UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
--------------------
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2001
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number 1-8704
HOWELL CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 74-1223027
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
1111 Fannin, Suite 1500, Houston, Texas 77002
(Address of principal executive offices) (Zip Code)
(713) 658-4000
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
Indicate the number of shares outstanding on each of the issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding at July 31, 2001
- ----------------------------- ------------------------------
Common Stock, $1.00 par value 6,097,352
This report contains 15 pages
HOWELL CORPORATION AND SUBSIDIARIES
Form 10-Q
INDEX
Page No.
--------
Part I. Financial Information
Item 1. Condensed Consolidated Statements of Operations --
Three and six months ended June 30, 2001 and 2000 (unaudited). 3
Condensed Consolidated Balance Sheets --
June 30, 2001 (unaudited) and December 31, 2000............... 4
Condensed Consolidated Statements of Cash Flows --
Six months ended June 30, 2001 and 2000 (unaudited)........... 5
Notes to Condensed Consolidated Financial Statements
(unaudited)................................................... 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations..................................... 11
Part II.Other Information
Item 6. Exhibits and Reports on Form 8-K............................... 15
-2-
PART I. FINANCIAL INFORMATION
(ITEM 1)
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
Howell Corporation and Subsidiaries
Three Months Ended Six Months Ended
June 30, June 30,
2001 2000 2001 2000
---- ---- ---- ----
(In thousands, except per share amounts)
Revenues......................................... $22,839 $18,789 $45,810 $37,065
--------- --------- --------- ---------
Cost and expenses:
Lease operating expenses....................... 9,507 7,452 18,209 14,264
Depreciation, depletion, and amortization...... 2,201 1,780 4,243 3,531
General and administrative..................... 1,216 748 2,308 1,855
--------- --------- --------- ---------
12,924 9,980 24,760 19,650
--------- --------- --------- ---------
Operating profit................................. 9,915 8,809 21,050 17,415
--------- --------- --------- ---------
Other income (expense):
Interest expense............................... (1,121) (1,526) (2,381) (3,193)
Interest income................................ 18 22 43 68
Other-net...................................... 1 1 250 1
--------- --------- --------- ---------
(1,102) (1,503) (2,088) (3,124)
--------- --------- --------- ---------
Earnings before income taxes.................... 8,813 7,306 18,962 14,291
Income tax provision............................. 3,085 2,628 6,637 5,073
--------- --------- --------- ---------
Net earnings .................................... 5,728 4,678 12,325 9,218
Less: Preferred stock dividends................ (604) (604) (1,208) (1,208)
--------- --------- --------- ---------
Net earnings applicable to common shares......... $ 5,124 $ 4,074 $11,117 $ 8,010
========= ========= ========= =========
Net earnings per common share - basic............ $ 0.86 $ 0.67 $ 1.85 $ 1.32
========= ========= ========= =========
Weighted average shares outstanding - basic...... 5,971 6,076 5,998 6,074
========= ========= ========= =========
Net earnings per common share - diluted.......... $ 0.66 $ 0.55 $ 1.43 $ 1.08
========= ========= ========= =========
Weighted average shares outstanding - diluted.... 8,659 8,580 8,641 8,554
========= ========= ========= =========
Cash dividends per common share.................. $ 0.04 $ 0.04 $ 0.08 $ 0.08
========= ========= ========= =========
See accompanying Notes to Consolidated Financial Statements.
