UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-Q
[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 No. 1-16295
ENCORE ACQUISITION COMPANY
(Exact name of Registrant as specified in its charter)
Delaware 75-2759650
-------------------------------- -----------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
777 Main Street, Suite 1400, Ft. Worth, Texas 76102
--------------------------------------------- -----
(Address of principal executive offices) (Zip code)
Registrant's Telephone Number, including area code: (817) 877 - 9955
Not applicable
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [x] No [ ]
Number of shares of Common Stock outstanding as of May 3, 2002.......30,029,961
ENCORE ACQUISITION COMPANY
INDEX
Page
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets as of March 31, 2002 and
December 31, 2001............................................ 3
Consolidated Statements of Operations for the three months
ended March 31, 2002 and 2001................................ 4
Consolidated Statements of Stockholders' Equity for the three
months ended March 31, 2002.................................. 5
Consolidated Statements of Cash Flows for the three
months ended March 31, 2002 and 2001......................... 6
Notes to Consolidated Financial Statements...................... 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations............................. 11
Item 3. Quantitative and Qualitative Disclosure about Market
Risk............................................................ 15
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.......................... 16
Signatures........................................................ 17
2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ENCORE ACQUISITION COMPANY
CONSOLIDATED BALANCE SHEETS
(in thousands except share data)
MARCH 31, DECEMBER 31,
2002 2001
----------- ------------
(unaudited)
ASSETS
Current assets:
Cash and cash equivalents .......................................... $ 169 $ 115
Accounts receivable (Net of allowance of $7.0 million) ............. 19,514 16,286
Deferred tax asset ................................................. 4,438 --
Derivative assets .................................................. 1,031 7,030
Other current assets ............................................... 5,574 5,117
--------- ---------
Total current assets ........................................ 30,726 28,548
--------- ---------
Properties and equipment, at cost -- successful efforts method:
Producing properties ............................................... 493,247 422,542
Undeveloped properties ............................................. 866 776
Accumulated depletion, depreciation and amortization ............... (68,905) (60,548)
--------- ---------
425,208 362,770
--------- ---------
Other property and equipment ....................................... 3,324 3,001
Accumulated depletion, depreciation, and amortization .............. (1,462) (1,253)
--------- ---------
1,862 1,748
--------- ---------
Other assets ......................................................... 3,232 8,934
--------- ---------
Total assets ................................................ $ 461,028 $ 402,000
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable ................................................... $ 5,389 $ 10,793
Derivative liabilities ............................................. 7,529 3,525
Current portion of note payable .................................... -- 1,107
Other current liabilities .......................................... 15,131 12,016
--------- ---------
Total current liabilities ................................... 28,049 27,441
--------- ---------
Derivative liabilities ............................................... 1,774 1,288
Long-term debt ....................................................... 133,000 78,000
Deferred income taxes ................................................ 29,571 25,969
--------- ---------
Total liabilities ........................................... 192,394 132,698
--------- ---------
Commitments and contingencies ........................................ -- --
Stockholders' equity:
Preferred stock, $.01 par value, 5,000,000 shares authorized,
none issued and outstanding ...................................... -- --
Common stock, $.01 par value, 60,000,000 authorized,
30,029,961 issued and outstanding ................................ 300 300
Additional paid-in capital ......................................... 248,786 248,786
Retained earnings .................................................. 23,149 16,039
Accumulated other comprehensive income ............................. (3,601) 4,177
--------- ---------
Total stockholders' equity .................................. 268,634 269,302
--------- ---------
Total liabilities and stockholders' equity .................. $ 461,028 $ 402,000
========= =========
The accompanying notes are an integral part of these consolidated
financial statements.
