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 September 30, 2002
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 November 6, 2002
- ----------------------------- -------------------------------
Common Stock, $1.00 par value 6,765,028
This report contains 17 pages
HOWELL CORPORATION AND SUBSIDIARIES
Form 10-Q
INDEX
Page No.
--------
Part I. Financial Information
Item 1. Consolidated Statements of Operations --
Three and nine months ended September 30, 2002 and
2001 (unaudited)........................................... 3
Consolidated Balance Sheets --
September 30, 2002 (unaudited) and December 31, 2001....... 4
Consolidated Statements of Cash Flows --
Nine months ended September 30, 2002 and 2001 (unaudited).. 5
Notes to Consolidated Financial Statements (unaudited)....... 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations.................................. 10
Item 3. Quantitative and Qualitative Disclosures About Market Risk... 14
Item 4. Controls and Procedures...................................... 14
Part II.Other Information
Item 6. Exhibits and Reports on Form 8-K............................. 15
-2-
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements and Notes Thereto
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
Howell Corporation and Subsidiaries
Three Months Ended Nine Months Ended
September 30, September 30,
2002 2001 2002 2001
---- ---- ---- ----
(In thousands, except per share amounts)
Revenues......................... $26,385 $21,547 $68,575 $67,357
-------- -------- -------- --------
Cost and expenses:
Lease operating expenses....... 10,179 9,060 28,722 27,269
Depreciation, depletion, and
amortization................. 2,926 2,408 8,819 6,651
General and administrative
expenses..................... 2,879 2,046 6,486 4,354
-------- -------- -------- --------
15,984 13,514 44,027 38,274
-------- -------- -------- --------
Other income (expense):
Interest expense............... (707) (976) (2,277) (3,357)
Interest income................ 5 19 25 62
Other-net...................... 1 (37) 2 213
-------- -------- -------- --------
(701) (994) (2,250) (3,082)
-------- -------- -------- --------
Earnings before income taxes.... 9,700 7,039 22,298 26,001
Income tax provision............. 3,395 2,323 7,804 8,960
-------- -------- -------- --------
Net earnings .................... 6,305 4,716 14,494 17,041
Less: Preferred stock dividends (604) (604) (1,812) (1,812)
-------- -------- -------- --------
Net earnings applicable to common
shares........................... $ 5,701 $ 4,112 $12,682 $15,229
======== ======== ======== ========
Net earnings per common share -
basic............................ $ 0.88 $ 0.63 $ 1.94 $ 2.31
======== ======== ======== ========
Weighted average shares
outstanding - basic.............. 6,499 6,561 6,521 6,586
======== ======== ======== ========
Net earnings per common share -
diluted.......................... $ 0.67 $ 0.50 $ 1.55 $ 1.80
======== ======== ======== ========
Weighted average shares
outstanding - diluted............ 9,398 9,427 9,371 9,490
======== ======== ======== ========
Cash dividends per common share.. $ 0.04 $ 0.04 $ 0.12 $ 0.12
======== ======== ======== ========
See accompanying Notes to Consolidated Financial Statements.
-3-
CONSOLIDATED BALANCE SHEETS
Howell Corporation and Subsidiaries
September 30, December 31,
2002 2001
---- ----
(Unaudited)
(In thousands, except share data)
Assets
Current assets:
Cash and cash equivalents...................... $ 8,284 $ 7,442
Trade accounts receivable, less allowance
for doubtful accounts of
$187 in 2002 and 2001........................ 10,264 6,868
Income tax receivable.......................... 816 1,037
Deferred income taxes.......................... 59 59
Other current assets........................... 1,327 1,296
--------- ---------
Total current assets......................... 20,750 16,702
--------- ---------
Property, plant and equipment:
Oil and gas properties, utilizing the
full-cost method of accounting............... 373,807 368,030
Unproven properties............................ 19,123 19,123
Other.......................................... 4,742 4,688
Less accumulated depreciation, depletion
and amortization............................. (251,061) (244,454)
--------- ---------
Net property, plant and equipment............ 146,611 147,387
--------- ---------
Other assets..................................... 136 687
--------- ---------
Total assets................................. $167,497 $164,776
========= =========
Liabilities and Shareholders' Equity
Current liabilities:
Accounts payable............................... $ 10,733 $ 10,284
Accrued liabilities - oil and gas
properties................................... 2,482 2,380
Accrued liabilities - other.................... 3,885 2,766
Income tax payable............................. 511 74
--------- ---------
Total current liabilities.................... 17,611 15,504
--------- ---------
Deferred income taxes............................ 9,208 5,628
--------- ---------
Other liabilities................................ 4,308 2,728
--------- ---------
Long-term debt................................... 71,000 87,000
--------- ---------
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; 6,735,620
shares issued in 2002; 6,098,652 shares
issued and outstanding in 2001............... 6,736 6,099
Additional paid-in capital..................... 53,366 46,729
Treasury stock (11,900 shares) at cost......... (132) -
Unearned compensation.......................... (1,273) (828)
Retained earnings.............................. 5,983 1,226
--------- ---------
Total shareholders' equity................... 65,370 53,916
--------- ---------
Total liabilities and shareholders' equity... $167,497 $164,776
========= =========
See accompanying Notes to Consolidated Financial Statements.
