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 March 31, 1996
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 April 29, 1996
----------------------------- -----------------------------
Common Stock, $1.00 par value 4,935,796
This report contains 12 pages
HOWELL CORPORATION AND SUBSIDIARIES
Form 10-Q
INDEX
Page No.
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Part I. Financial Information
Item 1. Consolidated Statements of Earnings --
Three months ended March 31, 1996 and 1995 3
Consolidated Balance Sheets --
March 31, 1996 and December 31, 1995 4
Consolidated Statements of Cash Flows --
Three months ended March 31, 1996 and 1995 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 9
Part II. Other Information
Item 6. Exhibits and Reports on Form 8-K 11
PART I. FINANCIAL INFORMATION
(ITEM 1)
CONSOLIDATED STATEMENTS OF EARNINGS (UNAUDITED)
Howell Corporation and Subsidiaries
Quarter Ended March 31,
1996 1995
---- ----
(In thousands, except
per share amounts)
Revenues $166,257 $151,516
-------- --------
Cost and expenses:
Products including operating expenses 159,587 146,823
Selling, general and administrative expenses 2,901 2,856
-------- --------
162,488 149,679
-------- --------
Other income (expense):
Interest expense (1,946) (627)
Interest income 14 43
Other-net 4 (4)
-------- --------
(1,928) (588)
-------- --------
Earnings before income taxes 1,841 1,249
Provision for income taxes 646 417
-------- --------
Net earnings $ 1,195 $ 832
======== ========
Weighted average common shares outstanding 4,934 4,837
======== ========
Net earnings per common share $ .12 $ .05
======== ========
Cash dividends per common share $ .04 $ .04
======== ========
See accompanying Notes to Consolidated Financial Statements.
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
Howell Corporation and Subsidiaries
March 31, December 31,
1996 1995
---- ----
(In thousands)
Assets
Current assets:
Cash and cash equivalents $ 1,945 $ 3,742
Trade accounts receivable, less allowance for doubtful
accounts of $229,000 in 1996 and $239,000 in 1995 61,811 65,288
Inventories 5,321 5,428
Other current assets 1,406 1,712
-------- --------
Total current assets 70,483 76,170
-------- --------
Property, plant and equipment:
Oil and gas properties, utilizing the full-cost
method of accounting 261,050 278,505
Fee mineral properties, unproven 18,188 18,188
Other 128,412 107,735
Less accumulated depreciation, depletion and amortization (212,991) (209,087)
-------- --------
Net property and equipment 194,659 195,341
-------- --------
Other assets, net of accumulated amortization of $15,000 and
$51,000 in 1996 and 1995, respectively 1,995 1,815
-------- --------
Total assets $267,137 $273,326
======== ========
Liabilities and Shareholders' Equity
Current liabilities:
Current portion of long-term debt $8,271 $8,068
Accounts payable 56,519 61,771
Accrued liabilities 6,629 7,141
-------- --------
Total current liabilities 71,419 76,980
-------- --------
Deferred income taxes 21,593 20,971
-------- --------
Other liabilities 150 150
-------- --------
Long-term debt 94,553 96,205
-------- --------
Commitments and contingencies
Shareholders' equity:
Preferred stock, $1 par value; 690,000 shares issued and
outstanding in 1996 and 1995, liquidation value
of $34,500,000 690 690
Common stock, $1 par value; 4,934,121 issued and outstanding
in 1996; 4,933,446 issued and outstanding in 1995 4,934 4,933
Additional paid-in capital 34,396 34,390
Retained earnings 39,402 39,007
-------- --------
Total shareholders' equity 79,422 79,020
-------- --------
Total liabilities and shareholders' equity $267,137 $273,326
======== ========
See accompanying Notes to Consolidated Financial Statements.
