SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
- ---
EXCHANGE ACT OF 1934
For the Quarterly period ended September 30, 2000
------------------
OR
____ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Transition period ______________ to _____________
Commission File Number 0-22650
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PETROCORP INCORPORATED
(Exact name of registrant as specified in its charter)
Texas 76-0380430
(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
6733 South Yale
Tulsa, Oklahoma 74136
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code: (918) 491-4500
Not Applicable
---------------------------------------------------------------------
(Former Name, Former Address and Former Fiscal Year, if changed since last
report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.
Yes X No____
-----
Indicate the number of shares outstanding of each of the Registrant's classes of
stock, as of October 31, 2000:
Common Stock, $.01 per value 8,700,019
------------------------------ ---------
(Title of Class) (Number of Shares Outstanding)
PETROCORP INCORPORATED
INDEX
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PAGE NO.
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets at September 30, 2000 and December 31, 1999 1
Consolidated Statements of Operations for the three and nine months ended September 30, 2000 and 1999 2
Consolidated Statements of Cash Flows for the nine months ended September 30, 2000 and 1999 3
Notes to Consolidated Financial Statements 4
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 9
Item 3. Quantitative and Qualitative Disclosures about Market Risk 13
PART II. OTHER INFORMATION 13
SIGNATURES 14
EXHIBIT INDEX 15
Certain matters discussed in this report, excluding historical information,
include forward-looking statements - statements that discuss the Company's
expected future results based on current and pending business operations. The
Company is making these forward-looking statements in reliance on the safe
harbor protections provided under the PRIVATE SECURITIES LITIGATION REFORM ACT
OF 1995.
Forward-looking statements can be identified by words such as "anticipates,"
"believes," "expects," "planned," "scheduled" or similar expressions. Although
the Company believes these forward-looking statements are based on reasonable
assumptions, statements made regarding future results are subject to numerous
assumptions, uncertainties and risks that may cause future results to be
materially different from the results stated or implied in this document.
Important risk factors (but not necessarily all important factors) that could
cause actual results to differ materially from those expressed in any forward-
looking statement made by, or on behalf of, the Company would include, but in no
way be limited by, the Company's ability to obtain agreements with co-venturers,
partners and governments; it ability to engage drilling, construction and other
contractors; its ability to obtain economical and timely financing; geological,
land, sea or weather conditions; world prices for oil, natural gas and natural
gas liquids, adequate and reliable transportation systems; and foreign and
United State laws, including tax laws. Additional information about issues that
could lead to material changes in performance is contained in the Company's Form
10-K.
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements
PETROCORP INCORPORATED
----------------------
CONSOLIDATED BALANCE SHEETS
---------------------------
(in thousands, except share amounts)
(Unaudited)
September 30, December 31,
2000 1999
-------------- ------------
Assets
------
Current assets:
Cash and cash equivalents $ 11,909 $ 12,899
Accounts receivable, net 7,909 4,605
Other current assets 505 162
--------- ---------
Total current assets 20,323 17,666
--------- ---------
Property, plant and equipment:
Oil and gas properties, at cost, full cost method, net
of accumulated depreciation, depletion and amortization 68,772 70,152
Plant and related facilities, net 2,679 3,151
Other, net 137 403
--------- ---------
71,588 73,706
--------- ---------
Deferred income taxes 11,817 13,916
Other assets, net 203 107
--------- ---------
Total assets $ 103,931 $ 105,395
========= =========
Liabilities and Shareholders' Equity
------------------------------------
Current liabilities:
Accounts payable $ 9,541 $ 6,138
Accrued liabilities 2,150 3,609
Income tax payable 2,462 --
Current portion of long-term debt 987 4,277
--------- ---------
Total current liabilities 15,140 14,024
--------- ---------
Long-term debt 34,426 43,410
--------- ---------
Deferred income taxes 5,912 5,598
--------- ---------
Shareholders' equity:
Preferred stock, $0.01 par value, 1,000,000 shares authorized,
none issued
Common stock, $0.01 par value, 25,000,000 shares authorized,
8,700,019 and 8,683,019 shares outstanding as of
September 30, 2000 and December 31, 1999, respectively 87 87
Additional paid-in capital 71,591 71,380
Accumulated deficit (17,426) (24,530)
Accumulated other comprehensive loss (5,799) (4,574)
--------- ---------
Total shareholders' equity 48,453 42,363
--------- ---------
Total liabilities and shareholders' equity $ 103,931 $ 105,395
========= =========
The accompanying notes are an integral part of these financial statements.
