SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-QSB
[X] QUARTERLY REPORT UNDER SECTION 13 or 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1998
OR
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _________________ to ____________________
Commission file number: 0-8043
SOUTHERN MINERAL CORPORATION
(Exact Name of Small Business Issuer as Specified In Its Charter)
Nevada 36-2068676
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
1201 Louisiana, Suite 3350 77002-5686
Houston, Texas (Zip Code)
(Address of Principal Executive Offices)
Issuer's Telephone Number, Including Area Code: (713) 658-9444
Check whether the issuer: (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 such shorter period that the issuer was required to file such
reports) and (2) has been subject to such filing requirements for the past 90
days.
Yes [X] No [ ]
State the number of shares outstanding of each of the issuer's classes of
common equity, as of the latest practical date: As of August 14, 1998, there
were 12,873,698 shares of the Issuer's common stock outstanding.
Transitional Small Business Disclosure Format (check one):
Yes [ ] No [X]
SOUTHERN MINERAL CORPORATION
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
CONSOLIDATED FINANCIAL STATEMENTS:
Condensed Consolidated Balance Sheets as of
June 30, 1998 and December 31,1997 ........................ 3
Condensed Consolidated Statements of Operations for the
three and six months ended June 30, 1998 and 1997 ......... 4
Condensed Consolidated Statements of Cash Flows for the
six months ended June 30, 1998 and 1997 ................... 5
Notes to Consolidated Financial Statements .................... 7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations
Financial Condition and Results of Operations ................. 11
Liquidity and Capital Resources ............................... 13
PART II. OTHER INFORMATION ........................................ 16
Item 4. Submission of Matters to a Vote of Security Holders ...... 16
Item 6. Exhibits and Reports on Form 8-K ......................... 16
2
SOUTHERN MINERAL CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(thousands omitted)
June 30, December 31,
1998 1997
------------ ------------
(Unaudited)
ASSETS
Current Assets
Cash ........................................... $ 562 $ 10,011
Receivables and other .......................... 7,377 3,444
--------- --------
Total current assets ...................... 7,939 13,455
Property and equipment, at cost using successful
efforts method for oil and gas activities
Property and equipment ......................... 147,515 54,461
Accumulated depreciation, depletion
and amortization ............................. (16,141) (12,168)
--------- --------
131,374 42,293
Properties held for sale and other ............. 7,011 6,127
--------- --------
Total assets .............................. $ 146,324 $ 61,875
========= ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts payable and accrued liabilities ....... $ 8,657 $ 2,749
Notes Payable .................................. -- 207
--------- --------
Total current liabilities ................. 8,657 2,956
Long-term Debt ................................... 98,232 41,400
Deferred Income Taxes ............................ 9,665 1,039
Stockholders' Equity
Preferred stock, par value $.01 per share;
authorized 5,000,000 shares at
June 30, 1998 and December 31, 1997;
none issued ................................ -- --
Common stock, par value $.01 per share;
authorized 50,000,000 shares at
June 30, 1998; issued 12,827,530
and 9,133,033 shares at June 30, 1998
and December 31, 1997 respectively .......... 128 91
Additional paid-in capital ..................... 30,370 14,152
Retained earnings (deficit) .................... (316) 2,516
Accumulative other comprehensive
income ....................................... (360) (227)
--------- --------
29,822 16,532
Less: Treasury stock ........................... (52) (52)
--------- --------
Total stockholders' equity .................. 29,770 16,480
--------- --------
Total liabilities and stockholders' equity ...... $ 146,324 $ 61,875
========= ========
The accompanying notes are an integral part of this statement.
3
SOUTHERN MINERAL CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(thousands omitted, except share and per share amounts)
Three Months Ended Six Months Ended
June 30, June 30,
---------------------------- ---------------------------
1998 1997 1998 1997
---- ---- ---- ----
(unaudited) (unaudited)
Revenue
Oil and gas ............................. $ 4,367 $ 2,888 $ 8,777 $ 6,720
Gain (loss) on sale ..................... (7) 359 (3) 544
------------ ----------- ------------ -----------
4,360 3,247 8,774 7,264
Expenses
Production .............................. 2,023 810 3,186 1,611
Exploration ............................. 1,527 -- 1,666 283
Depreciation, depletion and amortization 1,619 801 3,229 1,492
General and administrative 842 512 1,902 1,134
------------ ----------- ------------ -----------
6,011 2,123 9,983 4,520
------------ ----------- ------------ -----------
Income (loss) from operations ............. (1,651) 1,124 (1,209) 2,744
Other income, expenses and deductions
Interest and other income ............... 48 108 140 122
Interest and debt expense ............... (952) (174) (1,786) (239)
------------ ----------- ------------ -----------
Income (loss) before income taxes ......... (2,555) 1,058 (2,855) 2,627
Provision (benefit) for federal and
state
Current provision (benefit) ............. (37) (143) (12) 338
Deferred provision (benefit) ............ 19 650 (11) 627
------------ ----------- ------------ -----------
(18) 507 (23) 965
------------ ----------- ------------ -----------
Net income (loss) ......................... $ (2,537) $ 551 $ (2,832) $ 1,662
============ =========== ============ ===========
Net income (loss) per share-basic ......... ($ 0.20) $ 0.06 ($ 0.24) $ 0.18
Net income (loss) per share-diluted ....... ($ 0.20) $ 0.06 ($ 0.24) $ 0.17
Weighted average shares outstanding-basic . 12,502,511 9,104,876 11,997,009 9,100,081
Weighted average shares outstanding-diluted 12,502,511 9,754,293 11,997,009 9,802,712
The accompanying notes are an integral part of this statement.
