Item 3. Legal Proceedings
In 1993, the Company incurred an oil spill on its Montalvo properties. In early 1997, the Company reached a final settlement with the appropriate federal and state agencies. Management believes that its prior accruals have been adequate and that any remaining charges or income will be immaterial to the Company.
The Company is a party to certain lawsuits arising in the ordinary course of business. Although the outcome of these lawsuits cannot be predicted with certainty, the Company does not expect such matters to have a material adverse effect on the financial statements of the Company.
Item 4.
Item 4. Submission of Matters to a Vote of Security Holders
None.
EXECUTIVE OFFICERS
Listed below are the names, ages (as of December 31, 1997) and positions of the executive officers of Berry and their business experience during at least the past five years. All officers of the Company are elected in May of each year at an organizational meeting of the Board of Directors. There are no family relationships between any executive officers and members of the Board of Directors.
JERRY V. HOFFMAN, 48, Chairman of the Board, President and Chief Executive Officer. Mr. Hoffman has been President and Chief Executive Officer since May 1994 and President and Chief Operating Officer from March 1992 until May 1994. Mr. Hoffman was added to the Board of Directors in March 1992 and named Chairman on March 21, 1997. Mr. Hoffman held the Senior Vice President and Chief Financial Officer positions from January 1988 until March 1992. Mr. Hoffman, a CPA, has held a variety of other positions with the Company and its predecessors since February 1985.
DONALD A. DALE, 51, Controller since December 1985. Mr. Dale, a CPA, was the Controller for Berry Holding Company from September 1985 to December 1985.
RALPH J. GOEHRING, 41, Senior Vice President and Chief Financial Officer. Mr. Goehring has been Senior Vice President since April 1997, Chief Financial Officer since March 1992 and was Manager of Taxation from September 1987 until March 1992. Mr. Goehring, a CPA, is also the Assistant Secretary for Berry Petroleum Company.
KENNETH A. OLSON, 42, Corporate Secretary since December 1985 and Treasurer since August 1988. Mr. Olson, a CPA, has held a variety of other positions with the Company and its predecessors since July 1985.
BRIAN L. REHKOPF, 50, Manager of Engineering since September 1997, joined the Company's engineering department in June 1997. Mr. Rehkopf, a registered petroleum engineer, was previously a Vice President and Asset Manager with ARCO Western Energy, a subsidiary of Atlantic Richfield Corp. (ARCO) since 1992 and an Operations Engineering Supervisor with ARCO from 1988 to 1992.
MICHAEL R. STARZER, 36, Vice President of Corporate Development since March 1996 and Manager of Corporate Development since April 1995. Mr. Starzer, a registered petroleum engineer, was with Unocal from August 1983 to May 1991 and from August 1993 to April 1995. Mr. Starzer was an engineering consultant and worked with the California State Lands Commission from May 1991 to August 1993.
STEVEN J. THOMAS, 47, passed away February 21, 1998. Mr. Thomas was Manager of Production from March 1993 until his death. Mr. Thomas joined the Company's engineering department in September 1992. Mr. Thomas, a registered petroleum engineer, was an engineering and petroleum consultant from 1990 to 1992 and was employed by Chevron USA from 1979 to 1990 in various drilling, production and facilities engineering positions.
PART II
Item 5.
Item 5. Market for the Registrant's Common Equity and Related Shareholder Matters
Shares of Class A Common Stock (Common Stock) and Class B Stock, referred to collectively as the "Capital Stock", are each entitled to one vote and 95% of one vote, respectively. Each share of Class B Stock is entitled to a $1.00 per share preference in the event of liquidation or dissolution. Further, each share of Class B Stock is convertible into one share of Common Stock at the option of the holder.
In 1989, the Company adopted a Shareholder Rights Agreement and declared a dividend distribution of one such Right for each outstanding share of Capital Stock on December 22, 1989. Each share of Capital Stock issued after December 22, 1989 includes one Right. The Rights expire on December 8, 1999. See Note 7 of Notes to the Financial Statements.
In conjunction with the acquisition of Tannehill in 1996, the Company issued a Warrant Certificate to the beneficial owners of Tannehill Oil Company. This Warrant authorizes the purchase of 100,000 shares of Berry Petroleum Company Class A Common Stock until November 8, 2003 at $14.06 per share. All the warrants are currently outstanding and the underlying shares will not be registered under the Securities Act of 1933.
Berry's Class A Common Stock is listed on the New York Stock Exchange under the symbol "BRY". The Class B Stock is not publicly traded. The market data and dividends for 1997 and 1996 are shown below:
1997 1996 --------------------------- ----------------------------- Price Range Dividends Price Range Dividends High Low per Share High Low per Share -------- ------ --------- -------- ------ --------- First Quarter $ 15 7/8 $ 14 $ .10 $ 11 1/8 $ 8 3/4 $ .10 Second Quarter 19 13 7/8 .10 12 1/2 10 3/8 .10 Third Quarter 20 1/2 16 3/16 .10 11 3/4 10 3/8 .10 Fourth Quarter 21 3/8 17 .10 14 1/2 11 1/4 .10
The closing price per share of Berry's Common Stock, as reported on the New York Stock Exchange Composite Transaction Reporting System for February 20, 1998, December 31, 1997 and December 31, 1996 was $16.125, $17.4375 and $14.375, respectively.
The number of holders of record of the Company's Common Stock was 926 (and approximately 3,000 street name shareholders) as of February 20, 1998. There was one Class B Stockholder of record as of February 20, 1998.
The Company paid cash dividends for many years prior to the roll-up of the various Berry companies into Berry Petroleum Company on December 16, 1985. Since Berry's formation, the Company has paid dividends on its Common Stock for eight consecutive semi-annual periods through September 1989 and for 33 consecutive quarters through December 31, 1997. The Company intends to continue the payment of dividends, although future dividend payments will depend upon the Company's level of earnings, operating cash flow, capital commitments and other relevant factors.
At December 31, 1997, dividends declared on 4,041,400 shares of certain Common Stock are restricted, whereby 37.5% of the dividends declared on these shares are paid by the Company to the surviving member of a group of individuals, the B group, for as long as this remaining member shall live.
Item 6.
Item 6. Selected Financial Data
The following table sets forth certain financial information with respect to the Company and is qualified in its entirety by reference to the historical financial statements and notes thereto of the Company included in Item 8, "Financial Statements and Supplementary Data." The statement of operations and balance sheet data included in this table for each of the five years in the period ended December 31, 1997 were derived from the audited financial statements and the accompanying notes to those financial statements (in thousands, except per share and per barrel data):
1997 1996 1995 1994 1993 Statement of Operations ------ ------ ------ ------ ------ Data: Sales of oil and gas $ 67,172 $ 55,264 $ 45,773 $ 39,451 $ 42,843 Operating costs 22,407 17,587 18,264 21,224 23,790 General and administrative expenses (G&A) 5,907 4,820 4,578 5,118 5,999 Depreciation, depletion & amortization(DD&A) 10,138 7,323 6,847 7,270 9,983 Net income (loss) 19,260 17,546 12,203 (1,129) 32 Basic net income (loss) per share .88 .80 .56 (.05) - Weighted average number of shares outstanding 21,976 21,939 21,932 21,932 21,926
Balance Sheet Data: Working capital $ 11,499 $ 7,850 $ 36,506 $ 38,273 $ 40,418 Total assets 177,724 176,403 117,722 118,254 135,519 Long-term debt 32,000 36,000 - - - Shareholders' equity 111,871 101,009 92,060 88,632 98,323 Cash dividends per share .40 .40 .40 .40 .55
Operating Data: Cash flow from operations 31,401 29,182 17,070 14,579 10,957 Capital expenditures (excluding acquisitions)18,597 15,616 14,569 5,911 13,983 Property acquisitions - 69,330 503 1,023 - Per BOE: Sales price $ 14.71 $ 15.36 $ 13.48 $ 11.60 $ 11.43 Operating costs 4.92 4.92 5.41 6.28 6.35 G&A 1.30 1.35 1.35 1.51 1.60 ------- ------- ------- ------- ------- Cash flow 8.49 9.09 6.72 3.81 3.48 DD&A 2.23 2.05 2.03 2.15 2.67 ------- ------- ------- ------- ------- Operating income $ 6.26 $ 7.04 $ 4.69 $ 1.66 $ .81 ======= ======= ======= ======= =======
Production (BOE) 4,550 3,573 3,379 3,382 3,746
Proved Reserves Information: Total BOE 101,043 102,116 78,068 77,084 72,991 Present value (PV10) of estimated future cash flow before income taxes $376,459 $634,579 $308,370 $263,890 $ 50,124 Year end BOE price for PV10 purposes 12.19 18.37 13.39 12.49 8.25
Other: Return on average shareholders' equity 18.1% 18.2% 13.6% (1.2)% 0% Return on average total assets 10.9% 13.3% 10.5% (0.9)% 0% Total debt/total debt plus equity 22.2% 29.8% N/A N/A N/A
Item 7.
