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, 1999
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 October 31, 1999
- ----------------------------- -------------------------------
Common Stock, $1.00 par value 5,471,782
This report contains 14 pages
HOWELL CORPORATION AND SUBSIDIARIES
Form 10-Q
INDEX
Page No.
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Part I. Financial Information
Item 1. Condensed Consolidated Statements of Operations --
Three and nine months ended September 30, 1999 and 1998
(unaudited)................................................. 3
Condensed Consolidated Balance Sheets -- September 30, 1999
(unaudited)and December 31, 1998............................ 4
Condensed Consolidated Statements of Cash Flows -- Nine
months ended September 30, 1999 and 1998 (unaudited)........ 5
Notes to Condensed Consolidated Financial Statements
(unaudited)................................................. 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................... 10
Part II.Other Information
Item 6. Exhibits and Reports on Form 8-K.............................. 14
PART I. FINANCIAL INFORMATION
(ITEM 1)
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
Howell Corporation and Subsidiaries
Three Months Ended Nine Months Ended
September 30, September 30,
1999 1998 1999 1998
(In thousands, except
per share amounts)
Revenues ................................ $ 13,368 $ 12,525 $ 33,428 $ 39,059
-------- -------- -------- --------
Cost and expenses:
Lease operating expenses .............. 6,019 6,386 16,834 20,437
Depreciation, depletion, and
amortization ......................... 1,367 2,842 4,926 8,908
Ceiling test write-down ............... -- -- -- 66,118
General and administrative
expenses ............................. 828 91 3,360 3,212
-------- -------- -------- --------
8,214 9,319 25,120 98,675
-------- -------- -------- --------
Other income (expense):
Interest expense ...................... (1,642) (2,772) (5,640) (8,206)
Interest income ....................... 24 22 84 69
Net earnings of Genesis ............... (60) 227 (180) 451
Other-net ............................. 31 (78) (49) (235)
-------- -------- -------- --------
(1,647) (2,601) (5,785) (7,921)
-------- -------- -------- --------
Earnings (loss) before income
taxes ................................. 3,507 605 2,523 (67,537)
Income tax provision (benefit) .......... 1,209 (60) 903 (23,180)
-------- -------- -------- --------
Net earnings (loss) from
continuing operations ................. 2,298 665 1,620 (44,357)
-------- -------- -------- --------
Discontinued operations:
Net (loss) earnings from Howell
Hydrocarbons (less applicable
income taxes of $65, $235,
$753, and $220, respectively) ....... (53) 455 1,283 396
-------- -------- -------- --------
Net earnings (loss) ..................... 2,245 1,120 2,903 (43,961)
Less: Preferred stock dividends ....... (604) (604) (1,811) (1,811)
-------- -------- -------- --------
Net earnings (loss) applicable to
common shares ........................ $ 1,641 $ 516 $ 1,092 $(45,772)
======== ======== ======== ========
Basic earnings (loss) per common share:
Continuing operations ................. $ 0.31 $ 0.01 $ (0.03) $ (8.44)
Discontinued operations ............... (0.01) 0.08 0.23 0.07
-------- -------- -------- --------
Net earnings (loss) per common
share (basic) ....................... $ 0.30 $ 0.09 $ 0.20 $ (8.37)
======== ======== ======== ========
Weighted average shares
outstanding (basic) .................. 5,472 5,472 5,472 5,469
======== ======== ======== ========
Diluted earnings (loss) per common share:
Continuing operations ................. $ 0.30 $ 0.01 $ (0.03) $ (8.44)
Discontinued operations ............... (0.01) 0.08 0.23 0.07
-------- -------- -------- --------
Net earnings (loss) per common
share (diluted) ...................... $ 0.29 $ 0.09 $ 0.20 $ (8.37)
======== ======== ======== ========
Weighted average shares
outstanding (diluted) ................ 7,665 5,472 5,528 5,469
======== ======== ======== ========
Cash dividends per common share.......... $ 0.04 $ 0.04 $ 0.12 $ 0.12
======== ======== ======== ========
See accompanying Notes to Consolidated Financial Statements.
