10-Q 1 d87217e10-q.txt FORM 10-Q FOR QUARTER ENDED MARCH 31, 2001 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended March 31, 2001 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to ------ ------ Commission file number 001-14575 ---------------- PRIZE ENERGY CORP. ------------------ (Exact name of registrant as specified in charter) Delaware 75-2766114 ------------------------------------- ----------------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 3500 William D. Tate, Suite 200 Grapevine, TX 76051 -------------------------------------------------------------------------------- (Address of principal executive offices) (Zip Code) (817) 424-0400 --------------------------------------------- (Registrant's telephone number, including area code) 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 --- --- Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. Class Outstanding at May 04, 2001 ----------------------------- --------------------------- Common Stock, $.01 Par Value 12,880,005 2 PRIZE ENERGY CORP. Index to Form 10-Q Quarterly Report to the Securities and Exchange Commission

DEFINITIONS As used in this document: "Mcf" means thousand cubic feet "MMcf" means million cubic feet "Bcf" means billion cubic feet "Bbl" means barrel "MBbls" means thousand barrels "MMBbls" means million barrels "Boe" means equivalent barrels of oil "Mboe" means thousand equivalent barrels of oil "MMboe" means million equivalent barrels of oil "Oil" includes crude oil and condensate "NGLs" means natural gas liquids 2 3 PRIZE ENERGY CORP. PART I. FINANCIAL INFORMATION ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS, MARCH 31, 2001 AND 2000 3 4 PRIZE ENERGY CORP. CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS AND SHARES)

The accompanying notes are an integral part of these consolidated financial statements. 4 5 PRIZE ENERGY CORP. CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED, IN THOUSANDS EXCEPT PER SHARE AMOUNTS AND SHARES)

The accompanying notes are an integral part of these consolidated financial statements 5 6 PRIZE ENERGY CORP. CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (IN THOUSANDS, EXCEPT SHARES)

The accompanying notes are an integral part of these consolidated financial statements. 6 7 PRIZE ENERGY CORP. CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED, IN THOUSANDS)