-3-
CONSOLIDATED BALANCE SHEETS
Howell Corporation and Subsidiaries
June 30, December 31,
2001 2000
---- ----
(Unaudited)
(In thousands, except share data)
Assets
Current assets:
Cash and cash equivalents........................... $ 5,300 $ 5,553
Trade accounts receivable, less allowance for
doubtful accounts of $66 in 2001 and 2000......... 10,099 12,515
Income tax receivable............................... 990 705
Deferred income taxes............................... 59 59
Other current assets................................ 1,341 750
---------- ----------
Total current assets.............................. 17,789 19,582
---------- ----------
Property, plant and equipment:
Oil and gas properties, utilizing the full-cost
method of accounting.............................. 333,245 401,851
Unproven properties................................. 20,174 20,174
Other............................................... 4,280 3,737
Less accumulated depreciation, depletion and
amortization...................................... (239,203) (320,602)
---------- ----------
Net property and equipment........................ 118,496 105,160
---------- ----------
Other assets.......................................... 616 672
---------- ----------
Total assets...................................... $136,901 $125,414
========== ==========
Liabilities and Shareholders' Equity
Current liabilities:
Accounts payable.................................... $ 13,042 $ 12,880
Accrued liabilities - oil and gas properties........ 2,823 2,521
Accrued liabilities - other......................... 2,727 2,605
Income taxes payable................................ 417 319
---------- ----------
Total current liabilities......................... 19,009 18,325
---------- ----------
Deferred income taxes................................. 2,616 625
---------- ----------
Other liabilities..................................... 459 545
---------- ----------
Long-term debt........................................ 66,000 67,000
---------- ----------
Commitments and contingencies
Shareholders' equity:
Preferred stock, $1 par value; 690,000 shares
issued and outstanding, liquidation value of
$34,500,000....................................... 690 690
Common stock, $1 par value; 6,096,252 shares issued
and outstanding in 2001; 5,524,907 shares issued
and outstanding in 2002........................... 6,096 5,525
Additional paid-in capital.......................... 46,696 41,079
Unearned compensation............................... (978) (209)
Retained deficit.................................... (3,687) (8,166)
---------- ----------
Total shareholders' equity........................ 48,817 38,919
---------- ----------
Total liabilities and shareholders' equity........ $136,901 $125,414
========== ==========
See accompanying Notes to Consolidated Financial Statements.
-4-
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
Howell Corporation and Subsidiaries
Six Months Ended June 30,
2001 2000
---- ----
(In thousands)
OPERATING ACTIVITIES:
Net earnings from operations.......................... $ 12,325 $ 9,218
Adjustments for non-cash items:
Depreciation, depletion and amortization............ 4,243 3,531
Deferred income taxes............................... 1,991 2,061
Other............................................... 150 35
---------- ----------
Earnings from continuing operations plus non-cash
operating items..................................... 18,709 14,845
Changes in components of working capital from
operations:
Decrease in trade accounts receivable............... 2,416 49
Increase in federal income tax receivables.......... (285) -
Decrease (increase) in other current assets......... (591) 2,137
Increase in accounts payable........................ 162 103
Increase in accrued and other liabilities........... 410 426
Increase (decrease) in income tax payable........... 98 (72)
---------- ----------
Cash provided by continuing operations................ 20,919 17,488
Cash utilized in discontinued operations.............. (72) (118)
---------- ----------
Cash provided by operating activities................. 20,847 17,370
---------- ----------
INVESTING ACTIVITIES:
Proceeds from the disposition of property............. 667 3,000
Additions to property, plant and equipment............ (18,246) (6,611)
Other, net............................................ 56 64
---------- ----------
Cash utilized in investing activities................. (17,523) (3,547)
---------- ----------
FINANCING ACTIVITIES:
Repayments under credit agreements, net............... (1,000) (14,000)
Cash dividends:
Common shareholders................................. (467) (442)
Preferred shareholders.............................. (1,208) (1,208)
Stock options exercised............................... 158 3
Stock purchased and reissued restricted shares........ (1,060) -
---------- ----------
Cash utilized in financing activities................. (3,577) (15,647)
---------- ----------
NET DECREASE IN CASH AND CASH EQUIVALENTS............. (253) (1,824)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD........ 5,553 2,112
---------- ----------
CASH AND CASH EQUIVALENTS, END OF PERIOD.............. $ 5,300 $ 288
========== ==========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Net cash paid for:
Interest.............................................. $ 2,258 $ 2,808
========== ==========
Income taxes.......................................... $ 4,838 $ 3,091
========== ==========
See accompanying Notes to Consolidated Financial Statements
-5-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Howell Corporation and Subsidiaries
June 30, 2001 and 2000
Note 1 - Basis of Financial Statement Preparation
The unaudited consolidated financial statements included herein have been
prepared by Howell Corporation (the "Company"), pursuant to the rules and
regulations of the Securities and Exchange Commission and in accordance with
generally accepted accounting principles. In the opinion of management, all
adjustments (all of which are normal and recurring) have been made which are
necessary for a fair statement of the results of operations for the three and
six months ended June 30, 2001 and 2000. The results of operations for the three
and six months ended June 30, 2001 are not necessarily indicative of results to
be expected for the full year. The accounting policies followed by the Company
are set forth in Note 1 to the consolidated financial statements in its Annual
Report on Form 10-K for the year ended December 31, 2000. These consolidated
financial statements should be read in conjunction with the financial statements
and notes thereto included in the Company's latest Form 10-K.
