DRAFT
AUGUST 13, 1996
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 June 30, 1996
-------------
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)
16800 Greenspoint Park Drive 77060-2391
Suite 300, North Atrium (Zip Code)
Houston, Texas
(Address of Principal Executive Offices)
Registrant's Telephone Number, Including Area Code: (713) 875-2500
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 July 31, 1996:
Common Stock, $.01 per value 8,584,519
---------------------------- ---------
(Title of Class) (Number of Shares Outstanding)
PETROCORP INCORPORATED
INDEX
-----
PAGE NO.
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements.
Consolidated Balance Sheet at June 30, 1996 and December 31, 1995 1
Consolidated Statement of Operations for the quarters and six months ended June 30, 1996 and 1995 2
Consolidated Statement of Cash Flows for the six months ended June 30, 1996 and 1995 3
Notes to Consolidated Financial Statements 4
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 6
PART II. OTHER INFORMATION 13
SIGNATURES 14
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements.
PETROCORP INCORPORATED
CONSOLIDATED BALANCE SHEET
(dollar amounts in thousands)
June 30, December 31,
1996 1995
----------- --------------
Assets (Unaudited)
------
Current assets:
Cash and cash equivalents $ 22,898 $ 11,764
Accounts receivable, net 5,267 7,632
Other current assets 357 1,433
-------- --------
Total current assets 28,522 20,829
-------- --------
Property, plant and equipment:
Oil and gas properties, at cost, full cost method, net of
accumulated depreciation, depletion and amortization 77,041 79,667
Unproved properties not subject to depletion 3,812 4,406
Plant and related facilities, net 4,905 6,389
Other, net 2,203 3,128
-------- --------
87,961 93,590
-------- --------
Other assets, net 344 420
-------- --------
Total assets $116,827 $114,839
======== ========
Liabilities and Shareholders' Equity
------------------------------------
Current liabilities:
Accounts payable $ 7,026 $ 5,259
Accrued liabilities 2,129 3,370
Current portion of long-term debt 6,822 5,856
-------- --------
Total current liabilities 15,977 14,485
-------- --------
Long-term debt 32,550 36,513
-------- --------
Deferred revenue 1,899 -
-------- --------
Deferred income taxes 3,099 2,320
-------- --------
Commitments and contingencies (Note 4)
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, 8,616,216 shares issued and
8,584,519 shares outstanding 86 86
Additional paid-in capital 71,170 71,170
Retained deficit, since October 1, 1992 (4,274) (6,043)
Foreign currency translation adjustment (3,363) (3,375)
Treasury stock, at cost (31,697 shares) (317) (317)
-------- --------
Total shareholders' equity 63,302 61,521
-------- --------
Total liabilities and shareholders' equity $116,827 $114,839
======== ========
The accompanying notes are an integral part of this statement.
1
PETROCORP INCORPORATED
CONSOLIDATED STATEMENT OF OPERATIONS
(amounts in thousands, except per share data)
(Unaudited)
For the quarter For the six months
ended June 30, ended June 30,
----------------------- -----------------------
1996 1995 1996 1995
--------- --------- --------- ---------
Revenues:
Oil and gas $6,938 $ 6,244 $13,814 $ 12,337
Plant processing 459 473 926 932
Other (8) 282 179 548
------ ------- ------- --------
7,389 6,999 14,919 13,817
------ ------- ------- --------
Expenses:
Production costs 1,671 1,981 3,283 3,800
Depreciation, depletion and amortization 3,061 3,405 6,154 6,832
Oil and gas property valuation adjustment - 8,500 - 8,500
General and administrative 1,210 1,336 2,457 2,909
Other operating expenses 38 79 104 134
------ ------- ------- --------
5,980 15,301 11,998 22,175
------ ------- ------- --------
Income (loss) from operations 1,409 (8,302) 2,921 (8,358)
------ ------- ------- --------
Other income (expenses):
Investment and other income 258 234 1,433 418
Interest expense (892) (988) (1,800) (1,971)
Other expenses (7) (55) (7) (108)
------ ------- ------- --------
(641) (809) (374) (1,661)
------ ------- ------- --------
Income (loss) before income taxes 768 (9,111) 2,547 (10,019)
Income tax provision (benefit) 248 (184) 778 (524)
------ ------- ------- --------
Net income (loss) $ 520 $(8,927) $ 1,769 $ (9,495)
====== ======= ======= ========
Net income (loss) per common share $ 0.06 $ (1.03) $ 0.20 $ (1.09)
====== ======= ======= ========
Weighted average number of common shares 8,698 8,698 8,698 8,698
====== ======= ======= ========
The accompanying notes are an integral part of this statement.