SOUTHERN MINERAL CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(thousands omitted)
SIX MONTHS ENDED
JUNE 30,
-----------------------
1998 1997
------- -------
(unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES
Net (loss) income ................................ $ (2,832) $ 1,662
Adjustments to net income ........................ 3,797 2,462
-------- --------
Net cash provided by operating activities ........ 965 4,124
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sales of properties ................ 19 1,038
Capital expenditures ............................. (10,841) (20,691)
Acquisition of
Amerac, net of cash and proceeds
of sale of assets .............................. (2,187) --
Acquisition of Neutrino, net of cash ............. (34,200) --
Other ............................................ (2) --
-------- --------
Net cash used in investing activities ............ (47,211) (19,653)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Payments of long-term debt ....................... (6,500) (1,900)
Proceeds from long-term debt ..................... 43,700 17,200
Payments on note payable ......................... (208) --
Loan acquisition costs ........................... (156) --
Debenture offering costs ......................... (12) --
Proceeds from issuance
of common stock ................................. (7) (74)
-------- --------
Net cash provided by
financing activities ............................ 36,817 15,226
-------- --------
Effect of exchange rate on cash .................... (20) --
Net decrease in cash ............................... (9,449) (303)
Cash at beginning of period ........................ 10,011 471
-------- --------
Cash at end of period .............................. $ 562 $ 168
======== ========
The accompanying notes are an integral part of this statement.
SOUTHERN MINERAL CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(thousands omitted)
Six Months Ended
June 30,
------------------
1998 1997
------- -------
(unaudited)
SUPPLEMENTAL CASH FLOW DISCLOSURE
CASH PAID FOR INTEREST: ................................ $ 1,609 $ 221
CASH PAID FOR TAXES: ................................... $ 109 $ 411
NON CASH TRANSACTIONS:
Acquisition of Amerac
Property and equipment additions ................ 17,167 --
Issuance of common stock ........................ 15,000 --
Accounts receivable and other current assets .... 1,527 --
Accounts payable ................................ 1,507 --
Acquisition of Neutrino for cash, common stock
and assumption of debt
Property and equipment additions ................ 65,193 --
Issuance of common stock ........................ 1,095 --
Accounts receivable ............................. 3,350 --
Prepaids and other current assets ............... 363 --
Accounts payable ................................ 5,368 --
Other assets .................................... 53 --
Long term debt .................................. 19,632 --
Deferred tax liability .......................... 8,664 --
Issuance of common stock for property
acquisition ....................................... 50 --
Director's fees and employee compensation
for stock ......................................... 107 69
The accompanying notes are an integral part of this statement.
6
SOUTHERN MINERAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note 1 - Basis of Presentation
The condensed consolidated financial statements included herein have been
prepared by the Company, without audit, pursuant to the rules and regulations of
the Securities and Exchange Commission. Certain information and footnote
disclosures normally included in financial statements prepared in accordance
with generally accepted accounting principles have been condensed or omitted
pursuant to such rules and regulations, though the Company believes that the
disclosures are adequate to make the information presented not misleading.
These condensed consolidated financial statements should be read in conjunction
with the financial statements and the notes thereto included in the Company's
latest Annual Report to the Securities and Exchange Commission on Form 10-KSB
for the year ended December 31, 1997. In the opinion of the Company, all
adjustments, consisting only of normal recurring adjustments, necessary to
present fairly the financial position as of June 30, 1998, and December 31,
1997, the results of operations for the three and six months ended June 30,
1998 and 1997 and statements of cash flows for the six months then ended have
been included.
USE OF ESTIMATES -The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amount of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
EARNINGS (LOSS) PER SHARE - Statements of Financial Accounting Standards No.