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
Howell Corporation and Subsidiaries
Quarter Ended March 31,
1996 1995
---- ----
(In thousands)
OPERATING ACTIVITIES:
Net earnings $ 1,195 $ 832
Adjustments for noncash items:
Depreciation, depletion and amortization 4,134 3,342
Deferred income taxes 622 324
(Gain) loss on sales of assets (55) 1
Decrease (increase) in trade accounts receivable 3,477 (9,593)
Decrease (increase)in inventories 107 (409)
Decrease (increase) in other current assets 306 (85)
(Decrease) increase in accounts payable (5,252) 6,647
(Decrease) increase in accrued and other liabilities (512) 183
------- --------
Cash provided by operating activities 4,022 1,242
------- --------
INVESTING ACTIVITIES:
Proceeds from the disposition of property 453 3
Additions to property, plant and equipment (3,826) (73,356)
Other, net (204) (591)
------- --------
Cash utilized in investing activities (3,577) (73,944)
------- --------
FINANCING ACTIVITIES:
Long-term debt:
Borrowings under revolving credit agreement - 15,300
(Repayments) borrowing under term loan agreement (1,437) 57,500
Other repayments (12) (10)
Cash dividends:
Common shareholders (196) (193)
Preferred shareholders (604) (604)
Exercise of stock options 7 -
------- --------
Cash (utilized in) provided by financing activities (2,242) 71,993
------- --------
NET DECREASE IN CASH BALANCE $(1,797) $ (709)
======= ========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Net cash paid for:
Interest $ 2,031 $ 612
======= ========
Income taxes $ 9 $ 62
======= ========
See accompanying Notes to Consolidated Financial Statements
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Howell Corporation and Subsidiaries
March 31, 1996 and 1995
Note 1 - Basis of Financial Statement Preparation
The consolidated financial statements included herein have been prepared by
Howell Corporation (the Company) without audit, 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 months
ended March 31, 1996 and 1995. 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 - Adoption of New Accounting Standards
Impairment of Long-Lived Assets
In 1995, Statement of Financial Accounting Standards No. 121, "Impairment
of Long-Lived Assets" ("Statement 121") was issued. Statement 121 contains
provisions for recording impairment of long-lived assets that are not expected
to produce net cash flows in the future to fully recover the remaining cost of
the related assets. The Company adopted Statement 121 in the first quarter of
1996. The Company was not required to record impairment of any of its assets.
Stock-Based Compensation
In October 1995, Statement of Financial Accounting Standards No. 123,
"Stock-Based Compensation" ("Statement 123") was issued. Statement 123 permits,
but does not require, a fair value based method of accounting for employee stock
option plans which results in compensation expense being recognized in the
results of operations when stock options are granted. Statement 123 is
effective for the Company in the first quarter of 1996. The Company will
continue the use of its current intrinsic value based method of accounting for
such plans where no compensation expense is recognized. However, as required by
Statement 123, the Company will provide pro forma disclosure of net income and
earnings per share in the notes to the consolidated financial statements of its
1996 annual report as if the fair value based method of accounting had been
applied.
Note 3 - Inventories
The components of inventories at the balance sheet dates are as follows:
March 31, December 31,
1996 1995
---- ----
(In thousands)
Refined products $1,572 $1,494
Crude oil 2,803 2,140
Chemicals 850 1,695
Other materials and supplies 96 99
------ ------
$5,321 $5,428
====== ======
Note 4 - Financial Instruments and Hedging Activities
In order to mitigate the effects of future price fluctuations, the Company uses
a limited program of hedging its crude oil inventories. Crude oil futures and
options contracts are used as the hedging tools. Changes in the market value of
the futures transactions are deferred until the gain or loss is recognized on
the hedged transactions.
In 1995, the Company purchased a put option and sold a call option covering
3,300 barrels per day of oil production for an eighteen month period beginning
March 1, 1995. The option strike prices are based on the average price of crude
oil on the organized exchange, with monthly settlement. The strike prices are
$17 per barrel for the put option and $20 per barrel for the call option. The
premiums for the options are being amortized over the option period.
Note 5 - Earnings Per Share
Earnings per common share has been computed by dividing net earnings, after
reduction for preferred stock dividends, by the weighted average number of
common shares outstanding. Shares issuable in connection with stock options are
not included in the per share computations since their dilutive effect is less
than 3%. Earnings per share assuming full dilution does not result in a
difference from earnings per share assuming no dilution. The common shares
issuable upon conversion of the convertible preferred stock are anti-dilutive,
and the common shares issuable in connection with stock options result in a
dilutive effect of less than 3%.
Note 6 - Income Taxes
The effective tax rate for the first quarter of 1996 and 1995 was 35% and 33%,
respectively.
Note 7 - Litigation and Contingent Liabilities
Donna Refinery Partners, Ltd. v. Howell Crude Oil Company and Howell
Corporation; Texas District Court; No. 89-033634. In December 1993, a jury
verdict of $1.9 million was rendered against the Company in this lawsuit
alleging breach of contract. The trial judge reduced the jury verdict to
approximately $675,000. The Company believes the judgment is in error. The
Company filed a motion for a new trial that was denied, so the Company appealed
the decision. Donna has filed an appeal to increase the recovery by $1.25
million. Briefs have been filed and arguments heard, and a decision on the
appeal is pending. The Company does not believe that the ultimate resolution of
this matter will have a material adverse effect on the financial condition or
results of operations of the Company.
Mobile Mineral Corporation, et al, v. Howell Crude Oil Company, et al; Circuit
Court of Mobile County, Alabama; CV-95-1564. This lawsuit was filed as a class
action in May 1995 by one working interest owner and two royalty owners in the
North Frisco City Field alleging breach of contracts by not paying the
plaintiffs " . . . the highest available price for oil". Damages claimed by the
plaintiffs are approximately $3.8 million and are based on numerous damage
theories including, but not limited to, allegations of breach of contract and
fraud. The complaint also seeks punitive damages. The Company has filed an
answer denying all charges.
