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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-QSB
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO 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 77002-5609
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 November 12, 1998,
there were 12,873,413 shares of the Issuer's common stock outstanding.
Transitional Small Business Disclosure Format (check one):
Yes [ ] No [X]
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SOUTHERN MINERAL CORPORATION
TABLE OF CONTENTS
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
CONSOLIDATED FINANCIAL STATEMENTS:
Condensed Consolidated Balance Sheets as of September 30, 1998
(unaudited) and December 31, 1997.................................3
Unaudited Condensed Consolidated Statements of Operations for the
three and nine months ended September 30, 1998 and 1997...........4
Unaudited Condensed Consolidated Statements of Cash Flows for the
nine months ended September 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....................................................17
Item 6. Exhibits and Reports on Form 8-K.....................................17
Page 2
SOUTHERN MINERAL CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(thousands omitted)
SEPTEMBER 30, DECEMBER 31,
1998 1997
-------------- --------------
ASSETS (Unaudited)
CURRENT ASSETS
Cash ............................................................... $ 725 $ 10,011
Receivables and other .............................................. 7,309 3,444
-------------- --------------
Total current assets .......................................... 8,034 13,455
PROPERTY AND EQUIPMENT, AT COST USING SUCCESSFUL
EFFORTS METHOD FOR OIL AND GAS ACTIVITIES
Property and equipment
equipment ......................................................... 145,430 54,461
Accumulated depreciation, depletion and amortization ............... (18,208) (12,168)
-------------- --------------
127,222 42,293
PROPERTIES HELD FOR SALE AND OTHER ................................. 6,940 6,127
-------------- --------------
Total assets .................................................. $ 142,196 $ 61,875
============== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable and accrued liabilities ........................... $ 7,595 $ 2,749
Notes payable ...................................................... -- 207
-------------- --------------
Total current liabilities ..................................... 7,595 2,956
LONG-TERM DEBT ....................................................... 99,424 41,400
DEFERRED INCOME TAXES ................................................ 8,993 1,039
STOCKHOLDERS' EQUITY
Preferred stock, par value $.01 per share; authorized 5,000,000
shares at September 30, 1998; none issued ..................... -- --
Common stock, par value $.01 per share; authorized 50,000,000
shares at September 30, 1998; issued 12,834,491 and 9,133,033
shares at September 30, 1998 and December 31, 1997, respectively 128 91
Additional paid-in capital ......................................... 30,401 14,152
Retained earnings (deficit) ........................................ (2,308) 2,516
Cumulative foreign exchange translation adjustment ................. (1,985) (227)
-------------- --------------
26,236 16,532
Less: Treasury stock ............................................... (52) (52)
-------------- --------------
Total stockholders' equity ...................................... 26,184 16,480
-------------- --------------
Total liabilities and stockholders' equity .......................... $ 142,196 $ 61,875
============== ==============
The accompanying notes are an integral part of this statement.
Page 3
SOUTHERN MINERAL CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(thousands omitted, except share and per share amounts)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
1998 1997 1998 1997
------------ ------------ ------------ ------------
(unaudited) (unaudited)
REVENUE
Oil and gas ...................................... $ 6,743 $ 3,533 $ 15,520 $ 10,253
Gain (loss) on sale .............................. (3) (41) (6) 503
------------ ------------ ------------ ------------
6,740 3,492 15,514 10,756
EXPENSES
Production ....................................... 2,774 999 5,960 2,610
Exploration ...................................... 456 1,302 2,122 1,517
Depreciation, depletion and amortization ......... 2,988 1,020 6,217 2,512