CONDENSED CONSOLIDATED BALANCE SHEETS
Howell Corporation and Subsidiaries
September 30, December 31,
1999 1998
(Unaudited)
(In thousands, except share data)
Assets
Current assets:
Cash and cash equivalents .......................... $ 502 $ 5,871
Trade accounts receivable, less allowance for
doubtful accounts of $161 and $156 in 1999 and
1998, respectively .............................. 9,558 9,230
Income tax receivable .............................. -- 5,701
Deferred income taxes .............................. 2,365 3,408
Other current assets ............................... 288 577
--------- ---------
Total current assets ............................. 12,713 24,787
--------- ---------
Property, plant and equipment:
Oil and gas properties, utilizing the
full-cost method of accounting .................. 360,376 385,048
Unproven properties ................................ 38,554 43,263
Other .............................................. 2,731 2,653
Less accumulated depreciation, depletion
and amortization ................................ (311,473) (309,330)
--------- ---------
Net property and equipment ....................... 90,188 121,634
--------- ---------
Investment in Genesis ................................ 16,606 16,908
Other assets ......................................... 2,743 2,962
========= =========
Total assets ..................................... $ 122,250 $ 166,291
========= =========
Liabilities and Shareholders' Equity
Current liabilities:
Current portion of long-term debt .................. $ -- $ 22,000
Accounts payable ................................... 9,774 8,639
Accrued liabilities ................................ 3,596 5,520
--------- ---------
Total current liabilities ........................ 13,370 36,159
--------- ---------
Other liabilities .................................... 573 1,261
--------- ---------
Long-term debt ....................................... 81,000 102,000
--------- ---------
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; 5,471,782
shares issued and outstanding in 1999
and 1998 ......................................... 5,472 5,472
Additional paid-in capital ......................... 40,829 40,829
Retained deficit ................................... (19,684) (20,120)
--------- ---------
Total shareholders' equity ....................... 27,307 26,871
========= =========
Total liabilities and shareholders'equity $ 122,250 $ 166,291
========= =========
See accompanying Notes to Consolidated Financial Statements.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
Howell Corporation and Subsidiaries
Nine Months Ended September 30,
1999 1998
(In thousands)
OPERATING ACTIVITIES:
Net earnings (loss) from continuing operations .. $ 1,620 $(44,357)
Adjustments for non-cash items:
Depreciation, depletion and amortization ...... 4,926 75,026
Deferred income taxes ......................... 381 (21,403)
Equity in earnings of Genesis - net of
amortization ............................... 180 (451)
Distributions received from Genesis ........... 122 119
Gain on sale of assets ..................... -- (2)
-------- --------
Earnings from continuing operations plus
non-cash operating items ..................... 7,229 8,932
Changes in components of working capital from
operations:
Increase in trade accounts receivable ......... (338) (6,515)
Decrease in federal income tax receivables .... 5,701 --
Decrease in other current assets .............. 289 660
Increase in accounts payable .................. 1,005 4,874
(Decrease) increase in accrued and other
liabilities ................................ (2,576) 918
Increase in income tax payable ................ 38 145
-------- --------
Cash provided by continuing operations .......... 11,348 9,014
Cash provided by discontinued operations ........ 2,011 5
-------- --------
Cash provided by operating activities ........... 13,359 9,019
-------- --------
INVESTING ACTIVITIES:
Proceeds from the disposition of oil and gas
properties ................................. 28,653 39
Additions to property, plant and equipment ...... (2,134) (18,667)
Refund of deposit for Amoco Beaver Creek
acquisition .................................. -- 12,369
Other, net ...................................... 220 (679)
-------- --------
Cash provided by (utilized in) investing
activities ................................... 26,739 (6,938)
-------- --------
FINANCING ACTIVITIES:
(Repayments) borrowings under credit agreements,
net ........................................ (43,000) 500
Cash dividends:
Common shareholders ........................ (656) (659)
Preferred shareholders ..................... (1,811) (1,811)
Exercise of stock options ....................... -- 65
-------- --------
Cash utilized in financing activities ........... (45,467) (1,905)
-------- --------
NET (DECREASE) INCREASE IN CASH AND CASH
EQUIVALENTS .................................. (5,369) 176
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD .. 5,871 56
-------- --------
CASH AND CASH EQUIVALENTS, END OF PERIOD ........ $ 502 $ 232
======== ========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Net cash paid for:
Interest ........................................ $ 5,664 $ 6,976
======== ========
Income taxes .................................... $ 481 $ 66
======== ========
See accompanying Notes to Consolidated Financial Statements
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Howell Corporation and Subsidiaries
September 30, 1999 and 1998
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
nine months ended September 30, 1999 and 1998. The results of operations for the
three and nine months ended September 30, 1999 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 2 to the consolidated financial statements in
its Annual Report on Form 10-K for the year ended December 31, 1998. These
condensed 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 1998 financial presentation to
conform with the 1999 presentation.
