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 June 30, 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.
- ------------------------------------------------------------------------------
(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 June 30, 1996, is 11,626,957.
PART I - FINANCIAL INFORMATION
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ITEM 1 - FINANCIAL STATEMENTS
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KEY PRODUCTION COMPANY, INC.
STATEMENT OF INCOME
(Unaudited)
For the Quarter For the Six Months
Ended June 30, Ended June 30,
---------------- -------------------
(In thousands, except per share data) 1996 1995 1996 1995
-------- -------- -------- --------
REVENUES:
Oil and gas production revenues $10,127 $4,685 $16,008 $9,421
Other revenues 82 3 82 5
------- ------ ------- ------
10,209 4,688 16,090 9,426
------- ------ ------- ------
OPERATING EXPENSES:
Depreciation, depletion and
amortization 3,633 1,806 5,959 3,562
Operating costs 2,634 1,539 4,217 3,113
Administrative, selling and other 672 401 1,063 738
Financing costs:
Interest expense 215 53 326 109
Interest income (19) (3) (24) (6)
------- ------ ------- ------
7,135 3,796 11,541 7,516
------- ------ ------- ------
INCOME BEFORE INCOME TAXES 3,074 892 4,549 1,910
PROVISION FOR INCOME TAXES 1,168 107 1,729 494
------- ------ ------- ------
NET INCOME $ 1,906 $ 785 $ 2,820 $1,416
======= ====== ======= ======
NET INCOME PER COMMON AND COMMON
EQUIVALENT SHARE $ .16 $ .08 $ .26 $ .15
======= ====== ======= ======
WEIGHTED AVERAGE COMMON AND COMMON
EQUIVALENT SHARES OUTSTANDING 12,265 9,667 10,858 9,614
======= ====== ======= ======
The accompanying notes to financial statements are
an integral part of this statement.
2
KEY PRODUCTION COMPANY, INC.
STATEMENT OF CASH FLOWS
(Unaudited)
For the Six Months
Ended June 30,
------------------
(In thousands) 1996 1995
-------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 2,820 $ 1,416
Adjustments to reconcile net income
to net cash provided by operating activities:
Depreciation, depletion and
amortization 5,959 3,562
Deferred income taxes 1,547 418
Changes in operating assets and
liabilities:
(Increase) decrease in receivables (1,337) 454
Increase in prepaid expenses and other (323) (294)
Decrease in accounts payable and
accrued expenses (297) (810)
Decrease in long-term property
liabilities and other - (65)
-------- -------
Net cash provided by operating
activities 8,369 4,681
-------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Oil and gas exploration and
development expenditures (7,791) (5,164)
Acquisition of oil and gas properties (429) (128)
Cash received in connection with
acquisition, net of cash purchase adjustments 2,433 -
Proceeds from sale of oil and gas
properties 23 107
Other capital expenditures (136) (135)
-------- -------
Net cash used by investing activities (5,900) (5,320)
-------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Long-term borrowings 10,104 900
Payments on long-term debt (11,500) (300)
Proceeds from issuance of common stock 10 -
Payments to acquire treasury stock - (2)
-------- -------
Net cash provided (used) by financing
activities (1,386) 598
-------- -------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS 1,083 (41)
CASH AND CASH EQUIVALENTS AT BEGINNING
OF YEAR 591 281
-------- -------
CASH AND CASH EQUIVALENTS AT END OF
PERIOD $ 1,674 $ 240
======== =======
The accompanying notes to financial statements are
an integral part of this statement.
3
KEY PRODUCTION COMPANY, INC.
BALANCE SHEET
June 30, December 31,
(In thousands) 1996 1995
----------- -------------
(Unaudited)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 1,674 $ 591
Receivables 5,787 3,346
Prepaid expenses and other 1,083 481
-------- --------
8,544 4,418
-------- --------
OIL AND GAS PROPERTIES, ON THE BASIS OF
FULL COST ACCOUNTING:
Proved properties 90,102 61,470
Unproved properties and properties
under development, not being amortized 10,669 9,104
-------- --------
100,771 70,574
Less - accumulated depreciation,
depletion and amortization (22,297) (16,420)
-------- --------
78,474 54,154
-------- --------
OTHER ASSETS, NET 681 627
-------- --------
$ 87,699 $ 59,199
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 3,279 $ 2,948
Accrued exploration and development 1,366 370
Accrued lease operating expense and other 964 531
-------- --------
5,609 3,849
-------- --------
LONG-TERM DEBT 21,154 14,600
-------- --------
DEFERRED CREDITS AND OTHER NONCURRENT
LIABILITIES
Income taxes 6,364 3,199
Long-term property liabilities and other 2,143 1,852
-------- --------
8,507 5,051
-------- --------
STOCKHOLDERS' EQUITY:
Common stock, $.25 par value, 50,000,000
shares authorized, 11,665,610 and
11,656,350 shares issued, respectively 2,916 2,914
Paid-in capital 37,357 34,401
Retained earnings 12,309 9,489
Treasury stock at cost, 38,653 and
2,806,882 shares, respectively (153) (11,105)
-------- --------
52,429 35,699
-------- --------
$ 87,699 $ 59,199
======== ========
The accompanying notes to financial statements are
an integral part of this statement.