1
PETROCORP INCORPORATED
----------------------
CONSOLIDATED STATEMENTS OF OPERATIONS
-------------------------------------
(in thousands, except share amounts)
(Unaudited)
For the three months For the nine months
ended September 30, ended September 30,
---------------------- ----------------------
2000 1999 2000 1999
--------- --------- -------- --------
Revenues:
Oil and gas $ 10,956 $ 7,194 $ 26,847 $ 18,099
Plant processing 668 426 1,526 1,332
Other 163 108 317 162
--------- -------- -------- --------
11,787 7,728 28,690 19,593
--------- --------- -------- --------
Expenses:
Production costs 2,396 1,693 6,144 4,806
Depreciation, depletion and amortization 2,474 2,755 6,748 8,222
General and administrative 428 826 1,389 2,701
Restructuring costs (NOTE 2) -- 2,400 (500) 3,490
Other operating expenses 67 57 253 210
--------- -------- -------- --------
5,365 7,731 14,034 19,429
--------- -------- -------- --------
Income (loss) from operations 6,422 (3) 14,656 164
--------- -------- -------- --------
Other income (expenses):
Investment income 147 185 524 352
Interest expense (813) (962) (2,831) (2,821)
Other income (expenses) 105 (141) 293 (142)
--------- -------- -------- --------
(561) (918) (2,014) (2,611)
--------- -------- -------- --------
Income (loss) before income taxes 5,861 (921) 12,642 (2,447)
--------- -------- -------- --------
Income tax provision (benefit):
Current 1,079 -- 2,511 --
Deferred 1,518 (551) 2,785 (1,439)
--------- -------- -------- --------
2,597 (551) 5,296 (1,439)
--------- -------- -------- --------
Net income (loss) before extraordinary item 3,264 (370) 7,346 (1,008)
Extraordinary item - extinguishment of debt (less
applicable taxes of $143,000) -- -- 242 --
--------- -------- -------- --------
Net income (loss) $ 3,264 $ (370) $ 7,104 $ (1,008)
========= ======== ======== ========
Net income (loss) per common share - basic:
Income (loss) before extraordinary item $ 0.38 $ (0.04) $ 0.85 $ (0.12)
Extraordinary item -- -- (0.03) --
--------- -------- -------- --------
Net income (loss) $ 0.38 $ (0.04) $ 0.82 $ (0.12)
========= ======== ======== ========
Net income (loss) per common share - diluted:
Income (loss) before extraordinary item $ 0.37 $ (0.04) $ 0.84 $ (0.12)
Extraordinary item -- -- (0.03) --
--------- -------- -------- --------
Net income (loss) $ 0.37 $ (0.04) $ 0.81 $ (0.12)
========= ======== ======== ========
Weighted average number of common shares - basic 8,694 8,656 8,688 8,656
========= ======== ======== ========
Weighted average number of common shares - diluted 8,822 8,680 8,757 8,672
========= ======== ======== ========
The accompanying notes are an integral part of these financial statements.
2
PETROCORP INCORPORATED
----------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
(in thousands)
(Unaudited)
For the nine months
ended September 30,
-----------------------
2000 1999
----------- ----------
Cash flows from operating activities:
Net income (loss) $ 7,104 $ (1,008)
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Depreciation, depletion and amortization 6,748 8,222
Deferred income tax expense (benefit) 2,785 (1,439)
Other 49 (112)
Changes in operating assets and liabilities:
Accounts receivable (3,304) 129
Other current assets (343) 116
Accounts payable 3,403 725
Accrued liabilities (1,353) 1,276
Income tax payable 2,462 --
--------- --------
Net cash provided by operating activities 17,551 7,909
--------- --------
Cash flows from investing activities:
Additions to oil and gas properties (5,573) (2,850)
Additions to plant and related facilities (464) (97)
Additions to other property, plant and equipment -- (13)
--------- --------
Net cash used in investing activities (6,037) (2,960)
--------- --------
Cash flows from financing activities:
Proceeds from long-term debt 15,913 2,195
Repayment of long-term debt (28,125) (2,769)
Other (114) --
--------- --------
Net cash used in financing activities (12,326) (574)
--------- --------
Effect of exchange rate changes on cash (178) 82
--------- --------
Net increase (decrease) in cash and cash equivalents (990) 4,457
Cash and cash equivalents at beginning of period 12,899 7,786
--------- --------
Cash and cash equivalents at end of period $ 11,909 $ 12,243
========= ========
The accompanying notes are an integral part of these financial statements.