2
PETROCORP INCORPORATED
CONSOLIDATED STATEMENT OF CASH FLOWS
(amounts in thousands)
(Unaudited)
For the six months
ended June 30,
----------------------------
1996 1995
---------- ----------
Cash flows from operating activities:
Net income (loss) $ 1,769 $(9,495)
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Depreciation, depletion and amortization 6,154 6,832
Oil and gas property valuation adjustment - 8,500
Gain on sale of gas gathering system (999) -
Deferred income tax provision (benefit) 778 (524)
------- -------
7,702 5,313
Change in operating assets and liabilities:
Accounts receivable 2,365 294
Other current assets 1,076 503
Accounts payable 1,767 (1,435)
Accrued liabilities (1,241) (375)
Other (190) 87
------- -------
Net cash provided by operating activities 11,479 4,387
------- -------
Cash flows from investing activities:
Proceeds from sale of oil and gas properties 3,950 103
Proceeds from sale of interest in plant and related facilities 1,211 -
Proceeds from sale of other property, plant and equipment 3,838 -
Additions to oil and gas properties (6,018) (6,992)
Additions to plant and related facilities (184) (174)
Additions to other property, plant and equipment (159) (651)
Additions to other assets - (9)
Proceeds from sale of short-term investment - 3,500
------- -------
Net cash provided by (used in) investing activities 2,638 (4,223)
------- -------
Cash flows from financing activities:
Proceeds from long-term debt 55 448
Repayment of long-term debt (3,053) (1,214)
------- -------
Net cash used in financing activities (2,998) (766)
------- -------
Effect of exchange rate changes on cash 15 109
------- -------
Net increase (decrease) in cash and cash equivalents 11,134 (493)
Cash and cash equivalents at beginning of period 11,764 10,127
------- -------
Cash and cash equivalents at end of period $22,898 $ 9,634
======= =======
The accompanying notes are an integral part of this statement.
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, 1995, included in the Company's 1995
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 - HEDGING PROGRAM:
From time to time, the Company has utilized hedging transactions to manage
its exposure to price fluctuations on its sales of oil and natural gas.
Realized gains and losses from the Company's hedging activities are included in
oil and gas revenues in the period of the hedged production. Normally, any
realized and unrealized gains and losses prior to the period when the hedged
production occurs are deferred. To-date, the Company has used oil and natural
gas futures contracts or natural gas option contracts traded on the NYMEX to
hedge its oil and gas sales.
As a result of its hedging transactions, the Company reduced its oil and
gas revenues by $762,000 during the first six months of 1996 while reducing oil
and gas revenues by $39,000 during the first six months of 1995. As of June 30,
1996, the Company had deferred $163,000 of unrealized hedging losses related to
oil sales.
In connection with its oil and gas hedging program, the Company may be
exposed to the risk of financial loss in certain circumstances including
instances where production is less than expected, the Company's customers fail
to purchase or take delivery of the contracted sales quantities, or a sudden,
unexpected event materially impacts product prices. The Company attempts to
reduce these risks by limiting, at any point in time, its U.S. hedged oil and
natural gas sales volumes to approximately 85% of total U.S. sales volumes and
limiting its Canadian hedged natural gas sales volumes to approximately 65% of
total Canadian natural gas sales volumes. The Company had no oil or natural gas
futures contracts open as of August 12, 1996.
4
NOTE 3 - DEFERRED REVENUE:
In March 1996, the Company's wholly-owned subsidiary, Fidelity Gas Systems,
Inc., sold its Southwest Oklahoma City Field gas gathering system for $3.8
million. The Company's total gain on the sale was $3.1 million, with $1.0
million being recognized in the first quarter of 1996 in "investment and other
income" on the consolidated statement of operations while the remaining $2.1
million of the gain was deferred. The $2.1 million deferred revenue will be
recognized in future periods as a component of gas revenues by partially
offsetting the gas gathering fees paid by the Company over the productive life
of the Company's Southwest Oklahoma City Field. During the second quarter of
1996, $190,000 was recognized, leaving a balance of $1.9 million in "deferred
revenue" on the consolidated balance sheet as of June 30, 1996.
