SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ______________________________________________________ FORM 10-Q QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For Quarter Ended March 31, 1998 Commission File Number 0-25192 CALLON PETROLEUM COMPANY (Exact name of Registrant as specified in its charter) Delaware 64-0844345 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 200 North Canal Street Natchez, Mississippi 39120 (Address of principal executive offices)(Zip code) (601) 442-1601 (Registrant's telephone number, including area code) 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 ---- ---- As of May 1, 1998, there were 8,027,863 shares of the Registrant's Common Stock, par value $0.01 per share, outstanding. CALLON PETROLEUM COMPANY INDEX Page No. Part I. Financial Information Consolidated Balance Sheets as of March 31, 1998 and December 31, 1997 3 Consolidated Statements of Operations for the three-month periods ended March 31, 1998 and March 31, 1997 4 Consolidated Statements of Cash Flows for the three-month periods ended March 31, 1998 and March 31, 1997 5 Notes to Consolidated Financial Statements 6 Management's Discussion and Analysis of Financial Condition and Results of Operations 8-11 Part II. Other Information 12
CALLON PETROLEUM COMPANY CONSOLIDATED BALANCE SHEETS (In thousands) March 31, December 31, 1998 1997 (Unaudited) ASSETS Current assets: Cash and cash equivalents $ 11,674 $ 15,597 Accounts receivable 10,222 12,168 Other current assets 1,727 723 --------- --------- Total current assets 23,623 28,488 --------- --------- Oil and gas properties, full cost accounting method: Evaluated properties 399,593 398,046 Less accumulated depreciation, depletion and amortization (288,380) (282,891) --------- --------- 111,213 115,155 Unevaluated properties excluded from amortization 46,093 35,339 --------- --------- Total oil and gas properties 157,306 150,494 --------- --------- Other property and equipment, net 8,368 8,442 Other assets, net 2,318 2,997 --------- --------- Total assets $ 191,615 $ 190,421 ========= ========= LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable and accrued liabilities $ 12,253 $ 12,389 Other current liabilities 3,490 3,380 --------- --------- Total current liabilities 15,743 15,769 Long-term debt 60,250 60,250 Other long-term liabilities 834 701 --------- --------- Total liabilities 76,827 76,720 --------- --------- Stockholders' equity: Preferred stock 13 13 Common stock 80 79 Unearned compensation - restricted stock (4,484) (2,232) Capital in excess of par value 109,263 106,433 Retained earnings 9,916 9,408 --------- --------- Total stockholders' equity 114,788 113,701 --------- --------- Total liabilities and stockholders' equity $ 191,615 $ 190,421 ========= ========= The accompanying notes are an integral part of these financial statements. CALLON PETROLEUM COMPANY CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited) (In thousands, except per share data) Three Months Ended March 31, March 31, 1998 1997 Revenues: Oil and gas sales $ 11,045 $ 12,474 Interest and other 447 307 -------- -------- Total revenues 11,492 12,781 -------- -------- Costs and expenses: Lease operating expenses 1,941 2,408 Depreciation, depletion and amortization 5,570 3,816 General and administrative 1,502 1,031 Interest 651 111 -------- -------- Total costs and expenses 9,664 7,366 -------- -------- Income from operations 1,828 5,415 Income tax expense 621 1,733 -------- -------- Net income 1,207 3,682 Preferred stock dividends 699 699 -------- -------- Net income available to common shares $ 508 $ 2,983 ======== ======== Net earnings per common share: Basic $ .06 $ .50 ======== ======== Diluted $ .06 $ .39 ======== ======== Shares used in computing earnings per common share: Basic 8,015 6,010 ======== ======== Diluted 8,221 9,332 ======== ======== The accompanying notes are an integral part of these financial statements. CALLON PETROLEUM COMPANY CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (In thousands) Three Months Ended March 31, March 31, 1998 1997 Cash flows from operating activities: Net income $ 1,207 $ 3,682 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation, depletion and amortization 5,697 3,909 Amortization of deferred costs 164 94 Deferred income tax expense 621 1,733 Noncash compensation related to stock plans 634 152 Changes in current assets & liabilities: Accounts receivable 1,946 2,825 Other current assets (1,004) (294) Current liabilities (65) 90 Change in gas balancing receivable (23) (146) Change in gas balancing payable 52 231 Change in other long-term liabilities -- (13) Change in other assets, net (82) (94) -------- -------- Cash provided by operating activities 9,147 12,169 -------- -------- Cash flows from investing activities: Capital expenditures (12,775) (8,813) Cash proceeds from sale of mineral interests 339 45 -------- -------- Cash used in investing activities (12,436) (8,768) -------- -------- Cash flows from financing activities: Change in accrued liabilities for capital expenditures 39 308 Stock canceled (145) -- Sale of common stock 171 -- Dividends on preferred stock (699) (699) -------- -------- Cash provided by (used in) financing activities (634) (391) -------- -------- Net increase (decrease) in cash and cash equivalents (3,923) 3,010 Cash and cash equivalents: Balance, beginning of period 15,597 7,669 -------- -------- Balance, end of period $ 11,674 $ 10,679 ======== ======== The accompanying notes are an integral part of these financial statements.
