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Venoco 10-Q 2005

Documents found in this filing:

  1. 10-Q
  2. Ex-31.1
  3. Ex-31.2
  4. Ex-32
  5. Ex-32

 

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 June 30, 2005

or

o        TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

Commission File Number: 333-123711

Venoco, Inc.

(Exact name of registrant as specified in its charter)

Delaware

 

77-0323555

(State or other jurisdiction of
incorporation or organization)

 

(I.R.S. Employer
Identification Number)

370 17th Street, Suite 2950
Denver, Colorado

 

80202-1370

(Address of principal executive offices)

 

(Zip Code)

 

Registrant’s telephone number, including area code: (303) 626-8300

N/A

(Former name or former address, if changed since last report)

Indicate by check mark whether the registrant (1) has filed all reports required 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 report(s), and (2) has been subject to such filing requirements for the past 90 days.

YES  x   NO  o

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).

YES  o   NO  x

As of June 30, 2005, there were 4,359 shares of the issuer’s common stock, par value $0.01 per share, issued and outstanding.

 




VENOCO, INC.
Form 10-Q for the Quarterly Period Ended June 30, 2005
TABLE OF CONTENTS

 

 

Page

PART I.

 

FINANCIAL INFORMATION

 

 

 

Item 1.

 

Financial Statements (Unaudited)

 

 

 

 

 

Condensed Consolidated Balance Sheets
at June 30, 2005 and December 31, 2004

 

3

 

 

 

Condensed Consolidated Income Statements
for the Three and Six Months Ended June 30, 2005 (Successor),
and the Three and Six Months Ended June 30, 2004 (Predecessor),

 

4

 

 

 

Condensed Consolidated Statements of Cash Flows
for the Six Months Ended June 30, 2005 (Successor) and
the Six Months Ended June 30, 2004 (Predecessor)

 

5

 

 

 

Notes to Condensed Consolidated Financial Statements

 

6

 

Item 2.

 

Management’s Discussion and Analysis of Financial Condition and Results of
Operations

 

22

 

Item 3.

 

Quantitative and Qualitative Disclosures about Market Risk

 

30

 

Item 4.

 

Controls and Procedures

 

32

 

PART II.

 

OTHER INFORMATION

 

 

 

Item 1.

 

Legal Proceedings

 

33

 

Item 2.

 

Unregistered Sales of Equity Securities and Use of Proceeds

 

33

 

Item 3.

 

Defaults upon Senior Securities

 

33

 

Item 4.

 

Submission of Matters to a Vote of Security Holders

 

33

 

Item 5.

 

Other Information

 

33

 

Item 6.

 

Exhibits and Reports on Form 8-K

 

33

 

Signatures

 

34

 

 

2




PART I—FINANCIAL INFORMATION

VENOCO, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(in thousands, except shares and per share amounts)

 

 

June 30,

 

December 31,

 

 

 

2005

 

2004

 

ASSETS

 

 

 

 

 

 

 

CURRENT ASSETS:

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

5,661

 

 

$

54,715

 

 

Accounts receivable

 

27,197

 

 

17,755

 

 

Inventories

 

1,135

 

 

1,079

 

 

Income tax receivable

 

 

 

3,906

 

 

Commodity derivatives

 

844

 

 

5,300

 

 

Notes receivable—officer

 

 

 

1,420

 

 

Prepaid expenses and other current assets

 

4,781

 

 

3,640

 

 

Total current assets

 

39,618

 

 

87,815

 

 

CASH RESTRICTED FOR INVESTMENT IN OIL AND NATURAL GAS PROPERTIES

 

44,619

 

 

 

 

PROPERTY, PLANT AND EQUIPMENT, AT COST:

 

 

 

 

 

 

 

Oil and natural gas properties (full cost method, of which $1,673 and $3,317 were excluded from amortization at June 30, 2005 and December 31, 2004, respectively)

 

202,707

 

 

214,842

 

 

Drilling equipment

 

7,687

 

 

7,594

 

 

Other property and equipment

 

26,524

 

 

25,857

 

 

Total property, plant and equipment

 

236,918

 

 

248,293

 

 

Less accumulated depletion, depreciation, amortization and impairment

 

59,223

 

 

49,730

 

 

Net property, plant and equipment

 

177,695

 

 

198,563

 

 

OTHER ASSETS:

 

 

 

 

 

 

 

Commodity derivatives

 

4,918

 

 

4,855

 

 

Deferred loan costs

 

6,174

 

 

6,596

 

 

Other

 

1,409

 

 

1,053

 

 

Total other assets

 

12,501

 

 

12,504

 

 

 

 

$

274,433

 

 

$

298,882

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT)

 

 

 

 

 

 

 

CURRENT LIABILITIES:

 

 

 

 

 

 

 

Accounts payable and accrued liabilities

 

$

21,956

 

 

$

19,385

 

 

Undistributed revenue payable

 

7,902

 

 

4,774

 

 

Income taxes payable

 

5,332

 

 

 

 

Current maturities of long-term debt

 

123

 

 

127

 

 

Commodity derivatives

 

20,665

 

 

1,520

 

 

Minority interest purchase accrued

 

70

 

 

5,316

 

 

Total current liabilities

 

56,048

 

 

31,122

 

 

LONG-TERM DEBT

 

173,938

 

 

163,542

 

 

DEFERRED INCOME TAXES

 

15,510

 

 

32,208

 

 

ASSET RETIREMENT OBLIGATIONS

 

23,715

 

 

23,184

 

 

COMMODITY DERIVATIVES

 

15,568

 

 

 

 

Total liabilities

 

284,779

 

 

250,056

 

 

COMMITMENTS AND CONTINGENCIES

 

 

 

 

 

 

 

STOCKHOLDERS’ EQUITY (DEFICIT):

 

 

 

 

 

 

 

Common stock, $.01 par value (10,000 shares authorized; 4,359 shares issued and outstanding at June 30, 2005 and December 31, 2004)

 

 

 

 

 

Additional paid-in capital

 

17,883

 

 

31,576

 

 

Retained earnings (accumulated deficit)

 

(17,669

)

 

15,327

 

 

Accumulated other comprehensive income (loss)

 

(10,560

)

 

1,923

 

 

Total stockholders’ equity (deficit)

 

(10,346

)

 

48,826

 

 

 

 

$

274,433

 

 

$

298,882

 

 

 

See notes to condensed consolidated financial statements.