3
ENCORE ACQUISITION COMPANY
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands except per share data)
THREE MONTHS ENDED
MARCH 31,
-----------------------
2002 2001
-------- --------
(unaudited)
Revenues:
Oil ........................................................... $ 26,686 $ 27,377
Natural gas ................................................... 5,611 8,844
-------- --------
Total revenues ........................................... 32,297 36,221
Expenses:
Production --
Direct lifting costs ....................................... 6,817 6,355
Production, ad valorem, and severance taxes ................ 3,013 4,270
General and administrative (excluding non-cash
stock based compensation) .................................. 1,493 1,263
Non-cash stock based compensation ............................. -- 9,587
Depletion, depreciation, and amortization .................... 8,559 7,563
Derivative fair value (gain) loss ............................. (653) 102
Other operating expense ....................................... 139 --
-------- --------
Total expenses ........................................... 19,368 29,140
-------- --------
Operating income ................................................ 12,929 7,081
Other income (expenses):
Interest ...................................................... (1,492) (2,537)
Other ......................................................... 30 52
-------- --------
Total other income (expenses) ............................ (1,462) (2,485)
-------- --------
Income before income taxes ...................................... 11,467 4,596
Provision for income taxes - current ............................ (430) (604)
Provision for income taxes - deferred ........................... (3,927) (4,785)
-------- --------
Income (loss) before accounting change .......................... 7,110 (793)
Cumulative effect of accounting change (net of
income taxes of $0 and $541, respectively) .................... -- (884)
-------- --------
Net income (loss) ........................................ $ 7,110 $ (1,677)
======== ========
Income (loss) per common share before accounting change:
Basic and diluted ............................................. $ 0.24 $ (0.03)
Income (loss) per common share after accounting change:
Basic and diluted ............................................. $ 0.24 $ (0.07)
Weighted average common shares outstanding:
Basic ......................................................... 30,030 24,707
Diluted ....................................................... 30,052 24,707
The accompanying notes are an integral part of these consolidated
financial statements.
4
ENCORE ACQUISITION COMPANY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
MARCH 31, 2002
(in thousands)
(unaudited)
Accumulated
Additional Other
Retained Common Paid-In Comprehensive Stockholders'
Earnings Stock Capital Income (Loss) Equity
--------- --------- ---------- ------------- ------------
Balance at December 31, 2001 ..................... $ 16,039 $ 300 $ 248,786 $ 4,177 $ 269,302
Components of comprehensive income:
Net income .................................... 7,110 -- -- -- 7,110
Change in deferred hedge loss (net
of income taxes of $4,767) ................. -- -- -- (7,778) (7,778)
---------
Total comprehensive loss ................ (668)
--------- --------- --------- --------- ---------
Balance at March 31, 2002 ........................ $ 23,149 $ 300 $ 248,786 $ (3,601) $ 268,634
========= ========= ========= ========= =========
The accompanying notes are an integral part of these consolidated
financial statements.
5
ENCORE ACQUISITION COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
THREE MONTHS ENDED
MARCH 31,
-------------------------
2002 2001
--------- ---------
(unaudited)
Operating activities
Net income (loss) ......................................................... $ 7,110 $ (1,677)
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Depletion, depreciation, and amortization ............................... 8,559 7,563
Deferred taxes .......................................................... 3,927 3,505
Non-cash stock based compensation ....................................... -- 9,587
Non-cash cumulative accounting change ................................... -- 884
Non-cash derivative fair value (gain) loss .............................. (653) 102
Other non-cash items .................................................... (470) 480
Loss on disposition of assets ........................................... 147 --
Changes in operating assets and liabilities:
Accounts receivable ..................................................... (3,228) (2,605)
Other current assets .................................................... (700) (951)
Other assets ............................................................ 4,855 1,068
Accounts payable and other current liabilities .......................... (2,303) 1,631
--------- ---------
Cash provided by operating activities .................................... 17,244 19,587
Investing activities
Proceeds from disposition of assets ..................................... 35 --
Purchases of other property and equipment ............................... (323) (101)
Acquisition of oil and gas properties ................................... (50,438) (262)
Development of oil and gas properties ................................... (20,357) (14,243)
--------- ---------
Cash used by investing activities ......................................... (71,083) (14,606)
Financing activities
Proceeds from initial public offering ................................... -- 93,095
Offering costs paid ..................................................... -- (1,625)
Proceeds from long-term debt ............................................ 76,000 33,000
Payments on long-term debt .............................................. (21,000) (125,417)
Payments on note payable ................................................ (1,107) (4,685)
--------- ---------
Cash provided (used) by financing activities .............................. 53,893 (5,632)
Increase (decrease) in cash and cash equivalents .......................... 54 (651)
Cash and cash equivalents, beginning of period ............................ 115 876
--------- ---------
Cash and cash equivalents, end of period .................................. $ 169 $ 225
========= =========
The accompanying notes are an integral part of these consolidated
financial statements.
