FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _______________ to _______________
Commission file number 0-17162
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KEY PRODUCTION COMPANY, INC.
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(Exact name of registrant as specified in its charter)
Delaware 84-1089744
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
One Norwest Center, 20th Floor
1700 Lincoln Street, Denver, Colorado 80203-4520
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(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code (303) 837-0779
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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 for 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
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The number of shares of Key Production Company, Inc. common stock, $.25 par
value, outstanding as of March 31, 1996, is 11,616,591.
PART I - FINANCIAL INFORMATION
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ITEM 1 - FINANCIAL STATEMENTS
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KEY PRODUCTION COMPANY, INC.
CONSOLIDATED STATEMENT OF INCOME
(Unaudited)
For the Three Months
Ended March 31,
----------------------
(In thousands, except per share data) 1996 1995
---------- ----------
Revenues:
Oil and gas production revenues $5,881 $4,736
Other revenues - 2
------ ------
5,881 4,738
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Operating Expenses:
Depreciation, depletion and amortization 2,326 1,756
Operating costs 1,583 1,574
Administrative, selling and other 391 337
Financing costs:
Interest costs 111 56
Interest income (5) (3)
------ ------
4,406 3,720
------ ------
Income Before Income Taxes 1,475 1,018
Provision for Income Taxes 561 387
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Net Income $ 914 $ 631
====== ======
Net Income Per Common and Common Equivalent Share: $ .10 $ .07
====== ======
Weighted Average Common and Common Equivalent
Shares Outstanding 9,459 9,561
====== ======
The accompanying notes to financial statements are
an integral part of this statement.
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KEY PRODUCTION COMPANY, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
For the Three Months
Ended March 31,
----------------------
(In thousands) 1996 1995
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Cash Flows From Operating Activities:
Net income $ 914 $ 631
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation, depletion and amortization 2,326 1,756
Deferred income taxes 502 346
Changes in operating assets and liabilities:
(Increase)decrease in receivables (609) 1,111
(Increase)decrease in prepaid expenses and
other 146 (280)
Decrease in accounts payable and accrued
expenses (688) (709)
Decrease in long-term property liabilities
and other (4) (174)
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Net cash provided by operating activities 2,587 2,681
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Cash Flows From Investing Activities:
Oil and gas exploration and development
expenditures (3,933) (2,712)
Acquisitions of oil and gas properties (181) (85)
Cash received in connection with acquisition 1,686 -
Proceeds from sale of oil and gas properties - 87
Other capital expenditures (24) (77)
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Net cash used by investing activities (2,452) (2,787)
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Cash Flows From Financing Activities:
Long-term borrowings 1,600 900
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Net cash provided by financing activities 1,600 900
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Net Increase in Cash and Cash Equivalents 1,735 794
Cash and Cash Equivalents at Beginning of Year 591 281
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Cash and Cash Equivalents at End of Period $ 2,326 $ 1,075
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The accompanying notes to financial statements are
an integral part of this statement.
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KEY PRODUCTION COMPANY, INC.
CONSOLIDATED BALANCE SHEET
March 31, December 31,
(In thousands) 1996 1995
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(Unaudited)
ASSETS
Current Assets:
Cash and cash equivalents $ 2,326 $ 591
Receivables 7,139 3,346
Prepaid expenses and other 605 481
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10,070 4,418
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Oil and Gas Properties, on the basis of full
cost accounting:
Proved properties 85,800 61,470
Unproved properties and properties under
development, not being amortized 10,829 9,104
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96,629 70,574
Less - accumulated depreciation,
depletion and amortization (18,705) (16,420)
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77,924 54,154
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Other Assets, net 610 627
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$ 88,604 $ 59,199
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LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 3,406 $ 2,948
Accrued exploration and development 1,728 370
Accrued lease operating expense and other 697 531
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5,831 3,849
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Long-Term Debt 24,150 14,600
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Noncurrent Liabilities
Income taxes 5,319 3,199
Long-term property liabilities and other 2,796 1,852
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8,115 5,051
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Stockholders' Equity:
Common stock, $.25 par value, 50,000,000
shares authorized, 11,656,350
shares issued 2,914 2,914
Paid-in capital 37,348 34,401
Retained earnings 10,403 9,489
Treasury stock at cost, 39,759 and
2,806,882 shares, respectively (157) (11,105)
-------- --------
50,508 35,699
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$ 88,604 $ 59,199
======== ========
The accompanying notes to financial statements are
an integral part of this statement.