3




VENOCO, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(in thousands)

 

 

Three Months Ended
June 30,

 

Six Months Ended
June 30,

 

 

 

2005

 

2004

 

2005

 

2004

 

 

 

(Successor)

 

(Predecessor)

 

 (Successor) 

 

 (Predecessor) 

 

REVENUES:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Oil and natural gas sales

 

 

$

45,352

 

 

 

$

32,092

 

 

 

$

87,390

 

 

 

$

62,917

 

 

Commodity derivative losses (realized)

 

 

(3,037

)

 

 

(3,754

)

 

 

(6,049

)

 

 

(6,108

)

 

Commodity derivative losses (unrealized)

 

 

(2,957

)

 

 

(433

)

 

 

(29,105

)

 

 

(841

)

 

Other

 

 

843

 

 

 

748

 

 

 

1,570

 

 

 

1,417

 

 

Total revenues

 

 

40,201

 

 

 

28,653

 

 

 

53,806

 

 

 

57,385

 

 

EXPENSES:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Oil and natural gas production

 

 

12,352

 

 

 

11,484

 

 

 

24,282

 

 

 

22,715

 

 

Transportation expense

 

 

367

 

 

 

297

 

 

 

695

 

 

 

675

 

 

Depletion, depreciation, amortization and impairment

 

 

3,840

 

 

 

3,360

 

 

 

9,493

 

 

 

7,381

 

 

Accretion of abandonment liability

 

 

576

 

 

 

360

 

 

 

1,018

 

 

 

720

 

 

General and administrative, net of amounts capitalized

 

 

4,583

 

 

 

3,305

 

 

 

7,699

 

 

 

5,740

 

 

Amortization of deferred loan costs

 

 

676

 

 

 

61

 

 

 

1,021

 

 

 

130

 

 

Interest, net

 

 

3,323

 

 

 

305

 

 

 

6,820

 

 

 

633

 

 

Total expenses

 

 

25,717

 

 

 

19,172

 

 

 

51,028

 

 

 

37,994

 

 

Income (loss) before income taxes

 

 

14,484

 

 

 

9,481

 

 

 

2,778

 

 

 

19,391

 

 

Income tax provision (benefit)

 

 

5,704

 

 

 

3,953

 

 

 

774

 

 

 

8,084

 

 

Net income (loss)

 

 

8,780

 

 

 

5,528

 

 

 

2,004

 

 

 

11,307

 

 

Preferred stock dividends

 

 

 

 

 

(2,116

)

 

 

 

 

 

(4,232

)

 

Net income (loss) applicable to common
equity

 

 

$

8,780

 

 

 

$

3,412

 

 

 

$

2,004

 

 

 

$

7,075

 

 

 

See notes to condensed consolidated financial statements.

4




VENOCO, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(in thousands)

 

 

Six Months Ended
June 30,

 

 

 

2005

 

2004

 

 

 

(Successor)

 

(Predecessor)

 

CASH FLOWS FROM OPERATING ACTIVITIES:

 

 

 

 

 

 

 

Net income

 

$

2,004

 

 

$

11,307

 

 

Adjustments to reconcile net income to net cash provided by operating activities:

 

 

 

 

 

 

 

Depletion, depreciation, amortization and impairment

 

9,493

 

 

7,381

 

 

Accretion of abandonment liability

 

1,018

 

 

720

 

 

Deferred income taxes

 

(5,945

)

 

2,366

 

 

Amortization of deferred loan costs and bond discount

 

1,106

 

 

103

 

 

Gain on sale of property and equipment

 

 

 

(84

)

 

Change in other liabilities

 

 

 

(352

)

 

Change in operating assets and liabilities

 

1,108

 

 

(3,405

)

 

Net premiums paid on derivative contracts

 

(10,715

)

 

 

 

Changes in unrealized commodity derivatives

 

29,105

 

 

841

 

 

Net cash provided by operating activities

 

27,174

 

 

18,877

 

 

CASH FLOWS FROM INVESTING ACTIVITIES:

 

 

 

 

 

 

 

Expenditures for oil and gas properties

 

(30,659

)

 

(3,902

)

 

Acquisition of Marquez Energy, LLC

 

(14,628

)

 

 

 

Proceeds from sale of oil and gas properties

 

44,619

 

 

1,526

 

 

Increase in cash restricted for investment in property

 

(44,619

)

 

 

 

Notes receivable—officers and employees

 

1,390

 

 

1,406

 

 

Other

 

(1,102

)

 

133

 

 

Net cash (used in) provided by investing activities

 

(44,999

)

 

(837

)

 

CASH FLOWS FROM FINANCING ACTIVITIES:

 

 

 

 

 

 

 

Proceeds from long-term debt

 

23,000

 

 

 

 

Principal payments on long-term debt

 

(12,677

)

 

(13,167

)

 

Distribution payments to Marquez Energy member

 

(707

)

 

 

 

Payments of dividends to shareholder

 

(35,000

)

 

 

 

Purchase of minority interest shares

 

(5,246

)

 

 

 

Increase in deferred loan costs

 

(599

)

 

(15

)

 

Net cash used in financing activities

 

(31,229

)

 

(13,182

)

 

Net (decrease) increase in cash and cash equivalents

 

(49,054

)

 

4,858

 

 

Cash and cash equivalents, beginning of period

 

54,715

 

 

8,417

 

 

Cash and cash equivalents, end of period

 

5,661

 

 

13,275

 

 

Supplemental Disclosure of Cash Flow Information—

 

 

 

 

 

 

 

Cash paid during the year for:

 

 

 

 

 

 

 

Interest

 

$

6,979

 

 

$

1,066

 

 

Income taxes

 

$

 

 

$

4,700

 

 

 

See notes to condensed consolidated financial statements.