128, "Earnings per Share", specifies new measurement, presentation and
disclosure requirements for earnings per share and is required to be applied
retroactively upon initial adoption. The Company has adopted SFAS No. 128
effective with the release of December 31, 1997 earnings data, and accordingly,
has restated all previously reported earnings per share data. Basic earnings per
share is based on the weighted average shares out standing without any dilutive
effects considered. Diluted earnings per share reflects dilution from all
potential common shares, including options, warrants and convertible debt. A
reconciliation of such earnings per share data is as follows (stated in
thousands except per share data):
NET INCOME PER SHARE
(LOSS) SHARES AMOUNTS
------ ------ -------
QUARTER ENDED JUNE 30, 1998
Basic earnings per share .............. $(2,537) 12,503 $ (0.20)
Effect of dilutive warrants ........... -- 323 --
Effect of dilutive stock options ...... -- 229 --
------ ------ -------
Diluted earnings per share ............ $(2,537) 13,055 $ (0.20)
====== ====== =======
QUARTER ENDED JUNE 30, 1997
Basic earnings per share .............. $ 551 9,105 $ 0.06
Effect of dilutive warrants ........... -- 394 --
Effect of dilutive stock options ...... -- 255 --
------ ------ -------
Diluted earnings per share ............ $ 551 9,754 $ 0.06
====== ====== =======
SIX MONTHS ENDED JUNE 30, 1998
Basic earnings per share .............. $(2,832) 11,997 $ (0.24)
Effect of dilutive warrants ........... -- 346 --
Effect of dilutive stock options ...... -- 241 --
------ ------ -------
Diluted earnings per share ............ $(2,832) 12,584 $ (0.24)
====== ====== =======
SIX MONTHS ENDED JUNE 30, 1997
Basic earnings per share .............. $ 1,662 9,100 $ 0.18
Effect of dilutive warrants ........... -- 431 --
Effect of dilutive stock options ...... -- 272 --
------ ------ -------
Diluted earnings per share ............ $ 1,662 9,803 $ 0.17
====== ====== =======
7
Common stock equivalents with a weighted average of 552,000 and 587,000 common
stock equivalents are not considered in the calculation of diluted earnings per
share due to the net loss recorded during the quarter and the six month period
ended June 30, 1998, respectively. No adjustment to net income was made in
calculating diluted earnings per share for the quarter and the six month period
ended June 30, 1997.
Reclassifications - Certain amounts in prior financial statements have been
reclassified to conform to the 1998 financial statement presentation.
Note 2 - Adoption of Accounting Standards
Effective January 1, 1998, the Company adopted Statement of Financial Accounting
Standards ("SFAS") No. 130, "Reporting Comprehensive Income," which establishes
standards for reporting and display of comprehensive income and its components
in a full set of financial statements. Comprehensive income includes all changes
in a company's equity, including, among other things, foreign currency
translation adjustments and unrealized gains (losses) on marketable securities
classified as available-for-sale. The Company's total comprehensive income
(loss) for the six months ended June 30, 1998 and 1997 were as follows (in
thousands):
Six months ended
June 30,
----------------------
1998 1997
------- --------
Net (loss) income ........................ $(2,832) $ 1,662
Foreign currency translation adjustment .. (133) (45)
----- -----
Total comprehensive (loss) income .... $(2,965) $ 1,617
===== =====
Note 3 - Acquisitions
On June 23, 1998, the Company agreed to acquire 92.3% of the outstanding common
shares of Neutrino Resources, Inc. ("Neutrino"), which was effective as of June
30, 1998 and funded on July 2, 1998. On July 3, 1998, the Company initiated a
compulsory acquisition of the remaining shares outstanding, which was effective
as of June 30, 1998 and funded on July 21, 1998. The acquisition was accounted
for as if it had occurred on June 30, 1998. The Company acquired Neutrino
through a cash tender offer for the common shares outstanding, and assumed
Neutrino's bank debt and working capital deficiency. Neutrino is an independent
oil and gas company located in Calgary, Canada. The merger was effective on June
30, 1998, and was accounted for as a purchase. The total purchase price is
approximately $56,582,000, consisting of the following:
Cash consideration for common stock ............ $ 34,200,000
Fair value of 324,400 shares of common
stock issued ................................. 1,095,000
Debt assumed and working capital ............... 19,943,000
Legal, accounting and transaction costs ........ 1,344,000
----------
$ 56,582,000
==========
The allocation of the purchase price is
summarized as follows:
Oil and gas properties and other assets ........ $ 65,246,000
Deferred income taxes .......................... (8,664,000)
----------
$ 56,582,000
==========
On January 28, 1998, the shareholders of both the Company and Amerac Energy
Corporation ("Amerac") approved the merger of Amerac into a subsidiary of
Southern Mineral Corporation. Pursuant to the merger agreement, the Company
issued 3,333,333 shares of its common stock to acquire the shares of Amerac
common stock and assumed the outstanding debt, which was approximately
$8,700,000. The debt was paid upon consummation of the acquisition. The merger
was effective on January 28, 1998, and was accounted for as a purchase. The
total purchase price was approximately $24,000,000. The purchase price was
reduced by the subsequent sale of Amerac's Golden Trend properties for
$6,969,000 on June 30, 1998.