CALLON PETROLEUM COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS March 31, 1998 1. Basis of Presentation The financial information presented as of any date other than December 31, has been prepared from the books and records without audit. Financial information as of December 31, has been derived from the audited financial statements of the Company, but does not include all disclosures required by generally accepted accounting principles. In the opinion of management, all adjustments, consisting only of normal recurring adjustments, necessary for the fair presentation of the financial information for the period indicated, have been included. For further information regarding the Company's accounting policies, refer to the Consolidated Financial Statements and related notes for the year ended December 31, 1997 included in the Company's Annual Report on Form 10-K dated March 17, 1998. 2. Per Share Amounts In February 1997, the Financial Accounting Standards Board issued Statement No. 128 ("FAS 128"), Earnings Per Share, which generally simplified the manner in which earnings per share are determined. The Company adopted FAS 128 effective December 15, 1997. In accordance with FAS 128, the Company's previously reported earnings per share for 1997 was restated. Basic earnings per common share were computed by dividing net income by the weighted average number of shares of common stock outstanding during the quarter. Diluted earnings per common share for the three months ended March 31, 1998 and 1997 were determined on a weighted average basis using common shares issued and outstanding adjusted for the effect of stock options considered common stock equivalents computed using the treasury stock method and the effect of the convertible preferred stock (if dilutive). A reconciliation of the basic and diluted earnings per share computation is as follows (in thousands, except per share amounts): Three Months Ended March 31, 1998 1997 (a) Net income available for common stock $ 508 $ 2,983 Preferred dividends assuming conversion of preferred stock (if dilutive) $ -- (1) $ 699 (b) Income available for common stock assuming conversion of preferred stock (if dilutive) $ 508 $ 3,682 (c) Weighted average shares outstanding 8,015 6,010 Dilutive impact of stock options 206 332 Convertible preferred stock (if dilutive) -- (1) 2,990 (d) Total diluted shares 8,221 9,332 Basic earnings per share (a/c) $ 0.06 $ 0.50 Diluted earnings per share (b/d) $ 0.06 $ 0.39 (1) The conversion of the preferred stock was not included in the diluted calculation for the three months ended March 31, 1998, due to its anti- diluted earnings per share. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS General This report includes "forward-looking statements" within the meaning of Section 21E of the Securities Exchange Act of 1934. All statements other than state- ments of historical fact included in this report regarding the Company's financial position, estimated quantities, business strategy, plans and objectives for future operations and covenant compliance, are forward-looking statements. Although the Company believes that the assumptions upon which such forward-looking statements are based are reasonable, it can give no assurances that such assumptions will prove to have been correct. Important factors that could cause actual results to differ materially from the Company's expectations ("Cautionary Statements") are disclosed below and elsewhere in this report. The Cautionary Statements expressly qualify all subsequent written and oral forward-looking statements attributable to the Company or persons acting on its behalf. The Company's revenues, profitability and future growth and the carrying value of its oil and gas properties are substantially dependent on prevailing prices of oil and gas. The Company's ability to maintain or increase its borrowing capacity and to obtain additional capital on attractive terms is also influenced by oil and gas prices. Prices for oil and gas are subject to large fluctuations in response to relatively minor changes in the supply of and demand for oil and gas, market uncertainty and a variety of additional factors beyond the control of the Company. These factors include weather conditions in the United States, the condition of the United States economy, the actions of the Organization of Petroleum Exporting Countries, governmental regulations, political stability in the Middle East and elsewhere, the foreign supply of oil and gas, the price of foreign imports and the availability of alternate fuel sources. Any substantial and extended decline in the price of oil or gas would have an adverse effect on the Company's carrying value of its proved reserves, borrowing capacity, revenues, profitability and cash flows from operations. Volatile oil and gas prices make it difficult to estimate the value of producing properties for acquisition and often cause disruption in the market for oil and gas producing properties, as buyers and sellers have difficulty agreeing on such value. Price volatility also makes it difficult to budget for and project the return on acquisitions, exploration and development projects. The following discussion is intended to assist in an understanding of the Company's historical financial position and results of operations for the three-month periods ended March 31, 1998 and 1997. The Company's historical financial statements and notes thereto included elsewhere in this quarterly report contain detailed information that should be referred to in conjunction with the following discussion. Liquidity and Capital Resources During the quarter ending March 31, 1998, the Company incurred a total of $12.8 million was paid for capital expenditures and $699,000 was paid as dividends to the preferred stockholders. Net cash provided