-4-
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
Howell Corporation and Subsidiaries
Nine Months Ended September 30,
2002 2001
---- ----
(In thousands)
OPERATING ACTIVITIES:
Net earnings from operations....................... $ 14,494 $ 17,041
Adjustments for non-cash items:
Depreciation, depletion and amortization......... 8,819 6,651
Deferred income taxes............................ 3,580 3,694
Other............................................ 379 225
--------- ---------
Earnings from operations plus non-cash operating
items......................................... 27,272 27,611
Changes in components of working capital:
Decrease (increase) in trade accounts
receivable.................................... (3,396) 3,189
Decrease (increase) in income tax receivable..... 221 (506)
Increase in other current assets................. (31) (1,604)
Increase (decrease) in accounts payable.......... 457 (1,762)
Increase in accrued and other liabilities........ 2,793 3,974
Increase in income tax payable................... 437 909
--------- ---------
Cash provided by operating activities.............. 27,753 31,811
--------- ---------
INVESTING ACTIVITIES:
Proceeds from the disposition of property.......... 123 667
Additions to property, plant and equipment......... (8,166) (22,478)
Other, net......................................... 551 (157)
--------- ---------
Cash utilized in investing activities.............. (7,492) (21,968)
--------- ---------
FINANCING ACTIVITIES:
Repayments under revolving credit agreement, net... (16,000) (1,000)
Cash dividends:
Common shareholders........................... (784) (712)
Preferred shareholders........................ (1,811) (1,811)
Stock options exercised............................ 176 167
Stock purchased and reissued as restricted shares.. (868) (1,060)
Stock purchased for treasury....................... (132) -
--------- ---------
Cash utilized in financing activities.............. (19,419) (4,416)
--------- ---------
NET INCREASE IN CASH AND CASH EQUIVALENTS.......... 842 5,427
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD..... 7,442 5,553
--------- ---------
CASH AND CASH EQUIVALENTS, END OF PERIOD........... $ 8,284 $ 10,980
========= =========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid for:
Interest........................................... $ 2,206 $ 3,436
========= =========
Income taxes....................................... $ 3,561 $ 4,868
========= =========
See accompanying Notes to Consolidated Financial Statements.
-5-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Howell Corporation and Subsidiaries
September 30, 2002 and 2001
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 United States of America. 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 nine months ended September 30, 2002
and 2001. The results of operations for the three and nine months ended
September 30, 2002 and 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, 2001. 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.
Note 2 - 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.
There were no hedging tools in place during the first nine months of 2002.
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 September 30, 2001, was $0.5
million.
During the fourth quarter of 2000, the Company purchased a put option
covering 7,500 MMBTU of natural gas 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 September 30, 2001, was $0.9
million.
The Company recognizes changes in the market value of the derivative
instruments in earnings for the respective period.
Note 3 - Accumulated Depreciation, Depletion and Amortization
The Company's depletion rate for the three months ended September 30, 2002
and 2001, was $2.58 per equivalent barrel for each period. The depletion
rate for the nine months ended September 30, 2002 and 2001, was $2.67 and
$2.46 per equivalent barrel, respectively.
Note 4 - Merger Agreement
On September 29, 2002, the Company entered into an agreement to be acquired
by Houston-based Anadarko Petroleum Corporation ("Anadarko") in a cash merger
in which the Company's common stockholders are to receive $20.75 per share
and holders of the Company's $3.50 Convertible Preferred Stock, Series A are
to receive $76.15 per share. The boards of directors of Howell and Anadarko
have unanimously approved the acquisition, which is expected to close in late
2002, subject to customary conditions, including approval by holders of a
majority of Howell common stock. Certain Howell directors, officers and
founding-family members, representing about 41% of common shares outstanding
have agreed to vote their shares in favor of the transaction with Anadarko.
