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, 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: (281) 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 October 31, 1996:
Common Stock, $.01 per value 8,584,519
---------------------------- ---------
(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 Sheet at September 30, 1996 and December 31, 1995 1
Consolidated Statement of Operations for the quarters and nine months
ended September 30, 1996 and 1995 2
Consolidated Statement of Cash Flows for the nine months ended
September 30, 1996 and 1995 3
Notes to Consolidated Financial Statements 4
Item 2. Management's Discussion and Analysis of Financial Condition and 6
Results of Operations
PART II. OTHER INFORMATION 12
SIGNATURES 13
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
PETROCORP INCORPORATED
----------------------
CONSOLIDATED BALANCE SHEET
--------------------------
(dollar amounts in thousands)
September 30, December 31,
1996 1995
------------- ------------
(Unaudited)
ASSETS
------
Current assets:
Cash and cash equivalents $ 27,707 $ 11,764
Accounts receivable, net 4,809 7,632
Other current assets 285 1,433
------------- ------------
Total current assets 32,801 20,829
------------- ------------
Property, plant and equipment:
Oil and gas properties, at cost, full cost method, net of
accumulated depreciation, depletion and amortization 74,924 79,667
Unproved properties not subject to depletion 4,298 4,406
Plant and related facilities, net 4,755 6,389
Other, net 2,126 3,128
------------- ------------
86,103 93,590
------------- ------------
Other assets, net 305 420
------------- ------------
Total assets $ 119,209 $ 114,839
============= ============
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
Current liabilities:
Accounts payable $ 4,901 $ 5,259
Accrued liabilities 7,244 3,370
Current portion of long-term debt 5,607 5,856
------------- ------------
Total current liabilities 17,752 14,485
------------- ------------
Long-term debt 32,358 36,513
------------- ------------
Deferred revenue 1,686 -
------------- ------------
Deferred income taxes 3,449 2,320
------------- ------------
Commitments and contingencies (Note 4)
Shareholder's 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 (3,639) (6,043)
Foreign currency translation adjustment (3,336) (3,375)
Treasury stock, at cost (31,697 shares) (317) (317)
------------- ------------
Total shareholders' equity 63,964 61,521
------------- ------------
Total liabilities and shareholders' equity $ 119,209 $ 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 three months For the nine months
ended September 30, ended September 30,
-------------------------- ------------------------------------
1996 1995 1996 1995
---------- ---------- ------------- ------------
REVENUES:
Oil and gas $ 6,947 $ 5,696 $ 20,761 $ 18,033
Plant processing 360 473 1,286 1,405
Other (1) 247 178 795
---------- ---------- ------------- ------------
7,306 6,416 22,225 20,233
---------- ---------- ------------- ------------
EXPENSES:
Production costs 1,714 1,776 4,997 5,576
Depreciation, depletion and amortization 3,011 3,172 9,165 10,004
Oil and gas property valuation adjustment - - - 8,500
General and administrative 1,013 1,343 3,470 4,252
Other operating expenses 31 69 135 203
---------- ---------- ------------- ------------
5,769 6,360 17,767 28,535
---------- ---------- ------------- ------------
INCOME (LOSS) FROM OPERATIONS 1,537 56 4,458 (8,302)
---------- ---------- ------------- ------------
OTHER INCOME (EXPENSES):
Investment and other income 252 149 1,685 567
Interest expense (795) (982) (2,595) (2,953)
Other expense (10) (57) (17) (165)
---------- ---------- ------------- ------------
(553) (890) (927) (2,551)
---------- ---------- ------------- ------------
INCOME (LOSS) BEFORE INCOME TAXES 984 (834) 3,531 (10,853)
Income tax provision (benefit) 349 (377) 1,127 (901)
---------- ---------- ------------- ------------
NET INCOME (LOSS) $ 635 $ (457) $ 2,404 $ (9,952)
========== ========== ============= ============
NET INCOME (LOSS) PER COMMON SHARE $ 0.07 $ (0.05) $ 0.28 $ (1.14)
========== ========== ============= ============
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 nine months
ended September 30,
-----------------------------------
1996 1995
------------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 2,404 $ (9,952)
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Depreciation, depletion and amortization 9,165 10,004
Oil and gas property valuation adjustment - 8,500
Gain on sale of gas gathering system (999) -
Deferred income tax provision (benefit) 1,127 (901)
----------- ----------
11,697 7,651
Change in operating assets and liabilities:
Accounts receivable 2,823 2,232
Other current assets 1,148 284
Accounts payable (358) (1,847)
Accrued liabilities 3,874 983
Other (403) 126
----------- ----------
NET CASH PROVIDED BY OPERATING ACTIVITIES 18,781 9,429
----------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of oil and gas properties 6,317 111
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 (9,339) (10,940)
Additions to plant and related facilities (212) (369)
Additions to other property, plant and equipment (240) (712)
Additions to other assets - (9)
Proceeds from sale of short-term investment - 6,682
----------- ----------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES 1,575 (5,237)
----------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from long-term debt 86 472
Repayment of long-term debt (4,493) (1,436)
----------- ----------
NET CASH USED IN FINANCING ACTIVITIES (4,407) (964)
----------- ----------
EFFECT OF EXCHANGE RATE CHANGES ON CASH (6) 260
----------- ----------
NET INCREASE IN CASH AND CASH EQUIVALENTS 15,943 3,488
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 11,764 10,127
----------- ----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 27,707 $ 13,615
=========== ==========
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 hedging transactions, oil and gas revenues were reduced by
$918,000 during the first nine months of 1996 while oil and gas revenues were
increased by $133,000 during the first nine months of 1995. As of September 30,
1996, the Company had no material deferred hedging gains or losses.