NOTE 4 - COMMITMENTS AND CONTINGENCIES:
There are claims and actions pending against the Company. In the opinion
of management, the amounts, if any, which may be awarded in connection with any
of these claims and actions would not be material to the Company's consolidated
financial position or results of operations.
5
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. 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 quarter For the six months
ended June 30, ended June 30,
--------------- ------------------
1996 1995 1996 1995
------- ------ -------- --------
Production:
United States:
Oil (Mbbls)............................................. 169 177 336 341
Gas (MMcf).............................................. 1,398 1,454 2,724 3,060
Oil equivalents (MBOE).................................. 402 419 790 851
Canada:
Oil (Mbbls)............................................. --- --- --- 1
Gas (MMcf).............................................. 758 722 1,615 1,554
Oil equivalents (MBOE).................................. 126 120 269 260
Total:
Oil (Mbbls)............................................. 169 177 336 342
Gas (MMcf).............................................. 2,156 2,176 4,339 4,614
Oil equivalents (MBOE).................................. 528 540 1,059 1,111
AVERAGE SALES PRICES (including the effects of hedging):
United States:
Oil (per Bbl)........................................... $17.47 $18.21 $17.82 $17.74
Gas (Mcf)............................................... 2.19 1.63 2.15 1.59
Canada:
Oil (per Bbl)........................................... --- --- --- 18.11
Gas (per Mcf)........................................... 1.21 0.91 1.22 0.91
Weighted average:
Oil (per Bbl)........................................... 17.47 18.21 17.82 17.74
Gas (per Mcf)........................................... 1.85 1.39 1.80 1.36
SELECTED DATA PER BOE:
Average sales price...................................... $13.14 $11.56 $13.04 $11.10
Production costs......................................... 3.16 3.67 3.10 3.42
General and administrative expenses...................... 2.29 2.47 2.32 2.62
Oil and gas depreciation, depletion and amortization..... 5.00 5.47 4.99 5.36
6
RESULTS OF OPERATIONS
Comparison of Second Quarter 1996 and Second Quarter 1995
Overview. The Company recorded $1.4 million in income from operations in the
second quarter of 1996 compared to a loss from operations of $8.3 million in the
second quarter of 1995. Excluding an $8.5 million oil and gas property
valuation adjustment recorded in 1995, the improvement between quarters is
primarily the result of a 33% increase in the Company's weighted average natural
gas price coupled with a 12% decrease in operating expenses. The Company
recorded net income of $520,000, or $0.06 per share, during the second quarter
of 1996 compared to a net loss of $8.9 million, or $1.03 per share, for the same
period in 1995.
Revenues. Total revenues increased 6% to $7.4 million in the second quarter
of 1996 from $7.0 million in the second quarter of 1995. Oil production
decreased 5% to 169 Mbbls from 177 Mbbls. Natural gas production decreased
slightly to 2,156 MMcf in the second quarter of 1996 from 2,176 MMcf in the
second quarter of 1995, resulting in an overall slight production decrease of 2%
to 528 MBOE from 540 MBOE. The Company sold a portion of its reserves in the
Canadian Hanlan Swan Hills Unit in May 1996 and certain producing reserves along
with its sale of non-producing mineral fee interests in the fourth quarter of
1995. Absent these property sales, second quarter 1996 production on a BOE
basis would have increased slightly by 1%. The Company's second quarter average
U.S. natural gas price increased 34% to $2.19 per Mcf in 1996 from $1.63 per Mcf
in 1995 while the Company's second quarter average Canadian natural gas price
increased 33% to $1.21 per Mcf from $0.91 per Mcf. As a result of hedging
transactions, the Company's second quarter 1995 U.S. and Canadian average
natural gas prices were reduced by $0.03 per Mcf and $0.06 per Mcf,
respectively, from the average prices that would have otherwise been received.
The Company's average oil price decreased 4% to $17.47 per barrel for the second
quarter of 1996 from $18.21 per barrel for the second quarter of 1995. As a
result of hedging transactions, the Company's second quarter 1996 average oil
price was reduced by $3.18 per barrel from the average price that would have
otherwise been received. Primarily as a result of the increase in natural gas
prices, partially offset by a slight decline in production, oil and gas revenues
increased 11% to $6.9 million for the second quarter of 1996 from $6.2 million
for the second quarter of 1995. Plant processing revenues decreased slightly to
$459,000 from $473,000, while other revenues were almost zero compared to
$282,000 in the prior year quarter. Other revenues declined due to reduced gas
gathering fees, resulting from the March 1996 sale of the Company's Oklahoma gas
gathering system, and lower average sulfur prices, $7.10 per long-ton compared
to $36.35 per long-ton.