3
PETROCORP INCORPORATED
----------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
(Unaudited)
NOTE 1 - BASIS OF PRESENTATION:
The unaudited consolidated financial statements of PetroCorp Incorporated
(the "Company" or "PetroCorp") have been prepared in accordance with generally
accepted accounting principles for interim financial information and with
instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do
not include all of the information and footnotes required by generally accepted
accounting principles for complete financial statements. In the opinion of
management, all adjustments, consisting of normal and recurring adjustments
necessary for a fair presentation, have been included. For further information,
refer to the consolidated financial statements and footnotes thereto for the
year ended December 31, 1999, included in the Company's 1999 Annual Report on
Form 10-K pursuant to Section 13 or 15(d) of the Securities Exchange Act of
1934. Interim period results are not necessarily indicative of results of
operations or cash flows for a full-year period.
NOTE 2 - RESTRUCTURING:
As part of a restructuring plan, on August 3, 1999, PetroCorp's Board of
Directors entered into a Management Agreement with its largest shareholder,
Kaiser-Francis Oil Company ("Kaiser-Francis"), under which Kaiser-Francis
provides management, technical, and administrative support services for all
PetroCorp operations in the United States and Canada.
As a result of the restructuring, fifty-two employees were terminated in
1999 with one employee terminated in 2000. Several employees elected to defer
receipt of their termination benefits until 2000. The Houston, Oklahoma City and
Calgary offices were closed but the Company was still liable under the lease
agreements. In the second quarter, the Company was able to find a replacement
lessee for some of the idle office space earlier than anticipated. The following
table shows the change in accrued restructuring costs:
Expenditures
Balance at charged Balance at
December 31, against Changes in September 30,
1999 accrual estimates 2000
------------- ----------- ------------ ---------------
Employee termination costs $ 1,341,000 $ 1,333,000 $ -- $ 8,000
Office lease discontinuance and other
related costs 820,000 230,000 (500,000) 90,000
----------- ----------- ----------- -----------
$ 2,161,000 $ 1,563,000 $ (500,000) $ 98,000
=========== =========== =========== ===========
4
NOTE 3 - COMPREHENSIVE INCOME OR LOSS:
The Company's comprehensive income (loss) for the three and nine months
ended September 30, 2000 and 1999 is as follows (in thousands):
For the three For the nine
months ended months ended
September 30, September 30,
------------- -------------
2000 1999 2000 1999
-------- -------- ------- ---------
Net income (loss) $ 3,264 $ (370) $ 7,104 $(1,008)
Foreign currency translation gain (loss) (454) 89 (1,225) 1,179
------- ------- ------- -------
Comprehensive income (loss) $ 2,810 $ (281) $ 5,879 $ 171
======= ======= ======= =======
NOTE 4 - EARNINGS PER SHARE:
The following is a reconciliation of the numerators and denominators of the
basic and diluted per share computations for the periods presented (in
thousands, except share amounts):
Three months ended September 30, Per Share Amounts
------------------------------------------
Net income
Net (loss) before Net
Income extraordinary Extraordinary Income
(Loss) Shares item loss (loss)
---------- --------- ---------- ------------- ----------
2000
Basic EPS:
Net income....................... $ 3,264 8,694 $ 0.38 $ -- $ 0.38
Effect of dilutive securities:
Options.......................... -- 128 (0.01) -- (0.01)
-------- ------- --------- --------- ---------
Diluted EPS:
Net income....................... $ 3,264 8,822 $ 0.37 $ -- $ 0.37
======== ======= ========= ========= =========
1999
Basic EPS:
Net loss......................... $ (370) 8,656 $ (0.04) $ -- $ (0.04)
Effect of dilutive securities:
Options.......................... -- 24 -- -- --
-------- ------- --------- --------- ---------
Diluted EPS:
Net income....................... $ (370) 8,680 $ (0.04) $ -- $ (0.04)
======== ======= ========= ========= =========
5
Nine months ended September 30, Per Share Amounts
---------------------------------------------
Net income
Net (loss) before Net
Income extraordinary Extraordinary Income
(Loss) Shares item loss (loss)
---------- -------- ------------- --------------- -----------
2000
Basic EPS:
Net income (A)................ $ 7,104 8,688 $ 0.85 $ (0.03) $ 0.82
Effect of dilutive securities:
Options....................... -- 69 (0.01) -- (0.01)
--------- ----- ----------- ----------- -----------
Diluted EPS:
Net income.................... $ 7,104 8,757 $ 0.84 $ (0.03) $ 0.81
========= ===== =========== =========== ===========
1999
Basic EPS:
Net loss...................... $ (1,008) 8,656 $ (0.12) $ -- $ (0.12)
Effect of dilutive securities:
Options....................... -- 16 -- -- --
--------- ----- ---------- ---------- ----------
Diluted EPS:
Net loss...................... $ (1,008) 8,672 $ (0.12) $ -- $ (0.12)
========= ===== =========== =========== ===========
/(A)/ Net of extraordinary loss of $242,000.
