-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, IN8OSL8EKio/KMGTPp3USRgYh41L15jiuObzN8P5ACfi8163sUrr1JPX2yUa4/bY T2ljbWKHGM4QHarFULbHog== 0000930661-98-000628.txt : 19980331 0000930661-98-000628.hdr.sgml : 19980331 ACCESSION NUMBER: 0000930661-98-000628 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 11 CONFORMED PERIOD OF REPORT: 19971231 FILED AS OF DATE: 19980330 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: VINTAGE PETROLEUM INC CENTRAL INDEX KEY: 0000809428 STANDARD INDUSTRIAL CLASSIFICATION: CRUDE PETROLEUM & NATURAL GAS [1311] IRS NUMBER: 731182669 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 001-10578 FILM NUMBER: 98577348 BUSINESS ADDRESS: STREET 1: 4200 ONE WILLIAMS CTR CITY: TULSA STATE: OK ZIP: 74172 BUSINESS PHONE: 9185920101 MAIL ADDRESS: STREET 1: 4200 ONE WILLIAMS CENTER CITY: TULSA STATE: OK ZIP: 74172 10-K 1 FORM 10-K ================================================================================ SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K (MARK ONE) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 1997 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 1-10578 VINTAGE PETROLEUM, INC. (Exact name of registrant as specified in its charter) DELAWARE 73-1182669 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 4200 ONE WILLIAMS CENTER TULSA, OKLAHOMA 74172 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (918) 592-0101 Securities registered pursuant to Section 12(b) of the Act: NAME OF EACH EXCHANGE TITLE OF EACH CLASS ON WHICH REGISTERED ------------------- ------------------- Common Stock, $.005 Par Value New York Stock Exchange Securities registered pursuant to Section 12(g) of the Act: None 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 by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [_] As of March 17, 1998, 51,636,086 shares of the Registrant's Common Stock were outstanding, and the aggregate market value of the Common Stock held by non-affiliates was approximately $683,917,000. DOCUMENTS INCORPORATED BY REFERENCE Portions of the Registrant's Annual Report to Stockholders for the fiscal year ended December 31, 1997, are incorporated by reference into Parts I and II of this Form 10-K. Portions of the Registrant's Proxy Statement for the Annual Meeting of Stockholders to be held May 12, 1998, are incorporated by reference into Part III of this Form 10-K. ================================================================================ VINTAGE PETROLEUM, INC. FORM 10-K YEAR ENDED DECEMBER 31, 1997 TABLE OF CONTENTS Page ---- PART I Items 1 and 2. Business and Properties........................................ 1 Item 3. Legal Proceedings.............................................. 26 Item 4. Submission of Matters to a Vote of Security-Holders............................................... 27 Item 4A. Executive Officers of the Registrant........................... 27 PART II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters................................ 30 Item 6. Selected Financial Data........................................ 30 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.................. 30 Item 7A. Quantitative and Qualitative Disclosures About Market Risk..... 30 Item 8. Financial Statements and Supplementary Data.................... 30 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure......................... 30 PART III Item 10. Directors and Executive Officers of the Registrant............. 30 Item 11. Executive Compensation......................................... 30 Item 12. Security Ownership of Certain Beneficial Owners and Management.......................................... 30 Item 13. Certain Relationships and Related Transactions................. 31 PART IV Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K........................................ 31 Signatures................................................................. 34 -i- CERTAIN DEFINITIONS AS USED IN THIS FORM 10-K: Unless the context requires otherwise, all references to the "Company" include Vintage Petroleum, Inc., its consolidated subsidiaries and its proportionately consolidated general partner interests in various limited partnerships and joint ventures. "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 and "MMBOE" means million equivalent barrels of oil. Unless otherwise indicated in this Form 10-K, gas volumes are stated at the legal pressure base of the state or area in which the reserves are located and at 60/o/ Fahrenheit. Equivalent barrels of oil are determined using the ratio of six Mcf of gas to one Bbl of oil. The term "gross" refers to the total acres or wells in which the Company has a working interest, and "net" refers to gross acres or wells multiplied by the percentage working interest owned by the Company. "Net production" means production that is owned by the Company less royalties and production due others. The terms "net" and "net production" include 100 percent of the Company's subsidiary Cadipsa S.A. and do not reflect reductions for minority interest ownership. The term "oil" includes crude oil, condensate and natural gas liquids. "Proved reserves" are estimated quantities of oil and 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 reserves" are those reserves which are expected to be recovered through existing wells with existing equipment and operating methods. "Proved undeveloped reserves" are those reserves which are expected to be recovered from new wells on undrilled acreage or from existing wells where a relatively major expenditure is required. FORWARD-LOOKING STATEMENTS THIS FORM 10-K INCLUDES CERTAIN STATEMENTS THAT MAY BE DEEMED TO BE "FORWARD-LOOKING STATEMENTS" WITHIN THE MEANING OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995. ALL STATEMENTS IN THIS FORM 10-K, OTHER THAN STATEMENTS OF HISTORICAL FACTS, THAT ADDRESS ACTIVITIES, EVENTS OR DEVELOPMENTS THAT THE COMPANY EXPECTS, BELIEVES OR ANTICIPATES WILL OR MAY OCCUR IN THE FUTURE, INCLUDING FUTURE CAPITAL EXPENDITURES (INCLUDING THE AMOUNT AND NATURE THEREOF), THE DRILLING OF WELLS, RESERVE ESTIMATES, FUTURE PRODUCTION OF OIL AND GAS, FUTURE CASH FLOWS, FUTURE RESERVE ACTIVITY AND OTHER SUCH MATTERS ARE FORWARD-LOOKING STATEMENTS. ALTHOUGH THE COMPANY BELIEVES THE EXPECTATIONS EXPRESSED IN SUCH FORWARD-LOOKING STATEMENTS ARE BASED ON REASONABLE ASSUMPTIONS WITHIN THE BOUNDS OF ITS KNOWLEDGE OF ITS BUSINESS, SUCH STATEMENTS ARE NOT GUARANTEES OF FUTURE PERFORMANCE AND ACTUAL RESULTS OR DEVELOPMENTS MAY DIFFER MATERIALLY FROM THOSE IN THE FORWARD-LOOKING STATEMENTS. FACTORS THAT COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE IN FORWARD-LOOKING STATEMENTS INCLUDE: OIL AND GAS PRICES; EXPLOITATION AND EXPLORATION SUCCESSES; CONTINUED AVAILABILITY OF CAPITAL AND FINANCING; GENERAL ECONOMIC, MARKET OR BUSINESS CONDITIONS; ACQUISITION OPPORTUNITIES (OR LACK THEREOF); CHANGES IN LAWS OR REGULATIONS; RISK FACTORS LISTED FROM TIME TO TIME IN THE COMPANY'S REPORTS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION; AND OTHER FACTORS. THE COMPANY ASSUMES NO OBLIGATION TO UPDATE PUBLICLY ANY FORWARD-LOOKING STATEMENTS, WHETHER AS A RESULT OF NEW INFORMATION, FUTURE EVENTS OR OTHERWISE. -ii- PART I ITEMS 1 AND 2. BUSINESS AND PROPERTIES. GENERAL Vintage Petroleum, Inc. (the "Company") is an independent oil and gas company focused on the acquisition of producing oil and gas properties which contain the potential for increased value through exploitation and development. The Company, through its experienced management and engineering staff, has been successful in realizing such potential on prior acquisitions through workovers, recompletions, secondary recovery operations, operating cost reductions, and the drilling of development or infill wells. The Company believes that its primary strengths are its ability to add reserves at attractive prices through property acquisitions and subsequent exploitation, and its low cost operating structure. These strengths have allowed the Company to substantially increase reserves, production and cash flow during the last five years. As the Company has grown its cash flow and added to its technical staff, exploration has become a larger focus for its future growth. Planned exploration expenditures for 1998 of approximately $65 million represent 35 percent of the Company's 1998 capital budget, excluding acquisitions. At December 31, 1997, the Company owned and operated producing properties in 10 states, with its domestic proved reserves located primarily in four core areas: the West Coast, Gulf Coast, East Texas and Mid-Continent areas of the United States. During 1996 and the first half of 1997, the Company expanded its Gulf Coast area through the acquisition of the Exxon Properties, the Conoco Properties and the Burlington Properties. See "--Acquisition Activities." In addition, the Company established a new core area in 1995 by acquiring 12 oil concessions, 11 of which are producing and operated by the Company, in the south flank of the San Jorge Basin in southern Argentina. The Company in 1996 expanded its South American operations into Bolivia through the acquisition of Vintage Petroleum Boliviana Ltd. (formerly Shamrock Ventures (Boliviana) Ltd.) ("Vintage Boliviana") which owns and operates three blocks covering approximately 570,000 acres in the Chaco Plains area of southern Bolivia. During 1997, the Company enhanced its operations in Bolivia by obtaining the concession rights to the Naranjillos concession located in the Santa Cruz Province. As of December 31, 1997, the Company owned interests in 3,815 gross (2,778 net) producing wells in the United States, of which approximately 78 percent are operated by the Company, 699 gross (686 net) producing wells in Argentina, of which approximately 98 percent are operated by the Company, and 7 gross (6 net) producing wells in Bolivia, 100 percent of which are operated by the Company. As of December 31, 1997, the Company's properties had proved reserves of 279.8 MMBOE, comprised of 187.8 MMBbls of oil and 552.2 Bcf of gas, with a present value of estimated future net revenues before income taxes (utilizing a 10 percent discount rate) of $1.2 billion and a standardized measure of discounted future net cash flows of $1.0 billion. The Company has consistently achieved growth in proved reserves, production and revenues and has been profitable every full year since its founding in 1983. From the first quarter of 1995 through the fourth quarter of 1997, the Company increased its average net daily production from 17,000 Bbls of oil to 44,700 Bbls of oil and from 77,000 Mcf of gas to 129,700 Mcf of gas. Financial information relating to the Company's industry segments is set forth in "Note 8 to Consolidated Financial Statements - Segment Information" which is incorporated by reference from page 45 of the Company's 1997 Annual Report to Stockholders. The Company was incorporated in Delaware on May 31, 1983. The Company's principal office is located at 4200 One Williams Center, Tulsa, Oklahoma 74172, and its telephone number is (918) 592-0101. -1- BUSINESS STRATEGY The Company's overall goal is to maximize its value through profitable growth in its oil and gas reserves and production. The Company has been successful at achieving this goal through its ongoing strategy of (a) acquiring producing oil and gas properties, at favorable prices, with significant exploitation potential, (b) focusing on low risk exploitation and development activities to maximize production and ultimate reserve recovery, (c) exploring non-producing properties, (d) maintaining a low cost operating structure, and (e) maintaining financial flexibility. Key elements of the Company's strategy include: . Acquisitions of Producing Properties. The Company has an experienced management and engineering team which focuses on acquisitions of operated producing properties that meet its selection criteria which include (a) significant potential for increasing reserves and production through low risk exploitation and development, (b) attractive purchase price, and (c) opportunities for improved operating efficiency. The Company's emphasis on property acquisitions reflects its belief that continuing consolidation and restructuring activities on the part of major integrated and large independent oil companies has afforded in recent years, and should afford in the future, attractive opportunities to purchase domestic and international producing properties. This acquisition strategy has allowed the Company to rapidly grow its reserves at favorable acquisition prices. From January 1, 1995, through December 31, 1997, the Company acquired 164.4 MMBOE of proved oil and gas reserves at an average acquisition cost of $2.67 per BOE, which is significantly below the industry average. The Company replaced through acquisitions approximately 3.1 times its production of 52.6 MMBOE during the same period. . Exploitation and Development. The Company pursues workovers, recompletions, secondary recovery operations and other production optimization techniques on its properties, as well as development and infill drilling, to offset normal production declines and replace the Company's annual production. From January 1, 1995, through December 31, 1997, the Company spent approximately $227.9 million on exploitation and development activities. During this period, the Company's recompletion and workover activities resulted in improved production or operating efficiencies in approximately 75 percent of these operations, and the result of all of its exploitation activities, including development and infill drilling, succeeded in replacing approximately 81 percent of production during this period. The Company has an extensive inventory of exploitation and development opportunities including identified projects which represent an inventory of over 10 years at current activity levels. The Company anticipates spending approximately $45 million in the United States and approximately $75 million in Argentina and Bolivia during 1998 on exploitation and development projects. . Exploration. The Company's overall exploration strategy balances high potential international prospects with lower risk drilling in known formations in the United States and Argentina. This prospect mix and the Company's practice of risk-sharing with industry partners is intended to lower the incidence and costs of dry holes. The Company makes extensive use of geophysical studies, including 3-D seismic, which further reduce the cost and increase the success of its exploration program. From January 1, 1995, through December 31, 1997, the Company spent approximately $64.6 million on exploration activities, including the drilling of 50 gross (29.95 net) exploration wells, of which approximately 56 percent gross (60 percent net) were productive. The Company has increased its exploration budget to approximately $65 million in 1998, with spending planned in its core areas in the United States and Argentina as well as Bolivia. . Low Cost Structure. The Company is an efficient operator and capitalizes on its low cost structure in evaluating acquisition opportunities. The Company generally achieves substantial reductions in labor and other field level costs from those experienced by the previous operators. In addition, the Company targets acquisition candidates which are located in its core areas and -2- provide opportunities for cost efficiencies through consolidation with other Company operations. The lower cost structure has generally allowed the Company to substantially improve the cash flow of newly acquired properties. . Financial Flexibility. The Company is committed to maintaining substantial financial flexibility, which management believes is important for the successful execution of its acquisition, exploitation and exploration strategy. In conjunction with the purchase of substantial oil and gas assets in 1990, 1992 and 1995, the Company completed three public equity offerings, as well as a public debt offering in 1995. The Company also successfully completed simultaneous public debt and equity offerings in February 1997. These six offerings provided the Company with aggregate net proceeds of approximately $416 million. In addition to accessing the public capital markets, the Company currently has approximately $130 million of availability under its revolving credit facility. ACQUISITION ACTIVITIES Historically, the Company has allocated a substantial portion of its capital expenditures to the acquisition of producing oil and gas properties. The Company's emphasis on property acquisitions reflects its belief that continuing consolidation and restructuring activities on the part of major integrated and large independent oil companies has afforded in recent years, and should afford in the future, attractive opportunities to purchase domestic and international producing properties. The Company's ability to quickly evaluate and complete acquisitions as well as its financial flexibility allow it to take advantage of these opportunities as they materialize. Since the Company's incorporation in May 1983, it has been actively engaged in the acquisition of producing oil and gas properties primarily in the Gulf Coast, East Texas and Mid-Continent areas of the United States, and in California since April 1992. In 1995, a series of acquisitions made by the Company established a new core area in the San Jorge Basin in southern Argentina. In late 1996, that core area was expanded into Bolivia. From January 1, 1995, through December 31, 1997, the Company made oil and gas property acquisitions involving total costs of approximately $439 million. As a result of these acquisitions, the Company acquired approximately 164.4 MMBOE of proved oil and gas reserves. The following table summarizes the Company's acquisition experience during the periods indicated:
Proved Reserves When Acquired Acquisition ------------------------------- Cost Per Acquisition Oil Gas BOE When Costs (MBbls) (MMcf) MBOE Acquired -------------- ---------- --------- -------- ----------- (In thousands) U.S. Acquisitions 1995.................................. $ 38,896 8,840 39,486 15,421 $2.52 1996.................................. 50,480 8,095 20,787 11,560 4.37 1997.................................. 133,548 24,653 62,253 35,029 3.81 -------- ------- ------- ------- Total U.S. Acquisitions............ 222,924 41,588 122,526 62,010 3.60 -------- ------- ------- ------- Argentina Acquisitions 1995.................................. 168,762 65,653 -- 65,653 2.57 1996.................................. 3,754 2,849 -- 2,849 1.32 1997.................................. -- -- -- -- -- -------- ------- ------- ------- Total Argentina Acquisitions....... 172,516 68,502 -- 68,502 2.52 -------- ------- ------- ------- Bolivia Acquisitions 1996.................................. 37,048 4,953 57,758 14,579 2.54 1997.................................. 6,201 758 111,212 19,293 0.32 -------- ------- ------- ------- Total Bolivia Acquisitions......... 43,249 5,711 168,970 33,872 1.28 -------- ------- ------- ------- Total U.S. and International Acquisitions.................. $438,689 115,801 291,496 164,384 $2.67 ======== ======= ======= =======
-3- The following is a brief discussion of significant acquisitions in recent years: 1995 Acquisitions. United States. In May 1995, the Company purchased all of Texaco's ------------- interests in nine oil fields and seven gas fields in California located primarily in Kern, Ventura, Los Angeles, Orange and Santa Barbara Counties and the Sacramento Basin area for $26.7 million in cash (the "Texaco Properties"). Netherland, Sewell & Associates, Inc. ("Netherland, Sewell") estimated that proved reserves attributable to these properties at the date of acquisition were approximately 7.5 MMBbls of oil and 16.4 Bcf of gas. The Company identified numerous exploitation opportunities in these properties including development drilling, recompletions, steam flood expansions as well as lease operating expense efficiencies. International. In the third quarter of 1995, the Company closed two ------------- acquisitions of related properties located in the south flank of the San Jorge Basin in southern Argentina, establishing a new core area for the Company. On July 5, 1995, the Company purchased approximately 51.8 percent of the outstanding common stock of Cadipsa S.A. ("Cadipsa") for 605,616 shares (after giving effect to the Company's two-for-one common stock split effected on October 7, 1997) of the Company's common stock (then valued at $5.7 million) and $7.4 million in cash. Cadipsa's major assets included a 100 percent working interest in two concessions and a 50 percent working interest in three additional concessions, all five of which were mature, producing and operated by Cadipsa, covering approximately 322,000 gross acres. Cadipsa's net daily production at the date of acquisition was approximately 3,700 Bbls of mid- gravity oil from multiple zones at depths between 2,500 feet and 5,500 feet. The Company has subsequently purchased an additional 45 percent of Cadipsa which increased its total ownership to approximately 97 percent at December 31, 1997. Effective July 1, 1997, the operations of Cadipsa were merged into Vintage Argentina, a wholly owned subsidiary of the Company, and Cadipsa is currently awaiting governmental approval of formal dissolution. On September 29, 1995, the Company purchased 100 percent of the outstanding common stock of BG Argentina, S.A. (subsequently renamed Vintage Oil Argentina, Inc.) ("Vintage Argentina") from British Gas plc, for $37 million in cash. Vintage Argentina's major assets consist of a 50 percent working interest in three of the producing concessions previously operated by Cadipsa now operated by Vintage Argentina. In November 1995, the Company entered into separate agreements with Astra Compania Argentina de Petroleo S.A. ("Astra") and Shell Compania Argentina de Petroleo S.A. ("Shell") to acquire certain producing oil and gas properties in Argentina (the "Astra/Shell Properties"). On November 30, 1995, the Company completed the purchase of the Astra portion of the Astra/Shell Properties by paying $17.9 million in cash for Astra's 35 percent working interest in the Astra/Shell Properties. On December 27, 1995, the Company completed the purchase of the remaining 65 percent working interest from Shell for $32.8 million cash and deferred payments valued at $5.1 million. The acquisition of the Astra/Shell Properties resulted in the Company acquiring 100 percent working interests in seven concessions, six of which are currently producing and all of which are located on the south flank of the San Jorge Basin in southern Argentina. The concessions cover approximately 450,000 acres and are located in close proximity to the Company's other Argentina properties. 1996 Acquisitions. United States. On January 31, 1996, the Company purchased interests in ------------- two fields located in south-central Louisiana from Conoco Inc. for $13.9 million (the "Conoco Properties"). Funds were provided by advances under the Company's revolving credit facility. The Conoco Properties included 26 gross (21 net) productive wells with daily net production at the time of acquisition of approximately 1,000 Bbls of oil and 550 Mcf of gas. All of the wells are now operated by the Company. The primary producing sands include the -4- Ortego A, Haas, Tate, Wilcox 1 through 6 and the Middle and Basal Cockfield at depths ranging from 7,500 feet to 12,000 feet. Exploitation activities include workovers, recompletions and development drilling. On November 20, 1996, the Company purchased certain producing oil and gas properties and facilities from Exxon Company, U.S.A. located in south Alabama for approximately $29.4 million in cash (the "Exxon Properties"). Funds were provided by advances under the Company's revolving credit facility. The Exxon Properties include an interest in two fields totaling approximately 5,000 net acres with a total of 17 gross (9.9 net) productive wells with net daily production at the time of acquisition of approximately 1,450 Bbls of oil and liquids and 2,800 Mcf of gas. All of the wells are now operated by the Company. The primary producing sands are the Smackover and Norphlet at depths of approximately 15,000 feet. Exploitation activities include operating cost reductions, treating plant efficiencies, workovers and infill drilling. International. In November 1996, the Company agreed to purchase 100 ------------- percent of the outstanding common stock of Vintage Boliviana from affiliates of Ultramar Diamond Shamrock Corporation for approximately $29.0 million in cash. In addition, at closing on January 7, 1997, the Company repaid all of Vintage Boliviana's existing bank debt (approximately $9.2 million). Funds for the purchase of the stock and the repayment of debt were provided by advances under the Company's revolving credit facility. Vintage Boliviana's assets included (a) oil and gas properties valued at $37.0 million (including the effect of approximately $7.0 million of deferred income taxes recorded under the purchase method of accounting), and (b) inventory, receivables, cash and other assets net of liabilities (other than bank debt repaid at closing) of approximately $8.2 million. The acquisition of Vintage Boliviana represented an extension of the Company's South American operating area that was initially established through a series of acquisitions in Argentina during 1995. The oil and gas properties of Vintage Boliviana consist of three blocks, totaling approximately 570,000 acres, in the Chaco Plains area of southern Bolivia. This region has experienced the greatest amount of exploration and currently accounts for the majority of the country's production. The properties consist of a 100 percent interest in the Chaco and Porvenir blocks and a 50 percent interest in the Nupuco block. Proved reserves at the time of acquisition, as estimated by Netherland, Sewell, were 57.8 Bcf of gas and 5.0 MMBbls of oil. Net daily production at the time of acquisition was approximately 14,500 Mcf of gas and 230 Bbls of condensate. The average 1997 realized price for natural gas on the properties was approximately $1.10 per Mcf. The purchase also included a 29 mile gas pipeline and an interest in a gas processing plant with a capacity of 110 MMcf per day. Liquids are transferred through the pipeline to the processing plant. The current market for the gas is Argentina. The Company believes that the Vintage Boliviana properties contain substantial upside potential which may be realized through exploitation and future exploration. Bolivia occupies a strategic position in the area known as the "Southern Cone" of South America. The Company expects that gas will be the key energy source for the developing regional economies. The development of the sizable gas reserves in southern Bolivia will play an important role as a source of energy for the net importing countries of this region, the most significant of which is Brazil. Third parties are constructing a gas pipeline from Santa Cruz, Bolivia to Sao Paulo, Brazil with completion scheduled for early 1999. The Company has begun work to evaluate the exploration prospects on the Bolivian properties in order to be ready to take advantage of the increased market for Bolivian gas that should occur when the pipeline to Brazil is completed. 1997 Acquisitions. United States. During 1997, the Company acquired, through several ------------- transactions, oil and gas properties for an aggregate purchase price of approximately $133.5 million. Based on estimates prepared by the Company, except with respect to the Burlington Properties described below which estimates were prepared by Netherland, Sewell, proved reserves as of the dates of the various acquisitions aggregated -5- 24.7 MMBbls of oil and 62.3 Bcf of gas, or a total of 35.0 MMBOE. These reserves were acquired at an average cost of $3.81 per BOE. On April 1, 1997, the Company purchased certain producing oil and gas properties and facilities located in the gulf coast of Texas and Louisiana from subsidiaries of Burlington Resources Inc. (the "Burlington Properties") for approximately $102.7 million in cash. Funds were provided by advances under the revolving credit facility. The Burlington Properties consist of several key onshore fields, five offshore fields and a number of smaller fields covering a total of 74,547 gross (67,970 net) acres. Approximately 47 percent of this acreage is associated with offshore fields. The Company now operates the Burlington Properties with current net daily production of approximately 5,600 Bbls of crude oil and 17,000 Mcf of gas. At April 1, 1997, the Burlington Properties totaled 24.3 MMBbls of oil and 25.2 Bcf of gas for a total of 28.5 MMBOE of proved reserves as estimated by Netherland, Sewell. The two largest fields obtained in the purchase of the Burlington Properties are Luling Branyon and West Ranch. For a brief description of these fields, see "--Oil and Gas Properties--Gulf Coast Area." International. On December 10, 1997, the Company entered into a ------------- contract with the Bolivian government for the concession rights to the Naranjillos concession located in the Santa Cruz Province of Bolivia. The Company's contract required a $1.0 million cash payment and a commitment to perform 17,728 work units within the next three years. The work unit commitment is guaranteed by the Company through the issuance of an $88.6 million letter of credit; however, the Company anticipates that it will fulfill its three-year work unit commitment through approximately $45 to $50 million of various seismic and drilling capital expenditures. The Naranjillos concession is located approximately 25 miles west of the city of Santa Cruz, Bolivia, and contained proved reserves of 116 Bcf of gas equivalent at the time of acquisition based on estimates prepared by the Company. The Company believes that this concession contains significant exploratory prospects and has initiated a 3-D seismic program covering nearly 39 square miles to be followed by drilling a minimum of two wells of varying depths later in 1998. In addition, the Company plans to begin exploitation work aimed at producing existing proved reserves under its existing market allocation. The Company estimates capital expenditures for exploration and development of $17 million during the initial phase of the three-year program. The Bolivia-to-Brazil gas pipeline is a major project with targeted deliverability in excess of one Bcf of Bolivian gas per day to meet the growing gas demand in Brazil. The Company believes that the exploitation potential of the Naranjillos concession, combined with the exploration prospects it acquired last year in the Chaco Basin of Bolivia, position the Company to be a potentially significant beneficiary of the Bolivia-to-Brazil gas pipeline project. The Company intends to continue its growth strategy emphasizing reserve additions through its acquisition efforts. The Company may utilize any one or a combination of its line of credit with banks, institutional financing, issuance of debt securities or additional equity securities and internally generated cash flow to finance its acquisition efforts. No assurance can be given that sufficient external funds will be available to fund the Company's desired acquisitions. The Company does not have a specific acquisition budget since the timing and size of acquisitions are difficult to forecast. The Company is constantly reviewing acquisition possibilities. The Company may expand into new domestic core areas. The Company is also evaluating additional acquisition opportunities in other countries which the Company believes are politically stable. At the present time the Company has no binding agreements with respect to any significant acquisitions. -6- EXPLOITATION AND DEVELOPMENT ACTIVITIES The Company concentrates its acquisition efforts on proved producing properties which demonstrate a potential for significant additional development through workovers, behind-pipe recompletions, secondary recovery operations, the drilling of development or infill wells, and other exploitation techniques. The Company has pursued an active workover, recompletion and development drilling program on the properties it has acquired and intends to continue these activities in the future. The Company's exploitation staff focuses on maximizing the value of the properties within its reserve base. The Company's exploitation engineers, who strive to offset normal production declines and replace the Company's annual production, have replaced more than 81 percent of the Company's production during the last three years. The results of their efforts are reflected in revisions to reserves. Net revisions to reserves for 1997 (before the impact of lower oil and gas prices) totaled 29.9 MMBOE, or 132 percent of the Company's production of 22.6 MMBOE. However, the replacement of these reserves was entirely offset by a 30 MMBOE downward revision of reserves resulting from sharply lower realized oil and gas prices at year-end 1997 used in the calculation of proved reserves. From January 1, 1995, through December 31, 1997, the Company spent approximately $102.3 million on recompletion and workover operations. A measure of the overall success of the Company's recompletion and workover operations during this period (excluding minor equipment repair and replacement) has been that improved production or operating efficiencies have been achieved from approximately 75 percent of such operations. However, there can be no assurance that such results will continue. The Company anticipates spending $22 million on workover and recompletion operations during 1998. The expenditures required for this program have historically been, and are expected to continue to be, financed by internally generated funds. Development drilling activity is generated both through the Company's exploration efforts and as a result of the Company's obtaining undeveloped acreage in connection with producing property acquisitions. In addition, there are many opportunities for infill drilling on Company leases currently producing oil and gas. The Company intends to continue to pursue development drilling opportunities which offer potentially significant returns to the Company. From January 1, 1995, through December 31, 1997, the Company participated in the drilling of 199 gross (152.90 net) development wells, of which approximately 91 percent gross (93 percent net) were productive. However, there can be no assurance that this past rate of drilling success will continue in the future. The Company is pursuing development drilling in the West Coast, Gulf Coast, Mid- Continent and East Texas areas as well as its Argentina concessions and anticipates continued growth in its drilling activities. Additionally, the Company has numerous infill drilling locations in several East Texas area fields, specifically South Gilmer (Cotton Valley formation), Southern Pine (Travis Peak formation), Bethany Longstreet (Hosston formation) and Rosewood (Cotton Valley formation) fields. During 1997, the Company participated in the drilling of 90 gross (73.54 net) development wells. At December 31, 1997, the Company's proved reserves included approximately 138 development or infill drilling locations on its U.S. acreage and 131 locations on its Argentine acreage. In addition, the Company has an extensive inventory of development and infill drilling locations on its existing properties which are not included in proved reserves. The Company spent approximately $47.7 million on development/infill drilling during 1997. The Company expects to spend approximately $98 million on development/infill drilling activities during 1998. In connection with its exploitation focus, the Company actively pursues operating cost reductions on the properties it acquires. The Company believes that its cost structure and operating practices generally result in improved operating economics. Although each situation is unique, the Company generally has -7- achieved reductions in labor and other field level costs from those experienced by the previous operators, particularly in its acquisitions from major oil companies. The following is a brief discussion of significant developments in the Company's recent exploitation and development activities: West Coast Area. The San Miguelito/Rincon field area, acquired from Conoco, Santa Fe Energy and Mobil, continues to be a focus area of the Company's West Coast exploitation efforts. Consolidation of the three acquisition areas into a single operating unit has significantly reduced operating costs. Exploitation efforts including artificial lift enhancements, waterflood optimization, recompletions and sidetracking junked producers have resulted in sustaining the average field production at levels comparable to that of the three prior years. During 1997, one well was successfully sidetracked to the Fourth Grubb zone with resulting gross daily production of 175 Bbls of oil. Six more sidetracks are planned for 1998. The Company has been able to increase proved reserves each year in this field area, and believes ongoing reservoir studies will continue to identify additional exploitation projects in addition to the 50 projects currently identified. In addition to the San Miguelito/Rincon field area, exploitation efforts have been successful in other areas of California. A horizontal well drilled in the Zaca field has produced at rates in excess of 75 Bbls of oil per day since its completion in February 1997. This successful well sets up additional horizontal wells, both extensional and exploratory. Two infill wells were drilled in the Buena Vista Hills field during the first half of 1997. Electric submersible pumps are currently being designed for both wells. Test data indicates that once the wells are equipped, production for each well should be approximately 200 Bbls of oil per day. The Company has identified several more infill wells and recompletions in this field. An expansion of the current three-pattern steamflood pilot on the Carlton Investment property in the North Antelope Hills field is planned for 1998. Six additional steam injection wells are planned to be drilled and total steam injection into the heavy-oil Packwood formation will increase from the current rate of 1,000 Bbls of steam (cold-water equivalent) per day to over 3,000 Bbls of steam per day. Incremental oil production from the steamflood expansion is expected to peak at 385 Bbls of oil per day in approximately two years. Current field production is 320 Bbls of oil per day. The expansion project is expected to recover net proved oil reserves of one MMBbls, with an ultimate recovery of 70 percent of the original oil in place. Gulf Coast Area. Exploitation of the Burlington Properties had an aggressive start in 1997, and plans call for the pace to continue into 1998 and beyond. Activity in 1997 included the recompletion of 28 wells, artificial lift upgrades in 20 wells and, most recently, the initiation and completion of four horizontal wells. These activities were successful at replacing oil production and offsetting the natural decline curve. For 1998, exploitation activities are expected to increase with the aim of growing oil production. Plans for 1998 include the drilling of several horizontal wells and numerous recompletions and artificial lift upgrades. In addition to these activities, total operating costs for properties in the three main fields, Luling Branyon, Darst Creek and West Ranch, have been reduced by 16 percent, or $2.7 million annually, from the time the properties were purchased in April 1997. Additional improvements planned for 1998 should lower these costs an additional five percent. The inventory of identified exploitation projects provides additional opportunities for 1999 and beyond. In the Galveston Bay area of Texas, the Company performed three workovers during 1997 in the Red Fish Reef field which is 100 percent owned by the Company and which historically has had good exploitation potential. This work consisted of workovers and recompletions in the multi-pay Frio zones productive in the area which resulted in a total gross daily production increase of 68 Bbls of oil and 2,840 Mcf of gas. During 1997, the Company also performed three recompletions in the Four Sevens field, owned 90 percent by the Company, which resulted in gross daily production increases of 63 Bbls of oil and 2,500 Mcf of gas. The Company also recompleted three wells in the South Pass 24 field increasing daily gross field production by 225 Bbls of oil and 3,810 Mcf of gas. In the Fanny Church field in Alabama, oil production was increased by 770 Bbls per day by removing surface piping restrictions in one well. -8- Mid-Continent Area. Infill drilling in gas fields and waterflooding oil fields continue to be the major activities of the Company in this area. The Company participates in a large number of Company-generated and partner- generated low risk infill projects each year in the many gas fields in this area. The Company also has ongoing and planned waterfloods in Texas and Kansas. The four Booker Upper Morrow waterfloods in the panhandle of Texas are expected to respond to injection during 1998. For additional information regarding activities in this area, see "--Oil and Gas Properties." Argentina Concessions. Development and extensional drilling along with the implementation and optimization of secondary recovery projects have been the focus of the Company's exploitation efforts in its Argentina properties. The Company's successful exploitation program has resulted in a gross daily production increase from 10,200 Bbls of oil in January 1996 to over 18,500 Bbls of oil currently. Drilling activity commenced during February 1996 and continued through the end of 1997 with 102 wells having been completed. The three focus areas for drilling activity to date have been Canadon Minerales with 52 wells, Canadon Seco with 26 wells, and Meseta Espinosa with 20 wells. Largely due to the results of this drilling activity, average gross daily oil production on these three concessions has increased from a total of 6,800 Bbls to 14,400 Bbls. Drilling activity continues with two drilling rigs currently operating. During 1996, the Company acquired 48 square miles (124 square kilometers) of 3-D seismic to aid in the optimum placement of drilling locations. Based on the successful results obtained from the utilization of the 1996 3-D data, the Company has acquired an additional 99 square miles (256 square kilometers) of 3- D data during 1997. The Company believes that substantial upside potential that has historically been overlooked can be economically exploited with the aid of 3-D seismic. The Company has also continued its endeavor to optimize existing secondary recovery projects and to initiate new waterfloods. The waterflood work in 1996 and 1997 on Canadon Minerales Block 123A, Canadon Minerales Block 123E, Cerro Wenceslao Flanco Oriental and Clavada Block 24 has exhibited incremental gross daily production responses of 970 Bbls of oil. Only a small portion of the producing areas of the concessions controlled by the Company have been subject to secondary recovery operations. There are ten new waterflood project areas that are currently in various stages of development. The Company believes that numerous other areas presently under primary recovery are amenable to waterflooding. The Company also believes that the utilization of 3-D seismic will enhance the ultimate recovery derived from these new waterflood projects and be a valuable tool in identifying new secondary recovery project areas that previously would have gone undeveloped. Bolivia Concessions. The Company initiated its exploitation program in Bolivia during 1997 with the rework of two wells. Incremental gross daily production from this work was approximately 7,500 Mcf of gas and 200 Bbls of condensate. The activity in 1998 will see a dramatic increase as the Bolivia- to-Brazil pipeline is completed and gas begins to flow into the Brazilian market in early 1999. In preparation for the opening of the Brazilian market, the Company has initiated work to upgrade the existing facilities and compression in Nupuco and Naranjillos. These facility improvements along with planned additional development drilling should position the Company to take advantage of this increased gas market opportunity. A rig has been contracted and drilling is currently underway to test a Devonian Iquiri sand oil accumulation that was identified by a well drilled in the early 1960's. More development drilling locations may be identified as a result of a 3-D seismic survey that is to be completed and interpreted in the first quarter of 1998. EXPLORATION The Company's exploration program is designed to contribute significantly to its growth. Management divides the strategic objectives of its exploration program into two parts. First, in the U.S. and in Argentina, the Company's exploration focus is in its core areas where its geological and engineering expertise and -9- experience are greatest. State-of-the-art technology, including 3-D seismic, is employed to identify prospects. Exploration in the U.S. and Argentina is designed to generate reserve growth in the Company's core areas in combination with its exploitation activities. The Company's longer-term plans are to increase the magnitude of this program with a goal of achieving production replacement through core area exploration. Such exploration is characterized by numerous individual projects with medium to low risk. Secondly, international exploration targets significant long-term reserve growth and value creation. International exploration projects in Ecuador, Bolivia and Yemen are characterized by higher potential and higher risk. From January 1, 1995, through December 31, 1997, the Company spent $64.6 million on exploration activities. The Company plans to spend approximately $65 million on exploration activities during 1998, approximately $39 million in the U.S. and Argentina and approximately $26 million in other international areas. The following is a brief discussion of the primary areas of exploration activity for the Company: United States. Gulf Coast Area. In 1997, the Company successfully drilled and --------------- completed three wildcat discoveries and one field extension in the geopressured pay horizons of Galveston Bay in south Texas. All the locations were based on interpretations derived from the Company's 180 square mile 3-D seismic survey. The State Tract 75-2 well was a successful extension to the Company's 1996 discovery well, the State Tract 75-1. Wildcats drilled at the Umbrella Point West, White Heron and White Heron North prospects in the Umbrella Point field were successful and are currently producing at gross daily rates ranging from 5 MMcf of gas to 15 MMcf of gas along with condensate of up to 600 Bbls per well. Plans for 1998 include the drilling of five additional wildcats where the Company's working interests range between 50 percent to 100 percent. In an attempt to extend the play, the Company is planning to shoot an additional 30 square miles of proprietary 3-D seismic in an adjacent onshore area where lease options have been secured. For additional information, see "--Oil and Gas Properties--Gulf Coast Area." Three potentially significant south Louisiana prospects will be evaluated in 1998. 3-D seismic surveys have been shot and geophysical processing is nearing completion on both the Lake Washington and Little Lake Deep prospects. Geological and 2-D seismic leads will be evaluated with potential drilling planned sometime in 1998. The Company will have working interests ranging from 50 percent to 100 percent. In the Deweyville prospect of south Texas, initial drilling is expected to commence in the summer of 1998 to evaluate 3-D and geochemically defined locations in the expanded Yegua trend. Mid-Continent Area. The Company is participating in a regional 3-D ------------------ Seismic Alliance in which over 625 square miles of non-contiguous, high-quality 3-D seismic has been shot. Several different play concepts are being pursued. Main objectives include the Hunton, Springer, Morrow and Granite Wash formations. A potentially significant discovery in the Company's Jayhawk prospect, the #1 Weise, was recently completed with gross daily production of 4.5 MMcf of gas and 255 Bbls of oil from the Hunton formation. A delineation well is planned in the first quarter of 1998. Additional 3-D seismic data has been acquired and is currently being processed. An aggressive drilling program is anticipated in 1998 on prospects identified in this Alliance. In the Stagecoach prospect in southern Oklahoma, the Company is pursuing a multipay gas project in which the Granite Wash as well as multiple shallower horizons in the Hoxbar and Deese formations are of primary interest. Preliminary results from the first well are encouraging and two additional wells, the Ithaca #1 and Travis #1, have been drilled and are being tested. A 100 square mile 3-D seismic survey will be shot in 1998 and is expected to help evaluate the deeper drilling potential. West Coast Area. Horizontal drilling will evaluate two potentially --------------- undrained fault blocks adjacent to the Company's Zaca oil field in 1998. Two prospects target the Monterrey formation and will attempt to extend production beyond the limits of the existing field. -10- A 30 square mile 3-D seismic survey covering the Company's Rio Vista field is currently being evaluated. Multiple pay horizons are potential in this structurally and stratigraphically complex field that is one of California's largest gas fields. The Company believes that a detailed geologic and geophysical evaluation will uncover previously untapped gas reserves in fault and stratigraphic traps that 2-D seismic could not identify. International. South America. The Company is currently pursuing several international ------------- exploratory projects. The Company believes that its existing projects in Ecuador and Bolivia have the potential to significantly increase reserves. The Company has a 30 percent working interest in a project to explore Block 19 in the Oriente Basin in Ecuador. Numerous commercially productive fields have been discovered in this basin. Primary targets are the Hollin, Napo "U" and "T" sands which are productive in other significant fields in this basin. The first of two planned exploration wells was drilled during 1997. This well was abandoned after testing at subcommercial rates. Plans are to drill the next exploration well in 1998 or 1999, testing another structure. Activity in Bolivia during 1997 was relatively modest due to restriction of the current gas market to Argentina. However, the activity in 1998 will see a significant increase as the Bolivia-to-Brazil pipeline is completed and gas begins to flow into the Brazilian market in early 1999. This third-party pipeline is designed to deliver approximately one Bcf of gas per day, as compared to the current export market to Argentina of approximately 200 MMcf of gas per day. The Company significantly expanded its operations in Bolivia by acquiring the Naranjillos concession in December 1997. The Company believes this 15,444 acre concession contains significant upside exploration and development potential which it plans to capitalize upon beginning in 1998. Multiple exploration well targets have been located and more are expected to follow upon completion of a 3-D seismic shoot that is currently underway. In addition to the Naranjillos concession, the Company has exploration plans in 1998 for its Chaco and Nupuco concessions in Bolivia. A 3-D seismic survey covering a portion of both of these concessions is to be completed and interpreted in the first quarter of 1998. At least two new wells are planned for 1998 and more may follow upon completion of the 3-D seismic interpretation. Yemen. The Company has entered into a farm-in agreement with ----- TransGlobe Energy in the expectation of receiving approval by the Republic of Yemen to explore on the S-1 Damis Block in central Yemen. The block covers approximately one million acres (4,484 square kilometers). The Company will receive a 75 percent interest in the S-1 Damis Block for its commitment of $11 million over two and one-half years in the initial exploration phase. The $11 million of expenditures will include a 3-D seismic survey of 58 square miles (150 square kilometers) and the drilling of three exploration wells. OIL AND GAS PROPERTIES At December 31, 1997, the Company owned and operated producing properties in ten states, with its U.S. proved reserves located primarily in four core areas: the West Coast, Gulf Coast, East Texas and Mid-Continent areas. In addition, the Company established a new core area in the San Jorge Basin of Argentina during 1995 and entered Bolivia during 1996. As of December 31, 1997, the Company operated approximately 3,679 productive wells and also owned non-operating interests in 842 productive wells. The Company continuously evaluates the profitability of its oil, gas and related activities and has a policy of divesting itself of unprofitable leases or areas of operations that are not consistent with its operating philosophy. The following table summarizes the Company's proved reserves in its 30 largest fields in the U.S., its five largest concessions in Argentina and its two largest concessions in Bolivia at December 31, 1997, as -11- estimated by Netherland, Sewell. These fields and concessions represent approximately 82 percent of the Company's proved reserves on such date.