6
ENCORE ACQUISITION COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
1. FORMATION OF ENCORE
Encore Acquisition Company ("Encore"), a Delaware Corporation, is an
independent (non-integrated) oil and natural gas company in the United States.
We were organized in April 1998 and are engaged in the acquisition, development,
exploitation and production of North American oil and natural gas reserves. Our
oil and natural gas reserves are concentrated in fields located in the Williston
Basin of Montana and North Dakota, the Permian Basin of Texas and New Mexico,
the Anadarko Basin of Oklahoma and the Powder River Basin of Montana.
2. BASIS OF PRESENTATION
In the opinion of management, the accompanying unaudited consolidated
financial statements of Encore include all adjustments necessary to present
fairly our financial position as of March 31, 2002 and results of operations and
cash flows for the three months ended March 31, 2002 and 2001. All adjustments
are of a recurring nature. These interim results are not necessarily indicative
of results for an entire year. Certain amounts of prior periods have been
reclassified in order to conform to the current period presentation.
Certain disclosures have been condensed or omitted from these consolidated
financial statements pursuant to the rules and regulations of the Securities and
Exchange Commission. Therefore, these financial statements should be read in
conjunction with Encore's 2001 consolidated financial statements and related
notes thereto included in Encore's Annual Report filed on Form 10-K.
3. NEW ACCOUNTING STANDARDS
In August 2001, the FASB issued Statement of Financial Accounting Standards
No. 143 ("SFAS 143"), Accounting for Asset Retirement Obligations, which the
Company will be required to adopt as of January 1, 2003. This statement requires
us to record a liability in the period in which an asset retirement obligation
("ARO") is incurred, based upon the discounted estimated fair value of the
obligation. Also, upon initial recognition of the liability, we must capitalize
additional asset cost equal to the amount of the liability. In addition to any
obligations that arise after the effective date of SFAS 143, upon initial
adoption we must recognize (1) a liability for any existing AROs, (2)
capitalized cost related to the liability, and (3) accumulated depletion,
depreciation, and amortization on that capitalized cost. We are currently
reviewing the provisions of the statement and assessing their impact on our
financial statements. We do not currently know the effect, if any, the adoption
of SFAS 143 will have on our financial statements.
4. INDEBTEDNESS
The Company's overall debt has increased by $53.9 million since December 31,
2001. The Company closed the Central Permian acquisition for $50.1 million in
January 2002. The remaining borrowings were used to fund ordinary operating and
capital requirements under the 2002 budget.
7
5. EARNINGS (LOSS) PER SHARE (EPS)
The following table reflects earnings (loss) per share data for the three
months ended March 31 (in thousands, except per share data):
THREE MONTHS ENDED
MARCH 31,
2002 2001
---------- ----------
NUMERATOR:
----------
Income (loss) before accounting change .................................... $ 7,110 $ (793)
========== ==========
Net income (loss) ......................................................... $ 7,110 $ (1,677)
========== ==========
DENOMINATOR:
------------
Denominator for basic earnings per share --
weighted average shares outstanding ..................................... 30,030 24,707
Effect of dilutive securities:
Dilutive options ........................................................ 22 --
---------- ----------
Denominator for diluted earnings per share ................................ 30,052 24,707
========== ==========
Basic income (loss) per common share before accounting change ............. $ 0.24 $ (0.03)
Cumulative effect of accounting change, net of tax ........................ -- (0.04)
---------- ----------
Basic income (loss) per common share after accounting change .............. $ 0.24 $ (0.07)
========== ==========
Diluted income (loss) per common share before accounting change ........... $ 0.24 $ (0.03)
Cumulative effect of accounting change, net of tax ........................ -- (0.04)
---------- ----------
Diluted income (loss) per common share after accounting change ............ $ 0.24 $ (0.07)
========== ==========
For the quarters ended March 31, 2002 and 2001, outstanding employee stock
options of 500,000 and 602,000, respectively, were excluded from the calculation
of diluted earnings per share because their effect would have been antidilutive.
6. DERIVATIVE FINANCIAL INSTRUMENTS
During the quarter ended March 31, 2002, current derivative assets decreased
$6.0 million and long term derivative assets decreased $0.2 million, while
current derivative liabilities increased $4.0 million and long-term derivative
liabilities increased $0.5 million. These changes were due primarily to an
increase in the futures price of oil and natural gas. Also, during the quarter
we recorded a $0.7 million derivative fair value gain, resulting primarily from
a decrease in the market value of our 2,000 Bbls per day short oil put
contracts.