8
On May 20, 1997, the Company purchased from Mario Garcia and Dolores E. Garcia,
the outstanding capital stock of BEC Energy, Inc. ("BEC"). The purchase price
was $10,640,000. BEC's assets consist of working interests in fourteen oil and
gas wells located in the Big Escambia Creek Field, Escambia County, Alabama. The
Company financed the acquisition with a $10,600,000 advance under the Company's
credit facility with Compass Bank-Houston. The acquisition was accounted for as
a purchase. The Company has since acquired additional interest in the field in
three transactions totaling $6,300,000.
In addition, during 1997, the Company acquired other interests, including a 10%
interest in a concession in the Santa Elena Peninsula in Ecuador for
approximately $2,800,000, which did not have a material effect on the
historical results of the Company.
The following summarizes pro forma (unaudited) information and assumes the
acquisitions of Neutrino, Amerac and BEC had occurred on January 1, 1997.
Six months ended June 30,
------------------------------
(000's omitted, except per share data)
1998 1997
------- --------
Revenues ........................ $ 14,462 $18,932
Net (loss) income ............... (5,829) 2
Net income per share ............ $ (.45) $ .00
These pro forma results are not necessarily indicative of those that would have
occurred had the acquisitions taken place at the beginning of 1998 and 1997. The
above amounts reflect adjustments for interest on notes payable issued as part
of the purchase price and depreciation on revalued property.
Note 4 - Long-Term Debt
Effective May 29, 1998, the Company amended its domestic bank credit agreement
increasing its borrowing base from $38,400,000 to $45,000,000. As of August 12,
1998, the borrowing base under the credit facility had been reduced to
$36,850,000 as a result of the transfer of the Company's Canadian assets to
Neutrino and the sale of certain domestic assets for cash. Outstanding
borrowings as of August 12, 1998 are $34,200,000, leaving $2,650,000 available
to borrow.
The domestic credit facility borrowing base reduces $40,000 per month commencing
July 1, 1998, and is reviewed by the bank semi-annually until maturity on June
1, 2001. The obligations under the credit facility are secured by substantially
all of the assets of the Company and its subsidiaries. The credit facility
contains certain covenants relating to the financial condition of the Company.
As of June 30, 1998, the Company was in compliance with the terms of the credit
facility. The credit facility bears interest at the Company's option, of either
prime rate floating or at the LIBOR rate plus one and one-half percent to two
percent, depending upon the level of debt outstanding.
On October 2, 1997, the Company issued $41,400,000 of 6.875% convertible
subordinated debentures due on October 1, 2007. The debentures are convertible
at any time prior to maturity, at a conversion price of $8.26 per share.
Effective June 25, 1998, Neutrino entered into a new credit facility and has an
available Cdn $40,000,000 (U.S.$27,254,000) revolving demand loan facility under
which it can borrow at bank prime or at Bankers Acceptance Rates plus a 1%
stamping fee. As of June 30, 1998, the Canadian bank prime rate was 6.5% and the
Banker Acceptance Rates for 30 day maturities was 4.99%. As of August 12, 1998,
outstanding borrowings thereunder were Cdn $34,700,000, (U.S. $ 23,601,000)
leaving Cdn $5,360,000 (U.S. $3,652,000) available to borrow. The credit
facility borrowing base will be reviewed by September 30, 1998, and is reviewed
thereafter by the bank semi-annually, however, no principal payments are
scheduled providing certain conditions of the bank agreement continue to be
satisfied. The obligations under the credit facility are secured by
substantially all of the assets of Neutrino. The credit facility contains
certain covenants relating to the financial condition of the Company. As of June
30, 1998, the Company was in compliance with the terms of the credit facility.
9
Note 4 - Long-Term Debt-Continued
June 30, June 30,
1998 1997
----------- -----------
Domestic bank credit facility ................... $37,200 $19,200
Canadian bank credit facility (U.S. Dollars) .... 19,632 --
Convertible subordinated debentures ............. 41,400 --
------ ------
Long-term debt .................................. $98,232 $19,200
====== ======
Note 5 - Natural Gas Hedging
During the second quarter of 1998, the Company entered into natural gas price
swaps with a third party. The natural gas price swaps hedge against potential
adverse effects of fluctuations in future prices for the Company's anticipated
production volumes based on current engineering estimates. The natural gas price
swaps qualify as hedges and correlate to gas production; therefore, any gains
and losses will be recorded when the related gas production has been delivered.