5




VENOCO, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
THREE AND SIX MONTHS ENDED JUNE 30, 2005 AND 2004 (UNAUDITED)

1.   BASIS OF PRESENTATION

Interim Financial Statements—The accompanying condensed consolidated financial statements of Venoco Inc. for the three and six months ended June 30, 2005 and 2004 are unaudited. In the opinion of management, the accompanying unaudited condensed consolidated financial statements contain all adjustments (consisting of normal recurring accruals only) necessary to present fairly the Company’s financial position at June 30, 2005, the results of operations for the three and six months ended June 30, 2005 and 2004 and cash flows for the six months ended June 30, 2005 and 2004. Certain disclosures have been condensed or omitted from these financial statements. Accordingly, these financial statements should be read in conjunction with our audited 2004 financial statements contained in our Registration Statement on Form S-4/1A (Registration No. 333-123711) as filed with the Securities and Exchange Commission on April 20, 2005. The results for interim periods are not necessarily indicative of annual results.

New Company Basis—During 2004, the Company’s CEO, Tim Marquez, increased his ownership in the Company from 41% to 100%. As a result of a transaction that closed on July 12, 2004, Mr. Marquez purchased 53% of the common shares (2,468 common shares) of the Company from two of the Company’s former officers and their respective affiliates. On December 22, 2004, the Company merged with a corporation the sole stockholder of which was a trust controlled by Mr. Marquez. This merger had the effect of giving Mr. Marquez the remaining 6% of the Company’s common stock.

As a result of Mr. Marquez obtaining control of over 95% of the common stock of the Company on December 22, 2004, SEC Staff Accounting Bulletin No. 54 requires the acquisition by Mr. Marquez to be “pushed-down”, meaning the post-transaction condensed consolidated balance sheet and the condensed consolidated statements of operations and cash flows of the Company reflect a new basis of accounting (“successor basis”). The pre-transaction condensed consolidated statements of operations and cash flows are presented on the historical basis (“predecessor basis”).

Common Control Merger—On March 21, 2005 the Company completed the acquisition of Marquez Energy, LLC, a Colorado limited liability company (“Marquez Energy”) majority-owned and controlled by Timothy Marquez, the Company’s CEO and sole shareholder. Due to the common control aspects of the transaction, the financial statements of Marquez Energy have been combined with the consolidated financial statements of the Company and its subsidiaries in a manner similar to a pooling-of-interests, since the date that common control was achieved. Therefore, the Company’s financial statements since July 12, 2004 were restated to include Marquez Energy’s financial results.

2.   ACQUISITION OF PROPERTIES

On March 21, 2005, the Company completed the acquisition of Marquez Energy. The transaction added proved reserves of approximately 2.0 MMBOE as of December 31, 2004, based on a reserve report prepared by Netherland, Sewell and Associates, Inc. (NSAI). The purchase price for the membership interests in Marquez Energy was $16.6 million. The purchase price was based on the member’s equity on Marquez Energy’s unaudited December 31, 2004 balance sheet as adjusted to reflect the value of its oil and natural gas properties (as determined by NSAI as of December 31, 2004) and certain other adjustments. For the purpose of calculating the purchase price, the following values were assigned to Marquez Energy’s proved reserves: (i) $1.75/Mcfe for its proved developed producing reserves, (ii) $1.00/Mcfe for its proved developed non-producing reserves and (iii) $0.75/Mcfe for its proved undeveloped reserves. NSAI or

6




another nationally recognized engineering firm will conduct supplemental evaluations of the Marquez Energy properties as of year-end 2005 and 2006. In the event those evaluations attribute proved reserves to the Marquez Energy properties as of December 31, 2004 in excess of those reflected in NSAI’s initial report, additional payments will be made to the former holders of interests in Marquez Energy pursuant to the same formula, subject to a maximum aggregate price, including debt assumption, of $25 million. The Company had paid a deposit of $2 million to the members of Marquez Energy as of December 31, 2004 and on March 21, 2005 paid the remaining $14.6 million to the members of Marquez Energy and $3.2 million to Bank of Oklahoma to repay the existing debt. Because this entity was owned by the Company’s CEO and sole shareholder, the assets and liabilities on a net basis were recorded at their historical cost. The amount of the purchase price in excess of the historical cost has been charged directly against equity.

3.   SALES OF PROPERTIES

In February 2005, the Company entered into a purchase and sale agreement to sell its interest in the Big Mineral Creek field (“BMC”), located in Grayson County, Texas. The sales price was $45 million, subject to adjustments that, among other things, gave economic effect to the transaction as of February 1, 2005. The closing of the transaction occurred on March 31, 2005. As of December 31, 2004 the field had proved reserves of approximately 3.4 MMBOE, according to a report by NSAI.

In order to facilitate a possible like-kind exchange of the Company’s BMC property under Section 1031 of the Internal Revenue Code, the proceeds of the sale were deposited with a qualified intermediary. In addition, the equity interests in Marquez Energy are currently being held by an independent entity acting on behalf of the Company to allow a portion of the Marquez Energy properties to be potentially used as replacement properties to the BMC property. The Company has and will at all times continue to maintain beneficial ownership of the interests, and will assume direct ownership of them within 180 days of the closing. The purpose of this structure is to give the Company the option of effecting a like-kind exchange of the BMC property pursuant to Section 1031 and thereby deferring a portion of the taxes payable with respect to the sale of the BMC property. We have identified and are pursuing acquisition opportunities which qualify as replacement properties. The Company has not recorded a gain on the sale of the BMC property, but has applied the sales proceeds of $44.6 million to reduce the capitalized cost of oil and natural gas properties and has recorded the cash received in the account “Cash Restricted for Investment in Oil and Natural Gas Properties” on the condensed consolidated balance sheet at June 30, 2005. In the event the Company does not acquire qualified replacement properties prior to September 27, 2005 it will not be able to utilize the like kind exchange provisions of Section 1031, in which case it may incur an income tax liability on the gain on the sale of the BMC property of up to approximately $15.2 million, and the $44.6 million sales proceeds currently held in the account “Cash Restricted for Investment in Oil and Natural Gas Properties” would be transferred to the cash account and be available for capital expenditures, the acquisition of long-term assets, and, subject to certain limitations pursuant to the covenants of its senior notes, for general corporate purposes.