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
The following discussion provides information on the results of operations for each of the three years ended December 31, 1997 and the financial condition, liquidity and capital resources as of December 31, 1997. The financial statements and the notes thereto contain detailed information that should be referred to in conjunction with this discussion.
The profitability of the Company's operations in any particular accounting period will be directly related to the average realized prices of oil and gas sold, the type and volume of oil and gas produced and the results of acquisition, development, exploitation and exploration activities. The average realized prices for oil and gas will fluctuate from one period to another due to world and regional market conditions and other factors. The aggregate amount of oil and gas produced may fluctuate based on the success of development and exploitation of oil and gas reserves pursuant to current reservoir management. Production rates, steam costs, labor, maintenance expenses and production taxes are expected to be the principal influences on operating costs. Accordingly, the results of operations of the Company may fluctuate from period to period based on the foregoing principal factors, among others.
Results of Operations
Net income for 1997 was $19.3 million, up 10%, or $1.8 million, from $17.5 million in 1996 and 58%, or $7.1 million, from $12.2 million in 1995. For the fourth quarter of 1997, net income was $4.7 million, down 11% from $5.3 million in the fourth quarter of 1996, but up 27% from $3.7 million in the fourth quarter of 1995. Although production on the Company's core assets has continued to increase, profitability decreased from the third quarter of 1997 due to lower oil prices and higher operating costs.
The following table presents certain operating data for the years ended December 31, 1997, 1996 and 1995 for comparative purposes:
1997 1996 1995 ---- ---- ---- Net production - BOE per day 12,465 9,762 9,258 Per BOE: Average sales price $14.71 $15.36 $13.48 Operating costs* 4.24 4.44 4.96 Production taxes 0.68 0.48 0.45 Total operating costs 4.92 4.92 5.41 DD&A 2.23 2.05 2.03 G&A 1.30 1.35 1.35 * Excluding production taxes.
Operating income from producing operations was $35.0 million in 1997, up $4.3 million from $30.7 million in 1996 and up $15.9 million from $19.1 million in 1995. The improvement from 1996 was primarily due to higher production volumes, partially offset by both higher DD&A and production taxes, and lower oil prices.
The average sales price/BOE received of $14.71 in 1997 was 4% lower than the $15.36 received in 1996, but 9% higher than the $13.48 received in 1995. Recently, worldwide oil prices have declined sharply with average postings for Midway-Sunset field crude oil at $7.13 per barrel as of March 9, 1998. Oil and gas production was 12,465 BOE/day, up 28% from 9,762 BOE/day in 1996 and up 35% from 9,258 BOE/day in 1995. The increase in production was due primarily to the 1997 drilling and development program and increased steam volumes related to the properties acquired in the fourth quarter of 1996. Total production from the Formax and Tannehill properties purchased in the fourth quarter of 1996 has increased to approximately 3,900 BOE/day at the end of 1997 from approximately 2,200 BOE/day upon acquisition.
The Company has a hedge contract for 3,000 B/D of the Company's crude production with a California refiner to help protect the Company's revenue from declines in the price of crude oil. The current contract was initiated in February 1997 and expires on August 31, 1998. The current price of California heavy crude oil is considerably under the lower threshold of the contract, therefore, the Company anticipates that its revenues per barrel will be beneficially impacted under the terms of the contract, if the low price levels continue.
Operating costs per BOE in 1997 of $4.92 were equal to $4.92 in 1996 and 9% lower than $5.41 in 1995. The Formax properties were produced by our predecessor at reservoir temperatures below the temperature conditions on the Company's adjacent properties. To improve production levels, the Company provided additional heat to the reservoir by firing several conventional generators in addition to its cogeneration facilities to increase the volume of injected steam. However, the cost of conventionally generated steam is more expensive than the steam produced by the Company's two cogeneration plants. Therefore, the cost of steam and the volume injected increased in 1997 compared to 1996. On a per barrel basis, the Company more than offset this increased steam cost by reducing other lifting costs.
Production taxes per BOE have increased $.20, or 42%, in 1997 compared to 1996 due primarily to the 1996 acquisitions and significantly higher pricing assumptions used by Kern County to calculate the 1997/1998 property taxes. The Company expects lower production taxes in 1998, in both real terms and on a BOE basis, primarily due to the current low oil price environment and higher anticipated production. Although total operating costs increased, operating costs/BOE were equal to the 1996 level due to higher production volumes in 1997. The Company anticipates that its operating cost per BOE will trend lower in 1998 due to increased production, lower production taxes and continuing operating cost efficiencies.
DD&A per BOE increased to $2.23 in 1997, up from $2.05 and $2.03 in 1996 and 1995, respectively. The increase was due primarily to the 1996 property acquisitions and increased drilling activity in 1996 and 1997. The Company expects that its DD&A cost per BOE will stay relatively flat to slightly higher in 1998.
In 1997, the Company completed the sale of its California San Joaquin Valley "Eastside" non-core properties located in the Poso Creek and Kern Front fields and certain non-operated interests in Louisiana for a total of $1.5 million. The Company disposed of these properties due to limited exploitation potential and high operating costs.
In the fourth quarter of 1996, the Company acquired the producing properties of Tannehill Oil Company and Formax Oil Company, which are adjacent to the Company's core South Midway-Sunset properties. At the time of the acquisitions, the properties produced approximately 2,250 barrels per day of 13 degree API gravity crude oil. As of December 31, 1997, production from these properties had increased to approximately 3,900 B/D, exceeding the Company's stated goal of 3,500 B/D.
General
Interest and dividend income in 1997 was $.6 million, down from $2.1 million and $2.0 million in 1996 and 1995, respectively. In addition, interest expense for 1997 was $2.3 million, up significantly from $.2 million in 1996 and $0 in 1995. The Company did not capitalize any interest in 1997 or 1996. These fluctuations were due to the use of cash and debt to finance the acquisitions made in the fourth quarter of 1996. Total debt at December 31, 1996 was $42.9 million, comprised of long-term debt of $36 million and a short-term note payable of $6.9 million. However, by the end of 1997, total debt was $32 million, all long-term, for a total reduction of $10.9 million, or 25%. The Company expects long-term debt to decrease further in 1998 unless additional capital is needed for an acquisition and/or the price of crude oil remains low.
G&A was $5.9 million in 1997, up 23% and 28%, from $4.8 million in 1996 and $4.6 million in 1995, respectively. However, on a BOE basis, G&A decreased to $1.30 from $1.35 in both 1996 and 1995. Two factors that increased G&A costs in 1997 were higher non-cash compensation related to the exercising of stock options and the writeoff of failed acquisition expenses. These two items accounted for $.7 million. The Company anticipates that its total G&A costs will not exceed its 1997 costs and will continue to decrease on a per BOE basis.
The Company's effective income tax rate in 1997 was 32%, down from 36% and 37% in 1996 and 1995, respectively. The lower rate in 1997 was due to additional federal and state tax credits generated from increased investment in qualified enhanced oil recovery projects. The Company expects that its effective rate would decrease significantly in a continuing low oil price environment.
In December 1997, the Company adopted Statement of Financial Accounting Standards (SFAS) No. 128, "Earnings Per Share". As required by this new standard, the Company reports two earnings per share amounts, basic net income per share and diluted net income per share. Basic net income per share is computed by dividing income available to common shareholders (the numerator) by the weighted average number of common shares outstanding (the denominator). The computation of diluted net income per share is similar to the computation of basic net income per share except that the denominator is increased to include the dilutive effect of the additional common shares that would have been outstanding if all convertible securities had been converted to common shares during the period.
Also, during 1997 the Company adopted the provisions of the American Institute of Certified Public Accountants Statement of Position (SOP) 96-1, "Environmental Remediation Liabilities" and SFAS No. 125, "Accounting for Transfer and Servicing of Financial Assets and Extinguishments of Liabilities." The adoption of these two pronouncements had no material impact on the financial statements of the Company.