Reclassifications
Certain reclassifications have been made to the 2000 financial presentation to
conform with the 2001 presentation.
Note 2 - New Accounting Standards
The Company adopted Statement of Financial Accounting Standards ("SFAS") No. 133
effective January 1, 2001. The Company has reviewed all of its contracts to
determine which, if any, contain derivatives. As of January 1, 2001, the Company
had only one derivative contract and it was accounted for and carried at market
value. Therefore, upon adoption of SFAS No. 133, no transition adjustment was
recorded by the Company.
On June 29, 2001, the FASB approved its proposed SFAS No. 141, ("FAS 141")
"Business Combinations," and SFAS No. 142 ("FAS 142"), "Goodwill and Other
Intangible Assets."
Under FAS 141, all business combinations should be accounted for using the
purchase method of accounting; use of the pooling-of-interests method is
prohibited. The provisions of the statement will apply to all business
combinations initiated after June 30, 2001.
FAS 142 will apply to all acquired intangible assets whether acquired singly, as
part of a group, or in a business combination. The statement will supersede
Accounting Principles Board, ("APB"), Opinion No. 17, "Intangible Assets," and
will carry forward provisions in APB Opinion No.17 related to internally
developed intangible assets. Adoption of FAS 142 will result in ceasing
amortization of goodwill. All of the provisions of the statement should be
applied in fiscal years beginning after December 15, 2001 to all goodwill and
other intangible assets recognized in an entity's statement of financial
position at that date, regardless of when those assets were initially
recognized.
The Company does not expect the adoption of these standards to have a material
effect on its consolidated financial statements.
Note 3 - Financial Instruments and Hedging Activities
In order to mitigate the effects of future price fluctuations, the Company from
time to time uses limited programs to hedge its production. Futures and options
contracts are used as the hedging tools.
During the second quarter of 2001, the Company purchased a put option covering
4,000 barrels of oil per day for calendar months June through December 2001,
allowing it to benefit should the NYMEX price for oil fall below $23.40 per
barrel. The premium paid was $0.4 million and the market value of the position
and its carrying value at June 30, 2001, was $0.4 million. The Company
recognizes changes in the market value of this derivative instrument in earnings
for the period.
-6-
During the fourth quarter of 2000, the Company purchased a put option covering
7,500 MMBTU per day for NYMEX contract months March through December 2001,
allowing it to benefit should the NYMEX price for gas fall below $3.50 per
MMBTU. The premium paid was $0.3 million and the market value of the position
and its carrying value at June 30, 2001, was $0.6 million. The Company
recognizes changes in the market value of this derivative instrument in earnings
for the period.
The Company had entered into two hedging programs for the year 2000. The first
program was a purchase of a put option and a sale of a call option covering
1,700 barrels of oil per day effective January 1, 2000, through December 31,
2000. The strike prices were $17.25 per barrel for the put option and $22.00 per
barrel for the call option. The second program was a purchase of a put option
and a sale of a call option covering 1,800 barrels of oil per day effective
January 1, 2000, through December 31, 2000. The strike prices were $18.50 per
barrel for the put option and $26.00 per barrel for the call option. Each
program provided for monthly settlements and was based on monthly average oil
prices. There were no premiums associated with either program. Prior to the
adoption of SFAS No. 133, changes in the market value of the derivatives were
deferred until the gain or loss was recognized on the hedged transactions.
During the three and six months ended June 30, 2000, the strike prices of the
call options were exceeded, resulting in a reduction of revenues of $1.5 million
and $3.0 million, respectively, from what would have been received had no
hedging programs been in place. Without the options the average price per barrel
of oil for the three and six months ended June 30, 2000, would have increased
from $24.30 to $26.54 and from $24.31 to $26.58, respectively.
Note 4 - Accumulated Depreciation, Depletion and Amortization
The Company's depletion rate for the three and six months ended June 30, 2001,
was $2.38 and $2.39 per equivalent barrel, respectively, versus a rate of $2.15
and $2.14, respectively, for the same periods ended June 30, 2000.