In February 2004, the Company sold its interest in the North and South Afton, California, gas properties for a net sales price of approximately $1.5 million. In accordance with its accounting policies, the Company did not recognize any gain or loss on the transaction, but applied the net sales proceeds to reduce the capitalized cost of its oil and gas properties.

In March 2004, the Company sold its subsidiary, Venoco Patagonia, Ltd., a Bermuda corporation, for $0.2 million. The $0.2 million sales price was comprised of cash of $0.1 million and payment of liabilities of $0.1 million.

7




4.   HEDGING AND DERIVATIVE FINANCIAL INSTRUMENTS

The Company enters into derivative contracts, primarily collars, swaps and option contracts, to hedge future crude oil and natural gas production in order to mitigate the risk of market price fluctuations. The objective of the Company’s hedging activities and the use of derivative financial instruments is to achieve more predictable cash flows. While the use of these derivative instruments limits the downside risk of adverse price movements, they also limit future revenues from favorable price movements. The use of derivatives also involves the risk that the counterparties to such instruments will be unable to meet the financial terms of such contracts.

In order to qualify for hedge accounting, the relationship between the hedging instrument and the hedged item must be highly effective in achieving the offset of changes in cash flows attributable to the hedged risk both at the inception of the contract and on an ongoing basis. The Company measures effectiveness on a quarterly basis. Hedge accounting is discontinued prospectively when a hedge instrument is no longer considered highly effective.

All derivative instruments are recorded on the balance sheet at fair value. Fair value is generally determined based on the difference between the fixed contract price and the underlying market price at the determination date, and/or confirmed by the counterparty. Changes in the fair value of the effective portion of the cash flow hedges are recorded as a component of accumulated other comprehensive income (loss), which is later transferred to the income statement as a component of commodity derivative income (loss) when the hedged transaction occurs. Changes in the fair value of derivatives which do not qualify as a hedge or are not designated as a hedge, as well as the ineffective portion of hedge derivatives, are recorded in commodity derivative income (loss) on the income statement. The Company determines hedge ineffectiveness based on changes during the period in the price differentials between the index price of the derivative contracts (which uses a New York Mercantile Exchange (“NYMEX”) index in the case of oil hedges, and NYMEX and PG&E Citygate in the case of natural gas hedges) and the contract price for the point of sale for the cash flow that is being hedged. Hedge ineffectiveness occurs only if the cumulative gain or loss on the derivative hedging instrument exceeds the cumulative change in the expected future cash flows on the hedged transaction. Ineffectiveness is recorded in earnings to the extent the cumulative changes in fair value of the actual derivative exceed the cumulative changes in fair value of the hypothetical derivative.

The components of commodity derivative losses in the condensed consolidated income statements are as follows (in thousands):

 

 

Three Months Ended
June 30,

 

Six Months Ended
June 30,

 

 

 

2005

 

2004

 

2005

 

2004

 

 

 

(Successor)

 

(Predecessor)

 

(Successor)

 

(Predecessor)

 

Realized commodity derivative losses

 

 

$

3,037

 

 

 

$

3,754

 

 

 

$

6,049

 

 

 

$

6,108

 

 

Unrealized commodity derivative losses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Change in fair value of derivatives that do not qualify for hedge accounting

 

 

5,340

 

 

 

(190

)

 

 

28,436

 

 

 

218

 

 

Ineffective portion of derivatives qualifying for hedge accounting

 

 

(2,936

)

 

 

623

 

 

 

(437

)

 

 

623

 

 

Amortized portion of premiums paid on derivative contracts

 

 

553

 

 

 

 

 

 

1,106

 

 

 

 

 

Unrealized commodity derivative losses

 

 

2,957

 

 

 

433

 

 

 

29,105

 

 

 

841

 

 

Total realized and unrealized commodity derivative losses

 

 

$

5,994

 

 

 

$

4,187

 

 

 

$

35,154

 

 

 

$

6,949

 

 

 

8




The estimated fair values of derivatives included in the consolidated balance sheets at June 30, 2005 and December 31, 2004 are summarized below. The increase in the net derivative liability from December 31, 2004 to June 30, 2005 is primarily attributable to the effect of rising oil and natural gas prices, partially offset by cash settlements of derivatives during the period (in thousands):

 

 

June 30,

 

December 31,

 

 

 

2005

 

2004

 

Derivative Assets:

 

 

 

 

 

 

 

Oil derivative contracts

 

$

4,900

 

 

$

6,775

 

 

Gas derivative contracts

 

862

 

 

3,380

 

 

Derivative Liabilities:

 

 

 

 

 

 

 

Oil derivative contracts

 

(33,530

)

 

(1,383

)

 

Gas derivative contracts

 

(2,703

)

 

(137

)

 

Net derivative asset (liability)

 

$

(30,471

)

 

$

8,635

 

 

 

As of June 30, 2005, an unrealized derivative fair value loss of $17.5 million ($10.6 million after tax), related to cash flow hedges, was recorded in accumulated other comprehensive loss. Based on June 30, 2005 mark-to-market prices, the Company expects to reclassify as decreases to earnings $9.7 million ($5.8 million after tax) from accumulated other comprehensive loss during the next twelve months. The actual reclassification to earnings will be based on mark-to-market prices at the contract settlement date.

Crude Oil AgreementsAs of June 30, 2005, the Company has entered into option, swap and collar agreements to receive average minimum and maximum New York Mercantile Exchange (NYMEX) West Texas Intermediate (WTI) prices as summarized below. Location and quality differentials attributable to the Company’s properties are not included in the following prices. The agreements provide for monthly settlement based on the differential between the agreement price and the actual NYMEX crude oil price.