The net income per share and net loss per share amounts do not include the
effect of potentially dilutive securities of 389,000 and 575,000 for the three
months ended September 30, 2000 and 1999, respectively, and 419,650 and 575,000
for the nine months ended September 30, 2000 and 1999, respectively, as the
impact of these outstanding options was antidilutive.
NOTE 5 - HEDGING ACTIVITIES:
In the first quarter of 2000, the Company entered into swap transactions in
an effort to lock in a portion of higher oil prices which currently exist. These
transactions apply to approximately 50 percent of the Company's projected oil
production from April 2000 through December 2000, at prices ranging from $23.57
to $29.00 per barrel. The fair value of the swap transactions, based on NYMEX
oil futures settlement prices as of September 30, 2000, would result in the
company paying $527,000. Oil and gas revenue includes $69,000 received and
$434,000 paid in settlement of swap transactions through September 30, 2000.
In the second quarter of 2000, the Company entered into a no-cost collar
arrangement by which 180,000 MMbtu for each of the months July through October
2000 are subject to a $4.96 ceiling and a $3.50 floor per MMbtu. No liability or
receivable to the Company arose for the first three months of this arrangement.
The settlement of the October 2000 hedge resulted in a payment by the Company of
$62,000.
No hedge transactions were in place in 1999.
On June 15, 1998, the financial Accounting Standards board issued Statement
of financial Accounting Standards (SFAS) No. 133 "Accounting for Derivative
Instruments and Hedging Activities." SFAS 133, as amended by SFAS 137 and 138,
is effective for all fiscal quarters of all fiscal years beginning after June
15, 2000 for certain companies (January 1, 2001 for the Company). SFAS 133
requires that all derivative instruments be recorded on the balance sheet at
their fair value. Changes in the fair value of derivatives will be recorded each
period in current earnings or other comprehensive income (only certain types of
hedge transactions are reported as a component of other
6
comprehensive income). Additionally, for all hedge transactions the nature and
type of hedge will be disclosed. Based on the nature of the Company's
anticipated use of derivative instruments in 2000, the Company does not
anticipate that the adoption of SFAS 133 will have a significant effect on the
results of operations or financial position.
NOTE 6 - PROPERTY, PLANT AND EQUIPMENT:
Investments in property, plant and equipment were as follows at September
30, 2000 and December 31, 1999 (amounts in thousands):
2000 1999
---------- -----------
Oil and gas properties ................ $ 226,827 $ 223,145
Plant and related facilities .......... 9,880 9,806
Gas gathering facilities .............. 1,698 1,698
Furniture, fixtures and equipment ..... -- 29
---------- -----------
238,405 234,678
Less - accumulated depreciation,
depletion and amortization........... (166,817) (160,972)
---------- -----------
$ 71,588 $ 73,706
========== ===========
NOTE 7 - LONG-TERM DEBT:
In June 2000, the revolving credit agreement was amended to increase the
current borrowing base to $40 million and change the termination date to July
31, 2000, pending a new loan agreement between Toronto-Dominion and the Company.
The new loan agreement was successfully completed in July, 2000. Also in June
2000, the Company paid off the Series B fixed rate notes, using available
capital and borrowings under the revolving credit agreement. Early termination
payments required by the Series B agreement and remaining unamortized debt costs
were expensed and are reflected in the financial statements as an extraordinary
item of $385,000, net of applicable taxes of $143,000.
In July 2000, the Company entered into a $75 million revolving credit
agreement with the Toronto-Dominion Bank (TD Bank), the agent, and the Bank of
Nova Scotia. The term of the facility is through April 30, 2003 and the initial
borrowing base was set at $58 million. Borrowings can be funded by either
Eurodollar loans or Base Rate loans. The interest rate on the borrowings is
equal to an interest rate spread plus either the Eurodollar rate or the Base
Rate. The interest spread is determined from a sliding scale based on the
Company's borrowing base percentage utilization in effect from time to time. The
spread ranges from 1.25 to 2.25 on Eurodollar loans and .25 to 1.25 on Base Rate
loans.