Note 2 - New Accounting Standards
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities" ("SFAS 133"). SFAS 133 establishes accounting and
reporting standards for derivative instruments and hedging activities that
require an entity to recognize all derivatives as an asset or liability measured
at its fair value. Depending on the intended use of the derivative, changes in
its fair value will be reported in the period of change as either a component of
earnings or a component of other comprehensive income. SFAS 133 is effective for
all fiscal quarters of fiscal years beginning after June 15, 2000. Earlier
application of SFAS 133 is encouraged, but retroactive application to periods
prior to adoption is not allowed. The Company has not quantified the impact of
adoption on its financial statements or the date it intends to adopt.
Note 3 - Financial Instruments and Hedging Activities
In order to mitigate the effects of future price fluctuations, the Company from
time to time uses a limited program of hedging its crude oil production. 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. The Company is currently engaged in eight
and nine-month hedging programs, each ending December 31, 1999. The Company was
also engaged in a nine-month hedging program ending December 31, 1998.
The Company entered into two hedging programs during the second quarter of 1999.
The first program is a purchase of a put option and a sale of a call option
covering 1,750 barrels of oil per day effective April 1, 1999, through December
31, 1999. The strike prices are $15.00 per barrel for the put option and $17.00
per barrel for the call option. The second program is a purchase of a put option
and a sale of a call option also covering 1,750 barrels of oil per day effective
from May 1, 1999, through December 31, 1999. The strike prices are $14.50 per
barrel for the put option and $18.80 per barrel for the call option. There are
no premiums associated with either of these programs. The strike price of the
call options was exceeded during each month of the third quarter of 1999
resulting in a reduction of revenues of $1.2 million 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 nine months ended September 30, 1999
would have increased from $17.51 to $19.41 and from $13.54 to $14.19,
respectively.
In 1998, the Company purchased a put option and sold a call option covering
4,800 barrels of oil per day for a nine-month period ended December 31, 1998.
The strike prices were $16.00 per barrel for the put option and $19.25 per
barrel for the call option. There was no premium associated with these options.
During the three months ended September 30, 1998, the Company received $0.8
million as a result of the options. Without the options the average price per
barrel of oil for the three and nine months ended September 30, 1998, would have
been reduced from $10.92 to $9.95 and $11.53 to $10.98, respectively.
The Company has also entered into a hedge program for a portion of its oil
production in the year 2000. The Company purchased a put option and sold a call
option covering 1,700 barrels of oil per day effective January 1, 2000, through
December 31, 2000. The strike prices are $17.25 per barrel for the put option
and $22.00 per barrel for the call option. There are no premiums associated with
this hedge program.
Note 4 - Accumulated Depreciation, Depletion and Amortization
During the first quarter of 1998 a pre-tax write-down of the Company's oil and
gas properties of $66.1 million was required as a result of lower energy prices.
On an after-tax basis, the write-down amounted to $43.6 million. The Company's
depletion rate for the three and nine months ended September 30, 1999, was $1.67
and $1.90 per equivalent barrel, respectively, versus a pre write-down rate of
$2.64 and $2.74, respectively, for the same periods ended September 30, 1998.