During 1996, the Company implemented the disclosure requirements of SFAS No. 123, "Accounting for Stock Based Compensation." This statement sets forth alternative standards for recognition of the cost of stock-based compensation and requires that a Company's financial statements include certain disclosures about stock-based employee compensation arrangements regardless of the method used to account for them. As allowed in this statement, the Company continues to apply Accounting Principles Board Opinion (APB) No. 25, "Accounting for Stock Issued to Employees," and related interpretations in recording compensation related to its plans. The supplemental disclosure requirements and further information related to the Company's stock option plans are presented in Note 9 to the Company's financial statements.
Financial Condition, Liquidity and Capital Resources
Working capital as of December 31, 1997 was $11.5 million, up from $7.9 million at December 31, 1996, but down from $36.5 million at December 31, 1995. Cash flow from operations in 1997 increased to a record $31.4 million, up 8% and 84% from $29.2 million and $17.1 million in 1996 and 1995, respectively. Cash flow increased in 1997 from 1996 due primarily to higher production, offset partially by lower oil prices. Working capital increased in 1997 primarily because internally generated cash flow was more than sufficient to pay $18.6 million in capital expenditures, $8.8 million in dividends and retire $10.9 million in debt, $6.9 million of which was short-term notes payable. The Company drilled and completed 89 new wells in 1997, reworked an additional 70 wells and made several improvements and additions to surface facilities on the Company's core properties.
On December 1, 1996, the Company established a $150 million unsecured three-year revolving credit facility with NationsBank of Texas. As of December 31, 1997, the borrowing base was $40 million, but was reduced to $35 million on January 23, 1998. The Company is carrying $32 million in long-term debt under this credit facility as of February 20, 1998.
The total proved reserves at December 31, 1997 were 101 million BOE, down from 102.1 million BOE at December 31, 1996 and up from 78.1 million BOE at December 31, 1995. After production of 4.6 million BOE, the Company's proved reserves increased 3.5 million BOE, or 76%, of 1997 production. The increase in 1996 was primarily related to the acquisition of Tannehill and Formax in the fourth quarter of 1996. The Company's present value of estimated future net cash flows before income taxes, discounted at 10%, was $376 million at December 31, 1997, down 41% from $635 million at December 31, 1996, but up 22% from $308 million at December 31, 1995. These values were determined based on year end oil prices of $12.19, $18.37 and $13.39 per BOE for 1997, 1996 and 1995, respectively.
Future Developments
In December 1997, worldwide crude oil prices began to decline sharply and, as of March 9, 1998, the current average posting for the Company's 13 degree API gravity crude oil is $7.13 per barrel. In response, the Company will defer a minimum of 25% of its original 1998 $13.4 million capital program until at least the latter part of 1998 or until crude prices recover. In addition, certain operating costs have been reduced, such as steam, contractor services and overhead in response to the current pricing situation. Also, in mid-March 1998 the Company is instituting a 10% across-the-board salary cut with certain members of Management taking a larger percentage reduction.
Deregulation of the electricity generation market in California may have a positive or negative impact on the Company's future steam costs as electricity prices somewhat de-couple from natural gas prices. Currently, the Company's electricity price received for sales from the two cogeneration plants owned by the Company correlates directly with natural gas prices. Therefore, our net steam costs are fairly consistent between quarters and years. In the future, electricity prices will be determined by not only the cost of natural gas, but also the cost of coal, hydroelectric, nuclear and other sources of fuel. In addition, power consumption demand may make electricity prices more volatile than in the past.
The Company has performed a review of its computer systems and software to determine what steps must be taken to ensure the Company can handle transactions in the year 2000 and beyond. To handle this "Year 2000" issue, the Company will be replacing all of its accounting software in 1998 and expects this project to be completed in a timely manner for a total cost of approximately $.6 million. The Company is assessing all other Company systems to verify that they are "Year 2000" compliant.
In 1998, the Company will adopt SFAS No. 130, "Reporting Comprehensive Income." Management does not believe that adoption of this standard will have a material impact on the financial statements of the Company.
Impact of Inflation
The impact of inflation on the Company has not been significant in recent years because of the relatively low rates of inflation experienced in the United States.
Forward Looking Statements
"Safe Harbor" statement under the Private Securities Litigation Reform Act of 1995. With the exception of historical information, the matters discussed in this Form 10-K are forward-looking statements that involve risks and uncertainties. Although the Company believes that its expectations are based on reasonable assumptions, it can give no assurance that its goals will be achieved. Important factors that could cause actual results to differ materially from those in the forward-looking statements herein include, but are not limited to, the timing and extent of changes in commodity prices for oil and gas, environmental risks, drilling and operating risks, uncertainties about the estimates of reserves and government regulation.
Item 8.
Item 8. Financial Statements and Supplementary Data
BERRY PETROLEUM COMPANY Index to Financial Statements and Supplementary Data
Page
Report of Coopers & Lybrand L.L.P., Independent Accountants . . . . . . 19
Balance Sheets at December 31, 1997 and 1996 . . . . . . . . . . . . . 20
Statements of Operations for the Years Ended December 31, 1997, 1996 and 1995 . . . . . . . . . . . . 21
Statements of Shareholders' Equity for the Years Ended December 31, 1997, 1996 and 1995 . . . . . . . . . . . . 22
Statements of Cash Flows for the Years Ended December 31, 1997, 1996 and 1995 . . . . . . . . . . . . 23
Notes to the Financial Statements . . . . . . . . . . . . . . . . . . . 24
Supplemental Information About Oil & Gas Producing Activities . . . . . 35
Financial statement schedules have been omitted since they are either not required, are not applicable, or the required information is shown in the financial statements and related notes.
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors Berry Petroleum Company
We have audited the accompanying balance sheets of Berry Petroleum Company as of December 31, 1997 and 1996, and the related statements of operations, shareholders' equity and cash flows for each of the three years in the period ended December 31, 1997. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Berry Petroleum Company as of December 31, 1997 and 1996, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 1997, in conformity with generally accepted accounting principles.
COOPERS & LYBRAND L.L.P.
/s/ Coopers & Lybrand L.L.P.
February 20, 1998 Los Angeles, California
BERRY PETROLEUM COMPANY Balance Sheets December 31, 1997 and 1996 (In Thousands, Except Share Information)
1997 1996 ASSETS ------- ------- Current assets: Cash and cash equivalents $ 7,756 $ 9,970 Cash - restricted - 2,570 Short-term investments available for sale 718 704 Accounts receivable 8,990 11,701 Prepaid expenses and other 1,979 1,307 ------- ------- Total current assets 19,443 26,252
Oil and gas properties (successful efforts basis), buildings and equipment, net 157,441 149,510 Other assets 840 641 ------- ------- $ 177,724 $ 176,403 ======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities: Accounts payable $ 4,432 $ 5,154 Notes payable - 6,900 Accrued liabilities 2,459 5,300 Federal and state income taxes payable 1,053 1,048 ------- ------- Total current liabilities 7,944 18,402
Long-term debt 32,000 36,000
Deferred income taxes 25,909 20,992
Shareholders' equity: Preferred stock, $.01 par value, 2,000,000 shares authorized; no shares outstanding - - Capital stock, $.01 par value: Class A Common Stock, 50,000,000 shares authorized; 21,094,494 shares issued and outstanding (21,046,885 in 1996) 211 210 Class B Stock, 1,500,000 shares authorized; 898,892 shares issued and outstanding (liquidation preference of $899) 9 9 Capital in excess of par value 53,422 53,029 Retained earnings 58,229 47,761 ------- ------- Total shareholders' equity 111,871 101,009 ------- -------
$ 177,724 $ 176,403 ======= =======
The accompanying notes are an integral part of these financial statements.