Note 5 - Acquisitions & Dispositions
On February 28, 2001, the Company announced that it traded certain producing oil
and gas properties in a tax-free, like-kind exchange. The Company assigned all
of its working interest in Main Pass Blocks 64 and 65 in exchange for a 26%
working interest in the Salt Creek Field Light Oil Unit located in Natrona
County, Wyoming. The Company also paid $7.6 million as part of the transaction.
The trade did not materially affect the Company's reserve base. This trade
concluded the Company's operations in the offshore area of the Gulf of Mexico.
The Company now owns a 98% working interest in the Salt Creek Field Light Oil
Unit, the largest producing unit in the field. In addition, the Company received
16,900 undeveloped net acres in the Big Horn Basin of Wyoming and a cash payment
of $0.3 million in exchange for acreage in the Wind River Basin of Wyoming.
On February 28, 2000, the Company entered into a Purchase and Sale Agreement to
sell its 46% interest in Genesis Energy, L.L.C. for $3.0 million. The proceeds
from the sale were used to reduce debt and no gain or loss was recognized on the
sale. There were no pre-tax earnings attributable to the Company's interest in
Genesis during the first six months of 2000.
Note 6 - Litigation
Howell Pipeline Texas, Inc. v. Exxon Pipeline Company, 125th Judicial District,
District Court of Harris County, Texas, Cause No. 1999 - 32526. On June 25,
1999, Howell Pipeline Texas, Inc. ("HPTex") sued Exxon Pipeline Company
("Exxon") for failure to pay rent for the use of certain crude oil storage tanks
("Tanks"). Exxon notified HPTex of its intention to cancel a lease on the Tanks
effective March 31, 1996. Exxon stopped paying rent but did not vacate the
premises after notification of the lease cancellation. Exxon continued to store
crude oil and hydrostatic test water for an additional eighteen months. HPTex
claims Exxon owes in excess of $2 million in rent plus interest and attorney's
fees.
-7-
Exxon filed a counterclaim against HPTex in which Exxon claims that HPTex is
responsible for the removal costs associated with certain contents of the Tanks.
Exxon claims it "has incurred actual damages in an amount not to exceed $2
million."
This matter is set for trial in the fourth quarter of 2001. The Company believes
that the ultimate resolution of this matter will not have a material adverse
effect on its results of operations, financial position or cash flows.
There are various lawsuits and claims arising in the ordinary course of business
against the Company, none of which, in the opinion of management, will have a
material adverse effect on the Company.
Note 7 - Earnings (Loss) per Share
Prior year's earnings per share ("EPS") have been restated to reflect the 10%
stock dividend declared and issued in the first quarter of 2001.
Basic EPS amounts are calculated using the average number of common shares
outstanding during each period less the average number of restricted shares
outstanding during each period. Diluted EPS assumes conversion of dilutive
convertible preferred stock and exercise of all stock options and restricted
stock having exercise prices less than the average market price of the common
stock using the treasury stock method.
-8-
The tables below present the reconciliation of the numerators and denominators
in calculating diluted EPS from operations in accordance with Statement of
Financial Accounting Standards No. 128.
Three Months Ended June 30, 2001
Earnings
Increase in per
Increase in Number of Incremental
Earnings Shares Share
----------- ----------- -----------
Common stock options and restricted stock. - 388,265 -
Dividends on convertible preferred stock.. $ 603,750 2,300,000 $ 0.26
Computation of Diluted Earnings per Share
Earnings Common
Available Shares Per Share
----------- ----------- -----------
$5,124,250 5,971,030 $ 0.86
Common stock options and restricted stock. - 388,265 -
----------- ----------- -----------
$5,124,250 6,359,295 $ 0.81 Dilutive
Dividends on convertible preferred stock.. 603,750 2,300,000 -
----------- ----------- -----------
$5,728,000 8,659,295 $ 0.66 Dilutive
=========== =========== ===========
Note: Because EPS decreases from $0.86 to $0.81 when common stock options and
restricted stock are included in the computation and because EPS decreases from
$0.81 to $0.66 when convertible preferred shares are included in the
computation, those common stock options, restricted stock and convertible
preferred shares are dilutive. Therefore, diluted EPS is reported as $0.66.