Note 5 - Acquisitions & Dispositions
On January 4, 1999, the Company sold its right to participate in the future
earnings of Specified Fuels & Chemicals, Inc. ("SFC") for $2.0 million. SFC
acquired the Company's research and reference fuel business in July 1997. The
sale and results of the research and reference fuel business have been
classified as discontinued operations in the accompanying consolidated financial
statements. Discontinued Operations had a gain of $1.3 million for the nine
months ended September 30, 1999, primarily as a result of the sale.
On January 29, 1999, the Company sold its interest in the LaBarge field, located
in southwestern Wyoming, for $15.8 million. The effective date was January 1,
1999. The properties consisted of three Federal units, 17 producing wells, a
field gathering system, a dehydration plant, a 32-mile dehydrated raw gas
pipeline, and a gas processing plant. In addition to natural gas, the properties
produced carbon dioxide, helium and sulfur. The Company owned a 4.8% working
interest in the Fogarty Creek Unit which contained 12 gross wells (0.6 net
wells) which produced from depths between 14,500 to 17,000 feet.
On March 19, 1999, the Company sold its interests in the Grass Creek Unit in Hot
Springs County, Wyoming, and the Pitchfork Unit in Park County, Wyoming for
$12.6 million, net of closing adjustments. The Company owned a 25% working
interest at Pitchfork and various working interests ranging from 13.08% to
43.14% in different producing horizons at Grass Creek.
The properties sold during the first quarter of 1999 were not considered to be
integral to the Company's future. The cumulative proceeds from these events,
totaling $29.8 million, have been used to reduce debt.
Note 6 - Litigation
There are various lawsuits and claims against the Company, none of which, in the
opinion of management, will have a materially adverse effect on the Company.
Note 7 - Earnings (Loss) per Share
Basic earnings per common share amounts are calculated using the average number
of common shares outstanding during each period. Diluted earnings per share
assumes conversion of dilutive convertible preferred stocks and exercise of all
stock options having exercise prices less than the average market price of the
common stock using the treasury stock method.
The tables below present the reconciliation of the numerators and denominators
in calculating diluted earnings per share ("EPS") from continuing operations in
accordance with Statement of Financial Accounting Standards No. 128.
Three Months Ended September 30, 1999
Increase
in Earnings
Number per
Increase of Incremental
in Income Shares Share
------------ ---------- ----------
Options .................... -- 102,665
Dividends on convertible
preferred stock ......... $ 603,750 2,090,909 $0.29
Computation of Diluted Earnings per Share
Income
Available
from
Continuing Common
Operations Shares Per Share
------------ ---------- ----------
$ 1,694,250 5,471,782 $0.31
Common stock options.......... -- 102,665 --
------------ ---------- ----------
$ 1,694,250 5,574,447 $0.30 Dilutive
Dividends on convertible
preferred stock............ 603,750 2,090,909 --
============ ========== ==========
$ 2,298,000 7,665,356 $0.30 Dilutive
============ ========== ==========
Three Months Ended September 30, 1998
Increase
in Earnings
Number per
Increase of Incremental
in Income Shares Share
------------ ---------- ----------
Options.................. -- 543
Dividends on convertible
preferred stock....... $ 603,750 2,090,909 $0.29
Computation of Diluted Earnings per Share
Income
Available
from
Continuing Common
Operations Shares Per Share
------------ ---------- ----------
$ 61,250 5,471,782 $0.01
Common stock options..... -- 543 --
------------ ---------- ----------
$ 61,250 5,472,325 $0.01 Dilutive
Dividends on convertible
preferred stock....... 603,750 2,090,909 --
============ ========== ==========
$ 665,000 7,563,234 $0.09 Antidilutive
============ ========== ==========
Note: Because diluted EPS from continuing operations increases from $0.01 to
$0.09 when convertible preferred shares are included in the computation, those
convertible preferred shares are antidilutive and are ignored in the computation
of diluted EPS for continuing operations. Therefore, diluted EPS from continuing
operations is reported as $.01.