The accompanying notes are an integral part of these consolidated financial statements 7 8 PRIZE ENERGY CORP. NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS MARCH 31, 2001 AND 2000 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES BASIS OF PRESENTATION The accompanying consolidated financial statements and notes of Prize Energy Corp. ("Prize" or, the "Company") have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission. The accompanying consolidated financial statements and notes should be read in conjunction with the consolidated financial statements and notes included in Prize's 2000 annual report on Form 10-K. In the opinion of Prize's management, all adjustments (all of which are normal and recurring) have been made which are necessary to fairly state the consolidated financial position of Prize and its subsidiaries as of March 31, 2001, and the results of their operations and their cash flows for the three month periods ended March 31, 2001 and 2000. BUSINESS AND ORGANIZATION Prize was formed on January 15, 1999 (inception) and is a Delaware corporation engaged in the development and production of proved oil and gas properties. The Company's corporate headquarters are located in Grapevine, Texas with oil and gas producing properties primarily located in Texas, Louisiana, and Oklahoma. On February 8, 2000, the Company merged with Vista Energy Resources, Inc. (Vista), an independent oil and gas development and production company. Though the Company's stockholders exchanged their shares for new shares of Vista, the stockholders of the Company acquired an 84% controlling interest in the merged company. Accordingly, the transaction was accounted for as a purchase of Vista by the Company in accordance with the provisions of APB 16. The merged company's stock is listed on the American Stock Exchange under the ticker symbol "PRZ." Under the terms of the merger, Prize stockholders effectively exchanged 16% of their interest in Prize for an 84% interest in Vista. Prior to the merger, Prize was a private company with no readily determinable market value. Thus, in order to determine the purchase price paid by Prize, Prize management estimated the fair value of Prize's oil and gas assets, its debt and other assets and liabilities as of the purchase agreement date. The final purchase price of Vista was $69.9 million, including liabilities assumed of $53.8 million. The final purchase price was assigned to the assets of Vista based on their fair value, resulting in current and other assets of $5.6 million, oil and gas properties of $84.8 million, current liabilities of $13.7 million, debt of $53.7 million, and a net deferred tax liability of $6.9 million. Additionally, $1.3 million of accrued interest and bank fees were rolled into the debt principal. 8 9 2. HEDGING Effective January 1, 2001, the Company adopted Financial Accounting Standards Board Statement No. 133, "Accounting for Derivative Instruments and Hedging Activities." The adoption of Statement No. 133 resulted in a cumulative effect of an accounting change being recognized as a charge to accumulated other comprehensive income, a component of stockholders' equity, of $55.4 million. Under Statement No. 133, the accounting for changes in the fair value of a derivative instrument depends on whether it has been designated and qualifies as part of a hedging relationship and further, on the type of hedging relationship. For those derivative instruments that are designated and qualify as hedging instruments, a company must designate the hedging instrument, based upon the exposure being hedged, as a fair value hedge, cash flow hedge or a hedge of a net investment in a foreign operation. Substantially all of the Company's hedges are cash flow hedges. As such, the effective portion of the gain or loss on the derivative instrument is reported as a component of other comprehensive income and reclassified into earnings in the same period or periods during which the hedged transaction affects earnings. The remaining gain or loss on the derivative instrument in excess of the cumulative change in the present value of future cash flows of the hedged item, if any, is recognized in earnings during the period of change. For derivative instruments not designated as hedging instruments, the gain or loss is recognized in current earnings during the period of change. The Company's cumulative effect of adoption included a charge of $11.5 million for certain options which previously qualified for hedge treatment but will not qualify as hedges under Statement No. 133. Accordingly, this amount was charged to accumulated other comprehensive income and will be reversed as these options expire. $6.0 million was reversed from accumulated other comprehensive income during the first quarter of 2001. Subsequent changes in the fair value of these options will be recognized in earnings on a mark to market basis. Accordingly, $130,000 was credited to the change in derivative fair value during the first quarter of 2001. To protect against the volatility of oil and gas prices related to the Company's production, the Company has instituted a cash flow hedging program. The Company hedges portions of its forecasted revenues from oil and gas production. When oil and gas prices rise, the increase in the expected cash flows from production is offset by hedging losses. When oil and gas prices decrease, the decrease in the expected cash flows from production is offset by hedging gains. The Company's hedging program includes crude oil and natural gas swaps and collar options. During the first quarter of 2001, the Company recognized a net gain of $5.0 million related to the ineffectiveness of its cash flow hedging instruments. The gain was primarily due to changes in the time and volatility value of the Company's natural gas collar options. The Company's hedges resulted in a charge to revenues of $18.4 million for those derivatives which were designated against first quarter production. At March 31, 2001, $32.3 million remains in accumulated other comprehensive income. Of this amount $25.3 million relates to hedges which are designated against 2001 production, while the 9 10 remainder is designated against 2002 and 2003 production. The amounts remaining in accumulated other comprehensive income includes $5.5 million that relates to the options previously discussed that do not qualify as hedges under Statement No. 133. The following table summarizes the components recognized in the change in derivative fair value during the first quarter of 2001 (in thousands):

The estimated fair values of the Company's derivatives as of March 31, 2001 are provided below (in thousands):