Production Costs. Production costs declined 15% to $1.7 million in the second
quarter of 1996 compared to $2.0 million in the second quarter of 1995, while
production costs per BOE decreased 14% to $3.16 per BOE from $3.67 per BOE. The
decrease in production costs in absolute dollars and on a BOE basis results from
the Company's continued focus on reducing costs.
Depreciation, Depletion & Amortization (DD&A). Total DD&A decreased 10% to
$3.1 million in the second quarter of 1996 from $3.4 million in the second
quarter of 1995, primarily as a result of the decrease in the oil and gas DD&A
rate and the slight decrease in production. On a BOE basis, the oil and gas
DD&A rate decreased 9% to $5.00 per BOE from $5.47 per BOE.
Oil and Gas Property Valuation Adjustment. The Company follows the full cost
method of accounting for its oil and gas properties. Under this method, all
productive and non-productive exploration and development costs, incurred for
the purpose of finding oil and gas reserves, are capitalized and may not exceed
a calculated ceiling computed on a country-by-country basis. The ceiling is
calculated on a quarterly basis as the sum of (i) the present value (discounted
at 10%) of future net revenues from estimated production of proved oil and gas
reserves plus (ii) the lower of cost or estimated fair market
7
value of the unproved properties, less (iii) the related income tax effects. At
June 30, 1995, primarily as a result of the impairment of the Company's
valuation of its unproved fee mineral interests and a decline in oil and gas
prices, the Company's net capitalized costs for its U.S. oil and gas properties
exceeded the ceiling by $8.5 million, resulting in the corresponding valuation
adjustment. The ceiling was calculated using $16.00 per barrel of oil and $1.52
per Mcf of natural gas, the prices in effect as of June 30, 1995.
General and Administrative Expenses. General and administrative expenses
decreased 8% to $1.2 million in the second quarter of 1996 from $1.3 million in
the second quarter of 1995 primarily due to a reduction in personnel.
Interest Expense. Interest expense decreased 10% to $892,000 in the second
quarter of 1996 from $988,000 million in 1995, primarily due to a reduction in
the Company's Series A and Series B senior notes outstanding between quarters.
During the second quarter of 1996 the Company had an outstanding balance of
$35.8 million of senior notes with a combination of adjustable and fixed
interest rates which averaged 7.4%. This compares to the second quarter of 1995
outstanding balance of $39.2 million of senior notes with a combination of
adjustable and fixed interest rates which averaged 7.5%.
Income Taxes. The Company recorded a $248,000 income tax provision on pre-tax
income of $768,000 in the second quarter of 1996 compared to an income tax
benefit of $184,000 on a pre-tax loss of $611,000 in the second quarter of 1995
(excluding the effect of the oil and gas property valuation adjustment of $8.5
million which is calculated on after-tax basis and has no effect on the income
tax benefit).
Comparison of Six Months Ended June 30, 1996 and Six Months Ended June 30, 1995
Overview. The Company recorded $2.9 million in income from operations in the
first six months of 1996 compared to a loss from operations of $8.4 million in
the first six months of 1995. Excluding an $8.5 million oil and gas property
valuation adjustment recorded in 1995, the improvement between periods is
primarily the result of a 32% increase in the Company's weighted average natural
gas price coupled with a 12% decrease in operating expenses. During the first
six months of 1996, the Company recorded net income of $1.8 million, or $0.20
per share, which includes $629,000, or $0.07 per share, related to the after-tax
gain on the sale of the gas gathering system in Oklahoma. During the first six
months of 1995 the Company recorded a net loss of $9.5 million, or $1.09 per
share.