Gains and losses on closed natural gas price swap agreements will be deferred
and amortized over the original term of the agreement. Should the natural gas
price swaps cease to become recognized as a hedge, subsequent changes in value
will be recorded in the Statement of Operations. While the swaps are intended to
reduce the Company's exposure to declines in the market price of natural gas,
they may limit the Company's gain from increases in the market price. At June
30, 1998, the natural gas price swap agreements were for the Company's gas
production of 100,000 Mmbtu of gas per month for July through October 1998 at a
weighted average price of $2.42 per Mmbtu. At June 30, 1998, the Company
estimates the loss of unwinding this position to be approximately $18,600.
10
SOUTHERN MINERAL CORPORATION
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Financial Condition and Results of Operations
For the Quarter Ended June 30, 1998
As Compared to the Quarter Ended June 30, 1997
Oil and gas revenues for the quarter ended June 30,1998, are $4,367,000,
compared to oil and gas revenues for the same period in 1997 of $2,888,000. The
increase in revenues reflects higher production volumes of both natural gas and
crude oil, which were partially offset by lower commodity prices for crude oil
and higher prices for natural gas. Higher production volumes are primarily due
to the acquisition of Amerac Energy Corporation, acquired on January 28, 1998; a
working interest in Lake Raccourci Field, acquired on November 24, 1997 and the
acquisition of BEC Energy, Inc., acquired on May 20, 1997. The Company also
acquired a 10% interest in the Santa Elena Concession located in the Santa Elena
Peninsula in Ecuador for approximately $2,800,000 in June of 1997.
Natural gas production for the three months ended June 30, 1998 is 1,043 Mmcf, a
15% increase as compared to production for the same period in 1997 of 908 Mmcf.
The Company's crude oil production for the three months ended June 30, 1998
increased 86% to 111,503 barrels as compared to 59,932 barrels for the same
period in 1997.
The average natural gas price in 1998 increased 35% to $2.19 per Mcf compared to
$1.62 per Mcf in 1997, which was caused by an increase in the domestic gas
sales, resulting in a reduction in the percentage of Canadian gas sales to total
gas sales. Historically Canadian gas prices have been lower than domestic gas
prices. Crude oil prices decreased 30% in 1998 to $13.10 per barrel, compared to
$18.67 per barrel in 1997.
As part of the Company's on-going operations, the Company may sell non-strategic
assets or oil and gas properties. The proceeds would be used to pay down debt or
redeploy capital to opportunities that may have a higher rate of return. These
activities have resulted in the sale of the Company's Golden Trend properties
for $6,969,000. The sales proceeds were applied to the purchase price of Amerac,
resulting in no gain or loss on the transaction. Gain on sale of assets in the
second quarter of 1997 was $359,000. The gain on sale of assets in 1997 was
primarily the result of the sale of a non-strategic oil and gas interest in
Canada, which the Company sold for approximately $360,000.
Production costs, including production and ad valorem taxes, increased in 1998
to $2,023,000, up 150% from $810,000 in 1997, primarily due to the above
mentioned acquisitions and gas plant maintenance at the Company's Big Escambia
Creek Field for a period of 18 days during the second quarter. On a cost per
Mcfe basis, production costs for 1998 increased to $1.08 per Mcfe, or 74% from
$0.62 per Mcfe in 1997.
General and administrative expenses increased as a result of the above mentioned
acquisitions to $842,000 in 1998, up 64% from $512,000 in 1997. On a cost per
Mcfe basis, general and administrative expenses increased to $0.45 per Mcfe, or
15% from $0.39 Mcfe in 1997.
Exploration, dry hole and lease impairment expenses increased to $1,527,000 in
1998, compared to none in the same period of 1997. The 1998 expense is due
primarily to a dry hole drilled in Lafourche Parish, Louisiana in which the
Company had a 93% working interest. Since the Company uses the successful
efforts method of accounting, exploration expenses may vary greatly from year to
year based upon the level of exploration activity during the year.
Depreciation, depletion and amortization ("DD&A") expense for 1998 increased to
$1,619,000, up 102% from $801,000 in 1997, which was due primarily to the above
mentioned acquisitions. The Company computes depreciation and depletion on each
producing property on a unit-of-production method. Since this method employs
estimates of remaining reserves, depreciation and depletion expenses may vary
from period to period because of revisions to reserve estimates, production
rates and other factors. DD&A expenses increased in 1998 to $0.86 per Mcfe, up
43% from $0.60 per Mcfe in 1997.
11
Interest and debt expense in the quarter ended June 30, 1998 is $952,000,
compared to $174,000 in 1997. During the 1998 second quarter, funded debt
increased to fund capital expenditures, and to consummate the above mentioned
acquisitions.