General and administrative ....................... 1,050 383 2,952 1,518
------------ ------------ ------------ ------------
7,268 3,704 17,251 8,157
------------ ------------ ------------ ------------
Income (loss) from operations ...................... (528) (212) (1,737) 2,599
Other income, expenses and deductions
Interest and other income ........................ 80 80 220 135
Interest and debt expense ........................ (1,768) (545) (3,554) (785)
------------ ------------ ------------ ------------
Income (loss) before income taxes .................. (2,216) (677) (5,071) 1,949
Provision (benefit) for foreign, federal and state
Current provision ................................ 50 53 38 391
Deferred provision (benefit) ..................... (274) (461) (285) 165
------------ ------------ ------------ ------------
(224) (408) (247) 556
------------ ------------ ------------ ------------
Net income (loss) .................................. $ (1,992) $ (269) $ (4,824) $ 1,393
============ ============ ============ ============
Net income (loss) per share-basic .................. $ (0.16) $ (0.03) $ (0.39) $ 0.15
Net income (loss) per share-diluted ................ $ (0.16) $ (0.03) $ (0.39) $ 0.14
Weighted average shares outstanding-basic .......... 12,833,844 9,110,396 12,279,019 9,103,557
Weighted average shares outstanding-diluted ........ 12,833,844 9,110,396 12,279,019 9,799,454
Page 4
SOUTHERN MINERAL CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(thousands omitted)
NINE MONTHS ENDED
SEPTEMBER 30,
-----------------------
1998 1997
-------- -------
(UNAUDITED)
CASH FLOWS FROM OPERATING ACTIVITIES
Net (loss) income ................................ $ (4,824) $ 1,393
Adjustments to net income ........................ 7,600 3,420
-------- --------
Net cash provided by operating activities ........ 2,776 4,813
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sales of properties ................ 28 1,047
Capital expenditures ............................. $(13,452) $ (8,116)
Acquisitions of Amerac, net of cash
and proceeds from sales of assets ............... (764) --
Acquisition of Neutrino, net of cash ............. (34,091) --
Acquisition of BEC, net of cash .................. -- (10,683)
Acquisition of SMC Ecuador, net of cash .......... -- (2,816)
Other ............................................ (2) --
-------- --------
Net cash used in investing activities ............ (47,834) (20,568)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Payments of long-term debt ....................... (9,500) (6,682)
Proceeds from long-term debt ..................... 47,892 22,600
Payments on note payable ......................... (208) --
Loan acquisition costs ........................... (205) --
Debenture offering costs ......................... (12) --
Proceeds from issuance of common stock ........... (7) (68)
-------- --------
Net cash payable by financing activities ......... 37,960 15,850
-------- --------
Effect of exchange rate on cash .................... (1,741) (15)
Net increase (decrease) in cash .................... (9,286) 80
Cash at beginning of period ........................ 10,011 471
-------- --------
Cash at end of period .............................. $ 725 $ 551
======== ========
The accompanying notes are an integral part of this statement.
Page 5
SOUTHERN MINERAL CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(thousands omitted)
NINE MONTHS ENDED
SEPTEMBER 30,
-----------------
1998 1997
------- -------
(UNAUDITED)
SUPPLEMENTAL CASH FLOW DISCLOSURE
CASH PAID FOR INTEREST: ................................................ $ 3,458 $ 759
CASH PAID FOR TAXES: ................................................... $ 137 $ 652
NON CASH TRANSACTIONS:
Acquisition of Amerac for common stock and assumption of debt
Property and equipment .......................................... 15,743 --
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 .......................................... 65,089 --
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 .......................................... 8,668 --
Issuance of common stock for property acquisition ................... 50 --
Change in property and equipment additions .......................... -- 1,394
Assumption of debt with property acquisitions ....................... -- 1,394
Directors' fees and employee compensation for stock ................. 128 69
The accompanying notes are an integral part of this statement.