4
KEY PRODUCTION COMPANY, INC.
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 - - 2,820 - 2,820
Common stock issued 2 8 - - 10
Treasury stock issued - 2,948 - 10,952 13,900
--------- --------- -------- --------- ---------
BALANCE, JUNE 30, 1996 $ 2,916 $ 37,357 $ 12,309 $ (153) $ 52,429
========= ========= ======== ========= =========
5
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
Key consummated the acquisition of Brock Exploration Corporation ("Brock")
on March 28, 1996 in a tax-free reorganization pursuant to which Brock became a
wholly-owned subsidiary of Key. To effect the transaction, each Brock
shareholder received one share of Key common stock for each 1.45 Brock shares
held. The accompanying financial statements include the accounts of Key for 1996
and 1995 and the accounts of Brock for periods subsequent to the acquisition.
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:
Six Months Ended June 30,
-------------------------
1996 1995
---------- ----------
Current Taxes:
Federal $ - $ -
State 182 76
Deferred Taxes: 1,547 418
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$ 1,729 $ 494
========== ==========
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.
6
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 4.9 percent and 5.3 percent rates of interest at June 30,
1996 and December 31, 1995, respectively, with cost approximating market.
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
For the Six Months
Ended June 30,
------------------
1996 1995
-------- --------
(In thousands)
Cash paid during the period for:
Interest (net of amounts capitalized) $ 295 $ 68
Income taxes $ 156 $ 360
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES
The Brock acquisition had the following noncash impact on the Company's
June 30, 1996 balance sheet:
Amount
--------------
(in thousands)
Current assets $ 1,383
Oil and gas properties 21,011
Current liabilities (1,099)
Long-term debt (7,950)
Non-current liabilities (1,909)
Stockholders' equity (13,869)
--------------
$ (2,433)
==============
In connection with the acquisition, the Company received cash and cash
equivalents totaling $2,433,000.
7
PRO FORMA FINANCIAL INFORMATION
The following unaudited pro forma information was prepared as if the Brock
acquisition occurred on January 1, 1995. The pro forma data presented is based
on numerous assumptions and is not necessarily indicative of future operations.
Six Months Ended Six Months Ended
June 30, 1996 June 30, 1995
---------------- ----------------
(In thousands, except per share data)
Revenues $18,595 $14,438
Net income $ 3,361 $ 2,053
Net income per share $ .28 $ .17
8
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
FINANCIAL RESULTS
Key is reporting second quarter 1996 net income of $1.9 million. This
represents a 143 percent increase over the $.8 million reported for the same
quarter of 1995. Net income per share of $.16 is twice the $.08 reported a year
ago. Results for the second quarters of 1996 and 1995 are based on revenues of
$10.2 million and $4.7 million, respectively.
On a year to date basis, Key is reporting net income of $.26 per share, or
$2.8 million. Net income for 1996 increased 73 percent and 99 percent over the
$.15 per share, or $1.4 million reported for the first six months of 1995.
Key's notable increases for the second quarter and first six months are
attributable to oil and gas revenue increases. Production increases and
favorable pricing both contributed to the excellent outcome.
RESULTS OF OPERATIONS
For the Quarter For the Six Months
Ended June 30, Ended June 30,
--------------- ------------------
1996 1995 1996 1995
------- ------- -------- --------
Selected Oil and Gas
Operating Statistics
- --------------------
Gas Volume - Mcf per day 30,152 14,432 23,596 14,319
Gas Price - Per Mcf $ 1.91 $ 1.64 $ 1.97 $ 1.67
Oil Volume - Barrels per day 2,651 1,616 2,143 1,712
Oil Price - Per barrel $ 19.81 $ 16.67 $ 18.85 $ 15.99
Full Cost Amortization Rate 35.5% 37.8% 36.7% 37.1%
Second quarter 1996 oil and gas revenues of $10.1 million are more than
double the $4.7 million reported in the second quarter of 1995. Oil and gas
revenues for the six month periods increased 70 percent to $16 million between
1996 and 1995. These increases are due to the acquisition of Brock at the end of
the first quarter, production from new drilling and improved product prices.