3. ACQUISITIONS On February 28, 2001, the Company closed on the purchase of $60.5 million of interests in oil and gas properties from Apache Corporation. At December 31, 2000, the Company had deposited $6.5 million towards the purchase. The Company financed the acquisition under its existing bank credit facility. 4. CREDIT FACILITIES On February 8, 2000, in connection with the merger with Vista, the Company amended its Senior Facility to provide for total borrowings of up to $400 million. Since then, the Company has further amended the Senior Facility which is now due June 29, 2006. The revised Senior Facility provides for letters of credit in addition to a revolving credit facility. In October 2000, the Company amended the Senior Facility to provide for an increase in the limits for letters of credit to an aggregate of $15 million with an additional supplemental letter of credit (as defined by the credit agreement) of $15 million. At March 31, 2001, $13.5 million was outstanding under the letter of credit provisions of the facility. The revolver converts to a term loan on June 29, 2004, with quarterly principal payments after that date through June 29, 2006. Interest is due quarterly at either the bank's prime rate or eurodollar rate plus a margin as defined in the agreement. The Company assumed $54 million of debt when it purchased Vista. At March 31, 2001, $281.3 10 11 million was outstanding. As of April 1, 2001, the Company's borrowing base was raised from $325 million to $375 million. The bank credit facility has various restrictions including a limit on incurred debt and asset dispositions. The Company is required to maintain certain financial and non-financial covenants including minimum current and interest coverage ratios. Borrowings under the credit facility are secured by substantially all of the Company's assets. In April and May 2001, Prize paid a total of $26.5 million of principal on the Senior Credit Facility. At May 14, 2001, $254.8 million was outstanding. Additionally, in May 2001, Prize reduced the balance on its outstanding letter of credit to $10 million. 5. STOCKHOLDERS' EQUITY On March 28, 2000, Prize entered into an agreement with Pioneer to acquire 1,346,482 shares of Prize common stock for approximately $18.4 million. Prior to the acquisition, Pioneer agreed to convert all convertible preferred stock to common stock, resign the two board seats held by Pioneer, and cancel the exploration and participation agreement associated with the convertible preferred stock. The transaction was effective March 31, 2000 and was funded through the Company's Senior Credit Facility. 6. EARNINGS PER SHARE The following tables provide reconciliations between basic and diluted earnings per common share for the three months ended March 31, 2001 and 2000. Three Months Ended March 31, 2001 (in thousands, except shares and per share amounts):

11 12 Three Months Ended March 31, 2000 (in thousands, except shares and per share amounts):

Warrants to purchase 1,708,724 and 1,773,724 shares of common stock have been excluded from the earnings per share calculation as antidilutive for the three months ended March 31, 2001 and 2000, respectively. 7. SUBSEQUENT EVENTS On April 30, 2001, the Company closed on the sale of $12.9 million of interests in oil and gas properties to Texas Petroleum Investment Company. The properties divested are located in the Onshore Gulf Coast region of South Texas and Louisiana. The sales price approximated the carrying value of the properties, and no gain or loss was recognized. 12 13 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion addresses material changes in results of operations for the three months ended March 31, 2001 compared to the same period in 2000 and in financial condition since December 31, 2000. It is presumed that readers have read or have access to Prize's 2000 annual report on Form 10-K. OVERVIEW On February 28, 2001, the Company closed on the purchase of $60.5 million of interests in oil and gas properties from Apache Corporation. At December 31, 2000, the Company had deposited $6.5 million towards the purchase. The Company financed the acquisition under its existing bank credit facility. On April 30, 2001, the Company closed on the sale of $12.9 million of interests in oil and gas properties to Texas Petroleum Investment Company. The properties divested are primarily located in the Onshore Gulf Coast region of South Texas and Louisiana. The sales price approximated the carrying value of the properties, and no gain or loss was recognized. For the quarter ended March 31, 2001, net income was $17.8 million or $1.38 (basic) per common share. This compares to first quarter of 2000 net income available to common stockholders of $4.7 million or $.49 (basic) per common share. The substantial increase in the 2000 net income is directly attributable to increased production from acquisitions and heightened levels of development activities as well as substantial increases in oil and gas prices. RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 2001 AND 2000 As previously discussed, Prize merged with Vista on February 8, 2000. Accordingly, the financial statements of Prize for the three months ended March 31, 2000 include only two months of the oil and gas operations from the Vista properties. Likewise, the financial statements for the three months ended March 31, 2000 do not contain any operations from the properties acquired from Apache on February 28, 2001. Consequently, a portion of the changes discussed below are due to these acquisitions. Changes in oil/liquids and gas production, average realized prices including the effects of hedging, and revenues for the three months ended March 31, 2001 and 2000, are shown in the table below: 13 14