Revenues. Total revenues increased 8% to $14.9 million in the first six
months of 1996 from $13.8 million in the first six months of 1995. Oil
production decreased slightly to 336 Mbbls from 342 Mbbls. Natural gas
production decreased 6% to 4,339 MMcf in the first six months of 1996 from 4,614
MMcf in the first six months of 1995, resulting in an overall production
decrease of 5% to 1,059 MBOE from 1,111 MBOE. The decrease in production on a
BOE basis was primarily the result of decreased natural gas production resulted
from freezing problems associated with the very cold winter in the Mid-Continent
area this year in addition to the reserves sold as discussed. Otherwise, new
production generally offset normal declines. The Company's first six months of
1996 average U.S. natural gas price increased 35% to $2.15 per Mcf in 1996 from
$1.59 per Mcf in 1995 while the Company's average Canadian natural gas price
increased 34% to $1.22 from $0.91. As a result of hedging transactions, the
U.S. average natural gas price the Company would have otherwise received during
the first six months of 1996 was reduced by $0.06 per Mcf. The Canadian natural
gas price for the first six months of 1995 was reduced by $0.03 per Mcf. The
Company's average U.S. oil price increased slightly to $17.82 per barrel for the
first six months of 1996 from $17.74 per barrel for the first six months of
1995. As a result of hedging transactions, the Company's average oil price for
the first six months of 1996 was reduced by $1.80 per barrel from the average
price that would have otherwise been received. As a result of the increase in
natural gas prices, partially offset by a decline in production, oil and gas
revenues increased 12% to $13.8
8
million for the first six months of 1996 from $12.3 million for the first six
months of 1995. Plant processing revenues remained level at $926,000, while
other revenues declined 67% to $179,000 from $548,000. Other revenues declined
due to reduced gas gathering fees, resulting from the March 1996 sale of the
Company's Oklahoma gas gathering system, and lower average sulfur prices, $13.93
per long-ton compared to $33.05 per long-ton.
Production Costs. Production costs declined 14% to $3.3 million in the first
six months of 1996 compared to $3.8 million in the first six months of 1995,
while production costs per BOE decreased 9% to $3.10 per BOE from $3.42 per BOE.
The decrease in production costs in absolute dollars and on a BOE basis results
from the Company's continued focus on reducing costs.
Depreciation, Depletion & Amortization (DD&A). Total DD&A decreased 10% to
$6.2 million in the first six months of 1996 from $6.8 million in the first six
months of 1995, primarily as a result of the decrease in production volumes
coupled with a decrease in the oil and gas DD&A rate. On a BOE basis, the oil
and gas DD&A rate decreased 7% to $4.99 per BOE from $5.36 per BOE.
Oil and Gas Property Valuation Adjustment. The Company follows the full cost
method of accounting for its oil and gas properties. Under this method, all
productive and non-productive exploration and development costs, incurred for
the purpose of finding oil and gas reserves, are capitalized and may not exceed
a calculated ceiling computed on a country-by-country basis. The ceiling is
calculated on a quarterly basis as the sum of (i) the present value (discounted
at 10%) of future net revenues from estimated production of proved oil and gas
reserves plus (ii) the lower of cost or estimated fair market value of the
unproved properties, less (iii) the related income tax effects. At June 30,
1995, primarily as a result of the impairment of the Company's valuation of its
unproved fee mineral interests and a decline in oil and gas prices, the
Company's net capitalized costs for its U.S. oil and gas properties exceeded the
ceiling by $8.5 million, resulting in the corresponding valuation adjustment.
The ceiling was calculated using $16.00 per barrel of oil and $1.52 per Mcf of
natural gas, the prices in effect as of June 30, 1995.
General and Administrative Expenses. General and administrative expenses
decreased 16% to $2.5 million in the first six months of 1996 from $2.9 million
in the first six months of 1995 primarily due to a reduction in personnel.
Investment and Other Income. Investment and other income increased to $1.4
million in the first six months of 1996 from $418,000 in the first six months of
1995 as a result of a $1.0 million gain on the sale of the Company's Oklahoma
City gas gathering system.
Interest Expense. Interest expense decreased 9% to $1.8 million in the second
quarter of 1996 from $2.0 million in 1995, primarily due to a reduction in the
Company's Series A and Series B senior notes outstanding between periods. During
the first six months of 1996 the Company had an outstanding balance of $35.8
million of senior notes with a combination of adjustable and fixed interest
rates which averaged 7.4%. This compares to the first six months of 1995
outstanding balance of $39.2 million of senior notes with a combination of
adjustable and fixed interest rates which averaged 7.5%.
Income Taxes. The Company recorded a $778,000 income tax provision on pre-tax
income of $2.5 million in the first six months of 1996 compared to an income tax
benefit of $524,000 on a pre-tax loss of $1.5 million in the first six months of
1995 (excluding the effect of the oil and gas property valuation adjustment of
$8.5 million which is calculated on after-tax basis and has no effect on the
income tax benefit).