BERRY PETROLEUM COMPANY Statements of Operations Years ended December 31, 1997, 1996 and 1995 (In Thousands, Except Per Share Data)
1997 1996 1995 ------- ------- ------- Revenues: Sales of oil and gas $ 67,172 $ 55,264 $ 45,773 Interest and dividend income 643 2,081 2,040 Gain on sale of assets 1,093 - 3,073 Other income (expense), net 87 (72) 304 ------- ------- ------- 68,995 57,273 51,190 ------- ------- -------
Expenses: Operating costs 22,407 17,587 18,264 Depreciation, depletion & amortization 10,138 7,323 6,847 Interest expense 2,302 178 - Exploratory dry hole costs - 71 2,012 General and administrative 5,907 4,820 4,578 ------- ------- ------- 40,754 29,979 31,701 ------- ------- -------
Income before income taxes 28,241 27,294 19,489 Provision for income taxes 8,981 9,748 7,286 ------- ------- -------
Net income $ 19,260 $ 17,546 $ 12,203 ======= ======= =======
Basic net income per share $ .88 $ .80 $ .56 ======= ======= ======= Diluted net income per share $ .87 $ .80 $ .56 ======= ======= =======
Weighted average number of shares of capital stock outstanding (used to calculate basic net income per share) 21,976 21,939 21,932
Effect of dilutive securities: Stock options 173 25 - Warrants 16 - - ------- ------- ------- Weighted average number of shares of capital stock used to calculate diluted net income per share 22,165 21,964 21,932 ======= ======= =======
The accompanying notes are an integral part of these financial statements.
BERRY PETROLEUM COMPANY Statements of Shareholders' Equity Years Ended December 31, 1997, 1996 and 1995 (In Thousands, Except Per Share Data)
Capital in Capital Stock Excess of Retained Shareholders' Class A Class B Par Value Earnings Equity ------- ------- ---------- -------- ------------ Balances at January 1, 1995 $ 210 $ 9 $ 52,852 $ 35,561 $ 88,632
Stock options expired - - (2) - (2) Cash dividends declared- $.40 per share - - - (8,773) (8,773) Net income - - - 12,203 12,203 ----- ----- ------- ------- -------
Balances at December 31, 1995 210 9 52,850 38,991 92,060
Stock retired - - (1) - (1) Stock options exercised - - 180 - 180 Cash dividends declared- $.40 per share - - - (8,776) (8,776) Net income - - 	 - 17,546 17,546 ----- ----- ------- ------- ------- Balances at December 31, 1996 210 9 53,029 47,761 101,009
Stock options exercised 1 - 393 - 394 Cash dividends declared- $.40 per share - - - (8,792) (8,792) Net income - - - 19,260 19,260 ----- ----- ------- ------- -------
Balances at December 31, 1997 $ 211 $ 9 $ 53,422 $ 58,229 $ 111,871 ===== ===== ======= ======= =======
The accompanying notes are an integral part of these financial statements.
BERRY PETROLEUM COMPANY Statements of Cash Flows Years Ended December 31, 1997, 1996 and 1995 (In Thousands)
1997 1996 1995 Cash flows from operating activities: ------- ------- -------
Net income $ 19,260 $ 17,546 $ 12,203 Depreciation, depletion and amortization 	10,138 7,323 6,847 Gain on sale of assets (1,093) - (3,073) Exploratory dry hole costs - 71 2,012 Increase (decrease) in deferred income tax liability 4,917 4,024 (1,985) Other, net (302) (329) (72) ------- ------- ------- Net working capital provided by operating activities 32,920 28,635 15,932
Decrease (increase) in current assets other than cash, cash equivalents and short-term investments 2,039 (2,262) 3,113 Increase (decrease) in current liabilities other than notes payable (3,558) 2,809 (1,975) ------- ------- ------- Net cash provided by operating activities 31,401 29,182 17,070 ------- ------- ------- Cash flows from investing activities: Capital expenditures, excluding property acquisitions (18,597) (15,616) (14,569) Property acquisitions - (69,330) (503) Proceeds from sale of assets 1,892 352 6,242 Purchase of short-term investments (14) (710) (3,078) Maturities of short-term investments - 15,700 15,000 Restricted cash deposit 2,570 (2,570) - Other, net (50) (100) (96) ------- ------- ------- Net cash provided by (used in) investing activities (14,199) (72,274) 2,996 ------- ------- -------
Cash flows from financing activities: Proceeds from issuance of long-term debt 3,000 36,000 - Proceeds from issuance of short-term notes payable - 6,900 - Payment of long-term debt (7,000) - - Payment of short-term notes payable (6,900) - - Dividends paid (8,792) (8,776) (8,773) Proceeds from exercise of stock options 276 179 - ------- ------- ------- Net cash provided by (used in) financing activities (19,416) 34,303 (8,773) ------- ------- ------- Net increase (decrease) in cash and cash equivalents (2,214) (8,789) 11,293 Cash and cash equivalents at beginning of year 9,970 18,759 7,466 ------- ------- ------- Cash and cash equivalents at end of year $ 7,756 $ 9,970 $ 18,759 ======= ======= =======
Supplemental disclosures of cash flow information: Interest paid $ 2,319 $ - $ 12 ======= ======= ======= Income taxes paid $ 4,280 $ 4,709 $ 5,554 ======= ======= =======
The accompanying notes are an integral part of these financial statements.
BERRY PETROLEUM COMPANY Notes to the Financial Statements
1. General
The Company is an independent energy company engaged in the production, development, acquisition, exploitation, exploration and marketing of crude oil and natural gas. Substantially all of the Company's oil and gas reserves are located in California. Approximately 99% of the Company's production is crude oil, which is principally sold to other oil companies for processing in refineries located in California.
The preparation of financial statements in conformity with generally accepted accounting principles requires Management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
2. Summary of significant accounting policies
Cash and cash equivalents
The Company considers all highly liquid investments purchased with a remaining maturity of three months or less to be cash equivalents.
Short-term investments
All short-term investments are classified as available for sale. Short-term investments consist principally of United States treasury notes and corporate notes with remaining maturities of more than three months at date of acquisition. Such investments are stated at cost, which approximates market. The Company utilizes specific identification in computing realized gains and losses on investments sold.
Oil and gas properties, buildings and equipment
The Company accounts for its oil and gas exploration and development costs using the successful efforts method. Under this method, costs to acquire and develop proved reserves and to drill and complete exploratory wells that find proved reserves are capitalized and amortized over the remaining life of the reserves using the units- of-production method. Exploratory dry hole costs and other exploratory costs, including geological and geophysical costs, are charged to expense when incurred. The costs of carrying and retaining unproved properties are also expensed when incurred.
Depletion of oil and gas producing properties is computed using the units-of-production method. Depreciation of lease and well equipment is computed using the units-of-production method or on a straight-line basis over estimated useful lives ranging from 10 to 20 years. The estimated costs, net of salvage value, of plugging and abandoning oil and gas wells and related facilities are accrued using the units-of-production method and are taken into account in determining DD&A expense. Buildings and equipment are recorded at cost. Depreciation is provided on a straight-line basis over estimated useful lives ranging from 5 to 30 years for buildings and improvements and 3 to 10 years for machinery and equipment. Assets are grouped at the field level and if it is determined that the book value of long- lived assets cannot be recovered by estimated future undiscounted cash flows, they will be written down to fair value. When assets are sold, the applicable costs and accumulated depreciation and depletion are removed from the accounts and any gain or loss is included in income. Expenditures for maintenance and repairs are expensed as incurred.
BERRY PETROLEUM COMPANY Notes to the Financial Statements
2. Summary of significant accounting policies (cont'd)
Hedging
The Company periodically enters into bracketed zero cost collar hedge contracts on a portion of its crude oil production with a California refiner to protect the Company's revenues from potential price declines. Any revenues received or costs incurred related to this hedging activity is reflected in sales of oil and gas of the Company.
Steam Costs
The costs of producing steam are recorded as an operating expense of the Company. Proceeds received from the sale of electricity produced by its cogeneration plants are reported as a reduction to operating costs in the Company's financial statements.
Stock-Based Compensation
During 1996, the Company implemented the disclosure requirements of Statement of Financial Accounting Standards (SFAS) No. 123, "Accounting for Stock-Based Compensation." This statement sets forth alternative standards for recognition of the cost of stock-based compensation and requires that a Company's financial statements include certain disclosures about stock-based employee compensation arrangements regardless of the method used to account for them. As allowed in this statement, the Company continues to apply Accounting Principles Board Opinion (APB) No. 25, "Accounting for Stock Issued to Employees," and related interpretations in recording compensation related to its plans. The supplemental disclosure requirements and further information related to the Company's stock option plans are presented in Note 9 to the Company's financial statements.
Income Taxes
Income taxes are provided based on the liability method of accounting pursuant to SFAS No. 109, "Accounting for Income Taxes." The provision for income taxes is based on pre-tax financial accounting income. Deferred tax assets and liabilities are recognized for the future expected tax consequences of temporary differences between income tax and financial reporting, and principally relate to differences in the tax bases of assets and liabilities and their reported amounts using enacted tax rates in effect for the year in which differences are expected to reverse. If it is more likely than not that some portion or all of a deferred tax asset will not be realized, a valuation allowance is recognized.