NOTE 8 - STOCK OPTIONS:
On May 19, 2000, shareholders approved the Company's 2000 Stock Option
Plan. Grants of 82,000 shares at $6.13 and 24,650 shares at $7.06 have been
issued. These shares vest one year from date of grant. The weighted average
exercise price for options outstanding under the Plan at September 30, 2000 was
$6.34. For additional stock option information, see the Company's most recent
10-K.
7
NOTE 9 - GEOGRAPHIC AREA INFORMATION:
The principal business of the Company is oil and gas, which consists of the
exploration, development, acquisition, exploitation and operation of oil and gas
properties and the production and sale of crude oil and natural gas in North
America. Pertinent information with respect to the Company's oil and gas
business is presented in the following table (in thousands):
United General
States Canada Corporate Total
----------- --------- ------------ ---------
Three months ended September 30, 2000:
Revenues................................ $ 6,782 $ 5,005 $ -- $ 11,787
Income (loss) from operations........... 3,804 3,046 (428) 6,422
Three months ended September 30, 1999:
Revenues................................ $ 4,366 $ 3,362 $ -- $ 7,728
Income (loss) from operations........... 1,510 1,713 (3,226)/(A)/ (3)
Nine months ended September 30, 2000:
Revenues................................ $ 16,381 $ 12,309 $ -- $ 28,690
Income (loss) from operations........... 8,093 7,452 (889)/(B)/ 14,656
Identifiable assets at September 30..... 53,569 50,159 203 103,931
Nine months ended September 30, 1999:
Revenues................................ $ 11,275 $ 8,318 $ -- $ 19,593
Income (loss) from operations........... 2,547 3,808 (6,191)/(C)/ 164
Identifiable assets at September 30..... 62,472 43,086 386 105,944
/(A)/ Includes $2,400 of restructuring costs.
/(B)/ Net of $500 restructuring cost credit.
/(C)/ Includes $3,490 of restructuring costs.
8
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
General
The Company's principal line of business is the production and sale of its
oil and natural gas reserves located in North America. Results of operations are
dependent upon the quantity of production and the price obtained for such
production. Prices received by the Company for the sale of its oil and natural
gas have fluctuated significantly from period to period. Such fluctuations
affect the Company's ability to maintain or increase its production from
existing oil and gas properties and to explore, develop or acquire new
properties.
The following table reflects certain operating data for the periods
presented:
For the For the
three months nine months
ended September 30, ended September 30,
---------------------- ---------------------
2000 1999 2000 1999
----------- --------- -------- ---------
Production:
United States
Oil (MBbls)............................................... 74 78 228 242
Gas (MMcf)................................................ 1,162 1,044 2,952 3,432
Total gas equivalents (MMcfe)............................. 1,606 1,512 4,320 4,884
Canada:
Oil (MBbls)............................................... 25 42 86 111
Gas (MMcf)................................................ 1,180 1,066 3,177 3,254
Total gas equivalents (MMcfe)............................. 1,330 1,318 3,693 3,920
Total:
Oil (MBbls)............................................... 99 120 314 353
Gas (MMcf)................................................ 2,342 2,110 6,129 6,686
Total gas equivalents (MMcfe)............................. 2,936 2,830 8,013 8,804
Average sales prices:
United States:
Oil (per Bbl)............................................. $ 25.76 $ 19.75 $ 27.01 $ 15.27
Gas (per Mcf)............................................. 4.13 2.70 3.43 2.20
Canada:
Oil (per Bbl)............................................. 24.75 18.57 25.95 15.07
Gas (per Mcf)............................................. 3.06 1.93 2.62 1.59
Weighted average:
Oil (per Bbl)............................................. 25.50 19.33 26.72 15.21
Gas (per Mcf)............................................. 3.59 2.31 3.01 1.90
Selected data per Mcfe:
Average sales price......................................... $ 3.73 $ 2.54 $ 3.35 $ 2.06
Production costs............................................ 0.82 0.60 0.77 0.55
General and administrative expenses......................... 0.15 0.29 0.17 0.31
Oil and gas depreciation, depletion and amortization........ 0.71 0.83 0.70 0.80
9
Results of Operations
Three Months Ended September 30, 2000 Compared to Three Months Ended
September 30, 1999
Overview. The Company recorded a third quarter 2000 net income of
$3,264,000, or $0.38 per share. This compares to a net loss of $370,000 or $0.04
per share recorded in the third quarter of 1999. This improvement results from
higher oil and gas prices and lower general and administrative, restructuring
costs and depreciation, depletion, and amortization expenses. Net cash provided
by operating activities was $9.6 million for the quarter ended September 30,
2000 compared to net cash provided of $5.6 million for the corresponding quarter
of 1999.