by operating activities for the three months totaled $9.1 million and an additional $339,000 was generated from the sale of mineral interests. The remaining net expenditures were funded by available cash and cash equivalents. At March 31, 1998, the Company had working capital of $7.9 million and a current ratio of 1.5 to 1. For the balance of the year, the Company will continue evaluating property acquisitions and drilling opportunities. The Company has budgeted up to $85 million in capital expenditures for 1998. The major portion of the capital expenditure budget will be used to drill development and exploratory wells in an attempt to replace current production and increase total proved reserves for the Company. The capital budget will be financed with available cash, projected cash flow from operations and unused capacity under the Company's Credit Facility. Comparison of Results of Operations for the Three Months Ended March 31, 1998 and the Three Months Ended March 31, 1997. Results of Operations The following table sets forth certain unaudited operating information with respect to the Company's oil and gas operations for the periods indicated. Three Months Ended March 31, 1998 1997 Production volumes: Oil (MBbls) 112 129 Gas (MMcf) 4,036 3,391 Total (MMcfe) 4,706 4,162 Average sales price: Oil (per Bbl) $ 13.85 $ 21.11 Gas (per Mcf) 2.35 2.88 Total (per Mcfe) 2.35 3.00 Average costs (per Mcfe): Lease operating (excluding severance taxes) $ 0.34 $ 0.47 Severance taxes 0.07 0.11 Depreciation, depletion and amortization 1.18 0.92 General and administrative (net of management fees) 0.32 0.25 The following table summarizes oil and gas production for the comparable periods. Oil Production Gas Production (Barrels) (Mcf) Three Months Ended Three Months Ended March 31, March 31, 1998 1997 1998 1997 Mobile Block 864 Area -- -- 1,145,000 -- Chandeleur Block 40 -- -- 779,000 1,172,000 Main Pass 163 -- -- 659,000 1,231,000 Mobile Block 952/953 -- -- 369,000 -- Main Pass 31 16,000 -- 344,000 -- Main Pass 164/165 -- -- 311,000 131,000 North Dauphin Island Field -- -- 223,000 458,000 Black Bay 40,000 47,000 -- -- Escambia Mineral properties 42,000 50,000 74,000 84,000 Other properties 14,000 32,000 132,000 315,000 ------- ------- --------- --------- Total 112,000 129,000 4,036,000 3,391,000 ======= ======= ========= ========= Oil and Gas Production and Revenues Total oil and gas revenues decreased 11% from $12.5 million in the first quarter of 1997 to $11.0 million in 1998. This $1.5 million decrease is largely attributed to lower average prices for both oil and gas. Oil production during the first quarter of 1998 totaled 112,000 barrels and generated $1.5 million compared to 129,000 barrels and $2.7 million in the same period in 1997. The first quarter average daily oil production decreased from 1,428 barrels per day in 1997 to 1,240 barrels per day in 1998. Average oil prices received in 1997 were $21.11 compared to $13.85 in 1998. Oil production volumes for 1998 included approximately 16,000 barrels of oil from our discovery at Main Pass 31 and volumes for1997 included approximately 10,000 barrels attributable to properties which have been sold. Other properties experienced a natural decline in production. The loss in revenues was largely a result of the reduced average sales price received. Gas production volumes during the first quarter of 1998 totaled to 4.0 billion cubic feet and generated $9.5 million in revenues compared to 3.4 billion cubic feet and $9.8 million in revenues during the same period in 1997. The first quarter average daily gas production increased from 37.6 million cubic feet per day to 44.8 million cubic feet per day in 1998. The average sales price for the first quarter of 1998 averaged $2.35 per thousand cubic feet compared to $2.88 per thousand cubic feet at this time last year. Lease Operating Expenses Lease operating expenses, including severance taxes, for the three-month period ending March 31, 1998 were $1.9 million, a decrease from the $2.4 million as of March 31, 1997. On a per Mcf equivalent basis these combined expenses declined from $0.58 to $0.41 as a result of higher production volumes without proportionate increases in field operating costs and a shift in production from state to federal waters, thereby reducing severance taxes. Depreciation, Depletion and Amortization Depreciation, depletion and amortization for the three months ending March 31, 1998 and 1997 were $5.6 million and $3.8 million, respectively. This increase increased production volumes at a higher overall rate per Mcfe. For the three month period ending March 31, 1998, the per Mcf equivalent amount was $1.18 and compares to $0.92 for the same period in 1997. General and Administrative General and administrative expenses as of March 31, 1998 were $1.5 million compared to $1.0 million as of March 31, 1997. On a per Mcf equivalent basis, general and administrative expenses increased from $0.25 in the first quarter of 1997 to $0.32 in the current quarter. Interest Expense Interest expense for the current period increased as a result of increased long-term debt when compared to the first quarter debt level in 1997. For the period ending March 31, 1998, interest expense was $651,000 and compares to $111,000 for the first quarter of 1997, net of interest capitalized as unevaluated property costs. Income Taxes Income taxes were provided at the statutory rate of 34% of net income. CALLON PETROLEUM COMPANY PART II. OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K a. Exhibits None b. Reports on Form 8-K None 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. CALLON PETROLEUM COMPANY Date May 5, 1998 By /s/ John S. Weatherly ----------------------------------------- John S. Weatherly, Senior Vice President, Chief Financial Officer and Treasurer