Page 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 September 30, 1998, and December 31, 1997, the results
of operations for the three and nine months ended September 30, 1998 and 1997
and statements of cash flows for the nine 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 - Statement 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 outstanding 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 SEPTEMBER 30, 1998
Basic earnings per share ............... $ (1,992) 12,834 $(0.16)
Effect of dilutive warrants ............ -- 208 --
Effect of dilutive stock options ....... -- 177 --
------------ -------- ------
Diluted earnings per share ............. $ (1,992) 13,219 $(0.16)
============ ======== ======
QUARTER ENDED SEPTEMBER 30, 1997
Basic earnings per share ............... $ (269) 9,110 $(0.03)
Effect of dilutive warrants ............ -- 104 --
Effect of dilutive stock options ....... -- 67 --
------------ -------- ------
Diluted earnings per share ............. $ (269) 9,281 $(0.03)
============ ======== ======
NINE MONTHS ENDED SEPTEMBER 30, 1998
Basic earnings per share ............... $ (4,824) 12,279 $(0.39)
Effect of dilutive warrants ............ -- 311 --
Effect of dilutive stock options ....... -- 218 --
------------ -------- ------
Diluted earnings per share ............. $ (4,824) 12,808 $(0.39)
============ ======== ======
NINE MONTHS ENDED SEPTEMBER 30, 1997
Basic earnings per share ............... $ 1,393 9,104 $ 0.15
Effect of dilutive warrants ............ -- 269 --
Effect of dilutive stock options ....... -- 426 --
------------ -------- ------
Diluted earnings per share ............. $ 1,393 9,799 $ 0.14
============ ======== ======
Page 7
Common stock equivalents with a weighted average of 385,000, 171,000 and 529,000
are not considered in the calculation of diluted earnings per share due to the
net loss recorded during the quarters, and the nine month period ended September
30, 1998, respectively. No adjustment to net income was made in calculating
diluted earnings per share for the nine month period ended September 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
(except those resulting from investments by and distributions to shareholders)
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 nine months ended September 30, 1998 and 1997 was as follows (in
thousands):
NINE MONTHS ENDED
SEPTEMBER 30,
-------------------
1998 1997
------- -------
Net (loss) income ........................... $(4,824) $ 1,393
Foreign currency translation adjustment ..... (1,758) (251)
------- -------
Total comprehensive (loss) income ....... $(6,582) $ 1,142
======= =======
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
$56,589,000, consisting of the following:
Cash consideration for common stock ................. $34,091,000
Fair value of 324,430 shares of common stock issued.. 1,095,000
Debt assumed and working capital .................... 19,890,000
Legal, accounting and transaction costs ............. 1,513,000
-----------
$56,589,000
===========
The allocation of the purchase price is summarized as follows:
Oil and gas properties and other assets (net)........ $ 65,257,000
Deferred income taxes ............................... (8,668,000)
-----------
$ 56,589,000
On January 28, 1998, the shareholders of both the Company and Amerac Energy
Corporation ("Amerac") approved the merger of Amerac into a subsidiary of the
Company. 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
Amerac's 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
Page 8
$24,500,000. The purchase price was reduced by the subsequent sale of Amerac's
Golden Trend properties for $6,969,000 on June 30, 1998 and the Riffe Field for
$510,000 on July 1, 1998.
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
four transactions totaling $8,750,000.
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 had 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.
NINE MONTHS ENDED SEPTEMBER 30,
(thousands omitted, except per share data)
1998 1997
-------- --------
Revenues ............................... $ 21,202 $ 27,824
Net loss ............................... (7,407) (1,921)
Net loss per share ..................... $ (.58) $ (.15)
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 November
12, 1998, the borrowing base under the credit facility had been reduced to
$36,690,000 as a result of the transfer of the Company's Canadian assets to
Neutrino, the sale of certain domestic assets for cash, and the scheduled
reduction discussed below. Outstanding borrowings as of November 12, 1998 are
$36,690,000, leaving no further availability under the domestic credit
agreement.
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. It is anticipated that the credit facility borrowing base will be
reviewed in December, 1998. The obligations under the credit facility are
secured by substantially all of the assets of the Company and its subsidiaries
other than Neutrino. The credit facility prohibits the payment of dividends and
contains certain covenants relating to the financial condition of the Company.
Effective as of September 1, 1998 certain of the financial covenants in the
credit facility were amended.
As of September 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.$26,084,000) revolving demand loan facility under
which it can borrow at bank prime or at Bankers Acceptance Rates plus a 1%
stamping fee. As of September 30, 1998, the Canadian bank prime rate was 7.25%
and the Banker's
Page 9
Acceptance Rates for 30 day maturities was 5.58%. As of November12, 1998,
outstanding borrowings thereunder were Cdn $33,559,000 (U.S. $ 21,884,000)
leaving Cdn $6,441,000 (U.S. $4,200,000) available to borrow. The credit
facility borrowing base was reviewed in April 1998, and is expected to be
reviewed again in late November 1998. 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 September 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 lender's
judgment of future oil and gas prices will impact their borrowing base
redeterminations. Therefore, required principal payments may increase or
decrease in future periods.