 

 

Minimum

 

Maximum

 

 

 

Barrels/day

 

Avg. Prices

 

Barrels/day

 

Avg. Prices

 

Crude oil hedges at June 30, 2005 for production:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

July 1 – December 31, 2005

 

 

9,471

 

 

 

$

37.73

 

 

 

5,471

 

 

 

$

47.17

 

 

January 1 – December 31, 2006

 

 

7,000

 

 

 

$

40.80

 

 

 

5,000

 

 

 

$

50.70

 

 

January 1 – December 31, 2007

 

 

4,313

 

 

 

$

43.96

 

 

 

4,313

 

 

 

$

68.99

 

 

January 1 – December 31, 2008

 

 

2,947

 

 

 

$

52.00

 

 

 

2,947

 

 

 

$

75.00

 

 

January 1 – June 30, 2009

 

 

2,170

 

 

 

$

50.00

 

 

 

2,170

 

 

 

$

75.00

 

 

 

Natural Gas AgreementsAs of June 30, 2005, the Company has entered into option, swap and collar agreements to receive average minimum and maximum PG&E Citygate prices as follows:

 

 

Minimum

 

Maximum

 

 

 

MMBtu/Day

 

Avg. Prices

 

MMBtu/Day

 

Avg. Prices

 

Natural gas hedges at June 30, 2005 for production:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

July 1 – December 31, 2005

 

 

14,000

 

 

 

$

6.09

 

 

 

4,000

 

 

 

$

6.77

 

 

January 1 – December 31, 2006

 

 

15,000

 

 

 

$

6.28

 

 

 

9,000

 

 

 

$

8.40

 

 

January 1 – December 31, 2007

 

 

6,000

 

 

 

$

6.00

 

 

 

6,000

 

 

 

$

8.40

 

 

 

As of June 30, 2005 the Company has entered into a forward sales contract with a gas purchaser under which it is obligated for physical delivery of specified volumes of gas with a floor price. As this contract provides for physical delivery of the gas it is not considered a derivative because it has been designated as a normal sale, the transaction will be recorded in the financial statements when the associated delivery occurs. The Company has contracted for 2,000 MCF per day at a floor price of $4.85 per MCF for the period July 1, 2005 to September 30, 2006.

9




5.   LONG-TERM DEBT

Our long term debt consists of the following (in thousands):

 

 

June 30,
2005

 

December 31,
2004

 

8.75% senior notes due December 15, 2011

 

$

149,112

 

 

$

149,043

 

 

Revolving Credit Facility due November 4, 2007

 

15,000

 

 

 

 

Revolving Credit Facility due August 31, 2006

 

 

 

4,684

 

 

5.79% Mortgage on office building due January 1, 2015

 

9,949

 

 

9,942

 

 

Total long-term debt

 

174,061

 

 

163,669

 

 

Less: current portion of long-term debt

 

(123

)

 

(127

)

 

Long-term debt, net of current portion

 

$

173,938

 

 

$

163,542

 

 

 

On December 20, 2004, the Company sold $150 million in 8.75% senior notes (“the notes”). The notes were issued at 99.362% of par to yield 8.80% to maturity due December 2011. Interest on the notes is due each June 15 and December 15 beginning June 15, 2005. The notes are senior unsecured obligations and contain covenants that, among other things, limit the Company’s ability to make investments, incur additional debt or issue preferred stock, create liens and sell assets.

Proceeds from the sale of the notes were used to repay existing borrowings of $98.7 million against the Company’s $102 million Senior Secured Facility (“the Senior Facility”) obtained in November 2004. The Company also obtained in December 2004 an amended and restated revolving credit agreement with an initial borrowing base of $50 million and no associated term loan facility (“restated Credit Agreement”). The borrowing base under the restated Credit Agreement was reduced to $40 million on March 31, 2005 due to the sale of BMC. The restated Credit Agreement contains a number of restrictive covenants with regard to leverage and current ratios and other terms customary in a credit facility secured by oil and natural gas properties. At June 30, 2005, there were $15 million of borrowings against the restated Credit Agreement. At June 30, 2005, the average interest rate on the revolving loans was 5.63 percent. As of June 30, 2005, the Company was in compliance with all of its financial covenants.

At December 31, 2004, Marquez Energy, now consolidated with the Company had a $5.0 million revolving credit facility with the Bank of Oklahoma. Interest accrued at the JP Morgan Chase Bank prime rate plus 1 percent. The agreement was collateralized by the Company’s oil and gas properties and was guaranteed by the Company’s principal shareholder and president. The credit agreement also contained certain net worth, leverage and ratio requirements and limited the payment of distributions. At December 31, 2004, the Company had approximately $4.7 million of outstanding borrowings under this credit facility. The Company repaid the outstanding borrowings on March 21, 2005 of $3.2 million on the credit facility.

In addition, on December 9, 2004, the Company purchased an office building in Carpinteria, California secured by a 5.79% $10 million promissory note due January 1, 2015. The promissory note provides for a monthly payment of $58,612 beginning February 1, 2005 and continuing through December 1, 2014. The balance of unpaid principal and all accrued but unpaid interest is due and payable on January 1, 2015.

10




6.   COMPREHENSIVE INCOME (LOSS)

Comprehensive income (loss) includes net income and certain items recorded directly to Stockholders’ Equity and classified as Accumulated Other Comprehensive Income (“OCI”). The following table reflects comprehensive income for the three and six month periods ended June 30, 2005 and 2004.