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 November 11, 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. Through September 30, 1996,
$403,000 has been recognized, leaving a balance of $1.7 million in "deferred
revenue" on the consolidated balance sheet as of September 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 nine
ended months ended
September 30, September 30,
--------------- -------------------------
1996 1995 1996 1995
------- ------ ------------ -----------
PRODUCTION:
United States:
Oil (Mbbls) 163 154 499 495
Gas (MMcf) 1,312 1,530 4,036 4,590
Oil equivalents (MBOE) 382 409 1,172 1,260
Canada:
Oil (Mbbls) --- --- --- 1
Gas (MMcf) 684 867 2,299 2,421
Oil equivalents (MBOE) 114 145 383 405
Total:
Oil (Mbbls) 163 154 499 496
Gas (MMcf) 1,996 2,397 6,335 7,011
Oil equivalents (MBOE) 496 554 1,555 1,665
AVERAGE SALES PRICES (including
the effects of hedging):
United States:
Oil (per Bbl) $20.21 $17.56 $18.60 $17.68
Gas (Mcf) 2.15 1.46 2.15 1.54
Canada:
Oil (per Bbl) --- --- --- 18.04
Gas (per Mcf) 1.22 .88 1.22 .90
Weighted average:
Oil (per Bbl) 20.21 17.56 18.60 17.68
Gas (per Mcf) 1.83 1.25 1.81 1.32
SELECTED DATA PER BOE:
Average sales price $14.01 $11.00 $13.35 $10.83
Production costs 3.46 3.21 3.21 3.35
General and administrative
expenses 2.04 2.42 2.23 2.55
Oil and gas depreciation,
depletion and amortization 5.31 4.92 5.09 5.21
6
RESULTS OF OPERATIONS
Comparison of Three Months Ended September 30, 1996 and Three Months Ended
September 30, 1995
Overview. The Company recorded $1.5 million in income from operations in the
third quarter of 1996 compared to income from operations of $56,000 in the third
quarter of 1995. The improvement between quarters is primarily the result of a
46% and a 15% increase in the Company's weighted average natural gas and oil
prices, respectively, coupled with a 9% decrease in operating expenses. The
Company recorded net income of $635,000, or $0.07 per share, during the third
quarter of 1996 compared to a net loss of $457,000, or $0.05 per share, for the
same period in 1995.