Earnings Per Share
In December 1997, the Company adopted SFAS No. 128, "Earnings per Share." As required by this new standard, the Company reports two earnings per share amounts, basic net income and diluted net income per share. Basic net income per share is computed by dividing income available to common shareholders (the numerator) by the weighted average number of common shares outstanding (the denominator). The computation of diluted net income per share is similar to the computation of basic net income per share except that the denominator is increased to include the dilutive effect of the additional common shares that would have been outstanding if all convertible securities had been converted to common shares during the period. Comparative earnings per share data for prior periods presented has been restated to conform to the new standard.
Reclassifications
Certain reclassifications have been made to the 1996 and 1995 financial statements to conform with the 1997 presentation.
BERRY PETROLEUM COMPANY Notes to the Financial Statements
3. Fair value of financial instruments
Financial instruments consist of cash and short-term investments, whose carrying amounts are not materially different from their fair values because of the short maturity of those instruments. Cash equivalents consist principally of commercial paper investments. Cash equivalents of $6.2 million and $5.9 million at December 31, 1997 and 1996, respectively, are stated at cost, which approximates market.
The Company's short-term investments available for sale at December 31, 1997 and 1996 consist of one United States treasury note. All of the short-term investments at December 31, 1997 mature in less than two years. The carrying value of the Company's long-term debt, which was incurred in 1996, is assumed to approximate its fair value since it is carried at current interest rates. For the three years ended December 31, 1997, realized and unrealized gains and losses were insignificant to the financial statements. United States treasury notes with an aggregate market value of $.6 million are pledged as collateral to the California State Lands Commission as a performance bond on the Company's Montalvo properties.
To protect the Company's revenues from potential price declines, the Company entered into a bracketed zero cost collar hedge contract with a California refiner covering 3,000 barrels/day of its crude oil production. The posted price of the Company's 13 degree API gravity crude oil was used as the basis for the hedge. The current contract expires on August 31, 1998.
4. Concentration of Credit Risks
The Company sells oil, gas and natural gas liquids to pipelines, refineries and major oil companies. Credit is extended based on an evaluation of the customer's financial condition. For the three years ended December 31, 1997, the Company has experienced no credit losses on the sale of oil, gas and natural gas liquids.
The Company places its temporary cash investments with high quality financial institutions and limits the amount of credit exposure to any one financial institution. For the three years ended December 31, 1997, the Company has not incurred losses related to these investments.
The following summarizes the accounts receivable balances at December 31, 1997 and sales activity with significant customers for each of the years ended December 31, 1997, 1996 and 1995 (in thousands):
Sales Accounts Receivable For the Year Ended December 31, ----------------------------------- ---------------------------- Customer December 31, 1997 December 31, 1996 1997 1996 1995 -------- ----------------- ----------------- ------ ------ ------ A $ 1,812 $ 2,246 $ 23,804 $ 23,067 $ 12,641 B 1,681 1,845 19,482 14,478 12,918 C 15 1,282 7,119 10,982 9,214 D 1,587 - 12,875 - - E - - - - 5,265 ------ ------ ------ ------ ------ $ 5,095 $ 5,373 $ 63,280 $ 48,527 $ 40,038 ====== ====== ====== ====== ======
BERRY PETROLEUM COMPANY Notes to the Financial Statements
5. Oil and gas properties, buildings and equipment
Oil and gas properties, buildings and equipment consist of the following at December 31 (in thousands):
1997 1996 Oil and gas: ------ ------ Proved properties: Producing properties, including intangible drilling costs $ 128,453 $ 126,361 Lease and well equipment 92,461 88,539 Unproved properties - 169 ------- ------- 220,914 215,069 Less accumulated depreciation, depletion and amortization 65,828 67,995 ------- ------- 155,086 147,074 ------- -------
Commercial and other: Land 151 151 Buildings and improvements 4,034 3,938 Machinery and equipment 3,653 3,707 ------- ------- 7,838 7,796 Less accumulated depreciation 5,483 5,360 ------- ------- 2,355 2,436 ------- ------- $ 157,441 $ 149,510 ======= =======
The following sets forth costs incurred for oil and gas property acquisition, exploration and development activities, whether capitalized or expensed (in thousands):
1997 1996 1995 ------ ------ ------ Acquisition of properties(1) $ - $ 69,330 $ 503 Exploration - 40 1,420 Development(2) 18,172 15,689 14,034 ------- ------- ------- $ 18,172 $ 85,059 $ 15,957 ======= ======= =======
(1) Excludes cogeneration facility costs and includes certain closing and consultant costs related to the acquisitions.
(2) Includes cogeneration facilities.
The Company completed two significant acquisitions (Tannehill and Formax) in 1996 for a combined purchase price of approximately $75 million, including the purchase of an 18 megawatt cogeneration facility. The properties, which produced approximately 3,900 barrels per day of 13 degree API gravity crude oil at the end of 1997, are in the Company's core South Midway-Sunset producing area. These acquisitions had proved reserves of approximately 27 million barrels upon acquisition, and were financed by utilizing working capital and long-term borrowings.
BERRY PETROLEUM COMPANY Notes to the Financial Statements
5. Oil and gas properties, buildings and equipment (cont'd)
Results of operations from oil and gas producing and exploration activities
The results of operations from oil and gas producing and exploration activities (excluding corporate overhead and interest costs) for the three years ended December 31 are as follows (in thousands):
1997 1996 1995 ------ ------ ------ Sales to unaffiliated parties $ 67,172 $ 55,264 $ 45,773 Production costs (22,407) (17,587) (18,264) Exploration expenses - (71) (2,012) Depreciation, depletion and amortization (9,731) (6,868) (6,354) ------- ------- ------- 35,034 30,738 19,143 Income tax expenses (10,870) (10,230) (6,084) ------- ------- ------- Results of operations from producing and exploration activities $ 24,164 $ 20,508 $ 13,059 ======= ======= =======
6. Debt obligations 1997 1996 Long-term debt for the years ended December 31 ------ ------ (in thousands):
Revolving bank facility $ 32,000 $ 36,000 ======= =======
At December 31, 1997, Berry had a $150 million unsecured three- year revolving credit facility with NationsBank of Texas. The maximum amount available is subject to an annual redetermination of the borrowing base in accordance with the lender's customary procedures and practices. Both parties have bilateral rights to one additional redetermination each year. As of December 31, 1997, the borrowing base was $40 million and the principal amount outstanding was $32 million. As of January 23, 1998, the borrowing base was reduced to $35 million. The revolving period is scheduled to terminate on November 30, 1999, at which time any unpaid balance can be converted to a four-year term loan, amortized quarterly. Interest on amounts borrowed is charged at NationsBank base rate or at London Interbank Offered Rates (LIBOR) plus 60 to 100 basis points, depending on the ratio of outstanding credit to the borrowing base. The weighted average interest rate on outstanding borrowings at December 31, 1997 was 6.48%. The Company pays a commitment fee of 20 to 35 basis points on the available unused portion of the commitment. The credit agreement contains various restrictive covenants as defined in the agreement.
In conjunction with the purchase of Tannehill in November 1996, the Company incurred $6.9 million in short-term notes, which were due and paid on January 6, 1997.
BERRY PETROLEUM COMPANY Notes to the Financial Statements
7. Shareholders' equity
Shares of Class A Common Stock (Common Stock) and Class B Stock, referred to collectively as the "Capital Stock", are each entitled to one vote and 95% of one vote, respectively. Each share of Class B Stock is entitled to a $1.00 per share preference in the event of liquidation or dissolution. Further, each share of Class B Stock is convertible into one share of Common Stock at the option of the holder.
In December 1989, the Company adopted a Shareholder Rights Agreement and declared a dividend distribution of one Right for each outstanding share of Capital Stock. Each Right, when exercisable, entitles the holder to purchase one one-hundredth of a share of a Series A Junior Participating Preferred Stock, or in certain cases other securities, for $38.00. The exercise price and number of shares issuable are subject to adjustment to prevent dilution. The Rights would become exercisable, unless earlier redeemed by the Company, 10 days following a public announcement that a person or group has acquired, or obtained the right to acquire, 20% or more of the outstanding shares of Common Stock or, 10 business days following the commencement of a tender or exchange offer for such outstanding shares which would result in such person or group acquiring 20% or more of the outstanding shares of Common Stock, either event occurring without the prior consent of the Company.