 

 

Three Months Ended
June 30,

 

Six Months Ended
June 30,

 

 

 

2005

 

2004

 

2005

 

2004

 

 

 

(Successor)

 

(Predecessor)

 

 (Successor) 

 

(Predecessor)

 

Net income

 

 

$

8,780

 

 

 

$

5,528

 

 

 

$

2,004

 

 

 

$

11,307

 

 

OTHER COMPREHENSIVE INCOME (LOSS), NET OF INCOME TAX:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Hedging activities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Reclassification adjustments for settled contracts

 

 

 

 

 

264

 

 

 

161

 

 

 

615

 

 

Changes in fair value of outstanding hedging positions

 

 

(997

)

 

 

(233

)

 

 

(12,644

)

 

 

(2,055

)

 

Other comprehensive loss

 

 

(997

)

 

 

31

 

 

 

(12,483

)

 

 

(1,440

)

 

Comprehensive income (loss)

 

 

$

7,783

 

 

 

$

5,559

 

 

 

$

(10,479

)

 

 

$

9,867

 

 

 

7.   LITIGATION

Beverly Hills Litigation

Six lawsuits have been filed against the Company and certain other energy companies in Los Angeles County Superior Court by persons who attended Beverly Hills High School or who are citizens of Beverly Hills/Century City or visitors to that area from the time period running from the 1930s to date. There are approximately 1,000 plaintiffs (including plaintiffs in two related lawsuits in which the Company has not been named) who claim to be suffering from various forms of cancer or some other illnesses, fear they may suffer from such maladies in the future, or are related in some manner to persons who have suffered from cancer or other illnesses. Plaintiffs allege that exposure to substances in the air, soil and water which derive from either oil field or other operations in the area are the cause of the cancers and other maladies. The Company has owned an oil and gas facility adjacent to the school since 1995. For the majority of the plaintiffs, their alleged exposures occurred before the Company owned the facility. It is anticipated that additional plaintiffs may be added to the litigation over time. All cases have been consolidated before one judge. The judge has ordered that all of the cases be stayed except for an initial trial group consisting of twelve “representative” plaintiffs. Discovery relating to the initial trial group is ongoing, with a trial set for March 2006. Management believes that the claims made in the suits are without merit and the Company intends to defend against the claims vigorously. However, the Company cannot predict, at this time, the outcome of the suits. The Company also has defense and indemnity obligations to certain other defendants in the actions. The Company cannot predict the cost of defense and indemnity obligations, if any, at the present time.

In accordance with SFAS No. 5, Accounting for Contingencies, the Company has not accrued for a loss contingency relating to the Beverly Hills litigation because it believes that, although unfavorable outcomes in the proceedings may be reasonably possible, they are not considered by management to be probable or reasonably estimable. If one or more of these matters are resolved in a manner adverse to the Company, and if insurance coverage is determined to not be applicable, their impact on the Company’s results of operations, financial position and/or liquidity could be material.

Litigation by former directors and former preferred stockholders

In December 2004, a lawsuit was filed against the Company by two of its former directors and the former preferred shareholders. The claim is for indemnification of attorneys’ fees and expenses incurred in

11




defending the former directors in litigation filed by the former CEO in connection with the termination of his employment from Venoco. Fees incurred in the defense total approximately $1,000,000. On July 28, 2005 the Company entered into a settlement agreement with the former directors and the former preferred shareholder and settled the litigation for amounts which did not differ materially from the amount previously accrued.

Former Chief Operating Officer (COO) Litigation

In December 2004, a former COO of the Company filed a lawsuit against the Company and its CEO in Santa Barbara County Superior Court, claiming that the Company breached his employment agreement and wrongfully failed to pay him wages due, primarily in connection with stock bonuses. The Company believes that he was entitled to approximately 45,000 shares (approximately 7,000 of which were previously issued) and that the Company has the right to repurchase those shares at net book value as of January 1, 2004 ($.53/share). The former COO is alleging that he is entitled to a cash bonus of approximately $24,000 plus interest and approximately 68,700 shares in total. The Company believes that the plaintiff’s contentions are without merit. In August 2005, the Company and the former COO agreed to settle the lawsuit for amounts accrued as of June 30, 2005 in the financial statements. The Company expects that the lawsuits will be dismissed.

8.   SHAREHOLDERS’ EQUITY

On June 1, 2004 an agreement was reached between certain shareholders of the Company that ultimately resulted in the acquisition of 53.5% of the outstanding common shares in the Company in a transaction that closed on July 12, 2004. The terms of the transaction were contained in a private agreement among Timothy Marquez and the selling shareholders (the “securities purchase agreement”). On June 2, 2004 Timothy Marquez was elected Chairman of the Board and CEO of the Company and the selling shareholders resigned from the Board of Directors.

On January 3, 2005, a dividend of $35 million was paid to a trust controlled by the Company’s sole shareholder and CEO from the proceeds of the senior notes.

All common and preferred share amounts in the accompanying financial statements have been adjusted for the one thousand-for-one reverse stock split affected on February 10, 2005.

9.   ASSET RETIREMENT OBLIGATIONS

The Company adopted SFAS No. 143, Accounting for Asset Retirement Obligations as of January 1, 2003. Under SFAS No. 143, liabilities are accreted to their present value each period and the capitalized asset retirement costs are depleted over the productive life of the related assets. Changes resulting from revisions to the timing or the amount of the original estimate of undiscounted cashflows are recognized as an increase or decrease in the asset retirement obligation (“ARO”) and the related capitalized asset retirement costs.

12




The Company’s asset retirement obligations represent expected future costs associated with site reclamation, facilities dismantlement, and plugging and abandonment of wells. The following is a summary of the asset retirement obligation activity (in thousands):

 

 

2005

 

2004

 

 

 

(Successor)

 

(Predecessor)

 

Balance of ARO as of January 1,

 

 

$

23,390

 

 

 

$

19,248

 

 

Revisions in estimated cashflows

 

 

 

 

 

 

 

Liabilities incurred during the six months ended June 30,

 

 

53

 

 

 

 

 

Liabilities settled during the six months ended June 30,

 

 

(547

)

 

 

(30

)

 

Accretion expense

 

 

1,018

 

 

 

720

 

 

Balance of ARO as of June 30,

 

 

$

23,914

 

 

 

$

19,938

 

 

 

Of the liability for asset retirement obligations balance at June 30, 2005, $0.2 million is classified as current and included in accrued liabilities in the accompanying consolidated balance sheet. The balance of ARO as of June 30, 2005 represents our estimate of the present value of our aggregate asset retirement obligations as of that date. The discount rates used to calculate the present value varied depending on the estimated timing of the obligation, but typically ranged between 6% and 8%.