With the adoption of SFAS 133 on January 1, 2001, Encore began recording
deferred hedging gains and losses as other comprehensive income. For the quarter
ended March 31, 2002, we had a comprehensive loss of $0.7 million, while net
income totaled $7.1 million. The difference between net income and comprehensive
loss is due to a $7.8 million change in deferred hedging gain/loss in other
comprehensive income. Due to an increase in the futures price of oil and natural
gas, we went from a deferred hedging gain of $4.2 million, net of tax, at
December 31, 2001 to a deferred hedging loss of $3.6 million, net of tax, at
March 31, 2002.
At December 31, 2001, we had $4.8 million in gross unrecognized gains in
other comprehensive income related to the termination of hedging contracts with
Enron that will be amortized into earnings during 2002 and 2003. The following
table illustrates the current and future amortization of this amount to revenue
(in thousands):
PERIOD OIL GAS TOTAL
------ ------- ------- -------
Q1 2002 ........................... $ 705 $ 399 $ 1,104
Q2 2002 ........................... 705 399 1,104
Q3 2002 ........................... 706 398 1,104
Q4 2002 ........................... 706 398 1,104
Q1 2003 ........................... 100 5 105
Q2 2003 ........................... 100 5 105
Q3 2003 ........................... 100 4 104
Q4 2003 ........................... 101 4 105
------- ------- -------
Total ............................. $ 3,223 $ 1,612 $ 4,835
======= ======= =======
8
The following tables summarize our open commodity hedging positions as of
March 31, 2002:
OIL HEDGES AT MARCH 31, 2002
DAILY FLOOR DAILY CAP DAILY SWAP
FLOOR VOLUME PRICE CAP VOLUME PRICE SWAP VOLUME PRICE
PERIOD (Bbl) (PER Bbl) (Bbl) (PER Bbl) (Bbl) (PER Bbl)
------ ------------ --------- ---------- --------- ----------- ---------
Jan -- June 2002 5,000 $ 23.14 2,500 $ 26.31 2,500 $ 18.43
July -- Dec 2002 4,000 $ 22.93 2,500 $ 26.31 2,000 $ 17.97
Jan -- Dec 2003 3,000 $ 19.17 3,000 $ 25.33 -- $ --
NATURAL GAS HEDGES AT MARCH 31, 2002
DAILY FLOOR DAILY CAP DAILY SWAP
FLOOR VOLUME PRICE CAP VOLUME PRICE SWAP VOLUME PRICE
PERIOD (Mcf) (PER Mcf) (Mcf) (PER Mcf) (Mcf) (PER Mcf)
------ ------------ --------- ---------- --------- ----------- ---------
2002 5,000 $ 3.13 2,500 $ 8.05 5,000 $ 2.83
2003 2,500 $ 3.00 -- $ -- 2,500 $ 3.69
INTEREST RATE HEDGES AT MARCH 31, 2002
FIXED
SWAP INTEREST SWAP
PERIOD RATE NOTIONAL
------ ------------- --------
2002 5.48% $ 60,000,000
2003 5.48% $ 60,000,000
2004 5.48% $ 60,000,000
2005 5.48% $ 60,000,000
The actual gains or losses we realize from our hedge transactions may vary
significantly from the amounts recorded in the March 31, 2002 balance sheet due
to the fluctuation of prices in the commodity markets and/or fluctuations in the
floating LIBOR interest rate.
Additionally, as of March 31, 2002, we had short oil put contracts in place
covering 2,000 Bbls per day at an average strike price of $19.25 which do not
qualify for hedge accounting. Accordingly, these contracts are marked to market
through earnings each period.
7. INCOME TAXES
During the first quarter of 2002, Encore incurred $4.4 million in income tax
expense. Of this, $3.9 million is deferred income tax expense and relates
primarily to intangible drilling costs incurred during the quarter, which are
deductible for income tax purposes, but have been capitalized as Properties and
Equipment under generally accepted accounting principles. These amounts will be
depleted and transferred to earnings over the production life of the wells.
Primarily as a result of the net deferred hedge loss recorded in other
comprehensive income during the first quarter of 2002, Encore has a deferred tax
asset in the amount of $5.1 million at March 31, 2002; $4.4 million of which is
current. The remaining $0.7 million has been netted with our deferred tax
liability on the balance sheet.