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KEY PRODUCTION COMPANY, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(Unaudited)
Total
Stock-
Common Paid-in Retained Treasury holders'
Stock Capital Earnings Stock Equity
------- -------- -------- ---------- --------
(In thousands, except per share data)
Balance, December 31, 1995 $2,914 $34,401 $ 9,489 $(11,105) $35,699
Net income - - 914 - 914
Treasury stock issued - 2,947 - 10,948 13,895
------ ------- ------- -------- -------
Balance, March 31, 1996 $2,914 $37,348 $10,403 $ (157) $50,508
====== ======= ======= ======== =======
The accompanying notes to financial statements are
an integral part of this statement.
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KEY PRODUCTION COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
The financial statements included herein have been prepared by Key Production
Company, Inc. ("Key" or the "Company"), without audit, pursuant to the rules and
regulations of the Securities and Exchange Commission, and reflect all
adjustments which are, in the opinion of management, necessary to a fair
statement of the results for the interim periods, on a basis consistent with the
annual audited statements. All such adjustments are of a normal, recurring
nature except as disclosed herein. Certain information, accounting policies,
and footnote disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been omitted
pursuant to such rules and regulations, although the Company believes that the
disclosures are adequate to make the information presented not misleading.
These financial statements should be read in conjunction with the financial
statements and summary of significant accounting policies and notes thereto
included in the Company's latest annual report on Form 10-K.
Basis of Presentation
The accompanying financial statements include the accounts of Key for 1996 and
1995 and the accounts of Brock Exploration Corporation ("Brock") for 1996.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Income Taxes
Income tax expense consisted of the following:
Three Months Ended March 31,
----------------------------
1996 1995
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Current Taxes:
Federal $ - $ -
State 59 41
Deferred Taxes: 502 346
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$ 561 $ 387
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Net Income Per Share
Net income per share amounts are based on the weighted average number of
common shares outstanding for each period. When dilutive, outstanding options
to purchase common stock are included as share equivalents using the treasury
stock method. Only one per share figure is presented for each period because
the fully diluted and primary earnings per share amounts are not materially
different.
Statement of Cash Flows
The Company considers all highly liquid debt instruments purchased with an
original maturity of three months or less to be cash equivalents. These
investments earned 4.8 percent and 5.3 percent rates of interest at March 31,
1996 and December 31, 1995, respectively, with cost approximating market.
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Supplemental Disclosure of Cash Flow Information
For the Three Months
Ended March 31,
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1996 1995
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(In thousands)
Cash paid during the period for:
Interest (net of amounts capitalized) $ 102 $ 39
Income taxes (net of refunds received) $ 12 $ 169
Supplemental Schedule of Noncash Investing and Financing Activities
On March 28, 1996, Key consummated the previously announced merger with
Brock Exploration Corporation. The noncash acquisition was structured as a tax-
free exchange. Each Brock stockholder will receive one share of Key common
stock for each 1.45 Brock shares held. The transaction had the following
noncash impact on the Company's March 31, 1996 balance sheet:
Amount
------
(in thousands)
Current assets $ 3,454
Oil and gas properties 20,582
Current liabilities (1,328)
Long-term debt (7,950)
Non-current liabilities (2,567)
Stockholders' equity (13,877)
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$ (1,686)
==========
In connection with the acquisition, the Company received cash and cash
equivalents totaling $1,686,000.
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Pro Forma Financial Information
As stated above, the Company completed a transaction to combine Key and
Brock on March 28, 1996. On that date, Key assumed all of the assets and
liabilities of Brock, including Brock's bank debt, and Brock became a wholly-
owned subsidiary of Key.
The following unaudited pro forma information was prepared as if the
acquisition occurred on January 1, 1995. The pro forma data presented is based
on numerous assumptions and is not necessarily indicative of future operations.
Three Months Ended Three Months Ended
March 31, 1996 March 31, 1995
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(In thousands, except per share data)
Revenues $8,386 $7,154
Net income $1,453 $1,114
Net income per share $ .12 $ .09
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ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Financial Results
Key is reporting 1996 first quarter net income of $.9 million, or $.10 per
share. On a per share basis, net income rose 43 percent over the $.07 per share
reported in 1995. Earnings for the first quarters of 1996 and 1995 are based on
revenues of $5.9 million and $4.7 million, respectively.