10.   RECENT ACCOUNTING PRONOUNCEMENTS

In December 2004 the FASB issued SFAS No.123R (revised 2004), “Share-Based Payment” (“SFAS 123R”). SFAS 123R requires that the compensation cost relating to share-based payment transactions be recognized in financial statements. That cost will be measured based on the fair value of the equity or liability instruments issued. SFAS No. 123R covers a wide range of share-based compensation arrangements including stock options, restricted stock plans, performance-based awards, stock appreciation rights, and employee stock purchase plans. SFAS 123R replaces FASB Statement No. 123, “Accounting for Stock-Based Compensation,” and supersedes APB Opinion No. 25, “Accounting for Stock Issued to Employees.” Public entities (other than those filing as small business issuers) were originally required to apply SFAS 123R as of the first interim or annual reporting period that begins after June 15, 2005. On April 14, 2005 the SEC announced the adoption of a new rule that amends the compliance dates for SFAS 123R. The Commission’s new rule allows registrants to implement SFAS 123R at the beginning of their next fiscal year, instead of the next reporting period, that begins after June 15, 2005. Accordingly, we will adopt SFAS 123R effective January 1, 2006. We are in the process of determining how the new method of valuing stock-based compensation as prescribed in SFAS 123R will be applied to valuing stock-based awards and the impact the recognition of compensation expense related to such awards will have on our financial statements.

11.   GUARANTOR FINANCIAL INFORMATION

In connection with the issuance of the senior notes in December 2004, BMC, Ltd., Whittier Pipeline Corp. and 217 State Street, Inc. (“Guarantors”) have fully and unconditionally guaranteed, on a joint and several basis, the Company’s obligations under the senior notes (the “Guarantees”). On March 31, 2005 Marquez Energy became a Guarantor of the notes. Each Guarantee is a general unsecured obligation of the Guarantor, senior in right of payment to all existing and future subordinated indebtedness of that Guarantor, pari passu in right of payment with any existing and future senior unsecured indebtedness of that Guarantor and effectively junior in right of payment to that Guarantor’s existing and future secured indebtedness, including its guarantee of indebtedness under the senior secured credit facility, to the extent of the value of the collateral securing that facility. All Guarantors are 100% owned by the Company.

The following are condensed consolidating statements of operations for the Company for the three and six months ended June 30, 2005 and 2004 and condensed consolidating balance sheets as of June 30, 2005 and December 31, 2004; and condensed consolidating statements of cash flows for the six months ended June 30, 2005 and 2004.

13




CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS (UNAUDITED)
THREE MONTHS ENDED JUNE 30, 2005
(Successor)
(in thousands)

 

 

Venoco, Inc.

 

Guarantor
Subsidiaries

 

Non-Guarantor
Subsidiaries

 

Eliminations

 

Consolidated

 

REVENUES:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Oil and natural gas sales

 

 

$

43,692

 

 

 

$

1,660

 

 

 

$

 

 

 

$

 

 

 

$

45,352

 

 

Commodity derivative losses (realized)

 

 

(3,037

)

 

 

 

 

 

 

 

 

 

 

 

(3,037

)

 

Commodity derivative losses (unrealized)

 

 

(2,957

)

 

 

 

 

 

 

 

 

 

 

 

(2,957

)

 

Other

 

 

903

 

 

 

4

 

 

 

1,695

 

 

 

(1,759

)

 

 

843

 

 

Total revenues

 

 

38,601

 

 

 

1,664

 

 

 

1,695

 

 

 

(1,759

)

 

 

40,201

 

 

EXPENSES:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Oil and natural gas production

 

 

11,837

 

 

 

251

 

 

 

264

 

 

 

 

 

 

12,352

 

 

Transportation expense

 

 

1,822

 

 

 

(124

)

 

 

 

 

 

(1,331

)

 

 

367

 

 

Depletion, depreciation, amortization and impairment

 

 

3,759

 

 

 

21

 

 

 

81

 

 

 

(21

)

 

 

3,840

 

 

Accretion of abandonment liability 

 

 

545

 

 

 

25

 

 

 

6

 

 

 

 

 

 

576

 

 

General and administrative, net of amounts capitalized

 

 

4,701

 

 

 

154

 

 

 

156

 

 

 

(428

)

 

 

4,583

 

 

Amortization of deferred loan costs 

 

 

676

 

 

 

 

 

 

 

 

 

 

 

 

676

 

 

Interest, net

 

 

3,625

 

 

 

 

 

 

(302

)

 

 

 

 

 

3,323

 

 

Total expenses

 

 

26,965

 

 

 

327

 

 

 

205

 

 

 

(1,780

)

 

 

25,717

 

 

Equity in subsidiary income

 

 

5,714

 

 

 

2,386

 

 

 

 

 

 

(8,100

)

 

 

 

 

Income (loss) before income taxes

 

 

17,350

 

 

 

3,723

 

 

 

1,490

 

 

 

(8,079

)

 

 

14,484

 

 

Income tax provision (benefit)

 

 

5,756

 

 

 

(2,660

)

 

 

254

 

 

 

2,354

 

 

 

5,704

 

 

Net income (loss)

 

 

$

11,594

 

 

 

$

6,383

 

 

 

$

1,236

 

 

 

$

(10,433

)

 

 

$

8,780

 

 

 

14




CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS (UNAUDITED)
THREE MONTHS ENDED JUNE 30, 2004
(Predecessor)
(in thousands)

 

 

Venoco, Inc.