8. ACQUISITION
On January 4, 2002, we completed the acquisition of interests in oil and
natural gas properties in the Permian Basin for $50.1 million from Conoco. The
two principal operated properties are the East Cowden Grayburg and Fuhrman Nix
fields; the non-operated properties are primarily in the North Cowden and Yates
fields. Production from the acquired properties averaged 1,638 BOE per day in
the first quarter of 2002. Over 40 development wells have been identified, and
the drilling program may be initiated in the second half of this year. The
acquisition was funded by additional borrowings under the Company's existing
credit agreement.
9
9. SUBSEQUENT EVENTS
On April 1, 2002, the Board of Directors of the Company upon recommendation
by its Audit Committee, approved the engagement of Ernst & Young LLP as the
Company's independent auditors for the fiscal year 2002, dismissing the firm of
Arthur Andersen LLP. The determination to change independent auditors followed
the Board of Director's decision to seek proposals from independent public
accountants to audit the Company's financial statements for the fiscal year
ending December 31, 2002.
On April 18, 2002, the company agreed to acquire oil and natural gas
properties in the Paradox Basin in Utah from a privately held oil and gas
company. The purchase price for the Paradox Basin acquisition is $23.4 million,
prior to closing adjustments. The Utah properties are the Ratherford Unit
operated by Exxon Mobil and the Aneth Unit operated by ChevronTexaco. The
working and net revenue interest in the Ratherford Unit is 19.3% and 16.8%
respectively, and the working interest and the net revenue interest in the Aneth
Unit are 12.0% and 10.3% respectively. Approximately 78% of the value of the
acquisition is subject to preferential rights held by the Navajo Nation. The
units produce from the Desert Creek zone at about 5,700 feet. The expected
closing date is August 31, 2002.
10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
This document contains forward-looking statements that involve risks and
uncertainties that are made pursuant to the Safe Harbor Provisions of the
Private Securities Litigation Reform Act of 1995. Actual results may differ
materially from those anticipated in our forward-looking statements due to many
factors, including, but not limited to, those set forth under "SPECIAL NOTE
REGARDING FORWARD-LOOKING STATEMENTS" contained in Item 7, Management's
Discussion and Analysis of Financial Condition and Results of Operations, in
Encore's 2001 Annual Report filed on Form 10-K. The following discussion should
be read in conjunction with the consolidated financial statements and notes
thereto included in this document and Encore's 2001 Form 10-K.
RESULTS OF OPERATIONS
The following table sets forth operating information of Encore for the
periods presented.
THREE MONTHS ENDED
MARCH 31,
--------------------------
INCREASE
2002 2001 (DECREASE)
---------- ---------- ----------
Operating Results (in thousands):
Oil and natural gas revenues .............................................. $ 32,297 $ 36,221 $ (3,924)
Direct lifting costs ...................................................... 6,817 6,355 462
Production, ad valorem and severance taxes ................................ 3,013 4,270 (1,257)
Daily production:
Oil volumes (Bbls) ...................................................... 15,674 13,236 2,438
Natural gas volumes (Mcf) ............................................... 24,009 21,179 2,830
Combined volumes (BOE) .................................................. 19,676 16,766 2,910
Average prices (net of hedging and net profits):
Oil (per Bbl) ........................................................... $ 18.92 $ 22.98 $ (4.06)
Natural gas (per Mcf) ................................................... 2.60 4.64 (2.04)
Combined volumes (per BOE) .............................................. 18.24 24.00 (5.76)
Average costs (per BOE):
Direct lifting costs .................................................... $ 3.85 $ 4.21 $ (0.36)
Production, ad valorem and severance taxes .............................. 1.70 2.83 (1.13)
G&A (excluding non-cash stock based compensation) ....................... 0.84 0.84 --
DD&A .................................................................... 4.83 5.01 (0.18)
11
COMPARISON OF QUARTER ENDED MARCH 31, 2002 TO QUARTER ENDED MARCH 31, 2001
Set forth below is our comparison of operations during the first quarter of
2002 with the first quarter of 2001.