9
LIQUIDITY AND CAPITAL RESOURCES
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. As of June 30, 1996, the Company
had working capital of $12.5 million as compared to $6.3 million at December 31,
1995. The increase in working capital was primarily due to net cash provided by
operating activities and the sales of the Company's partial interest in the
Canadian Hanlan Swan Hills Unit and the Oklahoma City gas gathering system,
partially offset by capital expenditures. Net cash provided by operating
activities was $11.5 million and $4.4 million for the six months ended June 30,
1996 and 1995, respectively, while net cash provided by operating activities
before changes in operating assets and liabilities for the same periods was $7.7
million and $5.3 million, respectively.
The Company spent $6.4 million during the six months ended June 30, 1996
primarily related to exploration and development and the purchase of producing
properties. For the same period in 1995, the Company spent $7.8 million
primarily related to exploration and development.
The Company's Canadian subsidiary redeemed its redeemable preferred stock on
August 9, 1994 for $7.0 million and simultaneously issued $7.0 million in
nonrecourse long-term notes payable with similar financial terms. At June 30,
1996, the nonrecourse long-term notes payable balance was $6.2 million, of which
$2.1 million was classified as current.
In July 1993, PetroCorp refinanced its long-term debt through the issuance of
$40.0 million in senior notes. The Note Purchase Agreement established $10.0
million of Senior Adjustable Rate Notes Series A, due June 30, 1999 (the Series
A Notes), payable to a subsidiary of USF&G Corporation, and $30.0 million of
7.55% Senior Notes Series B, due June 30, 2008 (the Series B Notes), payable to
two wholly-owned subsidiaries of CIGNA Corporation and to four unaffiliated
institutional investors in amounts totalling $20.0 million and $10.0 million,
respectively. Mandatory redemptions commenced on December 31, 1994 for the
Series A Notes and commenced on December 31, 1995 for the Series B Notes. As of
June 30, 1996, the remaining principal balances for the Series A and B Notes
were $5.8 million and $27.4 million, respectively, for a total of $33.2 million.
Interest on the Series A Notes is adjustable, based on a spread of 115 basis
points over the London Interbank Offered Rate (LIBOR). The Company may select a
rate which may be applicable for a one-, three-or six-month period. Interest is
payable in arrears at the end of the selected period. Interest on the Series B
Notes is fixed at a rate of 7.55% and is payable semiannually in arrears.
From time to time, the Company has utilized hedging transactions to manage its
exposure to price fluctuations on its sales of oil and natural gas. Realized
gains and losses from the Company's hedging activities are included in oil and
gas revenues in the period of the hedged production. Normally, any realized and
unrealized gains and losses prior to the period when the hedged production
occurs are deferred. To-date, the Company has used oil and natural gas futures
contracts or natural gas option contracts traded on the NYMEX to hedge its oil
and gas sales.
As a result of its hedging transactions, the Company reduced its oil and gas
revenues by $762,000 during the first six months of 1996 while reducing oil and
gas revenues by $39,000 during the first six months of 1995. As of June 30,
1996, the Company had deferred $163,000 of unrealized hedging losses related to
oil sales.
In connection with its oil and gas hedging program, the Company may be exposed
to the risk of financial loss in certain circumstances including instances where
production is less than expected, the Company's customers fail to purchase or
take delivery of the contracted sales quantities, or a sudden,
10
unexpected event materially impacts product prices. The Company attempts to
reduce these risks by limiting, at any point in time, its U.S. hedged oil and
natural gas sales volumes to approximately 85% of total U.S. sales volumes and
limiting its Canadian hedged natural gas sales volumes to approximately 65% of
total Canadian natural gas sales volumes. The Company had no oil or natural gas
futures contracts open as of August 12, 1996.
In March 1996, the Company's wholly-owned subsidiary, Fidelity Gas Systems,
Inc., sold its Southwest Oklahoma City Field gas gathering system for $3.8
million. The Company's total gain on the sale was $3.1 million, with $1.0
million being recognized in the first quarter of 1996 in "investment and other
income" on the consolidated statement of operations while the remaining $2.1
million of the gain was deferred. The $2.1 million deferred revenue will be
recognized in future periods as a component of gas revenues by partially
offsetting the gas gathering fees paid by the Company over the productive life
of the Company's Southwest Oklahoma City Field. During the second quarter of
1996, $190,000 was recognized, leaving a balance of $1.9 million in "deferred
revenue" on the consolidated balance sheet as of June 30, 1996.