Revenues. Total revenues increased 53% to $11.8 million in the third
quarter of 2000 compared to $7.7 million in the third quarter of 1999, primarily
due to commodity price increases. The Company's natural gas production increased
11% to 2,342 MMcf from 2,110 MMcf and oil production declined 18% to 99 MBbls
from 120 MBbls, resulting in the Company's overall equivalent production
increasing 4% to 2,936 MMcfe from 2,830 MMcfe. The increase in natural gas
production is primarily the result of the Alfred Martin Heirs and Alcott 2-4
wells in the U.S. and Shaw/Basing wells in Canada coming on line. The decrease
in oil production reflects normal production declines.
The Company's composite average oil price increased 32% to $25.50 per
barrel in the third quarter of 2000 from $19.33 per barrel in the third quarter
of 1999. Oil revenues were reduced by hedging payments of $374,000, or $3.78 per
barrel during the quarter. The Company's average U.S. natural gas price
increased 53% to $4.13 per Mcf in the third quarter of 2000 from $2.70 per Mcf
in the prior year quarter, while the average Canadian natural gas price
increased 59% to $3.06 per Mcf in the third quarter of 2000 from $1.93 per Mcf
for 1999. The significant increase in prices, partially offset by the decline in
production volumes, resulted in a 53% increase in oil and gas revenues to $11.0
million in the third quarter of 2000 from $7.2 million in the prior year.
Production Costs. Production costs increased 42% to $2.4 million in the
third quarter of 2000 as a result of workover operations for repairs and
production enhancement and higher U.S. production taxes related to higher
commodity prices. Production costs per Mcfe increased 37% to $0.82 per Mcfe in
the third quarter of 2000 from $0.60 in the same quarter of 1999. Approximately
$0.24 per Mcfe of increased costs are due to workover operations and increased
production taxes.
Depreciation, Depletion & Amortization (DD&A). Total DD&A decreased 10% to
$2.5 million in the third quarter of 2000 from $2.8 million in the third quarter
of 1999. The decrease reflects the impact of higher oil and gas reserves due to
price increases and field extensions. The composite oil and gas DD&A rate
decreased 14% to $0.71 per Mcfe from $0.83 per Mcfe.
General and Administrative Expenses. General and administrative expenses
decreased 48% to $0.4 million in the third quarter of 2000 from $0.8 million in
the third quarter of 1999 as a result of the Company's restructuring efforts and
the Management Agreement with Kaiser-Francis. See Note 2 to the consolidated
financial statements.
Investment Income. Investment income decreased 21% to $147,000 in the third
quarter of 2000 from $185,000 in the third quarter of 1999 due to excess cash
being used to pay down debt.
Interest Expense. Interest expense decreased 15% to $813,000 in the third
quarter of 2000 from $962,000 in the prior year quarter, reflecting the
reductions in outstanding debt, as described in the Liquidity and Capital
Resources section.
Income Taxes. The Company recorded a $2,597,000 income tax expense with an
effective tax rate of 44% on a pre-tax income of $5,861,000 in the third quarter
of 2000. This compares to an income tax benefit of $551,000 with an effective
tax rate of 60% on a pre-tax loss of $921,000 in the third quarter of 1999.
10
Nine Months Ended September 30, 2000 Compared to Nine Months Ended
September 30, 1999
Overview. The Company recorded net income of $7,104,000, or $0.82 per share
for the first nine months of 2000. This compares to a net loss of $1.0 million
or $0.12 per share recorded in the first nine months of 1999. This improvement
results from higher oil and gas prices and lower general and administrative,
restructuring costs and depreciation, depletion, and amortization expenses. Net
cash provided by operating activities was $17.6 million for the nine months
ended September 30, 2000 compared to $7.9 million for the corresponding nine
months of 1999.
Revenues. Total revenues increased 46% to $28.7 million in the first nine
months of 2000 compared to $19.6 million in the first nine months of 1999,
primarily due to commodity price increases. The Company's natural gas production
decreased 8% to 6,129 MMcf from 6,686 MMcf and oil production declined 11% to
314 MBbls from 353 MBbls, resulting in the Company's overall equivalent
production declining 9% to 8,013 MMcfe from 8,804 MMcfe. The decrease in natural
gas production is primarily the result of normal production declines coupled
with temporary reductions due to workover and facility related downtime and
pipeline capacity constraints in Canada, as well as the temporary shut down for
repairs, in March 2000, of the Minehead 8-13 well in Canada. The decrease in oil
production reflects normal production declines.