LOCATION (COUNTY NET NET OR PARISH, STATE OIL GAS AREA FIELD/CONCESSION NAME OR PROVINCE) (MBbls) (MMcf) MBOE ---- ------------------------ -------------------- ------- -------- ------ West Coast.................... San Miguelito Ventura, CA 15,103 3,818 15,740 South Mountain Ventura, CA 5,535 6,305 6,586 Buena Vista Hills Kern, CA 4,122 4,661 4,898 Rincon Ventura, CA 4,054 3,034 4,560 Rio Vista Sacramento, CA 3 26,834 4,475 Ojai-Silverthread Ventura, CA 1,900 8,836 3,372 Pleito Ranch Kern, CA 2,650 1,512 2,902 North Tejon Kern, CA 1,387 7,321 2,607 Sespe Ventura, CA 2,081 3,010 2,583 Santa Maria Valley/Cat Canyon Santa Barbara, CA 2,043 0 2,043 North Antelope Hills Kern, CA 1,664 0 1,664 Lathrop San Joaquin, CA 0 9,224 1,537 Canfield Ranch Kern, CA 1,428 301 1,478 Zaca Santa Barbara, CA 1,452 0 1,452 Gulf Coast.................... Luling Branyon Guadalupe, TX 11,778 418 11,847 West Ranch Jackson, TX 7,248 700 7,365 South Pass 24 Plaquemines, LA 2,842 10,630 4,614 Umbrella Point Chambers, TX 304 20,763 3,764 Flomaton Escambia, AL 1,882 6,232 2,921 Fanny Church Escambia, AL 1,580 3,410 2,148 Tepetate Acadia, LA 2,018 583 2,115 Darst Creek Guadalupe, TX 1,635 103 1,653 Ville Platte Evangeline, LA 939 3,798 1,572 Waveland Hancock, MS 121 8,145 1,478 East Texas.................... South Gilmer Upshur, TX 703 23,863 4,680 Colgrade Winn, LA 3,681 0 3,681 Southern Pine Cherokee, TX 0 18,371 3,062 Fruitvale Van Zandt, TX 21 17,415 2,923 Mid-Continent................. Booker Lipscomb, TX 1,737 283 1,784 Strong City Roger Mills, OK 46 9,118 1,565 San Jorge Basin, Argentina.... Canadon Minerales Santa Cruz Province 27,044 0 27,044 Canadon Seco Santa Cruz Province 15,982 0 15,982 Meseta Espinosa Santa Cruz Province 15,690 0 15,690 Las Heras/Piedra Clavada Santa Cruz Province 12,207 0 12,207 Cerro Wenceslao Santa Cruz Province 7,680 0 7,680 Chaco Basin, Bolivia.......... Naranjillos Santa Cruz Province 845 122,067 21,189 Nupuco Tarija Province 5,313 67,660 16,589
West Coast Area. The Company expanded its operations to the West Coast in 1992 through two separate acquisitions of properties located in Kern, Ventura, and Santa Barbara Counties in California. Since 1992, the Company has continued to expand its operations in the West Coast area through additional property acquisitions. As of December 31, 1997, the area comprised 25 percent of the Company's total proved reserves and 43 percent of the Company's U.S. proved reserves. The Company currently operates 1,168 active wells with current gross daily production of approximately 9,850 Bbls of mid-gravity oil, 2,300 Bbls of heavy oil and 29,200 Mcf of gas. In addition, the Company owns an interest in 71 productive wells operated by others. San Miguelito. The San Miguelito field is located in the west central ------------- portion of the greater Ventura Avenue field just north of the City of Ventura, California. Production is from multiple pay intervals in Pliocene-age sands which span 7,000 vertical feet. Well depths generally range from 7,000 feet to just over 16,000 feet in the deepest wells. Currently, active waterflood operations are underway in three of the producing zones. With the field still producing in excess of 3,000 gross Bbls of oil per day, the Company believes additional waterflood potential exists in lower sands currently producing on primary depletion and it has just initiated a program to begin waterflooding a fourth productive interval. The Company operates this -12- single lease property with a 100 percent working interest and an 87.5 percent net revenue interest. For additional information regarding this field, see "-- Exploitation and Development Activities--West Coast Area." South Mountain. The South Mountain field, located just south of -------------- Santa Paula, California, has become one of the Company's major producing areas. As a result of the 1995 acquisition of certain producing oil and gas properties from Texaco, which included certain properties in this field, the Company now operates 253 active wells in the South Mountain field. Current gross daily production of 1,100 Bbls of oil and 2,365 Mcf of gas comes from Eocene and Pliocene sand intervals at depths of 3,000 feet to 10,000 feet. The Company's working interests in the field range from 50 percent to 100 percent with revenue interests from 42 percent to 100 percent; however, the properties are predominantly owned 100 percent. The solution gas and gravity drainage producing mechanisms are responsible for low decline rates which result in long-life reserves. Buena Vista Hills. The Buena Vista Hills field is located ----------------- approximately 25 miles east of Bakersfield, California. Production is from the Stevens Upper Channel, Main Massive and Interbed zones at a depth of 5,000 feet to 5,500 feet. The Company operates 27 productive wells in the field with a 100 percent working interest. The Company drilled two infill wells in the first half of 1997, testing at rates in excess of 100 Bbls of oil per day. Plans are underway to install electrical submersible pumps in order to efficiently produce the wells. Daily rates are anticipated to be in excess of 200 Bbls per well when installation is complete. In addition, the Company has identified 14 workovers and recompletions in the field. Current gross daily production is 930 Bbls of oil. The Company believes that upside reserve potential exists through infill drilling and recompletions. For additional information regarding this field, see "--Exploitation and Development Activities--West Coast Area." Rincon. The Rincon field is located on the western updip end of ------ the greater Ventura Avenue field just north of the City of Ventura, California, and adjacent to the Company's San Miguelito field properties. Like the San Miguelito field, production is from multiple pay intervals of Pliocene-age sands. These intervals span several thousand feet. Producing intervals range in depth from approximately 3,500 feet to 14,000 feet. The Company operates this field with a 100 percent working interest and an 80 percent revenue interest. Current gross daily production is approximately 850 Bbls of oil and 800 Mcf of gas. The Company has continued its exploitation program on uphole producing intervals which it began in 1996. The Company believes that significant upside reserve potential exists in the development of these shallow producing horizons along with workover and stimulation activity in the presently producing intervals. For additional information regarding this field, see "--Exploitation and Development Activities--West Coast Area." Rio Vista. The Company purchased the Rio Vista Deep field and an --------- additional 31 percent working interest in the Rio Vista Gas Unit during 1997. The field, located in Solano County, California, produces dry gas at depths ranging from 5,500 feet to 11,000 feet. The Rio Vista Deep acquisition added 29 wells which are now operated by the Company. The Company has workover and drilling plans to exploit the proven reserves as well as other probable and possible reserve potential in the field. Deep exploration potential is also being evaluated using the latest 3-D seismic technology. Current gross daily production from these wells is 3,700 Mcf of gas. The Company owns a 95 percent working interest in these wells. The Rio Vista Gas Unit, operated by Amerada Hess, has current gross daily production of approximately 19,000 Mcf of gas from 71 wells. Ojai-Silverthread and Timber Canyon. The Ojai field, which extends ----------------------------------- to the Silverthread and Timber Canyon areas, is located in the central portion of Ventura County, California. Production in this area is from the fractured Monterey Shale formation which is encountered at depths ranging from 2,000 feet to 6,000 feet. The Company operates 111 productive wells in the field with a 100 percent working interest and net revenue interests ranging from 83 percent to 100 percent. The properties are mature, characterized by pressure depletion and gravity drainage, with highly predictable production decline rates. Combined current gross daily production is approximately 700 Bbls of oil and 3,000 Mcf of gas. -13- Pleito Ranch. The Pleito Ranch field is located on the southern ------------ end of the San Joaquin Basin. Production is from Miocene-age Chanac and Santa Margarita sands below the Wheeler Ridge thrust fault. Well depths range from 11,000 feet to 14,000 feet. All productive wells are operated by the Company with a 100 percent working and net revenue interest. The recovery mechanism is predominantly gravity drainage and is characterized by low decline, long-life reserves with current gross daily production of approximately 560 Bbls of oil. North Tejon. The North Tejon field is located near the southern ----------- end of the San Joaquin Basin. The field is divided into a series of fault blocks with productive reservoirs in the lower Miocene, Oligocene, Zemorrian and Eocene sands. These producing zones range in depth from 5,400 feet to 11,300 feet. All productive wells are operated by the Company with a 100 percent working interest. Current gross daily production rates average 250 Bbls of oil and 2,150 Mcf of gas. Gulf Coast Area. The Gulf Coast area comprised approximately 20 percent of the Company's December 31, 1997, total proved reserves. Production in this area is predominantly from structural accumulations in reservoirs of Miocene age. The depths of producing reservoirs in this area range from 1,200 feet to 14,500 feet. The Company currently operates 821 productive wells and owns an interest in an additional 434 productive wells in this area. Gross daily operated production from this area currently averages 14,700 Bbls of oil and 104,700 Mcf of gas. The Company's Umbrella Point exploration program in Galveston Bay, in which the Company generally owns a 50 percent working interest, contributes current gross daily production of 65,000 Mcf of gas and 1,100 Bbls of condensate of the above total Gulf Coast production. This project is ongoing with several new wells currently in the completion stage. Additional development potential exists from horizontal well drilling in the West Ranch and Luling Branyon fields which are 100 percent owned by the Company. Recompletion and development drilling potential also exists in the South Pass 24 (70 percent working interest) and Southern Pine (92 percent working interest) fields. Luling Branyon. The Luling Branyon field is located in Caldwell and -------------- Guadalupe Counties, Texas, and was purchased from Burlington Resources in 1997. This field produces primarily from the Upper Edwards carbonate at a depth of 2,100 feet. The field produces from a natural water drive with high water rates. Gross daily production from this field is 2,700 Bbls of oil from 307 producing wells. The Company operates this field with a 100 percent working interest. Since acquiring this field, the Company has drilled three horizontal development wells, increasing gross daily oil production by 750 Bbls. Recompletions and artificial lift upgrades have added another 150 Bbls per day. Significant reductions in operating costs have also been achieved, including the shutting in of approximately 40 marginal wells. Upside potential for this field includes another 28 horizontal drilling locations and additional recompletions and lift upgrades. West Ranch. The West Ranch field, purchased from Burlington Resources ---------- in 1997, is located in Jackson County, Texas. Production is from numerous Miocene and Frio age sands at depths between 2,900 feet and 7,200 feet. Current gross daily production is 2,000 Bbls of oil and 3,660 Mcf of gas from 140 active wells. Cumulative field production is over 350 MMBbls of oil and 850 Bcf of gas. The Company drilled one horizontal well in 1997 making 250 Bbls of oil per day in the Greta sand, the largest reservoir in the field, and plans on drilling eight more in 1998, and seven in 1999. Production enhancements, such as installing larger tubing and improved gas lift design, along with recompletions, have increased production rates approximately 250 Bbls of oil per day. The field is also being studied for enhanced oil recovery opportunities. The Company has a working interest of 100 percent in the field. South Pass 24. The South Pass 24 field is located in state waters of ------------- Plaquemines Parish, Louisiana, at shallow water depths averaging 10 feet to 20 feet. The 31 productive oil wells and eight productive gas wells in this field are operated by the Company and one other operator. The South Pass 24 field produces hydrocarbons from various members of the Miocene sand series at an average depth of -14- approximately 7,000 feet. Current gross daily operated production from the field is 965 Bbls of oil and 7,700 Mcf of gas. Recompletions to new zones in current wellbores have been very successful in this field. Similar work is planned for 1998 and beyond. Umbrella Point. This ongoing exploration project in Galveston Bay is a -------------- top contributor to current producing rates and reserves in the Gulf Coast area. For additional information regarding this field, see "--Exploration--Gulf Coast Area." Flomaton. This field, purchased from Exxon in 1996, is located in -------- Escambia County, Alabama, and produces from the Norphlet sand at 15,300 feet. Company operated gross daily production is 588 Bbls of oil and 11,300 Mcf of gas from nine wells. The Company has had recent success in enhancing production by installing velocity strings and plans on installing five more in 1998. The Company owns approximately a 95 percent working interest in this field. Fanny Church. Fanny Church field, purchased from Exxon in 1996, is ------------ located in Escambia County, Alabama, and produces from the Smackover carbonate at 15,300 feet. Company operated gross daily production is 1,680 Bbls of oil and 4,140 Mcf of gas from five wells. In mid-1997, gross oil production was increased 770 Bbls per day by removing surface piping restrictions in one well. Additional drilling and/or enhanced oil recovery options are being studied. The Company owns approximately a 80 percent working interest in this field. East Texas Area. The East Texas area comprised approximately seven percent of the Company's December 31, 1997, total proved reserves. The Cotton Valley, Smackover, Travis Peak and Wilcox formations are the dominant producing reservoirs on the Company's acreage in this area. The Company currently operates gross daily production of 1,425 Bbls of oil and 38,700 Mcf of gas from 673 operated productive wells in this area. The Company owns an interest in an additional 71 productive wells in this area. Significant infill drilling potential exists on the Company's acreage in the South Gilmer, Southern Pine, Rosewood, Bethany Longstreet and Bear Grass fields. The Company plans to continue infill drilling programs in Southern Pine and South Gilmer fields. South Gilmer. The South Gilmer field, the Company's largest field in ------------ the East Texas area, is located in Upshur County, Texas, and produces from the Cotton Valley Lime formation at average depths of 11,300 feet to 11,800 feet. The Company currently operates 20 productive wells and owns interest in two additional wells in this field. Significant behind-pipe reserves are booked for the Company's 6,727 gross acres in the Cotton Valley sand formation. Current gross daily operated production is 6,500 Mcf of gas and 90 Bbls of oil. The Company owns approximately a 80 percent working interest in this field. Colgrade. The Colgrade field, located in Winn Parish, Louisiana, -------- currently produces 1,140 Bbls of oil gross per day from the Wilcox formation at a depth of 1,400 feet. The Company operates 439 active wells in this field. During 1996, a pilot project was initiated to increase fluid withdrawal rates using submersible pumps. To date, 156 electrical submersible pumps have been installed, increasing oil production 390 Bbls per day. The Company plans to install 139 additional pumps during the remainder of 1998. These submersible pumps are low cost and replace conventional rod pump installations. Surface facilities are being modified to handle the increased rates. The Company generally has an 85 percent working interest and a 91 percent net revenue interest in this field due to significant fee mineral ownership. Southern Pine. The Southern Pine field, located in Cherokee County, ------------- Texas, produces from the Travis Peak formation at 10,800 feet. The Company currently operates 25 productive wells in this field with current gross daily production of 5,300 Mcf of gas. Operating costs were significantly lowered in 1997 by converting a marginal well to salt water disposal. The Company owns a 92 percent working interest in this field. -15- Mid-Continent Area. The Mid-Continent area extends from the Arkoma Basin of eastern Oklahoma to the Texas panhandle and north to include Kansas. This area comprised five percent of the Company's total proved reserves as of December 31, 1997. The Company currently operates gross daily production of 3,760 Bbls of oil and 28,900 Mcf of gas from 328 operated productive wells in this area. The Company owns an interest in an additional 249 productive wells in this area. For additional information regarding these operations, see "--Exploitation and Development Activities--Mid-Continent Area" and "--Exploration--Mid-Continent Area." Booker. The Booker field is located in Lipscomb and Ochiltree ------ Counties, in the Texas panhandle. Production from this field is primarily from four waterflood units adjacent to each other, each targeting the Upper Morrow sand at depths of approximately 8,000 feet. The Company owns working interests in these units from 82 percent to 100 percent. Water injection into three of the units began in 1996. Injection into the fourth unit began in July 1997. Two analogous Upper Morrow units immediately adjacent to this field have responded favorably to waterflood operations. First production response from the project is anticipated in 1998. The Company anticipates the addition of proved reserves based on the level of success of these secondary recovery projects. Argentina Concessions. The Argentina properties consist primarily of 12 mature producing concessions located on the south flank of the San Jorge Basin. These concessions comprised approximately 29 percent of the Company's December 31, 1997, total proved reserves. The Company currently operates 682 productive wells (100 percent working interest) with gross daily production of 18,500 Bbls of oil. In addition, the Company owns an interest in 17 productive wells operated by others. At December 31, 1997, the Company's proved reserves included approximately 131 development or infill drilling locations and 267 workovers on its Argentina acreage. In addition, the Company has an extensive inventory of workovers and development or infill drilling locations on its Argentina properties which are not included in proved reserves. Canadon Minerales. The primary oil producing reservoirs of the ----------------- Canadon Minerales oil concession are the Mina del Carmen and Canadon Seco formations which are both fluvial channel sand bodies at depths ranging from 3,000 feet to 6,200 feet. This concession currently has 183 producing wells and 36 water injection wells with gross daily production of approximately 6,000 Bbls of oil. Approximately 20 percent of the concession's daily production is produced from the Block 123A waterflood, which contains 22 producing wells and 17 water injection wells. Future development plans at Canadon Minerales include numerous workovers and development drilling locations. Many of the workovers are expected to return idle wells back to production by perforating zones not produced by the former owner. Log cross sections reveal many zones which do not appear to have been previously tested. In addition, the Company plans to further develop the significant waterflood potential in four areas of Block 130, Block 125 and two areas in Block 123 West. The proved undeveloped locations are generally infill development locations in areas offsetting existing production. Well depths vary from 3,000 to 6,000 feet. Fifty-two wells have been drilled on this concession during 1996 and 1997. See "--Exploitation and Development Activities--Argentina Concessions." Canadon Seco. The primary oil producing reservoirs of the Canadon ------------ Seco oil concession are the Canadon Seco and Mina del Carmen which are fluvial channel sand bodies at depths ranging from 4,000 feet to 7,000 feet. This concession currently has 87 producing wells and 20 water injection wells with gross daily production of approximately 4,000 Bbls of oil. There are three active waterfloods at Canadon Seco which contain a total of 20 water injection wells. The Block VIIIAo waterflood has additional drilling and water injection conversions scheduled for early 1998. -16- Twenty-six wells have been drilled on this concession during 1996 and 1997. Additional development plans at Canadon Seco include numerous workovers and development drilling locations. Many of the workovers are expected to return idle wells back to production by perforating additional zones. See "-- Exploitation and Development Activities--Argentina Concessions." Meseta Espinosa. The primary oil producing reservoirs of the --------------- Meseta Espinosa oil concession are the Canadon Seco and Mina del Carmen which are fluvial channel sand bodies with good to moderate sand quality at depths ranging from 4,000 feet to 7,000 feet. This concession currently has 108 producing wells and 10 water injection wells with gross daily production of approximately 4,200 Bbls of oil. There are seven active waterfloods at Meseta Espinosa which contain a total of 17 producing wells and 10 water injection wells. One new proven waterflood project was installed during 1996. It will be followed by the implementation of a second new proven waterflood project. Twenty wells have been drilled on this concession during 1996 and 1997. Additional development plans at Meseta Espinosa include several workovers and the drilling of development and extensional wells. See "--Exploitation and Development Activities--Argentina Concessions." Las Heras/Piedra Clavada. The primary oil producing reservoirs of ------------------------ the Las Heras/Piedra Clavada oil concession are the Castillo and Bajo Barreal formations which are both fluvial channel sand bodies with good to moderate sand quality at depths ranging from 3,500 feet to 7,000 feet. Currently, there are 87 producing wells and five water injection wells with gross daily production of approximately 1,200 Bbls of oil. There is one active waterflood in Block 24, which contains 13 producing wells and five water injection wells. In addition to the activities in Block 24, there are three other waterflood projects scheduled for development at Las Heras/Piedra Clavada. Future development plans at Las Heras/Piedra Clavada include numerous workovers and development drilling locations. Many of these workovers are expected to return idle wells back to production by perforating additional zones. Cross sections reveal many zones which do not appear to have been tested. The proved undeveloped locations are generally infill development locations in areas offsetting existing production. Seven wells have been drilled on this concession during 1996 and 1997. Cerro Wenceslao. The primary oil producing reservoir of the Cerro --------------- Wenceslao oil concession is the Bajo Barreal which contains sands at depths ranging from 1,000 feet to 3,000 feet. Currently, there are 122 producing oil wells and 11 water injection wells with gross daily production of approximately 1,500 Bbls of oil. Two wells have been drilled on this concession during 1996 and 1997. Future development plans at Cerro Wenceslao include workovers, fracture stimulations, and development drilling on several locations. In addition, the Company plans to further develop the significant waterflood potential in Block 2, Block 5 and the East Flank Block. Bolivia Concessions. The Bolivia properties consist of three producing concessions and one exploration concession located in the Chaco Plains area of southern Bolivia. The Company has a 100 percent working interest in the Chaco exploration concession, the Porvenir producing concession and the Naranjillos producing concession. In the other concession, Nupuco, the Company has a 50 percent working interest. The Company operates all four concessions. These concessions comprise approximately 14 percent of the Company's December 31, 1997, total proved reserves and include 7 gross (6 net) active producing wells, all of which are operated by the Company. The current gross daily production is approximately 30,850 Mcf of gas and 800 Bbls of condensate. Naranjillos. The Naranjillos concession is located approximately 25 ----------- miles west of the city of Santa Cruz, in the Santa Cruz Province. The concession was shut in prior to the Company assuming operations. The Company believes that the potential exists to significantly increase production above historic -17- levels through gas compression and recompletion of wells. This potential will be evaluated through testing operations, which are scheduled to begin in the second quarter of 1998. The Company believes that significant exploration potential also exists. There are three exploration concepts to be tested in Naranjillos during 1998, the most significant of which is the Upper Devonian Iquiri formation. The Iquiri sands appear to be trapped between two major thrust faults. Two previous wells penetrated this formation but were not tested due to abnormally high pressures. To evaluate this potential, the Company is currently shooting a 3-D seismic survey which will cover the entire concession. This survey is scheduled for completion by the end of April 1998. The data from this survey will be used to select locations for drilling in 1998 and 1999. A total of five drilling well locations have already been identified, without the aid of 3-D; drilling is scheduled to begin in the second quarter of 1998. In preparation for the opening of the Brazilian market, the Company has also initiated work to upgrade existing facilities so that the Company's proved reserves can be delivered to the new market. Nupuco. The Nupuco concession is located in the southern part of ------ Bolivia approximately 230 miles south of the city of Santa Cruz and approximately 60 miles north of the border with Argentina. The primary gas producing reservoirs are the Triassic-age Cangapi and the Carboniferious-age San Telmo and Escarpment. This concession currently has two gross (one net) active producing wells with gross daily production of approximately 25,000 Mcf of gas and 675 Bbls of condensate. A study is currently underway to install gas compression and plans are to have this installation completed by the end of the year in anticipation of the opening of the Bolivia-to-Brazil gas pipeline. MARKETING The Company's gas production and gathered gas are sold primarily on the spot market or under market-sensitive, long-term agreements with a variety of purchasers, including intrastate and interstate pipelines, their marketing affiliates, independent marketing companies and other purchasers who have the ability to move the gas under firm transportation agreements. Because an insignificant amount of the Company's gas is committed to long-term fixed-price contracts, the Company is positioned to take advantage of rising prices for gas but it is also subject to gas price declines. In order to more efficiently handle spot market transactions, the Company's domestic gas marketing activities are handled by Vintage Gas, Inc., its wholly- owned gas marketing affiliate, which commenced operation on May 1, 1991. This marketing affiliate purchases gas on the spot market from the Company and third parties. Generally, the marketing affiliate purchases this gas on a month-to- month basis at a percentage of resale prices. Generally, the Company's domestic oil production is sold under short-term contracts at posted prices plus a premium in some cases. The Company's Argentina oil production is currently sold at port to ESSO SAPA, ARCO and Shell at West Texas Intermediate spot prices less a specified differential. The most significant purchaser of the Company's oil during 1997 was Texaco Trading and Transportation, Inc. Such oil purchases amounted to approximately 10 percent of the Company's total revenues for 1997. No other purchaser of the Company's oil or gas during 1997 exceeded 10 percent of the Company's total revenues. The Company has previously engaged in oil and gas hedging activities and intends to continue to consider various hedging arrangements to realize commodity prices which it considers favorable. The Company had no oil or gas hedges in place at December 31, 1997. -18- GATHERING SYSTEMS The Company owns 100 percent interests in two oil and gas gathering systems located in Pottawatomie County, Oklahoma and Harris and Chambers Counties, Texas. In addition, the Company owns 100 percent interests in 24 gas gathering systems located in active producing areas of California, Kansas, Texas and Oklahoma. All of these gathering systems are operated by the Company. Together, these systems comprise approximately 300 miles of varying diameter pipe with a combined capacity in excess of 255 MMcf of gas per day. At December 31, 1997, there were 360 wells (most of which are operated by the Company) connected to these systems. Generally, the gathering systems buy gas at the wellhead on the basis of a percentage of the resale price under contracts containing terms of one to ten years. RESERVES At December 31, 1997, the Company had proved reserves, as estimated by Netherland, Sewell, of 279.8 MMBOE, comprised of 187.8 MMBbls of oil and 552.2 Bcf of gas. The following table sets forth, at December 31, 1997, the present value of future net revenues (revenues less production and development costs) before income taxes attributable to the Company's proved reserves at such date (in thousands): Proved Reserves: Future net revenues......................................... $1,981,616 Present value of future net revenues before income taxes, discounted at 10 percent.................................. 1,222,560 Standardized measure of discounted future net cash flows.... 1,016,645 Proved Developed Reserves: Future net revenues......................................... 1,405,821 Present value of future net revenues before income taxes, discounted at 10 percent.................................. 934,899 In computing this data, assumptions and estimates have been utilized, and the Company cautions against viewing this information as a forecast of future economic conditions. The historical future net revenues are determined by using estimated quantities of proved reserves and the periods in which they are expected to be developed and produced based on December 31, 1997, economic conditions. The estimated future production is priced at prices prevailing at December 31, 1997, except where fixed and determinable price escalations are provided by contract. The resulting estimated future gross revenues are reduced by estimated future costs to develop and produce the proved reserves, based on December 31, 1997, cost levels, but such costs do not include debt service, general and administrative expenses and income taxes. For additional information concerning the historical discounted future net revenues to be derived from these reserves and the disclosure of the Standardized Measure information in accordance with the provisions of Statement of Financial Accounting Standards No. 69, "Disclosures about Oil and Gas Producing Activities," see "Note 11 to Consolidated Financial Statements--Supplementary Financial Information for Oil and Gas Producing Activities" which is incorporated by reference from pages 47 through 52 of the Company's 1997 Annual Report to Stockholders. Oil and gas prices have declined from the year-end prices used in determining the Standardized Measure at December 31, 1997. Such declines may reduce the Standardized Measure at March 31, 1998, to an extent that a writedown of the Company's capitalized oil and gas costs would be required. -19- The following table sets forth estimates of the proved oil and gas reserves of the Company at December 31, 1997, as evaluated by Netherland, Sewell:
OIL (MBBLS) GAS (MMCF) ---------------------------------- --------------------------------- MBOE DEVELOPED UNDEVELOPED TOTAL DEVELOPED UNDEVELOPED TOTAL TOTAL --------- ----------- ------- --------- ----------- ------- ------- West Coast......... 40,862 10,487 51,349 94,548 11,454 106,002 69,016 Gulf Coast......... 29,278 8,283 37,561 100,452 11,686 112,138 56,251 East Texas......... 4,930 365 5,295 77,415 14,536 91,951 20,620 Mid-Continent...... 4,424 1,305 5,729 43,890 6,866 50,756 14,188 ------- ------ ------- ------- ------ ------- ------- Total U.S......... 79,494 20,440 99,934 316,305 44,542 360,847 160,075 Argentina.......... 47,806 33,845 81,651 -- -- -- 81,651 Bolivia............ 1,503 4,680 6,183 140,124 51,192 191,316 38,069 ------- ------ ------- ------- ------ ------- ------- Total Company..... 128,803 58,965 187,768 456,429 95,734 552,163 279,795 ======= ====== ======= ======= ====== ======= =======
Estimates of the Company's 1997 proved reserves set forth above have not been filed with, or included in reports to, any Federal authority or agency, other than the Securities and Exchange Commission. The Company's non-producing proved reserves are largely behind-pipe in fields which it operates. Undeveloped proved reserves are predominantly infill drilling locations and secondary recovery projects. Approximately 82 percent of the December 31, 1997, U.S. proved reserves associated with infill drilling locations are located in the Company's 30 largest U.S. fields. The reserve data set forth in this Form 10-K represent only estimates. Reserve engineering is a subjective process of estimating underground accumulations of oil and gas that cannot be measured in an exact manner. The accuracy of any reserve estimate is a function of the quality of available data and of engineering and geological interpretation and judgment. As a result, estimates of different engineers often vary. In addition, results of drilling, testing and production subsequent to the date of an estimate may justify revision of such estimate. Accordingly, reserve estimates often differ from the quantities of oil and gas that are ultimately recovered. The meaningfulness of such estimates is highly dependent upon the accuracy of the assumptions upon which they were based. For further information on reserves, costs relating to oil and gas activities and results of operations from producing activities, see "Note 11 to Consolidated Financial Statements--Supplementary Financial Information for Oil and Gas Producing Activities" which is incorporated by reference from pages 47 through 52 of the Company's 1997 Annual Report to Stockholders. PRODUCTIVE WELLS; DEVELOPED ACREAGE The following table sets forth the Company's productive wells and developed acreage assignable to such wells at December 31, 1997:
PRODUCTIVE WELLS -------------------------------------------------- DEVELOPED ACREAGE OIL GAS TOTAL ---------------------- --------------- ------------ -------------- GROSS NET GROSS NET GROSS NET GROSS NET --------- --------- ----- ----- ----- --- ----- ----- U.S.............. 666,069 407,428 2,804 2,304 1,011 474 3,815 2,778 Argentina........ 1,008,339 844,372 699 686 -- -- 699 686 Bolivia.......... 99,458 88,339 -- -- 7 6 7 6 --------- --------- ----- ----- ----- --- ----- ----- Total.......... 1,773,866 1,340,139 3,503 2,990 1,018 480 4,521 3,470 ========= ========= ===== ===== ===== === ===== =====
Productive wells consist of producing wells and wells capable of production, including gas wells awaiting pipeline connections to commence deliveries and oil wells awaiting connection to production facilities. -20- Wells which are completed in more than one producing horizon are counted as one well. Of the gross wells reported above, two had multiple completions. PRODUCTION; UNIT PRICES; COSTS The following table sets forth information with respect to production and average unit prices and costs for the periods indicated: YEARS ENDED DECEMBER 31, ------------------------------------- 1997 1996 1995 ------- ------- ------- PRODUCTION: Oil (MBbls)- U.S....................... 9,692 7,694 6,647 Argentina................. 5,630 4,245 961 Bolivia................... 135 -- -- Total..................... 15,457 11,939 7,608 Gas (MMcf)- U.S....................... 36,623 32,366 30,610 Bolivia................... 6,068 -- -- Total..................... 42,691 32,366 30,610 Total MBOE................... 22,573 17,333 12,710 AVERAGE SALES PRICES: Oil (per Bbl)- U.S....................... $ 17.23 $ 17.19(b) $ 15.44 Argentina................. 16.67(a) 15.91(b) 13.98 Bolivia................... 16.52 -- -- Total..................... 17.02(a) 16.73(b) 15.26 Gas (per Mcf)- U.S....................... 2.33 1.81 -- Bolivia................... 1.10 -- -- Total..................... 2.16 1.81 1.46 PRODUCTION COSTS (PER BOE): U.S....................... $ 5.64 $ 5.42 $ 5.24 Argentina................. 4.29 4.93 5.42 Bolivia................... 1.00 -- -- Total..................... 5.07 5.30 5.25 - -------------- (a) Reflects the impact of oil hedges which reduced the Company's 1997 Argentina and total average oil prices per Bbl by 66 cents and 24 cents, respectively. (b) Reflects the impact of oil hedges which reduced the Company's 1996 U.S., Argentina and total average oil prices per Bbl by $1.47, $2.96 and $2.00, respectively. The components of production costs may vary substantially among wells depending on the methods of recovery employed and other factors, but generally include production taxes, maintenance and repairs, labor and utilities. UNDEVELOPED ACREAGE At December 31, 1997, the Company held the following undeveloped acres located in the United States, Bolivia and Ecuador. With respect to such United States acreage held under leases, 113,438 gross -21- (44,551 net) acres are held under leases with primary terms that expire at varying dates through December 31, 2001, unless commercial production is commenced. The Bolivia and Ecuador acreage are held under concessions with primary terms that expire at varying dates in 1999 and 2000. Although substantial undeveloped acreage exists in the Company's concessions in Argentina, the concessions in their entirety are held by production. STATE/COUNTRY GROSS ACRES NET ACRES ------------- ----------- --------- California........... 8,366 7,966 Kansas............... 2,020 2,020 Louisiana............ 2,353 2,330 Mississippi.......... 40 1 Montana.............. 9,811 4,425 New Mexico........... 8,285 1,011 Oklahoma............. 30,004 12,508 Texas................ 57,490 18,595 --------- ------- Total U.S.......... 118,369 48,856 Bolivia.............. 485,552 485,552 Ecuador.............. 494,226 148,268 --------- ------- Total Company...... 1,098,147 682,676 ========= ======= DRILLING ACTIVITY During the periods indicated, the Company drilled or participated in the drilling of the following exploratory and development wells: YEARS ENDED DECEMBER 31, -------------------------------------------- 1997 1996 1995 ------------- ------------- ------------ GROSS NET GROSS NET GROSS NET ----- ----- ----- ----- ----- ----- DEVELOPMENT: United States- Productive........... 30 15.74 22 12.67 36 19.26 Non-Productive....... 3 0.80 5 2.94 5 3.49 Argentina- Productive........... 55 55.00 39 39.00 -- -- Non-Productive....... 2 2.00 2 2.00 -- -- --- ----- --- ----- --- ----- Total.............. 90 73.54 68 56.61 41 22.75 === ===== === ===== === ===== EXPLORATORY: United States- Productive........... 7 3.01 6 3.00 13 9.84 Non-Productive....... 6 2.87 7 3.12 5 2.69 Argentina- Productive........... -- -- 2 2.00 -- -- Non-Productive....... 1 1.00 1 1.00 -- -- Other International- -- -- -- -- -- -- Productive........... -- -- -- -- -- -- Non-Productive....... 1 0.42 1 1.00 -- -- --- ----- --- ----- --- ----- Total.............. 15 7.30 17 10.12 18 12.53 === ===== === ===== === ===== TOTAL: Productive............. 92 73.75 69 56.67 49 29.10 Non-Productive......... 13 7.09 16 10.06 10 6.18 --- ----- --- ----- --- ----- Total.............. 105 80.84 85 66.73 59 35.28 === ===== === ===== === ===== -22- The above well information excludes wells in which the Company has only a royalty interest. At December 31, 1997, the Company was a participant in the drilling or completion of 26 gross (20.84 net) wells. All of the Company's drilling activities are conducted with independent contractors. The Company owns no drilling equipment. SEASONALITY The results of operations of the Company are somewhat seasonal due to seasonal fluctuations in the price for gas. Gas prices have been generally higher in the fourth and first quarters. Due to these seasonal fluctuations, results of operations for individual quarterly periods may not be indicative of results which may be realized on an annual basis. COMPETITION Competition in the oil and gas industry is intense. Both in seeking to obtain and acquire desirable producing properties, new leases and exploration prospects, and in marketing oil and gas, the Company faces competition from both major and independent oil and gas companies, as well as from numerous individuals and drilling programs. Many of these competitors have financial and other resources substantially in excess of those available to the Company. Increases in worldwide energy production capability have brought about substantial surpluses in energy supplies in recent years. This, in turn, has resulted in substantial competition for markets historically served by domestic gas resources from alternative sources of energy, such as residual fuel oil, and among domestic gas suppliers. Changes in government regulations relating to the production, transportation and marketing of gas have also resulted in significant changes in the historical marketing patterns of the industry. Generally, these changes have resulted in the abandonment by many pipelines of long-term contracts for the purchase of gas, the development by gas producers of their own marketing programs to take advantage of new regulations requiring pipelines to transport gas for regulated fees, and the emergence of various types of marketing companies and other aggregators of gas supplies. As a consequence, gas prices, which were once effectively determined by government regulations, are now largely established by competition. Competitors of the Company in this market include other producers, gas pipelines and their affiliated marketing companies, independent marketers, and providers of alternate energy supplies, such as residual fuel oil. Exploration for and production of oil and gas are affected by the availability of pipe, casing and other tubular goods and certain other oil field equipment, including drilling rigs and tools. The Company is dependent upon independent drilling contractors to furnish rigs, equipment and tools to drill the wells it operates. The Company has not experienced and does not anticipate difficulty in obtaining supplies, materials, drilling rigs, equipment or tools. Higher prices for oil and gas production, however, may cause competition for these items to increase and may result in increased costs of operations. RISKS OF INTERNATIONAL OPERATIONS International investments represent approximately 43 percent of the Company's total proved reserves at December 31, 1997, and are expected to represent a significant portion of the Company's total assets in the future. The Company continues to evaluate international investment opportunities but currently has no binding agreements or commitments to make any material international acquisitions. The Company's foreign properties, operations or investments may be adversely affected by local political and economic developments, exchange controls, currency fluctuations, royalty and tax increases, retroactive tax claims, expropriation, civil unrest or war, import and export regulations and other foreign laws or policies as well as by laws and policies of the United States affecting foreign trade, taxation and investment. -23- In addition, in the event of a dispute arising from foreign operations, the Company may be subject to the exclusive jurisdiction of foreign courts or may not be successful in subjecting foreign persons to the jurisdiction of the courts in the United States. The Company may also be hindered or prevented from enforcing its rights with respect to a governmental instrumentality because of the doctrine of sovereign immunity. The Company's operations in Argentina and Bolivia are subject to various laws and regulations in those countries. These laws and regulations as currently imposed are not anticipated to have a material adverse effect upon the Company's operations. REGULATION The domestic oil and gas industry is extensively regulated by federal, state and local authorities. Legislation affecting the oil and gas industry is under constant review for amendment or expansion. Numerous departments and agencies, both federal and state, have issued rules and regulations affecting the oil and gas industry and its individual members, some of which carry substantial penalties for the failure to comply. The regulatory burden on the oil and gas industry increases its cost of doing business and, consequently, affects its profitability. Inasmuch as such laws and regulations are frequently amended or reinterpreted, the Company is unable to predict the future cost or impact of complying with such regulations. Exploration and Production. Exploration and production operations of the Company are subject to various types of regulation at the federal, state and local levels. Such regulation includes requiring permits for the drilling of wells, maintaining bonding requirements in order to drill or operate wells, and regulating the location of wells, the method of drilling and casing wells, the surface use and restoration of properties upon which wells are drilled and the plugging and abandoning of wells. The Company's operations are also subject to various conservation regulations, including regulation of the size of drilling and spacing units or proration units, the density of wells which may be drilled and the unitization or pooling of oil and gas properties. In this regard, some states allow the forced pooling or integration of lands and leases to facilitate exploration, while other states rely on voluntary pooling of lands and leases. In addition, state conservation laws establish maximum, quarterly and/or daily allowable rates of production from oil and gas wells, generally prohibit the venting or flaring of gas and impose certain requirements regarding the ratability of production. The effect of these regulations is to limit the amounts of oil and gas the Company can produce from its wells and the number of wells or the locations at which the Company can drill. Various federal, state and local laws and regulations covering the discharge of materials into the environment, or otherwise relating to the protection of the environment, may affect exploration, development and production operations of the Company. For example, the discharge or substantial threat of a discharge of oil by the Company into United States waters or onto an adjoining shoreline may subject the Company to liability under the Oil Pollution Act of 1990 and similar state laws. While liability under the Oil Pollution Act of 1990 is limited under certain circumstances, such limits are so high that the maximum liability would likely have a significant adverse effect on the Company. The Company's operations generally will be covered by insurance which the Company believes is adequate for these purposes. However, there can be no assurance that such insurance coverage will always be in force or that, if in force, it will adequately cover any losses or liability the Company may incur. The Company is also subject to laws and regulations concerning occupational safety and health. It is not anticipated that the Company will be required in the near future to expend amounts that are material in the aggregate to the Company's overall operations by reason of environmental or occupational safety and health laws and regulations, but because such laws and regulations are frequently changed, the Company is unable to predict the ultimate cost of compliance. Certain of the Company's oil and gas leases are granted by the federal government and administered by various federal agencies. Such leases require compliance with detailed federal regulations and orders which regulate, among other matters, drilling and operations on these leases and calculation of royalty payments to the federal government. The Mineral Lands Leasing Act of 1920 places limitations on the number -24- of acres under federal leases that may be owned in any one state. While subject to this law, the Company does not have a substantial federal lease acreage position in any state or in the aggregate. The Mineral Lands Leasing Act of 1920 and related regulations also may restrict a corporation from the holding of a federal onshore oil and gas lease if stock of such corporation is owned by citizens of foreign countries which are not deemed reciprocal under such Act. Reciprocity depends, in large part, on whether the laws of the foreign jurisdiction discriminate against a United States person's ownership of rights to minerals in such jurisdiction. The purchase of shares in the Company by citizens of foreign countries who are not deemed to be reciprocal under such Act could have an impact on the Company's ownership of federal leases. Marketing, Gathering and Transportation. Federal legislation and regulatory controls have historically affected the price of the gas produced and sold by the Company and the manner in which such production is marketed. Historically, the transportation and sale for resale of gas in interstate commerce have been regulated pursuant to the Natural Gas Act of 1938 (the "NGA"), the Natural Gas Policy Act of 1978 (the "NGPA") and the regulations promulgated thereunder by the Federal Energy Regulatory Commission ("FERC"). On July 26, 1989, the Natural Gas Wellhead Decontrol Act of 1989 (the "Decontrol Act") was enacted. The Decontrol Act amended the NGPA to remove as of January 1, 1993, all remaining natural gas wellhead pricing, sales, certificate and abandonment regulation of first sales that had been regulated by the FERC. Commencing in 1985, the FERC through Order Nos. 436, 500 and 636 promulgated changes that significantly affect the transportation and marketing of gas. These changes have been intended to foster competition in the gas industry by, among other things, inducing or mandating that interstate pipeline companies provide nondiscriminatory transportation services to producers, distributors, buyers and sellers of gas and other shippers (so-called "open access" requirements). The FERC has also sought to expedite the certification process for new services, facilities, and operations of those pipeline companies providing "open access" services. In 1992 the FERC issued Order 636. Among other things, Order 636 required each interstate pipeline company to "unbundle" its traditional wholesale services and create and make available on an open and nondiscriminatory basis numerous constituent services (such as gathering services, storage services, firm and interruptible transportation services, and stand-by sales services) and to adopt a new rate making methodology to determine appropriate rates for those services. Each pipeline company had to develop the specific terms of service in individual proceedings. The new rules and various pipeline compliance filings are the subject of appeals and resulting remand proceedings concerning certain issues. The Company cannot predict whether and to what extent further FERC remand proceedings and judicial review will affect these matters. Although the new regulations do not directly regulate gas producers such as the Company, the availability of non-discriminatory transportation services and the ability of pipeline customers to modify or terminate their existing purchase obligations under these regulations have greatly enhanced the ability of producers to market their gas directly to end users and local distribution companies. In this regard, access to markets through interstate gas pipelines is critical to the marketing activities of the Company. The FERC has issued a new policy regarding the use of nontraditional methods of setting rates for interstate gas pipelines in certain circumstances as alternatives to cost-of-service based rates. A number of pipelines have obtained FERC authorization to charge negotiated rates as one such alternative. Under the NGA, gas gathering facilities are generally exempt from FERC jurisdiction. Interstate transmission facilities are, on the other hand, subject to FERC jurisdiction. The FERC has historically distinguished between these types of activities on a very fact-specific basis which makes it difficult to predict with certainty the status of the Company's gathering facilities. While the FERC has not issued any order or opinion declaring the Company's facilities as gathering rather than transmission facilities, the Company believes that these systems meet the traditional tests that the FERC has used to establish a pipeline status as a gatherer. Further, while some states provide for the rate regulation of pipelines engaged in the intrastate -25- transportation of gas, such regulation has not generally been applied against gatherers of gas. The Company's gathering systems could be adversely affected should they be subjected in the future to the application of such state or federal regulation. As a result of Order 636 a number of interstate pipeline companies have (i) "spun down" their gathering systems from regulated pipeline transportation companies to unregulated affiliates, (ii) "spun-off" gathering systems to non- related entities, and/or (iii) "refunctionalized" portions of their pipeline facilities from transmission to gathering. In 1994 FERC ruled that it generally does not have jurisdiction over gathering facilities absent abuse involving the pipeline-affiliate relationship. In addition, the interstate pipeline must seek authority under Section 7(b) of the NGA to abandon certified gathering facilities and must file for authority under Section 4 of the NGA to terminate gathering service from both certified and uncertified facilities. A consequence of this divestiture of gathering facilities could be separate, and higher, gathering fees. With respect to oil pipeline rates subject to the FERC's jurisdiction, in October 1993 the FERC issued Order 561 to fulfill the requirements of Title XVIII of the Energy Policy Act of 1992. Order 561 established an indexing system, effective January 1, 1995, under which oil pipelines will be able to readily change their rates to track changes in the Producer Price Index for Finished Goods (PPI-FG), minus one percent. This index established ceiling levels for rates. Order 561 also permits cost-of-service proceedings to establish just and reasonable rates. The order does not alter the right of a pipeline to seek FERC authorization to charge market-based rates. However, until the FERC makes the finding that the pipeline does not exercise significant market power, the pipeline's rates cannot exceed the applicable index ceiling level or a level justified by the pipeline's cost of service. EMPLOYEES The Company employs approximately 210 people in its Tulsa office whose functions are associated with management, engineering, geology, land and legal, accounting, financial planning, and administration. In addition, approximately 228 full time employees are responsible for the supervision and operation of its U.S. field activities. The Company also has approximately 142 employees located in South America for the management and operation of its properties in Argentina and Bolivia. The Company believes its relations with its employees are excellent. ITEM 3. LEGAL PROCEEDINGS. On November 5, 1996, the Province of Santa Cruz, Argentina brought suit against Cadipsa in the Corte Suprema de Justicia de la Nacion (the Supreme Court of Justice of the Argentine Republic, Buenos Aires, Argentina), Dossier No. s- 1451, seeking to recover approximately $10.6 million (which sum includes interest) allegedly due as additional royalties on four concessions granted in 1990 in which the Company currently owns a 100 percent working interest. The Company and its predecessors in title have been paying royalties at an eight percent rate; the Province of Santa Cruz claims the rate should be 12 percent. The amount of such claim will increase at the differential of these royalty rates until this claim is resolved. With respect to the 50 percent interest in the two concessions that the Company acquired from British Gas, plc, the Company believes that it is entitled to indemnification by British Gas, plc for any loss sustained by the Company as a result of this claim. Such indemnification equals approximately $4.4 million of the current $15.1 million claim. The Company has no indemnification from its predecessors in title with respect to the payment of royalties on the other two concessions. Although the Company cannot predict the outcome of this litigation, based upon the advice of counsel, the Company does not expect this claim to have a material adverse impact on the Company's financial position or results of operations. On April 4, 1997, Mr. Patrick I. Chapman of Hockley, Texas, former Vice President-Marketing for the Company, sued the Company in the United States District Court for the Southern District of Texas, alleging actual and exemplary damages for breach of his employment contract with the Company and fraud. The case -26- was transferred to the United States District Court for the Northern District of Oklahoma on the motion of the Company. On February 26, 1998, this action was settled by the parties. The settlement consisted of the purchase by the Company of Mr. Chapman's interest in assets jointly owned by Mr. Chapman and the Company for an amount that was less than the total of the fair market value of the assets plus the costs of litigating this matter further. The Company is also a named defendant in other lawsuits and is a party in governmental proceedings from time to time arising in the ordinary course of business. While the outcome of such other lawsuits or proceedings against the Company cannot be predicted with certainty, management does not expect these matters to have a material adverse effect on the Company's financial position or results of operations. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS. There were no matters submitted to the Company's stockholders during the fourth quarter of the fiscal year ended December 31, 1997. ITEM 4A. EXECUTIVE OFFICERS OF THE REGISTRANT. The following table sets forth certain information regarding the executive officers of the Company. Officers are elected annually by the Board of Directors and serve at its discretion.