Nine months Ended September 30, 1999
Increase
in Earnings
Number per
Increase of Incremental
in Income Shares Share
------------ ---------- ----------
Options.................. -- 56,593 --
Dividends on convertible
preferred stock....... $ 1,811,250 2,090,909 $ 0.87
Computation of Diluted Earnings per Share
Income
Available
from
Continuing Common
Operations Shares Per Share
------------ ---------- ----------
$ (191,250) 5,471,782 $(0.03)
Common stock options..... -- 56,593 --
------------ ---------- ----------
$ (191,250) 5,528,375 $(0.03) Antidilutive
Dividends on convertible
preferred stock....... 1,811,250 2,090,909 --
============ ========== ==========
$ 1,620,000 7,619,284 $ 0.21 Antidilutive
============ ========== ==========
Note: Because diluted EPS from continuing operations increases from $(0.03) to
$0.21 when common stock options and convertible preferred shares are included in
the computation, those common stock options and convertible preferred shares are
antidilutive and are ignored in the computation of diluted EPS for continuing
operations. Therefore, diluted EPS from continuing operations is reported as
$(0.03).
Nine months Ended September 30, 1998
Increase
in Earnings
Number per
Increase of Incremental
in Income Shares Share
------------ ---------- ----------
Options.................. -- 56,608 --
Dividends on convertible
preferred stock....... $ 1,811,250 2,090,909 $ 0.87
Computation of Diluted Earnings per Share
Net Loss
Available
from
Continuing Common
Operations Shares Per Share
------------ ---------- ----------
$(46,168,250) 5,469,428 $(8.44)
Common stock options..... -- 56,608 --
------------ ---------- ----------
$(46,168,250) 5,526,036 $(8.35) Antidilutive
Dividends on convertible
preferred stock.......... 1,811,250 2,090,909 --
============ ========== ==========
$(44,357,000) 7,616,945 $(5.82) Antidilutive
============ ========== ==========
Note: Because diluted EPS from continuing operations increases from $(8.44) to
$(8.35) when common stock options are included in the computation and because
diluted EPS increases from $(8.35) to $(5.82) when convertible preferred shares
are included in the computation, both the common stock options and convertible
preferred shares are antidilutive and are ignored in the computation of diluted
EPS from continuing operations. Therefore, diluted EPS from continuing
operations is reported as $(8.44).
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 CONTINUING OPERATIONS
The Company's principal business segment is oil and gas production. Results of
continuing operations for the three and nine months ended September 30, 1999 and
1998, are discussed below.
Oil and Gas Production
Three Months Ended Nine Months Ended
September 30, September 30,
1999 1998 1999 1998
Revenues (in thousands):
Sales of oil and natural gas .... $ 13,341 $ 11,689 $ 32,991 $ 36,751
Sales of LaBarge other products . -- 468 180 1,250
Gas marketing ................... -- 198 83 683
Minerals leasing and other ...... 27 170 174 375
-------- -------- -------- --------
Total revenues ............. $ 13,368 $ 12,525 $ 33,428 $ 39,059
======== ======== ======== ========
Operating profit (loss) (in
thousands) .................. $ 5,154 $ 3,206 $ 8,308 $(59,616)
======== ======== ======== ========
Operating information:
Average net daily production:
Oil and NGL (Bbls) .......... 7,390 9,467 7,886 9,684
Natural gas (Mcf) ........... 7,482 12,626 8,439 12,571
Average sales prices:
Oil and NGL (per Bbl)(1)..... $ 17.33 $ 10.98 $ 13.35 $ 11.46
Natural gas (per Mcf) ....... $ 2.26 $ 1.83 $ 1.84 $ 1.88
(1) includes the effects of hedging
Revenues
Revenues for the three months ended September 30, 1999, increased $0.8 million
when compared to the three months ended September 30, 1998, primarily due to a
58% increase in the average oil and NGL price partially offset by a 22% decrease
in the average net daily production of oil and NGL and a 41% decrease in average
daily natural gas production. Contributing to the decrease in production was the
sale of the Grass Creek and Pitchfork units in March 1999, the sale of the
LaBarge project in January 1999, and sale of the mineral interest in December
1998.
For the nine months ended September 30, 1999, revenues decreased $5.6 million
from the same period in 1998. The change was primarily due to a decrease in
average net daily oil and NGL production and natural gas production of 19% and
33%, respectively, and a decrease in the sales of LaBarge other products of 86%.