The Rights will expire in December 1999 or may be redeemed by the Company at $.01 per Right prior to that date unless they have theretofore become exercisable. The Rights do not have voting or dividend rights, and until they become exercisable, have no diluting effect on the earnings of the Company. A total of 250,000 shares of the Company's Preferred Stock has been designated Series A Junior Participating Preferred Stock and reserved for issuance upon exercise of the Rights.
In conjunction with the acquisition of Tannehill, the Company issued a Warrant Certificate to the beneficial owners of Tannehill Oil Company. This Warrant authorizes the purchase of 100,000 shares of Berry Petroleum Company Class A Common Stock until November 8, 2003 at $14.06 per share. All the warrants are currently outstanding and the underlying shares will not be registered under the Securities Act of 1933.
The Company issued 47,621, 13,932, and -0- shares in 1997, 1996 and 1995, respectively, through its stock option plans.
At December 31, 1997, dividends declared on 4,041,400 shares of certain Common Stock are restricted, whereby 37.5% of the dividends declared on these shares are paid by the Company to the surviving member of a group of individuals, the B Group, as long as this remaining member shall live.
BERRY PETROLEUM COMPANY Notes to the Financial Statements
8. Income taxes
The Provision for income taxes consists of the following (in thousands):
1997 1996 1995 ----- ----- ----- Current: Federal $ 3,502 $ 3,519 $ 5,089 State 995 1,027 2,042 ------ ------ ------ 4,497 4,546 7,131 ------ ------ ------
Deferred: Federal 3,940 4,322 828 State 544 880 (673) ------ ------ ------ 4,484 5,202 155 ------ ------ ------ Total $ 8,981 $ 9,748 $ 7,286 ====== ====== ======
The current deferred tax assets and liabilities are offset and presented as a single amount in the financial statements. Similarly, the noncurrent deferred tax assets and liabilities are presented in the same manner. The following table summarizes the components of the total deferred tax assets and liabilities before such financial statement offsets. The components of the net deferred tax liability consist of the following at December 31 (in thousands):
1997 1996 Deferred tax asset ------ ------ Federal benefit of state taxes $ 1,900 $ 1,710 Credit/deduction carryforwards 1,440 - Other, net 415 448 ------- ------ 3,755 2,158 ------- -------
Deferred tax liability Depreciation and depletion (24,069) (18,529) State taxes, net of federal benefit (4,546) (4,002) Other, net (619) (622) ------- ------- (29,234) (23,153) ------- ------- Net deferred tax liability $ (25,479) $ (20,995) ======= =======
BERRY PETROLEUM COMPANY Notes to the Financial Statements
8. Income taxes (cont'd)
Reconciliation of the statutory federal income tax rate to the effective income tax rate follows:
1997 1996 1995 ------ ------ ------
Tax computed at statutory federal rate 35.0% 35.0% 35.0%
Asset acquisition/sale differences - - 6.7 State income taxes, net of federal benefit 3.5 4.5 4.6 Tax credits (7.6) (4.5) (5.7) Other .9 .7 (3.2) ------ ------ ------ Effective tax rate 31.8% 35.7% 37.4% ====== ====== ======
The Company has $.3 million of loss carryforwards which may be utilized in future years to reduce the Company's federal income taxes. These loss carryforwards expire in the year 2000. The Company also has approximately $2.2 million of federal and $1.0 million of state enhanced oil recovery (EOR) tax credit carryforwards available to reduce future income taxes. The EOR credits will expire in the year 2012, if not previously utilized.
The Company went to trial in April 1993 before the U.S. Tax Court on certain federal tax issues relating to the years 1987 through 1989. The Court's decision was rendered in May 1995, resulting in an approximate $.5 million charge. The Company is pursuing an appeal of the Court's decision with respect to certain issues to the U.S. Court of Appeals (Ninth Circuit) and a hearing was held in March 1997 with a decision expected in the near future.
BERRY PETROLEUM COMPANY Notes to the Financial Statements
9. Stock option and stock appreciation rights plans
The Company has a 1987 Nonstatutory Stock Option Plan (the NSO Plan) and a 1987 Stock Appreciation Rights Plan (the SAR Plan). The NSO Plan provided for the granting of options (Options) to purchase up to an aggregate of 700,000 shares of Common Stock. The SAR Plan originally authorized a maximum of 700,000 shares of Common Stock subject to stock appreciation rights (SARs). Holders of SARs have the right upon exercise to receive a payment, payable at the discretion of the Compensation Committee in cash or in shares of Common Stock, equal to the amount by which the market price exceeds the Base Price (as defined) with respect to the shares subject to such SARs on the date of exercise. In December 1994, the Board of Directors adopted a resolution to terminate the 1987 Stock Appreciation Rights Plan without utilizing the 307,860 SARs which were still available for issuance. The 1,120 outstanding SARs at year end were exercised in early 1998. Total compensation expense recognized for the SAR Plan in 1997, 1996 and 1995 was $-0-, $.1 million and $-0-, respectively.
On December 2, 1994, the Board of Directors of the Company adopted the Berry Petroleum Company 1994 Stock Option Plan (the 1994 Plan). The 1994 Plan was approved by the shareholders in May 1995 and provides for the granting of stock options to purchase up to an aggregate of 1,000,000 shares of Common Stock. All Options, with the exception of the formula grants to non-employee Directors, will be granted at the discretion of the Compensation Committee of the Board of Directors. The term of each Option may not exceed ten years from the date the Option is granted.
On December 5, 1997, June 2, 1997 and December 6, 1996, 200,000, 40,000 and 480,000 Options, respectively, were issued to certain key employees at an exercise price of $19.375, $15.50 and $14.00 per share, respectively, which was the closing market price of the Company's Class A Common Stock on the New York Stock Exchange on those dates. The Options vest 25% per year for four years. The 1994 Plan also allows for Option grants to the Board of Directors under a formula plan whereby all non-employee Directors are eligible to receive 3,000 Options annually on December 2 at the fair value on the date of grant. The Options granted to the non-employee Directors vest immediately. Through the 1994 Plan, 30,000, 33,000 and 33,000 Options, respectively, were issued on December 2, 1997, 1996 and 1995, (3,000 Options to each of the non-employee Directors each year) at an exercise price of $18.9375, $13.75 and $10.625 per share, respectively.
The Company applies APB No. 25 and related interpretations in accounting for its stock option plans. Accordingly, since the stock options related to the 1987 Plan were issued at prices below the existing current market prices and they were fully vested previously, compensation related to this plan was recorded in prior years. The Options issued per the 1994 Plan were issued at market price. Compensation recognized related to this plan was $.5 million in 1997, $.1 million in 1996 and $-0- in 1995.
Under SFAS No. 123, compensation cost would be recognized for the fair value of the employee's option rights. The fair value of each option grant was estimated on the date of grant using the Black-Scholes option-pricing model with the following assumptions:
1997 1996 1995 ------ ------ ------ Dividend - $/year $ .40 $ .40 $ .40 Expected option life-years 4 4 4 Volatility 26.03% 24.97% 24.97% Risk-free interest rate 5.48% 6.10% 6.10%
BERRY PETROLEUM COMPANY Notes to the Financial Statements
9. Stock option and stock appreciation rights plans (cont'd)
Had compensation cost for the 1994 Plan been based upon the fair value at the grant dates for awards under this plan consistent with the method of SFAS No. 123, the Company's net income and earnings per share would have been reduced to the pro-forma amounts indicated below (in thousands, except per share data):
1997 1996 1995 ------ ------ ------
Net income as reported $ 19,260 $ 17,546 $ 12,203 Pro forma $ 19,185 $ 17,387 $ 12,066
Net income per share as reported $ .88 $ .80 $ .56 Pro forma $ .87 $ .79 $ .55
The following is a summary of stock-based compensation activity for the years 1997, 1996 and 1995.