NAME AGE POSITION - --------------------------- --- ---------------------------------------------------- Charles C. Stephenson, Jr.. 61 Director and Chairman of the Board of Directors Jo Bob Hille............... 56 Director and Vice Chairman of the Board of Directors S. Craig George............ 45 Director, President and Chief Executive Officer William L. Abernathy....... 46 Executive Vice President and Chief Operating Officer William C. Barnes.......... 43 Director, Executive Vice President, Chief Financial Officer, Treasurer and Secretary William E. Dozier.......... 45 Senior Vice President--Operations Robert W. Cox.............. 52 Vice President--General Counsel Andy R. Lowe............... 46 Vice President--Marketing Michael F. Meimerstorf..... 41 Vice President and Controller Robert E. Phaneuf.......... 51 Vice President--Corporate Development Barry D. Quackenbush....... 56 Vice President--Production Larry W. Sheppard.......... 43 Vice President--International Martin L. Thalken.......... 37 Vice President--Acquisitions
Mr. Stephenson, a co-founder of the Company, has been a Director since June 1983 and Chairman of the Board of Directors of the Company since April 1987. He was also Chief Executive Officer of the Company from April 1987 to March 1994 and President of the Company from June 1983 to May 1990. From October 1974 to March 1983, he was President of Santa Fe-Andover Oil Company (formerly Andover Oil Company), an independent oil and gas company ("Andover"), and from January 1973 to October 1974, he was Vice President of Andover. Mr. Stephenson also serves as a Director of AAON, Inc. Mr. Stephenson has a B.S. Degree in Petroleum Engineering from the University of Oklahoma, and has approximately 38 years of oil and gas experience. Mr. Hille, the other co-founder of the Company, has been a Director since June 1983 and Vice Chairman of the Board of Directors of the Company since September 1995. He was also President of the Company from May 1990 to September 1995, Chief Executive Officer of the Company from March 1994 to December 1997, Chief Operating Officer of the Company from April 1987 to March 1994, Executive Vice -27- President of the Company from June 1983 to May 1990 and Treasurer and Secretary of the Company from June 1983 to April 1987. From August 1972 to March 1983, Mr. Hille was employed by Andover where he served at various times primarily as Executive Vice President and Vice President--Operations. Mr. Hille has a B.S. Degree in Petroleum Engineering from the University of Tulsa, and has approximately 32 years of oil and gas experience. Mr. George has been a Director since October 1991, President of the Company since September 1995 and Chief Executive Officer of the Company since December 1997. He was also Chief Operating Officer of the Company from March 1994 to December 1997, an Executive Vice President of the Company from March 1994 to September 1995 and a Senior Vice President of the Company from October 1991 to March 1994. From April 1991 to October 1991, Mr. George was Vice President of Operations and International with Santa Fe Minerals, Inc., an independent oil and gas company ("Santa Fe Minerals"). From May 1981 to March 1991, he served in various other management and executive capacities with Santa Fe Minerals and its subsidiary, Andover. From December 1974 to April 1981, Mr. George held various management and engineering positions with Amoco Production Company. He has a B.S. Degree in Mechanical Engineering from the University of Missouri-Rolla. Mr. Abernathy has been an Executive Vice President and Chief Operating Officer of the Company since December 1997. He was Senior Vice President-- Acquisitions of the Company from March 1994 to December 1997, Vice President-- Acquisitions of the Company from May 1990 to March 1994 and Manager-- Acquisitions of the Company from June 1987 to May 1990. From June 1976 to June 1987, Mr. Abernathy was employed by Exxon Company USA, where he served at various times as Senior Staff Engineer, Senior Supervising Engineer and in other engineering capacities, with assignments in drilling, production and reservoir engineering in the Gulf Coast and offshore. He has B.S. and M.S. Degrees in Mechanical Engineering from Auburn University. Mr. Barnes, a certified public accountant, has been a Director, Treasurer and Secretary of the Company since April 1987, an Executive Vice President of the Company since March 1994 and Chief Financial Officer of the Company since May 1990. He was also a Senior Vice President of the Company from May 1990 to March 1994 and Vice President--Finance of the Company from January 1984 to May 1990. From November 1982 to December 1983, Mr. Barnes was an audit manager for Arthur Andersen & Co., an independent public accounting firm, where he dealt primarily with clients in the oil and gas industry. He was Assistant Controller- - -Finance of Andover from December 1980 to November 1982. From June 1976 to December 1980, he was an auditor with Arthur Andersen & Co., where he dealt primarily with clients in the oil and gas industry. Mr. Barnes has a B.S. Degree in Business Administration from Oklahoma State University. Mr. Dozier has been Senior Vice President--Operations of the Company since December 1997. He was Vice President--Operations of the Company from May 1992 to December 1997. From June 1983 to April 1992, he was employed by Santa Fe Minerals where he held various engineering and management positions serving most recently as Manager of Operations Engineering. From January 1975 to May 1983, he was employed by Amoco Production Company serving in various positions where he worked on all phases of production, reservoir evaluations, drilling and completions in the Mid-Continent and Gulf Coast areas. He has a B.S. Degree in Petroleum Engineering from the University of Texas. Mr. Cox has been Vice President--General Counsel of the Company since March 1988. From August 1982 to March 1988, he was employed by Santa Fe Minerals and its subsidiary, Andover, where he served at various times as Vice President--Law and Regional Attorney. From April 1982 to August 1982, he was employed as Corporate Attorney by Andover. Prior to that time, Mr. Cox was employed by Amerada Hess Corporation, a major oil company, served as General Counsel and Secretary of Kissinger Petroleum Corporation, an independent oil and gas company, and served on the legal staff of Champlin Petroleum Company, an independent oil and gas company. He has a B.S. Degree in Business Administration with a -28- major in Petroleum Marketing from the University of Tulsa, and a Juris Doctor from the University of Michigan Law School. Mr. Lowe has been Vice President--Marketing of the Company since December 1997. He was General Manager--Marketing of the Company from July 1992 to December 1997. From September 1983 to November 1990, he was employed by Maxus Energy Corporation, formerly Diamond Shamrock Exploration Company, serving as Manager--Marketing and in various other management and supervisory capacities. From 1981 to October 1983, he was employed by American Quasar Exploration Company as Manager--Oil and Gas Marketing. From 1978 to 1981, he was employed by Texas Pacific Oil Company serving in various positions in production and marketing. He has a B.S. Degree in Education from Texas Tech University. Mr. Meimerstorf, a certified public accountant, has been Controller of the Company since January 1988 and a Vice President of the Company since May 1990. He was Accounting Manager of the Company from February 1984 to January 1988. From April 1981 to February 1984, he was the Financial Reporting Supervisor for Andover. From June 1979 to April 1981, he was an auditor with Arthur Andersen & Co. He has a B.S. Degree in Accounting from Arkansas Tech University and an M.B.A. Degree from the University of Arkansas. Mr. Phaneuf has been Vice President--Corporate Development of the Company since October 1995. From June 1995 to October 1995, he was employed in the Corporate Finance Group of Arthur Andersen LLP, specializing in energy industry corporate finance activities. From April 1993 to August 1994, he was Senior Vice President and head of the Energy Research Group at Kemper Securities, an investment banking firm. From 1988 until April 1993, he was employed by Rauscher, Pierce Refsnes, Inc., an investment banking firm, as a Senior Vice President, serving as an energy analyst involved in equity research. From 1978 to 1988, Mr. Phaneuf was Vice President of Kidder, Peabody, & Co., an investment banking firm, serving as an energy analyst in the Research Department. From 1976 to 1978, he was employed by Schneider, Bernet, and Hickman, serving as an energy analyst in the Research Department. From 1972 to 1976, he held the position of Investment Advisor for First International Investment Management, a subsidiary of NationsBank. He holds a B.A. Degree in Psychology and an M.B.A. Degree from the University of Texas. Mr. Quackenbush has been Vice President--Production of the Company since May 1990. He was Manager--Production of the Company from November 1989 to May 1990. From May 1970 to July 1989, Mr. Quackenbush was employed by Tenneco Oil Co., an oil and gas company, where he served as Acquisition Manager and in various engineering positions. He has a B.S. Degree in Petroleum Engineering from the Colorado School of Mines. Mr. Sheppard has been Vice President--International of the Company since November 1994. From June 1984 to August 1994, he was employed by Santa Fe Minerals serving as Manager--Acquisitions & Special Projects, Manager-- International Operations, and in various other management and supervisory capacities. From August 1977 to June 1984, he was employed by Amoco Production Company serving in various engineering and supervisory capacities. He has a B.S. Degree in Petroleum Engineering from Texas Tech University. Mr. Thalken has been Vice President--Acquisitions of the Company since December 1997. He was Acquisitions Technical Manager of the Company from May 1995 to December 1997 and an acquisitions engineer with the Company from January 1992 to May 1995. From October 1990 to December 1991, he was employed by Enron Oil and Gas Company, serving as a production engineer. From May 1983 to September 1990, he was employed by Exxon Company, USA, in various engineering and supervisory capacities. He has a B.S. Degree in Mechanical Engineering from Kansas University. -29- PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS. The information required by this Item is incorporated by reference from the sections on page 54 of the Company's 1997 Annual Report to Stockholders entitled "Stock Price Information," "Dividend Policy" and "Number of Stockholders." ITEM 6. SELECTED FINANCIAL DATA. The information required by this Item is incorporated by reference from page 28 of the Company's 1997 Annual Report to Stockholders. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. The information required by this Item is incorporated by reference from pages 29 through 33 of the Company's 1997 Annual Report to Stockholders. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. Not applicable. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. The information required by this Item is incorporated by reference from pages 34 through 53 of the Company's 1997 Annual Report to Stockholders. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. None. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT. The information required by this Item with respect to the Company's directors is incorporated by reference from the sections of the Company's definitive Proxy Statement for its 1998 Annual Meeting of Stockholders (the "Proxy Statement") entitled "Election of Directors" and "Section 16(a) Beneficial Ownership Reporting Compliance." The information required by this Item with respect to the Company's executive officers appears at Item 4A of Part I of this Form 10-K. ITEM 11. EXECUTIVE COMPENSATION. The information required by this Item is incorporated by reference from the section of the Proxy Statement entitled "Executive Compensation." ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. The information required by this Item is incorporated by reference from the section of the Proxy Statement entitled "Principal Stockholders and Security Ownership of Management." -30- ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. The information required by this Item is incorporated by reference from the section of the Proxy Statement entitled "Certain Transactions." PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K. (a) (1) Financial Statements: The financial statements of the Company and its subsidiaries and report of independent public accountants listed below are incorporated by reference from the following pages of the Company's 1997 Annual Report to Stockholders: Annual Report Page ------------- Consolidated Balance Sheets as of December 31, 1997 and 1996..... 34 Consolidated Statements of Income for the years ended December 31, 1997, 1996 and 1995................................ 35 Consolidated Statements of Changes in Stockholders' Equity for the years ended December 31, 1997, 1996 and 1995............ 36 Consolidated Statements of Cash Flows for the years ended December 31, 1997, 1996 and 1995................................ 37 Notes to Consolidated Financial Statements for the years ended December 31, 1997, 1996 and 1995 ............................... 38 through 52 Report of Independent Public Accountants......................... 53 (2) Financial Statement Schedules: All schedules are omitted as inapplicable or because the required information is contained in the financial statements or included in the notes thereto. (3) Exhibits: The following documents are included as exhibits to this Form 10-K. 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. 3.1 Restated Certificate of Incorporation, as amended, of the Company (Filed as Exhibit 3.2 to the Company's report on Form 10-Q for the quarter ended June 30, 1997, filed August 13, 1997). 3.2 Restated By-laws of the Company (Filed as Exhibit 3.2 to the Company's Registration Statement on Form S-1, Registration No. 33-35289 (the "S-1 Registration Statement")). 4.1 Form of stock certificate for Common Stock, par value $.005 per share (Filed as Exhibit 4.1 to the S-1 Registration Statement). 4.2 Indenture dated as of December 20, 1995, between Chemical Bank, as Trustee, and the Company (Filed as Exhibit 99.1 to the Company's report on Form 8-K filed January 16, 1996). -31- 4.3 Indenture dated as February 5, 1997, between The Chase Manhattan Bank, as Trustee, and the Company (Filed as Exhibit 4.3 to the Company's report on Form 10-K for the year ended December 31, 1996, filed March 27, 1997). 10.1* Employment and Noncompetition Agreement dated January 7, 1987, between the Company and Charles C. Stephenson, Jr. (Filed as Exhibit 10.19 to the S-1 Registration Statement). 10.2* Employment and Noncompetition Agreement dated January 7, 1987, between the Company and Jo Bob Hille (Filed as Exhibit 10.20 to the S-1 Registration Statement). 10.3* Form of Indemnification Agreement between the Company and certain of its officers and directors (Filed as Exhibit 10.23 to the S-1 Registration Statement). 10.4* Vintage Petroleum, Inc. 1990 Stock Plan (Filed as Exhibit 4(d) to the Company's Registration Statement on Form S-8, Registration No. 33-37505). 10.5* Amendment No. 1 to Vintage Petroleum, Inc. 1990 Stock Plan, effective January 1, 1991 (Filed as Exhibit 10.15 to the Company's report on Form 10-K for the year ended December 31, 1991, filed March 30, 1992). 10.6* Amendment No. 2 to Vintage Petroleum, Inc. 1990 Stock Plan dated February 24, 1994 (Filed as Exhibit 10.15 to the Company's report on Form 10-K for the year ended December 31, 1993, filed March 29, 1994). 10.7* Amendment No. 3 to Vintage Petroleum, Inc. 1990 Stock Plan dated March 15, 1996 (Filed as Exhibit A to the Company's Proxy Statement for Annual Meeting of Stockholders dated April 1, 1996). 10.8* Vintage Petroleum, Inc. 401(k) Plan (Filed as Exhibit 4(c) to the Company's Registration Statement on Form S-8, Registration No. 33-55706). 10.9* Vintage Petroleum, Inc. Non-Management Director Stock Option Plan (Filed as Exhibit 10.18 to the Company's report on Form 10-K for the year ended December 31, 1992, filed March 31, 1993 (the "1992 Form 10-K")). 10.10* Form of Incentive Stock Option Agreement under the Vintage Petroleum, Inc. 1990 Stock Plan (Filed as Exhibit 10.20 to the Company's report on Form 10-K for the year ended December 31, 1990, filed April 1, 1991). 10.11* Form of Non-Qualified Stock Option Agreement under the Vintage Petroleum, Inc. 1990 Stock Plan (Filed as Exhibit 10.20 to the 1992 Form 10-K). 10.12 Amended and Restated Credit Agreement dated December 8, 1997, among the Company, as borrower, certain commercial lending institutions, as lenders, and Bank of Montreal, as agent. 10.13 Purchase and Sale Agreement dated as of February 12, 1997, among the Company, Burlington Resources Oil & Gas Company and Glacier Park Company, and Amendments thereto dated March 11, 1997, and March 20, 1997 (filed as Exhibit 2 to the Company's report on Form 8-K filed April 16, 1997). 13. Portions of the Company's 1997 Annual Report to Stockholders. -32- 21. Subsidiaries of the Company. 23.1 Consent of Arthur Andersen LLP. 23.2 Consent of Netherland, Sewell & Associates, Inc. 27.1 Financial Data Schedule for fiscal 1997. 27.2 Restated Financial Data Schedule for fiscal 1997 interim periods. 27.3 Restated Financial Data Schedule for fiscal 1996 and fiscal 1996 interim periods. 99.1 Letter of Netherland, Sewell & Associates, Inc. dated March 18, 1998, regarding U.S. oil and gas reserve information. 99.2 Letter of Netherland, Sewell & Associates, Inc. dated March 19, 1998, regarding South American oil and gas reserve information. ____________________ * Management contract or compensatory plan or arrangement. (b) Reports on Form 8-K. Form 8-K was filed October 16, 1997, to report under Item 5 (a) the Company's two-for-one common stock split effected on October 7, 1997, and (b) certain pro forma financial information of the Company. No other reports on Form 8-K were filed during the fourth quarter of the fiscal year ended December 31, 1997. -33- SIGNATURES 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, thereunto duly authorized. VINTAGE PETROLEUM, INC. Date: March 27, 1998 By: /s/ C. C. Stephenson, Jr. ---------------------------- C. C. Stephenson, Jr. Chairman of the Board 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 and on the dates indicated: SIGNATURE TITLE DATE --------- ----- ---- /s/ C. C. Stephenson, Jr. Director and Chairman March 27, 1998 - ---------------------------- of the Board C. C. Stephenson, Jr. /s/ Jo Bob Hille Director and Vice March 27, 1998 - ---------------------------- Chairman of the Board Jo Bob Hille /s/ S. Craig George Director, President and March 27, 1998 - --------------------------- Chief Executive Officer S. Craig George (Principal Executive Officer) /s/ William C. Barnes Director, Executive Vice March 27, 1998 - ---------------------------- President, Chief Financial William C. Barnes Officer and Treasurer (Principal Financial Officer) /s/ Bryan H. Lawrence Director March 27, 1998 - ---------------------------- Bryan H. Lawrence /s/ John T. McNabb, II Director March 27, 1998 - ---------------------------- John T. McNabb, II /s/ Michael F. Meimerstorf Vice President and Controller March 27, 1998 - ---------------------------- (Principal Accounting Officer) Michael F. Meimerstorf -34- INDEX TO EXHIBITS The following documents are included as exhibits to this Form 10-K. 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 ------ ----------- 3.1 Restated Certificate of Incorporation, as amended, of the Company (Filed as Exhibit 3.2 to the Company's report on Form 10-Q for the quarter ended June 30, 1997, filed August 13, 1997). 3.2 Restated By-laws of the Company (Filed as Exhibit 3.2 to the Company's Registration Statement on Form S-1, Registration No. 33-35289 (the "S-1 Registration Statement")). 4.1 Form of stock certificate for Common Stock, par value $.005 per share (Filed as Exhibit 4.1 to the S-1 Registration Statement). 4.2 Indenture dated as of December 20, 1995, between Chemical Bank, as Trustee, and the Company (Filed as Exhibit 99.1 to the Company's report on Form 8-K filed January 16, 1996). 4.3 Indenture dated as February 5, 1997, between The Chase Manhattan Bank, as Trustee, and the Company (Filed as Exhibit 4.3 to the Company's report on Form 10-K for the year ended December 31, 1996, filed March 27, 1997). 10.1* Employment and Noncompetition Agreement dated January 7, 1987, between the Company and Charles C. Stephenson, Jr. (Filed as Exhibit 10.19 to the S-1 Registration Statement). 10.2* Employment and Noncompetition Agreement dated January 7, 1987, between the Company and Jo Bob Hille (Filed as Exhibit 10.20 to the S-1 Registration Statement). 10.3* Form of Indemnification Agreement between the Company and certain of its officers and directors (Filed as Exhibit 10.23 to the S-1 Registration Statement) . 10.4* Vintage Petroleum, Inc. 1990 Stock Plan (Filed as Exhibit 4(d) to the Company's Registration Statement on Form S-8, Registration No. 33-37505). 10.5* Amendment No. 1 to Vintage Petroleum, Inc. 1990 Stock Plan, effective January 1, 1991 (Filed as Exhibit 10.15 to the Company's report on Form 10-K for the year ended December 31, 1991, filed March 30, 1992). 10.6* Amendment No. 2 to Vintage Petroleum, Inc. 1990 Stock Plan dated February 24, 1994 (Filed as Exhibit 10.15 to the Company's report on Form 10-K for the year ended December 31, 1993, filed March 29, 1994). 10.7* Amendment No. 3 to Vintage Petroleum, Inc. 1990 Stock Plan dated March 15, 1996 (Filed as Exhibit A to the Company's Proxy Statement for Annual Meeting of Stockholders dated April 1, 1996). 10.8* Vintage Petroleum, Inc. 401(k) Plan (Filed as Exhibit 4(c) to the Company's Registration Statement on Form S-8, Registration No. 33-55706). 10.9* Vintage Petroleum, Inc. Non-Management Director Stock Option Plan (Filed as Exhibit 10.18 to the Company's report on Form 10-K for the year ended December 31, 1992, filed March 31, 1993 (the "1992 Form 10-K")). 10.10* Form of Incentive Stock Option Agreement under the Vintage Petroleum, Inc. 1990 Stock Plan (Filed as Exhibit 10.20 to the Company's report on Form 10-K for the year ended December 31, 1990, filed April 1, 1991). 10.11* Form of Non-Qualified Stock Option Agreement under the Vintage Petroleum, Inc. 1990 Stock Plan (Filed as Exhibit 10.20 to the 1992 Form 10-K). 10.12 Amended and Restated Credit Agreement dated December 8, 1997, among the Company, as borrower, certain commercial lending institutions, as lenders, and Bank of Montreal, as agent. 10.13 Purchase and Sale Agreement dated as of February 12, 1997, among the Company, Burlington Resources Oil & Gas Company and Glacier Park Company, and Amendments thereto dated March 11, 1997, and March 20, 1997 (filed as Exhibit 2 to the Company's report on Form 8-K filed April 16, 1997). 13. Portions of the Company's 1997 Annual Report to Stockholders. 21. Subsidiaries of the Company. 23.1 Consent of Arthur Andersen LLP. 23.2 Consent of Netherland, Sewell & Associates, Inc. 27.1 Financial Data Schedule for fiscal 1997. 27.2 Restated Financial Data Schedule for fiscal 1997 interim periods. 27.3 Restated Financial Data Schedule for fiscal 1996 and fiscal 1996 interim periods. 99.1 Letter of Netherland, Sewell & Associates, Inc. dated March 18, 1998, regarding U.S. oil and gas reserve information. 99.2 Letter of Netherland, Sewell & Associates, Inc. dated March 19, 1998, regarding South American oil and gas reserve information. _____________________ * Management contract or compensatory plan or arrangement. EX-10.12 2 AMENDED AND RESTATED CREDIT AGREEMENT EXHIBIT 10.12 U.S. $500,000,000 AMENDED AND RESTATED CREDIT AGREEMENT, dated as of December 8, 1997 among VINTAGE PETROLEUM, INC., as the Borrower, and CERTAIN COMMERCIAL LENDING INSTITUTIONS, as the Lenders, and BANK OF MONTREAL, acting through certain U.S. branches or agencies, as the Agent for the Lenders. TABLE OF CONTENTS ----------------- PAGE I DEFINITIONS AND ACCOUNTING TERMS...................... 2 1.1. Defined Terms................................ 2 1.2. Use of Defined Terms......................... 17 1.3. Cross-References............................. 17 1.4. Accounting and Financial Determinations...... 17 II COMMITMENTS, BORROWING PROCEDURES AND NOTES............ 18 2.1. Commitments................................... 18 2.1.1. Revolving Loan Commitment..................... 18 2.1.2. Term Loan Commitment.......................... 18 2.1.3. Commitment to Issue Letters of Credit......... 18 2.1.4. Lenders Not Permitted or Required To Make Loans or Issue or Participate in Letters of Credit Under Certain Circumstances......... 19 2.2. Termination and Reduction of Commitment Amounts....................................... 19 2.2.1. Optional...................................... 19 2.2.2. Mandatory as to Revolving Loans............... 19 2.2.3. Mandatory as to Term Loans.................... 20 2.3. Borrowing Procedure........................... 20 2.4. Continuation and Conversion Elections......... 20 2.5. Funding....................................... 21 2.6. Notes......................................... 21 2.7. Determination of the Borrowing Base........... 21 2.7.1. Annual Scheduled Determinations of the Borrowing Base................................ 21 2.7.2. Semi-Annual Scheduled Determination of the Borrowing Base................................ 22 2.7.3. Discretionary Determination of the Borrowing Base................................ 23 2.7.4. Reduction of the Borrowing Base Upon Sales of Oil and Gas Properties..................... 23 2.8. Letters of Credit............................. 23 2.8.1. Issuance Requests............................. 23 2.8.2. Issuances..................................... 23 2.8.3. Aggregate Amount Available Under Letters of Credit..................................... 23 2.8.4. Other Lenders' Participation.................. 24 2.8.5. Disbursements................................. 25 2.8.6. Reimbursement................................. 25 2.8.7. Deemed Disbursements.......................... 26 2.8.8. Nature of Reimbursement Obligations........... 27 2.8.9. Increased Costs; Indemnity.................... 27 2.8.10. Letter of Credit Collateral Account........... 28 i TABLE OF CONTENTS (CONTINUED) PAGE ---- III REPAYMENTS, PREPAYMENTS, INTEREST AND FEES............. 29 3.1. Repayments and Prepayments.................... 29 3.1.1. Repayments.................................... 29 3.1.2. Mandatory Prepayments on Loans................ 29 3.1.3. Repayment Upon Acceleration................... 30 3.1.4. Voluntary Repayments.......................... 30 3.2. Interest Provisions........................... 31 3.2.1. Rates......................................... 31 3.2.2. Post-Maturity Rates........................... 32 3.2.3. Payment Dates................................. 32 3.3. Fees.......................................... 32 3.3.1. Commitment Fee................................ 32 3.3.2. Agent's Fee................................... 33 3.3.3. Letter of Credit Face Amount Fee.............. 33 IV CERTAIN LIBO RATE AND OTHER PROVISIONS................. 33 4.1. If LIBO Rate Lending Unlawful................. 33 4.2. If Deposits Unavailable....................... 33 4.3. Increased LIBO Rate Loan Costs, etc........... 34 4.4. Funding Losses................................ 34 4.5. Increased Capital Costs....................... 34 4.6. Taxes......................................... 35 4.7. Payments, Computations, etc................... 36 4.8. Sharing of Payments........................... 36 4.9. Setoff........................................ 37 4.10. Use of Proceeds............................... 37 V CONDITIONS TO BORROWING................................ 37 5.1. Continuation of Original Loans; Initial Borrowing............................. 37 5.1.1. Resolutions, etc.............................. 38 5.1.2. Delivery of Notes............................. 38 5.1.3. [Reserved].................................... 38 5.1.4. Compliance with Representations and Warranties.................................... 38 5.1.5. Opinions of Counsel........................... 38 5.1.6. Closing Fees, Expenses, etc................... 38 5.2. Conditions Precedent to Revolving Loans....... 38 5.2.1. Compliance with Warranties, No Default, etc... 38 5.2.2. Borrowing Request............................. 39 5.2.3. Satisfactory Legal Form....................... 39 5.3. Conditions Precedent to the Making of the Term Loans.................................... 39 ii TABLE OF CONTENTS (CONTINUED) PAGE ---- VI REPRESENTATIONS AND WARRANTIES......................... 40 6.1. Organization, etc............................. 40 6.2. Due Authorization, Non-Contravention, etc..... 40 6.3. Government Approval, Regulation, etc.......... 40 6.4. Validity, etc................................. 41 6.5. Financial Information......................... 41 6.6. No Material Adverse Change.................... 41 6.7. Litigation, Labor Controversies, etc.......... 41 6.8. Subsidiaries.................................. 41 6.9. Ownership of Properties....................... 41 6.10. Taxes......................................... 42 6.11. Pension and Welfare Plans..................... 42 6.12. Environmental Warranties...................... 42 6.13. Regulations G, U and X........................ 43 6.14. Accuracy of Information....................... 43 6.15. No Default.................................... 44 6.16. No Violation of Applicable Law................ 44 6.17. Permits ...................................... 44 VII COVENANTS.............................................. 45 7.1. Affirmative Covenants......................... 45 7.1.1. Financial Information, Reports, Notices, etc.................................. 45 7.1.2. Compliance with Laws, etc..................... 46 7.1.3. Maintenance of Properties..................... 46 7.1.4. Insurance..................................... 47 7.1.5. Books and Records............................. 47 7.1.6. Environmental Covenant........................ 47 7.1.7. Employee Benefit Plans........................ 47 7.1.8. Designated Senior Indebtedness................ 48 7.2. Negative Covenants............................ 48 7.2.1. Business Activities........................... 48 7.2.2. Indebtedness.................................. 48 7.2.3. Liens......................................... 49 7.2.4. Financial Condition........................... 50 7.2.5. Take or Pay Contracts......................... 50 7.2.6. Consolidation, Merger, etc.................... 50 7.2.7. Asset Dispositions, etc....................... 51 7.2.8. Guaranties, Loans or Advances................. 51 7.2.9. Other Agreements.............................. 52 7.2.10. Transactions with Affiliates.................. 52 7.2.11. Negative Pledges, Restrictive Agreements, etc........................................... 52 7.2.12. Investment in Subsidiaries.................... 53 iii TABLE OF CONTENTS (CONTINUED) PAGE ---- VIII EVENTS OF DEFAULT...................................... 53 8.1. Listing of Events of Default.................. 53 8.1.1. Non-Payment of Obligations.................... 53 8.1.2. Breach of Warranty............................ 53 8.1.3. Non-Performance of Certain Covenants and Obligations............................... 54 8.1.4. Non-Performance of Other Covenants and Obligations................................... 54 8.1.5. Default on Other Indebtedness................. 54 8.1.6. Other Material Obligations.................... 54 8.1.7. Judgments..................................... 54 8.1.8. Pension Plans................................. 54 8.1.9. Bankruptcy, Insolvency, etc................... 55 8.1.10. Change of Control............................. 55 8.2. Action if Bankruptcy.......................... 55 8.3. Action if Other Event of Default.............. 56 IX THE AGENT.............................................. 56 9.1. Actions....................................... 56 9.2. Funding Reliance, etc......................... 57 9.3. Exculpation................................... 57 9.4. Successor..................................... 57 9.5. Loans by Bank of Montreal..................... 58 9.6. Credit Decisions.............................. 58 9.7. Copies, etc. ................................. 58 X MISCELLANEOUS PROVISIONS............................... 59 10.1. Waivers, Amendments, etc...................... 59 10.2. Notices....................................... 59 10.3. Payment of Costs and Expenses................. 60 10.4. Indemnification............................... 60 10.5. Survival...................................... 61 10.6. Severability.................................. 61 10.7. Headings...................................... 61 10.8. Execution in Counterparts, Effectiveness, etc........................................... 61 10.9. Governing Law; Entire Agreement............... 61 10.10. Successors and Assigns........................ 62 10.11. Sale and Transfer of Loans and Notes; Participations in Loans and Notes............. 62 10.11.1. Assignments................................... 62 10.11.2. Participations................................ 63 10.12. Other Transactions............................ 64 10.13. Sale and Purchase of Loans.................... 64 10.14. Forum Selection and Consent to Jurisdiction... 65 10.15. Waiver of Jury Trial.......................... 66 iv SCHEDULE I - Disclosure Schedule* EXHIBIT A - Form of Note EXHIBIT B - Form of Borrowing Request EXHIBIT C - Form of Continuation/Conversion Notice EXHIBIT D - Form of Lender Assignment Agreement EXHIBIT E-1 - Form of Opinion of Counsel to the Borrower* EXHIBIT E-2 - Form of Opinion of Counsel to the Borrower* EXHIBIT F-1 - Commitments* EXHIBIT F-2 - Schedule of Outstandings and Commitments* EXHIBIT G - Form of Issuance Request EXHIBIT H - Exxon Properties* - --------------------- * Omitted. The Registrant agrees to furnish supplementally a copy of any such omitted schedules or exhibits to the Securities and Exchange Commission upon its request. v THIS AMENDED AND RESTATED CREDIT AGREEMENT, dated as of December 8, 1997, among VINTAGE PETROLEUM, INC., a Delaware corporation (the "Borrower"), the various financial institutions as are or may become parties hereto (collectively, the "Lenders"), and BANK OF MONTREAL, acting through certain of its U.S. branches or agencies ("Bank of Montreal"), as agent (the "Agent") for the Lenders. W I T N E S S E T H: WHEREAS, the Borrower is engaged directly and through its various Subsidiaries in the businesses of exploration for and production of oil and gas, oil and gas gathering and marketing, and related activities; and WHEREAS, the Borrower, various financial institutions (the "Original Lenders") and Bank of Montreal in its capacity as Agent, heretofore entered into a Credit Agreement dated as of August 29, 1996 (such agreement, as previously amended, the "Original Credit Agreement") pursuant to which the lenders party to the Original Credit Agreement agreed to make loans (therein referred to as the "Original Loans") to the Borrower; and WHEREAS, the Borrower would like to obtain Commitments from the Lenders pursuant to which Revolving Loans and Term Loans, in a maximum aggregate principal amount at any one time outstanding not to exceed the amounts hereinafter provided, will be made to the Borrower from time to time prior to the applicable Commitment Termination Dates for such Commitments; and WHEREAS, the Lenders are willing, on the terms and subject to the conditions hereinafter set forth (including Article V), to extend such Commitments and make such Loans to the Borrower; and WHEREAS, the proceeds of such Loans will be used (a) for acquisitions of oil and gas properties, gathering systems and related assets; and (b) for general corporate purposes and working capital purposes of the Borrower and its Subsidiaries; and WHEREAS, certain financial institutions not previously a party to the Original Credit Agreement intend to become a party to the credit facilities extended to the Borrower as more fully described in the next succeeding paragraph; and WHEREAS, the Borrower has requested that the Lenders, and the Lenders have agreed to, restructure, rearrange, renew, extend and refinance all indebtedness evidenced by and outstanding under the Original Credit Agreement as of the Effective Date (the "Prior Indebtedness") into obligations and commitments hereunder; and WHEREAS, as part of the restructuring and rearranging of the Prior Indebtedness, the Lenders shall modify their respective commitments under the Original Credit Agreement such that on the Effective Date each Lender shall be obligated hereunder, subject to the terms hereof, to the Commitment stated on Schedule F-1 for such Lender; and WHEREAS, any loans outstanding under the Original Credit Agreement on the Effective Date bearing interest at a LIBO Rate (as defined therein) shall be deemed continued as Loans under this Agreement at such LIBO Rate and for the Interest Period with respect thereto under the Original Credit Agreement; and WHEREAS, the Borrower, the Lenders, and the Agent intend to amend and restate the Original Credit Agreement in its entirety as hereinafter set forth; and WHEREAS, the parties hereto intend that upon the effectiveness hereof pursuant to Article V, the Commitments, outstanding Notes, and Loans under the Original Credit Agreement shall become Commitments, Notes, and Loans, respectively, hereunder and interest accrued on the Loans and Commitment fees accrued under the Original Credit Agreement through the effective date hereof shall be deemed due and payable hereunder. NOW, THEREFORE, in consideration of the premises and mutual covenants herein contained the parties hereto hereby agree as follows: ARTICLE I DEFINITIONS AND ACCOUNTING TERMS SECTION 1.1. Defined Terms. The following terms (whether or not underscored) when used in this Agreement, including its preamble and recitals, shall, except where the context otherwise requires, have the following meanings (such meanings to be equally applicable to the singular and plural forms thereof): "Acquisition" means any transaction, or any series of related transactions, consummated after the date of this Agreement, by which the Borrower or any of the Subsidiaries (i) acquires any going business or all or substantially all of the assets of any firm, corporation or division thereof, whether through purchase of assets or otherwise or (ii) directly or indirectly acquires (in one transaction or as the most recent transaction in a series of transactions) at least a controlling interest of the ownership of a Person. "Affiliate" of any Person means any other Person which, directly or indirectly, controls, is controlled by or is under common control with such Person (excluding any trustee under, or any committee with responsibility for administering, any Plan). A Person shall be deemed to be "controlled by" any other Person if such other Person possesses, directly or indirectly, power (a) to vote 10% or more of the securities (on a fully diluted basis) 2 having ordinary voting power for the election of directors or managing general partners; or (b) to direct or cause the direction of the management and policies of such Person whether by contract or otherwise. "Agent" is defined in the preamble and includes each other Person as shall have subsequently been appointed as the successor Agent pursuant to Section 9.4. "Agreement" means, on any date, this Credit Agreement as originally in effect on the Effective Date and as thereafter from time to time amended, supplemented, amended and restated, or otherwise modified and in effect on such date. "Alternate Base Rate" means, on any date and with respect to all Base Rate Loans, a fluctuating rate of interest per annum equal to the higher of (a) the rate of interest most recently announced by Bank of Montreal at its Domestic Office as its base rate for Dollar loans made in the United States; and (b) the Federal Funds Rate most recently determined by the Agent plus 1/2%. The Alternate Base Rate is not necessarily intended to be the lowest rate of interest determined by Bank of Montreal in connection with extensions of credit. Changes in the rate of interest on that portion of any Loans maintained as Base Rate Loans will take effect simultaneously with each change in the Alternate Base Rate. The Agent will give notice promptly to the Borrower and the Lenders of changes in the Alternate Base Rate. "Applicable Lenders" means, for any determination of the Borrowing Base, Lenders (including the Agent) with an aggregate Percentage of at least 75%. "Assignee Lender" is defined in Section 10.11.1. "Authorized Officer" means, relative to the Borrower, those of its officers whose signatures and incumbency shall have been certified to the Agent and the Lenders pursuant to Section 5.1.1. "Bank of Montreal" is defined in the preamble. "Base Rate Loan" means a Loan bearing interest at a fluctuating rate determined by reference to the Alternate Base Rate. "Base Rate Applicable Margin" means (a) on any date for which it is determined and on which the outstanding principal balance of Senior Debt, including any Term Loans, shall be less than or equal to the Borrowing Base then in effect, zero percent (0%); and (b) on any date on which the outstanding principal balance of Senior Debt, including all Loans, exceeds the Borrowing Base then in effect, one-half of one percent (.5%). "Borrower" is defined in the preamble. 3 "Borrowing" means (i) the Loans of the same type and, in the case of LIBO Rate Loans, having the same Interest Period made by all Lenders on the same Business Day and pursuant to the same Borrowing Request in accordance with Section 2.1 and (ii) Letters of Credit issued pursuant to Section 2.1.3. "Borrowing Base" is defined in Section 2.7.1. "Borrowing Request" means a loan request and certificate duly executed by an Authorized Officer of the Borrower, substantially in the form of Exhibit B hereto. "Business Day" means (a) any day which is neither a Saturday or Sunday nor a legal holiday on which banks are authorized or required to be closed in Chicago, Illinois; and (b) relative to the making, continuing, prepaying or repaying of any LIBO Rate Loans, any day described in clause (a) which is also a day on which dealings in Dollars are carried on in the London interbank market. "Cadipsa" means Cadipsa S.A., a Republic of Argentina corporation. "Capital Stock" in any Person means, for purposes of the definitions of "Voting Stock" and "Change of Control," any and all shares, interests, participations or other equivalents in the equity interest (however designated) in such Person and any rights (other than debt securities convertible into an equity interest), warrants or options to subscribe for or to acquire an equity interest in such Person; provided that Capital Stock of such Person shall not include any equity security of such Person that by its terms (or by the terms of any security into which it is convertible or for which it is exchangeable) or otherwise (including upon the happening of any event), is or could become required to be redeemed for cash or other property or is or could become redeemable for cash or other property at the option of the holder thereof, in whole or in part, or is or could become exchangeable at the option of the holder thereof for Indebtedness at any time, in whole or in part, in each case on or prior to the first anniversary of the Stated Maturity (as defined in the Indenture) for the payment of principal of the Subordinated Debt permitted by clause (p) of Section 7.2.2, but "Capital Stock" shall not exclude any equity security by virtue of the fact that it may be converted or exchanged at the option of the holder for Capital Stock of the Borrower having no preference as to dividends or liquidation over any other Capital Stock of the Borrower. "Capitalized Lease Liabilities" means all monetary obligations of the Borrower or any of its Subsidiaries under any leasing or similar arrangement which, in accordance with GAAP, would be classified as capitalized leases, and, for purposes of this Agreement and each other Loan Document, the amount of such obligations shall be the capitalized amount thereof, determined in accordance with GAAP, and the stated maturity thereof shall be the date of the last payment of rent or any other amount due under such 4 lease prior to the first date upon which such lease may be terminated by the lessee without payment of a penalty. "CERCLA" means the Comprehensive Environmental Response, Compensation and Liability Act of 1980, as amended. "CERCLIS" means the Comprehensive Environmental Response Compensation Liability Information System List. "Change of Control" means the occurrence of any of the following events: (i) any "person" or "group" (within the meaning of Sections 13(d)(3) and 14(d)(2) of the Exchange Act or any successor provision to either of the foregoing, including any group acting for the purpose of acquiring, holding or disposing of securities within the meaning of Rule 13d-5(b)(1) under the Exchange Act), other than any one or more of the Permitted Holders, becomes the "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act) of 50% or more of the total voting power of all classes of the Voting Stock of the Borrower and/or warrants or options to acquire such Voting Stock, calculated on a fully diluted basis, (ii) the sale, lease, conveyance or transfer of all or substantially all of the assets of the Borrower (other than to any Restricted Subsidiary which is wholly-owned by the Borrower or another wholly-owned Restricted Subsidiary) shall have occurred, (iii) the stockholders of the Borrower shall have approved any plan of liquidation or dissolution of the Borrower, (iv) the Borrower consolidates with or merges into another Person or any Person consolidates with or merges into the Borrower in any such event pursuant to a transaction in which the outstanding Voting Stock of the Borrower is reclassified into or exchanged for cash, securities or other property, other than any such transaction where (A) the outstanding Voting Stock of the Borrower is reclassified into or exchanged for Voting Stock of the surviving corporation that is Capital Stock and (B) the holders of the Voting Stock of the Borrower immediately prior to such transaction own, directly or indirectly, not less than a majority of the Voting Stock of the surviving corporation immediately after such transaction in substantially the same proportion as before the transaction, or (v) during any period of two consecutive years, individuals who at the beginning of such period constituted the Borrower's Board of Directors (together with any new directors whose election or appointment by such board or whose nomination for election by the stockholders of the Borrower was approved by a vote of a majority of the directors then still in office who were either directors at the beginning of such period or whose election or nomination for election was previously so approved) cease for any reason to constitute a majority of the Borrower's Board of Directors then in office. For purposes of this definition, a wholly-owned Subsidiary means any Subsidiary all of the Voting Stock of which (except for director's qualifying shares) is owned directly or indirectly by the Borrower and its other wholly-owned Subsidiaries. Nothing set forth in this definition shall be construed to permit any transaction which is prohibited by this Agreement, including any transaction not permitted by Section 7.2.6. 5 "Code" means the Internal Revenue Code of 1986, as amended, reformed or otherwise modified from time to time. "Commitment" means, as the context may require, a Lender's Revolving Loan Commitment or Term Loan Commitment. "Commitment Amount" means, as the context may require, either the Revolving Period Commitment Amount or the Term Period Commitment Amount. "Commitment Termination Date" means, as the context may require, either the Revolving Period Commitment Termination Date or the Term Period Commitment Termination Date. "Commitment Termination Event" means (a) the occurrence of any Default described in clauses (a) through (d) of Section 8.1.9 with respect to the Borrower or any of its Subsidiaries; or (b) the occurrence and continuance of any other Event of Default and either (i) the declaration of the Loans to be due and payable pursuant to Section 8.3 or the demand by an Issuer that the Borrower deliver cash collateral pursuant to Section 2.8.7, or (ii) in the absence of such declaration or demand, the giving of notice by the Agent, acting at the direction of the Required Lenders, to the Borrower that the Commitments have been terminated. "Contingent Liability" means any agreement, undertaking or arrangement by which any Person guarantees, endorses or otherwise becomes or is contingently liable upon (by direct or indirect agreement, contingent or otherwise, to provide funds for payment, to supply funds to, or otherwise to invest in, a debtor, or otherwise to assure a creditor against loss) the indebtedness, obligation or any other liability of any other Person (other than by endorsements of instruments in the course of collection), or guarantees the payment of dividends or other distributions upon the shares of any other Person. The amount of any Person's obligation under any Contingent Liability shall (subject to any limitation set forth therein) be deemed to be the outstanding principal amount (or maximum principal amount, if larger) of the debt, obligation or other liability guaranteed thereby. "Continuation/Conversion Notice" means a notice of continua tion or conversion and certificate duly executed by an Authorized Officer of the Borrower, substantially in the form of Exhibit C hereto. "Controlled Group" means all members of a controlled group of corporations and all members of a controlled group of trades or businesses (whether or not incorporated) under common control which, together with the Borrower, are treated as a single employer under Section 414(b) or 414(c) of the Code or Section 4001 of ERISA. "Current Ratio" means the ratio of (a) consolidated current assets of the Borrower and its Subsidiaries to (b) consolidated 6 current liabilities (excluding the current portion of Senior Debt) of the Borrower and its Subsidiaries. For purposes of the definition of "Current Ratio", any unused portion of the Revolving Period Commitment Amount is deemed to be a current asset of the Borrower. "Default" means any Event of Default or any condition, occurrence or event which, after notice or lapse of time or both, would constitute an Event of Default. "Disbursement" is defined in Section 2.8.5. "Disbursement Date" is defined in Section 2.8.5. "Disclosure Schedule" means the Disclosure Schedule attached hereto as Schedule I, as it may be amended, supplemented or otherwise modified from time to time by the Borrower with the written consent of the Agent and the Required Lenders. "Documentary Letter of Credit" means a letter of credit which is a short term, self-liquidating trade-related contingency. "Dollar" and the sign "$" mean lawful money of the United States. "Domestic Office" means, relative to any Lender, the office of such Lender designated as such below its signature hereto or designated in the Lender Assignment Agreement, or such other office of a Lender (or any successor or assign of such Lender) within the United States as may be designated from time to time by notice from such Lender, as the case may be, to each other Person party hereto. "Effective Date" means the date this Agreement becomes effective pursuant to Section 10.8. "Environmental Laws" means all applicable Argentina, U.S. federal, or state or local statutes, laws, ordinances, codes, rules and regulations (including consent decrees and administrative orders) relating to public health and safety and protection of the environment. "ERISA" means the Employee Retirement Income Security Act of 1974, as amended, and any successor statute of similar import, together with the regulations thereunder, in each case as in effect from time to time. References to sections of ERISA also refer to any successor sections. "Event of Default" is defined in Section 8.1. "Exchange Act" means the United States Securities Exchange Act of 1934 and any successor statute thereto, in each case as amended from time to time. 7 "Federal Funds Rate" means, for any period, a fluctuating interest rate per annum equal for each day during such period to (a) the weighted average of the rates on overnight federal funds transactions with members of the Federal Reserve System arranged by federal funds brokers, as published for such day (or, if such day is not a Business Day, for the next preceding Business Day) by the Federal Reserve Bank of New York; or (b) if such rate is not so published for any day which is a Business Day, the average of the quotations for such day on such transactions received by Bank of Montreal from three federal funds brokers of recognized standing selected by it. "Fiscal Quarter" means any quarter of a Fiscal Year. "Fiscal Year" means any period of twelve consecutive calendar months ending on December 31st; references to a Fiscal Year with a number corresponding to any calendar year (e.g., the "1996 Fiscal Year") refer to the Fiscal Year ending on December 31st, occurring during such calendar year. "F.R.S. Board" means the Board of Governors of the Federal Reserve System or any successor thereto. "GAAP" is defined in Section 1.4. "Hazardous Material" means (a) any "hazardous substance", as defined by CERCLA; (b) any "hazardous waste", as defined by the Resource Conservation and Recovery Act, as amended; (c) any petroleum product; or (d) any pollutant or contaminant or hazardous, dangerous or toxic chemical, material or substance within the meaning of any other applicable Argentina, U.S. federal, or state or local law, regulation, ordinance or requirement (including consent decrees and administrative orders) relating to or imposing liability or standards of conduct concerning any hazardous, toxic or dangerous waste, substance or material, all as amended or hereafter amended. "Hedging Obligations" means, with respect to any Person, all liabilities of such Person under interest rate swap agreements, interest rate cap agreements and interest rate collar agreements, and all other agreements or arrangements designed to protect such Person against fluctuations in interest rates, currency exchange rates or commodity prices. "herein", "hereof", "hereto", "hereunder" and similar terms contained in this Agreement or any other Loan Document refer to this Agreement or such other Loan Document, as the case may be, as a whole and not to any particular Section, paragraph or provision of this Agreement or such other Loan Document. "Impermissible Qualification" means, relative to the opinion or certification of any independent public accountant as to any financial statement of the Borrower, any qualification or exception to such opinion or certification (a) which is of a "going concern" 8 or similar nature; (b) which relates to the limited scope of examination of matters relevant to such financial statement; or (c) which relates to the treatment or classification of any item in such financial statement and which, as a condition to its removal, would require an adjustment to such item the effect of which would be to cause the Borrower to be in default of any of its obligations under Section 7.2.4. "including" means including without limiting the generality of any description preceding such term, and, for purposes of this Agreement and each other Loan Document, the parties hereto agree that the rule of ejusdem generis shall not be applicable to limit a general statement, which is followed by or referable to an enumeration of specific matters, to matters similar to the matters specifically mentioned. "Indebtedness" of any Person means, without duplication: (a) all obligations of such Person for borrowed money and all obligations of such Person evidenced by bonds, debentures, notes or other similar instruments; (b) all obligations, contingent or otherwise, relative to the face amount of all letters of credit, whether or not drawn, and banker's acceptances issued for the account of such Person; (c) all obligations of such Person as lessee under leases which have been or should be, in accordance with GAAP, recorded as Capitalized Lease Liabilities; (d) all other items which, in accordance with GAAP, would be included as liabilities on the liability side of the balance sheet of such Person as of the date at which Indebtedness is to be determined; (e) net liabilities of such Person under all Hedging Obligations; (f) whether or not so included as liabilities in accordance with GAAP, all obligations of such Person to pay the deferred purchase price of property or services, and indebtedness (excluding prepaid interest thereon) secured by a Lien on property owned or being purchased by such Person (including indebtedness arising under conditional sales or other title retention agreements), whether or not such indebtedness shall have been assumed by such Person or is limited in recourse; and (g) all Contingent Liabilities of such Person in respect of any of the foregoing. For all purposes of this Agreement, the Indebtedness of any Person shall include the Indebtedness of any partnership or joint venture in which such Person is a general partner or a joint venturer. "Indemnified Liabilities" is defined in Section 10.4. "Indemnified Parties" is defined in Section 10.4. "Indenture" means that certain Indenture of the Borrower to Chemical Bank as Trustee entered into with respect to the Subordinated Debt permitted by clause (p) of Section 7.2.2, as such Indenture may from time to time be amended, supplemented or otherwise modified. "Interest Period" means, relative to any LIBO Rate Loans, the period beginning on (and including) the date on which such LIBO 9 Rate Loan is made or continued as, or converted into, a LIBO Rate Loan pursuant to Section 2.3 or 2.4 and shall end on (but exclude) the day which numerically corresponds to such date one, two, three or six months thereafter (or, if such month has no numerically corresponding day, on the last Business Day of such month), in either case as the Borrower may select in its relevant notice pursuant to Section 2.3 or 2.4; provided, however, that (a) the Borrower shall not be permitted to select Interest Periods to be in effect at any one time which have expiration dates occurring on more than five different dates; (b) Interest Periods commencing on the same date for Loans comprising part of the same Borrowing shall be of the same duration; (c) if such Interest Period would otherwise end on a day which is not a Business Day, such Interest Period shall end on the next following Business Day (unless such next following Business Day is the first Business Day of a calendar month, in which case such Interest Period shall end on the Business Day next preceding such numerically corresponding day); and (d) no Interest Period for a Revolving Loan may end later than the date six months after the Revolving Period Commitment Termination Date, and no Interest Period for a Term Loan may end after the Stated Maturity Date for Term Loans. "Interests" is defined in Section 10.13. "Issuance Request" means a request and certificate duly executed by the chief executive, accounting, or financial Authorized Officer of the Borrower, substantially in the form of Exhibit G attached hereto (with such changes thereto as may be agreed from time to time by the Agent and the Borrower). "Issuer" means any affiliate, unit or agency of Bank of Montreal or any other Lender which has agreed to issue one or more Letters of Credit at the request of the Borrower. "Lender Assignment Agreement" means a Lender Assignment Agreement substantially in the form of Exhibit D hereto. "Lenders" is defined in the preamble. "Letter of Credit" is defined in Section 2.8.1. "Letter of Credit Applicable Margin" means (a) on any date for which it is determined prior to the Revolving Period Commitment Termination Date and on which the ratio (expressed as a percentage) of the outstanding principal of Senior Debt, including any Revolving Loans outstanding, to the Borrowing Base then in effect shall equal those ratios set forth below, the percentage set forth opposite such ratio: 10 Ratio of Senior Debt Letter of Credit to Borrowing Base Applicable Margin -------------------- ----------------- Greater than 75% 1.00% Greater than 60% and less than or equal to 75% .750% Greater than 40% and less than or equal to 60% .625% Less than or equal to 40% .550% (b) on any date for which it is determined on or after the Revolving Period Commitment Termination Date and on which the outstanding principal balance of Senior Debt, including any Term Loans, shall be less than or equal to the Borrowing Base then in effect, one percent (1%); and (c) on any date on which the aggregate outstanding principal balance of Senior Debt, including all Loans, exceeds the Borrowing Base then in effect, one and one-half percent (1.5%). Changes in the Letter of Credit Applicable Margin shall occur automatically with a change in such ratio of the Senior Debt to the Borrowing Base. "Letter of Credit Collateral Account" is defined in Section 2.8.10. "Letter of Credit Commitment" means, relative to any Lender, such Lender's obligation to issue (in the case of an Issuer) or participate in (in the case of all Lenders) Letters of Credit pursuant to Section 2.1.3. "Letter of Credit Outstandings" means, at any time, an amount equal to the sum of (a) the aggregate face amount at such time of all Letters of Credit then outstanding and undrawn (as such aggregate face amount shall be adjusted, from time to time, as a result of drawings, the issuance of Letters of Credit, or otherwise), plus (b) the then aggregate amount of all unpaid and outstanding Reimbursement Obligations. "Letter of Credit Sublimit" is defined in Section 2.8.3. "LIBO Rate" is defined in Section 3.2.1. "LIBO Rate Applicable Margin" means (a) on any date for which it is determined prior to the Revolving Period Commitment Termination Date and on which the ratio (expressed as a percentage) of the outstanding principal of Senior Debt, including any Revolving Loans outstanding, to the Borrowing Base then in effect shall equal those ratios set forth below, the percentage set forth opposite such ratio: Ratio of Senior Debt LIBO Rate to Borrowing Base Applicable Margin -------------------- ----------------- 11 Greater than 75% 1.00% Greater than 60% and less than or equal to 75% .750% Greater than 40% and less than or equal to 60% .625% Less than or equal to 40% .550% (b) on any date for which it is determined on or after the Revolving Period Commitment Termination Date and on which the outstanding principal balance of Senior Debt, including any Term Loans, shall be less than or equal to the Borrowing Base then in effect, one percent (1%); and (c) on any date on which the aggregate outstanding principal balance of Senior Debt, including all Loans, exceeds the Borrowing Base then in effect, one and one-half percent (1.5%). Changes in the LIBO Rate Applicable Margin shall occur automatically with a change in such ratio of the Senior Debt to the Borrowing Base. "LIBO Rate Loan" means a Loan bearing interest, at all times during an Interest Period applicable to such Loan, at a fixed rate of interest determined by reference to the LIBO Rate (Reserve Adjusted). "LIBO Rate (Reserve Adjusted)" is defined in Section 3.2.1. "LIBOR Office" means, relative to any Lender, the office of such Lender designated as such below its signature hereto or designated in the Lender Assignment Agreement or such other office of a Lender as designated from time to time by notice from such Lender to the Borrower and the Agent, whether or not outside the United States, which shall be making or maintaining LIBO Rate Loans of such Lender hereunder. "LIBOR Reserve Percentage" is defined in Section 3.2.1. "Lien" means any security interest, mortgage, pledge, hypothecation, assignment, deposit arrangement, encumbrance, lien (statutory or otherwise), charge against or interest in property to secure payment of a debt or performance of an obligation or other priority or preferential arrangement of any kind or nature whatsoever. "Loan" means, as the context may require, either a Revolving Loan or a Term Loan of either type. "Loan Document" means this Agreement, the Notes, each Issuance Request and each other document or instrument executed and delivered in connection with this Agreement, the Notes and the Letters of Credit. 12 "Maximum Commitment Amount" means an amount equal to $500,000,000. "Non-Recourse Indebtedness" shall mean any Indebtedness of the Borrower and its Subsidiaries with respect to which the holder thereof agrees that (i) the Borrower and its Subsidiaries are not personally liable and (ii) such holder may require payment only to the extent specifically identified properties of the Borrower and its Subsidiaries are available to provide therefor, such matters to be set forth in an agreement or other instrument in form and substance reasonably satisfactory to the Required Lenders, and shall include such Indebtedness of partnerships and joint ventures with respect to which the Borrower or any of its Subsidiaries is a partner or joint venturer which is identified in Item 7.2.2(c) ("Ongoing Indebtedness") of the Disclosure Schedule. "Note" means a promissory note of the Borrower payable to any Lender, in the form of Exhibit A hereto (as such promissory note may be amended, endorsed or otherwise modified from time to time), evidencing the aggregate Indebtedness of the Borrower to such Lender resulting from outstanding Loans, and also means all other promissory notes accepted from time to time in substitution therefor or renewal thereof. "Obligations" means all obligations (monetary or otherwise) of the Borrower arising under or in connection with this Agreement, the Notes, the Letters of Credit and each other Loan Document. "Oil and Gas Properties" means oil, gas and other liquid or gaseous hydrocarbon properties and interests of the Borrower and its Subsidiaries, whether now owned or hereafter acquired, located in the United States or Argentina. "Organic Document" means, relative to the Borrower, its certificate of incorporation, its by-laws and all shareholder agreements, voting trusts and similar arrangements applicable to any of its authorized shares of capital stock. "Original Credit Agreement" is defined in the second recital. "Original Lenders" is defined in the second recital. "Original Loans" is defined in the second recital. "Other Letter of Credit" means a Documentary Letter of Credit or a Standby Letter of Credit or similar instrument for which the Borrower or one or more of its Subsidiaries is liable and which is not issued pursuant to this Agreement. "Participant" is defined in Section 10.11.2. "PBGC" means the Pension Benefit Guaranty Corporation and any entity succeeding to any or all of its functions under ERISA. 