Three Months Ended June 30, 2000
Earnings
Increase in per
Increase in Number of Incremental
Earnings Shares Share
----------- ----------- -----------
Common stock options...................... - 203,836 -
Dividends on convertible preferred stock.. $ 603,750 2,300,000 $ 0.26
Computation of Diluted Earnings per Share
Earnings Common
Available Shares Per Share
----------- ----------- -----------
$4,074,250 6,075,961 $ 0.67
Common stock options...................... - 203,836 -
----------- ----------- -----------
$4,074,250 6,279,797 $ 0.65 Dilutive
Dividends on convertible preferred stock.. 603,750 2,300,000 -
----------- ----------- -----------
$4,678,000 8,579,797 $ 0.55 Dilutive
=========== =========== ===========
Note: Because EPS decreases from $0.67 to $0.65 when common stock options are
included in the computation and because EPS decreases from $0.65 to $0.55 when
convertible preferred shares are included in the computation, those common stock
options and convertible preferred shares are dilutive. Therefore, diluted EPS is
reported as $0.55.
-9-
<page>
Six Months Ended June 30, 2001
Earnings
Increase in per
Increase in Number of Incremental
Earnings Shares Share
------------ ----------- -----------
Common stock options and restricted stock. - 342,318 -
Dividends on convertible preferred stock.. $ 1,207,500 2,300,000 $ 0.53
Computation of Diluted Earnings per Share
Earnings Common
Available Shares Per Share
------------ ----------- -----------
$11,117,500 5,998,391 $ 1.85
Common stock options and restricted stock. - 342,318 -
------------ ----------- -----------
$11,117,500 6,340,709 $ 1.75 Dilutive
Dividends on convertible preferred stock.. 1,207,500 2,300,000 -
------------ ----------- -----------
$12,325,000 8,640,709 $ 1.43 Dilutive
============ =========== ===========
Note: Because EPS decreases from $1.85 to $1.75 when common stock options and
restricted stock are included in the computation and because EPS decreases from
$1.75 to $1.43 when convertible preferred shares are included in the
computation, those common stock options, restricted stock and convertible
preferred shares are dilutive. Therefore, diluted EPS is reported as $1.43.
Six Months Ended June 30, 2000
Earnings
Increase in per
Increase in Number of Incremental
Earnings Shares Share
------------ ----------- -----------
Options................................... - 179,964 -
Dividends on convertible preferred stock.. $ 1,207,500 2,300,000 $ 0.53
Computation of Diluted Earnings per Share
Earnings Common
Available Shares Per Share
------------ ----------- -----------
$ 8,010,500 6,074,059 $ 1.32
Common stock options and restricted stock. - 179,964 -
------------ ----------- -----------
$ 8,010,500 6,254,023 $ 1.28 Dilutive
Dividends on convertible preferred stock.. 1,207,500 2,300,000 -
------------ ----------- -----------
$ 9,218,000 8,554,023 $ 1.08 Dilutive
============ =========== ===========
Note: Because EPS decreases from $1.32 to $1.28 when common stock options are
included in the computation and because EPS decreases from $1.28 to $1.08 when
convertible preferred shares are included in the computation, those common stock
options and convertible preferred shares are dilutive. Therefore, diluted EPS is
reported as $1.08.
-10-
PART I. FINANCIAL INFORMATION
(ITEM 2)
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following is a discussion of the Company's financial condition, results of
operations, capital resources and liquidity. This discussion and analysis should
be read in conjunction with the Consolidated Financial Statements of the Company
and the notes thereto.
RESULTS OF OPERATIONS
The Company's principal business segment is oil and gas production. Results of
operations for the three and six months ended June 30, 2001 and 2000, are
discussed below.