REVENUES AND PRODUCTION. Oil and natural gas revenues of Encore for the
first quarter of 2002 decreased as compared to 2001 by $3.9 million, from $36.2
million to $32.3 million. The following table illustrates the primary components
of oil and natural gas revenue for the quarters ended March 31, 2002 and 2001,
as well as each quarter's respective oil and natural gas volumes (in thousands
except per unit amounts):
THREE MONTHS ENDED MARCH 31,
2002 2001 DIFFERENCE
----------------------- ----------------------- ------------------------
REVENUES: Revenue $/Unit Revenue $/Unit Revenue $/Unit
---------- ------ ---------- ------ ---------- ------
Oil wellhead ...................... $ 26,543 $ 18.82 $ 31,768 $ 26.67 $ (5,225) $ (7.85)
Net profits oil ................... (328) (0.23) (1,090) (0.92) 762 0.69
Oil hedges ........................ (235) (0.17) (3,301) (2.77) 3,066 2.60
Enron hedges ...................... 706 0.50 -- -- 706 0.50
-------- -------- -------- -------- -------- --------
Total Oil Revenues ........... $ 26,686 $ 18.92 $ 27,377 $ 22.98 $ (691) $ (4.06)
======== ======== ======== ======== ======== ========
Natural gas wellhead .............. $ 4,768 $ 2.21 $ 12,410 $ 6.51 $ (7,642) $ (4.30)
Net profits gas ................... (7) -- (47) (0.02) 40 0.02
Gas hedges ........................ 452 0.21 (3,519) (1.85) 3,971 2.06
Enron hedges ...................... 398 0.18 -- -- 398 0.18
-------- -------- -------- -------- -------- --------
Total Gas Revenues ........... $ 5,611 $ 2.60 $ 8,844 $ 4.64 $ (3,233) $ (2.04)
======== ======== ======== ======== ======== ========
NYMEX NYMEX NYMEX
OTHER DATA: Production $/Unit Production $/Unit Production $/Unit
---------- --------- ---------- --------- ---------- ---------
Oil (Bbls) ........................ 1,411 $ 21.64 1,191 $ 28.73 220 $ (7.09)
Gas (Mcf) ......................... 2,161 2.49 1,906 6.30 255 (3.81)
Although oil volumes increased, total oil revenue was down due to lower
prices, offset by lower hedging and net profits payments. Oil volumes increased
220 MBbls due to the Company's successful development drilling program and the
Central Permian acquisition completed this quarter. Wellhead oil revenues
decreased $7.85 per Bbl primarily from a decrease in the overall market price
for oil as reflected in the $7.09 per Bbl decrease in the average NYMEX price
over the same period. The decrease in wellhead oil revenues was offset by a
decrease in payments made for net profits and hedging, which decreased $0.8
million and $3.1 million, respectively. The decrease in net profits was
primarily due to lower prices and higher capital expenditures in the first
quarter of 2002. The Company's hedging activities are not a component of the
expenses deducted in calculating net profits interest payments. The decrease in
hedging payments is a direct result of the decrease in the average NYMEX price
for oil.
Natural gas revenues decreased by $3.2 million due to a decrease in the net
sales price per Mcf, which was somewhat offset by a 255 MMcf increase in
production and net hedging receipts in the first quarter of 2002 versus net
hedging payments in the first quarter of 2001. The increase in volumes is due to
increased production in the Cedar Creek Anticline and Crockett County properties
due to successful development drilling. Wellhead price received decreased $4.30
per Mcf, consistent with the average NYMEX price decrease of $3.81 per Mcf for
the three months ended March 31, 2001 to the three months ended March 31, 2002,
while hedging payments decreased $2.06 per Mcf due to lower natural gas prices.
DIRECT LIFTING COSTS. Direct lifting costs of Encore for the first quarter
of 2002 increased as compared to the first quarter of 2001 by $0.5 million. The
increase in direct lifting costs is primarily attributable to increased
production in 2002 offset by a decrease in per BOE costs. On a per BOE basis,
direct lifting costs decreased from $4.21 to $3.85, primarily as a result of the
company deferring a portion of first quarter scheduled maintenance until the
second quarter. As a result, second quarter 2001 direct lifting costs will rise
from the first quarter and move direct lifting costs for the year more in line
with our 2002 expected amount of $4.25 per BOE.
PRODUCTION, AD VALOREM AND SEVERANCE TAXES. Production, ad valorem and
severance taxes for the first quarter of 2002 decreased as compared to the first
quarter of 2001 by approximately $1.3 million, from $4.3 million to $3.0
million. The decrease in production, ad valorem and severance taxes was a result
of the substantially lower prices as compared to the first quarter of 2001. The
decrease was partially offset by increased taxes as a result of the Central
Permian acquisition. As a percent of oil and natural gas revenues (excluding the
effects of hedges), production, ad valorem and severance taxes remained fairly
constant, down to 9.7% from 9.9%.