13 "Pension Plan" means a "pension plan", as such term is defined in section 3(2) of ERISA, which is subject to Title IV of ERISA (other than a multiemployer plan as defined in section 4001(a)(3) of ERISA), and to which the Borrower or any corporation, trade or business that is, along with the Borrower, a member of a Controlled Group, may have liability, including any liability by reason of having been a substantial employer within the meaning of section 4063 of ERISA at any time during the preceding five years, or by reason of being deemed to be a contributing sponsor under section 4069 of ERISA. "Percentage" means, relative to any Lender, the percentage set forth opposite the name of such Lender in Exhibit F-1 to this Agreement as such percentage may be adjusted from time to time pursuant to Lender Assignment Agreements executed by a Lender and its Assignee Lenders and delivered pursuant to Section 10.11. "Permitted Designee" means (i) a spouse or a child of a Permitted Holder, (ii) trusts for the benefit of a Permitted Holder or a spouse or child of a Permitted Holder, (iii) in the event of the death or incompetence of a Permitted Holder, his estate, heirs, executor, administrator, committee or other personal representative, or (iv) any Person so long as a Permitted Holder owns at least 51% of the voting power of all classes of the Voting Stock of such Person. "Permitted Holders" means Charles C. Stephenson, Jr., Jo Bob Hille, S. Craig George, William C. Barnes and their Permitted Designees. "Person" means any natural person, corporation, partnership, firm, association, trust, government, governmental agency or any other entity, whether acting in an individual, fiduciary or other capacity. "Plan" means any Pension Plan or Welfare Plan. "Quarterly Payment Date" means the first day of each March, June, September and December or, if any such day is not a Business Day, the next succeeding Business Day. "Reimbursement Obligations" is defined in Section 2.8.6. "Release" means a "release", as such term is defined in CERCLA. "Required Lenders" means, at any time, Lenders (including the Agent) holding at least 66-2/3% of the then aggregate outstanding principal amount of the Notes then held by the Lenders, or, if no such principal amount is then outstanding, Lenders (including the Agent) having at least 66-2/3% of the Commitments. 14 "Resource Conservation and Recovery Act" means the Resource Conservation and Recovery Act, 42 U.S.C. Section 6901, et seq., as in effect from time to time. "Restricted Subsidiary" means any Subsidiary of the Borrower that has not been designated an "Unrestricted Subsidiary" pursuant to the Indenture. "Revolving Loan" is defined in Section 2.1.1. "Revolving Loan Commitment" is defined in Section 2.1.1. "Revolving Period Commitment Amount" means, on any date, the lowest of (i) the Borrowing Base then in effect, (ii) the Maximum Commitment Amount, as such amount may be reduced from time to time pursuant to Section 2.2 and (iii) the amount (not less than the then outstanding principal amount of the Loans) from time to time designated by the Borrower in writing to the Agent provided that the Borrower will not designate an amount pursuant to this clause (iii) which is an increase over the then Revolving Period Commitment Amount without the consent of Lenders with an aggregate Percentage of at least 75%. "Revolving Period Commitment Termination Date" means the earliest of (a) December 1, 2000; (b) the date on which the Revolving Period Commitment Amount is terminated in full or reduced to zero pursuant to Section 2.2; and (c) the date on which any Commitment Termination Event occurs. Upon the occurrence of any event described in clause (b) or (c), the Revolving Loan Commitments shall terminate automatically and without any further action. "Senior Debt" means all Indebtedness for borrowed money (including the Loans under this Agreement) and all obligations, contingent or otherwise, relative to the face amount of all Letters of Credit and Other Letters of Credit, whether or not drawn, of the Borrower and its Subsidiaries other than Subordinated Debt, Non-Recourse Indebtedness, Indebtedness of any Subject Subsidiary and any Contingent Liability of the Borrower permitted by clause (n) of Section 7.2.2. "Standby Letter of Credit" means a letter of credit (other than a Documentary Letter of Credit). "Stated Amount" of each Letter of Credit and each Other Letter of Credit means, on any date for which it is determined, the face amount of such Letter of Credit or Other Letter of Credit as is in effect on such date. "Stated Expiry Date" is defined in Section 2.8.1. 15 "Stated Maturity Date" means (a) in the case of any Revolving Loan, December 1, 2000; and (b) in the case of any Term Loan, December 1, 2003. "Subject Subsidiary" means Cadipsa, or any Subsidiary designated by the Borrower and approved by the Applicable Lenders; such Subsidiaries are sometimes collectively called herein the "Subject Subsidiaries." "Subordinated Debt" means all unsecured Indebtedness of the Borrower for money borrowed which is subordinated, upon terms satisfactory to the Agent and the Required Lenders, in right of payment to the payment in full in cash of all Obligations, and includes Borrower's $150,000,000 Senior Subordinated Notes Due 2005 and Borrower's $100,000,000 Senior Subordinated Notes Due 2009. "Subsidiary" means, with respect to any Person, any corporation of which more than 50% of the outstanding capital stock having ordinary voting power to elect a majority of the board of directors of such corporation (irrespective of whether at the time capital stock of any other class or classes of such corporation shall or might have voting power upon the occurrence of any contingency) is at the time directly or indirectly owned by such Person, by such Person and one or more other Subsidiaries of such Person, or by one or more other Subsidiaries of such Person provided that, notwithstanding the foregoing, Subsidiaries of the Borrower shall not include, for the purposes of Article VI (except Sections 6.7 and 6.8), Section 7.1 (except for the purposes of consolidated financial statements delivered pursuant to Section 7.1.1) and Article VIII and the definitions referred to therein, the Subject Subsidiaries. "Tangible Net Worth" means the consolidated net worth of the Borrower and its Subsidiaries after subtracting therefrom the aggregate amount of any intangible assets of the Borrower and its Subsidiaries, including goodwill, franchises, licenses, patents, trademarks, trade names, copyrights, service marks and brand names. "Taxes" is defined in Section 4.6. "Term Loan" is defined in Section 2.1.2. "Term Loan Commitment" is defined in Section 2.1.2. "Term Period Commitment Amount" means the least of (i) the aggregate principal amount of all Revolving Loans outstanding to all Lenders plus all Letter of Credit Outstandings as of the Revolving Period Commitment Termination Date, (ii) the Commitment Amount in effect with respect to Revolving Loans plus all Letter of Credit Outstandings as of the Revolving Period Commitment Termination Date, or (iii) the Borrowing Base in effect as of the Revolving Period Commitment Termination Date minus the outstanding principal amount of all Senior Debt other than the Loans and all Letter of Credit Outstandings. 16 "Term Period Commitment Termination Date" means the earlier of (a) the Business Day after the Stated Maturity Date of the Revolving Loans; and (b) the date on which any Commitment Termination Event occurs. Upon the occurrence of any event described in clause (b), the Term Loan Commitments shall terminate automatically and without any further action. "type" means, relative to any Loan, the portion thereof, if any, being maintained as a Base Rate Loan or a LIBO Rate Loan. "United States" or "U.S." means the United States of America, its fifty States and the District of Columbia. "Voting Stock" of any Person means Capital Stock of such Person which ordinarily has voting power for the election of directors (or persons performing similar functions) of such Person whether at all times or only so long as no senior class of securities has such voting power by reason of any contingency. "Welfare Plan" means a "welfare plan", as such term is defined in section 3(1) of ERISA. SECTION 1.2. Use of Defined Terms. Unless otherwise defined or the context otherwise requires, terms for which meanings are provided in this Agreement shall have such meanings when used in the Disclosure Schedule and in each Note, Issuance Request, Borrowing Request, Continuation/Conversion Notice, Loan Document, notice and other communication delivered from time to time in connection with this Agreement or any other Loan Document. SECTION 1.3. Cross-References. Unless otherwise specified, references in this Agreement and in each other Loan Document to any Article or Section are references to such Article or Section of this Agreement or such other Loan Document, as the case may be, and, unless otherwise specified, references in any Article, Section or definition to any clause are references to such clause of such Article, Section or definition. SECTION 1.4. Accounting and Financial Determinations. Unless otherwise specified, all accounting terms used herein or in any other Loan Document shall be interpreted, all accounting determinations and computations hereunder or thereunder (including under Section 7.2.4) shall be made, and all financial statements required to be delivered hereunder or thereunder shall be prepared, in accordance with those generally accepted accounting principles ("GAAP") applied in the preparation of the financial statements referred to in Section 6.5. 17 ARTICLE II COMMITMENTS, BORROWING PROCEDURES AND NOTES SECTION 2.1. Commitments. On the terms and subject to the conditions of this Agreement (including Article V), each Lender severally agrees to make Loans and issue or participate in Letters of Credit pursuant to the Commitments described in this Section 2.1. SECTION 2.1.1. Revolving Loan Commitment. From time to time on any Business Day occurring prior to the Revolving Period Commitment Termination Date, each Lender will make Loans (relative to such Lender, its "Revolving Loans") to the Borrower equal to such Lender's Percentage of the aggregate amount of the Borrowing of Revolving Loans requested by the Borrower to be made on such day. The Commitment of each Lender described in this Section 2.1.1 is herein referred to as its "Revolving Loan Commitment". On the terms and subject to the conditions hereof, the Borrower may from time to time borrow, prepay and reborrow Revolving Loans. SECTION 2.1.2. Term Loan Commitment. On the Revolving Period Commitment Termination Date (unless such date shall occur as a result of clause (c) of the definition thereof), each Lender will make one term loan (relative to such Lender, its "Term Loan") to the Borrower equal to the lesser of its Revolving Loan and its Percentage of the Term Period Commitment Amount. The Commitment of each Lender described in this Section 2.1.2 is herein referred to as its "Term Loan Commitment". No amounts paid or prepaid with respect to the Term Loans may be reborrowed. LIBO Rate Loans for which the Interest Period shall not have terminated as of the Revolving Period Commitment Termination Date shall be continued as LIBO Rate Loans for the applicable Interest Period and Base Rate Loans shall be continued as Base Rate Loans after the Revolving Period Commitment Termination Date, unless the Borrower shall have elected otherwise by delivery of a Continuation/Conversion Notice pursuant to Section 2.4; provided that such LIBO Rate Loans which shall have converted to Term Loans shall be in a minimum amount of $5,000,000 and an integral multiple of $1,000,000. Any principal repayments received on the Revolving Period Commitment Termination Date for Revolving Loans not converted into Term Loans shall be applied first to Base Rate Loans and, after Base Rate Loans have been paid in full, to LIBO Rate Loans, unless the Borrower shall have otherwise instructed the Agent in writing. Upon a Lender making such Term Loan, its Term Loan Commitment shall terminate and it shall have no further Commitment to make Loans. SECTION 2.1.3. Commitment to Issue Letters of Credit. From time to time on any Business Day prior to the Revolving Period Commitment Termination Date, each Issuer will issue, and each Lender will participate in, to the extent of each Lender's Percentage, the Letters of Credit, in accordance with the terms of Section 2.8. 18 SECTION 2.1.4. Lenders Not Permitted or Required To Make Loans or Issue or Participate in Letters of Credit Under Certain Circumstances. No Lender shall be permitted or required to (A) continue any Original Loan as a Loan hereunder or to make any Revolving Loan if, after giving effect thereto (i) (a) the aggregate outstanding principal amount of all Revolving Loans of all Lenders, plus all Letter of Credit Outstandings would exceed the Revolving Period Commitment Amount or (b) the Senior Debt would exceed the Borrowing Base then in effect or (ii) the aggregate outstanding principal amount of all Loans of such Lender, together with its Percentage of all Letter of Credit Outstandings, would exceed such Lender's Percentage of the Revolving Period Commitment Amount; (B) issue (in the case of any Issuer) or participate in (in the case of each Lender) any Letter of Credit if, after giving effect thereto (i) (a) all Letter of Credit Outstandings plus the aggregate outstanding principal amount of all Loans of all Lenders would exceed the Revolving Period Commitment Amount, (b) the Senior Debt would exceed the Borrowing Base then in effect, or (c) all Letter of Credit Outstandings plus the aggregate Stated Amount of all Other Letters of Credit would exceed the Letter of Credit Sublimit or (ii) such Lender's Percentage of all Letter of Credit Outstandings together with the aggregate outstanding principal amount of all Loans of such Lender would exceed such Lender's Percentage of the Revolving Period Commitment Amount; or (d) make any Term Loan if, after giving effect thereto (i) the aggregate original principal amount of all Term Loans would exceed the Term Period Commitment Amount or (ii) the Term Loans of such Lender would exceed such Lender's Percentage of the Term Period Commitment Amount. SECTION 2.2. Termination and Reduction of Commitment Amounts. Each of the Commitment Amounts is subject to reduction from time to time pursuant to this Section 2.2. SECTION 2.2.1. Optional. The Borrower may, from time to time on any Business Day occurring after the time of the initial Borrowing hereunder, voluntarily reduce the amount of either Commitment Amount; provided, however, that all such reductions shall require at least three Business Days' prior notice to the Agent and be permanent, and any partial reduction of any Commitment Amount shall be in a minimum amount of $1,000,000 and in an integral multiple of $1,000,000. SECTION 2.2.2. Mandatory as to Revolving Loans. The Revolving Period Commitment Amount shall be reduced or terminated as described below: (a) Each Lender's Revolving Loan Commitment shall be automatically terminated on the Revolving Period Commitment Termination Date. (b) Each reduction in the Revolving Period Commitment Amount shall be made ratably among the Lenders in accordance with their respective Percentages. The Borrower shall pay to 19 the Agent for the account of the Lenders, on the date of each termination or voluntary reduction, the Commitment Fees accrued pursuant to Section 3.3.1 on the amount of Commitments so terminated or reduced through the date of such termination or reduction. SECTION 2.2.3. Mandatory as to Term Loans. The Term Period Commitment Amount shall be reduced or terminated as described below: (a) Each Lender's Term Loan Commitment shall be automatically terminated on the Term Period Commitment Termination Date. (b) Each reduction in the Term Period Commitment Amount hereunder shall be made ratably among the Lenders in accordance with their respective Percentages. SECTION 2.3. Borrowing Procedure. The Borrower may from time to time irrevocably request that a Borrowing be made in (a) for Base Rate Loans, a minimum amount of $300,000 and integral multiple of $100,000, (b) for LIBO Rate Loans a minimum amount of $5,000,000 and an integral multiple of $1,000,000, or (c) in the case of Revolving Loans, in the unused amount of the Revolving Period Commitment Amount. Such request shall be made by delivering a Borrowing Request to the Agent on or before 11:00 a.m. U.S. Central time, (x) on the Business Day of such Borrowing in the case of a Base Rate Borrowing and (y) on a Business Day not less than three nor more than five Business Days in advance of a LIBO Rate Borrowing. On the terms and subject to the conditions of this Agreement, each Borrowing shall be comprised of the type of Loans, and shall be made on the Business Day, specified in such Borrowing Request. On or before 12:00 Noon (U.S. Central time) on such Business Day each Lender shall deposit with the Agent same day funds in an amount equal to such Lender's Percentage of the requested Borrowing. Such deposit will be made to an account which the Agent shall specify from time to time by notice to the Lenders. To the extent funds are received from the Lenders, the Agent shall make such funds available to the Borrower by wire transfer to the accounts the Borrower shall have specified in its Borrowing Request. No Lender's obligation to make any Loan shall be affected by any other Lender's failure to make any Loan. SECTION 2.4. Continuation and Conversion Elections. By delivering a Continuation/Conversion Notice to the Agent on or before 11:00 a.m., U.S. Central time, on a Business Day, the Borrower may from time to time irrevocably elect, on not less than three nor more than five Business Days' notice that all, or any portion in an aggregate minimum amount of $5,000,000 and an integral multiple of $1,000,000, of any Loans be, in the case of Base Rate Loans, converted into LIBO Rate Loans or, in the case of LIBO Rate Loans, converted into a Base Rate Loan or continued as a LIBO Rate Loan (in the absence of delivery of a Continuation/Conversion Notice with respect to any LIBO Rate Loan at least three 20 Business Days before the last day of the then current Interest Period with respect thereto, such LIBO Rate Loan shall, on such last day, automatically convert to a Base Rate Loan); provided, however, that (a) each such conversion or continuation shall be pro rated among the applicable outstanding Loans of all Lenders, and (b) no portion of the outstanding principal amount of any Loans may be continued as, or be converted into, LIBO Rate Loans when any Default has occurred and is continuing. SECTION 2.5. Funding. Each Lender may, if it so elects, fulfill its obligation to make, continue or convert LIBO Rate Loans hereunder by causing one of its foreign branches or Affiliates (or an international banking facility created by such Lender) to make or maintain such LIBO Rate Loan; provided, however, that such LIBO Rate Loan shall nonetheless be deemed to have been made and to be held by such Lender, and the obligation of the Borrower to repay such LIBO Rate Loan shall nevertheless be to such Lender for the account of such foreign branch, Affiliate or international banking facility. In addition, the Borrower hereby consents and agrees that, for purposes of any determination to be made for purposes of Sections 4.1, 4.2, 4.3 or 4.4, it shall be conclusively assumed that each Lender elected to fund all LIBO Rate Loans by purchasing Dollar deposits in its LIBOR Office's interbank eurodollar market. SECTION 2.6. Notes. Each Lender's Loans under its Commitment shall be evidenced by a Note payable to the order of such Lender in a maximum principal amount equal to such Lender's Percentage of the original Maximum Commitment Amount. The Borrower hereby irrevocably authorizes each Lender to make (or cause to be made) appropriate notations on the grid attached to such Lender's Notes (or on any continuation of such grid), which notations, if made, shall evidence, inter alia, the date of, the outstanding principal of, and the interest rate and Interest Period applicable to the Loans evidenced thereby. Such notations shall be conclusive and binding on the Borrower absent manifest error; provided, however, that the failure of any Lender to make any such notations shall not limit or otherwise affect any Obligations of the Borrower. SECTION 2.7. Determination of the Borrowing Base. During the period from the date hereof to the date of the first determination of the Borrowing Base pursuant to the further provisions of this Section 2.7., the amount of the Borrowing Base shall be $450,000,000. SECTION 2.7.1. Annual Scheduled Determinations of the Borrowing Base. Promptly after December 31 of each calendar year commencing December 31, 1997, and in any event prior to April 1 of the following calendar year, the Borrower shall furnish to the Agent and each Lender a report in form and substance satisfactory to the Agent, prepared or audited by Netherland, Sewell and Associates, Inc. or such other engineering firm as may be selected by the Borrower with the prior approval of the Required Lenders, which report shall be dated as of December 31st of such calendar year and 21 shall set forth the proven and producing oil and gas reserves attributable to the Oil and Gas Properties and a projection of the rate of production and net operating income with respect thereto, as of such date, and a projection of the rate of production and net operating income with respect thereto, as of such date. Upon receipt of such report relating to the Oil and Gas Properties, the Agent shall make a determination within 25 days of the receipt of such report of the amount of Senior Debt which the Borrower may maintain (herein as determined and redetermined from time to time and in effect on any date called the "Borrowing Base") on account of such reserves as of such December 31st, subject to the approval of the Applicable Lenders as provided in this Section, and upon such determination the Agent shall promptly notify the Lenders in writing of its determination of the Borrowing Base. The determination of the Borrowing Base made by the Agent shall be so made by the Agent in the exercise of its sole discretion in accordance with the Agent's customary practices and standards for oil and gas loans. The Applicable Lenders may approve the Agent's determination of the Borrowing Base by written notice to the Agent within 10 days of the Agent's notification of its determination of the new Borrowing Base. If the Applicable Lenders fail to approve the determination of the Borrowing Base made by the Agent hereunder within such 10 days then, within an additional 5 days, the Applicable Lenders in their sole discretion shall determine the Borrowing Base in accordance with their respective customary practices and standards for oil and gas loans. SECTION 2.7.2. Semi-Annual Scheduled Determination of the Borrowing Base. In addition, within ninety (90) days after each June 30 (commencing June 30, 1998) the Borrower will make available for review by the Agent monthly production data for each property included within the Oil and Gas Properties for the six (6) month period preceding such date together with the Borrower's projection of the rate of production and net operating income for such properties (in the aggregate). Also to be made available are the reserves, projected rate of income and net operating income on (i) any Oil and Gas Properties which were developed by the Borrower subsequent to the preceding December 31 and which are to be included in the Borrowing Base. Upon the receipt of a report relating to the Oil and Gas Properties, the Agent shall make a determination within 25 days of the receipt of such report of the Borrowing Base as of the preceding June 30. The determinations of the Borrowing Base shall be made in the same manner and be subject to the same approvals as prescribed above with respect to the annual review, and likewise the Agent shall communicate the results of each such determination to the Lenders. The Applicable Lenders may approve the determination of the Borrowing Base by written notice to the Agent within 10 days of the giving of notice of the determination by the Agent to such Lenders and the Agent will thereupon notify the Borrower of the Borrowing Base approved by the Applicable Lenders. If the Applicable Lenders fail to approve a determination of the Borrowing Base made by the Agent pursuant to this Section 2.7.2 within such 10 days, then the Applicable Lenders shall, within an additional 5 days, make a determination of the Borrowing 22 Base based on their sole discretion in accordance with their respective customary practices and standards for oil and gas loans. SECTION 2.7.3. Discretionary Determination of the Borrowing Base. If, in addition to the foregoing scheduled annual and semi-annual determinations of the Borrowing Base, the Lenders (or the Applicable Lenders) shall be requested by the Borrower to redetermine the Borrowing Base, in their sole discretion based on their respective customary practices and standards for oil and gas loans, then the Borrower shall pay to the Agent a fee of $25,000 and to each Lender (other than the Agent) a fee of $12,500 in connection with such redetermination. SECTION 2.7.4. Reduction of the Borrowing Base Upon Sales of Oil and Gas Properties. In the event of a sale, transfer, lease, contribution or other conveyance of an Oil and Gas Property as permitted pursuant to Section 7.2.7, the Borrowing Base may be automatically reduced by an amount to be determined by the Agent with the approval of the Applicable Lenders in accordance with their respective customary standards for oil and gas loans on account of such sale, transfer, assignment, lease, contribution or other conveyance. SECTION 2.8. Letters of Credit. SECTION 2.8.1. Issuance Requests. By delivering to the Agent and the applicable Issuer an Issuance Request on or before 11:30 a.m. (U.S. Central time), the Borrower may request, from time to time prior to the Revolving Period Commitment Termination Date and on not less than three nor more than ten Business Days' notice, that such Issuer issue an irrevocable Standby Letter of Credit or Documentary Letter of Credit in such form as may be mutually agreed to by the Borrower and such Issuer (each a "Letter of Credit"), in support of obligations of the Borrower incurred in the Borrower's ordinary course of business and which are described in such Issuance Request. Upon receipt of an Issuance Request, the Agent shall promptly notify the Lenders thereof. Each Letter of Credit shall by its terms be stated to expire on a date (its "Stated Expiry Date") no later than five Business Days before the Stated Maturity Date of any Term Loan. SECTION 2.8.2. Issuances. On the terms and subject to the conditions of this Agreement (including Article V), the Issuer shall issue Letters of Credit in accordance with the Issuance Requests made therefor. Each Issuer will make available the original of each Letter of Credit which it issues in accordance with the Issuance Request therefor to the beneficiary thereof (and will promptly provide each of the Lenders and the Borrower with a copy of such Letter of Credit). The Borrower will provide the Agent with a copy of each Other Letter of Credit on the day such Other Letter of Credit is issued. SECTION 2.8.3. Aggregate Amount Available Under Letters of Credit. The aggregate Stated Amount of all Letters of Credit 23 outstanding at any one time shall not exceed the amount equal to $125,000,000 (the "Letter of Credit Sublimit") minus the aggregate Stated Amount of all Other Letters of Credit and after issuance of any Letter of Credit, the aggregate Letter of Credit Outstandings of all Letters of Credit plus the Stated Amount of all Other Letters of Credit plus the aggregate principal amount of outstanding Loans shall not exceed the Commitment Amount. SECTION 2.8.4. Other Lenders' Participation. Each Letter of Credit issued pursuant to Section 2.8.2 shall, effective upon its issuance and without further action, be issued on behalf of all Lenders (including the Issuer thereof) pro rata according to their respective Percentages. Each Lender shall, to the extent of its Percentage, be deemed irrevocably to have participated in the issuance of such Letter of Credit and shall be responsible to reimburse promptly the Issuer thereof for Reimbursement Obligations which have not been reimbursed by the Borrower in accordance with Section 2.8.5, or which have been reimbursed by the Borrower but must be returned, restored or disgorged by such Issuer for any reason, and each Lender shall, to the extent of its Percentage, be entitled to receive from the Agent a ratable portion of the letter of credit fees received by the Agent pursuant to Section 3.3.3, with respect to each Letter of Credit. In the event that the Borrower shall fail to reimburse any Issuer, or if for any reason Revolving Loans shall not be made to fund any Reimbursement Obligation, all as provided in Section 2.8.5 and in an amount equal to the amount of any drawing honored by such Issuer under a Letter of Credit issued by it, or in the event such Issuer must for any reason return or disgorge such reimbursement, such Issuer shall promptly notify each Lender of the unreimbursed amount of such drawing and of such Lender's respective participation therein. Each Lender shall make available to such Issuer, whether or not any Default shall have occurred and be continuing, an amount equal to its respective participation in same day or immediately available funds at the office of such Issuer specified in such notice if the Issuer shall notify the Agent on or before 11:30 a.m. (U.S. Central time) of any Business Day by the close of business on such Business Day or if the Issuer shall notify the Agent after 11:30 a.m. (U.S. Central time) of any Business Day not later than 11:30 a.m. (U.S. Central time) on the Business Day (under the laws of the jurisdiction of such Issuer) after the date notified by such Issuer. In the event that any Lender fails to make available to such Issuer the amount of such Lender's participation in such Letter of Credit as provided herein, such Issuer shall be entitled to recover such amount on demand from such Lender together with interest at the daily average Federal Funds Rate for three Business Days (together with such other compensatory amounts as may be required to be paid by such Lender to the Agent pursuant to the Rules for Interbank Compensation of the council on International Banking or the Clearinghouse Compensation Committee, as the case may be, as in effect from time to time) and thereafter at the LIBO Rate plus the Applicable Margin. Nothing in this Section 2.8.4 shall be deemed to prejudice the right of any Lender to recover from any Issuer any amounts made available by such Lender to such 24 Issuer pursuant to this Section 2.8.4 in the event that it is determined by a court of competent jurisdiction that the payment with respect to a Letter of Credit by such Issuer in respect of which payment was made by such Lender constituted gross negligence or wilful misconduct on the part of such Issuer. Each Issuer shall distribute to each other Lender which has paid all amounts payable by it under this Section 2.8.4 with respect to any Letter of Credit issued by such Issuer such other Lender's Percentage of all payments received by such Issuer from the Borrower in reimbursement of drawings honored by such Issuer under such Letter of Credit when such payments are received. SECTION 2.8.5. Disbursements. Each Issuer will notify the Borrower and the Agent promptly of the presentment for payment of any Letter of Credit, together with notice of the date (the "Disbursement Date") such payment shall be made. Subject to the terms and provisions of such Letter of Credit, the applicable Issuer shall make such payment (the "Disbursement") to the beneficiary (or its designee) of such Letter of Credit. Prior to 11:30 a.m. (U.S. Central time) on the Disbursement Date, the Borrower will reimburse the applicable Issuer for all amounts which it has disbursed under the Letter of Credit. In the event the applicable Issuer is not reimbursed by the Borrower on the Disbursement Date, or if such Issuer must for any reason return or disgorge such reimbursement, the Lenders (including such Issuer) shall, on the terms and subject to the conditions of this Agreement, fund the Reimbursement Obligation therefor by making, on the next Business Day, Revolving Loans which are Base Rate Loans as provided in Section 2.1.1 (the Borrower being deemed to have given a timely Borrowing Request therefor for such amount); provided, however, for the purpose of determining the availability of the Commitments to make Loans immediately prior to giving effect to the application of the proceeds of such Loans, such Reimbursement Obligation shall be deemed not to be outstanding at such time. To the extent the applicable Issuer is not reimbursed in full in accordance with the preceding sentences, the Borrower's Reimbursement Obligation shall accrue interest at a fluctuating rate determined by reference to the LIBO Rate, plus a margin of 2% per annum, payable on demand. SECTION 2.8.6. Reimbursement. The Borrower's obligation (a "Reimbursement Obligation") under Section 2.8.5 to reimburse an Issuer with respect to each Disbursement (including interest thereon), and each Lender's obligation to make participation payments in each drawing which has not been reimbursed by the Borrower, shall be absolute and unconditional under any and all circumstances and irrespective of any setoff, counterclaim, or defense to payment which the Borrower may have or have had against any Lender or any beneficiary of a Letter of Credit, including any defense based upon the occurrence of any Default, any draft, demand or certificate or other document presented under a Letter of Credit proving to be forged, fraudulent, invalid or insufficient, the failure of any disbursement to conform to the terms of the applicable Letter of Credit (if, in the applicable Issuer's good 25 faith opinion, such disbursement is determined to be appropriate) or any non-application or misapplication by the beneficiary of the proceeds of such disbursement, or the legality, validity, form, regularity, or enforceability of such Letter of Credit; provided, however, that nothing herein shall adversely affect the right of the Borrower or any Lender to commence any proceeding against the applicable Issuer for any wrongful disbursement made by such Issuer under a Letter of Credit as a result of acts or omissions constituting gross negligence or wilful misconduct on the part of such Issuer. SECTION 2.8.7. Deemed Disbursements. Upon either (i) the occurrence and during the continuation of an Event of Default pursuant to Section 8.1.9 or the occurrence of the Revolving Period Commitment Termination Date or (ii) the declaration by the Agent of all or any portion of the outstanding principal amount of the Loans and other Obligations to be due and payable and/or the commitments (if not theretofore terminated) to be terminated as provided in Section 8.3, an amount equal to that portion of Letter of Credit Outstandings attributable to outstanding and undrawn Letters of Credit shall, at the election of the applicable Issuer acting on instructions from the Required Lenders, and without demand upon or notice to the Borrower, be deemed to have been paid or disbursed by such Issuer under such Letters of Credit (notwithstanding that such amount may not in fact have been so paid or disbursed), and, upon notification by such Issuer to the Agent and the Borrower of its obligations under this Section, the Borrower shall be immediately obligated to reimburse such Issuer the amount deemed to have been so paid or disbursed by such Issuer. Any amounts so received by such Issuer from the Borrower pursuant to this Section shall be delivered to the Agent to be held as collateral security for the repayment of the Borrower's obligations in connection with the Letters of Credit. All amounts on deposit pursuant to this Section 2.8.7 shall, until their application to any Obligation or their return to the Borrower, as the case may be, at the Borrower's written request, be invested in high grade short-term liquid investments acceptable to Agent and designated by the Borrower, which investments shall be held by the Agent as additional collateral security for the repayment of the Borrower's Obligations under and in connection with the Letters of Credit and all other Obligations. Any losses, net of earnings, and reasonable fees and expenses of such investments shall be charged against the principal amount invested. The Agent, the Issuer and the Lenders shall not be liable for any loss resulting from any investment made by the Agent at the Borrower's request. The Agent is not obligated hereby, or by any other Loan Document, to make or maintain any investment, except upon written request by the Borrower. At any time when such Letters of Credit shall terminate and all Obligations to each Issuer are either terminated or paid or reimbursed to each Issuer in full, the Obligations of the Borrower under this Section 2.8.7 shall be reduced accordingly (subject, however, to reinstatement in the event any payment in respect of any of such Letters of Credit is recovered in any manner from such Issuer), and the Agent will return to the Borrower the excess, if 26 any, of the aggregate amount held by the Agent and not theretofore applied to any Reimbursement Obligation. At such time when all Events of Default shall have been cured or waived, if the Revolving Period Commitment Termination Date shall not have occurred for any reason, the Agent shall return to the Borrower all amounts then on deposit with the Agent pursuant to this Section 2.8.7. SECTION 2.8.8. Nature of Reimbursement Obligations. The Borrower shall assume all risks of the acts, omissions, or misuse of any Letter of Credit by the beneficiary thereof. Neither any Issuer, the Agent nor any Lender (except to the extent of its own gross negligence or wilful misconduct) shall be responsible for: (a) the form, validity, sufficiency, accuracy, genuineness, or legal effect of any Letter of Credit or any document submitted by any party in connection with the application for and issuance of a Letter of Credit, even if it should in fact prove to be in any or all respects invalid, insufficient, inaccurate, fraudulent, or forged; (b) the form, validity, sufficiency, accuracy, genuineness, or legal effect of any instrument transferring or assigning or purporting to transfer or assign a Letter of Credit or the rights or benefits thereunder or proceeds thereof in whole or in part, which may prove to be invalid or ineffective for any reason; (c) failure of the beneficiary to comply fully with conditions required in order to demand payment under a Letter of Credit; (d) errors, omissions, interruptions, or delays in transmission or delivery of any messages, by mail, cable, telegraph, telex, facsimile or otherwise; or (e) any loss or delay in the transmission or otherwise of any document or draft required in order to make a Disbursement under a Letter of Credit or of the proceeds thereof. None of the foregoing shall affect, impair, or prevent the vesting of any of the rights or powers granted any Issuer or any Lender hereunder. In furtherance and extension, and not in limitation or derogation, of any of the foregoing, any action taken or omitted to be taken by any Issuer in good faith shall be binding upon the Borrower and shall not put such Issuer under any resulting liability to the Borrower. SECTION 2.8.9. Increased Costs; Indemnity. If by reason of (a) any change in applicable law, regulation, rule, decree or regulatory requirement or any change in the interpretation or application by any judicial or regulatory authority of any law, regulation, rule, decree or regulatory requirement, or (b) compliance by any Issuer or any Lender with any direction, or requirement of any governmental or monetary authority, including Regulation D of the F.R.S. Board: (i) any Issuer or any Lender shall be subject to any tax (other than taxes on net income and franchises), levy, charge or withholding of any nature or to any variation thereof or to any penalty with respect to the maintenance or fulfillment of its obligations under this Section 2.8, whether directly or by such being imposed on or suffered by such Issuer or such Lender; (ii) any reserve, deposit or similar requirement is or shall be applicable, increased, imposed or modified in respect of any Letters of Credit issued by any Issuer or participations therein purchased by any Lender; or (iii) there shall be imposed on 27 any Issuer or any Lender any other condition regarding this Section 2.8, any Letter of Credit or any participation therein, and the result of the foregoing is directly to increase the cost to such Issuer or such Lender of issuing or maintaining any Letter of Credit or of purchasing or maintaining any participation therein, or to reduce any amount receivable in respect thereof by such Issuer or such Lender, then and in any such case such Issuer or such Lender may, at any time after the additional cost is incurred or the amount received is reduced, notify the Agent and the Borrower thereof, and the Borrower shall pay within 10 days of demand such amounts as such Issuer or Lender may in good faith specify to be necessary to compensate such Issuer or Lender for such additional cost or reduced receipt, together with interest on such amount from the date demanded until payment in full thereof at a rate equal at all times to the Alternate Base Rate per annum. The determination by such Issuer or Lender, as the case may be, of any amount due pursuant to this Section 2.8.9, as set forth in a statement setting forth the calculation thereof in reasonable detail, shall, in the absence of manifest error, be conclusive and binding on the Borrower. In addition to amounts payable as elsewhere provided in this Section 2.8, the Borrower hereby indemnifies, exonerates and holds each Issuer, the Agent and each Lender harmless from and against any and all actions, causes of action, suits, losses, costs, liabilities and damages, and expenses incurred in connection therewith (irrespective of whether such Issuer, the Agent or such Lender is a party to the action for which indemnification is sought), including reasonable attorneys' fees and disbursements, which such Issuer, the Agent or such Lender may incur or be subject to as a consequence, direct or indirect, of the issuance of the Letters of Credit, other than as a result of the gross negligence or wilful misconduct of such Issuer as determined by a court of competent jurisdiction, or the failure of such Issuer to honor a drawing under any Letter of Credit as a result of any act or omission, whether rightful or wrongful, of any present or future government or governmental authority. 2.8.10. Letter of Credit Collateral Account. The Borrower hereby agrees that it will, until the final expiration date of any Letter of Credit and thereafter as long as any amount is payable to the Lenders in respect of any Letter of Credit, maintain a special collateral account (the "Letter of Credit Collateral Account") with the Agent, in the name of the Borrower but under the sole dominion and control of the Agent, for the benefit of the Lenders and in which the Borrower shall have no interest other than as set forth in Section 3.1.2. The Agent will invest any funds on deposit from time to time in the Letter of Credit Collateral Account in short term investments, having a maturity not exceeding 30 days. Nothing in this Section 2.8.10 shall (i) obligate the Borrower to deposit any funds in the Letter of Credit Collateral Account, (ii) obligate the Agent to require the Borrower to deposit any funds in the Letter of Credit Collateral Account or (iii) limit the right of the Agent to release any funds held in the Letter of Credit Collateral 28 Account, other than as required by Section 3.1.2. The Borrower hereby grants to the Agent for the benefit of the Lenders a security interest in the Letter of Credit Collateral Account and any funds or investments in such account. ARTICLE III REPAYMENTS, PREPAYMENTS, INTEREST AND FEES SECTION 3.1. Repayments and Prepayments. The Borrower shall make mandatory repayments and prepayments and may also make voluntary prepayments from time to time pursuant to this Section 3.1. Each prepayment made pursuant to this Section shall be without premium or penalty, except as may be required by Section 4.4. SECTION 3.1.1. Repayments. To the extent that Term Loans are made to the Borrower on the Revolving Period Commitment Termination Date, such Term Loans shall be deemed to be for repayment of the principal of Revolving Loans outstanding as of the Revolving Period Commitment Termination Date. The Borrower shall repay in full the unpaid aggregate principal amount of each Loan upon the Stated Maturity Date therefor. Prior thereto, the Borrower shall, on each Quarterly Payment Date occurring after the Revolving Period Commitment Termination Date, make a scheduled repayment of the outstanding principal amount of the Term Loans in an amount equal to one twelfth (1/12) of the original aggregate principal amount of the Term Loans; provided, that the final scheduled repayment on the Stated Maturity Date for Term Loans shall be in an amount necessary to repay in full the unpaid principal of the Term Loans. SECTION 3.1.2. Mandatory Prepayments on Loans. If at any time, the aggregate principal amount of all Senior Debt outstanding shall exceed the Borrowing Base then in effect, the Borrower shall, at the Borrower's option, either (a) forthwith repay a portion of the Loans in an aggregate principal amount equal to such excess or (b) pay an amount equal to such excess in no more than six substantially equal monthly installments, the first such payment to be due within five days after the date on which it is first determined that such principal amount of Senior Debt exceeds the Borrowing Base, and the remaining payments due on the numerically corresponding day of each of the subsequent months so that, upon the conclusion of such mandatory prepayments, the aggregate principal amount of all outstanding Senior Debt does not exceed the Borrowing Base; provided that if the aggregate principal amount of all Senior Debt outstanding shall exceed the Borrowing Base as a result of the reduction of the Borrowing Base pursuant to Section 7.2.7, then the foregoing clause (b) shall not apply. If a subsequent month does not contain a numerically corresponding day, the Borrower shall make such payment on the last Business Day of such month, or if the numerically corresponding day is not a Business Day, such payment will be due on the preceding Business Day. In the event the aggregate of all Letter of Credit Outstandings plus the aggregate Stated Amount of all Other Letters 29 of Credit exceeds the Letter of Credit Sublimit, the Borrower shall either reduce the Letter of Credit Outstandings and/or the aggregate Stated Amount of all Other Letters of Credit by an aggregate amount equal to such excess or deposit cash collateral into the Letter of Credit Collateral Account on account of and to secure its Obligations with respect to Letters of Credit then in effect and not otherwise fully collateralized, such cash deposits to be in an amount equal to such excess. In addition, in the event the sum of the aggregate Letter of Credit Outstandings of all Letters of Credit plus the Stated Amount of all Other Letters of Credit plus the aggregate principal amount of outstanding Loans exceeds the Commitment Amount, the Borrower shall first make a mandatory prepayment of the outstanding principal amount of the Loans, and second, deposit cash collateral in the Letter of Credit Collateral Account, such prepayments and/or cash deposits to be in an aggregate amount equal to such excess. Mandatory prepayments pursuant to this Section 3.1.2 shall be in addition to and not in lieu of principal payments required pursuant to Section 3.1.1; provided, that such mandatory prepayments shall be applied against the next scheduled repayment or repayments required pursuant to Section 3.1.1 if, as of the date for such scheduled repayment, after giving effect to such scheduled repayment, the Senior Debt shall be less than or equal to the Borrowing Base then in effect. The Borrower shall, on each date when any reduction in the Revolving Period Commitment Amount shall become effective pursuant to Section 2.2.1, make a mandatory prepayment of all Revolving Loans equal to the excess, if any, of the aggregate, outstanding principal amount of all Revolving Loans over the Revolving Period Commitment Amount as so reduced and/or deposit cash collateral in the Letter of Credit Collateral Account, such prepayments and or cash deposits to be in an aggregate amount equal to such excess. SECTION 3.1.3. Repayment Upon Acceleration. The Borrower shall, immediately upon any acceleration of the Stated Maturity Date of any Loans pursuant to Section 8.2 or 8.3, repay all Loans. SECTION 3.1.4. Voluntary Repayments. The Borrower may, from time to time on any Business Day prior to the Stated Maturity Date, make a voluntary prepayment, in whole or in part, of the outstanding principal amount of any Loans; provided, however, that (i) any such prepayment shall be made pro rata among Loans of the same type and, if applicable, having the same Interest Period of all Lenders; (ii) no such prepayment of any LIBO Rate Loan may be made on any day other than the last day of the Interest Period for such Loan; and (iii) all such voluntary partial prepayments shall be in an aggregate minimum amount of $300,000 for Base Rate Loans and $1,000,000 for LIBO Rate Loans and an integral multiple of $100,000; provided that after giving effect to such partial prepayment, any outstanding LIBO Rate Loans with the same Interest Period, if any, shall be in a minimum aggregate principal amount of at least $5,000,000. Each voluntary prepayment of Term Loans made pursuant to this Section 3.1.4 shall be applied, to the extent of such prepayment, in the inverse order of the scheduled repayments 30 of Term Loans set forth in Section 3.1.1. Each prepayment of any Loans made pursuant to this Section shall be without premium or penalty, except as may be required by Section 4.4. No voluntary prepayment of principal of any Revolving Loans shall cause a reduction in the Revolving Period Commitment Amount. No voluntary prepayment of principal of any Term Loan may be reborrowed. SECTION 3.2. Interest Provisions. Interest on the outstanding principal amount of Loans shall accrue and be payable in accordance with this Section 3.2. SECTION 3.2.1. Rates. Pursuant to an appropriately delivered Borrowing Request or Continuation/Conversion Notice, the Borrower may elect that Loans comprising a Borrowing accrue interest at a rate per annum: (a) on that portion maintained from time to time as a Base Rate Loan, equal to the sum of the Alternate Base Rate from time to time in effect plus the Base Rate Applicable Margin; and (b) on that portion maintained as a LIBO Rate Loan, during each Interest Period applicable thereto, equal to the sum of the LIBO Rate (Reserve Adjusted) for such Interest Period plus the LIBO Rate Applicable Margin. The "LIBO Rate (Reserve Adjusted)" means, relative to any Loan to be made, continued or maintained as, or converted into, a LIBO Rate Loan for any Interest Period, a rate per annum (rounded upwards, if necessary, to the nearest 1/16 of 1%) determined pursuant to the following formula: LIBO Rate LIBO Rate (Reserve Adjusted) = ------------------------------- 1.00 - LIBOR Reserve Percentage The LIBO Rate (Reserve Adjusted) for any Interest Period for LIBO Rate Loans will be determined by the Agent on the basis of the LIBOR Reserve Percentage in effect on, and the applicable rates furnished to and received by the Agent from Bank of Montreal, two Business Days before the first day of such Interest Period. "LIBO Rate" means, relative to any Interest Period for LIBO Rate Loans, the rate of interest equal to the average (rounded upwards, if necessary, to the nearest 1/16 of 1%) of the rates per annum at which Dollar deposits in immediately available funds are offered to Bank of Montreal's LIBOR Office in the London interbank market as at or about 10:00 a.m. U.S. Central time two Business Days prior to the beginning of such Interest Period for delivery on the first day of such Interest Period, and in an amount approximately equal to the amount of Bank of Montreal's LIBO Rate Loan and for a period approximately equal to such Interest Period. "LIBOR Reserve Percentage" means, relative to any Interest Period for LIBO Rate Loans, the reserve percentage (expressed as a decimal) equal to the maximum aggregate reserve requirements (including all basic, emergency, supplemental, marginal and other reserves and taking into account any transitional adjustments or other scheduled changes in reserve requirements) specified under 31 regulations issued from time to time by the F.R.S. Board and then applicable to assets or liabilities consisting of and including "Eurocurrency Liabilities", as currently defined in Regulation D of the F.R.S. Board, having a term approximately equal or comparable to such Interest Period. All LIBO Rate Loans shall bear interest from and including the first day of the applicable Interest Period to (but not including) the last day of such Interest Period at the interest rate determined as applicable to such LIBO Rate Loan. SECTION 3.2.2. Post-Maturity Rates. After the date any principal amount of any Loan is due and payable (whether on the Stated Maturity Date, upon acceleration or otherwise), or after any other monetary Obligation of the Borrower shall have become due and payable, the Borrower shall pay, but only to the extent permitted by law, interest (after as well as before judgment) on such amounts at a rate per annum equal to the Alternate Base Rate plus a margin of 2%. SECTION 3.2.3. Payment Dates. Interest accrued on each Loan shall be payable, without duplication: (a) on the Stated Maturity Date therefor; (b) except in the case of voluntary prepayment of Base Rate Loans, on the date of any payment or prepayment, in whole or in part, of principal outstanding on such Loan; (c) with respect to Base Rate Loans, on each Quarterly Payment Date occurring after the date of the initial Borrowing hereunder; (d) with respect to LIBO Rate Loans, the last day of each applicable Interest Period (and, if such Interest Period shall exceed 90 days, on the 90th day of such Interest Period); and (e) on that portion of any Loans the Stated Maturity Date of which is accelerated pursuant to Section 8.2 or Section 8.3, immediately upon such acceleration. Interest accrued on Loans or other monetary Obligations arising under this Agreement or any other Loan Document after the date such amount is due and payable (whether on the Stated Maturity Date, upon acceleration or otherwise) shall be payable upon demand. Notwithstanding clauses (a) and (b) above, except as otherwise provided in this Section 3.2.3, no accrued interest shall be due and payable on the Revolving Period Commitment Termination Date on those Revolving Loans the principal of which is deemed to have been repaid by Term Loans to the Borrower pursuant to Section 3.1.1. SECTION 3.3. Fees. The Borrower agrees to pay the fees set forth in this Section 3.3. All such fees shall be non-refundable. SECTION 3.3.1. Commitment Fee. The Borrower agrees to pay to the Agent for the account of each Lender, for the period (including any portion thereof when any of its Commitments are suspended by reason of the Borrower's inability to satisfy any condition of Article V) commencing on the Effective Date and continuing through the Revolving Period Commitment Termination Date, a commitment fee at the rate of (i) during any period when the ratio (expressed as a percentage) of the outstanding principal of Senior Debt, including any Loans outstanding, to the Borrowing Base then in 32 effect is greater than 75%, 3/8 of 1% per annum and (ii) during all other periods 1/4 of 1% per annum on such Lender's Percentage of the average daily unused portion of the Revolving Period Commitment Amount. Such commitment fees shall be payable by the Borrower in arrears on each Quarterly Payment Date, commencing on March 1, 1998, and ending on the Revolving Period Commitment Termination Date. SECTION 3.3.2. Agent's Fees. To the Agent for its own account, the fees as set forth in the letter agreement between the Borrower and the Agent dated December 8, 1997. SECTION 3.3.3. Letter of Credit Face Amount Fee. The Borrower agrees to pay to the Agent, for the account of each Lender, a fee for each Letter of Credit for the period from and including the date of the issuance of such Letter of Credit to (but not including) the date upon which such Letter of Credit expires, at a per annum rate equal to the Letter of Credit Applicable Margin on the outstanding face amount of each Letter of Credit. Such fee shall be payable by the Borrower in arrears on each Quarterly Payment Date, and on the Stated Maturity Date of any Term Loan for any period then ending for which such fee shall not theretofore have been paid, commencing on the first such date after the issuance of such Letter of Credit. ARTICLE IV CERTAIN LIBO RATE AND OTHER PROVISIONS SECTION 4.1. If LIBO Rate Lending Unlawful. If any Lender shall determine (which determination shall, upon notice thereof to the Borrower and the Lenders, be conclusive and binding on the Borrower) that the introduction of or any change in or in the interpretation of any law makes it unlawful, or any central bank or other governmental authority asserts that it is unlawful, for such Lender to make, continue or maintain any Loan as, or to convert any Loan into, a LIBO Rate Loan, the obligations of all Lenders to make, continue, maintain or convert any such Loans shall, upon such determination, forthwith be suspended until such Lender shall notify the Agent that the circumstances causing such suspension no longer exist, and all LIBO Rate Loans shall automatically convert into Base Rate Loans at the end of the then current Interest Periods with respect thereto or sooner, if required by such law or assertion. SECTION 4.2. If Deposits Unavailable. If the Agent shall have determined that (a) Dollar deposits in the relevant amount and for the relevant Interest Period are not available to Bank of Montreal in its relevant market; or (b) by reason of circumstances affecting Bank of Montreal's relevant market, adequate means do not exist for ascertaining the interest rate applicable hereunder to LIBO Rate Loans, then, upon notice from the Agent to the Borrower and the Lenders, the obligations of all Lenders under Section 2.3 33 and Section 2.4 to make or continue any Loans as, or to convert any Loans into, LIBO Rate Loans shall forthwith be suspended until the Agent shall notify the Borrower and the Lenders that the circum stances causing such suspension no longer exist. SECTION 4.3. Increased LIBO Rate Loan Costs, etc. The Borrower agrees to reimburse each Lender for any increase in the cost to such Lender of, or any reduction in the amount of any sum receivable by such Lender in respect of, making, continuing or maintaining (or of its obligation to make, continue or maintain) any Loans as, or of converting (or of its obligation to convert) any Loans into, LIBO Rate Loans; provided, the Borrower shall only be obligated to reimburse a Lender in respect of such increases or reductions if such Lender is generally seeking such reimbursement from similar borrowers under similar circumstances and Borrower shall not be obligated to reimburse a Lender in respect of such increases or reductions in respect of any period prior to notice thereof to Borrower. Such Lender shall promptly notify the Agent and the Borrower in writing of the occurrence of any such event, such notice to state, in reasonable detail, the reasons therefor and the additional amount required fully to compensate such Lender for such increased cost or reduced amount. Such additional amounts shall be payable by the Borrower directly to such Lender within five days of its receipt of such notice, and such notice shall, in the absence of manifest error, be conclusive and binding on the Borrower. SECTION 4.4. Funding Losses. In the event any Lender shall incur any loss or expense (including any loss or expense incurred by reason of the liquidation or reemployment of deposits or other funds acquired by such Lender to make, continue or maintain any portion of the principal amount of any Loan as, or to convert any portion of the principal amount of any Loan into, a LIBO Rate Loan) as a result of (a) any conversion or repayment or prepayment of the principal amount of any LIBO Rate Loan on a date other than the scheduled last day of the Interest Period applicable thereto, whether pursuant to Section 3.1 or otherwise; (b) any Loans not being made as LIBO Rate Loans in accordance with the Borrowing Request therefor; or (c) any Loans not being continued as, or converted into, LIBO Rate Loans in accordance with the Continuation/Conversion Notice therefor; then, upon the written notice of such Lender to the Borrower (with a copy to the Agent), the Borrower shall, within five days of its receipt thereof, pay directly to such Lender such amount as will (in the reasonable determination of such Lender) reimburse such Lender for such loss or expense. Such written notice (which shall include calculations in reasonable detail) shall, in the absence of manifest error, be conclusive and binding on the Borrower. SECTION 4.5. Increased Capital Costs. If any change in, or the introduction, adoption, effectiveness, interpretation, reinterpretation or phase-in of, any law or regulation, directive, guideline, decision or request (whether or not having the force of law) of any court, central bank, regulator or other governmental 34 authority affects or would affect the amount of capital required or expected to be maintained by any Lender or any Person controlling such Lender, and such Lender determines (in its sole and absolute discretion) that the rate of return on its or such controlling Person's capital as a consequence of its Commitments or the Borrowings made by such Lender is reduced to a level below that which such Lender or such controlling Person could have achieved but for the occurrence of any such circumstance, then, in any such case upon notice from time to time by such Lender to the Borrower, the Borrower shall, within 5 days of its receipt of such notice, pay directly to such Lender additional amounts sufficient to compensate such Lender or such controlling Person for such reduction in rate of return; provided, the Borrower shall only be obligated to pay such amounts to a Lender if such Lender is generally seeking payment in respect of such amounts from similar borrowers under similar circumstances and Borrower shall not be obligated to reimburse a Lender in respect of such amounts in respect of any period prior to such notice to the Borrower. A statement of such Lender as to any such additional amount or amounts (including calculations thereof in reasonable detail) shall, in the absence of manifest error, be conclusive and binding on the Borrower. In determining such amount, such Lender may use any reasonable method of averaging and attribution that it (in its sole and absolute discretion) shall deem applicable. SECTION 4.6. Taxes. In the event that any withholding or deduction from any payment to be made by the Borrower hereunder is required in respect of any present or future income, excise, stamp or franchise taxes and other taxes, fees, duties, withholdings or other charges of any nature whatsoever imposed by any taxing authority, but excluding franchise taxes and taxes imposed on or measured by any Lender's or Issuer's net income or receipts (such non-excluded items being called "Taxes") pursuant to any applicable law, rule or regulation, then the Borrower will (a) pay directly to the relevant authority the full amount required to be so withheld or deducted; and (b) promptly forward to the Agent an official receipt or other documentation satisfactory to the Agent evidencing such payment to such authority. If the Borrower fails to pay any Taxes when due to the appropriate taxing authority or fails to remit to the Agent, for the account of the respective Lenders or the Issuer, the required receipts or other required documentary evidence, the Borrower shall indemnify the Lenders or the Issuer, as the case may be, for any incremental Taxes, interest or penalties that may become payable by any Lender as a result of any such failure. For purposes of this Section 4.6, a distribution hereunder by the Agent or any Lender or Issuer to or for the account of any Lender or Issuer shall be deemed a payment by the Borrower. Upon the request of the Borrower or the Agent, each Lender and Issuer that is organized under the laws of a jurisdiction other than the United States shall, prior to the due date of any payments under the Notes, execute and deliver to the Borrower and the Agent, 35 on or about the first scheduled payment date in each Fiscal Year, one or more (as the Borrower or the Agent may reasonably request) United States Internal Revenue Service Forms 4224 or Forms 1001 or such other forms or documents (or successor forms or documents), appropriately completed, as may be applicable to establish the extent, if any, to which a payment to such Lender or Issuer is exempt from withholding or deduction of Taxes. SECTION 4.7. Payments, Computations, etc. Unless otherwise expressly provided, all payments by the Borrower pursuant to this Agreement, the Notes or any other Loan Document shall be made by the Borrower to the Agent for the pro rata account of the Lenders or the Issuer entitled to receive such payment. All such payments required to be made to the Agent shall be made, without setoff, deduction or counterclaim, not later than 12:00 Noon, United States Central time, on the date due, in same day or immediately available funds, to such account as the Agent shall specify from time to time by notice to the Borrower. Funds received after that time shall be deemed to have been received by the Agent on the next succeeding Business Day. The Agent shall promptly remit in same day funds to each Lender or Issuer its share, if any, of such payments received by the Agent for the account of such Lender or Issuer. All interest and fees shall be computed on the basis of the actual number of days (including the first day but excluding the last day) occurring during the period for which such interest or fee is payable over a year comprised of 360 days (or, in the case of interest on a Base Rate Loan, 365 days or, if appropriate, 366 days). Whenever any payment to be made shall otherwise be due on a day which is not a Business Day, such payment shall (except as otherwise required by clause (c) of the definition of the term "Interest Period" with respect to LIBO Rate Loans) be made on the next succeeding Business Day and such extension of time shall be included in computing interest and fees, if any, in connection with such payment. SECTION 4.8. Sharing of Payments. If any Lender shall obtain any payment or other recovery (whether voluntary, involun tary, by application of setoff or otherwise) on account of any Loan or participation in a Letter of Credit (other than pursuant to the terms of Sections 4.3, 4.4 and 4.5) in excess of its pro rata share of payments then or therewith obtained by all Lenders, such Lender shall purchase from the other Lenders such participations in Loans made by them and participations in Letters of Credit held by them as shall be necessary to cause such purchasing Lender to share the excess payment or other recovery ratably with each of them; provided, however, that if all or any portion of the excess payment or other recovery is thereafter recovered from such purchasing Lender, the purchase shall be rescinded and each Lender which has sold a participation to the purchasing Lender shall repay to the purchasing Lender the purchase price to the ratable extent of such recovery together with an amount equal to such selling Lender's ratable share (according to the proportion of (a) the amount of such selling Lender's required repayment to the purchasing Lender to (b) the total amount so recovered from the purchasing Lender) of 36 any interest or other amount paid or payable by the purchasing Lender in respect of the total amount so recovered. The Borrower agrees that any Lender so purchasing a participation from another Lender pursuant to this Section 4.8 may, to the fullest extent permitted by law, exercise all its rights of payment (including pursuant to Section 4.9) with respect to such participation as fully as if such Lender were the direct creditor of the Borrower in the amount of such participation. If under any applicable bankruptcy, insolvency or other similar law, any Lender receives a secured claim in lieu of a setoff to which this Section 4.8 applies, such Lender shall, to the extent practicable, exercise its rights in respect of such secured claim in a manner consistent with the rights of the Lenders entitled under this Section 4.8 to share in the benefits of any recovery on such secured claim. SECTION 4.9. Setoff. Each Lender and Issuer shall, upon the occurrence of any Default described in clauses (a) through (d) of Section 8.1.9 with respect to the Borrower or any of its Subsidiaries or any other Event of Default, have the right to appropriate and apply to the payment of the Obligations owing to it (whether or not then due), and (as security for such Obligations) the Borrower hereby grants to each Lender and Issuer a continuing security interest in, any and all balances, credits, deposits, accounts or moneys of the Borrower then or thereafter maintained with such Lender or Issuer; provided, however, that any such appropriation and application shall be subject to the provisions of Section 4.8. Each Lender and Issuer agrees promptly to notify the Borrower and the Agent after any such setoff and application made by such Lender or Issuer; provided, however, that the failure to give such notice shall not affect the validity of such setoff and application. The rights of each Lender and Issuer under this Section 4.9 are in addition to other rights and remedies (including other rights of setoff under applicable law or otherwise) which such Lender or Issuer may have. SECTION 4.10. Use of Proceeds. The Borrower shall apply the proceeds of each Borrowing in accordance with the fifth recital; provided that the Borrower will not and will not permit any Subsidiary to use any proceeds to fund an Acquisition not approved by the board of directors or other governing body of the target or selling company or to acquire any "margin stock" (as defined in F.R.S. Regulation U) in violation of Regulation G,T,X or U of the Board of Governors of the Federal Reserve System. ARTICLE V CONDITIONS TO BORROWING SECTION 5.1. Continuation of Original Loans; Initial Borrowing. The obligations of the Lenders to continue the Original Loans as Loans hereunder and to fund the initial Borrowing and to issue the initial Letter of Credit shall be subject to the prior or concurrent satisfaction of each of the conditions precedent set forth in this Section 5.1. 