Oil and Gas Production
Three Months Ended Six Months Ended
June 30, June 30,
2001 2000 2001 2000
---- ---- ---- ----
(In thousands, except operating information)
Revenues:
Sales of oil and natural gas..................... $22,137 $18,733 $44,795 $36,940
Other............................................ 702 56 1,015 125
--------- --------- --------- ---------
Total revenues.............................. 22,839 18,789 45,810 37,065
Operating expenses............................... 12,924 9,980 24,760 19,650
--------- --------- --------- ---------
Operating profit................................. $ 9,915 $ 8,809 $21,050 $17,415
========= ========= ========= =========
Operating information:
Average net daily production:
Oil (Bbls)................................... 8,174 7,250 7,942 7,184
NGL (Bbls)................................... 380 426 376 443
Natural gas (Mcf)............................ 8,081 7,404 7,583 7,602
Equivalent (Bbls)............................ 9,901 8,910 9,582 8,894
Average sales prices:
Oil (per Bbl)................................ $ 24.92 $ 24.30 $ 25.18 $ 24.31
NGL (per Bbl)................................ $ 22.74 $ 17.52 $ 24.43 $ 19.27
Natural gas (per Mcf)........................ $ 3.82 $ 3.00 $ 5.05 $ 2.60
Revenues for the three months ended June 30, 2001, increased $4.1 million when
compared to the three months ended June 30, 2000, primarily due to a 13%
increase in oil production and a 9% increase in gas production, partially offset
by an 11% decrease in NGL production. A 27% increase in the average natural gas
price and a 30% increase in the average NGL price also contributed to the
increased revenues. The increase in other revenues was primarily due to the $0.5
million increase in the market value of the commodity contracts. See Note 3 of
Notes to the Consolidated Financial Statements.
For the six months ended June 30, 2001, revenues increased $8.7 million from the
same period in 2000. The change was primarily due to a 94% increase in average
gas prices and a 27% increase in average NGL prices. An 11% increase in oil
production, partially offset by a 15% decrease in NGL production, also
contributed to the increased revenues. Other revenues increased primarily due to
the $0.5 million increase in the market value of the commodity contracts and a
$0.3 million increase in sales of purchased gas. See Note 3 of Notes to the
Consolidated Financial Statements.
-11-
<page>
Operating expenses increased $2.9 million during the second quarter of 2001 when
compared to the same period in 2000. The primary reason for the increase was
related to an increase in production levels and an increase in prices received
(a $1.6 million increase in lease operating expense, a $0.4 million increase in
production and severance taxes, and a $0.4 million increase in depreciation,
depletion and amortization expense). General and administrative expenses
increased $0.5 million primarily due to a reduction in overhead charges billed
as a result of the trade of Main Pass properties. An increase in salaries and
benefits also contributed to higher operating expenses.
For the six months ended June 30, 2001, operating expenses increased $5.1
million from the same period in 2000. The primary reason for the increase was
related to an increase in production levels and an increase in prices received
(a $3.1 million increase in lease operating expense, a $0.8 million increase in
production and severance taxes, and a $0.7 million increase in depreciation,
depletion and amortization expense). General and administrative expenses
increased $0.5 million primarily due to a reduction in overhead charges billed
as a result of the trade of Main Pass. An increase in salaries and benefits also
contributed to higher operating expenses.
During the second quarter of 2001, the Company purchased a put option covering
4,000 barrels of oil per day for calendar months June through December 2001,
allowing it to benefit should the NYMEX price for oil fall below $23.40 per
barrel. The premium paid was $0.4 million and the market value of the position
and its carrying value at June 30, 2001, was $0.4 million. There was no effect
on earnings during the second quarter of 2001.
During the fourth quarter of 2000, the Company purchased a put option covering
7,500 MMBTU per day for NYMEX contract months March through December 2001,
allowing it to benefit should the NYMEX price for gas fall below $3.50 per
MMBTU. The premium paid was $0.3 million and the market value of the position
and its carrying value at June 30, 2001, was $0.6 million. The change in market
value resulted in earnings of $0.5 million and $0.4 million for the three and
six months ended June 30, 2001, respectively.
The Company had entered into two hedging programs for the year 2000. The first
program was a purchase of a put option and a sale of a call option covering
1,700 barrels of oil per day effective January 1, 2000, through December 31,
2000. The strike prices were $17.25 per barrel for the put option and $22.00 per
barrel for the call option. The second program was a purchase of a put option
and a sale of a call option covering 1,800 barrels of oil per day effective
January 1, 2000, through December 31, 2000. The strike prices were $18.50 per
barrel for the put option and $26.00 per barrel for the call option. Each
program provided for monthly settlements and was based on monthly average oil
prices. There were no premiums associated with either program. During the three
and six months ended June 30, 2000, the strike prices of the call options were
exceeded, resulting in a reduction of revenues of $1.5 million and $3.0 million,
respectively, from what would have been received had no hedging programs been in
place. Without the options the average price per barrel of oil for the three and
six months ended June 30, 2000, would have increased from $24.30 to $26.54 and
from $24.31 to $26.58, respectively.