Oil sales for the current quarter of $4.8 million are 95 percent, or $2.3
million, above the same quarter a year ago. Oil production climbed from 1,616
barrels per day in 1995 to 2,651 barrels per day in 1996. This 64 percent volume
increase added approximately $1.6 million to oil sales. Key's average daily
price increased from $16.67 to $19.81 per barrel in 1996 and contributed another
$.7 million to the favorable variance.
Oil sales increased by 48 percent between the first six months of 1996 and
1995 with both production increases and price increases contributing to the
gain. Average daily production advanced from 1,712 barrels per day in 1995 to
2,143 barrels per day in 1996 and added about $1.3 million to the 1996 results.
Oil prices increased 18 percent, or $1.1 million.
9
Gas sales for the quarter showed even greater gains than the Company's oil
sales. Key is reporting second quarter gas sales of $5.2 million in 1996,
compared to $2.2 million in 1995. Production volumes more than doubled to reach
30,152 Mcf per day in 1996. Volume increases alone had a positive impact of more
than $2.3 million on sales. Key's average price for the second quarter went from
$1.64 per Mcf in 1995 to $1.91 per Mcf in 1996 to add another $.7 million to gas
sales.
Gas revenue for the six month period also increased by 95 percent between
1996 and 1995. Daily production increased from 14,319 per day in 1995 to 23,596
per day in 1996. Production increases equated to $2.8 million of additional
sales. Key's average price increased from $1.67 per Mcf in 1995 to $1.97 per Mcf
in 1996.
Product sales from gas processing plants for the second quarter and first
six months increased 46 percent and 52 percent, respectively, but did not
contribute a significant amount to oil and gas revenues. Key's second quarter
oil and gas revenues are derived from the following product mix: 47 percent oil,
52 percent gas and 1 percent plant products. This compares to the following
components for 1995: 52 percent oil, 47 percent gas and 1 percent plant
products.
Key acquired a pipeline in the first quarter of 1996 as part of the Brock
acquisition. Other revenue for the second quarter and first six months of 1996
is income derived from this pipeline.
Depreciation, depletion and amortization (DD&A) expense for the second
quarter and first six months of 1996 increased 101 percent and 67 percent,
respectively, from the comparable periods of 1995. The DD&A increase was a
direct result of Key's increased oil and gas sales, but not as pronounced as the
sales increase due to a decline in the 1996 DD&A rates. Key's second quarter
amortization rate as a percentage of revenue decreased from 37.8 percent in 1995
to 35.5 percent in 1996. For the six months, the amortization rate decreased
from 37.1 percent to 36.7 percent. Significantly better oil and gas prices
through the first six months of 1996 were the catalyst for improved DD&A rates.
Operating expenses increased 71 percent between the second quarters of 1996
and 1995, and increased 35 percent between the first six months of 1996 and
1995. Expense increases are a result of the 1996 acquisition and the resulting
larger property base. In contrast, expenses compared on a unit of production
basis decreased between 1996 and 1995 for the quarter and first six months.
Second quarter unit of production operating expenses dropped from $.70 per EMcf
in 1995 to $.63 per EMcf in 1996. For the six months, expenses went from $.70
per EMcf in 1995 to $.64 per EMcf in 1996. (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 declined on a units of production
basis from $.18 per EMcf in the second quarter of 1995 to $.16 per EMcf in 1996.
10
Interest expense for the first six months increased from $381,000 in 1995
to $646,000 in 1996. Key assumed an additional $7.9 million of bank debt in
connection with the Brock acquisition. The long-term debt balance at June 30,
1996 was over $21 million, compared to $10.6 million at June 30, 1995.
Interest of $326,000 was capitalized in the first six months of 1996 for
borrowings associated with the undeveloped leasehold acquired in the second
quarter of 1994. Capitalized interest of $109,000 was recorded for the same
period of 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 for payment of existing financing obligations and trade commitments
related to oil and gas operations. The Company's primary sources of liquidity
are cash flows from operating activities and debt financing. Management believes
that the overall sources of funds available to Key, including cash on hand, will
continue to be more than sufficient to satisfy the Company's financial
obligations.
Cash from operating activities increased 79 percent to $8.4 million between
the first six months of 1996 and 1995.
Year-to-date expenditures of $7.8 million for exploration and development
are up 51 percent from the $5.2 million spent in 1995. In the first six months
of 1996, exploration and development expenditures amounted to 93 percent of
cash from operating activities. For the same period of 1995, 110 percent of
cash from operating activities was expended for exploration and development.
On March 28, 1996, Key consummated a merger with Brock Exploration
Corporation. In this non-cash transaction, Brock became a wholly-owned
subsidiary of Key. Key's consolidated balance sheet includes the assets and
liabilities as well as the adjustments required to record the acquisition under
purchase accounting rules.