37 SECTION 5.1.1. Resolutions, etc. The Agent shall have received from the Borrower a certificate, dated the date of the initial Borrowing or the issuance of the initial Letter of Credit, of its Secretary or Assistant Secretary as to (a) resolutions of its Board of Directors then in full force and effect authorizing the execution, delivery and performance of this Agreement, the Notes and each other Loan Document to be executed by it; and (b) the incumbency and signatures of those of its officers authorized to act with respect to this Agreement, the Notes and each other Loan Document executed by it, upon which certificate each Lender may conclusively rely until it shall have received a further certificate of the Secretary or Assistant Secretary of the Borrower canceling or amending such prior certificate. SECTION 5.1.2. Delivery of Notes. The Agent shall have received, for the account of each Lender, its Note duly executed and delivered by the Borrower. SECTION 5.1.3. [Reserved]. SECTION 5.1.4. Compliance with Representations and Warranties. The Agent shall have received a certificate from an Authorized Officer confirming compliance with Section 5.2.1 and stating that, after giving effect to Loans or Letters of Credit comprising the initial Borrowings, Senior Debt shall not exceed the Borrowing Base then in effect. SECTION 5.1.5. Opinions of Counsel. The Agent shall have received an opinion, dated the date of the initial Borrowing and addressed to the Agent and all Lenders and Issuers, from Conner & Winters, a Professional Corporation, counsel to the Borrower, substantially in the form of Exhibit E-1 hereto and the Agent shall be satisfied that it will receive within 30 days of the initial Borrowing an opinion from Conner & Winters, a Professional Corporation, counsel to the Borrower, substantially in the form of Exhibit E-2 hereto. SECTION 5.1.6. Closing Fees, Expenses, etc. The Agent shall have received for its own account, or for the account of each Lender, as the case may be, all fees, costs and expenses due and payable pursuant to Sections 3.3 and 10.3, if then invoiced. SECTION 5.2. Conditions Precedent to Revolving Loans. The obligation of each Lender to fund any Revolving Loan and of each Issuer to issue a Letter of Credit on the occasion of any Borrowing (including the initial Borrowing) shall be subject to the satisfaction of each of the conditions precedent set forth in this Section 5.2. SECTION 5.2.1. Compliance with Warranties, No Default, etc. Both before and after giving effect to any Borrowing (but, if any Default of the nature referred to in Section 8.1.5 shall have occurred with respect to any other Indebtedness, without giving effect to the application, directly or indirectly, of the proceeds 38 thereof) the following statements shall be true and correct: (a) the representations and warranties set forth in Article VI (excluding, however, those contained in Section 6.7) shall be true and correct with the same effect as if then made (unless stated to relate solely to an early date, in which case such representations and warranties shall be true and correct as of such earlier date); (b) except as disclosed by the Borrower to the Agent and the Lenders pursuant to Section 6.7 (i) no labor controversy, litigation, arbitration or governmental investigation or proceeding shall be pending or, to the knowledge of the Borrower, threatened against the Borrower or any of its Subsidiaries which might materially adversely affect the Borrower's consolidated business, operations, assets, revenues, properties or prospects or which purports to affect the legality, validity or enforceability of this Agreement, the Notes or any other Loan Document; and (ii) no development shall have occurred in any labor controversy, litigation, arbitration or governmental investigation or proceeding disclosed pursuant to Section 6.7 which might materially adversely affect the consolidated businesses, operations, assets, revenues, properties or prospects of the Borrower and its Subsidiaries; (c) no Default shall have then occurred and be continuing, and neither the Borrower nor any of its Subsidiaries are in material violation of any law or governmental regulation or court order or decree; (d) the Borrower is in compliance with the Current Ratio and Tangible Net Worth tests required by Section 7.2.4, and, immediately after giving effect to the proposed Borrowing, the Senior Debt of the Borrower shall not exceed the Borrowing Base and (e) the Loans and Letters of Credit requested will constitute "Designated Senior Indebtedness" pursuant to the Indenture, as defined therein. SECTION 5.2.2. Borrowing Request. The Agent shall have received a Borrowing Request for such Borrowing of a Loan and an Issuance Request for each Borrowing which is in the form of the issuance of a Letter of Credit. Each of the delivery of a Borrowing Request or Issuance Request shall constitute a representation and warranty by the Borrower that, on the date of such Borrowing (both immediately before and after giving effect to such Borrowing and the application of the proceeds thereof), the statements made in Section 5.2.1 are true and correct. SECTION 5.2.3. Satisfactory Legal Form. All documents executed or submitted pursuant hereto by or on behalf of the Borrower or any of its Subsidiaries shall be satisfactory in form and substance to the Agent and its counsel; the Agent and its counsel shall have received all information, approvals, opinions, documents or instruments as the Agent or its counsel may reasonably request. SECTION 5.3. Conditions Precedent to the Making of the Term Loans. The obligation of each Lender to make its Term Loan is subject to (a) the condition precedent that the principal of all Revolving Loans and accrued interest on all Revolving Loans, except those Revolving Loans the principal of which shall be deemed to 39 have been repaid by Term Loans pursuant to Section 3.1.1 and for which such interest is not otherwise due and payable, shall have been paid in full prior to or concurrently with the making of such Term Loan; and (b) the conditions precedent set forth in Section 5.2.1. The acceptance by the Borrower of the proceeds of the Term Loans shall constitute a representation and warranty that, on the Revolving Period Commitment Termination Date (both before and after giving effect to such Term Loans and the application of the proceeds thereof), the statements made in Section 5.2.1 are true and correct. ARTICLE VI REPRESENTATIONS AND WARRANTIES In order to induce the Lenders and the Agent to enter into this Agreement and to make Loans hereunder, and the Issuer to issue Letters of Credit and the Lenders to participate in Letters of Credit, the Borrower represents and warrants unto the Agent and each Lender and Issuer as set forth in this Article VI. SECTION 6.1. Organization, etc. The Borrower and each of its Subsidiaries is a corporation validly organized and existing and in good standing under the laws of the jurisdiction of its incorporation, is duly qualified to do business and is in good standing as a foreign corporation in each jurisdiction where the nature of its business requires such qualification, and has full power and authority and holds all requisite governmental licenses, permits and other approvals to enter into and perform its Obligations under this Agreement, the Notes and each other Loan Document and to own and hold under lease its property and to conduct its business substantially as currently conducted by it. SECTION 6.2. Due Authorization, Non-Contravention, etc. The execution, delivery and performance by the Borrower of this Agreement, the Notes and each other Loan Document executed or to be executed by it, are within the Borrower's corporate powers, have been duly authorized by all necessary corporate action, and do not (a) contravene the Borrower's Organic Documents; (b) contravene any contractual restriction, law or governmental regulation or court decree or order binding on or affecting the Borrower; or (c) result in, or require the creation or imposition of, any Lien on any of the Borrower's properties. SECTION 6.3. Government Approval, Regulation, etc. No authorization or approval or other action by, and no notice to or filing with, any governmental authority or regulatory body or other Person is required for the due execution, delivery or performance by the Borrower of this Agreement, the Notes or any other Loan Document. Neither the Borrower nor any of its Subsidiaries is an "investment company" within the meaning of the Investment Company Act of 1940, as amended, or a "holding company", or a "subsidiary company" of a "holding company", or an "affiliate" of a "holding 40 company" or of a "subsidiary company" of a "holding company", within the meaning of the Public Utility Holding Company Act of 1935, as amended. SECTION 6.4. Validity, etc. This Agreement constitutes, and the Notes and each other Loan Document executed by the Borrower will, on the due execution and delivery thereof, constitute, the legal, valid and binding obligations of the Borrower enforceable in accordance with their respective terms except as enforceability may be limited by applicable bankruptcy, insolvency, reorganization, moratorium or similar laws affecting the enforcement of creditors' rights generally. SECTION 6.5. Financial Information. The consolidated balance sheet of the Borrower and its Subsidiaries as at September 30, 1997, and the related consolidated statements of earnings and cash flows of the Borrower and its Subsidiaries, copies of which have been furnished to the Agent and each Lender, have been prepared in accordance with GAAP consistently applied, and present fairly the consolidated financial condition of the Borrower and its Subsidiaries as at the date thereof and the results of their operations for the period then ended. SECTION 6.6. No Material Adverse Change. Since the date of the financial statements described in Section 6.5, other than changes resulting from fluctuations in oil and gas prices, there has been no material adverse change in the financial condition, operations, assets, business, properties or prospects of the Borrower and its Subsidiaries, taken as a whole, except as disclosed in Item 6.6 of the Disclosure Schedule. SECTION 6.7. Litigation, Labor Controversies, etc. There is no pending or, to the knowledge of the Borrower, threatened litigation, action, proceeding, or labor controversy affecting the Borrower or any of its Subsidiaries, or any of their respective properties, businesses, assets or revenues, which may materially adversely affect the financial condition, operations, assets, business, properties or prospects of the Borrower and its Subsidiaries, taken as a whole, or which purports to affect the legality, validity or enforceability of this Agreement, the Notes or any other Loan Document, except as disclosed in Item 6.7 ("Litigation") of the Disclosure Schedule. SECTION 6.8. Subsidiaries. The Borrower has no Subsidiaries, except those Subsidiaries which are identified in Item 6.8 ("Existing Subsidiaries") of the Disclosure Schedule. SECTION 6.9. Ownership of Properties. The Borrower and each of its Subsidiaries owns good and defensible title to all of its properties and assets, real and personal, tangible and intangible, of any nature whatsoever (including patents, trade- 41 marks, trade names, service marks and copyrights), free and clear of all Liens, charges or claims (including infringement claims with respect to patents, trademarks, copyrights and the like), except those which would not have a material adverse effect on the financial conditions, operations, assets, business, properties or prospects of the Borrower and its Subsidiaries, taken as a whole, and except as permitted pursuant to Section 7.2.3. For the purposes of this representation, good and defensible title shall mean record title which may be subject to minor defects and irregularities which (a) do not materially reduce Borrower's net revenue interests or increase Borrower's working interests (without a corresponding and proportional increase in Borrower's net revenue interests) therein, and (b) are not likely to interfere materially with the benefit and enjoyment of production from such properties. SECTION 6.10. Taxes. To the best of the Borrower's knowledge, Borrower and each of its Subsidiaries has filed all tax returns and reports required by law to have been filed by it and has paid all taxes and governmental charges thereby shown to be owing, except any such taxes or charges which are being diligently contested in good faith by appropriate proceedings and for which adequate reserves in accordance with GAAP shall have been set aside on its books. SECTION 6.11. Pension and Welfare Plans. No steps have been taken to terminate any Pension Plan, and no contribution failure has occurred with respect to any Pension Plan sufficient to give rise to a Lien under section 302(f) of ERISA. No condition exists or event or transaction has occurred with respect to any Pension Plan which might result in the incurrence by the Borrower or any member of the Controlled Group of any material liability, fine or penalty. Neither the Borrower nor any member of the Controlled Group has any contingent liability with respect to any post-retirement benefit under a Welfare Plan, other than liability for continuation coverage described in Part 6 of Title I of ERISA. SECTION 6.12. Environmental Warranties. To the best of Borrower's knowledge after reasonable investigation, except as set forth in Item 6.12 ("Environmental Matters") of the Disclosure Schedule: (a) all facilities and property (including underlying groundwater) owned or leased by the Borrower or any of its Subsidiaries have been, and continue to be, owned or leased by the Borrower and its Subsidiaries in material compliance with all Environmental Laws; (b) there have been no past, and there are no pending or threatened (i) claims, complaints, notices or requests for information received by the Borrower or any of its Subsidiaries with respect to any alleged violation of any Environmental Law, or (ii) complaints, notices or inquiries to the Borrower or any of its Subsidiaries regarding potential liability under any Environmental Law; (c) there have been no Releases (or, in Argentina, release) of Hazardous Materials at, on or under any property now or previously owned or leased by the Borrower or any of its Subsidiaries that, singly or in the aggregate, have, or may reasonably be expected to have, a material adverse effect on the financial condition, 42 operations, assets, business, properties or prospects of the Borrower and its Subsidiaries, taken as a whole; (d) the Borrower and its Subsidiaries have been issued and are in material compliance with all permits, certificates, approvals, licenses and other authorizations relating to environmental matters and necessary or desirable for their businesses; (e) no property now or previously owned or leased by the Borrower or any of its Subsidiaries is listed or proposed for listing (with respect to owned property only) on the National Priorities List pursuant to CERCLA, on the CERCLIS or on any similar state list of sites requiring investigation or clean-up; (f) there are no underground storage tanks, active or abandoned, including petroleum storage tanks, on or under any property now or previously owned or leased by the Borrower or any of its Subsidiaries that, singly or in the aggregate, have, or may reasonably be expected to have, a material adverse effect on the financial condition, operations, assets, business, properties or prospects of the Borrower and its Subsidiaries, taken as a whole; (g) neither Borrower nor any Subsidiary of the Borrower has directly transported or directly arranged for the transportation of any Hazardous Material to any location which is listed or proposed for listing on the National Priorities List pursuant to CERCLA, on the CERCLIS or on any similar state list or which is the subject of federal, state or local enforcement actions or other investigations which may lead to material claims against the Borrower or such Subsidiary thereof for any remedial work, damage to natural resources or personal injury, including claims under CERCLA; (h) there are no polychlorinated biphenyls or friable asbestos present at any property now or previously owned or leased by the Borrower or any Subsidiary of the Borrower that, singly or in the aggregate, have, or may reasonably be expected to have, a material adverse effect on the financial condition, operations, assets, business, properties or prospects of the Borrower and its Subsidiaries, taken as a whole; and (i) no conditions exist at, on or under any property now or previously owned or leased by the Borrower or any Subsidiary which, with the passage of time, or the giving of notice or both, would give rise to liability under any Environmental Law which singly or in the aggregate have, or may reasonably be expected to have, a material adverse effect on the financial condition, operations, assets, business, properties or prospects of the Borrower and its Subsidiaries, taken as a whole. SECTION 6.13. Regulations G, U and X. The Borrower is not engaged in the business of extending credit for the purpose of purchasing or carrying margin stock, and no proceeds of any Loans will be used for a purpose which violates, or would be inconsistent with, F.R.S. Board Regulation G, U or X. Terms for which meanings are provided in F.R.S. Board Regulation G, U or X or any regulations substituted therefor, as from time to time in effect, are used in this Section with such meanings. SECTION 6.14. Accuracy of Information. All factual information heretofore or contemporaneously furnished by or on behalf of the Borrower in writing to the Agent or any Lender or 43 Issuer for purposes of or in connection with this Agreement or any transaction contemplated hereby is, and all other such factual information hereafter furnished by or on behalf of the Borrower to the Agent or any Lender or Issuer will be, true and accurate in every material respect on the date as of which such information is dated or certified and as of the date of execution and delivery of this Agreement by the Agent and such Lender or Issuer, and such information is not, or shall not be, as the case may be, incomplete by omitting to state any material fact necessary to make such information not misleading. SECTION 6.15. No Default. Neither the Borrower nor any Subsidiary is in default in any respect materially and adversely affecting the business, property, assets, operations or condition, financial or otherwise, of the Borrower and its Subsidiaries, taken as a whole, with respect to any indenture, mortgage, deed of trust or other agreement or instrument to which the Borrower is a party or by which the Borrower or its properties is/are bound or affected. SECTION 6.16. No Violation of Applicable Law. To the best of the Borrower's knowledge, neither the Borrower nor any of its Subsidiaries has violated any applicable statute, regulation or ordinance of the United States of America or any foreign country, or any state, municipality or other jurisdiction, or of any agency thereof in any respect materially and adversely affecting the business, property, assets, operations or condition, financial or otherwise, of Borrower and its Subsidiaries, taken as a whole, and the Borrower has not received any notice of probable violation from the Department of Energy or the Environmental Protection Agency. The Borrower is using the Borrower's best efforts to comply or cause its Subsidiaries to comply with all statutes, rules and regulations relating to environmental standards and controls in all jurisdictions where the Borrower and its Subsidiaries are presently doing business. SECTION 6.17. Permits. The Borrower and its Subsidiaries have all governmental and private permits, certificates, consents and franchises which in any respect are material to the business, property, assets, operations or condition, financial or otherwise, of the Borrower and its Subsidiaries to carry on the Borrower's and such Subsidiaries' business as now being conducted, and to own or lease and operate the Borrower's and such Subsidiaries' properties as now owned or leased. All such governmental and private permits, certificates, consents and franchises are valid and subsisting, and the Borrower and its Subsidiaries are not in violation thereof in a manner which would have a material and adverse effect thereon. 44 ARTICLE VII COVENANTS SECTION 7.1. Affirmative Covenants. The Borrower agrees with the Agent and each Lender that, until all Commitments have terminated and all Obligations have been paid and performed in full, the Borrower will perform the obligations set forth in this Section 7.1. SECTION 7.1.1. Financial Information, Reports, Notices, etc. The Borrower will furnish, or will cause to be furnished, to each Lender and the Agent copies of the following financial statements, reports, notices and information: (a) as soon as available and in any event within 45 days after the end of each of the first three Fiscal Quarters of each Fiscal Year of the Borrower, consolidated balance sheets of the Borrower and its Subsidiaries as of the end of such Fiscal Quarter and consolidated statements of earnings and cash flows of the Borrower and its Subsidiaries for such Fiscal Quarter and for the period commencing at the end of the previous Fiscal Year and ending with the end of such Fiscal Quarter, certified by the chief accounting or financial Authorized Officer of the Borrower; (b) as soon as available and in any event within 120 days after the end of each Fiscal Year of the Borrower, a complete copy of the annual audit report for such Fiscal Year for the Borrower and its Subsidiaries, including therein consolidated balance sheets of the Borrower and its Subsidiaries as of the end of such Fiscal Year and consolidated statements of earnings and cash flows of the Borrower and its Subsidiaries for such Fiscal Year, in each case certified (without any Impermissible Qualification) by Arthur Andersen LLP or other independent public accountants selected by the Borrower and reasonably acceptable to the Agent and the Required Lenders, together with a certificate from such accountants (i) containing a computation of, and showing compliance with, each of the financial ratios and restrictions contained in Section 7.2.4 and (ii) containing a computation of the Consolidated Interest Coverage Ratio (as defined in the Indenture) as of the date of such statements and to the effect that, in making the examination necessary for the signing of such annual report by such accountants, they have not become aware of any Default or Event of Default that has occurred and is continuing, or, if they have become aware of such Default or Event of Default, describing such Default or Event of Default and the steps, if any, being taken to cure it; (c) as soon as available and in any event within 45 days after the end of each Fiscal Quarter, a certificate, executed by the chief accounting or financial Authorized Officer of the Borrower, showing (in reasonable detail and with appropriate calculations and computations in all respects satisfactory to the Agent) (i) compliance with the financial covenants set forth in Section 7.2.4 and (ii) containing a computation of the Consolidated Interest Coverage Ratio (as defined in the Indenture) as of the 45 date of such statements; (d) forthwith upon the occurrence of each Default, a statement of the chief accounting or financial Authorized Officer of the Borrower setting forth details of such Default and the action which the Borrower has taken and proposes to take with respect thereto; (e) as soon as possible and in any event within three days after (i) the occurrence of any adverse development with respect to any litigation, action, proceeding, or labor controversy described in Section 6.7, or (ii) the commencement of any labor controversy, litigation, action or proceeding of the type described in Section 6.7, notice thereof and copies of all documentation relating thereto; (f) promptly after the sending or filing thereof, copies of all reports which the Borrower sends to any of its securityholders, and all reports and registration statements which the Borrower or any of its Subsidiaries files with the Securities and Exchange Commission or any national securities exchange; (g) immediately upon becoming aware of the institution of any steps by the Borrower or any other Person to terminate any Pension Plan, or the failure to make a required contribution to any Pension Plan, if such failure is sufficient to give rise to a Lien under section 302(f) of ERISA, or the taking of any action with respect to a Pension Plan which could result in the requirement that the Borrower furnish a bond or other security to the PBGC or such Pension Plan, or the occurrence of any event with respect to any Pension Plan which could result in the incurrence by the Borrower of any material liability, fine or penalty, or any material increase in the contingent liability of the Borrower with respect to any post-retirement Welfare Plan benefit, notice thereof and copies of all documentation relating thereto; and (h) such other information respecting the condition or operations, financial or otherwise, of the Borrower or any of its Subsidiaries as any Lender through the Agent may from time to time reasonably request. SECTION 7.1.2. Compliance with Laws, etc. The Borrower will, and will cause each of its Subsidiaries to, comply in all material respects with all applicable laws, rules, regulations and orders, such compliance to include (without limitation) the payment, before the same become delinquent, of all taxes, assessments and governmental charges imposed upon it or upon its property except to the extent being diligently contested in good faith by appropriate proceedings and for which adequate reserves in accordance with GAAP shall have been set aside on its books. The Borrower will maintain and preserve its corporate existence and qualification as a foreign corporation. SECTION 7.1.3. Maintenance of Properties. The Borrower will, and will cause each of its Subsidiaries to, maintain, preserve, protect and keep its material properties in good repair, working order and condition, and make necessary and proper repairs, renewals and replacements so that its business carried on in connection therewith may be properly conducted at all times, all in accordance with approved practices of prudent operators and standards prevailing in the oil and gas industry and within limits imposed by joint operating agreements. 46 SECTION 7.1.4. Insurance. The Borrower will, and will cause each of its Subsidiaries to, maintain or cause to be maintained, with responsible insurance companies insurance with respect to its properties and business against such casualties and contingencies and of such types and in such amounts as is customary in the case of similar businesses and will, upon request of the Agent, furnish to each Lender at reasonable intervals a certificate of an Authorized Officer of the Borrower setting forth the nature and extent of all insurance maintained by the Borrower and its Subsidiaries in accordance with this Section. SECTION 7.1.5. Books and Records. The Borrower will, and will cause each of its Subsidiaries to, keep books and records which accurately reflect all of its business affairs and transactions and permit the Agent and each Lender and Issuer or any of their respective representatives, at reasonable times and intervals, to visit all of its offices, to discuss its financial matters with its officers and to examine any of its books or other corporate records. SECTION 7.1.6. Environmental Covenant. The Borrower will, and will cause each of its Subsidiaries to (a) use and operate all of its facilities and properties in material compliance with all Environmental Laws, keep all necessary permits, approvals, certificates, licenses and other authorizations relating to environmental matters in effect and remain in material compliance therewith, and handle all Hazardous Materials in material compliance with all applicable Environmental Laws; (b) immediately notify the Agent and provide copies upon receipt of all written claims, complaints, notices or inquiries relating to the condition of its facilities and properties or compliance with Environmental Laws, and shall promptly cure and have dismissed with prejudice any actions and proceedings relating to compliance with Environmental Laws; and (c) provide such information and certifications which the Agent may reasonably request from time to time to evidence compliance with this Section 7.1.6. SECTION 7.1.7. Employee Benefit Plans. With respect to each Plan of Borrower, if any: (a) at all times make prompt payments of contributions with respect to each such Plan, so as to meet the minimum funding standards required by sections 302 through 305 of ERISA; (b) upon the receipt of reasonable written request from the Lenders, promptly furnish the Lenders with copies of each report required to be filed pursuant to (S).103 of ERISA in connection with such Plan for each plan-year, including any certified financial statements or actuarial statements required under said (S)103; (c) immediately notify the Lenders of any fact, including, but not limited to, any "Reportable Event" (as that term is defined in (S)4043 of ERISA) arising in connection with any such Plan which might constitute grounds for the termination thereof or for the appointment by the appropriate United States District Court of a trustee to administer such Plan, and, within thirty (30) days after the occurrence of any Reportable Event, deliver to the Lenders a statement from Borrower's President detailing such Reportable Event 47 and Borrower's proposed action with respect thereto; and (d) promptly upon their request therefor, furnish the Lenders such additional information concerning any such Plan as the Lenders may reasonably request. SECTION 7.1.8. Designated Senior Indebtedness. The Borrower and the Lenders hereby agree that all Obligations of the Borrower pursuant to this Agreement and each other Loan Document constitute Designated Senior Indebtedness (as defined in the Indenture) for purposes of the Indenture. The Borrower furthermore agrees that it shall deliver all notices and take such other action as may be required by the Indenture such that the Obligations of the Borrower under this Agreement shall at all times constitute Designated Senior Indebtedness. SECTION 7.2. Negative Covenants. The Borrower agrees with the Agent and each Lender and Issuer that, until all Commitments have terminated and all Obligations have been paid and performed in full, the Borrower will perform the obligations set forth in this Section 7.2. SECTION 7.2.1. Business Activities. The Borrower will not, and will not permit any of its Subsidiaries to, engage in any business activity, except those described in the first recital and such activities as may be incidental or related thereto. SECTION 7.2.2. Indebtedness. The Borrower will not, and will not permit any of its Subsidiaries to, create, incur, assume or suffer to exist or otherwise become or be liable in respect of any Indebtedness, other than, without duplication, the following: (a) Indebtedness in respect of the Loans and other Obligations; (b) Indebtedness existing as of the Effective Date which is identified in Item 7.2.2(c) ("Ongoing Indebtedness") of the Disclosure Schedule; (c) unsecured trade debt incurred in the ordinary course of business (including open accounts extended by suppliers on normal trade terms in connection with purchases of goods and services, but excluding Indebtedness incurred through the borrowing of money or Contingent Liabilities); (d) lease obligations under leases covering Borrower's or any of its Subsidiary's business premises (which shall include storage yard facilities); (e) lease obligations arising from the leasing of equipment located upon the Borrower's properties and utilized in the production of oil and gas therefrom; (f) lease obligations, not to exceed $1,000,000 in any Fiscal Year arising from the lease of equipment used in the ordinary course of business of the Borrower and its Subsidiaries; (g) current indebtedness to operators under joint operating agreements or compulsory pooling orders; (h) advances made as operator on behalf of non-operators pursuant to joint operating agreements or pooling orders; (i) letter of credit reimbursement agreements with issuers and any reimbursement obligations that arise thereunder, provided such letters of credit and reimbursement obligations together with all Letter of Credit Outstandings are not in excess of $125,000,000 at any time outstanding in the aggregate; (j) funds held for and payments due to third parties from 48 production from properties; (k) Indebtedness of the Borrower's Subsidiaries owing to the Borrower or to other Subsidiaries of the Borrower and unsecured Indebtedness of the Borrower owing to its Subsidiaries; (l) deferred tax liability; (m) Indebtedness of the Borrower in an outstanding amount not to exceed $50,000,000 in the aggregate, plus interest and premium, if any; (n) the guaranties by the Borrower of the obligations of its Subsidiaries otherwise permitted by the terms of this Agreement, provided that the aggregate outstanding principal amount of Indebtedness and other obligations of Subject Subsidiaries guaranteed by the Borrower shall not exceed $25,000,000 at any time; (o) Indebtedness of any Subject Subsidiary, provided that such Indebtedness shall not be a direct obligation or Contingent Liability of the Borrower or any other Subsidiary of the Borrower except as permitted by clause (n) above; (p) the Borrower's $150,000,000 9% Senior Subordinated Notes Due 2005; (q) Indebtedness in respect of Hedging Obligations, provided that such Hedging Obligations in respect of oil and gas do not exceed volumes with respect to any year in excess of 80% of the projected production attributable to the Borrower's and its Subsidiaries' then proved developed oil and gas properties in respect of such year; (r) the Borrower's $100,000,000 8 5/8% Senior Subordinated Notes Due 2009; (s) Indebtedness in an aggregate outstanding amount not to exceed $150,000,000, plus premium and interest, to be issued in the form of convertible junior subordinated debentures with a coupon rate of up to 6.5% and a tenure of at least 20 years; provided such Indebtedness is subordinated, upon terms satisfactory to the Agent and the Required Lenders, in right of payment to the payment in full in cash of all Obligations; and (t) any guarantee by the Borrower issued in connection with any convertible preferred securities issued by a statutory business trust formed by the Borrower; provided such guarantee is subordinated, upon terms satisfactory to the Agent and the Required Lenders, in right of payment to the payment in full in cash of all Obligations. SECTION 7.2.3. Liens. The Borrower will not, and will not permit any of its Subsidiaries (other than any Subject Subsidiary) to, create, incur, assume or suffer to exist any Lien upon any of its property, revenues or assets, whether now owned or hereafter acquired, except: (a) Liens granted prior to the Effective Date to secure payment of Indebtedness of the type permitted and described in clause (b) of Section 7.2.2; (b) Liens for taxes, assessments or other governmental charges or levies not at the time delinquent or thereafter payable without penalty or being diligently contested in good faith by appropriate proceedings and for which adequate reserves in accordance with GAAP shall have been set aside on its books; (c) Liens of carriers, warehousemen, mechanics, materialmen and landlords incurred in the ordinary course of business for sums not overdue or being diligently contested in good faith by appropriate proceedings and for which adequate reserves in accordance with GAAP shall have been set aside on its books; (d) encumbrances created by production sales contracts, joint operating agreements and other contracts entered into in the normal course of Borrower's business for exploration, development and/or operation 49 of the Borrower's properties; (e) easements, servitudes and other rights of user which do not materially interfere with the use of such assets; (f) other minor burdens and defects of or in title which do not secure the payment of money, other than as described in clause (a); (g) those and only those lease burdens previously disclosed to the Lenders in writing and existing operating agreements, farmout agreements and other agreements and contractual obligations related to the Borrower's properties; (h) Liens incurred in the ordinary course of business in connection with workmen's compensation, unemployment insurance or other forms of governmental insurance or benefits, or to secure performance of tenders, statutory obligations, leases and contracts (other than for borrowed money) entered into in the ordinary course of business or to secure obligations on surety or appeal bonds; (i) judgment Liens in existence less than 15 days after the entry thereof or with respect to which execution has been stayed or the payment of which is covered in full (subject to a customary deductible) by insurance maintained with responsible insurance companies; (j) Liens affecting the property of the Subject Subsidiaries only securing Indebtedness permitted by clause (o) of Section 7.2.2; (k) the Lien granted to Exxon Company, U.S.A. prior to the Effective Date covering property described in Exhibit H; (l) Liens on cash collateral delivered pursuant to Section 2.8.7; and (m) Liens granted pursuant to Section 4.9. SECTION 7.2.4. Financial Condition. The Borrower will not permit: (a) its Tangible Net Worth to be less than the sum of $275,000,000 plus 75% of the proceeds from third parties of the sale by the Borrower and its Subsidiaries of securities (other than securities constituting Indebtedness) net of reasonable incidental, brokerage, underwriting and legal costs actually paid to third parties in connection therewith, less the aggregate of the reductions after September 30, 1997 in the values at which the Borrower's oil and gas properties are carried on its books in accordance with GAAP in order to comply with the full cost method of accounting for oil and gas properties or as required by ceiling tests established by the Securities and Exchange Commission; and (b) its Current Ratio as of the end of any Fiscal Quarter to be less than 1:1; provided that for purposes hereof, any unused portion of the Revolving Period Commitment Amount will be deemed a current asset. SECTION 7.2.5. Take or Pay Contracts. The Borrower will not, and will not permit any of its Subsidiaries to, enter into or be a party to any arrangement for the purchase of materials, supplies, other property or services if such arrangement by its express terms requires that payment be made by the Borrower or such Subsidiary regardless of whether such materials, supplies, other property or services are delivered or furnished to it. SECTION 7.2.6. Consolidation, Merger, etc. The Borrower will not, and will not permit any of its Subsidiaries to, liquidate or dissolve, consolidate with, or merge into or with, any other corporation, or purchase or otherwise acquire all or substantially 50 all of the assets of any Person (or of any division thereof) except (a) any such Subsidiary may liquidate or dissolve voluntarily into, and may merge with and into, the Borrower or any other Subsidiary of the Borrower, and the assets or stock of any Subsidiary of the Borrower may be purchased or otherwise acquired by the Borrower or any other Subsidiary of the Borrower; provided, that no Subsidiary of the Borrower which is not a Subject Subsidiary may dissolve or liquidate voluntarily into, and neither the Borrower nor any Subsidiary of the Borrower which is not a Subject Subsidiary may merge with or into, any Subject Subsidiary unless the Borrower or such Subsidiary which is not a Subject Subsidiary is the surviving entity, and the assets or stock of any Subsidiary of the Borrower which is not a Subject Subsidiary may not be purchased or otherwise acquired by any Subject Subsidiary; and (b) so long as no Default has occurred and is continuing or would occur after giving effect thereto, the Borrower or any of its Subsidiaries may purchase all or substantially all of the assets of any Person, or acquire such Person by merger. SECTION 7.2.7. Asset Dispositions, etc. The Borrower will not, and will not permit any of its Subsidiaries to, sell, transfer, lease, contribute or otherwise convey, exchange or lease, or grant options, warrants or other rights with respect to, all or any substantial part of its assets (including accounts receivable and capital stock of Subsidiaries) to any Person (including any Subject Subsidiary), unless it has either given Lenders 15 Business Days prior written notice thereof or the aggregate consideration for all such sales, transfers, conveyances, exchanges or leases made in any six month period ending June 30 or December 31 is less than Twenty-five Million Dollars ($25,000,000). Notwithstanding anything to the contrary in this Agreement, the Borrower will not, and will not permit any of its Subsidiaries (other than a Subject Subsidiary) to, sell, transfer, lease, contribute or otherwise convey, exchange or lease, or grant options, warrants or other rights with respect to, all or any substantial part of its assets (including accounts receivable and capital stock of Subsidiaries) to any Subject Subsidiary. In the event that the Borrower and its Subsidiaries shall sell, transfer, lease, contribute or otherwise convey, exchange or lease properties in excess of Twenty-five Million Dollars ($25,000,000) in the aggregate in any six month period ending June 30 or December 31, the Applicable Lenders shall have the option to reduce the Borrowing Base. SECTION 7.2.8. Guaranties, Loans or Advances. Other than Borrower's Indebtedness hereunder and other than pursuant to Borrower's current and future employees' stock option plans, the Borrower will not become or be a guarantor or surety of, or otherwise become or be responsible in any manner (whether by agreement to purchase or repurchase any obligation, stock, assets, goods or services, or to supply or advance any funds, assets, goods or services, or otherwise, whether directly or indirectly) with respect to, any undertaking of any other person or entity, nor make or permit to exist any loans or advances to any other Persons which in the aggregate exceed the amount of $500,000 at any time 51 outstanding, except for (a) the endorsement, in the ordinary course of collection, of instruments payable to Borrower, or its order; (b) advances made and liabilities existing under joint operating agreements and compulsory pooling orders; (c) the liability to account to third persons for their share of production proceeds received by Borrower; (d) loans and advances to employees for the sole purpose of permitting such employees to purchase shares of Borrower's capital stock; (e) loans and advances to employees of the Borrower and its Subsidiaries for travel and other business expenses; (f)loans and advances by the Borrower to any of its Subsidiaries or by any Subsidiary of the Borrower to the Borrower or any other Subsidiary of the Borrower; (g) guaranties by the Borrower of obligations of its Subsidiaries otherwise permitted pursuant to this Agreement, provided that the aggregate outstanding principal amount of Indebtedness and other obligations of Subject Subsidiaries so guaranteed shall not at any time exceed $25,000,000 in the aggregate; and (h)any guarantee by the Borrower issued in connection with any convertible preferred securities issued by a statutory business trust formed by the Borrower; provided such guarantee is subordinated, upon terms satisfactory to the Agent and the Required Lenders, in right of payment to the payment in full in cash of all Obligations. SECTION 7.2.9. Other Agreements. The Borrower will not enter into any agreement containing any provision which would be violated or breached by the performance of its obligations hereunder or under any instrument or document delivered or to be delivered by it hereunder or in connection herewith. SECTION 7.2.10. Transactions with Affiliates. The Borrower will not, and will not permit any of its Subsidiaries to, enter into, or cause, suffer or permit to exist any arrangement or contract with any of its other Affiliates unless such arrangement or contract is determined by the Board of Directors of the Borrower to be (a) fair and equitable to the Borrower or such Subsidiary and (b) an arrangement or contract of the kind which would be entered into by a prudent Person in the position of the Borrower or such Subsidiary with a Person which is not one of its Affiliates. SECTION 7.2.11. Negative Pledges, Restrictive Agreements, etc. The Borrower will not, and will not permit any of its Subsidiaries to, enter into any agreement (excluding this Agreement, any other Loan Document, and any agreement governing any Indebtedness permitted by clause (b), (p),(r),(s) or (t) of Section 7.2.2) prohibiting (a) the creation or assumption of any Lien upon its properties, revenues or assets (other than the properties, revenues or assets of the Subject Subsidiaries) whether now owned or hereafter acquired, or the ability of the Borrower to amend or otherwise modify this Agreement or any other Loan Document; or (b) the ability of any Subsidiary (other than a Subject Subsidiary) to make any payments, directly or indirectly, to the Borrower by way of dividends, advances, repayments of loans or advances, reimbursements of management and other intercompany charges, expenses and accruals or other returns on investments, or any other 52 agreement or arrangement which restricts the ability of any such Subsidiary (other than a Subject Subsidiary) to make any payment, directly or indirectly, to the Borrower. Notwithstanding the foregoing, any agreement governing any Indebtedness permitted by clause (p),(r),(s) or (t) of Section 7.2.2 shall not prohibit the creation or assumption of any Lien upon the properties, revenues or assets of the Borrower or any Subsidiary (other than a Subject Subsidiary), whether now owned or hereafter acquired securing any Senior Debt, and no agreement governing any Indebtedness permitted by clause (p),(r),(s) or (t) of Section 7.2.2 shall prohibit the ability of any Subsidiary (other than a Subject Subsidiary) to make any payments, directly or indirectly, to the Borrower or the ability of the Borrower to amend or otherwise modify this Agreement or any other Loan Document. SECTION 7.2.12. Investment in Subsidiaries. If any Default or Event of Default shall have occurred and is continuing or during any period in which the aggregate principal amount of Senior Debt shall exceed the Borrowing Base then in effect, the Borrower shall not, and shall not permit any of its Subsidiaries which are not Subject Subsidiaries to, incur any Contingent Liabilities for any Indebtedness or other obligations of any Subject Subsidiary, make any loan or advance to, or assume, redeem, purchase, defease, pay or forgive any Indebtedness or other obligation of, or make any equity investment in, or incur any Indebtedness on behalf of, any Subsidiary and the Borrower shall not, and shall not permit any of its Subsidiaries which are not Subject Subsidiaries to, apply any of its funds, property or assets to the purchase, redemption, sinking fund for or other retirement of any shares of any class of capital stock of a Subsidiary or warrants, options or other rights with respect to any shares of any class of such capital stock or any Indebtedness or obligations of any Subsidiary. ARTICLE VIII EVENTS OF DEFAULT SECTION 8.1. Listing of Events of Default. Each of the following events or occurrences described in this Section 8.1 shall constitute an "Event of Default". SECTION 8.1.1. Non-Payment of Obligations. The Borrower shall default in the payment or prepayment when due of any principal of or interest on any Loan or any Reimbursement Obligations, or the Borrower shall default in the payment when due of any commitment fee or any letter of credit fees or of any other Obligation. SECTION 8.1.2. Breach of Warranty. Any representation or warranty of the Borrower made or deemed to be made hereunder or in any other Loan Document or any other writing or certificate furnished by or on behalf of the Borrower to the Agent or any 53 Lender for the purposes of or in connection with this Agreement or any such other Loan Document (including any certificates delivered pursuant to Article V) is or shall be incorrect when made in any material respect. SECTION 8.1.3. Non-Performance of Certain Covenants and Obligations. The Borrower shall default in the due performance and observance of any of its obligations under Sections 7.2.4 or 7.2.8. SECTION 8.1.4. Non-Performance of Other Covenants and Obligations. The Borrower shall default in the due performance and observance of any other agreement contained herein or in any other Loan Document, and such default shall continue unremedied for a period of 15 days after the Borrower shall become aware of such default, whether by notice thereof given to the Borrower by the Agent or any Lender or otherwise. SECTION 8.1.5. Default on Other Indebtedness. A default shall occur in the payment when due (subject to any applicable grace period), whether by acceleration or otherwise, of any Indebtedness for borrowed money (other than Indebtedness described in Section 8.1.1) or Contingent Liability of the Borrower or any of its Subsidiaries, or a default shall occur in the performance or observance of any obligation or condition with respect to such Indebtedness if the effect of such default is to accelerate the maturity of any such Indebtedness or such default shall continue unremedied for any applicable period of time sufficient to permit the holder or holders of such Indebtedness, or any trustee or agent for such holders, to cause such Indebtedness to become due and payable prior to its expressed maturity. SECTION 8.1.6. Other Material Obligations. Default in the payment for a period in excess of sixty (60) days of when due, or in the performance or observance of any material obligation of, or condition agreed to by, the Borrower or any Subsidiary with respect to any material purchase or lease of goods or services (except those which would not have a material adverse effect on the financial conditions, operations, assets, business, properties or prospects of the Borrower and its Subsidiaries, taken as a whole, and except only to the extent that the existence of any such default is being contested by the Borrower or such Subsidiary in good faith by appropriate proceedings). SECTION 8.1.7. Judgments. Any judgment or order for the payment of money in excess of $20,000,000 (or its equivalent) shall be rendered against the Borrower or any of its Subsidiaries and either (a) enforcement proceedings shall have been commenced by any creditor upon such judgment or order; or (b) there shall be any period of 10 consecutive days during which a stay of enforcement of such judgment or order, by reason of a pending appeal or otherwise, shall not be in effect. SECTION 8.1.8. Pension Plans. Any of the following events shall occur with respect to any Pension Plan: (a) the institution 54 of any steps by the Borrower, any member of its Controlled Group or any other Person to terminate a Pension Plan if, as a result of such termination, the Borrower or any such member could be required to make a contribution to such Pension Plan, or could reasonably expect to incur a liability or obligation to such Pension Plan, in excess of $1,000,000; or (b) a contribution failure occurs with respect to any Pension Plan sufficient to give rise to a Lien under section 302(f) of ERISA. SECTION 8.1.9. Bankruptcy, Insolvency, etc. The Borrower or any of its Subsidiaries shall (a) become insolvent or generally fail to pay, or admit in writing its inability or unwillingness to pay, debts as they become due; (b) apply for, consent to, or acquiesce in, the appointment of a trustee, receiver, sequestrator or other custodian for the Borrower or any of its Subsidiaries or any property of any thereof, or make a general assignment for the benefit of creditors; (c) in the absence of such application, consent or acquiescence, permit or suffer to exist the appointment of a trustee, receiver, sequestrator or other custodian for the Borrower or any of its Subsidiaries or for a substantial part of the property of any thereof, and such trustee, receiver, sequestrator or other custodian shall not be discharged within 60 days, provided that the Borrower, for itself and each of its Subsidiaries, hereby expressly authorizes the Agent and each Lender to appear in any court conducting any relevant proceeding during such 60-day period to preserve, protect and defend their rights under the Loan Documents; (d) permit or suffer to exist the commencement of any bankruptcy, reorganization, debt arrangement or other case or proceeding under any bankruptcy or insolvency law, or any dissolution, winding up or liquidation proceeding, in respect of the Borrower or any of its Subsidiaries, and, if any such case or proceeding is not commenced by the Borrower or such Subsidiary, such case or proceeding shall be consented to or acquiesced in by the Borrower or such Subsidiary or shall result in the entry of an order for relief or shall remain for 60 days undismissed, provided that the Borrower, for itself and each of its Subsidiaries, hereby expressly authorizes the Agent and each Lender to appear in any court conducting any such case or proceeding during such 60-day period to preserve, protect and defend their rights under the Loan Documents; or (e) take any corporate action authorizing, or in furtherance of, any of the foregoing. SECTION 8.1.10. Change of Control. A Change of Control shall occur. SECTION 8.2. Action if Bankruptcy. If any Event of Default described in clauses (a) through (d) of Section 8.1.9 shall occur with respect to the Borrower or any of its Subsidiaries, the Commitments (if not theretofore terminated) shall automatically terminate and the outstanding principal amount of all outstanding Loans and all other Obligations shall automatically be and become immediately due and payable, without notice (including notice of intent to accelerate and notice of acceleration) or demand and notice and demand, are hereby waived. 55 SECTION 8.3. Action if Other Event of Default. If any Event of Default (other than any Event of Default described in clauses (a) through (d) of Section 8.1.9 (with respect to the Borrower or any of its Subsidiaries) shall occur for any reason, whether voluntary or involuntary, and be continuing, the Agent, upon the direction of the Required Lenders, shall by notice to the Borrower declare all or any portion of the outstanding principal amount of the Loans and other Obligations to be due and payable and/or the Commitments (if not theretofore terminated) to be terminated, whereupon the full unpaid amount of such Loans and other Obligations which shall be so declared due and payable shall be and become immediately due and payable, without further notice (including notice of intent to accelerate and notice of acceleration), demand or presentment, and/or, as the case may be, the Commitments shall terminate, all of which notice, demand and presentment are hereby waived. ARTICLE IX THE AGENT SECTION 9.1. Actions. Each Lender hereby appoints Bank of Montreal as its Agent under and for purposes of this Agreement, the Notes, the Letters of Credit and each other Loan Document. Each Lender authorizes the Agent and each Issuer to act on behalf of such Lender under this Agreement, the Notes, the Letters of Credit and each other Loan Document and, in the absence of other written instructions from the Required Lenders received from time to time by the Agent (with respect to which the Agent agrees that it will comply, except as otherwise provided in this Section or as otherwise advised by counsel), to exercise such powers hereunder and thereunder as are specifically delegated to or required of the Agent or such Issuer by the terms hereof and thereof, together with such powers as may be reasonably incidental thereto. Each Lender hereby indemnifies (which indemnity shall survive any termination of this Agreement) the Agent, pro rata according to such Lender's Percentage, from and against any and all liabilities, obligations, losses, damages, claims, costs or expenses of any kind or nature whatsoever which may at any time be imposed on, incurred by, or asserted against, the Agent or such Issuer in any way relating to or arising out of its services as Agent under this Agreement, the Notes, the Letters of Credit and any other Loan Document, including reasonable attorneys' fees, and as to which the Agent or such Issuer is not reimbursed by the Borrower; provided, however, that no Lender shall be liable for the payment of any portion of such liabilities, obligations, losses, damages, claims, costs or expenses which are determined by a court of competent jurisdiction in a final proceeding to have resulted solely from the Agent's gross negligence or wilful misconduct. The Agent or any Issuer shall not be required to take any action hereunder, under the Notes under the Letters of Credit or under any other Loan Document, or to prosecute or defend any suit in respect of this Agreement, the Notes, the Letters of Credit or any other Loan Document, unless it 56 is indemnified hereunder to its satisfaction. If any indemnity in favor of the Agent or any Issuer shall be or become, in the Agent's determination, inadequate, the Agent or such Issuer may call for additional indemnification from the Lenders and cease to do the acts indemnified against hereunder until such additional indemnity is given. SECTION 9.2. Funding Reliance, etc. Unless the Agent shall have been notified by telephone, confirmed in writing, by any Lender by (i) 5:00 p.m., United States Central time, on the day prior to a Borrowing in the case of LIBO Rate Loans and (ii) 12:00 Noon United States Central time on the day of any Borrowing in the case of Base Rate Loans that such Lender will not make available the amount which would constitute its Percentage of such Borrowing on the date specified therefor, the Agent may assume that such Lender has made such amount available to the Agent and, in reliance upon such assumption, make available to the Borrower a corresponding amount. If and to the extent that such Lender shall not have made such amount available to the Agent, such Lender and the Borrower severally agree to repay the Agent forthwith on demand such corresponding amount together with interest thereon, for each day from the date the Agent made such amount available to the Borrower to the date such amount is repaid to the Agent, at the interest rate applicable at the time to Loans comprising such Borrowing. SECTION 9.3. Exculpation. Neither the Agent, any Issuer nor any of their respective directors, officers, employees or agents shall be liable to any Lender for any action taken or omitted to be taken by it or them under this Agreement or any other Loan Document, or in connection herewith or therewith, except for its or their own wilful misconduct or gross negligence, nor responsible for any recitals or warranties herein or therein, nor for the effectiveness, enforceability, validity or due execution of this Agreement or any other Loan Document, nor to make any inquiry respecting the performance by the Borrower of its obligations hereunder or under any other Loan Document. Any such inquiry which may be made by the Agent or any Issuer shall not obligate it to make any further inquiry or to take any action. The Agent and each Issuer shall be entitled to rely upon advice of counsel concerning legal matters and upon any notice, consent, certificate, statement or writing which the Agent believes to be genuine and to have been presented by a proper Person. SECTION 9.4. Successor. The Agent may resign as such at any time upon at least 30 days' prior notice to the Borrower and all Lenders. If the Agent at any time shall resign, the Required Lenders may appoint another Lender as a successor Agent which shall thereupon become the Agent hereunder. If no successor Agent shall have been so appointed by the Required Lenders, and shall have accepted such appointment, within 30 days after the retiring Agent's giving notice of resignation, then the retiring Agent may, on behalf of the Lenders, appoint a successor Agent, which shall be one of the Lenders or a commercial banking institution organized 57 under the laws of the U.S. (or any State thereof) or a U.S. branch or agency of a commercial banking institution, and having a combined capital and surplus of at least $500,000,000. Upon the acceptance of any appointment as Agent hereunder by a successor Agent, such successor Agent shall be entitled to receive from the retiring Agent such documents of transfer and assignment as such successor Agent may reasonably request, and shall thereupon succeed to and become vested with all rights, powers, privileges and duties of the retiring Agent, and the retiring Agent shall be discharged from its duties and obligations under this Agreement. After any retiring Agent's resignation hereunder as the Agent, the provisions of (a) this Article IX shall inure to its benefit as to any actions taken or omitted to be taken by it while it was the Agent under this Agreement; and (b) Section 10.3 and Section 10.4 shall continue to inure to its benefit. SECTION 9.5. Loans by Bank of Montreal. Bank of Montreal shall have the same rights and powers with respect to (x) the Loans made by it or any of its Affiliates, and (y) the Notes held by it or any of its Affiliates as any other Lender and may exercise the same as if it were not the Agent. Bank of Montreal and its Affiliates may accept deposits from, lend money to, and generally engage in any kind of business with the Borrower or any Subsidiary or Affiliate of the Borrower as if Bank of Montreal were not the Agent hereunder. Each Issuer shall have the same rights and powers hereunder as the other Lenders and may exercise the same rights and powers as though it were not an Issuer. SECTION 9.6. Credit Decisions. Each Lender acknowledges that it has, independently of the Agent and each other Lender, and based on such Lender's review of the financial information of the Borrower, this Agreement, the other Loan Documents (the terms and provisions of which being satisfactory to such Lender) and such other documents, information and investigations as such Lender has deemed appropriate, made its own credit decision to extend its Commitments. Each Lender also acknowledges that it will, independently of the Agent and each other Lender, and based on such other documents, information and investigations as it shall deem appropriate at any time, continue to make its own credit decisions as to exercising or not exercising from time to time any rights and privileges available to it under this Agreement or any other Loan Document. SECTION 9.7. Copies, etc. The Agent shall give prompt notice to each Lender of each notice or request required or permitted to be given to the Agent by the Borrower pursuant to the terms of this Agreement (unless concurrently delivered to the Lenders by the Borrower). The Agent will distribute to each Lender each document or instrument received for its account and copies of all other communications received by the Agent from the Borrower for distribution to the Lenders by the Agent in accordance with the terms of this Agreement. 