The Company's operating profit increased $1.1 million and $3.6 million for the
three and six months ended June 30, 2001, respectively, from the same periods of
2000. The increase is primarily due to increased energy prices and increased
production.
Interest Expense
Interest expense for the three and six months ended June 30, 2001, decreased
$0.4 million and $0.8 million, respectively, from the 2000 levels. The decrease
was primarily a result of decreased average debt outstanding of $3.0 million and
$7.0 million for the three and six months ended June 30, 2001, respectively. The
primary reason for the decrease in average debt was due to an increase in cash
flow primarily as a result of increased revenues from higher commodity prices
and increased production. Lower interest rates also contributed to the decrease
in interest expense.
-12-
Provision for Income Taxes
The Company's effective tax rate for the three months ended June 30, 2001 and
2000 was 35% and 36%, respectively. For the six months ended June 30, 2001 and
2000 the effective tax rate was 35% and 36%, respectively.
RESULTS FROM DISCONTINUED OPERATIONS
The Company sold its interest in Genesis Energy, L.L.C. during the first quarter
of 2000 for $3.0 million. The proceeds from the sale were used to reduce debt.
There were no pre-tax earnings from discontinued operations during the first six
months of 2000.
LIQUIDITY AND CAPITAL RESOURCES
Cash provided by continuing operations, before working capital changes, for the
six months ended June 30, 2001, was $18.7 million. This compares to $14.8
million for the same period during 2000. The Company's debt decreased by $1.0
million during the first six months of 2001 while there was a $14.0 million
decrease during the first six months of 2000. Capital expenditures for the six
months ended June 30, 2001, were $18.2 million compared to $6.6 million for the
2000 period.
The Company's total debt, all long-term, at June 30, 2001, was $66.0 million. At
June 30, 2001, the Company's borrowing base under the terms of its Credit
Facility was $100.0 million.
During the first six months of 2001, the Company paid common dividends of $0.5
million and preferred dividends of $1.2 million.
Effective July 26, 2001, the Credit Facility was renegotiated to, among other
things, extend the termination date to July 26, 2004, and lower interest rates
25 basis points.
UNPROVEN PROPERTIES
The Company acquired significant oil and gas properties from Amoco Production
Company in 1997. A portion of the acquisition cost was allocated to an oil
property that is a potential CO2 flood candidate. In light of the unusually low
oil price environment for nearly two years following the acquisition, limited
evaluation work was done during that period. With the strong rebound of oil
prices, Company personnel and consultants are now studying the properties to
determine the feasibility of such a project. It is expected that over the next
six months management will decide whether to implement the CO2 flood project.
FORWARD-LOOKING STATEMENTS
Statements contained in this Report and other materials filed or to be filed by
the Company with the Securities and Exchange Commission (as well as information
included in oral or other written statements made or to be made by the Company
or its representatives) that are forward-looking in nature are intended to be
"forward-looking statements" within the meaning of Section 27A of the Securities
Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934,
as amended, relating to matters such as anticipated operating and financial
performance, business prospects, developments and results of the Company. Actual
performance, prospects, developments and results may differ materially from any
or all anticipated results due to economic conditions and other risks,
uncertainties and circumstances partly or totally outside the control of the
Company, including rates of inflation, oil and natural gas prices, uncertainty
of reserve estimates, rates and timing of future production of oil and gas,
exploratory and development activities, acquisition risks, and changes in the
level and timing of future costs and expenses related to drilling and operating
activities.
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Words such as "anticipated", "expect", "estimate", "project", and similar
expressions are intended to identify forward-looking statements.
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PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
10.1 First Amendment to the December 1, 1998, Amended and Restated
Credit Agreement.
(b) Reports on Form 8-K
A report on Form 8-K was filed on January 30, 2001, announcing that
the Board of Directors of Howell Corporation authorized a 10% common
stock dividend.
A report on Form 8-K was filed on February 28, 2001, announcing that
it traded producing oil and gas properties in a tax-free, like-kind
exchange.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Howell Corporation
(Registrant)
Date: July 31, 2001 /s/ Allyn R. Skelton, II
-------------------------
Allyn R. Skelton, II
Vice President & Chief Financial Officer
(Principal Financial and Accounting Officer)
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