September 30, September 30,
1998 1997
------- -------
Domestic bank credit facility .............................. $35,700 $20,700
Canadian bank credit facility (U.S. Dollars) ............... 22,138 --
Canadian convertible subordinated debentures (U.S. Dollars) 186 --
Convertible subordinated debentures ........................ 41,400 --
------- -------
Long-term debt ............................................. $99,424 $20,700
======= =======
NOTE 5 - NATURAL GAS HEDGING
During the first nine months of 1998, the Company entered into natural gas price
swaps with third parties. 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 that are terminated
early 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 September 30, 1998, the natural gas price swap agreements
were for the Company's gas production of 100,000 MMbtu of gas for the month of
October 1998 at a weighted average price of $2.42 per MMbtu, and for 60,000
MMbtu of gas per month for April through October 1999, at a weighted average
price of $2.135 per MMbtu. At September 30, 1998, the Company estimates the gain
from unwinding this position to be approximately $18,700.
The Company's Canadian subsidiary entered into short-term fixed price natural
gas contracts which obligate the subsidiary to physically deliver contracted gas
volumes. The fixed price contracts are similar to price swaps in that they
reduce the Company's exposure to declines in the market price of natural gas and
also limit the potential gains from increases in the market price. At September
30, 1998, fixed price contracts were for the Company's gas production of 948
MMBtu per day for the month of October 1998 at an average price of Cdn $1.95 and
for 948 MMBtu per day for November 1998 through March 1999 at an average price
of Cdn $2.97. Should the Company be unable to physically deliver its gas
production, it would be required to make market purchases of gas from third
parties to fulfill its contractual obligation.
Page 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 SEPTEMBER 30, 1998
AS COMPARED TO THE QUARTER ENDED SEPTEMBER 30, 1997
Oil and gas revenues for the quarter ended September 30,1998, are $6,743,000,
compared to oil and gas revenues for the same period in 1997 of $3,533,000. The
increase in revenues reflects higher production volumes of both natural gas and
crude oil, which were partially offset by lower average crude oil and natural
gas prices. Higher production volumes are primarily due to the purchase of
Neutrino Resources Inc., as of June 30,1998; acquisition of Amerac Energy
Corporation, acquired on January 28, 1998; a 22.5% working interest in Lake
Raccourci Field, acquired on November 24, 1997, the acquisition by BEC Energy,
Inc. (acquired on May 20, 1997) of additional interests in the Big Escambia
Creek Field through four subsequent transactions and new production from
successful exploration and development programs at the Matthews project in
Texas.
Natural gas production for the three months ended September 30, 1998 was 2,103
MMcf, a 122% increase as compared to production for the same period in 1997 of
949 MMcf. The Company's crude oil production for the three months ended
September 30, 1998 increased 157% to 208,422 barrels as compared to 81,130
barrels for the same period in 1997. On an energy equivalent basis (1 barrel of
liquids = 6 Mcf of gas equivalent), the Company's production averaged 39,500
Mcfe per day during the third quarter of 1998. During the fourth quarter of
1998, the Company expects to sell a number of non-strategic oil and gas
properties in the United States and Canada. The property divestitures in the
fourth quarter of 1998, production declines and other net changes are expected
to result in production volumes for the fourth quarter of 1998 being at a level
similar to the third quarter of 1998.
The average natural gas price in the third quarter of 1998 decreased 7% to $1.75
per Mcf compared to $1.89 per Mcf in the same period in 1997, which was caused,
in part, by an increase in Canadian gas sales (with lower price realizations)
due to the Neutrino acquisition, resulting in an increase in the percentage of
Canadian gas sales to total gas sales, partially offset by gains from hedging
activities in 1998. Historically, Canadian gas prices have been lower than
domestic gas prices. Crude oil prices decreased 34% in 1998 to $10.99 per
barrel, compared to $16.60 per barrel in 1997. Average realized prices in Canada
are lower than the average realized prices domestically.
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 and the Riffe Field for $510,000, as of June 30, 1998 and July 1,
1998, respectively. The sales proceeds were applied to the purchase price of
Amerac, resulting in no gain or loss on the transactions. Loss on sale of assets
in the third quarter of 1997 was $41,000 compared to a loss of $3,000 in the
third quarter of 1998.