58 ARTICLE X MISCELLANEOUS PROVISIONS SECTION 10.1. Waivers, Amendments, etc. The provisions of this Agreement and of each other Loan Document may from time to time be amended, modified or waived, if such amendment, modification or waiver is in writing and consented to by the Borrower and the Required Lenders; provided, however, that no such amendment, modification or waiver which would: (a) modify any requirement hereunder that any particular action be taken by all the Lenders or by the Required Lenders or by the Applicable Lenders shall be effective unless consented to by each Lender; (b) modify this Section 10.1, change the definition of "Required Lenders" or "Applicable Lenders", increase any Commitment Amount or the Percentage of any Lender, reduce any fees described in Article III, or extend any Commitment Termination Date shall be made without the consent of each Lender and each holder of a Note; (c) extend the due date for, or reduce the amount of, any scheduled repayment or prepayment of principal of or interest on any Loan (or reduce the principal amount of or rate of interest on any Loan) shall be made without the consent of the holder of that Note evidencing such Loan; or (d) affect adversely the interests, rights or obligations of the Agent as the Agent shall be made without consent of the Agent. No failure or delay on the part of the Agent, any Lender, any Issuer or the holder of any Note in exercising any power or right under this Agreement or any other Loan Document shall operate as a waiver thereof, nor shall any single or partial exercise of any such power or right preclude any other or further exercise thereof or the exercise of any other power or right. No notice to or demand on the Borrower in any case shall entitle it to any notice or demand in similar or other circumstances. No waiver or approval by the Agent, any Lender, any Issuer or the holder of any Note under this Agreement or any other Loan Document shall, except as may be otherwise stated in such waiver or approval, be applicable to subsequent transactions. No waiver or approval hereunder shall require any similar or dissimilar waiver or approval thereafter to be granted hereunder. SECTION 10.2. Notices. All notices and other communications provided to any party hereto under this Agreement or any other Loan Document shall be in writing or by facsimile and addressed, delivered or transmitted to such party at its address or facsimile number set forth below its signature hereto or set forth in the Lender Assignment Agreement or at such other address or facsimile number as may be designated by such party in a notice to the other parties. Any notice, if mailed and properly addressed with postage prepaid or if properly addressed and sent by pre-paid courier service, shall be deemed given when received; any notice, if transmitted by facsimile, shall be deemed given when transmitted. 59 SECTION 10.3. Payment of Costs and Expenses. The Borrower agrees to pay on demand all reasonable expenses of the Agent (including the reasonable fees and out-of-pocket expenses of counsel to the Agent and of local counsel, if any, who may be retained by counsel to the Agent) in connection with (a) the negotiation, preparation, execution and delivery of this Agreement and of each other Loan Document, including schedules and exhibits, and any amendments, waivers, consents, supplements or other modifications to this Agreement or any other Loan Document as may from time to time hereafter be required, whether or not the transactions contemplated hereby are consummated, and (b) the preparation and review of the form of any document or instrument relevant to this Agreement or any other Loan Document. The Borrower further agrees to pay, and to save the Agent and the Lenders and Issuers harmless from all liability for, any stamp or other taxes which may be payable in connection with the execution or delivery of this Agreement, the borrowings hereunder, or the issuance of the Notes or any other Loan Documents. The Borrower also agrees to reimburse the Agent and each Lender and Issuer upon demand for all reasonable out-of-pocket expenses (including attorneys' fees and legal expenses) incurred by the Agent or such Lender in connection with (x) the negotiation of any restructuring or "work-out", whether or not consummated, of any Obligations, and (y) the enforcement of any Obligations. SECTION 10.4. Indemnification. In consideration of the execution and delivery of this Agreement by each Lender and the extension of the Commitments and the issuance of Letters of Credit, the Borrower hereby indemnifies, exonerates and holds the Agent, each Issuer and each Lender and each of their respective officers, directors, employees and agents (collectively, the "Indemnified Parties") free and harmless from and against any and all actions, causes of action, suits, losses, costs, liabilities and damages, and expenses incurred in connection therewith (irrespective of whether any such Indemnified Party is a party to the action for which indemnification hereunder is sought), including reasonable attorneys' fees and disbursements (collectively, the "Indemnified Liabilities"), incurred by the Indemnified Parties or any of them as a result of, or arising out of, or relating to (a) any transaction financed or to be financed in whole or in part, directly or indirectly, with the proceeds of any Loan or Letter of Credit; (b) the entering into and performance of this Agreement and any other Loan Document by any of the Indemnified Parties (except, with respect to any action brought by or on behalf of the Borrower, to the extent such Indemnified Party shall be found liable to the Borrower pursuant to a finding by a court of competent jurisdiction, not subject to appeal); (c) any investigation, litigation or proceeding related to any environmental cleanup, audit, compliance or other matter relating to the protection of the environment or the Release by the Borrower or any of its Subsidiaries of any Hazardous Material; or (d) the presence on or under, or the escape, seepage, leakage, spillage, discharge, emission, discharging or releases from, any real property owned or 60 operated by the Borrower or any Subsidiary thereof of any Hazardous Material (including any losses, liabilities, damages, injuries, costs, expenses or claims asserted or arising under any Environmental Law), regardless of whether caused by, or within the control of, the Borrower or such Subsidiary, except for any such Indemnified Liabilities arising for the account of a particular Indemnified Party by reason of the relevant Indemnified Party's gross negligence or wilful misconduct. If and to the extent that the foregoing undertaking may be unenforceable for any reason, the Borrower hereby agrees to make the maximum contribution to the payment and satisfaction of each of the Indemnified Liabilities which is permissible under applicable law. SECTION 10.5. Survival. The obligations of the Borrower under Sections 4.3, 4.4, 4.5, 4.6, 10.3 and 10.4, and the obligations of the Lenders under Section 9.1, shall in each case survive any termination of this Agreement, the payment in full of all Obligations and the termination of all Commitments. The representations and warranties made by the Borrower in this Agreement and in each other Loan Document shall survive the execution and delivery of this Agreement and each such other Loan Document. SECTION 10.6. Severability. Any provision of this Agreement or any other Loan Document which is prohibited or unenforceable in any jurisdiction shall, as to such provision and such jurisdiction, be ineffective to the extent of such prohibition or unenforceability without invalidating the remaining provisions of this Agreement or such Loan Document or affecting the validity or enforceability of such provision in any other jurisdiction. SECTION 10.7. Headings. The various headings of this Agreement and of each other Loan Document are inserted for convenience only and shall not affect the meaning or interpretation of this Agreement or such other Loan Document or any provisions hereof or thereof. SECTION 10.8. Execution in Counterparts, Effectiveness, etc. This Agreement may be executed by the parties hereto in several counterparts, each of which shall be executed by the Borrower and the Agent and be deemed to be an original and all of which shall constitute together but one and the same agreement. This Agreement shall become effective when counterparts hereof executed on behalf of the Borrower and each Lender (or notice thereof satisfactory to the Agent) shall have been received by the Agent and notice thereof shall have been given by the Agent to the Borrower and each Lender. SECTION 10.9. Governing Law; Entire Agreement. THIS AGREEMENT, THE NOTES AND EACH OTHER LOAN DOCUMENT SHALL EACH BE DEEMED TO BE A CONTRACT MADE UNDER AND GOVERNED BY THE INTERNAL LAWS OF THE STATE OF ILLINOIS. This Agreement, the Notes and the other Loan Documents constitute the entire understanding among the parties hereto with respect to the subject matter hereof and 61 supersede any prior agreements, written or oral, with respect thereto. THIS WRITTEN LOAN AGREEMENT REPRESENTS THE FINAL AGREEMENT AMONG THE PARTIES AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS, OR SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES. THERE ARE NO UNWRITTEN ORAL AGREEMENTS AMONG THE PARTIES. SECTION 10.10. Successors and Assigns. This Agreement shall be binding upon and shall inure to the benefit of the parties hereto and their respective successors and assigns; provided, however, that: (a) the Borrower may not assign or transfer its rights or obligations hereunder without the prior written consent of the Agent and all Lenders; and (b) the rights of sale, assignment and transfer of the Lenders are subject to Section 10.11. SECTION 10.11. Sale and Transfer of Loans and Notes; Participations in Loans and Notes. Each Lender may assign, or sell participations in, its Loans and Commitments to one or more other Persons in accordance with this Section 10.11. SECTION 10.11.1. Assignments. Any Lender, (a) with the written consent of the Borrower (in its sole discretion) and the Agent (which consent shall not be unreasonably delayed or withheld) and each Issuer, may at any time assign and delegate to one or more commercial banks or other financial institutions, and (b) with notice to the Borrower and the Agent and each Issuer, but without the consent of the Borrower or the Agent or any Issuer, may assign and delegate to any of its Affiliates or to any other Lender (each Person described in either of the foregoing clauses as being the Person to whom such assignment and delegation is to be made, being hereinafter referred to as an "Assignee Lender"), all or any fraction of such Lender's total Loans, Commitments and participations in Letters of Credit (which assignment and delegation shall be of a constant, and not a varying, percentage of all the assigning Lender's Loans and Commitments and participations in Letters of Credit) in a minimum aggregate amount of $20,000,000 or such Lender's Percentage of the Commitment Amount, if less; provided, however, that any such Assignee Lender will comply, if applicable, with the provisions contained in the last sentence of Section 4.6; and further, provided, however, that, the Borrower and the Agent shall be entitled to continue to deal solely and directly with such Lender in connection with the interests so assigned and delegated to an Assignee Lender until 62 (c) written notice of such assignment and delegation, together with payment instructions, addresses and related information with respect to such Assignee Lender, shall have been given to the Borrower and the Agent and each Issuer by such Lender and such Assignee Lender, (d) such Assignee Lender shall have executed and delivered to the Borrower, the Agent and each Issuer a Lender Assignment Agreement, accepted by the Borrower, the Agent and each Issuer, and (e) the processing fees described below shall have been paid. From and after the date that the Borrower and the Agent and each Issuer accepts such Lender Assignment Agreement, (x) the Assignee Lender thereunder shall be deemed automatically to have become a party hereto and to the extent that rights and obligations hereunder have been assigned and delegated to such Assignee Lender in connection with such Lender Assignment Agreement, shall have the rights and obligations of a Lender hereunder and under the other Loan Documents, and (y) the assignor Lender, to the extent that rights and obligations hereunder have been assigned and delegated by it in connection with such Lender Assignment Agreement, shall be released from its obligations hereunder and under the other Loan Documents. Within five Business Days after its receipt of notice that the Agent has received an executed Lender Assignment Agreement, the Borrower shall execute and deliver to the Agent (for delivery to the relevant Assignee Lender) new Notes evidencing such Assignee Lender's assigned Loans and Commitments and, if the assignor Lender has retained Loans and Commitments hereunder, replacement Notes in the principal amount of the Loans and Commitments retained by the assignor Lender hereunder (such Notes to be in exchange for, but not in payment of, those Notes then held by such assignor Lender). Each such Note shall be dated the date of the predecessor Notes. The assignor Lender shall mark the predecessor Notes "exchanged" and deliver them to the Borrower. Accrued interest on that part of the predecessor Notes evidenced by the new Notes, and accrued fees, shall be paid as provided in the Lender Assignment Agreement. Accrued interest on that part of the predecessor Notes evidenced by the replacement Notes shall be paid to the assignor Lender. Accrued interest and accrued fees shall be paid at the same time or times provided in the predecessor Notes and in this Agreement. Such assignor Lender or such Assignee Lender must also pay a processing fee to the Agent upon delivery of any Lender Assignment Agreement in the amount of $2,500. Any attempted assignment and delegation not made in accordance with this Section 10.11.1 shall be null and void. SECTION 10.11.2. Participations. Any Lender, with the prior written consent of the Borrower in its sole discretion, may at any time sell to one or more commercial banks (each of such commercial banks being herein called a "Participant") participating interests in any of the Loans, Commitments, or other interests of 63 such Lender hereunder; provided, however, that (a) no participation contemplated in this Section 10.11 shall relieve such Lender from its Commitments or its other obligations hereunder or under any other Loan Document, (b) such Lender shall remain solely responsible for the performance of its Commitments and such other obligations, (c) the Borrower and each other Obligor and the Agent shall continue to deal solely and directly with such Lender in connection with such Lender's rights and obligations under this Agreement and each of the other Loan Documents, (d) no Participant, unless such Participant is an Affiliate of such Lender, or is itself a Lender, shall be entitled to require such Lender to take or refrain from taking any action hereunder or under any other Loan Document, except that such Lender may agree with any Participant that such Lender will not, without such Participant's consent, take any actions of the type described in clause (b) or (c) of Section 10.1, and (e) the Borrower shall not be required to pay any amount under Section 4.6 that is greater than the amount which it would have been required to pay had no participating interest been sold. SECTION 10.12. Other Transactions. Nothing contained herein shall preclude the Agent or any other Lender from engaging in any transaction, in addition to those contemplated by this Agreement or any other Loan Document, with the Borrower or any of its Affiliates in which the Borrower or such Affiliate is not restricted hereby from engaging with any other Person. The parties hereto agree that if at any time the Borrower or its Subsidiaries shall grant to the Lenders Liens securing the obligations of the Borrower to the Lenders and Issuers hereunder, such Liens shall also secure obligations to any Lender in respect of any letter of credit reimbursement obligations permitted by Section 7.2.2.(i) hereof owing to one or more Lenders. SECTION 10.13. Sale and Purchase of Loans. On the Effective Date, the aggregate principal balance of the Prior Indebtedness outstanding is $189,000,000 as shown on Schedule F-2 and each Lender represents and warrants for itself that its outstanding loans under the Original Credit Agreement as of the Effective Date is as set forth in the second column of Schedule F-2. Lenders hereby sell, assign, transfer and convey, and Lenders hereby purchase and accept so much of the Prior Indebtedness and all of the rights, titles, benefits, interests, privileges, claims, liens, security interests, and obligations existing and to exist (collectively the "Interests") such that each Lender's Percentage of the outstanding loans and commitments under the Original Credit Agreement as amended and restated by this Agreement shall be as set forth in Schedule F-1 as of the Effective Date. The foregoing assignment, transfer and conveyance are without recourse to the Lenders and without any warranties whatsoever as to title, enforceability, collectibility, documentation or freedom from liens or encumbrances, in whole or in part, other than the warranty by each Lender that it has not sold, transferred, conveyed or encumbered such Interests. If as a result thereof, a Lender's Percentage of the outstanding Loans under this Agreement is less than its outstanding loans under the Original Credit Agreement on 64 the Effective Date, the difference set forth in the last column of Schedule F-2 shall be remitted to such Lender by the Agent upon receipt of funds from the other Lenders shown in the last column of Schedule F-2 on the Effective Date. Each Lender so acquiring a part of such outstanding loans assumes its Percentage of the outstanding Loans, Commitments, rights, titles, interests, privileges, claims, liens, security interests, benefits and obligations under this Agreement and the other Loan Documents and any Lender so acquiring an interest in such outstanding Loans may be paid a cost of funds with respect thereto as mutually agreed between the Borrower and such Lender. Lenders are proportionately released from the obligations assumed by Lenders so acquiring such obligations and, to that extent, the Lenders so released shall have no further obligation under the Original Credit Agreement, as amended and restated hereby. The Borrower hereby represents and warrants that it has no defenses, offsets or counterclaims to the Prior Indebtedness or its obligations or rights under this Agreement, including, without limitation, the Interests being assigned pursuant to this Section 10.13. Any loans outstanding under the Original Credit Agreement on the Effective Date bearing interest at a LIBO Rate (as defined therein) shall be deemed continued as a Loan under this Agreement at such LIBO Rate and for the Interest Period with respect thereto under the Original Credit Agreement. The promissory notes evidencing the Prior Indebtedness shall be appropriately endorsed and delivered by the holders thereof to the Agent and retained by the Agent until the Obligations shall have been paid in full, all Letters of Credit have expired or been canceled and the Commitments have been canceled. SECTION 10.14. Forum Selection and Consent to Jurisdiction. ANY LITIGATION BASED HEREON, OR ARISING OUT OF, UNDER, OR IN CONNECTION WITH, THIS AGREEMENT OR ANY OTHER LOAN DOCUMENT, OR ANY COURSE OF CONDUCT, COURSE OF DEALING, STATEMENTS (WHETHER VERBAL OR WRITTEN) OR ACTIONS OF THE AGENT, THE LENDERS, ANY ISSUER, OR THE BORROWER MAY BE BROUGHT AND MAINTAINED IN THE COURTS OF THE STATE OF ILLINOIS OR IN THE UNITED STATES DISTRICT COURT FOR THE NORTHERN DISTRICT OF ILLINOIS. THE BORROWER HEREBY EXPRESSLY AND IRREVOCABLY SUBMITS TO THE JURISDICTION OF THE COURTS OF THE STATE OF ILLINOIS AND OF THE UNITED STATES DISTRICT COURT FOR THE NORTHERN DISTRICT OF ILLINOIS FOR THE PURPOSE OF ANY SUCH LITIGATION AS SET FORTH ABOVE AND IRREVOCABLY AGREES TO BE BOUND BY ANY JUDGMENT RENDERED THEREBY IN CONNECTION WITH SUCH LITIGATION. THE BORROWER FURTHER IRREVOCABLY CONSENTS TO THE SERVICE OF PROCESS BY REGISTERED MAIL, POSTAGE PREPAID, OR BY PERSONAL SERVICE WITHIN OR WITHOUT THE STATE OF ILLINOIS. THE BORROWER HEREBY EXPRESSLY AND IRREVOCABLY WAIVES, TO THE FULLEST EXTENT PERMITTED BY LAW, ANY OBJECTION WHICH IT MAY HAVE OR HEREAFTER MAY HAVE TO THE LAYING OF VENUE OF ANY SUCH LITIGATION BROUGHT IN ANY SUCH COURT REFERRED TO ABOVE AND ANY CLAIM THAT ANY SUCH LITIGATION HAS BEEN BROUGHT IN AN 65 INCONVENIENT FORUM. TO THE EXTENT THAT THE BORROWER HAS OR HEREAFTER MAY ACQUIRE ANY IMMUNITY FROM JURISDICTION OF ANY COURT OF FROM ANY LEGAL PROCESS (WHETHER THROUGH SERVICE OR NOTICE, ATTACHMENT PRIOR TO JUDGMENT, ATTACHMENT IN AID OF EXECUTION OR OTHERWISE) WITH RESPECT TO ITSELF OR ITS PROPERTY, THE BORROWER HEREBY IRREVOCABLY WAIVES SUCH IMMUNITY IN RESPECT OF ITS OBLIGATIONS UNDER THIS AGREEMENT AND THE OTHER LOAN DOCUMENTS. SECTION 10.15. Waiver of Jury Trial. THE AGENT, THE LENDERS, EACH ISSUER AND THE BORROWER HEREBY KNOWINGLY, VOLUNTARILY AND INTENTIONALLY WAIVE ANY RIGHTS THEY MAY HAVE TO A TRIAL BY JURY IN RESPECT OF ANY LITIGATION BASED HEREON, OR ARISING OUT OF, UNDER, OR IN CONNECTION WITH, THIS AGREEMENT OR ANY OTHER LOAN DOCUMENT, OR ANY COURSE OF CONDUCT, COURSE OF DEALING, STATEMENTS (WHETHER VERBAL OR WRITTEN) OR ACTIONS OF THE AGENT, THE LENDERS OR THE BORROWER. THE BORROWER ACKNOWLEDGES AND AGREES THAT IT HAS RECEIVED FULL AND SUFFICIENT CONSIDERATION FOR THIS PROVISION (AND EACH OTHER PROVISION OF EACH OTHER LOAN DOCUMENT TO WHICH IT IS A PARTY) AND THAT THIS PROVISION IS A MATERIAL INDUCEMENT FOR THE AGENT, EACH ISSUER AND THE LENDERS ENTERING INTO THIS AGREEMENT AND EACH SUCH OTHER LOAN DOCUMENT. IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed by their respective officers thereunto duly authorized as of the day and year first above written. 66 VINTAGE PETROLEUM, INC. By:/s/ William C. Barnes -------------------------------------- William C. Barnes, Executive Vice President and Chief Financial Officer Address: 4200 One Williams Center Tulsa, Oklahoma 74172 Facsimile No.: (918) 584-7282 Attention: William C. Barnes, Executive Vice President and Chief Financial Officer 67 BANK OF MONTREAL acting through its U.S. branches and agencies, including initially its Chicago, Illinois branch, as Agent By:/s/ Robert L. Roberts -------------------------------------- Name: Robert L. Roberts Title: Director, U.S. Corporate Banking Address: 115 South LaSalle Street Chicago, Illinois 60603 Facsimile No.: --------------------------- Attention: ------------------------------- ------------------------------- with copy to: Bank of Montreal Houston Agency 700 Louisiana Street 4400 NationsBank Center Houston, Texas 77002 Facsimile No.: (713) 223-4007 Attention: Michael Stuckey, Director 68 LENDERS: BANK OF MONTREAL By:/s/ Robert L. Roberts -------------------------------------- Name: Robert L. Roberts Title: Director, U.S. Corporate Banking Domestic Office: 115 South LaSalle Street Chicago, Illinois 60603 Facsimile No.: --------------------------- Attention: ------------------------------- ------------------------------- LIBOR Office: 115 South LaSalle Street Chicago, Illinois 60603 Facsimile No.: --------------------------- Attention: ------------------------------- ------------------------------- with copy to: Bank of Montreal Houston Agency 700 Louisiana Street 4400 NationsBank Center Houston, Texas 77002 Facsimile No.: (713) 223-4007 Attention: Kenneth M. Schott 69 THE CHASE MANHATTAN BANK, as Lender and Lead Manager By:/s/ Ronald Potter -------------------------------------- Name: Ronald Potter Title: Managing Director Domestic Office: The Chase Manhattan Bank 1 Chase Manhattan Plaza Eighth Floor New York, NY 10081 Facsimile No.: (212) 552-5777 Attention: Loan and Agency Services LIBOR Office: The Chase Manhattan Bank 1 Chase Manhattan Plaza Eighth Floor New York, NY 10081 Facsimile No.:(212) 552-5777 Attention: Loan and Agency Services 70 BANKBOSTON, N.A., as Lender and Lead Manager By:/s/ Terrence Ronan -------------------------------------- Name: Terrence Ronan Title: Vice President Domestic 01-08-04 Office: 100 Federal Street Boston, MA 02110 Facsimile No.:(617) 434-5472 Attention: Terrence Ronan Vice President LIBOR 01-08-04 Office: 100 Federal Street Boston, MA 02110 Facsimile No.:(617) 434-9820 Attention: Deborah Williams Loan Administrator 71 NATIONSBANK OF TEXAS, N.A., as Lender and Lead Manager By:/s/ Denise A. Smith -------------------------------------- Name: Denise A. Smith Title: SVP Domestic Office: 901 Main Street, 14th Floor Dallas, Texas 75202 Facsimile No.: 214-508-0944 Attention: Maurice Washington LIBOR Office: 901 Main Street, 14th Floor Dallas, Texas 75202 Facsimile No.: 214-508-0944 Attention: Maurice Washington 72 SOCIETE GENERALE, SOUTHWEST AGENCY, as Lender and Lead Manager By:/s/ Richard A. Erbert -------------------------------------- Name: Richard A. Erbert Title: Vice President Domestic Office: 4800 Trammell Crow Center 2001 Ross Avenue Dallas, Texas 75201 Facsimile No.:(214) 754-0171 Attention: Loan Operations LIBOR Office: 4800 Trammell Crow Center 2001 Ross Avenue Dallas, Texas 75201 Facsimile No.:(214) 754-0171 Attention: Loan Operations with copy to: Societe Generale 1111 Bagby, Suite 2020 Houston, Texas 77002 Facsimile No. (713) 650-0824 Attention: Richard A. Erbert 73 ABN AMRO BANK, N.A., as Lender By:/s/ Charles W. Randall -------------------------------------- Name: Charles W. Randall Title: Senior Vice President By:/s/ Cheryl I. Lipshutz -------------------------------------- Name: Cheryl I. Lipshutz Title: Group Vice President Domestic Office: Facsimile No.: --------------------------- Attention: ------------------------------- ------------------------------- LIBOR Office: Facsimile No.: --------------------------- Attention: ------------------------------- ------------------------------- 74 BANK OF OKLAHOMA, NATIONAL ASSOCIATION as Lender By:/s/ Michael M. Coats -------------------------------------- Name: Michael M. Coats Title: Senior Vice Pres. Domestic Office: Facsimile No.:918-588-6880 Attention: ------------------------------- ------------------------------- LIBOR Office: Facsimile No.: --------------------------- Attention: ------------------------------- ------------------------------- 75 BANQUE PARIBAS, as Lender By:/s/ Barton D. Schouest -------------------------------------- Name: Barton D. Schouest Title: Managing Director By:/s/ Douglas R. Liftman -------------------------------------- Name: Douglas R. Liftman Title: Vice President Domestic Office: Facsimile No.: --------------------------- Attention: ------------------------------- ------------------------------- LIBOR Office: Facsimile No.: --------------------------- Attention: ------------------------------- ------------------------------- 76 CIBC INC., as Lender By:/s/ Aleksandra K. Dymanus -------------------------------------- Name: Aleksandra K. Dymanus Title: Authorized Signatory By: -------------------------------------- Name: Title: Domestic Office: Facsimile No.:770/319-4950 Attention: Kathryn S. McGovern LIBOR Office: Facsimile No.:770/319-4950 Attention: Kathryn S. McGovern 77 CREDIT LYONNAIS, as Lender By:/s/ Philippe Soustra -------------------------------------- Name: Philippe Soustra Title: Senior Vice President By: -------------------------------------- Name: Title: Domestic Office: Facsimile No.: --------------------------- Attention: ------------------------------- ------------------------------- LIBOR Office: Facsimile No.: --------------------------- Attention: ------------------------------- ------------------------------- 78 SANWA BANK, LIMITED, as Lender By:/s/ C. Lawrence Murphy -------------------------------------- Name: C. Lawrence Murphy Title: Senior Vice President By: -------------------------------------- Name: Title: Domestic Office: Facsimile No.:(212) 754-2360 Attention: ------------------------------- ------------------------------- LIBOR Office: Facsimile No.:(212) 754-2368 Attention: Renko Hara 79 THE FIRST NATIONAL BANK OF CHICAGO, as Lender By:/s/ Susan Stiernberg -------------------------------------- Name: Susan Stiernberg Title: Attorney-In-Fact Domestic Office: Facsimile No.:(312) 732-4840 Attention: Gwen Watson ------------------------------- LIBOR Office: Facsimile No.:(312) 732-4840 Attention: Gwen Watson ------------------------------- 80 UNION BANK OF CALIFORNIA, N.A. as Lender By:/s/ Randall Osterberg -------------------------------------- Name: Randall Osterberg Title: Vice President Domestic Office: 500 North Akard Street, Suite #4200 Dallas, TX 75201 Telecopier No: (214) 922-4209 Telephone No: (214) 922-4200 Attention: Randall L. Osterberg LIBOR Office: 445 South Figueroa Street Los Angeles, CA 90071 Telecopier No: (213) 236-4096 Telephone No: (213) 236-6199 Attention: Patricia Ayala with copy to: Union Bank of California, N.A. 500 North Akard Street, Suite #4200 Dallas, TX 75201 Attention: Randall L. Osterberg Vice President 81 For purposes of selling, assigning, transferring and conveying its respective Interests, the undersigned have caused this Agreement to be executed by their respective officers thereunto duly authorized as of the date and year first above written. MELLON BANK, N.A. By:/s/ A. Gary Chace -------------------------------------- Name: A. Gary Chace Title: Senior Vice President 82 EXHIBIT A NOTE $_____________ ____________, 19___ FOR VALUE RECEIVED, the undersigned, VINTAGE PETROLEUM, INC., a Delaware corporation (the "Borrower"), promises to pay to the order of _______________________ (the "Lender") the principal sum of ____________________ DOLLARS ($____________) or, if less, the aggregate unpaid principal amount of all Loans made by the Lender pursuant to that certain Amended and Restated Credit Agreement, dated as of December 8, 1997 (together with all amendments and other modifications, if any, from time to time thereafter made thereto, the "Credit Agreement"), among the Borrower, BANK OF MONTREAL, as Agent, the various financial institutions (including the Lender) as are, or may from time to time become, parties thereto, payable in installments as set forth in the Credit Agreement, with a final installment (in the amount necessary to pay in full this Note) due and payable on the Stated Maturity Date set forth therein. The Borrower also promises to pay interest on the unpaid principal amount hereof from time to time outstanding from the date hereof until maturity (whether by acceleration or otherwise) and, after maturity, until paid, at the rates per annum and on the dates specified in the Credit Agreement. Payments of both principal and interest are to be made in lawful money of the United States of America in same day or immediately available funds to the account designated by the Agent pursuant to the Credit Agreement. This Note is one of the Notes referred to in, and evidences Indebtedness incurred under, the Credit Agreement, to which reference is made for a statement of the terms and conditions on which the Borrower is permitted and required to make prepayments and repayments of principal of the Indebtedness evidenced by this Note and on which such Indebtedness may be declared to be immediately due and payable. Unless otherwise defined, terms used herein have the meanings provided in the Credit Agreement. [This Note is an extension, renewal, and replacement of, and is given in substitution and exchange for, that certain Note, dated August 29, 1996, in the original principal amount of ____________, executed by Borrower and payable to the order of Lender in connection with the Original Credit Agreement, and the indebtedness evidenced hereby and thereby is a continuing indebtedness and nothing herein contained or implied shall be construed to deem such indebtedness or any accrued and unpaid interest thereon paid, satisfied, novated or terminated, or any collateral or security therefore released or terminated.] All parties hereto, whether as makers, endorsers, or otherwise, severally waive presentment for payment, demand, protest and notice of dishonor. THIS NOTE HAS BEEN DELIVERED IN CHICAGO, ILLINOIS AND SHALL BE DEEMED TO BE A CONTRACT MADE UNDER AND GOVERNED BY THE INTERNAL LAWS OF THE STATE OF ILLINOIS. VINTAGE PETROLEUM, INC. By ----------------------- Title: 2
LOANS AND PRINCIPAL PAYMENTS - --------------------------------------------------------------------------------------------------------------------------- Amount of Unpaid Amount of Principal Principal Loan Made Repaid Balance --------- --------- ------- Interest Base LIBO Period (if Base LIBO Base LIBO Notation Date Rate Rate applicable) Rate Rate Rate Rate Total Made By ---- ---- ---- ----------- ---- ---- ---- ---- ----- ------- - --------------------------------------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------------------------------------------
3 EXHIBIT B BORROWING REQUEST Bank of Montreal 115 South LaSalle Street Chicago, Illinois 60603 Attention: [Name] [Title] VINTAGE PETROLEUM, INC. Gentlemen and Ladies: This Borrowing Request is delivered to you pursuant to Section 2.3 of the Amended and Restated Credit Agreement, dated as of December 8, 1997 (together with all amendments, if any, from time to time thereafter made thereto, the "Credit Agreement"), among Vintage Petroleum, Inc., a Delaware corporation (the "Borrower"), certain financial institutions and Bank of Montreal (the "Agent"). Unless otherwise defined herein or the context otherwise requires, terms used herein have the meanings provided in the Credit Agreement. The Borrower hereby requests that a Revolving Loan be made in the aggregate principal amount of $__________ on __________, 19___ as a [LIBO Rate Loan having an Interest Period of _______ months] [Base Rate Loan]. The Borrower hereby acknowledges that, pursuant to Section 5.2.2 of the Credit Agreement, each of the delivery of this Borrowing Request and the acceptance by the Borrower of the proceeds of the Loans requested hereby constitutes a representation and warranty by the Borrower that, on the date of such Loans, and before and after giving effect thereto and to the application of the proceeds therefrom, all statements set forth in Section 5.2.1 are true and correct in all material respects. The Borrower certifies that the Senior Debt of the Borrower and its Subsidiaries, other than Loans made pursuant to the Credit Agreement, is $_____________ as of the date hereof. The Borrower agrees that if prior to the time of the Borrowing requested hereby any matter certified to herein by it will not be true and correct at such time as if then made, it will immediately so notify the Agent. Except to the extent, if any, that prior to the time of the Borrowing requested hereby the Agent shall receive written notice to the contrary from the Borrower, each matter certified to herein shall be deemed once again to be certified as true and correct at the date of such Borrowing as if then made. Please wire transfer the proceeds of the Borrowing requested hereby to the accounts of the following persons at the financial institutions indicated respectively:
Person to be Paid Amount to be ------------------------------------ Name, Address, etc. Transferred Name Account No. of Transferee Lender - ----------- ---- ----------- -------------------- $ ----------- ------------ ---------- -------------------- -------------------- Attention: --------- $ ----------- ------------ ----------- -------------------- -------------------- Attention: --------- Balance of The Borrower such proceeds ----------- -------------------- -------------------- Attention: ---------
The Borrower has caused this Borrowing Request to be executed and delivered, and the certification and warranties contained herein to be made, by its duly Authorized Officer this ___ day of ___________, 19___. VINTAGE PETROLEUM, INC. By ----------------------- Title: 2 EXHIBIT C CONTINUATION/CONVERSION NOTICE Bank of Montreal 115 South LaSalle Street Chicago, Illinois 60603 Attention: [Name] [Title] VINTAGE PETROLEUM, INC. Gentlemen and Ladies: This Continuation/Conversion Notice is delivered to you pursuant to Section 2.4 of the Amended and Restated Credit Agreement, dated as of December 8, 1997 (together with all amendments, if any, from time to time thereafter made thereto, the "Credit Agreement"), among Vintage Petroleum, Inc., a Delaware corporation (the "Borrower"), certain financial institutions and Bank of Montreal (the "Agent"). Unless otherwise defined herein or the context otherwise requires, terms used herein have the meanings provided in the Credit Agreement. The Borrower hereby requests that on ____________, 19___, (1) $___________ of the presently outstanding principal amount of the [Term Loans] [Revolving Loans] originally made on __________, 19___ [and $__________ of the presently out standing principal amount of the [Revolving Loans] originally made on __________, 19___], (2) and all presently being maintained as */[Base Rate Loans] [LIBO Rate Loans], (3) be [converted into] [continued as], (4) **/[LIBO Rate Loans having an Interest Period of ______ months] [Base Rate Loans]. The Borrower hereby: (a) certifies and warrants that no Default has occurred and is continuing; and (b) agrees that if prior to the time of such continuation or conversion any matter certified to herein by - -------- */ Select appropriate interest rate option. ** Insert appropriate interest rate option. it will not be true and correct at such time as if then made, it will immediately so notify the Agent. Except to the extent, if any, that prior to the time of the continuation or conversion requested hereby the Agent shall receive written notice to the contrary from the Borrower, each matter certified to herein shall be deemed to be certified at the date of such continuation or conversion as if then made. The Borrower has caused this Continuation/Conversion Notice to be executed and delivered, and the certification and warranties contained herein to be made, by its Authorized Officer this ___ day of _________, 19___. VINTAGE PETROLEUM, INC. By ------------------------ Title: 2 EXHIBIT D LENDER ASSIGNMENT AGREEMENT To: Vintage Petroleum, Inc. To: Bank of Montreal, as the Agent VINTAGE PETROLEUM, INC. Gentlemen and Ladies: We refer to clause (d) of Section 10.11.1 of the Amended and Restated Credit Agreement, dated as of December 8, 1997 (together with all amendments and other modifications, if any, from time to time thereafter made thereto, the "Credit Agreement"), among Vintage Petroleum, Inc., a Delaware corporation (the "Borrower"), the various financial institutions (the "Lenders") as are, or shall from time to time become, parties thereto, and Bank of Montreal, as agent (the "Agent") for the Lenders. Unless otherwise defined herein or the context otherwise requires, terms used herein have the meanings provided in the Credit Agreement. This Agreement is delivered to you pursuant to clause (d) of Section 10.11.1 of the Credit Agreement and also constitutes notice to each of you, pursuant to clause (c) of Section 10.11.1 of the Credit Agreement, of the assignment and delegation to _______________ (the "Assignee") of ___% of the Loans and Commitments of _____________ (the "Assignor") outstanding under the Credit Agreement on the date hereof. After giving effect to the foregoing assignment and delegation, the Assignor's and the Assignee's Percentages for the purposes of the Credit Agreement are set forth opposite such Person's name on the signature pages hereof. [Add paragraph dealing with accrued interest and fees with respect to Loans and participations in Letters of Credit being assigned.] The Assignee hereby acknowledges and confirms that it has received a copy of the Credit Agreement and the exhibits related thereto, together with copies of the documents which were required to be delivered under the Credit Agreement as a condition to the making of the Loans thereunder. The Assignee further confirms and agrees that in becoming a Lender and in making its Commitments and Loans and in participating in Letters of Credit under the Credit Agreement, such actions have and will be made without recourse to, or representation or warranty by the Agent. Except as otherwise provided in the Credit Agreement, effective as of the date of acceptance hereof by the Agent (a) the Assignee (i) shall be deemed automatically to have become a party to the Credit Agreement, have all the rights and obligations of a "Lender" under the Credit Agreement and the other Loan Documents as if it were an original signatory thereto to the extent specified in the second paragraph hereof; and (ii) agrees to be bound by the terms and conditions set forth in the Credit Agreement and the other Loan Documents as if it were an original signatory thereto; and (b) the Assignor shall be released from its obligations under the Credit Agreement and the other Loan Documents to the extent specified in the second paragraph hereof. The Assignor and the Assignee hereby agree that the [Assignor] [Assignee] will pay to the Agent the processing fee referred to in Section 10.11.1 of the Credit Agreement upon the delivery hereof. The Assignee hereby advises each of you of the following administrative details with respect to the assigned Loans and Commitments and requests the Agent to acknowledge receipt of this document: (A) Address for Notices: Institution Name: Attention: Domestic Office: Telephone: Facsimile: LIBOR Office: Telephone: Facsimile: (B) Payment Instructions: The Assignee agrees to furnish the tax form required by the last sentence of Section 4.6 (if so required) of the Credit Agreement no later than the date of acceptance hereof by the Agent. This Agreement may be executed by the Assignor and Assignee in separate counterparts, each of which when so executed and delivered 2 shall be deemed to be an original and all of which taken together shall constitute one and the same agreement. Adjusted Percentage [ASSIGNOR] Term Loan Commitment and Term Loans: ___% Revolving Loan Commitment and Revolving Loans: ___% Letter of Credit participations: ___% By: ------------------------- Title: Percentage [ASSIGNEE] Term Loan Commitment and Term Loans: ___% Revolving Loan Commitment and Revolving Loans: ___% Letter of Credit participations: ___% By: ------------------------- Title: Accepted and Acknowledged this __ day of _______, 19__ BANK OF MONTREAL, as Agent By: ------------------------- Title: [VINTAGE PETROLEUM, INC., as Borrower By: ------------------------- Title:] [add signature blocks for each Issuer] 3 EXHIBIT G FORM OF ISSUANCE REQUEST Issuance Request Bank of Montreal 115 S. LaSalle Street Chicago, IL 60603 Attention: -------------------------- Re: Vintage Petroleum, Inc. Gentlemen and Ladies: This Issuance Request is delivered to you pursuant to Section 2.8.1 of the Amended and Restated Credit Agreement, dated as of December 8, 1997 (together with all amendments and other modifications, if any, from time to time thereafter made thereto, the "Credit Agreement"), among Vintage Petroleum, Inc., a Delaware corporation (the "Borrower"), the various financial institutions as are, or may from time to time become, parties thereto (collectively, the "Lenders"), and Bank of Montreal, acting through certain of its U.S. branches or agencies ("BMO") as agent (in such capacity, together with any successor(s) thereto in such capacity, the "Agent") for the Lenders. Terms used herein have the meanings provided in the Credit Agreement unless otherwise defined herein or the context otherwise requires. The Borrower hereby requests that __________________________ as the Issuer issue a Letter of Credit on [Date] in the aggregate initial face amount of [and in the form attached hereto].***/ The beneficiary of the requested Letter of Credit will be _________________________, and such Letter of Credit will be in support of the [Provide Description] and will have a stated expiry date of [Date]. [The following documents will be required upon presentation: [Provide Description] Attached hereto is an executed copy of an [Application for Letter of Credit]. The Borrower hereby acknowledges that, pursuant to Section 5.2.2 of the Credit Agreement, each of the delivery of this Issuance Request and the issuance of the Letter of Credit requested hereby constitutes a representation and warranty by the Borrower that, on the date of such Borrowing, and before and after giving - -------- ***/ Include where the Borrower is providing the form of Letter of Credit requested to be issued. effect thereto, all statements set forth in Section 5.2.1 are true and correct in all material respects. IN WITNESS WHEREOF, the Borrower has caused this Issuance Request to be executed and delivered by its duly Authorized Officer this ____ day of ________, 19__. VINTAGE PETROLEUM, INC. By ----------------------- Title: 2 EX-13 3 ANNUAL REPORT EXHIBIT 13 [LOGO OF VINTAGE PETROLEUM APPEARS HERE] SUMMARY FINANCIAL AND OPERATING DATA
- -------------------------------------------------------------------------------------------------------------------------- Years Ended December 31 1997 1996 1995 1994 1993 (In thousands, except per share amounts and operating data) FINANCIAL DATA INCOME STATEMENT DATA: Oil and gas sales......................... $ 355,113 $ 258,368 $ 160,254 $ 141,357 $ 113,259 Gathering revenues........................ 18,063 20,508 12,380 14,635 7,861 Gas marketing revenues.................... 45,981 31,920 20,912 27,285 36,175 Total revenues............................ 416,600 311,682 194,797 185,652 160,027 Operating expenses........................ 172,676 138,438 95,121 96,549 85,205 Depreciation, depletion and amortization..................... 99,065 70,057 52,257 45,774 33,335 Interest.................................. 36,762 30,109 20,178 12,002 6,943 Income before cumulative effect of accounting change.......... 72,207 41,192 11,361 13,929 16,789 Net income................................ 72,207 41,192 11,361 13,929 18,514 Earnings per share before effect of accounting change: Basic............................ 1.41 .86 .27 .33 .42 Diluted.......................... 1.39 .85 .27 .33 .41 Earnings per share: Basic............................ 1.41 .86 .27 .33 .47 Diluted.......................... 1.39 .85 .27 .33 .45 Dividends declared per share.............. .065 .0525 .0425 .0325 .0225 ----------- ----------- ----------- ----------- ----------- BALANCE SHEET DATA (END OF YEAR): Total assets.............................. $ 990,055 $ 813,950 $ 647,539 $ 407,752 $ 384,461 Long-term debt, less current portion...... 451,096 372,390 315,846 186,548 174,164 Stockholders' equity...................... 383,530 265,105 223,960 155,993 143,392 ----------- ----------- ----------- ----------- ----------- OPERATING DATA PRODUCTION: Oil (MBbls)............................... 15,457 11,939 7,608 6,657 4,785 Gas (MMcf)................................ 42,691 32,366 30,610 28,884 22,504 ----------- ----------- ----------- ----------- ----------- AVERAGE SALES PRICES: Oil (per Bbl)............................. $ 17.02 $ 16.73 $ 15.26 $ 13.53 $ 14.14 Gas (per Mcf)............................. 2.16 1.81 1.46 1.78 2.03 ----------- ----------- ----------- ----------- ----------- PROVED RESERVES (END OF YEAR): Oil (MBbls)............................... 187,768 178,296 147,871 70,789 63,277 Gas (MMcf)................................ 552,164 382,846 310,762 281,638 273,142 ----------- ----------- ----------- ----------- ----------- Present value of estimated future net revenues before income taxes discounted at 10 percent (in thousands): Oil and gas properties........... $ 1,222,560 $1,807,137 $ 894,249 $ 446,987 $ 359,978 Gathering systems................ 5,940 10,364 10,641 9,215 8,105 Standardized measure of discounted future net cash flows (in thousands)....................... 1,016,645 1,392,841 736,546 385,721 339,701 =========== ========== =========== =========== ===========
Significant acquisitions of producing oil and gas properties during 1997, 1995 and 1993 affect the comparability between the Financial and Operating Data for the years presented above. Earnings per share and dividends declared per share amounts have been adjusted to give effect to the Company's two-for-one common stock split effected on October 7, 1997. - ---------------------------- 28 - Vintage Petroleum, Inc. [LOGO OF VINTAGE PETROLEUM APPEARS HERE] MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - -------------------------------------------------------------------------------- RESULTS OF OPERATIONS The Company's results of operations have been significantly affected by its success in acquiring oil and gas properties and its ability to maintain or increase production through its exploitation and exploration activities. Fluctuations in oil and gas prices have also significantly affected the Company's results. Principally through acquisitions, the Company has achieved significant increases in its oil and gas production. The following table reflects the Company's average oil and gas prices and its oil and gas production for the periods presented: - ----------------------------------------------------------------------------- Years Ended December 31 1997 1996 1995 AVERAGE PRICES: Oil (per Bbl) U.S................................. $17.23 $17.19 $15.44 Argentina........................... 16.67 15.91 13.98 Bolivia............................. 16.52 -- -- Total............................... 17.02 16.73 15.26 Gas (per Mcf) U.S................................. $ 2.33 $ 1.81 $ 1.46 Bolivia............................. 1.10 -- -- Total............................... 2.16 1.81 1.46 PRODUCTION: Oil (MBbls) U.S................................. 9,692 7,694 6,647 Argentina........................... 5,630 4,245 961 Bolivia............................. 135 -- -- Total............................... 15,457 11,939 7,608 Gas (MMcf) U.S................................. 36,623 32,366 30,610 Bolivia............................. 6,068 -- -- Total............................... 42,691 32,366 30,610 Total MBOE 22,573 17,333 12,710 Average U.S. oil prices received by the Company fluctuate generally with changes in the West Texas Intermediate ("WTI") posted prices for oil. The Company's Argentina oil production is sold at WTI spot prices less a specified differential. The Company experienced a two percent increase in its average oil price in 1997 compared to 1996. During 1997, the impact of Argentina oil hedges reduced the Company's overall average oil price 24 cents to $17.02 per Bbl and its average Argentina oil price was reduced 66 cents to $16.67 per Bbl. Approximately 49 percent of the 1997 Argentina oil production was covered by hedges. Oil hedges reduced the Company's overall 1996 average oil price $2.00 to $16.73 per Bbl. The Company's 1996 average U.S. oil price was reduced $1.47 to $17.19 per Bbl while its average Argentina oil price was reduced $2.96 to $15.91 per Bbl. Overall, average realized oil prices in 1996 exceeded 1995 by 10 percent. Before the impact of oil hedges, the Company's average realized oil prices for 1997, 1996 and 1995 were approximately 84 percent, 85 percent and 82 percent of the average NYMEX reference price, respectively. Average U.S. gas prices received by the Company fluctuate generally with changes in spot market prices for gas, which may vary significantly by region. The Company's Bolivia average gas price is tied to a long-term contract for which the price varies only with seasonal differential adjustments. The Company's average gas price for 1997 was 19 percent higher than 1996 while its 1996 average gas prices exceeded 1995 by 24 percent. Average realized gas prices for 1996 were negatively impacted by five cents per Mcf as a result of certain gas hedges that were in place for 40,000 Mcf of gas per day for the period January through March 1996. The Company has previously engaged in oil and gas hedging activities and intends to continue to consider various hedging arrangements to realize commodity prices which it ----------------------- 1997 Annual Report - 29 [LOGO OF VINTAGE PETROLEUM APPEARS HERE] considers favorable. Currently, there are no oil or gas hedges in place. Relatively modest changes in either oil or gas prices significantly impact the Company's results of operations and cash flow. However, the impact of changes in the market prices for oil and gas on the Company's average realized prices may be reduced from time to time based on the level of the Company's hedging activities. Based on 1997 oil production, a change in the average oil price realized by the Company of $1.00 per Bbl would result in a change in net income and cash flow before income taxes for the year of approximately $11.4 million and $15.0 million, respectively. A 10 cent per Mcf change in the average price realized by the Company for gas would result in a change in net income and cash flow before income taxes for the year of approximately $2.6 million and $4.1 million, respectively, based on 1997 gas production. The declines in oil and gas prices since year-end 1997 will adversely impact net income and cash flow, and may reduce the Standardized Measure at March 31, 1998, to the extent that a writedown of the Company's capitalized oil and gas costs may be required. PERIOD TO PERIOD COMPARISONS During 1995, 1996 and 1997, the Company made various acquisitions which significantly impacted the period to period comparisons. Acquisitions made during 1995 (the "1995 Acquisitions") include the purchase of certain oil and gas properties from Texaco Exploration and Production, Inc. ("Texaco") (the "Texaco Properties") in May 1995, the acquisition of a controlling interest in Cadipsa, S.A., an Argentina oil and gas exploration company which was publicly traded until September 26, 1996 ("Cadipsa"), in July 1995, the acquisition of Vintage Oil Argentina, Inc., formerly BG Argentina, S.A. ("Vintage Argentina"), in September 1995, and the acquisition of certain Argentina oil and gas properties from Astra Compania Argentina de Petroleo S.A. and Shell Compania Argentina de Petroleo S.A. (collectively, the "Astra/Shell Properties") in November 1995 and December 1995, respectively. Acquisitions made during 1996 (the "1996 Acquisitions") include the purchase of certain oil and gas properties and facilities from Exxon Company, U.S.A. in November 1996 and the acquisition of Vintage Petroleum Boliviana Ltd., formerly Shamrock Ventures (Boliviana) Ltd. ("Vintage Boliviana"), from affiliates of Diamond Shamrock, Inc. and Austrofueguina, S.A. in December 1996. In April 1997, the Company purchased certain oil and gas properties and facilities from subsidiaries of Burlington Resources Inc. (the "Burlington Properties"). The Company's consolidated revenues and expenses for 1995, 1996 and 1997 include the consolidation of 100 percent of Cadipsa from the date of acquisition under the purchase method of accounting. The minority interest in income (loss) of subsidiary reflects the portion of Cadipsa's income (loss) attributable to the minority ownership for the years ended December 31, 1995, 1996 and 1997. Effective July 1, 1997, the operations of Cadipsa were merged into Vintage Argentina and Cadipsa became inactive and is awaiting governmental approval of formal dissolution. Year Ended December 31, 1997, Compared to Year Ended December 31, 1996 Net income was $72.2 million for the year ended December 31, 1997, up 75 percent from $41.2 million in 1996. Increases in the Company's oil and gas production of 30 percent on an equivalent barrel basis, an increase of 19 percent in natural gas prices, and an increase of two percent in oil prices are primarily responsible for the increase in net income. The production increases primarily relate to the acquisition of the Burlington Properties, exploitation activities in Argentina, exploration activities in the Galveston Bay area, and the 1996 Acquisitions. Oil and gas sales increased $96.7 million (37 percent), to $355.1 million for 1997 from $258.4 million for 1996. A 29 percent increase in oil production and a two percent increase in average oil prices combined to account for $63.3 million of the increase. A 32 percent increase in gas production and a 19 percent increase in average gas prices contributed to an additional $33.4 million increase. Other income (expense) decreased $3.5 million (389 percent), to an expense of $2.6 million for 1997 from income of $0.9 million for 1996, due primarily to a $5.5 million charge in 1997 related to an adverse judgement in a lawsuit involving the handling of proceeds received by the Company from a 1992 gas contract termination. The charge was partially offset by a $1.6 million gain recognized on the sale of a gas gathering system. Lease operating expenses, including production taxes, increased $22.4 million (24 percent), to $114.3 million for 1997 from $91.9 million for 1996. The increase in lease operating expenses is due primarily to costs associated with the Burlington Properties, the 1996 Acquisitions, and an increase in severance taxes due to higher oil and gas sales. Lease operating expenses per equivalent barrel produced decreased to $5.07 in 1997 from $5.30 for 1996. General and administrative expenses increased $2.1 million (13 percent), to $18.5 million for 1997 from $16.4 million for 1996, due primarily to the acquisition of Vintage Boliviana and the addition of personnel as a result of the acquisition of the Burlington Properties. Depreciation, depletion and amortization increased $29.0 million (41 percent), to $99.1 million for 1997 from $70.1 million for 1996, due primarily to the 30 percent increase in production on an equivalent barrel basis. Amortization per equivalent barrel of the Company's oil and gas properties increased to $4.27 in 1997 from $3.91 in 1996. Interest expense increased $6.7 million (22 percent), to $36.8 million for 1997 from $30.1 million for 1996, due primarily to a 29 percent increase in the Company's total average outstanding debt as a result of the acquisition of the - ---------------------------- 30 - Vintage Petroleum, Inc. [LOGO OF VINTAGE PETROLEUM APPEARS HERE] Burlington Properties on April 1, 1997, and the acquisitions made late in 1996. The increase was partially offset by a decrease in the Company's overall average interest rate from 8.36 percent in 1996 to 8.01 percent in 1997. Year Ended December 31, 1996, Compared to Year Ended December 31, 1995 Net income was $41.2 million for the year ended December 31, 1996, up 263 percent from $11.4 million in 1995. Increases in the Company's oil and gas production of 36 percent on an equivalent barrel basis, an increase of 24 percent in natural gas prices, and an increase of 10 percent in oil prices are primarily responsible for the increase in net income. The production increases primarily relate to the 1995 Acquisitions. Oil and gas sales increased $98.1 million (61 percent), to $258.4 million for 1996 from $160.3 million for 1995. A 57 percent increase in oil production and a 10 percent increase in average oil prices combined to account for $83.7 million of the increase. A six percent increase in gas production and a 24 percent increase in average gas prices contributed to an additional $14.4 million increase. Lease operating expenses, including production taxes, increased $25.1 million (38 percent), to $91.9 million for 1996 from $66.8 million for 1995. The increase in lease operating expenses is due primarily to the 1995 Acquisitions. Lease operating expenses per equivalent barrel produced increased one percent to $5.30 in 1996 from $5.25 for 1995. General and administrative expenses increased $4.8 million (41 percent), to $16.4 million for 1996 from $11.6 million for 1995, due primarily to the acquisitions of Cadipsa and Vintage Argentina in the last half of 1995. Depreciation, depletion and amortization increased $17.8 million (34 percent), to $70.1 million for 1996 from $52.3 million for 1995, due primarily to the 36 percent increase in production on an equivalent barrel basis. Interest expense increased $9.9 million (49 percent), to $30.1 million for 1996 from $20.2 million for 1995, due primarily to a 24 percent increase in the Company's total average outstanding debt related primarily to the 1995 Acquisitions. CAPITAL EXPENDITURES During 1997, the Company's domestic oil and gas capital expenditures totaled $201.2 million. Acquisitions of domestic producing oil and gas properties totaled $133.5 million, the largest being the April 1997 acquisition of the Burlington Properties for $102.7 million. Funds for these acquisitions were provided by advances under the Company's revolving credit facility. During 1997, the Company's international oil and gas capital expenditures of $67.5 million included $54.6 million in Argentina, primarily on exploitation and exploration activities. During 1996, the Company's domestic oil and gas capital expenditures totaled $113.7 million of which $50.5 million were for acquisitions of producing oil and gas properties. The largest of these acquisitions was approximately $28.5 million for producing oil and gas properties located in south Alabama acquired from Exxon Company, U.S.A. Funds for these acquisitions were provided by advances under the Company's revolving credit facility. The Company's 1996 international oil and gas capital expenditures of $90.3 million included approximately $49.4 million in Argentina, primarily for exploitation activities, and $37.0 million in Bolivia related to the acquisition of Vintage Boliviana. Funds for the purchase were provided by advances under the Company's revolving credit facility. The Company is committed to perform 17,728 work units within the next three years related to its concession rights in the Naranjillos field in Santa Cruz Province, Bolivia. The work unit commitment is guaranteed by the Company through an $88.6 million letter of credit; however, the Company anticipates that it will fulfill this three-year work unit commitment through approximately $45 to $50 million of various seismic and drilling capital expenditures. In addition, the Company is committed to perform 1,400 work units related to an exploration program within the Chaco Block in Bolivia. The entire obligation can be fulfilled by the drilling of one 15,000 foot well. The Company estimates the cost of this well to be approximately $4.5 million and expects to fulfill the obligation by drilling a well in 1998. Under the Company's exploration contract on Block 19 in Ecuador, the Company is required to participate in the drilling of one additional well. The Company expects to drill the well during 1998 at a cost of approximately $4.0 million. Except for the commitments discussed above, 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 primarily 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 substantially all of its planned $185 million of non-acquisition capital expenditures during 1998. The Company's planned 1998 non-acquisition capital expenditure budget is currently allocated 65 percent to exploitation activities, including development and infill drilling, and approximately 35 percent to exploration activities. The Company does not have a specific acquisition budget since the timing and size of acquisitions are difficult to forecast. The Company is actively pursuing additional acquisitions of oil and gas properties. In addition to internally generated cash flow and advances under its revolving credit facility, the Company may seek additional sources of capital to fund any future significant acquisitions (see "--Liquidity"). ----------------------- 1997 Annual Report - 31 [LOGO OF VINTAGE PETROLEUM APPEARS HERE] The Company's recent oil and gas capital expenditure history is as follows:
- --------------------------------------------------------------------------------------------------- Years Ended December 31 1997 1996 1995 (In thousands) Acquisition of oil and gas reserves ............... $ 139,749 $ 91,282 $ 207,658 Drilling .......................................... 71,069 33,482 21,343 Workovers and recompletions ....................... 32,856 51,175 18,313 Acquisition of undeveloped acreage and seismic data 10,349 14,847 7,684 Acquisition and construction of gathering systems . 1,209 724 234 Other ............................................. 13,460 12,546 5,367 --------- --------- --------- Total ........................................ $ 268,692 $ 204,056 $ 260,599 ========= ========= =========
LIQUIDITY Internally generated cash flow and the borrowing capacity under its revolving credit facility are the Company's major sources of liquidity. In addition, the Company may use other sources of capital, including the issuance of additional debt securities or equity securities, to fund any major acquisitions it might secure in the future and to maintain its financial flexibility. The Company funds its capital expenditures (excluding acquisitions) and debt service requirements primarily through internally generated cash flows from operations. Any excess cash flow is used to reduce outstanding advances under the revolving credit facility. In the past, the Company has accessed the public markets to finance significant acquisitions and provide liquidity for its future activities. In conjunction with the purchase of substantial oil and gas assets in 1990, 1992 and 1995, the Company completed three public equity offerings, as well as a public debt offering in 1995, which provided the Company with aggregate net proceeds of approximately $272 million. On February 5, 1997, the Company completed a public offering of 3,000,000 shares (after giving effect to the Company's two-for-one common stock split effected on October 7, 1997) of common stock, all of which were sold by the Company. Net proceeds to the Company of approximately $47 million were used to repay a portion of existing indebtedness under the revolving credit facility. Also on February 5, 1997, the Company issued $100 million of its 8 5/8% Senior Subordinated Notes Due 2009 (the "8 5/8% Notes"). Net proceeds to the Company of approximately $96 million were used to repay a portion of existing indebtedness under the revolving credit facility. The 8 5/8% Notes are redeemable at the option of the Company, in whole or part, at any time on or after February 1, 2002. The 8 5/8% Notes mature on February 1, 2009, with interest payable semiannually on February 1 and August 1 of each year. The 8 5/8% Notes and the Company's 9% Senior Subordinated Notes Due 2005, which were issued in 1995 (collectively, the "Notes"), are unsecured senior subordinated obligations of the Company, rank subordinate in right of payment to all senior indebtedness (as defined) and rank pari passu with each other. Upon a change in control (as defined therein) of the Company, holders of the Notes may require the Company to repurchase all or a portion of the Notes at a purchase price equal to 101 percent of the principal amount thereof, plus accrued and unpaid interest. The indentures for the Notes contain limitations on, among other things, additional indebtedness and liens, the payment of dividends and other distributions, certain investments and transfers or sales of assets. The Company's unsecured revolving credit facility under the Amended and Restated Credit Agreement dated December 8, 1997 (the "Credit Agreement"), establishes a borrowing base (currently $450 million) determined by the banks' evaluation of the Company's U.S. and Argentina oil and gas reserves. Outstanding advances under the Credit Agreement bear interest payable quarterly at a floating rate based on Bank of Montreal's alternate base rate (as defined) or, at the Company's option, at a fixed rate for up to six months based on the eurodollar market rate ("LIBOR"). The Company's interest rate increments above the alternate base rate and LIBOR vary based on the level of outstanding senior debt to the borrowing base. As of February 19, 1998, the Company had elected a fixed rate based on LIBOR for a substantial portion of its outstanding advances, which resulted in an average interest rate of approximately 6.6 percent per annum. In addition, the Company must pay a commitment fee ranging from 0.25 to 0.375 percent per annum on the unused portion of the banks' commitment. On a semiannual basis, the Company's borrowing base is redetermined by the banks based upon their review of the Company's U.S. and Argentina oil and gas reserves. If the sum of outstanding senior debt exceeds the borrowing base, as redetermined, the Company must repay such excess. Any principal advances outstanding under the Credit Agreement at December 1, 2000, will be payable in 12 equal consecutive quarterly installments commencing March 1, 2001, with maturity at December 1, 2003. The unused portion of the Credit Agreement was approximately $127 million at February 19, 1998. The unused portion of the Credit Agreement and the Company's internally generated cash flow provide liquidity which may be used to finance future capital expenditures, including acquisitions. As additional U.S. and Argentina acquisitions are made and properties are added to the borrowing base, the banks' - ---------------------------- 32 - Vintage Petroleum, Inc. [LOGO OF VINTAGE PETROLEUM APPEARS HERE] determination of the borrowing base and their commitments may be increased. Subsequent to the banks' most recent borrowing base determination, oil and gas prices have declined. The impact of these changes on the banks' next borrowing base determination is unknown at this time. INFLATION In recent years inflation has not had a significant impact on the Company's operations or financial condition. INCOME TAXES The total provision for U.S. income taxes is based on the Federal corporate statutory income tax rate plus an estimated average rate for state income taxes. The Company incurred a current provision for income taxes of approximately $5.2 million for 1997, $2.6 million for 1996, and a current benefit for income taxes of $1.0 million for 1995. The Company has a U.S. Federal alternative minimum tax ("AMT") credit carryforward of approximately $2.9 million which does not expire and is available to offset U.S. Federal regular income taxes in future years, but only to the extent that U.S. Federal regular income taxes exceed the AMT in such years. Earnings of the Company's foreign subsidiary, Vintage Boliviana, are subject to Bolivia income taxes. Earnings of the Company's foreign subsidiary, Vintage Argentina, are subject to Argentina income taxes. As of December 31, 1997, the Company had estimated net operating loss carryforwards of $26.5 million for Argentina income tax reporting purposes which can be used to offset future taxable income in Argentina. The carryforward amount includes certain Argentina net operating loss carryforwards which were acquired in a purchase business combination and are recorded at cost, which is less than the calculated value under the provisions of Statement of Financial Accounting Standards No. 109, Accounting for Income Taxes. These unrecorded net operating loss carryforwards will reduce the Company's foreign income tax provision for financial purposes in future years by approximately $4.5 million when their benefit is realized. No U.S. deferred tax liability will be recognized related to the unremitted earnings of these foreign subsidiaries as it is the Company's intention, generally, to reinvest such earnings permanently. FOREIGN OPERATIONS A majority of the Company's foreign operations are located in Argentina. The Company believes Argentina offers a relatively stable political environment and does not anticipate any significant change in the near future. The current democratic form of the government has been in place since 1983 and, since 1989, has pursued a steady process of privatization, deregulation and economic stabilization and reforms involving the reduction of inflation and public spending. Argentina's 12-month trailing inflation rate measured by the Argentine Consumer Price Index declined from 200.7 percent as of June 1991 to 0.3 percent as of December 1997. The Company believes that its Argentine operations present minimal currency risk. All of the Company's Argentine revenues are U.S. dollar based, while a large portion of its costs are denominated in Argentine pesos. The Argentina Central Bank is obligated by law to sell dollars at a rate of one Argentine peso to one U.S. dollar and has sought to prevent appreciation of the peso by buying dollars at rates of not less than 0.998 peso to one U.S. dollar. As a result, the Company believes that should any devaluation of the Argentine peso occur its revenues would be unaffected and its operating costs would not be significantly increased. At the present time, there are no foreign exchange controls preventing or restricting the conversion of Argentine pesos into dollars. With the purchase of Vintage Boliviana, the Company expanded its international operations into Bolivia. Since the mid-1980's, Bolivia has been undergoing major economic reform, including the establishment of a free-market economy and the encouragement of foreign private investment. Economic activities that had been reserved for government corporations were opened to foreign and domestic private investments. Barriers to international trade have been reduced and tariffs lowered. A new investment law and revised codes for mining and the petroleum industry, intended to attract foreign investment, have been introduced. On February 1, 1987, a new currency, the Boliviano ("Bs"), replaced the peso at the rate of one million pesos to one Boliviano. The exchange rate is set daily by the Government's exchange house, the Bolsin, which is under the supervision of the Bolivian central bank. Foreign exchange transactions are not subject to any controls. The US$:Bs exchange rate at December 31, 1997, was US$1:Bs 5.37. The Company believes that any currency risk associated with its Bolivian operations would not have a material impact on the Company's financial position or results of operations. YEAR 2000 In the next two years, most large companies will face a potentially serious information systems problem because many software applications and operational programs written in the past may not properly recognize calendar dates beginning in the year 2000. This problem could force computers to either shut down or provide incorrect data or information. The Company began the process of identifying the changes required to its computer programs and hardware, in consultation with software and hardware providers, in early 1997. Software upgrades designed to correct the year 2000 problem are scheduled to be implemented in mid-1998. The Company does not anticipate the cost of these software and hardware changes to have a material adverse impact on its business, financial condition or results of operations. ----------------------- 1997 Annual Report - 33 [LOGO OF VINTAGE PETROLEUM APPEARS HERE] CONSOLIDATED BALANCE SHEETS - -------------------------------------------------------------------------------- December 31 1997 1996 (In thousands, except shares and per share amounts) ASSETS CURRENT ASSETS: Cash and cash equivalents ................................. $ 5,797 $ 2,774 Accounts receivable - Oil and gas sales ...................................... 60,878 68,219 Joint operations ....................................... 6,358 4,445 Deferred income taxes ..................................... 4,206 -- Prepaids and other current assets ......................... 12,443 9,252 ---------- --------- Total current assets ............................... 89,682 84,690 ---------- --------- PROPERTY, PLANT AND EQUIPMENT, at cost: Oil and gas properties, full cost method .................. 1,230,288 964,623 Oil and gas gathering systems ............................. 12,943 13,489 Other ..................................................... 8,420 8,439 ---------- --------- 1,251,651 986,551 Less accumulated depreciation, depletion and amortization.. 370,103 275,392 ---------- --------- 881,548 711,159 ---------- --------- OTHER ASSETS, net ......................................... 18,825 18,101 ---------- --------- $ 990,055 $ 813,950 ========== ========= LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Revenue payable ........................................... $ 27,085 $ 24,746 Accounts payable - trade .................................. 21,088 20,355 Other payables and accrued liabilities .................... 31,504 26,595 Current portion of long-term debt ......................... -- 6,629 Acquisition costs payable ................................. -- 35,051 ---------- --------- Total current liabilities ........................... 79,677 113,376 ---------- --------- LONG-TERM DEBT, less current portion above ................ 451,096 372,390 ---------- --------- DEFERRED INCOME TAXES ..................................... 71,797 57,610 ---------- --------- OTHER LONG-TERM LIABILITIES ............................... 3,955 5,469 ---------- --------- COMMITMENTS AND CONTINGENCIES (NOTE 4) STOCKHOLDERS' EQUITY, per accompanying statements: Preferred stock, $.01 par, 5,000,000 shares authorized, zero shares issued and outstanding .................... -- -- Common stock, $.005 par, 80,000,000 shares authorized, 51,558,886 and 48,138,224 shares issued and outstanding .......................................... 258 241 Capital in excess of par value ............................ 202,008 152,200 Retained earnings ......................................... 181,264 112,664 ---------- --------- 383,530 265,105 ---------- --------- $ 990,055 $ 813,950 ========== ========= The accompanying notes are an integral part of these statements. - --------------------------- 34 - Vintage Petroleum, Inc. [LOGO OF VINTAGE PETROLEUM APPEARS HERE] CONSOLIDATED STATEMENTS OF INCOME
For the Years Ended December 31 1997 1996 1995 (In thousands, except per share amounts) REVENUES: Oil and gas sales .............................. $ 355,113 $ 258,368 $ 160,254 Oil and gas gathering .......................... 18,063 20,508 12,380 Gas marketing .................................. 45,981 31,920 20,912 Other income (expense) ......................... (2,557) 886 1,251 ----------- ----------- ----------- 416,600 311,682 194,797 ----------- ----------- ----------- COSTS AND EXPENSES: Lease operating, including production taxes .... 114,346 91,916 66,771 Oil and gas gathering .......................... 14,932 16,985 9,511 Gas marketing .................................. 43,398 29,537 18,839 General and administrative ..................... 18,541 16,441 11,601 Depreciation, depletion and amortization ....... 99,065 70,057 52,257 Interest ....................................... 36,762 30,109 20,178 ----------- ----------- ----------- 327,044 255,045 179,157 ----------- ----------- ----------- Income before income taxes and minority interest 89,556 56,637 15,640 PROVISION FOR INCOME TAXES: Current ........................................ 5,235 2,610 (955) Deferred ....................................... 11,911 12,328 6,034 MINORITY INTEREST IN (INCOME) LOSS OF SUBSIDIARY (203) (507) 800 ----------- ----------- ----------- Net Income ..................................... $ 72,207 $ 41,192 $ 11,361 =========== =========== =========== EARNINGS PER SHARE: Basic .......................................... $ 1 .41 $ .86 $ .27 =========== =========== =========== Diluted ........................................ $ 1 .39 $ .85 $ .27 =========== =========== =========== WEIGHTED AVERAGE COMMON SHARES OUTSTANDING: Basic .......................................... 51,178 48,090 41,555 =========== =========== =========== Diluted ........................................ 52,026 48,654 42,081 =========== =========== ===========
The accompanying notes are an integral part of these statements. ----------------------- 1997 Annual Report - 35 [LOGO OF VINTAGE PETROLEUM APPEARS HERE] CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY - --------------------------------------------------------------------------------
Capital In Excess Common Stock of Par Retained Shares Amount Value Earnings Total (In thousands, except per share amounts) Balance at December 31, 1994 ................ 40,326 $ 202 $ 91,100 $ 64,691 $ 155,993 Net income ............................... -- -- -- 11,361 11,361 Issuance of common stock ................. 5,606 28 55,176 -- 55,204 Exercise of warrants ..................... 588 3 1,465 -- 1,468 Exercise of stock options and resulting tax effects ................... 802 4 1,865 -- 1,869 Cash dividends declared ($.0425 per share) -- -- -- (1,935) (1,935) -------- --------- --------- --------- --------- Balance at December 31, 1995 ................ 47,322 237 149,606 74,117 223,960 Net income ............................... -- -- -- 41,192 41,192 Exercise of warrants ..................... 612 3 1,529 -- 1,532 Exercise of stock options and resulting tax effects ................... 204 1 1,065 -- 1,066 Cash dividends declared ($.0525 per share) -- -- -- (2,645) (2,645) -------- --------- --------- --------- --------- Balance at December 31, 1996 ................ 48,138 241 152,200 112,664 265,105 Net income ............................... -- -- -- 72,207 72,207 Issuance of common stock ................. 3,000 15 46,978 -- 46,993 Exercise of stock options and resulting tax effects ................... 421 2 2,830 -- 2,832 Cash dividends declared ($.0650 per share) -- -- -- (3,607) (3,607) -------- --------- --------- --------- --------- Balance at December 31, 1997 ................ 51,559 $ 258 $ 202,008 $ 181,264 $ 383,530 ======== ========= ========= ========= =========
The accompanying notes are an integral part of these statements. - --------------------------- 36 - Vintage Petroleum, Inc. [LOGO OF VINTAGE PETROLEUM APPEARS HERE] CONSOLIDATED STATEMENTS OF CASH FLOWS - --------------------------------------------------------------------------------
For the Years Ended December 31 1997 1996 1995 (In thousands) CASH FLOWS FROM OPERATING ACTIVITIES: Net income ............................................... $ 72,207 $ 41,192 $ 11,361 Adjustments to reconcile net income to cash provided by operating activities - Depreciation, depletion and amortization .......... 99,065 70,057 52,257 Minority interest in income (loss) of subsidiary... 203 507 (800) Provision for deferred income taxes ............... 11,911 12,328 6,034 ---------- ---------- --------- 183,386 124,084 68,852 Decrease (increase) in receivables ....................... 5,428 (24,614) (11,836) Increase (decrease) in payables and accrued liabilities .. 7,187 14,619 (1,012) Other .................................................... (569) 2,493 (1,805) ---------- ---------- --------- Cash provided by operating activities ................ 195,432 116,582 54,199 ---------- ---------- --------- CASH FLOWS FROM INVESTING ACTIVITIES: Additions to property, plant and equipment - Oil and gas properties ............................... (266,105) (162,129) (141,490) Gathering systems and other .......................... (2,275) (1,430) (3,256) Proceeds from sales of oil and gas properties ............ 360 1,291 604 Purchase of companies, net of cash acquired .............. (38,788) (9,160) (45,886) Other .................................................... (2,670) (3,233) 2,777 ---------- ---------- --------- Cash used by investing activities .................... (309,478) (174,661) (187,251) ---------- ---------- --------- CASH FLOWS FROM FINANCING ACTIVITIES: Sale of common stock ..................................... 47,910 2,528 51,191 Sale of 8 5/8% Senior Subordinated Notes Due 2009 ........ 96,270 -- -- Sale of 9% Senior Subordinated Notes Due 2005 ............ -- -- 145,137 Advances on revolving credit facility and other borrowings 192,521 149,014 178,264 Payments on revolving credit facility and other borrowings (216,335) (90,720) (237,679) Dividends paid ........................................... (3,297) (2,514) (1,747) ---------- ---------- --------- Cash provided by financing activities ................ 117,069 58,308 135,166 ---------- ---------- --------- NET INCREASE IN CASH AND CASH EQUIVALENTS ................ 3,023 229 2,114 CASH AND CASH EQUIVALENTS, beginning of year ............. 2,774 2,545 431 ---------- ---------- --------- CASH AND CASH EQUIVALENTS, end of year ................... $ 5,797 $ 2,774 $ 2,545 ========== ========== =========
The accompanying notes are an integral part of these statements. ----------------------- 1997 Annual Report - 37 [LOGO OF VINTAGE PETROLEUM APPEARS HERE] NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- For the Years Ended December 31, 1997, 1996 and 1995 1. BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES CONSOLIDATION Vintage Petroleum, Inc. is an independent energy company with operations primarily in the exploration and production, gas marketing and gathering segments of the oil and gas industry. Approximately 99 percent of the Company's operations are within the exploration and production segment based on 1997 operating income. Its core areas of exploration and production operations include the West Coast, Gulf Coast, East Texas and Mid-Continent areas of the United States, the San Jorge Basin of Argentina and, beginning in 1997, the Chaco Basin in Bolivia. Argentina exploration and production operations commenced in 1995 as a result of the acquisitions discussed in Note 7. The consolidated financial statements include the accounts of Vintage Petroleum, Inc. and its wholly- and majority-owned subsidiaries (collectively, the "Company"). All significant intercompany accounts and transactions have been eliminated in consolidation. 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, if any, 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. OIL AND GAS PROPERTIES Oil and gas properties are accounted for using the full cost method which provides for the capitalization of all acquisition, exploration and development costs incurred for the purpose of finding oil and gas reserves, including salaries, benefits and other internal costs directly attributable to these activities. The Company capitalized $5.5 million, $5.5 million and $4.4 million of internal costs in 1997, 1996 and 1995, respectively. The unamortized capitalized costs of oil and gas properties, including estimated future development and abandonment costs, are amortized using the units-of-production method based on proved reserves on a country-by-country basis. The Company's unamortized costs of oil and gas properties are limited, on a country-by-country basis, to the sum of the future net revenues attributable to proved oil and gas reserves discounted at 10 percent plus the cost of any unproved properties. If the Company's unamortized costs in oil and gas properties exceed this ceiling amount, a provision for additional depreciation, depletion and amortization is required. At December 31, 1997, 1996 and 1995, the Company's cost of oil and gas properties by country did not exceed such ceiling amounts. Amortization per equivalent barrel of the Company's U.S. oil and gas properties was $4.27, $3.78 and $3.89 for the years ended December 31, 1997, 1996 and 1995, respectively. Amortization per equivalent barrel of the Company's Argentina oil and gas properties for the years ended December 31, 1997, 1996 and 1995 was $4.37, $4.12 and $4.28, respectively. Amortization per equivalent barrel of the Company's Bolivia oil and gas properties for the year ended December 31, 1997 was $3.30. The Company had no Bolivia operations prior to 1997. REVENUE RECOGNITION Natural gas revenues are recorded using the sales method. Under this method, the Company recognizes revenues based on actual volumes of gas sold to purchasers. The Company and other joint interest owners may sell more or less than their entitlement share of the natural gas volumes produced. A liability is recorded and revenue is deferred if the Company's excess sales of natural gas volumes exceed its estimated remaining recoverable reserves. HEDGING The Company periodically uses hedges (swap agreements) to reduce the impact of oil and natural gas price fluctuations. Gains or losses on swap agreements are recognized as an adjustment to sales revenue when the related transactions being hedged are finalized. Gains or losses from swap agreements that do not qualify for accounting treatment as hedges are recognized currently as other income or expense. The cash flows from such agreements are included in operating activities in the consolidated statements of cash flows. DEPRECIATION Depreciation of property, plant and equipment (other than oil and gas properties) is provided using both straight-line and accelerated methods based on estimated useful lives ranging from three to ten years. INCOME TAXES Deferred income taxes are provided on transactions which are recognized in different periods for financial and tax reporting purposes. Such temporary differences arise primarily from the deduction of certain oil and gas exploration and development costs which are capitalized for financial reporting purposes and differences in the methods of depreciation. STATEMENTS OF CASH FLOWS Cash equivalents consist of highly liquid money-market mutual funds and bank deposits with initial maturities of three months or less. During the years ended December 31, 1997, 1996 and 1995, the Company made cash payments for interest totaling $33.2 million, $29.6 million and $21.6 million, respectively, and cash payments for U.S. income taxes of $5.3 million, - ---------------------------- 38 - Vintage Petroleum, Inc. [LOGO OF VINTAGE PETROLEUM APPEARS HERE] $1.3 million and $0.5 million, respectively. Cash payments of $0.1 million were made during 1996 for foreign tax withholdings. No cash payments were made during 1997 or 1995 for foreign income taxes. During 1995, the Company purchased a majority interest in Cadipsa (see Note 7). The value of the non-cash consideration is not reflected in the Company's 1995 Consolidated Statement of Cash Flows. Such non-cash consideration consisted of $5.7 million of the Company's common stock, $3.2 million cash paid in 1996, and approximately $58.1 million of net liabilities and a $7.9 million minority interest added through consolidation of Cadipsa. In December 1995, the Company purchased certain oil and gas properties from Shell (see Note 7). Deferred payments valued at $5.1 million represent non-cash consideration and are not reflected in the Company's 1995 Consolidated Statement of Cash Flows. In November 1996, the Company agreed to acquire 100 percent of the outstanding common stock of Shamrock Ventures (Boliviana) Ltd. (subsequently renamed Vintage Petroleum Boliviana Ltd.). Acquisition costs of $35.1 million were unpaid at December 31, 1996, and are reflected in the accompanying balance sheet as of such date as acquisition costs payable. These acquisition costs were paid in 1997 and are reflected in the Company's 1997 Consolidated Statement of Cash Flows. EARNINGS PER SHARE In February 1997, the Financial Accounting Standards Board issued Statement No. 128, Earnings Per Share ("SFAS No. 128"), establishing new standards for computing and presenting earnings per share. The provisions of SFAS No. 128 are effective for earnings per share calculations for periods ending after December 15, 1997. The Company has adopted SFAS No. 128 effective December 31, 1997, and all earnings per share amounts disclosed herein have been calculated under the provisions of SFAS No. 128. The adoption of SFAS No. 128 did not have a material effect on previously reported earnings per share or on 1997 earnings per share. Basic earnings per common share were computed by dividing net income by the weighted average number of shares outstanding during the period. Diluted earnings per common share were computed assuming the exercise of all dilutive options, as determined by applying the treasury stock method. GENERAL AND ADMINISTRATIVE EXPENSE The Company receives fees for operation of jointly-owned oil and gas properties and records such reimbursements as reductions of general and administrative expense. Such fees totaled approximately $3.4 million, $2.3 million and $2.9 million in 1997, 1996 and 1995, respectively. REVENUE PAYABLE Amounts payable to royalty and working interest owners resulting from sales of oil and gas from jointly-owned properties and from purchases of oil and gas by the Company's marketing and gathering segments are classified as revenue payable in the accompanying financial statements. ACCOUNTS RECEIVABLE The Company's oil and gas, gas marketing and gathering sales are to a variety of purchasers, including intrastate and interstate pipelines or their marketing affiliates, independent marketing companies and major oil companies. The Company's joint operations accounts receivable are from a large number of major and independent oil companies, partnerships, individuals and others who own interests in the properties operated by the Company. 2. LONG-TERM DEBT Long-term debt at December 31, 1997 and 1996, consists of the following: - -------------------------------------------------------------------------------- 1997 1996 (In thousands) Revolving credit facility............................ $ 202,200 $ 200,800 Senior subordinated notes- 9% Notes due 2005, less unamortized discount........................ 149,674 149,633 8 5/8% Notes due 2009, less unamortized discount........................ 99,222 -- Subsidiary debt - International Finance Corporation notes................................ -- 25,986 Other subsidiary debt.............................. -- 2,600 --------- --------- 451,096 379,019 Less - Current portion of long-term debt..................................... -- 6,629 --------- --------- $ 451,096 $ 372,390 ========= ========= The Company has no long-term debt maturities prior to March 1, 2001. Aggregate maturities of long-term debt for each of the years ending December 31, 2001, through December 31, 2003, are $67.4 million, $67.4 million and $67.4 million, with $248.9 million thereafter. The Company had $4.9 million and $2.3 million of accrued interest payable related to its long-term debt at December 31, 1997 and 1996, respectively, included in other payables and accrued liabilities. ----------------------- 1997 Annual Report - 39 [LOGO OF VINTAGE PETROLEUM APPEARS HERE] REVOLVING CREDIT FACILITY The Company has available an unsecured revolving credit facility under the Amended and Restated Credit Agreement dated December 8, 1997, (the "Credit Agreement"), between the Company and certain banks. The Credit Agreement establishes a borrowing base (currently $450 million) based on the banks' evaluation of the Company's U.S. and Argentina oil and gas reserves. Outstanding advances under the Credit Agreement bear interest payable quarterly at a floating rate based on Bank of Montreal's alternate base rate (as defined) or, at the Company's option, at a fixed rate for up to six months based on the eurodollar market rate ("LIBOR"). The Company's interest rate increments above the alternate base rate and LIBOR vary based on the level of outstanding senior debt to the borrowing base. In addition, the Company must pay a commitment fee ranging from 0.25 to 0.375 percent per annum on the unused portion of the banks' commitment. Total outstanding advances at December 31, 1997, were $202.2 million at an average interest rate of approximately 6.8 percent. On a semiannual basis, the Company's borrowing base is redetermined by the banks based upon their review of the Company's U.S. and Argentina oil and gas reserves. Subsequent to the banks' most recent borrowing base determination, oil and gas prices have declined. The impact of these changes on the banks' next borrowing base determination is unknown at this time. If the sum of outstanding senior debt exceeds the borrowing base, as redetermined, the Company must repay such excess. Any principal advances outstanding at December 1, 2000, will be payable in 12 equal consecutive quarterly installments commencing March 1, 2001, with maturity at December 1, 2003. The terms of the Credit Agreement impose certain restrictions on the Company regarding the pledging of assets and limitations on additional indebtedness. In addition, the Credit Agreement requires the maintenance of a minimum current ratio (as defined) and tangible net worth (as defined) of $275 million plus 75 percent of the net proceeds of any future equity offerings. SENIOR SUBORDINATED NOTES On December 20, 1995, the Company issued $150 million of its 9% Senior Subordinated Notes Due 2005 (the "9% Notes"). The 9% Notes are redeemable at the option of the Company, in whole or in part, at any time on or after December 15, 2000. The 9% Notes mature on December 15, 2005, with interest payable semiannually on June 15 and December 15 of each year. On February 5, 1997, the Company issued $100 million of its 8 5/8% Senior Subordinated Notes Due 2009 (the "8 5/8% Notes"). The 8 5/8% Notes are redeemable at the option of the Company, in whole or in part, at any time on or after February 1, 2002. The 8 5/8% Notes mature on February 1, 2009, with interest payable semiannually on February 1 and August 1 of each year. The 9% Notes and 8 5/8% Notes (collectively, the "Notes") are unsecured senior subordinated obligations of the Company, rank subordinate in right of payment to all senior indebtedness (as defined) and rank pari passu with each other. Upon a change in control (as defined) of the Company, holders of the Notes may require the Company to repurchase all or a portion of the Notes at a purchase price equal to 101 percent of the principal amount thereof, plus accrued and unpaid interest. The indentures for the Notes contain limitations on, among other things, additional indebtedness and liens, the payment of dividends and other distributions, certain investments and transfers or sales of assets. 3. CAPITAL STOCK On May 13, 1997, the Company's stockholders approved an increase in the number of authorized shares of common stock, $.005 per value per share, from 40 million to 80 million. On September 12, 1997, the Company's Board of Directors approved a two-for-one stock split of its common stock effective October 7, 1997, to stockholders of record on September 26, 1997. All references to the number of shares and per share amounts in the financial statements and notes thereto have been restated to reflect the stock split. PUBLIC OFFERINGS AND OTHER ISSUANCES On July 5, 1995, the Company issued 605,616 shares of common stock valued at $5.7 million as partial consideration to acquire a controlling interest in Cadipsa (see Note 7). On December 20, 1995, the Company completed a public offering of 5,587,400 shares of common stock, of which 5,000,000 shares were sold by the Company and 587,400 shares were sold by a stockholder. Net proceeds to the Company were approximately $49.5 million. The net proceeds were used to repay advances made under the revolving credit facility to fund the acquisition of a portion of the Astra/Shell Properties (see Note 7) and to finance a substantial portion of the acquisition of the remaining portion of the Astra/Shell Properties. A portion of a stock subscription warrant was exercised on December 20, 1995, for the purchase of 587,400 shares of the Company's common stock at an exercise price of $2.50 per share yielding net proceeds to the Company of approximately $1.5 million. The remaining portion of the stock subscription warrant was exercised on January 4, 1996, for the purchase of 612,600 shares of the Company's common stock at an exercise price of $2.50 per share yielding net proceeds to the Company of approximately $1.5 million. The Company had no stock subscription warrants outstanding as of December 31, 1997. On February 5, 1997, the Company completed a public offering of 3,000,000 shares of common stock, all of which were sold by the Company. Net proceeds to the Company of approximately $47 million were used to repay a portion of existing indebtedness under the Company's revolving credit facility. - ---------------------------- 40 - Vintage Petroleum, Inc. [LOGO OF VINTAGE PETROLEUM APPEARS HERE] STOCK PLANS The Company has three fixed plans which reserve shares of common stock for issuance to key employees and non-management directors. The Company accounts for these plans under Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees ("APB No. 25") and has adopted the disclosure-only provisions of Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation ("SFAS No. 123"). Accordingly, no compensation cost has been recognized. Had compensation cost for these plans been determined consistent with the provisions of SFAS No. 123, the Company's net income and earnings per share would have been reduced to the following pro forma amounts: - -------------------------------------------------------------------------------- 1997 1996 1995 (In thousands, except per share amounts) Net income - as reported .......... $ 72,207 $ 41,192 $ 11,361 Net income - pro forma .......... 71,258 40,781 11,320 Earnings per share - as reported: Basic ........................ 1.41 .86 .27 Diluted ...................... 1.39 .85 .27 Earnings per share - pro forma: Basic ........................ 1.39 .85 .27 Diluted ...................... 1.37 .84 .27 The pro forma effect on net income for 1997, 1996 and 1995 may not be representative of the pro forma effect on net income in future years because SFAS No. 123 has not been applied to options granted prior to January 1, 1995. The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model. The weighted average assumptions used for options granted in 1997 include a dividend yield of 0.4 percent, expected volatility of approximately 28.9 percent, a risk-free interest rate of approximately 6.3 percent, and expected lives of 4.2 years. The weighted average assumptions used for options granted in 1996 include a dividend yield of 0.4 percent, expected volatility of approximately 29.5 percent, a risk-free interest rate of approximately 6.2 percent, and expected lives of 4.2 years. The weighted average assumptions used for options granted in 1995 include a dividend yield of 0.4 percent, expected volatility of approximately 31.3 percent, a risk-free interest rate of approximately 5.9 percent, and expected lives of 4.2 years. Under the 1983 Stock Option Plan, as amended (the "1983 Plan"), incentive stock options were granted to key employees of the Company. Generally, options granted under the 1983 Plan were exercisable for a two to seven year period beginning three years from the date granted. As of December 31, 1997, all available options have been granted and exercised under the 1983 Plan. Under the 1990 Stock Plan, as amended (the "1990 Plan"), a total of up to 4,500,000 shares of common stock are available for issuance to key employees of the Company. The 1990 Plan permits the granting of any or all of the following types of awards: (a) stock options, (b) stock appreciation rights, and (c) restricted stock. As of December 31, 1997, awards for a total of 750,000 shares of common stock remain available for grant under the 1990 Plan. The 1990 Plan is administered by the Board of Directors of the Company (the "Board"). Subject to the terms of the 1990 Plan, the Board has the authority to determine plan participants, the types and amounts of awards to be granted and the terms, conditions and provisions of awards. Options granted pursuant to the 1990 Plan may, at the discretion of the Board, be either incentive stock options or non-qualified stock options. The exercise price of incentive stock options may not be less than the fair market value of the common stock on the date of grant and the term of the option may not exceed 10 years. In the case of non-qualified stock options, the exercise price may not be less than 85 percent of the fair market value of the common stock on the date of grant. Any stock appreciation rights granted under the 1990 Plan will give the holder the right to receive cash in an amount equal to the difference between the fair market value of the share of common stock on the date of exercise and the exercise price. Restricted stock under the 1990 Plan will generally consist of shares which may not be disposed of by participants until certain restrictions established by the Board lapse. Under the Non-Management Director Stock Option Plan (the "Director Plan"), 60,000 shares of common stock are available for issuance to the outside directors of the Company. Each outside director receives an initial option to purchase 5,000 shares of common stock during the director's first year of service to the Company. Annually thereafter, options to purchase 1,000 shares of common stock are to be granted to each outside director. Options granted pursuant to the Director Plan are non-qualified stock options with terms not to exceed 10 years and the option exercise price must equal the fair market value of the common stock on the date of grant. As of December 31, 1997, options for a total of 24,000 shares of common stock remain available for grant under the Director Plan. ----------------------- 1997 Annual Report - 41 [LOGO OF VINTAGE PETROLEUM APPEARS HERE] The following is an analysis of all option activity under the 1983 Plan, the 1990 Plan and the Director Plan for 1997, 1996 and 1995: - --------------------------------------------------------------------------------
1997 1996 1995 Wtd. Avg. Wtd. Avg. Wtd. Avg. Exercise Exercise Exercise Shares Price Shares Price Shares Price Beginning stock options outstanding............... 2,688,904 $ 8.13 2,266,204 $ 7.41 2,914,000 $ 5.82 Stock options granted............................. 810,000 15.53 630,000 9.71 196,000 10.12 Stock options canceled............................ -- -- (4,000) 9.69 (40,000) 9.07 Stock options exercised........................... (438,582) 4.99 (203,300) 4.94 (803,796) 2.24 --------- --------- --------- Ending stock options outstanding.................. 3,060,322 $ 10.53 2,688,904 $ 8.13 2,266,204 $ 7.41 ========= ========= ========= ======== ========= ========= Ending stock options exercisable.................. 1,406,757 $ 8.15 1,198,774 $ 6.93 683,592 $ 5.58 ========= ========= ========= ======== ========= ========= Weighted average fair value of options granted.... $ 4.92 $ 3.17 $ 3.38 ========= ========= =========
Of the 3,060,322 options outstanding at December 31, 1997: (a) 1,320,322 options have exercise prices between $3.50 and $9.41, with a weighted average exercise price of $7.94 and a weighted average contractual life of 6.1 years (1,252,715 of these options are exercisable at a weighted average price of $7.90); (b) 1,740,000 options have exercise prices between $9.69 and $17.31, with a weighted average exercise price of $12.50 and a weighted average contractual life of 8.5 years (154,042 of these options are exercisable at a weighted average price of $10.19). All of the outstanding options are exercisable at various times in years 1998 through 2007. All incentive stock options and non-qualified options were granted at fair market value on the date of grant. As of December 31, 1997, no awards other than incentive and non-qualified stock options have been granted under the 1990 Plan. Generally, options granted under the 1990 Plan have a 10-year term and provide for vesting after three years. At December 31, 1997, a total of 3,834,322 shares of the Company's common stock are reserved for issuance pursuant to the 1990 Plan and the Director Plan. PREFERRED STOCK Preferred stock at December 31, 1997, consists of 5,000,000 authorized but unissued shares. Preferred stock may be issued from time to time in one or more series, and the Board of Directors, without further approval of the stockholders, is authorized to fix the dividend rates and terms, conversion rights, voting rights, redemption rights and terms, liquidation preferences, sinking fund and any other rights, preferences, privileges and restrictions applicable to each series of preferred stock. 4. COMMITMENTS AND CONTINGENCIES The Company is committed to perform 17,728 work units within the next three years related to its concession rights in the Naranjillos field in Santa Cruz Province, Bolivia. The work unit commitment is guaranteed by the Company through an $88.6 million letter of credit; however, the Company anticipates that it will fulfill this three-year work unit commitment through approximately $45 to $50 million of various seismic and drilling capital expenditures. In addition, the Company is committed to perform 1,400 work units related to an exploration program within the Chaco Block in Bolivia. The entire obligation can be fulfilled by the drilling of one 15,000 foot well. The Company estimates the cost of this well to be approximately $4.5 million and expects to fulfill this obligation by drilling a well in 1998. The Company has $101.8 million in letters of credit (including the $88.6 million letter of credit discussed above) outstanding at December 31, 1997. These letters of credit relate primarily to various obligations for acquisition and exploration activities in South America and bonding requirements of various state regulatory agencies for oil and gas operations. Under the Company's exploration contract on Block 19 in Ecuador, the Company is required to participate in the drilling of one additional well. The Company expects to drill this well during 1998 at a cost of approximately $4.0 million. Rent expense was $1.2 million, $1.0 million and $0.8 million for 1997, 1996 and 1995, respectively. The future minimum commitments under long-term noncancelable leases for office space are $1.3 million, $1.1 million, $1.0 million, $1.0 million and $0.1 million for the calendar years 1998 through 2002, respectively. On November 5, 1996, the Province of Santa Cruz, Argentina brought suit against Cadipsa in the Corte Suprema de Justicia de la Nacion (the Supreme Court of Justice of the Argentine Republic, Buenos Aires, Argentina), Dossier No. s-1451, seeking to recover approximately $15.1 million (which sum includes interest) allegedly due as additional royalties on four concessions granted in 1990 in which the Company currently owns a 100 percent working interest. The Company and its predecessors in title have been paying royalties at an eight percent rate; the Province of Santa Cruz claims the rate should be 12 percent. The amount of such claim will increase at the differential of these royalty rates until - ---------------------------- 42 - Vintage Petroleum, Inc. [LOGO OF VINTAGE PETROLEUM APPEARS HERE] this claim is resolved. With respect to the 50 percent interest in the two concessions that the Company acquired from British Gas, plc (see Note 7), the Company believes that it is entitled to indemnification by British Gas, plc for any loss sustained by the Company as a result of this claim. Such indemnification equals approximately $4.4 million of the $15.1 million claim. The Company has no indemnification from its predecessors in title with respect to the payment of royalties on the other two concessions. Although the Company cannot predict the outcome of this litigation, based upon the advice of counsel, the Company does not expect the resolution of this claim to have a material adverse impact on the Company's financial position or results of operations. The Company is a defendant in various other lawsuits and is a party in governmental proceedings from time to time arising in the ordinary course of business. In the opinion of management, none of the various other pending lawsuits and proceedings should have a material adverse impact on the Company's financial position or results of operations. 5. FINANCIAL INSTRUMENTS PRICE RISK MANAGEMENT The Company periodically uses hedges (swap agreements) to reduce the impact of oil and natural gas price fluctuations on its operating results and cash flows. These swap agreements typically entitle the Company to receive payments from (or require it to make payments to) the counterparties based upon the differential between a fixed price and a floating price based on a published index. The Company's hedging activities are conducted with major investment and commercial banks which the Company believes are minimal credit risks. At December 31, 1997, the Company was not a party to any swap agreements. At December 31, 1996, the Company was a party to oil price swap agreements for calendar 1997 covering 2.738 MMBbls at an average NYMEX reference price of $19.26 per Bbl. FAIR VALUE OF FINANCIAL INSTRUMENTS The Company values financial instruments as required by Statement of Financial Accounting Standards No. 107, Disclosures About Fair Value of Financial Instruments. The Company estimates the value of the Notes based on quoted market prices. The Company estimates the value of its other long-term debt based on the estimated borrowing rates currently available to the Company for long-term loans with similar terms and remaining maturities. The estimated fair value of the Company's long-term debt at December 31, 1997 and 1996, was $463.6 million and $383.9 million, respectively, compared with a carrying value of $451.1 million and $379.0 million, respectively. The fair value of commodity swap agreements is the amount at which they could be settled, based on quoted market prices. At December 31, 1996, the Company would have been required to pay approximately $9.2 million to terminate its swap agreements. The Company had no swap agreements in place at December 31, 1997. The carrying value of other financial instruments approximates fair value because of the short maturity of those instruments. 6. INCOME TAXES Income before income taxes and minority interest is composed of the following: - -------------------------------------------------------------------------------- 1997 1996 1995 (In thousands) Domestic ............................. $ 55,047 $ 38,016 $ 15,536 Foreign .............................. 34,509 18,621 104 -------- -------- -------- $ 89,556 $ 56,637 $ 15,640 ======== ======== ======== The total provision for income taxes consists of the following: - -------------------------------------------------------------------------------- 1997 1996 1995 (In thousands) Current: Domestic ........................ 4,277 $ 2,610 $ (955) Foreign ........................ 958 -- -- Deferred: Domestic ........................ 15,000 12,328 6,034 Foreign ........................ (3,089) -- -- -------- -------- ------- $ 17,146 $ 14,938 $ 5,079 ======== ======== ======= A reconciliation of the Federal statutory income tax rate to the effective rate is as follows: - -------------------------------------------------------------------------------- 1997 1996 1995 Statutory income tax rate ............ 35.0% 35.0% 35.0% State income tax ..................... 3.9 3.9 3.9 Federal income tax credits ........... (2.1) (3.1) (7.4) Foreign operations ................... 0.4 (8.2) 1.3 Valuation allowance reversal.......... (16.2) -- -- Other ................................ (1.9) (1.2) (0.3) -------- -------- ------- 19.1% 26.4% 32.5% ======== ======== ======= The components of the Company's net deferred tax liability as of December 31, 1997 and 1996, are as follows: - -------------------------------------------------------------------------------- 1997 1996 (In thousands) Deferred Tax Liabilities: Differences between book and tax basis of property......................... $ 74,552 $ 62,735 Other............................................... 619 778 -------- -------- 75,171 63,513 -------- -------- Deferred Tax Assets: Argentina net operating loss carryforwards..................................... 4,206 14,472 Alternative minimum tax credit carryforward............................... 2,949 5,403 Other............................................... 425 500 -------- -------- 7,580 20,375 Valuation allowance................................... -- (14,472) -------- -------- 7,580 5,903 -------- -------- Net deferred tax liability............................ $ 67,591 $ 57,610 ======== ======== ----------------------- 1997 Annual Report - 43 [LOGO OF VINTAGE PETROLEUM APPEARS HERE] Earnings of the Company's foreign subsidiary, Vintage Oil Argentina, Inc. (see Note 7), are subject to Argentina income taxes. Earnings of the Company's foreign subsidiary, Vintage Petroleum Boliviana Ltd., are subject to Bolivia income taxes. No U.S. deferred tax liability will be recognized related to the unremitted earnings of these foreign subsidiaries, as it is the Company's intention, generally, to reinvest such earnings permanently. As of December 31, 1997, the Company has a U.S. Federal alternative minimum tax ("AMT") credit carryforward of approximately $2.9 million. The AMT credit carryforward does not expire and is available to offset U.S. Federal regular income taxes in future years, but only to the extent that U.S. Federal regular income taxes exceed the AMT in such years. As of December 31, 1997, the Company has estimated net operating loss carryforwards for Argentina income tax reporting purposes of approximately $26.5 million which can be used to offset future taxable income in Argentina. The carryforward amount includes certain Argentina net operating loss carryforwards which were acquired in a purchase business combination and are recorded at cost, which is less than the calculated value under the provisions of Statement of Financial Accounting Standards No. 109, Accounting for Income Taxes. These unrecorded net operating loss carryforwards will reduce the Company's foreign income tax provision in future years by approximately $4.5 million when their benefit is realized. 7. SIGNIFICANT ACQUISITIONS In May 1995, the Company acquired certain U.S. oil and gas properties from Texaco Exploration and Production, Inc. for approximately $26.7 million cash (the "Texaco Acquisition"). Through a series of transactions during the last six months of 1995, the Company purchased approximately 71.6 percent of the outstanding common stock of Cadipsa S.A. ("Cadipsa"), a publicly-traded Argentine oil and gas exploration and production company, for 605,616 shares of the Company's common stock (valued at $5.7 million) and $12.4 million cash (the "Cadipsa Acquisition"). Approximately $58.1 million of net liabilities and a $7.9 million minority interest resulted from the consolidation of Cadipsa as of the acquisition date. Effective December 26, 1996, Cadipsa was delisted with the Argentina Stock Exchange and is no longer a publicly-traded company. Effective July 1, 1997, the operations of Cadipsa were merged into Vintage Oil Argentina, Inc. and Cadipsa became inactive and is awaiting Argentina governmental approval of formal dissolution. On September 29, 1995, the Company purchased 100 percent of the outstanding common stock of BG Argentina, S.A. ("BG Argentina") from British Gas, plc for $37 million cash (the "BG Acquisition"). BG Argentina was subsequently renamed Vintage Oil Argentina, Inc. On November 3, 1995, the Company purchased a 35 percent interest in certain Argentina oil and gas properties (the "Astra/Shell Properties") from Astra Compania Argentina de Petroleo S.A. for $17.9 million cash. On December 28, 1995, the Company purchased the remaining 65 percent interest in the Astra/Shell Properties from Shell Compania Argentina de Petroleo S.A. for $32.8 million cash and deferred payments valued at $5.1 million. The Company accounted for these acquisitions under the purchase method. The consolidated statements of income include the operating results of the above acquisitions since their acquisition date. The Company completed on December 20, 1995, a public offering of 5,587,400 shares of the Company's common stock (the "Common Stock Offering"), of which 5,000,000 shares were sold by the Company and 587,400 shares were sold by a stockholder (see Note 3). The net proceeds to the Company of approximately $49.5 million were used to fund a substantial portion of the purchase of the Astra/Shell Properties. The Company's unaudited pro forma revenues, net income and earnings per share for the year ended December 31, 1995, presented below have been prepared assuming the Common Stock Offering, the Texaco Acquisition, the Cadipsa Acquisition, the BG Acquisition and the acquisition of the Astra/Shell Properties had been consummated as of January 1, 1995. However, such pro forma information is not necessarily indicative of what actually would have occurred had the transactions occurred on such date. - -------------------------------------------------------------------------------- 1995 Revenues (in thousands) ............................................ $244,921 Net income (in thousands)........................................... 18,712 Earnings per share: Basic ............................................................ .40 Diluted .......................................................... .40 On April 1, 1997, the Company acquired certain producing oil and gas properties and facilities located in the Gulf Coast area of Texas and Louisiana from subsidiaries of Burlington Resources Inc. for approximately $102.7 million in cash (the "Burlington Acquisition"). Funds for this acquisition were provided by advances under the Company's revolving credit facility. If the Burlington Acquisition had been consummated as of January 1, 1996, the Company's unaudited pro forma revenues, net income and earnings per share for the years ended December 31, 1997 and 1996, would have been as shown below; however, such pro forma information is not necessarily indicative of what actually would have occurred had the transaction occurred on such date. - -------------------------------------------------------------------------------- 1997 1996 Revenues (in thousands)................................. $431,318 $375,742 Net income (in thousands)............................... 74,956 51,960 Earnings per share: Basic................................................. 1.46 1.08 Diluted............................................... 1.44 1.07 - ---------------------------- 44 - Vintage Petroleum, Inc. [LOGO OF VINTAGE PETROLEUM APPEARS HERE] 8. SEGMENT INFORMATION The Company operates in the oil and gas exploration and production industry in the United States and South America. Operations in the gathering and gas marketing industries are in the United States. The following is industry segment data for the years ended December 31, 1997, 1996 and 1995: - --------------------------------------------------------------------------------
1997 1996 1995 (In thousands) REVENUES: Exploration and production - U.S................................................ $ 252,353 $ 190,839 $ 146,819 Argentina.......................................... 93,864 67,529 13,435 Other international................................ 8,896 -- -- Gas marketing.......................................... 110,450 62,851 49,775 Gathering.............................................. 34,171 34,917 22,289 Other income (expense)................................. (2,557) 886 1,251 Elimination of intersegment sales...................... (80,577) (45,340) (38,772) --------- --------- --------- $ 416,600 $ 311,682 $ 194,797 ========= ========= ========= INCOME BEFORE INCOME TAXES AND MINORITY INTEREST: Exploration and Production - U.S................................................ $ 95,857 $ 70,382 $ 39,524 Argentina.......................................... 45,157 29,110 4,114 Other international................................ 3,446 (841) -- Gas marketing.......................................... 2,584 2,383 2,073 Gathering.............................................. 3,388 2,186 1,568 Other income (expense)................................. (4,175) 886 1,251 --------- --------- --------- Operating income....................................... 146,257 104,106 48,530 Corporate expenses..................................... (19,939) (17,360) (12,712) Interest expense....................................... (36,762) (30,109) (20,178) --------- --------- --------- $ 89,556 $ 56,637 $ 15,640 ========= ========= ========= IDENTIFIABLE ASSETS: Exploration and production - U.S................................................ $ 634,298 $ 499,439 $ 431,391 Argentina.......................................... 238,227 228,002 180,488 Other international................................ 57,846 44,473 1,269 Gas marketing.......................................... 12,427 8,422 5,431 Gathering.............................................. 8,564 10,249 11,084 Corporate.............................................. 38,693 23,365 17,876 --------- --------- --------- $ 990,055 $ 813,950 $ 647,539 ========= ========= ========= DEPRECIATION, DEPLETION AND AMORTIZATION: Exploration and production - U.S................................................ $ 67,427 $ 49,466 $ 45,730 Argentina.......................................... 24,578 17,494 4,115 Other international................................ 4,302 841 -- Gathering.............................................. 1,360 1,337 1,301 Corporate.............................................. 1,398 919 1,111 --------- --------- --------- $ 99,065 $ 70,057 $ 52,257 ========= ========= ========= CAPITAL ADDITIONS: Exploration and Production - U.S................................................ $ 200,002 $ 113,037 $ 88,149 Argentina.......................................... 54,609 49,429 170,947 Other international................................ 12,872 40,866 1,269 Gathering.............................................. 1,209 724 234 Corporate.............................................. 1,799 706 3,023 --------- --------- --------- $ 270,491 $ 204,762 $ 263,622 ========= ========= =========
During 1997, 1996 and 1995, sales to one crude oil purchaser represented approximately 10 percent, 15 percent and 17 percent, respectively, of the Company's total revenues (exclusive of eliminations of intersegment sales and the impact of hedges). ----------------------- 1997 Annual Report - 45 [LOGO OF VINTAGE PETROLEUM APPEARS HERE] 9. DETAIL OF PREPAIDS AND OTHER CURRENT ASSETS - -------------------------------------------------------------------------------- 1997 1996 (In thousands) Value added tax receivable................................. $ 5,494 $ 3,510 Other prepaids and current assets.......................... 6,949 5,742 ------- ------- $12,443 $ 9,252 ======= ======= 10. QUARTERLY RESULTS (UNAUDITED) The following is a summary of the quarterly results of operations for the years ended December 31, 1997 and 1996: - --------------------------------------------------------------------------------
QUARTER ENDED MARCH 31 JUNE 30 SEPT. 30 DEC. 31 (In thousands, except per share amounts) 1997 Revenues..................................... $ 99,234 $ 99,843 $104,387 $113,136 Operating income............................. 40,824 32,623 33,564 39,246 Net income................................... 20,989 14,233 15,234 21,751 Earnings per share: Basic.................................... .42 .28 .30 .42 Diluted.................................. .41 .27 .29 .41 1996 Revenues..................................... $ 71,340 $ 76,043 $ 75,952 $ 88,347 Operating income............................. 21,619 26,714 23,979 31,794 Net income................................... 7,174 9,796 9,827 14,395 Earnings per share: Basic.................................... .15 .20 .20 .30 Diluted.................................. .15 .20 .20 .29
Revenues and operating income for the quarter ended December 31, 1997, were decreased by a $4.4 million charge resulting from an adverse judgement against the Company in a lawsuit involving a 1992 gas contract termination and increased by $1.6 million from a gain on the sale of a gas gathering system. The net impact of these items reduced net income for the quarter ended December 31, 1997, by $1.7 million, or three cents per basic and diluted share. - ---------------------------- 46 - Vintage Petroleum, Inc. [LOGO OF VINTAGE PETROLEUM APPEARS HERE] 11. SUPPLEMENTARY FINANCIAL INFORMATION FOR OIL AND GAS PRODUCING ACTIVITIES RESULTS OF OPERATIONS FROM OIL AND GAS PRODUCING ACTIVITIES The following sets forth certain information with respect to the Company's results of operations from oil and gas producing activities for the years ended December 31, 1997, 1996 and 1995. The Company began operations in Argentina through various acquisitions in the last two quarters of 1995 (see Note 7) and its Bolivia operations began in January 1997.