The Company's composite average oil price increased 76% to $26.72 per
barrel in the first nine months of 2000 from $15.21 per barrel in the first nine
months of 1999. Oil revenue was reduced by net hedging payments of $365,000, or
$1.16 per barrel for the year. The Company's average U.S. natural gas price
increased 56% to $3.43 per Mcf in the first nine months of 2000 from $2.20 per
Mcf in the prior year, while the average Canadian natural gas price increased
65% to $2.62 per Mcf in the first nine months of 2000 from $1.59 per Mcf for
1999. The significant increase in prices, partially offset by the decline in
production volumes, resulted in a 48% increase in oil and gas revenues to $26.8
million in the first nine months of 2000 verses $18.1 million in the prior year.
Production Costs. Production costs increased 28% to $6.1 million in the
first nine months of 2000 as a result of workover operations for repairs and
production enhancement and production tax increases related to higher commodity
prices. Production costs per Mcfe increased 40% to $0.77 per Mcfe in the first
nine months of 2000 from $0.55 in the same nine months of 1999. Approximately
$0.20 per Mcfe of increased costs are due to workover operations and increased
production taxes.
Depreciation, Depletion & Amortization (DD&A). Total DD&A decreased 18% to
$6.7 million in the first nine months of 2000 from $8.2 million in the first
nine months of 1999. The decrease reflects the impact of higher U.S. oil and gas
reserves due to price increases and field extensions. The composite oil and gas
DD&A rate decreased 13% to $0.70 per Mcfe from $0.80 per Mcfe.
General and Administrative Expenses. General and administrative expenses
decreased 48% to $1.4 million in the first nine months of 2000 from $2.7 million
in the first nine months of 1999 as a result of the Company's restructuring
efforts and the Management Agreement with Kaiser-Francis. See Note 2 to the
consolidated financial statements.
Restructuring Costs. The Company recorded a $0.5 million credit against
restructuring costs in the first nine months of 2000 primarily because the
Houston office space was leased to an outside party and the Company's obligation
ended. This compares to a $3.5 million restructuring charge in the first nine
months of 1999 related to the Company's pursuit of strategic alternatives to
maximize shareholder value. See Note 2 to the consolidated financial statements.
Investment Income. Investment income increased 49% to $524,000 in the first
nine months of 2000 from $352,000 in the first nine months of 1999 due to more
cash being available for investment.
Interest Expense. Interest expense increased less than 1% to $2,831,000 in
the first nine months of 2000 from $2,821,000 in the prior year first nine
months, reflecting the impact of rate increases, net of debt paydowns in the
third quarter. See the Liquidity and Capital Resources section for further
discussion.
11
Income Taxes. The Company recorded a $5,296,000 income tax expense with an
effective tax rate of 42% on a pre-tax income of $12,642,000 in the first nine
months of 2000. This compares to an income tax benefit of $1.4 million with an
effective tax rate of 59% on a pre-tax loss of $2.4 million in the first nine
months of 1999.
Liquidity and Capital Resources
As of September 30, 2000, the Company had working capital of $5.2 million
as compared to $3.6 million at December 31, 1999. Net cash provided by operating
activities was $17.6 million for the nine months ended September 30, 2000
compared to $7.9 million for the corresponding nine months of 1999.
The Company's total capital expenditures were $6.0 million and $3.0 million
for the nine months ended September 30, 2000 and 1999, respectively, primarily
related to exploration and development.
No sales of oil and gas properties occurred in the first nine months of
either 2000 or 1999.
In June 1997, the Company entered into a $50.0 million five-year revolving
credit agreement with the Toronto-Dominion Bank, the agent, and the Bank of Nova
Scotia. The facility was amended in June 1998 to extend the initial five-year
term an additional year to July 1, 2003 with quarterly borrowing base
amortization beginning September 30, 2001. The borrowings can be funded by
either Eurodollar loans or Prime loans. The interest rate on the borrowings is
equal to an interest rate spread plus either the Eurodollar rate or the Prime
rate. The interest spread is determined from a sliding scale based on the
Company's borrowing base percentage utilization in effect from time to time. The
spread ranges from 1-3/8% to 2% on Eurodollar loans and 3/8% to 1% on Prime
loans. The Company's average interest rate under this facility was approximately
8.4% through July 21, 2000, which was the date this facility was terminated,
verses 6.5% during the first nine months of 1999.
