production facilities have been
constructed and the well is expected to be placed on production as soon as the
work is completed. Meridian and its partners control approximately 2,300 acres
in this newly discovered area and have scheduled a second well in the field,
depending on test results, for late fourth quarter this year or early first
quarter of 2002. Meridian is the operator and owns approximately 90% of the
working interest in the well.
Thornwell/Lakeside Prospect Area: The SL 15223 No. 1 well in the Lakeside area
in Cameron Parish, Louisiana, was completed on July 14, 2001, and is currently
producing from the Camerina sands at a rate of approximately 4.4 MMcf/d plus 185
barrels of oil per day on a 10/64th inch choke with a flowing tubing pressure of
9,800 pounds per square inch. Meridian operates the well and has a net revenue
interest of 43%. A second well, the SL 15223 No. 2, has been spudded and is
currently drilling below 10,600 feet measured depth.
Thornwell Prospect: The Petitjean 17-2 well, in the South Thornwell Field, in
Jefferson Davis Parish, Louisiana, was completed on July 10, 2001, and is
currently producing from the Marg Idio sands at a rate of approximately 5.0
MMcf/d plus 65 barrels of oil per day on a 24/64th inch choke with a flowing
tubing pressure of 1,825 pounds per square inch. Meridian owns approximately 20%
of the net revenue interest in this well. The Addison 28 No. 1 well is currently
drilling below 9,800 feet with a target depth of 10,800 feet to test the Marg
Idio sands.
Southwest Donner Prospect: The Williams Land Company No. 1 well, in Assumption
Parish, Louisiana, is currently drilling below 16,500 feet with a target depth
of 18,200 feet to test multiple Operc sands which have been logged in its nearby
Thidodaux and Breaux wells. Meridian holds approximately 90% of the working
interest and a net revenue interest of approximately 62% in this well.
North Turtle Bayou/Ramos Prospect Area: The Thibodaux No. 25-2 well, in
Assumption Parish, Louisiana, has reached its total depth of 19,080 feet to
target the Operc sands and the Company is currently evaluating the results.
Meridian holds approximately 90% of the working interest and a net revenue
interest of approximately 63% in this well.
Weeks Island/Floyd Prospect: The Goodrich-Cocke No. 2 well was drilled to a
depth of 8,098 feet and has been completed and tested at a gross daily flow rate
of 1,099 barrels of oil per day and 394 Mcf/d on a 27/64th inch choke with a
flowing tube pressure of 981 pounds per square inch. Meridian is the operator
and holds a working interest of approximately 72% and a net revenue interest of
approximately 58% in this well.
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Dickinson Prospect: The East Hagler Unit No. 1 well in the Dickinson Prospect in
Galveston County, Texas, is currently drilling below 12,890 feet with a target
depth of 14,750 feet to test the Vicksburg sands. Meridian is the operator of
the prospect and holds approximately 97% of the working interest through the
completion and 72% thereafter.
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.
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. In this regard, average
worldwide oil and natural gas prices have increased substantially from levels in
early 2000. Our average oil price for the three months ended June 30, 2001, was
$27.16 per barrel compared to $28.97 per barrel for the three months ended March
31, 2001, and $24.24 per barrel for the three months ended June 30, 2000. Our
average oil price for the six months ended June 30, 2001, was $28.12 per barrel
compared to $24.27 per barrel for the six months ended June 30, 2000. Our
average natural gas price for the three months ended June 30, 2001, was $5.12
per Mcf compared to $7.78 per Mcf for the three months ended March 31, 2001, and
$3.57 per Mcf for the three months ended June 30, 2000. Our average natural gas
price for the six months ended June 30, 2001, was $6.53 per Mcf compared to
$3.13 per Mcf for the six months ended June 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.
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RESULTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 2001 COMPARED TO THREE MONTHS ENDED JUNE 30, 2000
OPERATING REVENUES. Second quarter 2001 oil and natural gas revenues decreased
$5.8 million as compared to second quarter 2000 revenues, primarily due to a 31%
decrease in production volumes partially offset by a 28% increase 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 June 30, 2001 and
2000:
THREE MONTHS ENDED
JUNE 30,
------------------------- INCREASE
2001 2000 (DECREASE)
----------- ----------- ----------
Production Volumes:
Oil (Mbbl) 687 1,018 (33)%
Natural gas (MMcf) 5,285 7,519 (30)%
MMcfe 9,405 13,627 (31)%
Average Sales Prices:
Oil (per Bbl) $ 27.16 $ 24.24 12%
Natural gas (per Mcf) $ 5.12 $ 3.57 43%
MMcfe $ 4.86 $ 3.78 28%
Operating Revenues (000's):
Oil $ 18,656 $ 24,673 (24)%
Natural gas 27,045 26,871 1%
----------- -----------
Total Operating Revenues $ 45,701 $ 51,544 (11)%
=========== ===========
OPERATING EXPENSES. Oil and natural gas operating expenses increased $0.1
million to $4.4 million for the three months ended June 30, 2001, compared to
$4.3 million for the same period in 2000. This increase was primarily due to the
non-recurring expenses from an expanded well workover program and higher lifting
costs on marginal wells, partially offset by a decrease in the number of wells
from the sale of non-core properties.