Results of Operations
Oil and gas revenues increased by $1.1 million, or 24 percent to reach $5.9
million in the first quarter of 1996. Most of the quarter over quarter increase
was fueled by a substantial increase to gas sales between the 1996 and 1995
quarters.
Gas sales climbed from $2.2 million in the first quarter of 1995 to $3.2
million in the first quarter of 1996, a 48 percent increase. Largely due to the
Company's successful drilling projects, average daily gas volumes increased from
14,204 Mcf per day in the first quarter of 1995 to 17,039 Mcf per day in 1996.
Production increases added approximately $.6 million to gas sales. Key's 1996
average gas price came in strong at $2.07 per Mcf. The $.37 per Mcf increase
over last year's average price had a $.4 million positive impact on gas sales.
Oil sales of $2.6 million reflect a three percent increase over last years
first quarter results. Favorable prices were more than enough to counteract a
decrease in production volumes between the comparable periods of 1996 and 1995.
Key's average oil price increased 12 percent from $15.37 per barrel in 1995 to
$17.29 per barrel in 1996. The favorable price variance had a positive impact
of $.3 million. Daily production fell slightly between 1996 and 1995. Average
daily volumes were 1,634 and 1,809 barrels per day, respectively, for 1996 and
1995.
Product sales from gas processing plants increased 59 percent in 1996, but
did not contribute a significant amount to oil and gas revenues. In the first
quarter of 1996, Key's oil and gas revenues are derived from the following
product mix: 44 percent oil, 55 percent gas and one percent plant products.
This compares to the following components for 1995: 53 percent oil, 46 percent
gas and one percent plant products.
Depreciation, depletion and amortization (DD&A) expense increased 32
percent to $2.3 million for the first quarter of 1996. The increase is a
consequence of higher oil and gas revenues and an increase to the amortization
rate. Key's oil and gas amortization rate as a percentage of revenue increased
from 36.5 percent in 1995 to 38.9 percent in 1996.
Quarterly operating expenses held steady at $1.6 million for 1996 and 1995
despite the large increase to oil and gas revenues. One reason for the level
expenses is that there were fewer dollars expended on workovers in the first
quarter of 1996 than there were in the comparable period of 1995. In the first
quarter of 1996, more emphasis was placed on drilling new wells. On a unit of
production basis, operating expenses for the first three months of 1996 are $.65
per EMcf, down from the $.70 per EMcf in 1995. (Oil is compared to natural gas
in terms of equivalent thousand cubic feet, "EMcf." One barrel of oil is the
energy equivalent of six Mcf of natural gas.)
Administrative, selling and other costs increased by 16 percent to $.4
million for the first three months of 1996. Due to economies of scale and the
capitalization of direct overhead related to exploration and development
activities, the Company experienced only modest increases to administrative
expenses while managing a larger asset base. Based on units of production,
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administrative expense increased to $.16 per EMcf in 1996 from $.15 per EMcf in
1995.
Cash Flow and Liquidity
Liquidity refers to the ability of an enterprise to generate adequate
amounts of cash to satisfy its financial commitments. Key's primary needs for
cash are to fund oil and gas exploration, development and acquisition activities
and for payment of existing obligations and trade commitments related to oil and
gas operations. The Company's primary source of liquidity are cash flows from
operating activities and proceeds from financing activities. Management
believes that the overall sources of funds available to Key will continue to be
more than sufficient to satisfy the Company's financial obligations.
Cash from operating activities declined slightly from $2.7 million in the
first quarter of 1995 to $2.6 million in the first quarter of 1996. Increases to
net income, DD&A and deferred taxes added $1 million to cash from operating
activities, while normal fluctuations in working capital accounts decreased cash
from operating activities by $1.1 million for a net $.1 million decrease.
First quarter cash expenditures for exploration and development for 1996
totaled $3.9 million, or 152 percent of cash from operating activities. This
compares to $2.7 million or 100 percent of cash from operating activities in
1995.
On March 28, 1996, Key consummated the previously announced merger with
Brock Exploration Corporation. In this noncash transaction, Brock became a
wholly-owned subsidiary of Key. Key's consolidated balance sheet at March 31,
1996 includes the assets and liabilities as well as the adjustments required to
record the acquisition under the purchase accounting rules.