Revenues. Total revenues increased 14% to $7.3 million in the third quarter
of 1996 from $6.4 million in the third quarter of 1995. Oil production
increased 6% to 163 Mbbls from 154 Mbbls. Natural gas production decreased 17%
to 1,996 MMcf in the third quarter of 1996 from 2,397 MMcf in the third quarter
of 1995, resulting in an overall production decrease of 10% to 496 MBOE from
554 MBOE. The decline in natural gas production is primarily the result of (1)
the sale of a portion of the Company's reserves in the Canadian Hanlan Swan
Hills Unit in May 1996, (2) also in Canada, the annual Hanlan-Robb gas
processing plant turn-around occurred in the third quarter of 1996 while plant
turn-around took place in the second quarter of 1995 and (3) the sale of certain
U.S. producing reserves along with the sale of the Company's non-producing
mineral fee interests in the fourth quarter of 1995. The Company's third
quarter average U.S. natural gas price increased 47% to $2.15 per Mcf in 1996
from $1.46 per Mcf in 1995 while the Company's third quarter average Canadian
natural gas price increased 39% to $1.22 from $0.88. As a result of hedging
transactions, the Company's third quarter 1995 U.S. average natural gas price
was increased by $0.03 per Mcf from the average price that would have otherwise
been received. The Company's average oil price increased 15% to $20.21 per
barrel for the third quarter of 1996 from $17.56 per barrel for the third
quarter of 1995. As a result of hedging transactions, the Company's third
quarter 1996 average oil price was reduced by $1.01 per barrel from the average
price that would have otherwise been received while the third quarter of 1995
average price was increased by $0.82 per barrel. As a result of the increases
in natural gas and oil prices, partially offset by the decline in production,
oil and gas revenues increased 22% to $6.9 million for the third quarter of 1996
from $5.7 million for the third quarter of 1995. Plant processing revenues
decreased to $360,000 from $473,000 primarily as a result of the Company's sale
of a portion of its interest in the Canadian Hanlan-Robb plant in May 1996.
Other revenues were almost zero compared to $247,000 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, $6.54 per long-ton compared to $31.00 per long-ton.
Production Costs. Production costs declined 3% to $1.7 million in the third
quarter of 1996 compared to $1.8 million in the third quarter of 1995, while
production costs per BOE increased 8% to $3.46 per BOE from $3.21 per BOE.
Absent increased costs related to the annual Hanlan-Robb plant turn-around,
production costs in absolute dollars would have declined further while
production costs per BOE would have declined slightly.
Depreciation, Depletion & Amortization (DD&A). Total DD&A decreased 5% to
$3.0 million in the third quarter of 1996 from $3.2 million in the third quarter
of 1995, primarily as a result of the decrease in production partially offset
by an increase in the oil and gas DD&A rate. On a BOE basis, the oil and gas
DD&A rate increased 8% to $5.31 per BOE from $4.92 per BOE.
General and Administrative Expenses. General and administrative expenses
decreased 25% to $1.0 million in the third quarter of 1996 from $1.3 million in
the third quarter of 1995 primarily due to a reduction in personnel.
7
Interest Expense. Interest expense decreased 19% to $795,000 in the third
quarter of 1996 from $982,000 in 1995, due to reductions in the Series A and B
Senior Notes and the Nonrecourse Notes Payable. The average interest rates, a
combination of adjustable and fixed rates, on the Series A and Series B Senior
Notes averaged 7.4% and 7.3% for the third quarter of 1996 and 1995,
respectively.
Income Taxes. The Company recorded a $349,000 income tax provision on pre-
tax income of $984,000 in the third quarter of 1996 compared to an income tax
benefit of $377,000 on a pre-tax loss of $834,000 in the third quarter of 1995.
Comparison of Nine Months Ended September 30, 1996 and Nine Months Ended
September 30, 1995
Overview. The Company recorded $4.5 million in income from operations in the
first nine months of 1996 compared to a loss from operations of $8.3 million in
the first nine 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 37% increase in the Company's weighted average natural
gas price coupled with a 11% decrease in operating expenses. During the first
nine months of 1996, the Company recorded net income of $2.4 million, or $0.28
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 nine
months of 1995 the Company recorded a net loss of $10.0 million, or $1.14 per
share.
Revenues. Total revenues increased 10% to $22.2 million in the first nine
months of 1996 from $20.2 million in the first nine months of 1995. Oil
production increased slightly to 499 Mbbls from 496 Mbbls. Natural gas
production decreased 10% to 6,335 MMcf in the first nine months of 1996 from
7,011 MMcf in the first nine months of 1995, resulting in an overall production
decrease of 7% to 1,555 MBOE from 1,665 MBOE. The decline in natural gas
production is primarily the result of (1) the sale of a portion of the
Company's reserves in the Canadian Hanlan Swan Hills Unit in May 1996, (2) the
sale of certain producing reserves along with the sale of the Company's non-
producing mineral fee interests in the fourth quarter of 1995 and (3) normal
production declines. The Company's first nine months of 1996 average U.S.