1997 1996 1995 --------------- --------------- -------------- Options SARs Options SARs Options SARs Balance outstanding, ------- ------ ------- ------ ------- ------ January 1 861,229 9,200 431,141 39,740 398,141 39,740 Granted 270,000 - 513,000 - 33,000 - Exercised (196,800) (8,080) (76,912 (30,540) - - Canceled/expired (10,000) - (6,000) - - - Balance outstanding, ------- ------- ------- ------- ------- ------- December 31 924,429 1,120 861,229 9,200 431,141 39,740 ======= ======= ======= ======= ======= =======
Balance exercisable at December 31 256,929 1,120 231,229 9,200 206,141 39,740 ======= ======= ======= ======= ======= =======
Available for future grant 60,800 - 320,800 - 827,800 - ======= ======= ======= ======= ======= ======= Exercise price-range $ 9.80 $ 9.80 $ 9.80 $ 9.80 $ 9.80 $ 9.80 to 19.375 to 10.00 to 14.00 to 10.00 to 10.75 to 10.00
Weighted average remaining contractual life (years) 9 1 9 2 8 3
Weighted average fair value per option granted during the year $ 4.56 $ 3.22 $ 2.23
Weighted average option exercise price information for the years 1997, 1996 and 1995 as follows:
1997 1996 1995 ------ ------ ------ Outstanding at January 1 $ 12.61 $ 10.52 $ 10.51 Granted during the year $ 18.75 $ 13.98 $ 10.63 Exercised during the year $ 11.03 $ 12.82 $ - Expired during the year $ 14.00 $ 10.69 $ - Outstanding at December 31 $ 14.71 $ 12.61 $ 10.52 Exercisable at December 31 $ 13.09 $ 11.02 $ 10.45
BERRY PETROLEUM COMPANY Notes to the Financial Statements
10. Retirement Plan
The Company sponsors a defined contribution retirement or thrift plan (401(k) Plan) to assist all employees in providing for retirement or other future financial needs. Employee contributions (up to 6% of their earnings) are matched by the Company dollar for dollar. Effective November 1, 1992, the 401(k) Plan was modified to provide for increased Company matching of employee contributions whereby the monthly Company matching contributions will range from 6% to 9% of eligible participating employee earnings, if certain financial results are achieved. Due to improved financial results, the monthly matching contributions ranged from 6% to 9% during 1997 and 1996. The Company's contributions to the 401(k) Plan were $.3 million in 1997 and 1996 and $.2 million in 1995.
11. Oil Spill
In December 1993, the Company experienced a crude oil spill at its Montalvo field in Ventura County, California. The Company reached final settlement with the federal and state governments in February 1997. The Company's prior accruals were adequate in settling all claims.
12. Quarterly financial data (unaudited)
The following is a tabulation of unaudited quarterly operating results for 1997 and 1996 (in thousands, except for per share data).
Basic Diluted 1997 Operating Gross Net Net Income Net Income - ----- Revenues Profit Income Per Share Per Share ---------- -------- -------- ----------- ----------- First Quarter $ 17,025 $ 8,952 $ 4,816 $ .22 $ .22 Second Quarter 15,988 8,787 4,652 .21 .21 Third Quarter 16,775 8,697 5,136 .23 .23 Fourth Quarter 17,327 8,533 4,656 .22 .21 ------- ------- ------- ------- ------- $ 67,115 $ 34,969 $ 19,260 $ .88 $ .87 ======= ======= ======= ======= =======
- ----- First Quarter $ 12,145 $ 6,825 $ 3,861 $ .18 $ .18 Second Quarter 13,219 7,820 4,398 .20 .20 Third Quarter 13,433 7,063 4,012 .18 .18 Fourth Quarter 16,394 8,958 5,275 .24 .24 ------- ------- ------- ------- ------- $ 55,191 $ 30,666 $ 17,546 $ .80 $ .80 ======= ======= ======= ======= =======
BERRY PETROLEUM COMPANY
Supplemental Information About Oil & Gas Producing Activities (Unaudited)
The following estimates of proved oil and gas reserves, both developed and undeveloped, represent interests owned by the Company located solely within the United States. Proved reserves represent estimated quantities of crude oil and natural gas which geological and engineering data demonstrate with reasonable certainty to be recoverable in future years from known reservoirs under existing economic and operating conditions. Proved developed oil and gas reserves are the quantities expected to be recovered through existing wells with existing equipment and operating methods. Proved undeveloped oil and gas reserves are reserves that are expected to be recovered from new wells on undrilled acreage, or from existing wells for which relatively major expenditures are required for completion.
Disclosures of oil and gas reserves which follow are based on estimates prepared by independent engineering consultants for the three years ended December 31, 1997. Such estimates are subject to numerous uncertainties inherent in the estimation of quantities of proved reserves and in the projection of future rates of production and the timing of development expenditures. These estimates do not include probable or possible reserves. The information provided does not represent Management's estimate of the Company's expected future cash flows or value of proved oil and gas reserves.
Changes in estimated reserve quantities
The net interest in estimated quantities of proved developed and undeveloped reserves of crude oil and natural gas at December 31, 1997, 1996 and 1995, and changes in such quantities during each of the years then ended were as follows (in thousands):
1997 1996 1995 --------------- --------------- --------------- Oil Gas Oil Gas Oil Gas Mbbls Mmcf Mbbls Mmcf Mbbls Mmcf Proved developed and ------ ------ ------ ------ ------ ------ undeveloped reserves: Beginning of year 101,336 4,682 77,071 5,983 75,996 6,530 Revision of previous estimates 3,647 (869) 739 (810) 5,266 803 Production (4,503) (282) (3,491) (491) (3,277) (611) Sale of reserves in place (26) - - - (1,698) (739) Purchase of reserves in place - - 27,017 - 784 - ------- ------ ------- ------ ------- ------ End of year 100,454 3,531 101,336 4,682 77,071 5,983 ======= ====== ======= ====== ======= ======
Proved developed reserves: Beginning of year 76,358 2,608 62,856 3,380 62,718 4,727 ======= ====== ======= ====== ======= ======
End of year 86,858 1,457 76,358 2,608 62,856 3,380 ======= ====== ======= ====== ======= ======
BERRY PETROLEUM COMPANY
Supplemental Information About Oil & Gas Producing Activities (Unaudited)(Cont'd)
The standardized measure has been prepared assuming year-end sales prices adjusted for fixed and determinable contractual price changes, current costs and statutory tax rates (adjusted for tax credits and other items), and a ten percent annual discount rate. No deduction has been made for depletion, depreciation or any indirect costs such as general corporate overhead or interest expense.
Standardized measure of discounted future net cash flows from estimated production of proved oil and gas reserves (in thousands):
1997 1996 1995 ----------- ----------- ----------- Future cash inflows $ 1,232,749 $ 1,875,373 $ 1,039,150 Future production and development costs (421,305) (429,879) (311,955) Future income tax expenses (246,668) (495,412) (245,416) --------- --------- --------- Future net cash flows 564,776 950,082 481,779
10% annual discount for estimated timing of cash flows (297,182) (529,523) (273,478) --------- --------- --------- Standardized measure of discounted future net cash flows $ 267,594 $ 420,559 $ 208,301 ========= ========= =========
Pre-tax standardized measure of discounted future net cash flows $ 376,459 $ 634,579 $ 308,370 ========= ========= =========
Average sales prices at December 31:
Oil ($/Bbl) $ 12.19 $ 18.37 $ 13.39 Gas ($/Mcf) $ 2.33 $ 3.02 $ 1.45
Changes in standardized measure of discounted future net cash flows from proved oil and gas reserves (in thousands):
1997 1996 1995 -------- -------- -------- Standardized measure - beginning of year $ 420,559 $ 208,301 $ 180,953
Sales of oil and gas produced, net of production costs (44,765) (37,677) (27,509) Revisions to estimates of proved reserves: Net changes in sales prices and production costs (259,026) 170,529 41,726 Revisions of previous quantity estimates 14,014 4,020 23,584 Change in estimated future development costs (1,775) (19,294) (14,234) Extensions, discoveries and improved recovery less related costs - - - Purchases of reserves in place - 171,456 2,316 Sale of reserves in place (244) - (8,645) Development costs incurred during the period 18,597 9,305 14,034 Accretion of discount 63,458 30,837 2,639 Income taxes 109,780 (101,936) (13,126) Other (53,004) (14,982) 6,563 ------- ------- ------- Net increase (decrease) (152,965) 212,258 27,348 ------- ------- ------- Standardized measure - end of year $ 267,594 $ 420,559 $ 208,301 ======= ======= =======
BERRY PETROLEUM COMPANY
Item 9.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None. PART III
Item 10.
Item 10. Directors and Executive Officers of the Registrant
The information called for by Item 10 is incorporated by reference from information under the caption "Election of Directors" in the Company's definitive proxy statement to be filed pursuant to Regulation 14A no later than 120 days after the close of its fiscal year. The information on Executive Officers is contained in Part I of this Form 10-K.