OIL/LIQUIDS REVENUES FOR 2001 COMPARED TO 2000. Oil/liquids revenues increased $5.6 million or 36% in the first quarter of 2001 compared to the same period in 2000. Production gains of .1 million barrels, or 13%, added $2.4 million of oil/liquids revenues in the 2001 period. The increase in production occurred as a result of Prize's ongoing development program and the Vista and Apache acquisitions. In addition to the production increases, oil/liquids revenues increased $3.2 million as a result of the $4.10 per barrel, or 20%, price increase realized in the first quarter of 2001 compared to the same period in 2000. Realized hedging losses decreased oil/liquids revenue by $2.8 million or $3.17 per barrel for the three months ended March 31, 2001 compared to $3.6 million or $4.64 per barrel in the 2000 period. GAS REVENUES FOR 2001 COMPARED TO 2000. Gas revenues increased $19.6 million or 148% in the first quarter of 2001 compared to the same period in 2000. Production gains of 1.8 Bcf of gas, or 33%, added $4.4 million of gas revenues in the 2001 period. The production gains were primarily the result of Prize's ongoing development program and the Vista and Apache acquisitions. In addition to the production increases, gas revenues increased $15.2 million as a result of the gas price realized increasing $2.09 per Mcf, or 86%, in the first quarter of 2001 as compared to the same period in 2000. Realized hedging losses decreased gas revenue by $15.5 million or $2.11 per Mcf for the three months ended March 31, 2001 compared to a negligible increase in the 2000 period. 14 15 PRODUCTION AND OPERATING EXPENSE. Listed below are the changes in production and operating expenses for the three months ended March 31, 2001 as compared to the 2000 period:

Recurring operations and maintenance expenses increased $1.1 million or 21%, in the first quarter of 2001 primarily due to acquisitions. Well workover expense increased $.6 million in the first quarter of 2001. The increase in the recurring operations and maintenance expenses is attributable to operating expenses for the month of March 2001 from the Apache acquisition properties. The rise in well workover expense is a result of the Company's ongoing effort to enhance production and reserves. Production taxes increased $3.1 million, or 111% in the three months ended March 31, 2001. This increase was caused by the dramatic increases in oil and gas prices and production in 2001 versus the 2000 period. DEPRECIATION, DEPLETION AND AMORTIZATION EXPENSES (DD&A). DD&A expense in the quarter ended March 31, 2001 was $8 million as compared to $5.5 million in the 2000 period. On a Boe basis, the average DD&A rate was $3.80, or 17% higher than the rate of $3.24 in 2000. The increase in rate is attributable to higher production, the acquisitions and investment resulting from Prize's ongoing development program. GENERAL AND ADMINISTRATIVE EXPENSES (G&A). G&A expense in the quarter ended March 31, 2001 was $3 million versus $1.6 million for the 2000 period. On a Boe basis, the G&A rate was $1.43, 47% higher than the rate of $.97 for the 2000 period. The increase in the 2001 period resulted substantially from Prize's increase in its corporate staff during the second half of 2000. INTEREST EXPENSE. Interest expense for the three months ended March 31, 2001 was $5 million as compared to a $3.5 million in the 2000 period. The $1.5 million increase in the expense resulted from the $69.9 million increase in debt outstanding between the two periods. In addition, the 2000 period included $53.7 million of debt assumed in the Vista acquisition only from February 8, 2000, forward and $18.4 million borrowed on March 28, 2000 for the purchase of treasury shares. The 2001 period also included interest for only one month of the period on $54 million of the $60.5 million borrowed in the Apache acquisition. The average rate on the 15 16 debt outstanding was 7.70% for the three months ended March 31, 2001 compared to the rate of 8.23% in 2000. CHANGE IN DERIVATIVE FAIR VALUE. In accordance with SFAS 133, the Company recorded an unrealized gain of $5.1 million in the 2001 first quarter. The gain resulted substantially from the ineffective portion of derivatives qualifying for hedge accounting. INCOME TAXES. Income tax expense is based upon the estimated effective income tax rate that is expected for the entire fiscal year. The estimated effective tax rate for 2001 and 2000 is 37%. CAPITAL EXPENDITURES, CAPITAL RESOURCES, AND LIQUIDITY The following discussion of capital expenditures, capital resources and liquidity should be read in conjunction with the consolidated statements of cash flows included in Part 1, Item 1 elsewhere herein. CAPITAL EXPENDITURES. Approximately $75 million was spent in the first quarter of 2001 for capital expenditures, including $54 million for the Apache acquisition, and $21 million for the drilling and development of oil and gas properties. Of the $21 million incurred, $13.1 million was spent on drilling, $4.0 million on development, and $3.9 million on oil and gas equipment and facilities. For the quarter March 31, 2001, the Company has participated in the drilling of 16 wells, achieving a success rate of 94%. In addition, the Company has performed a total of 25 recompletions, with a success rate of 88%. The success rates achieved in the 2001 capital expenditure program have significantly contributed to the increase in production realized in 2001. The timing of most of the Company's capital expenditures is discretionary with no material long-term capital expenditure commitments. Consequently, the Company has a significant degree of flexibility to adjust the level of such expenditures as circumstances warrant. The Company uses internally generated cash flow to fund capital expenditures other than significant acquisitions and anticipates that its cash flow, net of debt service obligations, will be sufficient to fund its planned 2001 capital expenditures of approximately $60 million. Prize does not have a specific acquisition budget since the timing and size of acquisitions are difficult to forecast. Prize regularly engages in discussions relating to the potential acquisition of oil and gas properties. Any future acquisitions may require additional financing and will be dependent upon financing arrangements being available at the time. CAPITAL RESOURCES AND LIQUIDITY. On February 8, 2000, in connection with the merger agreement with Vista, the Company amended its Senior Facility to provide for total borrowings of $400 million. The amended Senior Facility is due June 29, 2006. As of Apri1 1, 2001, the Company's borrowing base was raised from $325 million to $375 million. As of March 31, 2001, Prize's outstanding long-term debt was $281.3 million. During April and May, 2001, the Company paid $26.5 million of its long-term debt. At May 14, 2001, $254.8 million was outstanding. Also, in May 2001, the Company reduced the outstanding balance on its letter of credit to $10 million. 16 17 Cash provided by operating activity before changes in working capital ("operating cash flow") continued to be the primary source of capital and liquidity in the first quarter of 2001. Operating cash flow for the three months ended March 31, 2001 was $26.9 million. During the first quarter of 2001, Prize borrowed $67 million on the Senior Credit Facility. Prize utilized the borrowings to fund the Apache acquisition and a portion of its capital expenditures. In March 2000 and September 2000, the Company's Board of Directors approved a plan to buy back up to $20 million and $15 million, respectively, of its common stock from time to time in the open market or through negotiated transactions. On March 28, 2000, the Company entered into a stock purchase agreement with Pioneer Natural Resources to acquire 1,346,482 shares of Prize common stock for $18.4 million. As of December 31, 2000, the Company had acquired an additional 463,700 common shares for $7.7 million. 17 18 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK See the information included in "Quantitative and Qualitative Disclosures About Market Risk" in Item 7A of Prize's 2000 Annual Report on Form 10-K. Such information includes a description of Prize's potential exposure to market risks, including commodity price risk and interest rate risk. As a result of the decrease in both oil and natural gas prices, Prize's market risk relating to the fair market value exposure of hedges is $27.6 million as of March 31, 2001 compared to $55.4 million as of December 31, 2000. 18 19 PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS Not applicable. ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS Not applicable. ITEM 3. DEFAULTS UPON SENIOR SECURITIES Not applicable. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS Not applicable. ITEM 5. OTHER INFORMATION Not applicable. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K a) Exhibits The following documents are included as exhibits to this Form 10-Q. Those exhibits below incorporated by reference herein are indicated as such by the information supplied in the parenthetical thereafter. If no parenthetical appears after an exhibit, such exhibit is filed herewith. EXHIBIT NUMBER DESCRIPTION ------- ----------- 10.1 Fourth Amendment to Amended and Restated Credit Agreement, dated as of May 4, 2001, among Prize Energy Resources, L.P., the Company, Fleet National Bank, successor-in-interest to BankBoston, N.A., as administrative agent, and certain financial institutions. b) Reports on Form 8-K None. 19 20 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. Prize Energy Corp. ----------------------------------------- (Registrant) DATE: May 14, 2001 /s/ Lon C. Kile ---------------- ---------------------------------------------- Lon C. Kile President (Principal Accounting Officer) 20 21 EXHIBIT INDEX The following documents are included as exhibits to this Form 10-Q. Those exhibits below incorporated by reference herein are indicated as such by the information supplied in the parenthetical thereafter. If no parenthetical appears after an exhibit, such exhibit is filed herewith.

PRIZE ENERGY CORP 10-Q