Tax (benefit) expense in 1998 and 1997 is ($18,000) and $507,000, respectively.
.
The Company reported a net loss in the quarter ended June 30, 1998 of
$2,537,000, or $0.20 per share, compared to earnings of $551,000, or $0.06 per
share, in the same period in 1997.
For the Six Months Ended June 30, 1998
As Compared to the Six Months Ended June 30, 1997
Oil and gas revenues for the six months ended June 30, 1998 are $8,777,000, up
31% compared to oil and gas revenues for the same period in 1997 of $6,720,000.
The increase in revenues reflects higher production volumes of both natural gas
and crude oil which is offset by lower commodity prices for both natural gas and
crude oil. Higher production volumes are primarily due to the acquisition of
Amerac Energy Corporation , acquired on January 28, 1998; a working interest in
Lake Raccourci Field, acquired on November 24, 1997; BEC Energy, Inc., acquired
on May 20, 1997, and the acquisition of a working interest in the A. Philyaw 8-1
#1, acquired on April 7, 1997. The Company also acquired a 10% interest in the
Santa Elena Concession located in the Santa Elena Peninsula in Ecuador for
approximately $2,800,000 in June of 1997.
Natural gas production in the first six months of 1998 is 2,277 Mmcf, a 26%
increase compared to 1997 production of 1,801 Mmcf. The Company's crude oil
production in the first six months of 1998 increased 94% to 211,141 barrels
compared to 108,890 barrels in 1997.
The average natural gas price in the first six months of 1998 decreased 8% to
$2.06 per Mcf compared to $2.24 per Mcf in the same period of 1997. Crude oil
prices decreased 31% in the first six months of 1998 to $13.75 compared to
$20.06 per barrel in the same period of 1997.
As part of the Company's on-going operations, the Company may sell non-strategic
assets or oil and gas properties. The proceeds would be used to pay down debt or
redeploy capital to opportunities that may have a higher rate of return. These
activities have resulted in the sale of the Company's Golden Trend properties
for $6,969,000 in the second quarter of 1998. The sales proceeds were applied to
the purchase price of Amerac, resulting in no gain or loss on the transaction.
In 1997, the gain on sale of assets was $544,000. The gain on sale in 1997 was
primarily the result of the sales of an oil and gas prospect located in the
state waters offshore Texas and a working interest in an oil and gas property in
Canada, which the Company has agreed to sell for approximately $360,000.
Production costs, including production and ad valorem taxes, increased in the
first six months of 1998 to $3,186,000, up 98% from $1,611,000 in the same
period of 1997, primarily due to the above mentioned acquisitions and gas plant
maintenance at the Company's Big Escambia Creek Field for a period of 18 days
during the second quarter. On a cost per Mcfe basis, production costs for 1998
increased to $0.82 per Mcfe, or 28%, from $0.64 per Mcfe in 1997.
General and administrative expenses increased as a result of the above mentioned
acquisitions to $1,902,000 in the first six months of 1998, up 68% from
$1,134,000 in 1997. On a cost per Mcfe basis, general and administrative
expenses increased in 1998 to $0.49 per Mcfe, or 9% from $0.45 Mcfe in 1997.
Exploration, dry hole and lease impairment expenses increased in the six months
of 1998 to $1,666,000, compared to $283,000 in the same period of 1997, which is
due primarily to a dry hole drilled in Lafourche Parish, Louisiana in 1998 in
which the Company had a 93% working interest compared to a dry hole drilled in
Jefferson Parish, Louisiana in the first quarter of 1997. Since the Company uses
the successful efforts method of accounting, exploration expenses may vary
greatly from year to year based upon the level of exploration activity during
the year.
12
DD&A expense for the first six months of 1998 increased to $3,229,000, up 116%
from $1,492,000 in 1997, primarily due to the above mentioned acquisitions. The
Company computes depreciation and depletion on each producing property on a
unit-of-production method. Since this method employs estimates of remaining
reserves, depreciation and depletion expenses may vary from period to period
because of revisions to reserve estimates, production rates and other factors.
DD&A expenses increased in 1998 to $0.83 per Mcfe, up 41% from $0.59 per Mcfe in
1997.
Interest and debt expense increased in the first six months of 1998 to
$1,786,000, up 647% compared to $239,000 in 1997. During the 1998 second
quarter, funded debt increased to fund capital expenditures, and to consummate
the above mentioned acquisitions.
Tax (benefit) expense in 1998 and 1997 is ($23,000) and $965,000, respectively.
The Company reports a loss in 1998 of $2,832,000, or $0.24 per basic share,
compared to earnings of $1,662,000, or $0.18 per basic share in 1997. The number
of shares outstanding increased by 3,333,000 in January, 1998, as a result of
the acquisition of Amerac Energy Corporation.