The sale of the Grass Creek and Pitchfork units in March 1999, the sale of the
LaBarge project in January 1999, and sale of the mineral interest in December
1998, contributed to the decrease in production.
The Company entered into two hedging programs during the second quarter of 1999.
The first program is a purchase of a put option and a sale of a call option
covering 1,750 barrels of oil per day effective April 1, 1999, through December
31, 1999. The strike prices are $15.00 per barrel for the put option and $17.00
per barrel for the call option. The second program is a purchase of a put option
and a sale of a call option also covering 1,750 barrels of oil per day effective
from May 1, 1999, through December 31, 1999. The strike prices are $14.50 per
barrel for the put option and $18.80 per barrel for the call option. There are
no premiums associated with either of these programs. The strike price of the
call options was exceeded during each month of the third quarter of 1999
resulting in a reduction of revenues of $1.2 million 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 nine months ended September 30, 1999
would have increased from $17.51 to $19.41 and from $13.54 to $14.19,
respectively.
Operating Profit
The Company's operating profit increased $1.9 million when comparing the third
quarter of 1999 to the third quarter of 1998. The increase in operating profit
was due to a decrease in operating expenses and an increase in revenues.
Operating expenses decreased 12% during the third quarter of 1999 when compared
to the third quarter of 1998. The primary reason for the decrease was a $1.5
million decrease in depletion expense, and a decrease in total LaBarge expenses
of $0.8 million resulting from its sale in the first quarter of 1999. Also
contributing to the decrease was a reduction in gas marketing costs. Partially
offsetting the operating expense reductions was an increase in general and
administrative expenses and production taxes. General and administrative
expenses during the third quarter of 1998 were unusually low as a result of
additional transition expense adjustments associated with assuming operations of
the new Wyoming properties. Production taxes increased as a result of higher oil
prices during the current period.
For the nine-month period ending September 30, 1999, operating profits increased
$67.9 million when compared to the nine-month period ended September 30, 1998.
The increase is primarily due to a first quarter 1998 pre-tax non-cash
write-down of $66.1 million. Excluding the first quarter 1998 write-down,
operating profits increased $1.8 million when comparing the first nine months of
1999 to the same period of 1998. The effect of decreased operating expenses
during the first nine months of 1999 was partially offset by a corresponding
reduction of operating revenues during the same period.
For the nine months ending September 30, 1999, operating expenses decreased 23%
when compared to the pre write-down operating expenses during the same period of
1998. The primary reason for the decrease was a $4.0 million decrease in
depletion expense, a decrease in total LaBarge expenses of $2.0 million
resulting from its sale in the first quarter of 1999, a $0.8 million decrease in
lease operating expenses, and a $0.3 million decrease in production taxes. Also
contributing to the decrease in expenses was a reduction in gas marketing
expense.
Crude Oil Marketing
The Company has a direct and indirect equity interest in Genesis Crude Oil,
L.P., Genesis Energy, L.P., and Genesis Energy, L.L.C. (collectively referred to
hereinafter as "Genesis"). As a result of the Company's interest, the Company
recognized a net loss of $0.1 million and $0.2 million during the three and nine
months ended September 30, 1999, respectively. This represents a decrease in
earnings of $0.3 million and $0.6 million, respectively, from the three and nine
months ended September 30, 1998.
While market conditions have improved recently, a corresponding improvement has
not been seen in the overall operating and financial condition of Genesis.
Should there not be significant improvement in the fourth quarter operating
results or in the underlying operating fundamentals of Genesis, it may indicate
conditions and factors that are other than temporary which could result in an
impairment of the investment. Management is evaluating the realizable value of
the investment, but is not yet able to quantify the magnitude of such future
impairment charge, if any.
Interest Expense
Interest expense for the three and nine months ended September 30, 1999,
decreased $1.1 million and $2.6 million, respectively, from the 1998 levels as a
result of decreased debt of $56.5 million since September 30, 1998. The primary
reason for this decrease was the sale of various non-integral properties with
the proceeds used to reduce debt.