Production costs, including production and ad valorem taxes, increased in 1998
to $2,774,000, up 178% from $999,000 in 1997, primarily due to the above
mentioned acquisitions. On a cost per Mcfe basis, production costs for 1998
increased to $0.76 per Mcfe, or 17% from $0.65 per Mcfe in 1997.
General and administrative expenses increased as a result of the above mentioned
acquisitions to $1,050,000 in 1998, up 174% from $383,000 in 1997. On a cost per
Mcfe basis, general and administrative expenses increased to $0.29 per Mcfe,
or 16%, from $0.25 Mcfe in 1997.
Exploration, seismic and dry hole expenses decreased to $456,000 in the third
quarter of 1998, compared to $1,302,000 in the same period of 1997. The 1998
expense is due primarily two unsuccessful exploration wells and to additional
Page 11
costs of $208,000 associated with a dry hole drilled in Lafourche Parish,
Louisiana, during the second quarter of 1998 in which the Company had a 93%
working interest. In 1997, the Company expensed geological and geophysical costs
as well as interests in three unsuccessful exploration wells. 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 the third quarter
of 1998 increased to $2,988,000, up 192% from $1,020,000 in the same period 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 the third quarter of 1998 to $0.82 per Mcfe, up 24%
from $0.66 per Mcfe in the same period in 1997.
Interest and debt expense in the quarter ended September 30, 1998 is $1,768,000,
compared to $545,000 in 1997. During the 1998 third quarter, debt increased to
consummate the above mentioned acquisitions and to fund capital expenditure
programs.
Tax (benefit) expense in 1998 and 1997 is $(224,000) and $(408,000),
respectively.
The Company reported a net loss in the quarter ended September 30, 1998 of
$1,992,000, or $0.16 per share, compared to a net loss of $269,000, or $0.03 per
share, in the same period in 1997. The 1998 third quarter increased loss was
primarily the result of lower average crude oil and natural gas prices during
such period, higher general and administrative expenses and financing costs
associated with higher debt levels incurred in the connection with acquisitions,
partially offset by lower exploration expenses.
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998
AS COMPARED TO THE NINE MONTHS ENDED SEPTEMBER 30, 1997
Oil and gas revenues for the nine months ended September 30, 1998 were
$15,520,000, up 51% compared to oil and gas revenues for the same period in 1997
of $10,253,000. The increase in revenues reflects higher production volumes of
both natural gas and crude oil which is offset by lower average prices for both
natural gas and crude oil. Higher production volumes are primarily due to the
acquisition of Neutrino Resources Inc. as of June 30,1998; 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 new production from successful exploration and development programs at
the Matthews project in Texas.
Natural gas production in the first nine months of 1998 was 4,380 MMcf, a 59%
increase compared to 1997 production of 2,750 MMcf. The Company's crude oil
production in the first nine months of 1998 increased 121% to 419,564 barrels
compared to 190,020 barrels in 1997. On an energy equivalent basis (1 barrel of
liquids = 6 Mcf of gas equivalent), the Company's production averaged 27,548
Mcfe per day during the first nine months of 1998. During the fourth quarter of
1998, the Company expects to sell a number of non-strategic oil and gas
properties in the United States and Canada. The property divestitures in the
fourth quarter of 1998, production declines and other net changes are expected
to result in production volumes for the fourth quarter of 1998 being at a level
similar to the third quarter of 1998.
The average natural gas price in the first nine months of 1998 decreased 9% to
$1.93 per Mcf compared to $2.12 per Mcf in the same period of 1997. Crude oil
prices decreased 33% in the first nine months of 1998 to $12.38 compared to
$18.58 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 along with the Riffe Field for
$510,000 in the third quarter. The sales proceeds were applied to the purchase
price of Amerac, resulting in no gain or loss on the transactions. In 1997, the
gain on sale of assets was $503,000. The
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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 a
oil and gas property in Canada, which the Company agreed to sell for
approximately $360,000.
Production costs, including production and ad valorem taxes, increased in the
first nine months of 1998 to $5,960,000, up 128% from $2,610,000 in the same
period of 1997, primarily due to the above mentioned acquisitions. On a cost per
Mcfe basis, production costs for 1998 increased to $0.79 per Mcfe, or 24%, from
$0.64 per Mcfe in 1997.