Liquidity and Capital Resources
For the Period Ended June 30, 1998
The Company has historically funded its operations, acquisitions, exploration
and development expenditures from cash flows from operating activities, bank
borrowings, issuance of common stock and sales of non-strategic assets and oil
and gas properties.
The Company's cash flows provided by operating activities for the six months
ended June 30, 1998 and 1997 are $965,000 and $4,124,000, respectively.
Additional cash of $6,074,000 and $1,038,000 was realized in the first six
months of 1998 and 1997, respectively, from property sales of non-strategic
assets.
Effective May 29, 1998, the Company amended its domestic bank credit agreement
increasing its borrowing base from $38,400,000 to $45,000,000. As of August 12,
1998, the borrowing base under the credit facility had been reduced to
$36,850,000 as a result of the transfer of the Company's Canadian assets to
Neutrino and the sale of certain domestic assets. Outstanding borrowings as of
August 12, 1998 are $34,200,000, leaving $2,650,000 available to borrow.
The domestic credit facility borrowing base reduces $40,000 per month commencing
July 1, 1998, and is reviewed by the bank semi-annually until maturity on June
1, 2001. The obligations under the credit facility are secured by substantially
all of the assets of the Company and its subsidiaries. The credit facility
contains certain covenants relating to the financial condition of the Company.
As of June 30, 1998, the Company was in compliance with the terms of the credit
facility. The credit facility bears interest at the Company's option, of either
prime rate floating or at the LIBOR rate plus one and one-half percent to two
percent, depending upon the level of debt outstanding.
Effective June 25, 1998, Neutrino entered into a new credit facility and has an
available Cdn $40,000,000 (U.S.$27,254,000) revolving demand loan facility under
which it can borrow at bank prime or at Bankers Acceptance Rates plus a 1%
stamping fee. As of June 30, 1998, the Canadian bank prime rate was 6.5% and the
Banker Acceptance Rates for 30 day maturities was 4.99%. As of August 12, 1998,
outstanding borrowings thereunder are Cdn $34,700,000, (U.S. $ 23,601,000)
leaving Cdn $5,360,000 (U.S. $3,652,000) available to borrow. The credit
facility borrowing base, will be reviewed by September 30, 1998, and is reviewed
thereafter by the bank semi-annually, however, no principal payments are
scheduled providing certain conditions of the bank agreement continue to be
satisfied. The obligations under the credit facility are secured by
substantially all of the assets of Neutrino. The credit facility contains
certain covenants relating to the financial condition of the Company. As of June
30, 1998, the Company was in compliance with the terms of the credit facility.
Subsequent to determining the current borrowing bases for the domestic and
Canadian credit facilities, oil and gas prices have declined. The lenders
judgement of future oil and gas prices will impact their borrowing base
redeterminations and therefore required principal payments may increase or
decrease in future periods.
13
Capital spending in the first six months of 1998 totaled $10,841,000 for
properties, and $36,387,000 for acquisitions, and was primarily funded from bank
debt and cash flow generated from operations. The Company will evaluate its
level of capital spending throughout the year based upon drilling results,
commodity prices, cash flows from operations and property acquisitions.
The Company believes that it will have sufficient capital available from the
credit facility described above, together with cash flows from operating
activities, to fund its 1998 capital expenditure program, and to meet the
Company's other obligations. The Company also believes that the funds available
from such sources will enable the Company to continue to pursue strategic
corporate and property acquisitions.
The Company's debt to total capitalization ratio is 77% at June 30, 1998, as
compared to 49% at June 30, 1997. The Company's interest coverage ratio
(calculated as net income plus depreciation, depletion and amortization,
deferred income taxes, and exploration expenses divided by cash expenditures for
interest) is 1.34 to 1 for the first six months of 1998.
The Company did not declare dividends in the six months ended June 30, 1998,
fiscal 1997, 1996 or 1995. It is likely that for the foreseeable future funds
available for dividends on common stock, if any, will be retained by the Company
to finance future growth.
Year 2000 Compliance
The Company does not expect that the cost of converting its computer system to
year 2000 compliance will be material to its financial condition. The Company
believes that it will be able to achieve year 2000 compliance by the end of
1999, and it does not currently anticipate any disruption in its operations as
the result of any failure by the Company to be in compliance. The Company does
not currently have any information concerning the year 2000 compliance status of
its customers and vendors.
Recent Accounting Pronouncements
In June, 1997, the FASB issued Statement of Financial Accounting Standards No.
131, "Disclosures about Segments of an Enterprise and Related Information"
("SFAS 131"). SFAS 131 establishes standards for the way public enterprises are
to report information about operating segments in annual financial statements
and requires the reporting of selected information about operating segments in
interim financial reports issued to shareholders. It also establishes standards
for related disclosures about products and services, and major customers. SFAS
131 is effective for periods beginning after December 15, 1997, but need not be
applied to interim financial statements in the initial year of application.