 

Guarantor
Subsidiaries

 

Non-Guarantor
Subsidiaries

 

Eliminations

 

Consolidated

 

REVENUES:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Oil and natural gas sales

 

 

$

29,866

 

 

 

$

2,226

 

 

 

$

 

 

 

$

 

 

 

$

32,092

 

 

Commodity derivative losses (realized)

 

 

(3,754

)

 

 

 

 

 

 

 

 

 

 

 

(3,754

)

 

Commodity derivative losses (unrealized)

 

 

(433

)

 

 

 

 

 

 

 

 

 

 

 

(433

)

 

Other

 

 

840

 

 

 

15

 

 

 

1,784

 

 

 

(1,891

)

 

 

748

 

 

Total revenues

 

 

26,519

 

 

 

2,241

 

 

 

1,784

 

 

 

(1,891

)

 

 

28,653

 

 

EXPENSES:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Oil and natural gas production

 

 

10,605

 

 

 

530

 

 

 

349

 

 

 

 

 

 

11,484

 

 

Transportation expense

 

 

2,122

 

 

 

 

 

 

 

 

 

(1,825

)

 

 

297

 

 

Depletion, depreciation, amortization and impairment

 

 

3,178

 

 

 

182

 

 

 

21

 

 

 

(21

)

 

 

3,360

 

 

Accretion of abandonment liability 

 

 

337

 

 

 

17

 

 

 

6

 

 

 

 

 

 

360

 

 

General and administrative, net of amounts capitalized

 

 

3,112

 

 

 

193

 

 

 

66

 

 

 

(66

)

 

 

3,305

 

 

Amortization of deferred loan costs

 

 

61

 

 

 

 

 

 

 

 

 

 

 

 

61

 

 

Interest, net

 

 

651

 

 

 

 

 

 

(346

)

 

 

 

 

 

305

 

 

Total expenses

 

 

20,066

 

 

 

922

 

 

 

96

 

 

 

(1,912

)

 

 

19,172

 

 

Equity in subsidiary income

 

 

965

 

 

 

521

 

 

 

 

 

 

(1,486

)

 

 

 

 

Income (loss) before income taxes

 

 

7,418

 

 

 

1,840

 

 

 

1,688

 

 

 

(1,465

)

 

 

9,481

 

 

Income tax provision (benefit)

 

 

3,093

 

 

 

767

 

 

 

704

 

 

 

(611

)

 

 

3,953

 

 

Net income (loss)

 

 

$

4,325

 

 

 

$

1,073

 

 

 

$

984

 

 

 

$

(854

)

 

 

$

5,528

 

 

 

15




CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS (UNAUDITED)
SIX MONTHS ENDED JUNE 30, 2005
(Successor)
(in thousands)

 

 

Venoco, Inc.

 

Guarantor
Subsidiaries

 

Non-Guarantor
Subsidiaries

 

Eliminations

 

Consolidated

 

REVENUES:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Oil and natural gas sales

 

 

$

81,764

 

 

 

$

5,626

 

 

 

$

 

 

 

$

 

 

 

$

87,390

 

 

Commodity derivative losses (realized)

 

 

(6,049

)

 

 

 

 

 

 

 

 

 

 

 

(6,049

)

 

Commodity derivative losses (unrealized)

 

 

(29,105

)

 

 

 

 

 

 

 

 

 

 

 

(29,105

)

 

Other

 

 

1,684

 

 

 

21,678

 

 

 

3,742

 

 

 

(25,534

)

 

 

1,570

 

 

Total revenues

 

 

48,294

 

 

 

27,304

 

 

 

3,742

 

 

 

(25,534

)

 

 

53,806

 

 

EXPENSES:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Oil and natural gas production

 

 

22,400

 

 

 

1,215

 

 

 

667

 

 

 

 

 

 

24,282

 

 

Transportation expense

 

 

3,796

 

 

 

(103

)

 

 

 

 

 

(2,998

)

 

 

695

 

 

Depletion, depreciation, amortization and impairment

 

 

9,060

 

 

 

319

 

 

 

156

 

 

 

(42

)

 

 

9,493

 

 

Accretion of abandonment liability

 

 

949

 

 

 

58

 

 

 

11

 

 

 

 

 

 

1,018

 

 

General and administrative, net of amounts capitalized

 

 

7,804

 

 

 

747

 

 

 

287

 

 

 

(1,139

)

 

 

7,699

 

 

Amortization of deferred loan costs

 

 

1,017

 

 

 

4

 

 

 

 

 

 

 

 

 

1,021

 

 

Interest, net

 

 

7,355

 

 

 

48

 

 

 

(583

)

 

 

 

 

 

6,820

 

 

Total expenses

 

 

52,381

 

 

 

2,288

 

 

 

538

 

 

 

(4,179

)

 

 

51,028

 

 

Equity in subsidiary income

 

 

15,339

 

 

 

16,088

 

 

 

 

 

 

(31,427

)

 

 

 

 

Income (loss) before income taxes

 

 

11,252

 

 

 

41,104

 

 

 

3,204

 

 

 

(52,782

)

 

 

2,778

 

 

Income tax provision (benefit)

 

 

3,237

 

 

 

11,949

 

 

 

932

 

 

 

(15,344

)

 

 

774

 

 

Net income (loss)

 

 

$

8,015

 

 

 

$

29,155

 

 

 

$

2,272

 

 

 

$

(37,438

)

 

 

$

2,004

 

 

 

16




CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS (UNAUDITED)
SIX MONTHS ENDED JUNE 30, 2004
(Predecessor)
(in thousands)

 

 

Venoco, Inc.

 

Guarantor
Subsidiaries

 

Non-Guarantor
Subsidiaries

 

Eliminations

 

Consolidated

 

REVENUES:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Oil and natural gas sales

 

 

$

58,833

 

 

 

$

4,084

 

 

 

$

 

 

 

$

 

 

 

$

62,917

 

 

Commodity derivative losses (realized)

 

 

(6,108

)

 

 

 

 

 

 

 

 

 

 

 

(6,108

)

 

Commodity derivative losses (unrealized)

 

 

(841

)