-6-
Note 5 - Acquisitions and Dispositions
On November 20, 2001, the Company purchased an additional interest in the Elk
Basin Field for $26.0 million. The purchase gave the Company approximately
64% of the working interest in the field. The following pro forma
information assumes that the effective date of the acquisition was January 1,
2001. Adjustments have been made to reflect changes in the Company's results
from revenues and direct operating expenses of producing properties acquired,
additional interest expense to reflect the acquisition, and depreciation,
depletion and amortization based on fair values assigned to the assets
acquired. The unaudited pro forma financial data is not necessarily
indicative of financial results that would have occurred had the acquisition
occurred at the beginning of each period and should not be viewed as
indicative of operations in future periods.
Pro forma Unaudited
Three Months Ended Nine Months Ended
September 30, 2001
------------------
(In thousands, except per share amounts)
Revenues.................................. $25,502 $80,764
Net earnings from operations.............. $ 5,323 $19,561
Net earnings per common share - basic..... $ 0.72 $ 2.70
Net earnings per common share - diluted... $ 0.56 $ 2.06
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.
Note 6 - Litigation
There are various lawsuits and claims against the Company arising in the
ordinary course of business, none of which, in the opinion of management,
will have a material adverse effect on the Company.
Note 7 - Earnings per Share
Prior periods' earnings per share ("EPS") have been calculated after giving
retroactive effect to the 10% stock dividend declared and issued in the first
quarter of 2002.
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 having exercise
prices less than the average market price of the common stock, and assumes
the lapse of restrictions with respect to restricted stock, using the
treasury stock method.
-7-
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 September 30, 2002
Increase in Earnings
Number of per
Increase Common Incremental
in Income Shares Share
----------- ----------- -----------
Common stock options and
restricted stock................ - 366,479 -
Dividends on convertible
preferred stock................. $ 603,750 2,532,300 $0.24
Computation of Diluted Earnings per Share
Income Common Per
Available Shares Share
----------- ----------- -----------
$5,701,250 $6,499,210 $0.88
Common stock options and
restricted stock................ - 366,479 -
----------- ----------- -----------
5,701,250 6,865,689 0.83 Dilutive
Dividends on convertible
preferred stock................. 603,750 2,532,300 -
----------- ----------- -----------
$6,305,000 9,397,989 $0.67 Dilutive
=========== =========== ===========
Note: Because EPS decreases from $0.88 to $0.83 when common stock options
and restricted stock are included in the computation and because EPS
decreases from $0.83 to $0.67 when the 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 $0.67.
Three Months Ended September 30, 2001
Increase in Earnings
Number of per
Increase Common Incremental
in Income Shares Share
----------- ----------- -----------
Common stock options and
restricted stock................ - 333,429 -
Dividends on convertible
preferred stock................. $ 603,750 2,532,300 $0.24
Computation of Diluted Earnings per Share
Income Common Per
Available Shares Share
----------- ----------- -----------
$4,112,250 6,560,989 $0.63
Common stock options and
restricted stock................ - 333,429 -
----------- ----------- -----------
$4,112,250 6,894,418 0.60 Dilutive
Dividends on convertible
preferred stock................. 603,750 2,532,300 -
----------- ----------- -----------
$4,716,000 9,426,718 $0.50 Dilutive
=========== =========== ===========
Note: Because EPS decreases from $0.63 to $0.60 when common stock options
and restricted stock are included in the computation and because EPS
decreases from $0.60 to $0.50 when the 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 $0.50.
-8-
Nine Months Ended September 30, 2002
Increase in Earnings
Number of per
Increase Common Incremental
in Income Shares Share
------------ ----------- -----------
Common stock options and
restricted stock................ - 318,119 -
Dividends on convertible
preferred stock................. $1,811,250 2,532,300 $0.72
Computation of Diluted Earnings per Share
Income Common Per
Available Shares Share
------------ ----------- -----------
$12,682,750 6,520,791 $1.94
Common stock options and
restricted stock................ - 318,119 -
------------ ----------- -----------
12,682,750 6,838,910 1.85 Dilutive
Dividends on convertible
preferred stock................. 1,811,250 2,532,300 -
------------ ----------- -----------
$14,494,000 9,371,210 $1.55 Dilutive
============ =========== ===========
Note: Because EPS decreases from $1.94 to $1.85 when common stock options
and restricted stock are included in the computation and because EPS
decreases from $1.85 to $1.55 when the 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 $1.55.