Related to this matter, the Company, on July 11, 1995, received a demand letter
from the working interest owners in the North Frisco City Field and in the North
Rome Field indicating the Company had not paid according to the terms of a "call
on production".
The Company was granted a call on a portion of this production but has never
exercised the call. Accordingly, the Company has filed a petition for a
declaratory judgment to that effect in Texas District Court. The defendants in
this action have counterclaimed against the Company. These claims are similar
in nature to the Alabama litigation. One of the defendants, John Faulkinberry,
has filed a counterclaim against the Company seeking actual damages of $75,000
and punitive damages of $100,000,000. The Company does not believe that the
ultimate resolution of these matters will have a material adverse effect on the
financial condition or results of operations of the Company.
There are various other lawsuits and claims against the Company, none of which,
in the opinion of management, will have a material adverse effect on the
Company.
In January 1995, an Agreed Order with the Texas Natural Resource Conservation
Commission was signed by the Company with respect to alleged violations of rules
regarding the permitting and storage of hazardous wastes at a facility that was
previously owned by the Company. Penalties totaling $26,000 were assessed and
paid by the Company. During 1995 and 1994, the Company incurred costs of
$28,000 and $213,000, respectively, related to remediation and disposal of the
hazardous wastes. Additional testing and monitoring of the groundwater and
formal approval of the remediation work is still required. The Company has
completed the remediation work related to hazardous waste storage rule
violations. The new owner of the facility has accepted responsibility for the
first $100,000 of costs related to additional testing, monitoring and
remediation, if necessary, of the groundwater. Should the costs for these
activities exceed $100,000, the Company could be responsible for some portion of
the additional costs. The Company does not believe that this matter will have a
material adverse effect on the financial condition or results of operations of
the Company.
The Channelview facility is discharging wastewater pursuant to a state
wastewater discharge permit. Industries located in the state of Texas are
required to obtain wastewater discharge permits from the state and from the
Environmental Protection Agency ("EPA"). When the Company purchased the
Channelview facility in 1988, it requested and obtained a transfer of these
permits. In 1990, the Company applied for a renewal of both the federal and the
state wastewater permits. The state permit was reissued in 1992. During 1993,
the Company determined that the federal wastewater discharge permit may have
expired prior to the EPA's transfer of the permit to the Company. The EPA has
been contacted to resolve this issue, and the Company will be negotiating to
obtain a renewed permit. Penalties may potentially be imposed upon the Company
as a result of this matter; however, until this matter is resolved, the amount
of such penalties, if any, cannot be quantified. While penalties may be
material and the actions of regulatory bodies are not subject to accurate
prediction, based on information currently available to the Company and on the
circumstances present at its Channelview facility (including the existence of
the state permit, the Company's compliance with the more stringent state permit
and the ability, if required, to operate the Channelview facility utilizing
holding tanks and offsite third party treatment facilities in the absence of a
permit), the Company does not believe that this matter will have a material
adverse effect on the financial condition or results of operations of the
Company.
PART I. FINANCIAL INFORMATION
(ITEM 2)
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
The Company's principal business segments are oil and gas exploration and
production, crude oil marketing, technical fuels and chemical processing, and
transportation. Results of operations by segment for the three months ended
March 31, 1996 and 1995 are presented below and discussed in the following
sections. The "Other" segment includes primarily depreciation and amortization
of certain assets not directly related to those segments identified above.
Selling, general and administrative expenses incurred by each business segment
are included in the determination of the operating profit (loss) for that
business segment. General corporate expenses comprise the balance of selling,
general and administrative expenses.