natural gas price increased 40% to $2.15 per Mcf in 1996 from $1.54 per Mcf in
1995 while the Company's average Canadian natural gas price increased 36% to
$1.22 from $0.90. As a result of hedging transactions, the U.S. average natural
gas price the Company would have otherwise received during the first nine months
of 1996 was reduced by $0.04 per Mcf. The Canadian natural gas price for the
first nine months of 1995 was reduced by $0.02 per Mcf. The Company's average
U.S. oil price increased 5% to $18.60 per barrel for the first nine months of
1996 from $17.68 per barrel for the first nine months of 1995. As a result of
hedging transactions, the Company's average oil price for the first nine months
of 1996 was reduced by $1.54 per barrel from the average price that would have
otherwise been received while the third quarter of 1995 average price was
increased by $0.82 per barrel. As a result of the increases in natural gas and
oil prices, partially offset by a decline in production, oil and gas revenues
increased 15% to $20.8 million for the first nine months of 1996 from $18.0
million for the first nine months of 1995. Plant processing revenues declined
to $1.3 million from $1.4 million primarily as a result of the Company's sale of
a portion of its interest in the Canadian Hanlan-Robb plant in May 1996. Other
revenues declined 78% to $178,000 from $795,000 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, $6.41 per long-ton compared to $31.00
per long-ton.
Production Costs. Production costs declined 10% to $5.0 million in the first
nine months of 1996 compared to $5.6 million in the first nine months of 1995,
while production costs per BOE decreased 4% to $3.21 per BOE from $3.35 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 8% to
$9.2 million in the first nine months of 1996 from $10.0 million in the first
nine months of 1995, primarily as a result of the
8
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 2% to $5.09 per BOE
from $5.21 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 18% to $3.5 million in the first nine months of 1996 from $4.3 million
in the first nine months of 1995 primarily due to a reduction in personnel.
Investment and Other Income. Investment and other income increased to $1.7
million in the first nine months of 1996 from $567,000 in the first nine 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 12% to $2.6 million in the
first nine months of 1996 from $3.0 million in 1995, due to reductions in the
Series A and B Senior Notes and the Nonrecourse Notes Payable. The average
interest rates, a combination of adjustable and fixed rates, on the Series A and
Series B Senior Notes averaged 7.4% for the first nine months of 1996 and 1995.
Income Taxes. The Company recorded a $1.1 million income tax provision on
pre-tax income of $3.5 million in the first nine months of 1996 compared to an
income tax benefit of $901,000 on a pre-tax loss of $2.4 million in the first
nine 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).
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 September 30, 1996, the
Company had working capital of $15.0 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 plus the sales of the Company's partial
interest in the Canadian Hanlan Swan Hills Unit , certain non-strategic
properties at auction and the Oklahoma City gas gathering system, partially
offset by capital expenditures and reduction in long-term debt. Net cash
provided by operating activities was $18.8 million and $9.4 million for the nine
months ended September 30, 1996 and 1995, respectively, while net cash provided
by operating activities before changes in operating assets and liabilities for
the same periods was $11.2 million and $7.7 million, respectively.
The Company spent $9.3 million during the nine months ended September 30,
1996 primarily related to exploration and development and the purchase of
producing properties. For the same period in 1995, the Company spent $10.9
million primarily related to exploration and development.
9
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 September
30, 1996, the nonrecourse long-term notes payable balance was $4.8 million, of
which $907,000 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 totaling $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
September 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 ($4.7 million is classified as current).
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 hedging transactions, oil and gas revenues were reduced by
$918,000 during the first nine months of 1996 while oil and gas revenues were
increased by $133,000 during the first nine months of 1995. As of September 30,
1996, the Company had no material deferred hedging gains or losses.
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 November 11, 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. Through September 30, 1996,
$403,000 has been recognized, leaving a balance of $1.7 million in "deferred
revenue" on the consolidated balance sheet as of September 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
10
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 make pro forma disclosures in accordance with the provisions of SFAS 123
beginning in its financial statements for the year ending December 31, 1996.
11
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
--------
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.
Incorporated by reference to Exhibit 3.2 to the Form 10-Q
for the quarterly period ended June 30, 1996.
10.1 Amended and restated 1992 PetroCorp Stock Option Plan
(replaces incorrect copy previously filed).
27 Financial Data Schedule
______________________________
* Incorporated by reference.
(b) Reports on Form 8-K
-------------------
Report dated July 26, 1996 relating to acquisition by a
stockholder of 29.2% of the Company's outstanding common stock.
12
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: November 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)
13
EXHIBIT INDEX
EXHIBIT NO. EXHIBIT
- ----------- -------
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.
Incorporated by reference to Exhibit 3.2 to the Form 10-Q
for the quarterly period ended June 30, 1996.
10.1 Amended and restated 1992 PetroCorp Stock Option Plan
(replaces incorrect copy previously filed).
27 Financial Data Schedule
______________________________
* Incorporated by reference.