Nine Months Ended September 30, 2001
Increase in Earnings
Number of per
Increase Common Incremental
in Income Shares Share
------------ ----------- -----------
Common stock options and
restricted stock................ - 372,438 -
Dividends on convertible
preferred stock................. $1,811,250 2,532,300 $0.72
Computation of Diluted Earnings per Share
Income Common Per
Available Shares Share
------------ ----------- -----------
$15,229,750 6,585,680 $2.31
Common stock options and
restricted stock................ - 372,438 -
------------ ----------- -----------
15,229,750 6,958,118 2.19 Dilutive
Dividends on convertible
preferred stock................. 1,811,250 2,532,300 -
------------ ----------- -----------
$17,041,000 9,490,418 $1.80 Dilutive
============ =========== ===========
Note: Because EPS decreases from $2.31 to $2.19 when common stock options
and restricted stock are included in the computation and because EPS
decreases from $2.19 to $1.80 when the 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 $1.80.
-9-
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 nine months ended September 30, 2002 and
2001, are discussed below.
Oil and Gas Production
Three Months Ended Nine Months Ended
September 30, September 30,
2002 2001 2002 2001
---- ---- ---- ----
(In thousands, except operating information)
Revenues:
Sales of oil and natural gas. $26,206 $20,634 $68,045 $65,429
Other........................ 179 913 530 1,928
------- ------- ------- -------
Total revenues.......... 26,385 21,547 68,575 67,357
Operating expenses........... 15,984 13,514 44,027 38,274
------- ------- ------- -------
Operating profit............. $10,401 $ 8,033 $24,548 $29,083
======= ======= ======= =======
Operating information:
Average net daily production:
Oil (Bbls)............... 9,655 8,299 9,639 8,062
NGL (Bbls)............... 697 276 653 342
Natural gas (Mcf)........ 10,342 7,985 9,269 7,718
Equivalent (Bbls)........ 12,076 9,906 11,837 9,690
Average sales prices:
Oil (Bbls)............... $ 26.45 $ 24.48 $ 23.03 $ 24.94
NGL (Bbls)............... $ 16.93 $ 15.82 $ 15.28 $ 22.09
Natural gas (per Mcf).... $ 1.71 $ 2.10 $ 1.87 $ 4.02
Revenues for the three months ended September 30, 2002, increased $4.8
million when compared to the three months ended September 30, 2001. The
increase was primarily due to a 16% increase in oil production, a 153%
increase in NGL production and a 30% increase in gas production. The
increase in revenue was partially offset by a 19% decrease in the average
natural gas price. The increase in production was primarily due to the
purchase of an additional interest in the Elk Basin field during 2001 and
successful development drilling in the Elk Basin field. The decrease in
other revenues was primarily due to $0.6 million of income as a result of the
commodity contracts during the third quarter of 2001. See Note 2 of Notes to
the Consolidated Financial Statements.
For the nine months ended September 30, 2002, revenues increased $1.2 million
from the same period in 2001. The change was primarily due to a 20% increase
in oil and gas production and a 91% increase in NGL production. The increase
was partially offset by a 53% decrease in average gas prices, an 8% decrease
in average oil prices, and a 31% decrease in average NGL prices. The
increase in production was primarily due to the purchase of additional
interests in the Elk Basin and Salt Creek fields during 2001. The decrease
in other revenues was primarily due to $1.1 million of income as a result of
the commodity contracts during 2001. Additionally, during 2002, there have
been no sales of purchased gas which amounted to $0.4 million in 2001. See
Note 2 of Notes to the Consolidated Financial Statements.
-10-
Operating expenses increased $2.5 million during the third quarter of 2002
when compared to the third quarter of 2001. An increase in general and
administrative expenses of $0.8 million, an increase in production taxes of
$0.6 million, an increase in other lease operating expenses of $0.6 million
and an increase of $0.5 million in depreciation, depletion and amortization
expense related to increased production were primarily responsible for the
increased expenses. These were primarily due to the additional interest
acquired in the Elk Basin field during 2001, a reduction in overhead credits
received and increased production. Also contributing to the increase were
$0.5 million of costs associated with the proposed merger.