The Company borrowed $1.6 million and $.9 million in the first quarters of
1996 and 1995, respectively, against its NationsBank credit facility. The funds
were used to finance exploration and drilling activities in excess of cash
generated by operating activities.
The Company's ratio of current assets to current liabilities was 1.7 to 1
at March 31, 1996, an increase from the 1.1 to 1 ratio calculated at December
31, 1995.
Management believes that cash on hand, net cash generated from operations
and remaining amounts available under the existing line of credit will be
adequate to meet future liquidity needs, including satisfying the Company's
financial obligations and funding operations, exploration and development
activities.
Future Trends
As discussed previously, Key completed its acquisition of Brock Exploration
Corporation, by merger, on March 28, 1996. Brock is being operated as a wholly-
owned subsidiary of Key. A regional office will be maintained in New Orleans
staffed by five former Brock employees. These employees will focus on
exploration and acquisition activities in the Gulf Coast area.
The effect of the acquisition is reflected in Key's March 31, 1996, balance
sheet included herein. However, since the transaction closed at the end of the
first quarter, the impact on revenues and expenses will not appear until the
second quarter of 1996.
-10-
Subsequent to quarter end and consummation of the merger, the Company
completed its negotiations with NationsBank and, based on the reserve value of
the post-merger reserves, obtained an increase in its borrowing base. As a
result of its increased borrowing ability, Key was able to advance the funds
necessary to enable Brock to repay its outstanding loan with NationsBank,
thereby enabling Brock to take advantage of Key's lower borrowing rate.
Key continued to increase its drilling activity during the first quarter.
The majority of the Company's drilling continues to be in the Mid Continent,
Rocky Mountain and Gulf Coast regions. However, on April 9, 1996, the Company
announced that it had completed three gas wells in the Sacramento Basin of
California during the first quarter of 1996. Production from these wells
increased Key's daily net gas production by approximately 30% over the fourth
quarter 1995 rate. This is Key's first production in California. The Company
has recently completed a 3-D seismic survey in the area and plans to drill
additional wells and conduct another 3-D seismic survey before year-end.
Product prices were strong in the first quarter and current indications are
for relatively stronger prices for 1996, as compared to last year, which could
have a significant positive impact on revenue for the remainder of the year.
There is, however, no assurance to the future direction of either oil or gas
prices.
The Company expects that cash on hand, net cash generated by operating
activities and amounts available under the credit facility will be adequate to
meet future liquidity needs under current corporate policies. Management
believes that the overall sources of funds available to Key will continue to be
sufficient to provide resources to meet the Company's exploration, development
and acquisition objectives.
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PART II. - OTHER INFORMATION
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ITEM 1. LEGAL PROCEEDINGS
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None.
ITEM 2. CHANGES IN SECURITIES
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None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
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None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF THE SECURITY HOLDERS
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On March 28, 1996, the Company held a special meeting of stockholders at which
the issuance of an additional 2,800,000 shares in connection with the merger of
a subsidiary of Key Production Company, Inc. with and into Brock Exploration
Corporation was approved.
The following are the number of votes cast.
Proposal For Against Abstain
-------- --- ------- -------
Issuance of shares 4,772,095 135,655 115,994
ITEM 5. OTHER INFORMATION
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None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
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(a) Exhibits:
27.1 Financial Data Schedule for Commercial and Industrial Companies per
Article 5 of the Regulation S-X for the quarter ended March 31,
1996.
(b) Reports on Form 8-K:
On April 12, 1996, the Company filed a report dated March 28, 1996 on
Form 8-K. The Form 8-K reported that in special meetings held on March
28, 1996 the stockholders of Key Production Company, Inc. approved the
issuance of 2,800,000 shares of common stock and the stockholders of
Brock Exploration Corporation approved a merger with a subsidiary of Key
Production Company, Inc.
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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.
Dated: May 15, 1996
KEY PRODUCTION COMPANY, INC.
/s/ Monroe W. Robertson
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Monroe W. Robertson
Senior Vice President and Secretary
(Principal Financial Officer)
/s/ Cathy L. Anderson
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Cathy L. Anderson
Controller
(Principal Accounting Officer)
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