In August 1996, the Company's Board of Directors increased the Company's
exploration and development capital budget by $3.0 million, or 33%. The
currently approved capital budget of $24.0 million for 1996, now includes $12.0
million for exploration and development and $10.0 million for producing property
acquisitions. However, actual levels of expenditures for planned exploration
and development projects and producing property acquisitions may vary
significantly due to many factors, including drilling results, oil and gas
prices, industry conditions and acquisition opportunities, among others.
The Company plans to finance its 1996 exploration and development expenditures
with existing working capital and cash flow from operations while it may finance
a portion of its 1996 producing property acquisitions with new borrowings. If
the Company increases its exploration, development and acquisition activities in
the future, capital expenditures may require additional funding obtained through
borrowings from commercial banks and other institutional sources, public
offerings of equity or debt securities and existing and future relationships
with institutional investment partners.
Except for the historical information contained herein, the matters discussed
in this management's discussion and analysis are forward-looking statements that
involve risks and uncertainties, and actual results could differ materially from
these expectations. Among the factors that could cause actual results to differ
materially are the timing and success of the company's drilling activities, the
volatility of the prices and supply and demand for oil and gas, the numerous
uncertainties inherent in estimating quantities of oil and gas reserves and
actual future production rates and associated costs, the usual hazards
associated with the oil and gas industry (including blowouts, cratering, pipe
failure, spills, explosions and other unforeseen hazards), and increases in
regulatory requirements, as well as other risks described from time to time in
the company's periodic reports filed with the Securities and Exchange
Commission.
In October 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-based
Compensation" (SFAS 123), which established financial accounting and reporting
standards for stock-based employee compensation plans. SFAS 123 encourages
companies to adopt a fair value based method of accounting for such plans but
continues to allow the use of the intrinsic value based method prescribed by
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees" (Opinion 25). Companies electing to continue accounting in
accordance with Opinion 25 must make pro forma disclosures of net income and
earnings per share as if the fair value based method defined in SFAS 123 had
been applied. With respect to any new awards issued, the Company will continue
to account for its stock-based compensation in accordance with Opinion 25 and
will
11
make pro forma disclosures in accordance with the provisions of SFAS 123
beginning in its financial statements for the year ending December 31, 1996.
12
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
- -----------------------------------------------------------
(a) May 9, 1996 annual meeting of shareholders.
(b) (1) Election of Directors
Number of Votes
---------------------------------------------------
Abstentions and
Nominee For Withheld Authority Broker Non-Votes
----------- --------- --------------------- ----------------
G. Jay Erbe, Jr. 8,163,795 26,700 --
John A. Hill 8,163,795 26,700 --
Stephen M. Grath 8,163,795 26,700 --
(2) Ratification of Price Waterhouse LLP as the independent accountants of
the Company for the fiscal year ending December 31, 1996.
Number of Votes
- ---------------------------------------------------
Abstentions and
For Against Broker Non-Votes
- ------------------------ ------- ----------------
8,187,895 2,600 --
Item 5 - Other Information
- --------------------------
Not Applicable
Item 6 -
- ---------
(a) Exhibits
--------
3.1* Amended and Restated Articles of Incorporation of PetroCorp
Incorporated. Incorporated by reference to Exhibit 3.2 to the
Registration Statement on Form S-1 (Registration No. 33-36972)
initially filed with the Securities and Exchange Commission on August
26, 1993 (the "Registration Statement").
3.2 Amended and Restated Bylaws of PetroCorp Incorporated.
27 Financial Data Schedule
- -------------
* Incorporated by reference.
(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 thereunto duly authorized.
PETROCORP INCORPORATED
----------------------
(Registrant)
Date: August 13, 1996 /s/ CRAIG K. TOWNSEND
- -------------------------- -------------------------
Craig K. Townsend
Vice President - Finance,
Secretary and Treasurer
(On behalf of the Registrant
and as the Principal
Financial Officer)
14
EXHIBIT INDEX
EXHIBIT NO. EXHIBIT
- ----------- -------
3.2 Amended and Restated Bylaws of PetroCorp Incorporated (as
of August 1, 1996)
27 Financial Data Schedule