Item 11.
Item 11. Executive Compensation
The information called for by Item 11 is incorporated by reference from information under the caption "Executive Compensation" in the Company's definitive proxy statement to be filed pursuant to Regulation 14A no later than 120 days after the close of its fiscal year.
Item 12.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The information called for by Item 12 is incorporated by reference from information under the caption "Voting Securities" and "Principal Shareholders and Ownership by Management" in the Company's definitive proxy statement to be filed pursuant to Regulation 14A no later than 120 days after the close of its fiscal year.
Compliance with Section 16(a) of the Securities Exchange Act of 1934
Section 16(a) of the Securities Exchange Act of 1934 and related Securities and Exchange Commission rules require that directors and executive officers report to the Securities and Exchange Commission changes in their beneficial ownership of Berry stock, and that any late filings be disclosed. Based solely on a review of the copies of such forms furnished to the Company, or written representations that no Form 5 was required, the Company believes that all Section 16(a) filing requirements were complied with, except that one report for some shares gifted was filed late by Mr. William F. Berry.
Item 13.
Item 13. Certain Relationships and Related Transactions
The information called for by Item 13 is incorporated by reference from information under the caption "Certain Relationships and Related Transactions" in the Company's definitive proxy statement to be filed pursuant to Regulation 14A no later than 120 days after the close of its fiscal year.
PART IV
Item 14.
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
A. Financial Statements and Schedules
See Index to Financial Statements and Supplementary Data in Item 8.
B. Reports on Form 8-K
None.
C. Exhibits
Exhibit No. Description of Exhibit Page - ----------- -------------------------- ------ 3.1* Registrant's Restated Certificate of Incorporation (filed as Exhibit 3.1 to the Registrant's Registration Statement on Form S-1 filed on June 7, 1989, File No. 33-29165) 3.2* Registrant's Restated Bylaws (filed as Exhibit 3.2 to the Registrant's Registration Statement on Form S-1 on June 7, 1989, File No. 33-29165) 3.3* Registrant's Certificate of Designation, Preferences and Rights of Series A Junior Participating Preferred Stock (filed as Exhibit 3.3 to the Annual Report on Form 10-K for the year ended December 31, 1989, File No. 0-11708) 4.1* Rights Agreement between Registrant and Bank of America dated as of December 8, 1989 (filed as Exhibit 1 to Form 8-K filed on December 20, 1989, File No. 0-11708) 10.1 Description of Cash Bonus Plan of Berry Petroleum Company 43 10.2 Salary Continuation Agreement dated as of December 5, 1997, by and between Registrant and Jerry V. Hoffman 44 10.3 Form of Salary Continuation Agreement dated as of December 5, 1997, by and between Registrant and Ralph J. Goehring and Michael R. Starzer 47 10.4* Form of Salary Continuation Agreements dated as of March 20, 1987, as amended August 28, 1987, by and between Registrant and selected employees of the Company (filed as Exhibit 10.12 to the Registration Statement on Form S-1 filed on June 7, 1989, File No. 33-29165) 10.5* Instrument for Settlement of Claims and Mutual Release by and among Registrant, Victory Oil Company, the Crail Fund and Victory Holding Company effective October 31, 1986 (filed as Exhibit 10.13 to Amendment No. 1 to the Registrant's Registration Statement on Form S-4 filed on May 22, 1987, File No. 33-13240) 10.6* 1994 Stock Option Plan (filed as Exhibit 10.8 to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1994, File No. 1-9735) 10.7* Purchase and Sale Agreement, dated as of November 8, 1996, by and between the Registrant and Tannehill Oil Company, Inc., a California corporation (filed as Exhibit 10.1 in Registrant's Form 8-K filed on December 2, 1996, File No. 1-9735) 10.8* Purchase and Sale Agreement, dated as of November 8, 1996, by and between the Registrant and Tannehill Electric Company, Inc., a California corporation (filed as Exhibit 10.2 in Registrant's Form 8-K on December 2, 1996, File No. 1-9735) 10.9* Purchase and Sale Agreement, dated as of November 8, 1996, by and between the Registrant and Tannehill Oil Company, a California general partnership, and Boyce Resource Development Company, a California corporation; Albert G. Boyce, Jr., as Trustee of Trust "B" Under the Will of Albert G. Boyce, Sr., Deceased; William J. Boyce; Albert Gallatin Boyce V; Mary Katherine Boyce; John T. Hinkle; General Western, Inc., a New Mexico corporation; Delmar R. Archibald Family Trust, dated June 22, 1982; Lisle Q. Tannehill; John W. Tannehill; Gail Kay Tannehill, as Trustee of the Gail Kay Tannehill Family Trust, dated April 9, 1996; and Thomas H. Tannehill, all acting as partners of Tannehill Oil Company and individually, jointly and severally (filed as Exhibit 10.3 in Registrant's Form 8-K filed on December 2, 1996, File No. 1-9735)
Exhibits (cont'd)
Exhibit No. Description of Exhibit Page - ----------- --------------------------- ------ 10.10* Credit Agreement, dated as of December 1, 1996, by and between the Registrant and NationsBank of Texas, N.A. (filed as Exhibit 10.1 in Registrant's Form 8-K filed on December 18, 1996, File No. 1-9735) 10.11* Stock Purchase Agreement, dated December 11, 1996, by and between the Registrant and Exxon Corporation, a New Jersey corporation (filed as Exhibit 10.1 in Registrant's Form 8-K filed on December 17, 1996, File No. 1-9735) 10.12* Standard Offer #2 Power Purchase Agreement dated May 1984 by and between Registrant's predecessor and Pacific Gas and Electric Company (filed as Exhibit 10.14 in Registrant's Form 10-K filed on March 21, 1997, File No. 1-9735) 10.13* Standard Offer #1 Power Purchase Agreement dated January 16, 1997, by and between Registrant and Pacific Gas and Electric Company (filed as Exhibit 10.15 in Registrant's Form 10-K filed on March 21, 1997, File No. 1-9735) 10.14* Warrant Certificate dated November 14, 1996, by and between Registrant and Tannehill Oil Company (filed as Exhibit 10.16 in Registrant's Form 10-K filed on March 21, 1997, File No. 1-9735) 23.1 Consent of Coopers & Lybrand L.L.P. 50 23.2 Consent of DeGolyer and MacNaughton 51 27. ** Financial Data Schedule 52 99.1 Undertaking for Form S-8 Registration Statements 53 99.2* Form of Indemnity Agreement of Registrant (filed as Exhibit 28.2 in Registrant's Registration Statement on Form S-4 filed on April 7, 1987, File No. 33-13240) 99.3* Form of "B" Group Trust (filed as Exhibit 28.3 to Amendment No. 1 to Registrant's Registration Statement on Form S-4 filed on May 22, 1987, File No. 33-13240)
* Incorporated by reference ** Included in the Company's electronic filing on EDGAR
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereto duly authorized on March 10, 1998.
BERRY PETROLEUM COMPANY
/s/ JERRY V. HOFFMAN /s/ RALPH J. GOEHRING /s/ DONALD A. DALE JERRY V. HOFFMAN RALPH J. GOEHRING DONALD A. DALE Chairman of the Board, Senior Vice President and Controller (Principal President and Chief Chief Financial Officer Accounting Officer) Executive Officer (Principal Financial Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities on the dates so indicated.
Name Office Date
/s/ Jerry V. Hoffman Chairman of the Board , President March 10, 1998 Jerry V. Hoffman & Chief Executive Officer
/s/ Benton Bejach Director March 10, 1998 Benton Bejach
/s/ William F. Berry Director March 10, 1998 William F. Berry
/s/ Gerry A. Biller Director March 10, 1998 Gerry A. Biller
/s/ Ralph B. Busch, III Director March 10, 1998 Ralph B. Busch, III
/s/ William E. Bush, Jr. Director March 10, 1998 William E. Bush, Jr.
/s/ William B. Charles Director March 10, 1998 William B. Charles
/s/ Richard F. Downs Director March 10, 1998 Richard F. Downs
/s/ John A. Hagg Director March 10, 1998 John A. Hagg
/s/ Thomas J. Jamieson Director March 10, 1998 Thomas J. Jamieson
/s/ Roger G. Martin Director March 10, 1998 Roger G. Martin
/s/ James A. Middleton Director March 10, 1998 James A. Middleton