General and administrative expenses increased, primarily as a result of the
above mentioned acquisitions, to $2,952,000 in the first nine months of 1998, up
94% from $1,518,000 in 1997. On a cost per Mcfe basis, general and
administrative expenses increased in 1998 to $0.39 per Mcfe, or 5% from $0.37
Mcfe in 1997.
Exploration, dry hole and lease impairment expenses increased in the first nine
months of 1998 to $2,122,000, compared to $1,517,000 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. This compares to the
expense of $633,000 for geological and geophysical costs as well costs
associated with four unsuccessful exploration wells in 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.
DD&A expense for the first nine months of 1998 increased to $6,217,000, up 147%
from $2,512,000 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 34% from $0.62 per Mcfe in
1997.
Interest and debt expense increased in the first nine months of 1998 to
$3,554,000, up 353% compared to $785,000 in 1997. During the 1998 third quarter,
debt increased to consummate the acquisition of Neutrino and fund capital
spending programs.
Tax (benefit) expense in 1998 and 1997 is $(247,000) and $556,000, respectively.
The Company reported a net loss for the nine months ended September 30,1998 of
$4,824,000, or $0.39 per basic share, compared to earnings of $1,393,000, or
$0.15 per basic share for the same period in 1997. Production volumes grew 85%
to 27,600 Mcfe per day during the first nine months of 1998 from 14,900 Mcfe per
day in the comparable period in 1997. While the unit volume growth was
significant during 1998, the benefits were more than offset by lower oil and
natural gas prices, higher exploration costs, and increased general and
administrative and financing costs following the Amerac Energy Corporation and
Neutrino Resources Inc. acquisitions. The number of shares outstanding increased
by 3,333,000 in January, 1998, as a result of the acquisition of Amerac Energy
Corporation and by 324,430 in the acquisition of Neutrino Resources Inc, in June
1998.
LIQUIDITY AND CAPITAL RESOURCES
FOR THE PERIOD ENDED SEPTEMBER 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 other securities and sales of non-
strategic assets and oil and gas properties.
The Company's cash flows provided by operating activities for the nine months
ended September 30, 1998 and 1997 are $2,776,000 and $4,813,000, respectively.
Additional cash of $7,507,000 and $1,047,000 was realized in the first nine
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 November
12, 1998, the borrowing base under the credit facility had been reduced
Page 13
to $36,690,000 as a result of the transfer of the Company's Canadian assets to
Neutrino, the sale of certain domestic assets, and the scheduled reduction
discussed below. Outstanding borrowings as of November 12, 1998,are $36,690,000,
leaving no further availability under the domestic bank credit agreement. 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.It is anticipated that the credit facility borrowing base will be
reviewed in December, 1998. The obligations under the credit facility are
secured by substantially all of the assets of the Company and its subsidiaries
other than Neutrino. The credit facility prohibits the payment of dividends and
contains certain covenants relating to the financial condition of the Company.
The credit facility contains certain covenants relating to the financial
condition of the Company. Effective as of September 1, 1998, certain of the
financial covenants in the credit facility were amended.
As of September 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.$26,084,000) revolving demand loan facility under
which it can borrow at bank prime or at Bankers Acceptance Rates plus a 1%
stamping fee. As of September 30, 1998, the Canadian bank prime rate was 7.25%
and the Bankers Acceptance Rates for 30 day maturities was 5.58%. As of November
12, 1998, outstanding borrowings thereunder are Cdn $33,559,000, (U.S. $
21,884,000) leaving Cdn $6,441,000 (U.S. $4,200,000) available to borrow. The
credit facility borrowing base was reviewed in April 1997 and is expected to be
reviewed again in late November 1998. 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 Neutrino. As of September 30, 1998, Neutrino 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 lender's
judgment of future oil and gas prices will impact their borrowing base
redeterminations. Therefore, required principal payments may increase or
decrease in future periods.
Capital spending in the first nine months of 1998 totaled $13,452,000 for
properties, and $34,855,000 for acquisitions, and was primarily funded from bank
debt and cash flow generated from operations. The Company believes that it will
have sufficient capital available from the credit facilities described above,
together with cash flows from operating activities and property divestitures, to
fund the remainder of its 1998 capital expenditure plans, and to meet the
Company's other obligations. In connection with consummating any acquisition,
the Company will require additional debt or equity financing, which may not be
available on terms acceptable to the Company.