- ------------------------------------------------------------------------------------------------------------------------------ 1997 U.S. Argentina Bolivia Other Total (In thousands) Revenues......................................... $252,353 $ 93,864 $ 8,896 $ -- $355,113 Production (lifting) costs....................... 89,069 24,129 1,148 -- 114,346 Depreciation, depletion and amortization......... 67,427 24,578 3,785 517 96,307 -------- -------- -------- -------- -------- Results of operations before income taxes........ 95,857 45,157 3,963 (517) 144,460 Income tax expense (benefit)..................... 37,288 -- 1,347 (201) 38,434 -------- -------- -------- -------- -------- Results of operations (excluding corporate overhead and interest costs)................ $ 58,569 $ 45,157 $ 2,616 $ (316) $106,026 ======== ======== ======== ======== ======== - ------------------------------------------------------------------------------------------------------------------------------
1996 U.S. Argentina Other Total (In thousands) Revenues.......................................................... $190,839 $ 67,529 $ -- $258,368 Production (lifting) costs........................................ 70,991 20,925 -- 91,916 Depreciation, depletion and amortization.......................... 49,466 17,494 841 67,801 -------- -------- -------- -------- Results of operations before income taxes......................... 70,382 29,110 (841) 98,651 Income tax expense (benefit)...................................... 25,197 -- (327) 24,870 -------- -------- -------- -------- Results of operations (excluding corporate overhead and interest costs)................................. $ 45,185 $ 29,110 $ (514) $ 73,781 ======== ======== ======== ======== - ------------------------------------------------------------------------------------------------------------------------------
1995 U.S. Argentina Total (In thousands) Revenues......................................................................... $146,819 $ 13,435 $160,254 Production (lifting) costs....................................................... 61,565 5,206 66,771 Depreciation, depletion and amortization......................................... 45,730 4,115 49,845 -------- -------- -------- Results of operations before income taxes........................................ 39,524 4,114 43,638 Income tax expense............................................................... 12,332 -- 12,332 -------- -------- -------- Results of operations (excluding corporate overhead and interest costs).......... $ 27,192 $ 4,114 $ 31,306 ======== ======== ========
----------------------- 1997 Annual Report - 47 [LOGO OF VINTAGE PETROLEUM APPEARS HERE] CAPITALIZED COSTS AND COSTS INCURRED RELATING TO OIL AND GAS PRODUCING ACTIVITIES The Company's net investment in oil and gas properties at December 31, 1997 and 1996, was as follows:
- ---------------------------------------------------------------------------------------------------------------------------------- 1997 U.S. ARGENTINA BOLIVIA OTHER TOTAL (In thousands) Unproved properties not being amortized...... $ 19,813 $ -- $ -- $ 6,786 $ 26,599 Proved properties being amortized............ 882,012 274,785 46,892 -- 1,203,689 ---------- ---------- ---------- ---------- ---------- Total capitalized costs................. 901,825 274,785 46,892 6,786 1,230,288 Less accumulated depreciation, depletion and amortization.............. 307,486 46,328 3,785 -- 357,599 ---------- ---------- ---------- ---------- ---------- Net capitalized costs................ $ 594,339 $ 228,457 $ 43,107 $ 6,786 $ 872,689 ========== ========== ========== ========== ==========
The $6.8 million of unproved properties shown for Other in 1997 relate to the Company's exploration project in Ecuador. As discussed in Note 4, the Company plans to drill an additional well in 1998 at an estimated cost of $4.0 million. Depending on the success of this planned well, all or a portion of the Company's costs of oil and gas properties in Ecuador may be impaired in 1998 resulting in a charge to earnings.
- ---------------------------------------------------------------------------------------------------------------------------------- 1996 U.S. Argentina Bolivia Other Total (In thousands) Unproved properties not being amortized...... $ 16,420 $ -- $ -- $ 5,087 $ 21,507 Proved properties being amortized............ 685,692 220,376 37,048 -- 943,116 ---------- ---------- ---------- ---------- ---------- Total capitalized costs................. 702,112 220,376 37,048 5,087 964,623 Less accumulated depreciation, depletion and amortization.............. 240,059 21,688 -- 841 262,588 ---------- ---------- ---------- ---------- ---------- Net capitalized costs................ $ 462,053 $ 198,688 $ 37,048 $ 4,246 $ 702,035 ========== ========== ========== ========== ==========
- ---------------------------- 48 - Vintage Petroleum, Inc. [LOGO OF VINTAGE PETROLEUM APPEARS HERE] The following sets forth certain information with respect to costs incurred (exclusive of general support facilities) in the Company's oil and gas activities during 1997, 1996 and 1995:
- ------------------------------------------------------------------------------------------------------------------- 1997 U.S. Argentina Bolivia Other Total (In thousands) Acquisitions: Undeveloped properties............. $ 7,138 $ -- $ 560 $ 75 $ 7,773 Producing properties............... 133,548 -- 6,201 -- 139,749 Exploratory............................. 16,463 3,971 -- 2,983 23,417 Development............................. 42,853 50,638 3,053 -- 96,544 -------- -------- -------- -------- -------- Total costs incurred............ $200,002 $ 54,609 $ 9,814 $ 3,058 $267,483 ======== ======== ======== ======== ========
- ------------------------------------------------------------------------------------------------------------------- 1996 U.S. Argentina Bolivia Other Total (In thousands) Acquisitions: Undeveloped properties............. $ 9,868 $ 2,080 $ -- $ 3,818 $ 15,766 Producing properties............... 50,480 3,754 37,048 -- 91,282 Exploratory............................. 6,502 1,383 -- -- 7,885 Development............................. 46,187 42,212 -- -- 88,399 -------- -------- -------- -------- -------- Total costs incurred............ $113,037 $ 49,429 $ 37,048 $ 3,818 $203,332 ======== ======== ======== ======== ========
- ------------------------------------------------------------------------------------------------------------------- 1995 U.S. Argentina Other Total (In thousands) Acquisitions: Undeveloped properties............................. $ 6,415 $ -- $ 1,269 $ 7,684 Producing properties............................... 38,896 168,762 -- 207,658 Exploratory............................................. 2,037 -- -- 2,037 Development............................................. 40,801 2,185 -- 42,986 -------- -------- -------- -------- Total costs incurred............................ $ 88,149 $170,947 $ 1,269 $260,365 ======== ======== ======== ========
----------------------- 1997 Annual Report - 49 [LOGO OF VINTAGE PETROLEUM APPEARS HERE] ESTIMATED QUANTITIES OF PROVED OIL AND GAS RESERVES (UNAUDITED) Proved reserves are estimated quantities of crude oil, natural gas and natural gas liquids 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 reserves are those which are expected to be recovered through existing wells with existing equipment and operating methods. The following is an analysis of the Company's proved oil and gas reserves which are located in the United States, Argentina and Bolivia as estimated by the Company's independent petroleum consultants, Netherland, Sewell & Associates, Inc.
- ------------------------------------------------------------------------------------------------------------------------------------ U.S. Argentina Bolivia Total Oil Gas Oil Oil Gas Oil Gas (MBbls) (MMcf) (MBbls) (MBbls) (MMcf) (MBbls) (MMcf) Proved reserves at December 31, 1994........... 70,789 281,638 -- -- -- 70,789 281,638 Revisions of previous estimates................ 7,160 18,405 2,952 -- -- 10,112 18,405 Extensions, discoveries and other additions.... 338 2,015 -- -- -- 338 2,015 Production..................................... (6,647) (30,610) (961) -- -- (7,608) (30,610) Purchase of reserves-in-place.................. 8,840 39,486 65,653 -- -- 74,493 39,486 Sales of reserves-in-place..................... (253) (172) -- -- -- (253) (172) ------- ------- ------- ------- ------- ------- ------- Proved reserves at December 31, 1995........... 80,227 310,762 67,644 -- -- 147,871 310,762 Revisions of previous estimates................ 13,382 21,834 12,449 -- -- 25,831 21,834 Extensions, discoveries and other additions.... 458 5,445 308 -- -- 766 5,445 Production..................................... (7,694) (32,366) (4,245) -- -- (11,939) (32,366) Purchase of reserves-in-place.................. 8,095 20,787 2,849 4,953 57,758 15,897 78,545 Sales of reserves-in-place..................... (130) (1,374) -- -- -- (130) (1,374) ------- ------- ------- ------- ------- ------- ------- Proved reserves at December 31, 1996........... 94,338 325,088 79,005 4,953 57,758 178,296 382,846 Revisions of previous estimates................ (9,693) (18,045) 7,065 607 28,414 (2,021) 10,369 Extensions, discoveries and other additions.... 345 29,451 1,211 -- -- 1,556 29,451 Production..................................... (9,692) (36,623) (5,630) (135) (6,068) (15,457) (42,691) Purchase of reserves-in-place.................. 24,653 62,253 -- 758 111,212 25,411 173,465 Sales of reserves-in-place..................... (17) (1,277) -- -- -- (17) (1,277) ------- ------- ------- ------- ------- ------- ------- Proved reserves at December 31, 1997........... 99,934 360,847 81,651 6,183 191,316 187,768 552,163 ======= ======= ======= ======= ======= ======= ======= Proved developed reserves at: December 31, 1995.............................. 63,791 270,427 36,928 -- -- 100,719 270,427 ======= ======= ======= ======= ======= ======= ======= December 31, 1996.............................. 79,250 289,464 46,582 1,007 51,276 126,839 340,740 ======= ======= ======= ======= ======= ======= ======= December 31, 1997.............................. 79,494 316,306 47,806 1,502 140,124 128,802 456,430 ======= ======= ======= ======= ======= ======= =======
STANDARDIZED MEASURE OF DISCOUNTED FUTURE NET CASH FLOWS RELATING TO PROVED OIL AND GAS RESERVES (UNAUDITED) The Standardized Measure of Discounted Future Net Cash Flows Relating to Proved Oil and Gas Reserves ("Standardized Measure") is a disclosure requirement under SFAS No. 69. The Standardized Measure does not purport to present the fair market value of proved oil and gas reserves. This would require consideration of expected future economic and operating conditions which are not taken into account in calculating the Standardized Measure. Under the Standardized Measure, future cash inflows were estimated by applying year-end prices, adjusted for fixed and determinable escalations, to the estimated future production of year-end proved reserves. Future cash inflows were reduced by estimated future production, development and abandonment costs based on year-end costs to determine pre-tax cash inflows. Future income taxes were computed by applying the statutory tax rate to the excess of pre-tax cash inflows over the Company's tax basis in the associated proved oil and gas properties. Tax credits and permanent differences were also considered in the future income tax calculation. Future net cash inflows after income taxes were discounted using a 10 percent annual discount rate to arrive at the Standardized Measure. - ---------------------------- 50 - Vintage Petroleum, Inc. [LOGO OF VINTAGE PETROLEUM APPEARS HERE] Set forth below is the Standardized Measure relating to proved oil and gas reserves at December 31, 1997 and 1996:
- ------------------------------------------------------------------------------------------------------------------------------ 1997 U.S. Argentina Bolivia Total (In thousands) Future cash inflows......................................... $2,321,760 $1,138,154 $ 357,767 $3,817,681 Future production costs..................................... 1,005,407 448,262 32,321 1,485,990 Future development and abandonment costs.................... 177,792 150,544 27,985 356,321 ---------- ---------- ---------- ---------- Future net cash inflows before income tax expense........... 1,138,561 539,348 297,461 1,975,370 Future income tax expense................................... 281,019 99,588 97,739 478,346 ---------- ---------- ---------- ---------- Future net cash flows....................................... 857,542 439,760 199,722 1,497,024 10 percent annual discount for estimated timing of cash flows......................... 253,026 142,735 84,618 480,379 ---------- ---------- ---------- ---------- Standardized Measure of discounted future net cash flows.................................. $ 604,516 $ 297,025 $ 115,104 $1,016,645 ========== ========== ========== ==========
Crude oil and natural gas prices have declined from the year-end prices used in determining the Standardized Measure at December 31, 1997. Such declines may reduce the Standardized Measure at March 31, 1998, to the extent that a writedown of the Company's capitalized oil and gas costs would be required.
- ------------------------------------------------------------------------------------------------------------------------------ 1996 U.S. Argentina Bolivia Total (In thousands) Future cash inflows......................................... $3,110,810 $1,743,483 $ 188,211 $5,042,504 Future production costs..................................... 1,063,823 575,101 51,578 1,690,502 Future development and abandonment costs.................... 133,243 134,219 14,804 282,266 ---------- ---------- ---------- ---------- Future net cash inflows before income tax expense........... 1,913,744 1,034,163 121,829 3,069,736 Future income tax expense................................... 611,554 229,649 38,268 879,471 ---------- ---------- ---------- ---------- Future net cash flows....................................... 1,302,190 804,514 83,561 2,190,265 10 percent annual discount for estimated timing of cash flows......................... 484,288 285,896 27,240 797,424 ---------- ---------- ---------- ---------- Standardized Measure of discounted future net cash flows.................................. $ 817,902 $ 518,618 $ 56,321 $1,392,841 ========== ========== ========== ==========
----------------------- 1997 Annual Report - 51 CHANGES IN STANDARDIZED MEASURE OF DISCOUNTED FUTURE NET CASH FLOWS RELATING TO PROVED OIL AND GAS RESERVES (UNAUDITED) The following is an analysis of the changes in the Standardized Measure during 1997, 1996 and 1995:
- -------------------------------------------------------------------------------------------------------------------------- 1997 1996 1995 (In thousands) Standardized Measure - Beginning of year.......................... $ 1,392,841 $ 736,546 $ 385,721 Increases (decreases) - Sales, net of production costs............................... (240,767) (166,452) (93,483) Net change in sales price, net of production costs........... (824,264) 644,367 131,697 Discoveries and extensions, net of related future development and production costs................. 56,334 20,085 4,585 Changes in estimated future development costs................ (89,637) (69,433) (31,210) Development costs incurred................................... 77,127 77,174 37,600 Revisions of previous quantity estimates..................... 3,508 251,736 59,319 Accretion of discount........................................ 180,714 88,411 44,699 Net change in income taxes................................... 215,131 (248,427) (86,296) Purchase of reserves-in-place................................ 240,658 149,900 311,449 Sales of reserves-in-place................................... (2,518) (1,859) (661) Timing of production of reserves and other................... 7,518 (89,207) (26,874) ----------- ----------- ----------- Standardized Measure - End of year................................ $ 1,016,645 $ 1,392,841 $ 736,546 =========== =========== ===========
- ---------------------------- 52 - Vintage Petroleum, Inc. [LOGO OF VINTAGE PETROLEUM APPEARS HERE] REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS - -------------------------------------------------------------------------------- TO THE BOARD OF DIRECTORS AND STOCKHOLDERS OF VINTAGE PETROLEUM, INC.: We have audited the accompanying consolidated balance sheets of Vintage Petroleum, Inc. (a Delaware corporation) and subsidiaries as of December 31, 1997 and 1996, and the related consolidated statements of income, changes in stockholders' 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 Vintage Petroleum, Inc. and subsidiaries as of December 31, 1997 and 1996, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1997, in conformity with generally accepted accounting principles. Tulsa, Oklahoma ARTHUR ANDERSEN LLP February 19, 1998 ----------------------- 1997 Annual Report - 53 [LOGO OF VINTAGE PETROLEUM APPEARS HERE] STOCKHOLDER INFORMATION STOCK PRICE INFORMATION The Company's common stock trades on the New York Stock Exchange. The table below reflects the high and low sales prices and cash dividends paid per share during each quarter of 1996 and 1997 (after giving effect to the Company's two-for-one common stock split effected on October 7, 1997). - -------------------------------------------------------------------------------- Quarter Ended High Low Dividends Paid March 31, 1996 $ 11 1/4 $ 9 9/16 $ .0125 June 30, 1996 13 3/8 9 1/2 .0125 September 30, 1996 14 15/16 11 3/16 .0125 December 31, 1996 17 3/8 14 3/8 .015 March 31, 1997 18 11/16 13 .015 June 30, 1997 18 1/16 12 1/2 .015 September 30, 1997 25 1/2 15 3/8 .015 December 31, 1997 25 7/8 17 .02 DIVIDEND POLICY The Company began paying a quarterly dividend in the fourth quarter of 1992 and expects to continue paying a regular quarterly cash dividend. NUMBER OF STOCKHOLDERS Substantially all of the Company's stockholders maintain their shares in "street name" accounts and are not individually stockholders of record. There were approximately 85 stockholders of record at December 31, 1997. NYSE SYMBOL: VPI ANNUAL MEETING The Annual Meeting of Stockholders will be held: Tuesday, May 12, 1998, at 10:00 A.M. Bank of Oklahoma Tower, Ninth Floor One Williams Center, Tulsa, Oklahoma TRANSFER AGENT AND REGISTRAR Stockholders should refer specific questions concerning their stock certificates, in writing, directly to the Transfer Agent and Registrar, or by calling toll free 1-800-526-0801: ChaseMellon Shareholder Services, L.L.C. 85 Challenger Road Overpeck Centre Ridgefield Park, NJ 07660 www.chasemellon.com FORM 10-K Copies of the Company's Form 10-K for the year ended December 31, 1997, as filed with the Securities and Exchange Commission, are available to stockholders at no charge upon written request to: Stockholder Relations Vintage Petroleum, Inc. 4200 One Williams Center Tulsa, OK 74172 INDEPENDENT AUDITORS Arthur Andersen LLP 6450 S. Lewis, Suite 300 Tulsa, OK 74136 - -------------------------------------------------------------------------------- FORWARD-LOOKING STATEMENTS This Annual Report includes certain statements that may be deemed to be "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. All statements in this Annual Report, other than statements of historical facts, that address activities, events or developments that the Company expects, believes or anticipates will or may occur in the future, including future capital expenditures (including the amount and nature thereof), the drilling of wells, reserve estimates, future production of oil and gas, future cash flows, future reserve activity and other such matters are forward-looking statements. Although the Company believes the expectations expressed in such forward-looking statements are based on reasonable assumptions within the bounds of its knowledge of its business, such statements are not guarantees of future performance and actual results or developments may differ materially from those in the forward-looking statements. Factors that could cause actual results to differ materially from those in forward-looking statements include: oil and gas prices; exploitation and exploration successes; continued availability of capital and financing; general economic, market or business conditions; acquisition opportunities (or lack thereof); changes in laws or regulations; risk factors listed from time to time in the Company's reports filed with the Securities and Exchange Commission; and other factors. The Company assumes no obligation to update publicly any forward-looking statements, whether as a result of new information, future events or otherwise. - -------------------------------- 54 - Vintage Petroleum, Inc. EX-21 4 SUBSIDIARIES OF THE COMPANY EXHIBIT 21 SUBSIDIARIES OF THE REGISTRANT ------------------------------
State or Jurisdiction Ownership Name of Incorporation Percentage ---- --------------------- ---------- Vintage Gas, Inc. Oklahoma 100 Vintage Marketing, Inc. Oklahoma 100 Vintage Pipeline, Inc. Oklahoma 100 Vintage Petroleum International, Inc. Oklahoma 100 Vintage Oil Argentina, Inc. (formerly BG Argentina, S.A.) Cayman Islands 100 Cadipsa S.A. Republic of Argentina 97 Vintage Petroleum Argentina, Inc. Cayman Islands 100 Vintage Petroleum Ecuador, Inc. Cayman Islands 100 Vintage Petroleum Boliviana Ltd. (formerly Shamrock Ventures (Boliviana) Ltd.) Bermuda 100 VP Argentina, Inc. Cayman Islands 100 Vintage Petroleum Yemen Inc. Cayman Islands 100
EX-23.1 5 CONSENT OF ARTHUR ANDERSEN LLP EXHIBIT 23.1 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the incorporation of our report dated February 19, 1998, incorporated by reference in this Form 10-K, into the Company's previously filed Registration Statements on Form S-8 (File Nos. 33-37505 and 333-09205). ARTHUR ANDERSEN LLP Tulsa, Oklahoma March 27, 1998 EX-23.2 6 CONSENT OF NETHERLAND, SEWELL & ASSOCIATES, INC. EXHIBIT 23.2 [LETTERHEAD OF NETHERLAND, SEWELL & ASSOCIATES, INC.] CONSENT OF INDEPENDENT PETROLEUM ENGINEERS AND GEOLOGISTS --------------------------------------------------------- As Petroleum Engineers, we hereby consent to the inclusion of the information included in this Form 10-K and incorporated by reference in this Form 10-K from the 1997 Annual Report of Stockholders of Vintage Petroleum, Inc. with respect to the oil and gas reserves of Vintage Petroleum, Inc., the future net revenues from such reserves and the present value thereof, which information has been included in this Form 10-K in reliance upon the report of this firm and upon the authority of this firm as experts in petroleum engineering. We hereby further consent to all references to our firm included in this Form 10-K and to the incorporation by reference in the Registration Statements on Form S-8, Nos. 33-37505 and 333-09205, of Vintage Petroleum, Inc. of such information with respect to the oil and gas reserves of Vintage Petroleum, Inc., the future net revenues from such reserves and the present value thereof. NETHERLAND, SEWELL & ASSOCIATES, INC. By: /s/ Frederic D. Sewell ________________________________________ Frederic D. Sewell President Dallas, Texas March 27, 1998 EX-27.1 7 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM DECEMBER 31, 1997 FORM 10-K AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 12-MOS DEC-31-1997 JAN-01-1997 DEC-31-1997 5,797 0 67,236 0 0 89,682 1,251,651 370,103 990,055 79,677 451,096 0 0 258 383,272 990,055 419,157 416,600 172,676 172,676 117,606 0 36,762 89,556 17,146 72,207 0 0 0 72,207 1.41 1.39
EX-27.2 8 FINANCIAL DATA SCHEDULE
5 1,000 3-MOS 6-MOS 9-MOS DEC-31-1997 DEC-31-1997 DEC-31-1997 JAN-01-1997 JAN-01-1997 JAN-01-1997 MAR-31-1997 JUN-30-1997 SEP-30-1997 3,858 3,008 9,125 0 0 0 53,436 55,867 60,022 0 0 0 0 0 0 10,020 14,773 79,214 1,025,523 1,161,957 1,194,820 295,392 320,498 345,972 829,566 935,851 948,327 70,530 75,360 69,154 357,156 445,983 447,868 0 0 0 0 0 0 258 258 258 333,831 348,260 362,654 829,566 935,851 948,327 99,115 199,415 303,419 99,234 199,077 303,464 38,690 80,986 125,200 38,690 80,986 125,200 24,391 54,502 86,058 0 0 0 8,178 17,952 27,455 27,975 45,637 64,751 6,869 10,212 14,092 20,989 35,222 50,456 0 0 0 0 0 0 0 0 0 20,989 35,222 50,456 .42 .70 1.00 .41 .68 .97 Common, other-SE and EPS have been restated to reflect two-for-one common stock split effected on October 7, 1997. Additionally, EPS-Primary and EPS-Diluted have been restated for the adoption of SFAS No. 128.
EX-27.3 9 FINANCIAL DATA SCHEDULE
5 1,000 3-MOS 6-MOS 9-MOS 12-MOS DEC-31-1996 DEC-31-1996 DEC-31-1996 DEC-31-1996 JAN-01-1996 JAN-01-1996 JAN-01-1996 JAN-01-1996 MAR-31-1996 JUN-30-1996 SEP-30-1996 DEC-31-1996 3,697 5,569 5,339 2,774 0 0 0 0 47,828 50,136 48,635 72,664 0 0 0 0 0 0 0 0 10,131 9,240 13,536 9,252 813,504 841,986 879,737 986,551 222,349 238,890 256,645 275,392 663,011 678,502 701,358 813,950 60,574 62,258 62,644 113,376 321,541 323,752 336,380 372,390 0 0 0 0 0 0 0 0 240 240 240 240 232,353 241,887 250,992 264,865 663,011 678,502 701,358 813,950 70,876 146,859 222,676 310,796 71,340 147,383 223,335 311,682 32,948 65,894 100,329 138,438 32,948 65,894 100,329 138,438 20,826 41,738 63,339 86,498 0 0 0 0 7,319 14,737 22,467 30,109 10,247 25,014 37,200 56,637 3,065 7,846 10,043 14,938 7,174 16,970 26,796 41,192 0 0 0 0 0 0 0 0 0 0 0 0 7,174 16,970 26,796 41,192 .15 .35 .55 .86 .15 .35 .55 .85 Common, other-SE and EPS have been restated to reflect two-for-one common stock split effected on October 7, 1997. Additionally, EPS-Primary and EPS-Diluted have been restated for the adoption of SFAS No. 128.
EX-99.1 10 LETTER OF NETHERLAND, SEWELL & ASSOCIATES, INC. [LETTERHEAD OF NETHERLAND, SEWELL & ASSOCIATES,INC.] EXHIBIT 99.1 March 18, 1998 Mr. S. Craig George Vintage Petroleum, Inc. 4200 One Williams Center Tulsa, Oklahoma 74172 Dear Mr. George: In accordance with your request, we have estimated the proved reserves and future revenue, as of January 1, 1998, to the Vintage Petroleum, Inc. (Vintage) interest in certain oil and gas properties located in the United States as listed in the accompanying tabulations. This report has been prepared using constant prices and costs and conforms to the guidelines of the Securities and Exchange Commission (SEC). As presented in the accompanying summary projections, Tables I through V, we estimate the net reserves and future net revenue to the Vintage interest, as of January 1, 1998, to be:
Net Reserves Future Net Revenue (M$) --------------------------------------- -------------------------------------- Oil Gas Present Worth Category (MBBL) (MMCF) Total at 10% - --------------------- ---------------- ---------------- ---------------- ---------------- Proved Developed Producing 68,691.3 237,705.2 755,635.9 504,549.7 Non-Producing 10,739.9 78,600.4 227,033.5 125,229.3 Proved Undeveloped 20,368.7 44,542.1 204,311.2 103,910.6 Pipeline Revenue/(1)/ Proved Developed 0.0 0.0 10,772.4 5,940.3 ---------------- ---------------- ---------------- ----------------- Total Proved 99,799.9 360,847.7 1,197,753.0 739,629.9
/(1)/ Revenue is from the operations of Vintage Pipeline, Inc. The oil reserves shown include crude oil, condensate, and gas plant liquids. Oil volumes are expressed in thousands of barrels (MBBL); a barrel is equivalent to 42 United States gallons. Gas volumes are expressed in millions of standard cubic feet (MMCF) at the contract temperature and pressure bases. The estimates shown in the previous table do not include the effect of the Section 29 nonconventional fuel federal income tax credit. However, at the request of Vintage, we have prepared estimates of net reserves and future revenue including the effect of the tax credit for certain oil wells located in the Cat Canyon and Santa Maria Valley Fields, Santa Barbara County, California, which Vintage believes qualify for the tax credit. The basis used to identify wells which qualify for the Section 29 tax credit and the methods used to calculate the effect of this credit were provided by Vintage and have not been independently verified. As presented in the accompanying summary projections, Tables VI through X, we estimate the net reserves and future net revenue to the Vintage interest, including the effect of the Section 29 tax credit, as of January 1, 1998, to be:
Net Reserves Future Net Revenue (M$) --------------------------------------- -------------------------------------- Oil Gas Present Worth Category (MBBL) (MMCF) Total at 10% - --------------------- ---------------- ---------------- ---------------- ---------------- Proved Developed Producing 68,750.0 237,705.2 761,170.0 509,043.8 Non-Producing 10,743.7 78,600.4 227,269.2 125,402.5 Proved Undeveloped 20,440.3 44,542.1 204,458.9 103,928.6 Pipeline Revenue/(1)/ Proved Developed 0.0 0.0 10,772.4 5,940.3 ---------------- ---------------- ---------------- ----------------- Total Proved 99,934.0 360,847.7 1,203,670.5 744,315.2
/(1)/ Revenue is from the operations of Vintage Pipeline, Inc. The effect of the Section 29 tax credit on estimated reserves and future revenue is presented in the table following this letter, along with estimated reserves and future revenue to the Vintage interest in certain oil and gas properties, as of January 1, 1998, both excluding and including the effect of the tax credit. As shown in the Table of Contents, this report includes summary projections of reserves and revenue for each reserve category along with one- line summaries of reserves, economics, and basic data by lease, excluding the effect of the Section 29 tax credit. Also included are summary projections of reserves and revenue for each reserve category along with one-line summaries of reserves, economics, and basic data by lease, including the effect of the Section 29 tax credit, for the Cat Canyon and Santa Maria Valley Fields. For the purposes of this report, the term "lease" refers to a single economic projection. The estimated reserves and future revenue shown in this report are for proved developed producing, proved developed non-producing, and proved undeveloped reserves. In accordance with SEC guidelines, our estimates do not include any value for probable or possible reserves which may exist for these properties. This report does not include any value which could be attributed to interests in undeveloped acreage beyond those tracts for which undeveloped reserves have been estimated. Future gross revenue to the Vintage interest is prior to deducting state production taxes and ad valorem taxes. Future net revenue is after deducting these taxes, future capital costs, payments to net profits interests, and operating expenses, but before consideration of federal income taxes; future net revenue for the federal offshore properties is also after deducting abandonment costs. In accordance with SEC guidelines, the future net revenue has been discounted at an annual rate of 10 percent to determine its "present worth." The present worth is shown to indicate the effect of time on the value of money and should not be construed as being the fair market value of the properties. For the purposes of this report, a field inspection of the properties has not been performed nor has the mechanical operation or condition of the wells and their related facilities been examined. We have not investigated possible environmental liability related to the properties; therefore, our estimates do not include any costs which may be incurred due to such possible liability. Our estimates do not include any salvage value for the lease and well equipment nor the cost of abandoning the onshore properties or properties located in state waters offshore Louisiana and Texas. Future revenue estimates for properties located in federal waters offshore Louisiana also do not include any salvage value for the lease and well equipment, but do include Vintage's estimates of the costs to abandon the wells, platforms, and production facilities. Abandonment costs for federal offshore properties are included with other capital investments. Oil prices used in this report are based on an average December 1997 West Texas Intermediate posted price of $16.18 per barrel, adjusted by lease for gravity, transportation fees, premiums, and regional posted price differentials. As requested, additional oil premiums have been included for certain fields when Vintage is receiving premiums through purchaser contracts over and above those at the lease level. Oil prices are held constant in accordance with SEC guidelines. Gas prices used in this report are based on either the most current price available for each lease, adjusted to a December 1997 regional spot market price, or the contract price. The contract prices are escalated according to contract provisions until contract expiration in accordance with SEC guidelines for fixed and determinable price adjustments. At contract expiration, gas prices are adjusted to the December 1997 regional spot market price and held constant thereafter. All other gas prices are held constant in accordance with SEC guidelines. Lease and well operating costs are based on operating expense records of Vintage. For non-operated properties, these costs include the per-well overhead expenses allowed under joint operating agreements along with costs estimated to be incurred at and below the district and field levels. As requested, lease and well operating costs for the operated properties include only direct lease and field level costs. Headquarters general and administrative overhead expenses of Vintage are not included. Lease and well operating costs are held constant in accordance with SEC guidelines. Capital costs are included as required for workovers, new development wells, and production equipment. We have made no investigation of potential gas volume and value imbalances which may have resulted from overdelivery or underdelivery to the Vintage interest. Therefore, our estimates of reserves and future revenue do not include adjustments for the settlement of any such imbalances; our projections are based on Vintage receiving its net revenue interest share of estimated future gross gas production. The reserves included in this report are estimates only and should not be construed as exact quantities. They may or may not be recovered; if recovered, the revenues therefrom and the costs related thereto could be more or less than the estimated amounts. The sales rates, prices received for the reserves, and costs incurred in recovering such reserves may vary from assumptions included in this report due to governmental policies and uncertainties of supply and demand. Also, estimates of reserves may increase or decrease as a result of future operations. In evaluating the information at our disposal concerning this report, we have excluded from our consideration all matters as to which legal or accounting, rather than engineering and geological, interpretation may be controlling. As in all aspects of oil and gas evaluation, there are uncertainties inherent in the interpretation of engineering and geological data; therefore, our conclusions necessarily represent only informed professional judgments. The titles to the properties have not been examined by Netherland, Sewell & Associates, Inc., nor has the actual degree or type of interest owned been independently confirmed. The data used in our estimates were obtained from Vintage Petroleum, Inc.; other interest owners; various operators of the properties; and the nonconfidential files of Netherland, Sewell & Associates, Inc. and were accepted as accurate. We are independent petroleum engineers, geologists, and geophysicists; we do not own an interest in these properties and are not employed on a contingent basis. Basic geologic and field performance data together with our engineering work sheets are maintained on file in our office. Very truly yours, /s/ Frederic D. Sewell TJT:LJH EX-99.2 11 LETTER OF NETHERLAND, SEWELL & ASSOCIATES, INC. EXHIBIT 99.2 [LETTERHEAD OF NETHERLAND, SEWELL & ASSOCIATES, INC.] March 19, 1998 Mr. S. Craig George Vintage Petroleum, Inc. 4200 One Williams Center Tulsa, Oklahoma 74172 Dear Mr. George: In accordance with your request, we have estimated the proved reserves and future revenue, as of January 1, 1998, to the combined interests of Vintage Oil Argentina, Inc. and Shamrock Ventures (Boliviana) Ltd. (collectively referred to herein as "Total South America") in certain oil and gas properties located in the South American countries of Argentina and Bolivia as listed in the accompanying tabulations. This report has been prepared using constant prices and costs and conforms to the guidelines of the Securities and Exchange Commission (SEC). As presented in the accompanying summary projections, Tables I through IV, we estimate the net reserves and future net revenue to the Total South America interest, as of January 1, 1998, to be:
Net Reserves Future Net Revenue (USM$) --------------------------------------- -------------------------------------- Oil Gas Present Worth Category (MBBL) (MMCF) Total at 10% - --------------------- ---------------- ---------------- ---------------- ---------------- Proved Developed Producing 37,537.5 42,165.3 276,139.5 200,318.8 Non-Producing 11,771.1 97,958.8 215,182.6 115,826.0 Proved Undeveloped 38,525.0 51,192.1 371,336.1 183,732.5 -------------- -------------- ----------------- ----------------- Total Proved 87,833.6 191,316.2 862,658.2 499,877.3
The oil reserves shown include crude oil and condensate. Oil volumes are expressed in thousands of barrels (MBBL); a barrel is equivalent to 42 United States gallons. Gas volumes are expressed in millions of standard cubic feet (MMCF) at the contract temperature and pressure bases. All prices, costs, and revenue estimates are expressed in United States dollars referred to hereinafter as $. As shown in the Table of Contents, this report includes summary projections of reserves and revenue for each country by reserve category along with one-line summaries of reserves, economics, and basic data by lease. For the purposes of this report, the term "lease" refers to a single economic projection. The estimated reserves and future revenue shown in this report are for proved developed producing, proved developed non-producing, and proved undeveloped reserves. In accordance with SEC guidelines, our estimates do not include any value for probable or possible reserves which may exist for these properties. This report does not include any value which could be attributed to interests in undeveloped acreage beyond those tracts for which undeveloped reserves have been estimated. Future gross revenue to the Total South America interest is prior to deducting provincial production taxes. Future net revenue is after deducting these taxes, future capital costs, and operating expenses, but before consideration of Argentine, Bolivian, or United States federal income taxes. In accordance with SEC guidelines, the future net revenue has been discounted at an annual rate of 10 percent to determine its "present worth." The present worth is shown to indicate the effect of time on the value of money and should not be construed as being the fair market value of the properties. For the purposes of this report, a field inspection of the properties has not been performed nor has the mechanical operation or condition of the wells and their related facilities been examined. We have not investigated possible environmental liability related to the properties; therefore, our estimates do not include any costs which may be incurred due to such possible liability. Also, our estimates do not include any salvage value for the lease and well equipment nor the cost of abandoning the properties. Oil prices used in this report for Argentina are based on a NYMEX price of $17.45 per barrel, the weekly average price in effect on December 31, 1997, as specified by the contract under which the oil is sold. These prices are adjusted by lease for gravity, transportation fees, and regional posted price differentials. An oil price of $16.75 per barrel, based on a long-term sales contract, is used for Bolivia. Oil prices are held constant in accordance with SEC guidelines. Gas prices used in this report are based on contract prices, adjusted for transportation fees and BTU content. In accordance with SEC guidelines, these prices are adjusted according to the provisions of existing gas contracts which remain in effect throughout the life of the properties. Lease and well operating costs are based on operating expense records of Vintage Petroleum, Inc. (Vintage). For recently acquired properties for which there are not adequate historical operating expense records, the operating expense estimates of Vintage have been used. For non-operated properties, these costs include the per-well overhead expenses allowed under joint operating agreements along with costs estimated to be incurred at and below the district and field levels. As requested, lease and well operating costs for the operated properties include only direct lease and field level costs. Headquarters general and administrative overhead expenses of Vintage are not included. For certain recently acquired properties, lease and well operating costs are adjusted to reflect Vintage's intention to modify procedures upon obtaining operational control of the properties. In accordance with SEC guidelines, lease and well operating costs are held constant throughout the life of the properties with the exception of the adjustments described herein. Capital costs are included as required for workovers, new development wells, and production equipment. We have made no investigation of potential gas volume and value imbalances which may have resulted from overdelivery or underdelivery to the Total South America interest. Therefore, our estimates of reserves and future revenue do not include adjustments for the settlement of any such imbalances; our projections are based on Total South America receiving its net revenue interest share of estimated future gross gas production. The reserves included in this report are estimates only and should not be construed as exact quantities. They may or may not be recovered; if recovered, the revenues therefrom and the costs related thereto could be more or less than the estimated amounts. A substantial portion of these reserves are for behind pipe zones, undeveloped locations, and producing wells that lack sufficient production history upon which performance-related estimates of reserves can be based. Therefore, these reserves are based on estimates of reservoir volumes and recovery efficiencies along with analogies to similar production. As such reserve estimates are usually subject to greater revision than those based on substantial production and pressure data, it may be necessary to revise these estimates up or down in the future as additional performance data become available. The sales rates, prices received for the reserves, and costs incurred in recovering such reserves may vary from assumptions included in this report due to governmental policies and uncertainties of supply and demand. Also, estimates of reserves may increase or decrease as a result of future operations. In evaluating the information at our disposal concerning this report, we have excluded from our consideration all matters as to which legal or accounting, rather than engineering and geological, interpretation may be controlling. As in all aspects of oil and gas evaluation, there are uncertainties inherent in the interpretation of engineering and geological data; therefore, our conclusions necessarily represent only informed professional judgments. The titles to the properties have not been examined by Netherland, Sewell & Associates, Inc., nor has the actual degree or type of interest owned been independently confirmed. The data used in our estimates were obtained from Vintage Petroleum, Inc., and the nonconfidential files of Netherland, Sewell & Associates, Inc. and were accepted as accurate. We are independent petroleum engineers, geologists, and geophysicists; we do not own an interest in these properties and are not employed on a contingent basis. Basic geologic and field performance data together with our engineering work sheets are maintained on file in our office. Very truly yours, /s/ Frederic D. Sewell TJT:KBS -----END PRIVACY-ENHANCED MESSAGE-----