Since year-end 1995, long-term debt increased from $14.6 million to $21.2
million. Subsequent to the acquisition of Brock, Key drew on its own credit
facility to retire the Brock debt and obtain more favorable financing terms. The
Company's bank financing is a $50 million credit facility with NationsBank of
Texas, N.A. In March of 1996, the Company elected to increase the borrowing base
from $22 million to $36 million to retire the Brock debt and fund any future
acquisition and drilling opportunities. The current borrowing base is still
significantly less than the total borrowing base that could have been requested
under the terms of the agreement.
The Company's ratio of current assets to current liabilities was 1.52 to 1
at June 30, 1996, an increase from the 1.15 to 1 ratio calculated at December
31, 1995.
11
FUTURE TRENDS
As noted previously, Key completed its acquisition of Brock Exploration
Corporation ("Brock") on March 28, 1996. The effect of the acquisition was
reflected in Key's March 31, 1996 balance sheet. Consolidated net income and
cash flows for this quarter include the effect of Brock for the first time.
Administrative, land and accounting functions for the Brock assets have been
moved from New Orleans to Key's corporate office in Denver. Key is maintaining a
regional office in New Orleans with employees there focused on exploration and
acquisition activities in the Gulf Coast area.
Key invested approximately $7.8 million in exploration and development
during the first half of 1996. Exploration and development expenditures are
expected to continue at a comparable pace through the end of the year. Current
estimates show approximately half of this being spent in the Mid-Continent
region with the remainder split fairly equally between the California, Gulf
Coast and Rocky Mountain regions.
As discussed previously, current quarter revenue was impacted by
increased production from new drilling and the Brock acquisition combined with
improved product prices. It currently appears that oil and gas prices for the
second half of 1996 may be higher than those received in the comparable period
of 1995. However, the price received for the rest of 1996 may not be quite as
high as the price received during the first half 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.
CAUTIONARY STATEMENT PURSUANT TO SAFE HARBOR PROVISION OF THE PRIVATE SECURITIES
LITIGATION REFORM ACT OF 1995.
This report contains "forward-looking statements" within the meaning of
the federal securities laws. These forward-looking statements include, among
others, statements concerning the company's outlook for the remainder of 1996
with regard to production levels, price realizations, expenditures for
exploration and development, plans for funding operations and capital
expenditures and other statements of expectations, beliefs, future plans and
strategies, anticipated events or trends and similar expressions concerning
matters that are not historical facts. The forward-looking statements in this
report are subject to risks and uncertainties that could cause actual results to
differ materially from those expressed in or implied by the statements.
These risks and uncertainties include, but are not limited to,
fluctuations in the price the Company receives for its oil and gas production,
reductions in the quantity of oil and gas sold due to decreased industry-wide
demand and/or curtailments in production from specific properties due to
mechanical, marketing or other problems, operating and capital expenditures that
are either significantly higher or lower than anticipated because the actual
cost of identified projects varied from original estimates and/or from the
number of exploration and development opportunities being greater or fewer than
currently anticipated and increased financing costs due to a significant
increase in interest rates. These and other risks and uncertainties affecting
the Company are discussed in greater detail in this report and in other filings
by the company with the Securities and Exchange Commission.
12
PART II. - OTHER INFORMATION
----------------------------
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF THE SECURITY HOLDERS
- ----------------------------------------------------------------
On June 20, 1996, the Company held its annual meeting of stockholders at
which Francis H. Merelli, Cortlandt S. Dietler and Timothy J. Moylan were
elected as directors.
The following are the number of votes cast on the election of directors.
Directors: For Withhold Authority
- ---------------------- --------- ------------------
Francis H. Merelli 8,711,335 60,469
Cortlandt S. Dietler 8,706,591 65,213
Timothy J. Moylan* 8,711,655 60,149
* Mr. Moylan passed away on August 1, 1996.
ITEM 5. OTHER INFORMATION
- --------------------------
Effective June 11, 1996, Continental Stock Transfer & Trust Company became
Key Production Company, Inc.'s transfer agent. Its address and phone number is:
Continental Stock Transfer & Trust Company
2 Broadway
New York, NY 10004
800/509-5586
Effective June 25, 1996, Key Production Company, Inc. began trading on the
New York Stock Exchange under the symbol KP.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
- -----------------------------------------
(a) Exhibits:
27.1 Financial Data Schedule for Commercial and Industrial
Companies per Article 5 of the Regulation S-X for the quarter
ended June 30, 1996.
(b) Reports on Form 8-K:
None
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.
Dated: August 14, 1996
KEY PRODUCTION COMPANY, INC.
/s/ F.H. Merelli
______________________________
F.H. Merelli
Chairman, President and
Chief Executive Officer
/s/ Cathy L. Anderson
______________________________
Cathy L. Anderson
Controller
(Principal Accounting Officer)
14