The Company's debt to total capitalization (long-term debt plus shareholder
equity) ratio is 79% at September 30, 1998, as compared to 51% at September 30,
1997. The Company's interest coverage ratio (calculated as net income plus
depreciation, depletion and amortization, interest expense, deferred income
taxes, and exploration expenses divided by cash expenditures for interest) is
2.0 to 1 for the first nine months of 1998.
The Company did not declare dividends in the nine months ended September 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 its operations and future growth.
YEAR 2000 COMPLIANCE
The Company's State of Readiness
The "Year 2000" problem concerns the ability of technology to properly recognize
and process date sensitive information beyond December 31,1999. The Company is
in the process of evaluating its information technology (IT)
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and non-information technology. Year 2000 Committees have been formed at the
Company's office in Houston and at the Company's Canadian subsidiary
headquarters in Calgary. The Committees include members of senior management and
key employees from major business units. The Committees will assess Year 2000
issues; direct remedial actions necessary to minimize systems disruptions and
other risks; contact significant third party purchasers, suppliers, vendors and
operators with whom there are material transactions and data exchange; test
internal hardware and software; and make appropriate contingency plans. Neutrino
Resources Inc., the Canadian subsidiary, has engaged a consulting firm, which
has prepared a report on the status of Neutrino, including a detailed inventory
of hardware and software, priorities for action and an implementation plan. The
Company, on behalf of itself and its other subsidiaries, has contacted principal
software vendors. Thus far, the Company has received a letter of compliance for
its accounting and payroll systems and product conformity assurance for its
reservoir engineering system. The land and lease record systems vendor has
informed the Company that the system is Year 2000 compatible. The Company has no
proprietary software. Purchased software and hardware systems have been
installed or assembled by third party vendors that provide network, software and
hardware IT services to the Company. The vendors have been engaged to evaluate
the systems for Year 2000 compliance before year end 1998.
Costs to Address the Company's Year 2000 Issues
It has been estimated that the costs of compliance will not exceed $150,000,
which includes the evaluation, planning, replacement of the land and lease
records systems at Neutrino and the replacement of several desktop computers and
other hardware. Approximately $50,000 will be expended in 1998, with the balance
to be incurred in 1999.
Risks of the Company's Year 2000 Issues
Risks associated with the Year 2000 problem are potentially significant. Failure
to remedy a critical system problem could have a material affect on the results
of operations and financial condition. The Company has interests in operated and
non-operated properties in the United States, Canada and Ecuador. The Company
will continue to review and monitor software and equipment within its control.
The Company will continue to contact operators of its non-operated properties
and other third parties to determine their Year 2000 compliance procedures, but
cannot warrant the readiness of those systems. As the Company is in the process
of collecting this information from third parties, the Company cannot currently
state whether its operations will be materially affected by third party
compliance issues. The Company is not currently aware of any third party issues
that would cause a significant business disruption. The Company believes that it
will be able to achieve Year 2000 compliance by the end of 1999 with respect to
the Company's internal systems, and does not currently anticipate any disruption
in its operations or any materially adverse effects to its financial condition
as the result of any failure by the Company to be in compliance.
The Company's Contingency Plan
Contingency plans are being developed at this time, and will be monitored and
modified after the initial evaluation by the Committees of the Year 2000 is
complete. The Company intends to have such plans in place by June 30, 1999.
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
Page 15
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.
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, acquisitions and Year 2000 compliance are
forward-looking statements. These statements involve risks and uncertainties,
including price volatility, production levels, drilling results, capital
availability, operational and other risks, uncertainties and factors described
from time to time in the Company's public available Securities and Exchange
Commission reports, which could cause actual results to differ materially.
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.
Page 16
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 6. EXHIBITS AND REPORTS ON FORM 8-K
(A) EXHIBITS:
10.1 Letter Amendment dated November 4, 1998 to the
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:
None
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: November 12, 1998 By /s/ MICHAEL R. DAWSON
--------------------------------
Michael R. Dawson
Vice President-Finance and Chief
Financial Officer (and officer
duly authorized to sign on
behalf of the registrant)
Page 17