Three Months Ended March 31,
1996 1995
---- ----
(In thousands)
Revenues
Oil and gas exploration and production $ 8,567 $ 7,546
Crude oil marketing 151,847 138,880
Technical fuels and chemical processing 8,468 7,697
Transportation 4,259 3,962
Intersegment Sales (6,884) (6,569)
-------- --------
$166,257 $151,516
======== ========
Earnings
Oil and gas exploration and production $ 1,950 $ 1,712
Crude oil marketing 2,428 513
Technical fuels and chemical processing 108 262
Transportation 165 336
Other (32) (65)
-------- --------
Operating profit 4,619 2,758
General corporate expense (850) (921)
Other income (expense) (1,928) (588)
-------- --------
Earnings before income taxes 1,841 1,249
Provision for income taxes 646 417
-------- --------
Net earnings $ 1,195 $ 832
======== ========
Oil & Gas Exploration and Production
Revenues of the oil and gas exploration and production segment for the three
months ended March 31, 1996 and 1995 were as follows:
Three Months Ended March 31,
1996 1995
---- ----
(In thousands)
Sales of oil and natural gas $6,935 $6,503
Sales of LaBarge other products 514 537
Gas marketing 967 419
Minerals leasing and other 151 87
------ ------
Total revenues $8,567 $7,546
====== ======
Production and sales price per unit data for the three months ended March 31,
1996 and 1995 were as follows:
Three Months Ended March 31,
1996 1995
---- ----
(In thousands)
Production:
Crude oil (bbls per day) 3,171 3,493
Natural gas (Mcf per day) 9,483 9,223
Natural gas liquids (bbls per day) 195 232
Sales prices:
Crude oil (per bbl) $17.16 $15.90
Natural gas (per Mcf) $ 2.02 $ 1.47
Natural gas liquids (per bbl) $11.71 $ 9.84
Revenues from the sales of crude oil and natural gas increased due primarily to
8% and 37% increases in the average sales prices of the Company's crude oil and
natural gas production, respectively. The effect of these increases was
partially mitigated by a decrease in the volume of the Company's crude oil
production. Approximately 125 barrels per day of the reduced crude oil
production for the quarter is attributable to an operational problem at the
Company's North Frisco City Field that forced the shut-in of part of the field
for twelve days.
The Company's average sales price of its crude oil production was reduced by the
effects of the put and call options the Company had in place. The strike price
of the call option was exceeded for one month of the quarterly period, resulting
in a reduction of revenues of $0.2 million when combined with the amortization
of the option premiums. Without the effects of the options, the average sales
price of the Company's crude oil production would have been $17.96 for the first
quarter of 1996. See Note 4 of Notes to Consolidated Financial Statements.
Operating profit of the oil and gas exploration and production segment in the
first quarter of 1996 was $2.0 million, an increase of $0.2 million from the
first quarter of 1995. This improvement can be attributed primarily to the
improved revenues discussed above. Increases in lease operating costs per
barrel from $4.40 in the 1995 quarter to $5.49 in the 1996 quarter and
depreciation, depletion and amortization per barrel from $5.25 in the 1995
period to $5.36 in the 1996 period reduced the effect of the increased revenues
on operating profits.
Crude Oil Marketing
Operating profit of the crude oil marketing segment increased $1.9 million when
compared to the prior year period. This increase in profit can be attributed
primarily to the operating profits generated from the pipeline operations. On
March 31, 1995, the Company acquired from Exxon Pipeline Company ("Exxon") two
interstate crude oil pipeline systems and one intrastate crude oil pipeline
system. The interstate pipeline systems are located in Florida/Alabama and
Mississippi/Louisiana. The intrastate system is located in Texas. During the
first quarter of 1996, an average of 81,419 barrels per day were transported by
the pipelines, generating revenues of $4.1 million.
Also contributing to the increased revenues was an increase in crude oil market
prices. This increase was partially offset by a small decline in marketing
volumes.
Technical Fuels and Chemical Processing
The technical fuels and chemical processing segment reported an operating profit
of $0.1 million for the first quarter of 1996, a reduction of $0.2 million from
the 1995 quarter. A decrease in tolling activities in the 1996 quarter from the
1995 period was primarily responsible for the decline in operating profit.
Transportation
Operating profit of the transportation segment decreased $0.2 million when
compared to the 1995 quarter. The decrease resulted from a decline in
utilization of equipment in the first quarter of 1996, without a corresponding
decline in fixed costs.
Other Income (Expense)
Interest expense increased $1.3 million in the first quarter of 1996 when
compared to the first quarter of 1995. The majority of this increase is
attributable to the purchase of the pipelines from Exxon on March 31, 1995,
primarily with the proceeds of a term-loan from a group of banks. See Note 6 of
the consolidated financial statements contained in the Company's 1995 Annual
Report on Form 10-K.
Provision for Income Taxes
The effective tax rate was 35% and 33% in the first quarter of 1996 and 1995,
respectively.
LIQUIDITY AND CAPITAL RESOURCES
The Company generated cash from operating activities in the first quarter of
1996 of $4.0 million. During this quarter, the Company utilized the cash flow
generated from operations and $1.8 million of the cash on hand at December 31,
1995 to invest $3.8 million in additions to property, plant and equipment, to
pay $0.8 million of cash dividends to common and preferred shareholders and to
reduce debt by $1.4 million.
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.
(a)Exhibits
10.1 First Amendment to Credit Agreement between Howell Crude Oil Company
and Bank One, Texas, National Association, as Agent and Lender.
11 Computation of Earnings per Share
(b)Reports on Form 8-K
None
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: May 6, 1996 /s/ Allyn R. Skelton, II
------------------------
Allyn R. Skelton, II
Senior Vice President & Chief Financial Officer
(Principal Financial and Accounting Officer)