For the nine months ended September 30, 2002, operating expenses increased
$5.8 million when compared to the same period in 2001. The primary reason for
the increase was a $2.2 million increase in depreciation, depletion and
amortization expense, a $2.1 million increase in general and administrative
expenses, and a $1.5 million increase in production taxes and other lease
operating expenses. These were primarily due to the additional interests
acquired in the Salt Creek and Elk Basin fields during 2001, resulting in
increased production, higher benefit costs and a reduction in overhead
credits received. The increase also reflected $0.5 million of costs
associated with the proposed merger.
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 September 30, 2001, was $0.5
million. The change in market value resulted in earnings of $0.1 million for
the three and nine months ended September 30, 2001.
During the fourth quarter of 2000, the Company purchased a put option
covering 7,500 MMBTU of natural gas 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 September 30, 2001, was $0.9
million. The change in market value resulted in earnings of $0.6 million and
$1.0 million for the three and nine months ended September 30, 2001,
respectively.
The Company's operating profit increased $2.4 million for the three months
ended September 30, 2002, when compared to the same period in 2001. The
increase was primarily due to higher production and higher oil prices
partially offset by increased operating costs resulting from the additional
interest acquired in the Elk Basin field during 2001.
The Company's operating profit decreased $4.5 million for the nine months
ended September 30, 2002, when compared to the nine months ended September
30, 2001. The decrease was primarily due to lower energy prices and
increased operating costs, partially offset by higher production, resulting
from the additional interests acquired in the Salt Creek and Elk Basin fields
during 2001.
Interest Expense
Interest expense for the three and nine months ended September 30, 2002,
decreased $0.3 million and $1.1 million, respectively, from the 2001 level.
The decrease was primarily the result of a decrease in average interest rates
of 1.8% and 3.0% for the three and nine months ended September 30, 2002,
respectively. An increase in average debt outstanding of $9.3 million and
$14.4 million for the three and nine months ended September 30, 2002,
respectively, as compared to the same periods of 2001, partially offset the
decrease in rates.
Provision for Income Taxes
The Company's effective tax rate for the three and nine months ended
September 30, 2002 and 2001 was 35%.
-11-
LIQUIDITY AND CAPITAL RESOURCES
Cash provided by operations, before working capital changes, for the nine
months ended September 30, 2002, was $27.3 million. This compares to $27.6
million for the same period during 2001. The Company's debt decreased by
$16.0 million during the first nine months of 2002 while there was a $1.0
million decrease during the first nine months of 2001. Capital expenditures
for the nine months ended September 30, 2002, were $8.2 million compared to
$22.5 million for the 2001 period.
The Company's total debt, all long-term, at September 30, 2002, was $71.0
million. At September 30, 2002, the Company's borrowing base under the terms
of its Credit Facility was $115.0 million. The banks have made commitments
totaling $100.0 million under the facility and the Company has the right to
borrow up to the lesser of the borrowing base or the total of those
commitments. The Company also has the right to seek increased commitments
from the banks that are party to the facility or to bring in additional banks.
During the first nine months of 2002, the Company paid common dividends of
$0.8 million and preferred dividends of $1.8 million. During this period the
Company also acquired 11,900 shares of its common stock.
On September 29, 2002, the Company entered into an agreement to be acquired
by Houston-based Anadarko in a cash merger in which the Company's common
stockholders are to receive $20.75 per share and holders of the Company's
$3.50 Convertible Preferred Stock, Series A are to receive $76.15 per share.
UNPROVEN PROPERTIES
The Company acquired significant oil and gas properties in 1997. One of
those properties, the Salt Creek Field, was identified as having significant
potential beyond its existing producing reserves through a CO2 tertiary
recovery. Accordingly, a portion of the acquisition cost was allocated to
this 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 improvement in oil
prices, Company personnel and consultants studied the Salt Creek property to
determine the feasibility of such a project. The study culminated in a
recommendation to the Board of Directors in 2001 to implement a pilot CO2
flood, estimated to cost $10.6 million, $8.2 million of which would be spent
in the first three years. The Board approved the capital expenditures
necessary to fund the pilot.
In order to commence the flood, a CO2 pipeline has to be extended into the
area. The Company had discussions and negotiations with parties who have the
experience and the capital resources necessary to build, fund and operate
such a line. These discussions ultimately resulted in our agreement to be
acquired by Anadarko. Should the proposed merger with Anadarko not occur,
funding for the pilot would be expected to come from internally generated cash
flow, but expenditures would not commence until a CO2 supply is assured.