Provision for Income Taxes
The Company's effective tax rate for the nine months ended September 30, 1999
and 1998 was 36% and 34%, respectively.
RESULTS FROM DISCONTINUED OPERATIONS
Technical Fuels and Chemical Processing
On July 31, 1997, the Company completed the sale and disposition of Howell
Hydrocarbons & Chemicals, Inc. ("HHCI") to Specified Fuels & Chemicals, Inc.
("SFC") which represented substantially all of the assets of its research and
reference fuels and custom chemical manufacturing business.
The results of the technical fuels and chemical processing business have been
classified as discontinued operations in the accompanying consolidated financial
statements. On January 4, 1999, the Company sold its right to participate in the
future earnings of SFC for $2.0 million. Discontinued Operations had a gain of
$1.3 million for the nine months ended September 30, 1999, as a result of the
sale.
LIQUIDITY AND CAPITAL RESOURCES
Cash provided by continuing operations for the nine months ended September 30,
1999, was $11.3 million. This compares to $9.0 million of cash provided by
continuing operations during the same 1998 period. The Company's debt decreased
by $43.0 million during the first nine months of 1999 while the first nine
months of 1998 reflected a $0.5 million increase. Capital expenditures for the
nine months ended September 30, 1999, were $2.1 million compared to $18.7
million for the 1998 period. Management estimates that capital expenditures for
the balance of 1999 will approximate $4.0 to $6.0 million. To the extent that
cash flow from operations is inadequate to fund this level of expenditures, the
Company will use funds available under the terms of its Credit Facility.
As a result of sales of non-integral properties, the Company's total debt, all
long term, at September 30, 1999, was $81.0 million. At September 30, 1999, the
Company's borrowing base under the terms of its Credit Facility was $100.0
million.
During the first nine months of 1999, the Company paid common dividends of $0.7
million and preferred dividends of $1.8 million.
Year 2000 Date Conversion
The Company has implemented its plan that addresses the year 2000 ("Y2K")
conversion issue. The Company has evaluated all computer systems used in its
operations. This includes accounting and financial systems, field and production
systems, and other significant field or office devices that may not be Y2K
compliant. Further, the Company has made a determination of what remedial action
is necessary and has initiated its remedial plan. The Company has completed
corrective action on major office systems and completed corrective action of
field systems in the third quarter of 1999.
The Company has received assurances from its most important outside suppliers
and vendors that they will be able to provide goods and services without
disruption.
The present estimate of the cost of Y2K conversion and compliance is
approximately $420,000. It is not certain that this estimate is correct or that
Year 2000 compliance can be achieved. The Company does not expect a significant
disruption in its operations, but actual results could differ greatly from these
expectations. Some areas that could cause differences to occur are the
availability of personnel trained in this area, the ability to identify and
correct all relevant computer code and non-compliant embedded systems and the
degree of interdependence with third-party suppliers and purchasers. Other areas
outside the Company's control such as problems in the utility, banking, or
transportation systems could have a material disruptive effect on the Company's
ability to produce and deliver oil and gas, receive delivery of materials and
supplies, or disburse or receive funds.
The Company intends to prepare a Y2K contingency plan which will address
potential risks in the field, and possible solutions, including manual
intervention or equipment replacement. The Company is unable to anticipate every
potential problem and determine a contingency for every possible Y2K risk.
Should essential services such as electricity be affected adversely, or if other
Y2K problems limit or restrict production from one of the Company's major
fields, it could have a material adverse affect on the Company.
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, changes in the level
and timing of future costs and expenses related to drilling and operating
activities, and the operating and financial performance of Genesis.
Words such as "anticipated", "expect", "estimate", "project", and similar
expressions are intended to identify forward-looking statements.
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits - none.
(b) Reports on Form 8-K
A report on Form 8-K/A was filed on April 1, 1999, announcing the
retirement of its term loan and the completed sale of its Grass Creek
and Pitchfork Units.
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 9, 1999 /s/ Allyn R. Skelton, II
-------------------------
Allyn R. Skelton, II
Vice President & Chief Financial Officer
(Principal Financial and Accounting Officer)