Statement of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities" ("SFAS 133"), was issued by the Financial
Accounting Standards Board in June 1998. SFAS 133 standardizes the accounting
for derivative instruments, including certain derivative instruments embedded in
other contracts. Under the standard, entities are required to carry all
derivative instruments in the statement of financial position at fair value. The
accounting for changes in the fair value (i.e., gains or losses) of a
derivative instrument depends on whether it has been designated and qualifies as
part of a hedging relationship and, if so, on the reason for holding it. If
certain conditions are met, entities may elect to designate a derivative
instrument as a hedge of exposures to changes in fair values, cash flows or
foreign currencies. If the hedged exposure is a fair value exposure, the gain or
loss on the derivative instrument is recognized in earnings in the period of
change together with the offsetting loss or gain on the hedged item
attributable to the risk being hedged. If the hedged exposure is a cash flow
exposure, the effective portion of the gain or loss on the derivative instrument
is reported initially as a component of other comprehensive income (outside
earnings) and subsequently reclassified into earnings when the forecasted
transaction affects earnings. Any amounts excluded from the assessment of hedge
effectiveness, as well as the ineffective portion of the gain or loss, is
reported in earnings immediately. Accounting for foreign currency hedges is
similar to the accounting for fair value and cash flow hedges. If the derivative
instrument is not designated as a hedge, the gain or loss is recognized in
earnings in the period of change.
14
The Company will adopt SFAS 133 beginning in fiscal 2000. The Company has not
determined the impact that SFAS 133 will have on its financial statements and
believes that such determination will not be meaningful until closer to the date
of initial adoption.
Forward-Looking Statements
The Management's Discussion and Analysis of Financial Condition and Results of
Operations ("MD&A") contains "forward-looking statements" within the meaning of
Section 27A of the Securities Act of 1933, as amended (the "Securities Act"),
and Section 21E of the Securities Exchange Act of 1937, as amended (the
"Exchange Act"). All statements other than statements of historical fact
included in MD&A, including statements regarding the Company's operating
strategy, plans, objectives and beliefs of management for future operations,
planned capital expenditures and acquisitions are forward-looking statements.
Although the Company believes that the assumptions upon which such
forward-looking statements are based are reasonable, it can give no assurance
that such assumptions will prove to be correct.
15
PART II
OTHER INFORMATION
Items 1, 2, 3, and 5 for which provision is made in the applicable regulations
of the Securities and Exchange Commission are not required under the related
instructions or are inapplicable, and therefore have been omitted.
Item 4. Submission of Matters to a Vote of Security Holders
The Company's 1998 annual stockholders meeting was held on May 13, 1998. At the
meeting, the following matters were voted upon:
1. Election of eleven directors to serve until the next annual meeting of
stockholders and until their successors are elected and qualified;
2. Appointment of KPMG Peat Marwick LLP as auditors of the Company for the
year ending December 31, 1998; and
3. To consider and act upon such other business as may properly be presented
to the meeting or an adjournment thereof.
A total of 12,402,916 shares of the Company's common stock, par value $.01 per
share, were entitled to vote at the meeting. Of these shares, 7,369,602 shares
were present at the meeting and voted as follows:
With respect to each of the following nine nominees for reelection to the
Board of Directors, shares were voted for election as follows: B. Travis
Basham, Thomas R. Fuller, Donald H. Wiese, Jr. and Spencer L. Youngblood,
Robert R. Hillery, E. Ralph Hines, Jr., Steven H. Mikel and James E.
Nielson, Howell H. Howard, Jeffery B. Robinson and Michael D. Watford,
shares voted for: 7,364,405; Withheld: 5,197.
Voting results on the other matters, all of which were approved, are as
follows:
With respect to the approval of the appointment of KPMG Peat Marwick, LLP
as auditors for the period ended 12/31/98, shares voted For: 7,357,992;
Against/Abstain: 11,610.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
10.1 Amended and Restated Credit Agreement between the Company,
Compass Bank-Houston and First Union National Bank dated
June 19, 1998 (filed herewith)
27.1 Financial Data Schedule
(b) Report on Form 8-K:
Form 8-K of the Company, dated May 13, 1998, reporting the signing
of a definitive agreement to acquire Neutrino Resources, Inc.
Form 8-K of the Company, dated July 2, 1998, reporting the
completion of a cash tender offer for the acquisition of Neutrino
Resources, Inc.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the Company
has duly caused this report to be signed on its behalf by the undersigned
thereunto duly authorized.
SOUTHERN MINERAL CORPORATION
Date: August 14, 1998 By /s/ James H. Price
James H Price
Vice President-Finance