12
DEPLETION, DEPRECIATION AND AMORTIZATION (DD&A) EXPENSE. DD&A expense for
the first quarter of 2002 increased by $1.0 million, reflecting the increase in
our asset base resulting from the Central Permian acquisition and development
drilling and the corresponding increase in production. The average DD&A rate of
$4.83 per BOE of production during the first quarter of 2002 represents a
decrease of $0.18 per BOE from the $5.01 per BOE recorded in the first quarter
of 2001. The decrease was attributable to normal production declines in the
Lodgepole properties, which have relatively high DD&A rates as compared to our
other producing properties.
GENERAL AND ADMINISTRATIVE (G&A) EXPENSE. G&A expense increased $0.2 million
for the first quarter of 2002 as compared to the first quarter of 2001, from
$1.3 million to $1.5 million (excluding non-cash stock based $9.6 million in the
first quarter of 2001). The increase in G&A was a result of the hiring of
additional staff after the Central Permian acquisition to analyze and exploit
our drilling inventory and evaluate potential future acquisitions. On a per BOE
basis, G&A remained constant at $0.84 from the first quarter of 2001.
NON-CASH STOCK BASED COMPENSATION EXPENSE. Non-cash stock based compensation
expense decreased from $9.6 million in the first quarter of 2001 to zero in the
first quarter of 2002. This stock based compensation is associated with the
purchase by our management stockholders of Class A common stock under our
management stock plan adopted in August 1998. This amount represents the vested
portion of the shares purchased and is recorded as compensation, calculated in
accordance with variable plan accounting under APB 25. The amount recorded in
the first quarter of 2001 represented the final amount of expense to be recorded
related to the Class A stock.
INTEREST EXPENSE. Interest expense for the quarter ended March 31, 2002 was
$1.5 million compared to $2.5 million for the quarter ended March 31, 2001. The
decrease in interest expense is directly attributable to lower interest rates.
The weighted average interest rate, net of hedges, for the first quarter of 2002
was 4.7% compared to 7.1% for the first quarter of 2001.
LIQUIDITY AND CAPITAL RESOURCES
Principal uses of capital have been for the acquisition and development of
oil and natural gas properties.
During the quarter ended March 31, 2002, net cash provided by operations was
$17.2 million, a decrease of $2.3 million compared to the quarter ended March
31, 2001. This decrease is a result of lower oil and natural gas prices.
We anticipate that our capital expenditures will total approximately $22.0
million for the second quarter of 2002. The level of these and other future
expenditures is largely discretionary, and the amount of funds devoted to any
particular activity may increase or decrease significantly, depending on
available opportunities and market conditions. We plan to finance our ongoing
development and acquisition expenditures using internally generated cash flow,
available cash and our existing credit agreement. As previously announced,
Encore plans to invest $81.0 million in capital expenditures in 2002.
At March 31, 2002, Encore had total assets of $461.0 million. Total
capitalization was $401.6 million, of which 66.9% was represented by
stockholders' equity and 33.1% by debt under the Company's existing senior
credit facility.
Encore's operating subsidiary currently maintains a credit agreement with a
group of banks that matures in May 2004. Encore has guaranteed the subsidiary's
obligations under the credit agreement and has pledged the stock and other
equity interests of its subsidiaries to secure the guaranty. Borrowings under
the credit agreement totaled $133.0 million as of March 31, 2002. The borrowing
base, as established in the credit agreement, was $180.0 million as of March 31,
2002. During the first quarter of 2002, the weighted average interest rate under
the facility, net of hedges, was 4.7%. The remaining borrowing base available
under the credit agreement at March 31, 2002, was $47.0 million. Encore pays
certain fees based on the unused portion of the borrowing base. The credit
agreement contains a number of negative and financial covenants. Encore was in
compliance with the covenants as of March 31, 2002.
In March 2000, the Company issued a $35.2 million note payable to Burlington
Resources in connection with the Lodgepole acquisition in North Dakota. The note
required monthly principal payments over the 22 month period ending January 31,
2002. The note bore monthly compounded interest at the rate of 4% per annum on
the outstanding principal plus accrued interest. The final principal payment of
$1.1 million along with accrued interest of $1.3 million was paid on January 31,
2002.