In June 2000, the revolving credit agreement was amended to increase the
current borrowing base to $40 million and change the termination date to July
31, 2000, pending a new loan agreement between Toronto-Dominion and the Company.
The new loan agreement was successfully completed in July 2000. Also in June
2000, the Company paid off the Series B fixed rate notes, using available
capital and borrowings under the revolving credit agreement. Early termination
payments required by the Series B agreement and remaining unamortized debt costs
were expensed and are reflected in the financial statements as an extraordinary
item of $385,000, net of applicable taxes of $143,000.
In July 2000, the Company entered into a $75 million revolving credit
agreement with the Toronto-Dominion Bank (TD Bank), the agent, and the Bank of
Nova Scotia. The term of the facility is through April 30, 2003 and the initial
borrowing base was set at $58 million. Borrowings can be funded by either
Eurodollar loans or Base Rate loans. The interest rate on the borrowings is
equal to an interest rate spread plus either the Eurodollar rate or the Base
Rate. The interest spread is determined from a sliding scale based on the
Company's borrowing base percentage utilization in effect from time to time. The
spread ranges from 1.25 to 2.25 on Eurodollar loans and .25 to 1.25 on Base Rate
loans. At September 30, 2000, the Company had a total of $32,500,000 million
outstanding under the revolver and $25,500,000 available based on the current
borrowing base, as defined, subject to certain limitations. From July 21, 2000,
the date of inception of this facility, through September 30, 2000, the average
interest rate under this facility was approximately 8.6%.
The Company has historically funded its capital expenditures and working
capital requirements with its cash flow from operations, debt and equity capital
and participation by institutional investors. If the Company increases its
capital expenditure level in the future or operating cash flow is not as
expected, capital expenditures may require additional funding, obtained through
borrowings from commercial banks and other institutional sources or by public or
private offerings of equity or debt securities.
Year 2000 Issues
PetroCorp had no Year 2000 computer problems. Minimal costs were expended
in this area.
12
Item 3. Quantitative and Qualitative Disclosures about Market Risk
The Company's primary sources of market risk are from fluctuations in
commodity prices, interest rates and exchange rates.
Commodity Price Risk
The Company produces and sells natural gas, crude oil, condensate, natural
gas liquids and sulfur. As a result, the Company's financial results can be
significantly affected as these commodity prices fluctuate widely in response to
changing market forces. The Company has previously utilized hedging transactions
to manage its exposure to price fluctuations on its sales of oil and natural
gas. In the first quarter of 2000, the Company entered into swap transactions in
an effort to lock in a portion of higher oil prices which currently exist. These
transactions apply to approximately 50 percent of the Company's projected oil
production from April 2000 through December 2000, at prices ranging from $23.57
to $29.00 per barrel. The fair value of the swap transactions, based on NYMEX
oil futures settlement prices as of September 30, 2000, would result in the
company paying $527,000. Oil and gas revenue includes $69,000 received and
$434,000 paid in settlement of swap transactions through September 30, 2000.
In the second quarter of 2000, the Company entered into a no-cost collar
arrangement by which 180,000 MMbtu for each of the months July through October
2000 are subject to a $4.96 ceiling and a $3.50 floor per MMbtu. No liability or
receivable to the Company arose for the first three months of this arrangement.
The settlement of the October 2000 hedge resulted in a payment by the Company of
$62,000.
No hedge transactions were in place in 1999.
PART II. OTHER INFORMATION
Item 1 - Legal Proceedings
- --------------------------
Not Applicable
Item 2 - Changes in Securities
- ------------------------------
Not Applicable
Item 3 - Defaults upon Senior Securities
- ----------------------------------------
Not Applicable
Item 4 - Submission of Matters to Vote of Security Holders
- ----------------------------------------------------------
Not Applicable
Item 5 - Other Information
- --------------------------
Not Applicable
Item 6 -
- --------
(a) Exhibits
--------
27 Financial Data Schedule
(b) Reports on Form 8-K
-------------------
Not Applicable
13
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned duly authorized officer.
PETROCORP INCORPORATED
----------------------
(Registrant)
Date: November 7, 2000 /s/ STEVEN R. BERLIN
---------------- ---------------------------------------
Steven R. Berlin
Chief Financial Officer and Secretary
(On behalf of the Registrant and as the
Principal Financial Officer)
14
EXHIBIT INDEX
Exhibit No. Description
- ----------- -----------
27 Financial Data Schedule
15