While a successful pilot would be encouraging, additional pilots might be
necessary in order to prove the method effective across the field.
At September 30, 2002, $14.6 million attributable to the Salt Creek CO2 pilot
is included in unproven properties on the balance sheet. If the CO2 flood
project is abandoned or not successful, the associated costs will be
transferred to the full cost pool and would result in increasing depletion
expense in future periods. The Company has not recognized any proved
reserves attributable to the CO2 potential of the Salt Creek field.
-12-
FORWARD-LOOKING STATEMENTS
This Form 10-Q includes "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. All statements other than
statements of historical facts included in this Form 10-Q, including without
limitation the statements under "Business", "Properties" and "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
regarding the nature of the Company's oil and gas reserves, productive wells,
acreage, and drilling activities, the adequacy of the Company's financial
resources, current and future industry conditions and the potential effects
of such matters on the Company's business strategy, results of operations and
financial position, are forward-looking statements. Words such as
"anticipate", "expect", "project", and similar expressions are intended to
identify forward-looking statements. Although the Company believes that the
expectations reflected in the forward-looking statements contained herein are
reasonable, no assurance can be given that such expectations will prove to
have been correct. Certain important factors that could cause actual results
to differ materially from expectations ("Cautionary Statements"), include
without limitation, the failure of the requisite number of the Company's
common stockholders to approve the Company's acquisition by Anadarko,
fluctuations of the prices received for the Company's oil and natural gas,
uncertainty of drilling results and reserve estimates, competition from other
exploration, development and production companies, operating hazards,
abandonment costs, the effects of governmental regulation and the leveraged
nature of the Company, are stated herein in conjunction with the
forward-looking statements or are included elsewhere in this Form 10-Q. All
subsequent written and oral forward-looking statements attributable to the
Company or persons acting on its behalf are expressly qualified in their
entirety by the Cautionary Statements.
-13-
Item 3. Quantitative and Qualitative Disclosures About Market Risk
There have been no material changes in market risk from the information
provided in Item 7A of Form 10-K for the year ended December 31, 2001.
Item 4. Controls and Procedures
Within ninety days prior to the date of this report, our Chief Executive
Officer and Chief Financial Officer performed an evaluation of our disclosure
controls and procedures, which have been designed so that the information
required to be disclosed in the reports we file or submit under the
Securities Exchange Act of 1934, as amended, is recorded, processed,
summarized and reported within the time periods specified by the Commission.
Based on this evaluation, our Chief Executive Officer and Chief Financial
Officer concluded that our disclosure controls and procedures were
effective. We have made no significant changes in our internal controls or
in other factors that could significantly affect our internal controls since
the date of that evaluation.
-14-
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
2.1 Agreement and Plan of Merger dated as of September 29, 2002, by
and among Howell Corporation, Anadarko Petroleum Corporation, and
Belair Merger Corp. whereby Anadarko Petroleum Corporation will
acquire Howell Corporation.
10.1 Severance Program for Executives
99.1 Certification of Chief Executive Officer Pursuant to 18 U.S.C.
Section 1350, as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
99.2 Certification or Chief Financial Officer Pursuant to 18 U.S.C.
Section 1350, as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
(b) Reports on Form 8-K
A report on Form 8-K was filed September 30, 2002 announcing the
proposed acquisition of Howell Corporation by Anadarko Petroleum
Corporation.
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: November 7, 2002 /s/ ALLYN R. SKELTON, II
-------------------------------------
Allyn R. Skelton, II
Vice President & Chief Financial Officer
(Principal Financial and Accounting Officer)
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CERTIFICATIONS
I, Richard K. Hebert, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Howell Corporation;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this quarterly report is being
prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the effectiveness
of the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls;
and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and material
weaknesses.
Date: November 7, 2002
/s/ RICHARD K. HEBERT
---------------------
Richard K. Hebert
Chief Executive Officer
-16-
I, Allyn R. Skelton, II, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Howell Corporation;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this quarterly report is being
prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the effectiveness
of the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls;
and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and material
weaknesses.
Date: November 7, 2002
/s/ ALLYN R. SKELTON, II
------------------------
Allyn R. Skelton, II
Vice President & Chief Financial
Officer
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