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The Company believes that its capital resources are adequate to meet the
requirements of its business. Based on our anticipated capital investment
programs, we expect to invest our internally generated cash flow to replace
production and enhance our waterflood programs. Additional capital may be
required to pursue acquisitions and longer-term capital projects, such as our
proposed high pressure air injection tertiary recovery project in the Cedar
Creek Anticline, to increase our reserve base. Substantially all of these
expenditures are discretionary and will be undertaken only if funds are
available and the projected rates of return are satisfactory. Future cash flows
are subject to a number of variables including the level of oil and natural gas
production and prices. Operations and other capital resources may not provide
cash in sufficient amounts to maintain planned levels of capital expenditures.
INFLATION AND CHANGES IN PRICES
While the general level of inflation affects certain of our costs, factors
unique to the petroleum industry result in independent price fluctuations.
Historically, significant fluctuations have occurred in oil and natural gas
prices. In addition, changing prices often cause costs of equipment and supplies
to vary as industry activity levels increase and decrease to reflect perceptions
of future price levels. Although it is difficult to estimate future prices of
oil and natural gas, price fluctuations have had, and will continue to have, a
material effect on us.
The following table indicates the average oil and natural gas prices
received for the quarter ended March 31, 2002 and 2001. Average equivalent
prices for 2002 and 2001 were increased by $0.75 and decreased by $4.52 per BOE,
respectively, as a result of our hedging activities. Average prices per
equivalent barrel indicate the composite impact of changes in oil and natural
gas prices. Natural gas production is converted to oil equivalents at the
conversion rate of six Mcf per Bbl. Average prices shown in the following table
are net of net profits interests.
OIL NATURAL GAS EQUIV. OIL
(PER Bbl) (PER Mcf) (PER BOE)
--------- ----------- ----------
NET PRICE REALIZATION WITH HEDGES
Quarter ended March 31, 2002 .......................... $ 18.92 $ 2.60 $ 18.24
Quarter ended March 31, 2001 .......................... 22.98 4.64 24.00
AVERAGE WELLHEAD PRICE
Quarter ended March 31, 2002 .......................... $ 18.59 $ 2.21 $ 17.49
Quarter ended March 31, 2001 .......................... 25.75 6.49 28.52
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The information included in "Quantitative and Qualitative Disclosures About
Market Risk" in Encore's 2001 Annual Report filed on Form 10-K is incorporated
herein by reference. Such information includes a description of Encore's
potential exposure to market risks, including commodity price risk and interest
rate risk. Encore's open commodity positions as of March 31, 2001 are presented
in Note 6 to the accompanying financial statements. The fair value of our open
commodity and interest rate hedges is ($8.1) million as of March 31, 2002.
Subsequent to the first quarter of 2002, we entered into several additional
oil hedges. The following table summarizes the additional commodity hedging
positions entered into through May 3, 2002:
DAILY FLOOR DAILY CAP DAILY SWAP
FLOOR VOLUME PRICE CAP VOLUME PRICE SWAP VOLUME PRICE
PERIOD (Bbl) (PER Bbl) (Bbl) (PER Bbl) (Bbl) (PER Bbl)
------ ------------ --------- ---------- --------- ----------- ---------
July -- Dec 2002 2,500 $ 23.00 1,500 $ 29.85 1,000 $ 24.50
Jan -- June 2003 1,000 $ 22.50 1,000 $ 26.33 1,000 $ 24.50
July -- Dec 2003 1,000 $ 22.50 1,000 $ 26.33 -- $ --
Additionally, we entered into an interest rate swap effective April 3, 2002
through April 3, 2007 with a $30 million notional, whereby we pay a 5.26% fixed
rate and receive the floating LIBOR rate.
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PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
Exhibits
None.
Reports on Form 8-K
None.
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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.
ENCORE ACQUISITION COMPANY
Date: May 3, 2002 By: /s/ Morris B. Smith
--------------------------------------------
Morris B. Smith
Chief Financial Officer, Treasurer, Executive
Vice President and Principal Financial Officer
Date: May 3, 2002 By: /s/ Robert C. Reeves
--------------------------------------------
Robert C. Reeves
Vice President, Controller and Principal
Accounting Officer
17