SEVERANCE AND AD VALOREM TAXES. Severance and ad valorem taxes decreased $1.0
million to $2.6 million for the second quarter of 2001, compared to $3.6 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 $0.097 per Mcf for natural gas, an increase from $0.078 per Mcf
effective in July 2000. Our second quarter decrease was primarily due to the
decrease in oil and natural gas production over the same period in 2000
partially offset by the 12% increase in the average sales price of oil over 2000
and the increase in the natural gas tax rate.
DEPLETION AND DEPRECIATION. Depletion and depreciation expense decreased $0.7
million during the second quarter of 2001 to $16.6 million from $17.3 million
for the same period of 2000. This was primarily a result of the decrease in
production volumes in 2001 from 2000 levels partially offset by 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.
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GENERAL AND ADMINISTRATIVE EXPENSE. General and administrative expense increased
by $0.3 million to $4.4 million for three months ended June 30, 2001, compared
to $4.1 million during the comparable period last year. The increase was
primarily a result of increases 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, increased payouts
have resulted due to increased commodity prices.
INTEREST EXPENSE. Interest expense decreased $1.0 million to $5.4 million for
the second quarter of 2001 in comparison to the second 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 second 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.
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SIX MONTHS ENDED JUNE 30, 2001, COMPARED TO SIX MONTHS ENDED JUNE 30, 2000
OPERATING REVENUES. Oil and natural gas revenues during the six months ended
June 30, 2001, increased $15.6 million as compared to revenues during the six
months ended June 30, 2000, due to average sales prices increasing 61% partially
offset by a decrease in production volumes of 28%, 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 six months ended June 30, 2001 and 2000.
SIX MONTHS ENDED
JUNE 30,
---------------------------- INCREASE
2001 2000 (DECREASE)
------------- ------------- ----------
Production Volumes:
Oil (Mbbl) 1,466 2,158 (32)%
Natural gas (MMcf) 11,295 15,024 (25)%
MMcfe 20,089 27,974 (28)%
Average Sales Prices:
Oil (Bbl) $ 28.12 $ 24.27 16%
Natural gas (Mcf) $ 6.53 $ 3.13 108%
MMcfe $ 5.73 $ 3.56 61%
Gross Revenues (000's):
Oil $ 41,224 $ 52,384 (21)%
Natural gas 73,811 47,090 57%
------------- -------------
Total $ 115,035 $ 99,474 16%
============= =============
OPERATING EXPENSES. Oil and natural gas operating expenses increased $0.5
million to $9.2 million for the six months ended June 30, 2001, compared to $8.7
million for the six months ended June 30, 2000. This increase was primarily due
to the non-recurring expenses from an expanded well workover program and higher
lifting costs on marginal wells, partially offset by a decrease in the number of
wells from the sale of non-core properties.
SEVERANCE AND AD VALOREM TAXES. Severance and ad valorem taxes decreased $1.6
million to $6.3 million for the six months ended June 30, 2001, compared to $7.9
million for the six months ended June 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 $0.097 per Mcf for natural
gas. The tax rate for natural gas for the first half of 2000 was $0.078 per Mcf.
DEPLETION AND DEPRECIATION. Depletion and depreciation expense decreased $1.9
million to $33.7 million during the first six months of 2001 from $35.6 million
for the same period last year. This decrease was primarily a result of the 28%
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
non-core properties and completion delays of new wells for which reserves have
not yet been booked.
GENERAL AND ADMINISTRATIVE EXPENSE. General and administrative expense increased
$1.4 million to $9.4 million for the first six months of 2001 compared to $8.0
million during the first six months of 2000. This
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increase was primarily a result of increases 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, increased
payouts have resulted due to increased commodity prices.
INTEREST EXPENSE. Interest expense decreased $0.9 million to $11.9 million
during the first six months of 2001 compared to $12.8 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 second quarter of 2001, Meridian's capital
expenditures were internally financed with cash from operations. As of June 30,
2001, we had a cash balance of $20.7 million and a working capital deficit of
$23.6 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 June 30, 2001, was $190 million following a
$40 million payment in May 2001. The next scheduled redetermination is set for
September 30, 2001.
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 cash 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 2001 capital expenditure budget of $100 million.
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.
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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 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
At the annual meeting of shareholders held on June 20, 2001, the Company's
shareholders elected Class II Directors. The following summarizes the number of
votes for and against each nominee.
Broker
Nominee For Against Abstain Non-Vote
------------------- ---------- ------- ------- --------
E. L. Henry 45,663,945 476,646 -- --
Joe E. Kares 45,663,662 476,929 -- --
Gary A. Messersmith 45,661,862 478,729 -- --
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 AND SUBSIDIARIES
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(Registrant)
Date: August 14, 2001 By: LLOYD V. DELANO
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Lloyd V. DeLano
Vice President
Chief Accounting Officer
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