UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period ended June 30, 2001
Commission file No. 001-11769
KEY PRODUCTION COMPANY, INC.
707 Seventeenth Street, Suite 3300
Denver, Colorado 80202-3404
(303) 295-3995
Incorporated in the Employer Identification
State of Delaware No. 84-1089744
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 [_]
The number of shares outstanding of the Company's common stock as of June
30, 2001 is shown below:
Title of Class Number of Shares Outstanding
Common Stock, par value $0.25 per share 13,978,666
KEY PRODUCTION COMPANY, INC.
Table of Contents
Page
PART I
Item 1 - Financial Statements
Consolidated Statements of Income
For the Three Months Ended June 30, 2001 and June 30, 2000 and
for the Six Months Ended June 30, 2001 and June 30, 2000 3
Consolidated Statements of Cash Flows
For the Six Months Ended June 30, 2001 and June 30, 2000 4
Consolidated Balance Sheets
As of June 30, 2001 and December 31, 2000 5
Consolidated Statements of Stockholders' Equity
For the Six Months Ended June 30, 2001 6
Notes to Consolidated Financial Statements 7
Item 2 - Management's Discussion and Analysis of Financial Condition and
Results of Operations 10
Item 3 - Quantitative and Qualitative Disclosures About Market Risk 15
PART II
Item 4 - Submission of Matters to a Vote of Security Holders 16
Item 6 - Exhibits and Reports on Form 8-K 16
2
KEY PRODUCTION COMPANY, INC.
Consolidated Statements of Income
(Unaudited)
For the Three Months For the Six Months
Ended June 30, Ended June 30,
--------------------- ---------------------
2001 2000 2001 2000
-------- -------- -------- --------
(In thousands, except per share data)
Revenues:
Gas sales $ 19,700 $ 11,335 $ 48,471 $ 19,744
Oil sales 9,789 9,823 20,492 20,286
Plant product sales 388 476 637 838
Other 9 110 57 209
-------- -------- -------- --------
29,886 21,744 69,657 41,077
-------- -------- -------- --------
Operating expenses:
Depreciation, depletion
and amortization 8,207 8,320 19,430 16,264
Lease operating 4,341 2,908 8,193 5,555
Production taxes 1,845 772 4,331 1,403
General and administrative 847 701 1,698 1,421
Financing costs:
Interest expense 500 1,107 1,193 2,239
Capitalized interest (306) (393) (657) (735)
Interest income (47) (33) (120) (81)
-------- -------- -------- --------
15,387 13,382 34,068 26,066
-------- -------- -------- --------
Income before income taxes 14,499 8,362 35,589 15,011
Provision for income taxes 5,582 3,094 13,352 5,554
-------- -------- -------- --------
Net income $ 8,917 $ 5,268 $ 22,237 $ 9,457
======== ======== ======== ========
Basic earnings per share $ 0.64 $ 0.44 $ 1.59 $ 0.81
======== ======== ======== ========
Diluted earnings per share $ 0.62 $ 0.43 $ 1.54 $ 0.77
======== ======== ======== ========
Weighted average basic shares 13,977 11,901 13,969 11,748
======== ======== ======== ========
Weighted average diluted shares 14,450 12,222 14,400 12,212
======== ======== ======== ========
See accompanying notes to consolidated financial statements.
3
KEY PRODUCTION COMPANY, INC.
Consolidated Statements of Cash Flows
For the Six Months Ended June 30, 2001 and 2000
(Unaudited)
2001 2000
-------- --------
(In thousands)
Cash flows from operating activities:
Net income $ 22,237 $ 9,457
Adjustment to reconcile net income to net cash provided
by operating activities:
Depreciation, depletion and amortization 19,430 16,264
Deferred income taxes 6,758 4,954
Common stock issued as compensation 112 60
Amortization of unearned compensation 80 --
Income tax benefit related to stock options exercised 235 --
Changes in operating assets and liabilities:
Increase in receivables (259) (3,633)
(Increase) decrease in prepaid expenses and other 379 (104)
Decrease in accounts payable and accrued expenses (328) (1,507)
Increase in other liabilities 29 307
-------- --------
Net cash provided by operating activities 48,673 25,798
-------- --------
Cash flows from investing activities:
Oil and gas exploration and development expenditures (43,529) (23,872)
Acquisition of proved oil and gas reserves (119) (121)
Proceeds from sale of oil and gas properties 1 127
Other capital expenditures (230) (207)
-------- --------
Net cash used by investing activities (43,877) (24,073)
-------- --------
Cash flows from financing activities:
Long-term borrowings 2,000 --
Payments on long-term debt (12,000) (6,000)
Payments to acquire treasury stock (9) (4)
Proceeds from issuance of common stock 380 2,294
-------- --------
Net cash used by financing activities (9,629) (3,710)
-------- --------
Net decrease in cash and cash equivalents (4,833) (1,985)
Cash and cash equivalents at beginning of year 6,746 6,087
-------- --------
Cash and cash equivalents at end of period $ 1,913 $ 4,102
======== ========
See accompanying notes to consolidated financial statements.
4
KEY PRODUCTION COMPANY, INC.
Consolidated Balance Sheets
(Unaudited)
June 30, December 31,
Assets 2001 2000
--------- ------------
(In thousands, except share data)
Current assets:
Cash and cash equivalents $ 1,913 $ 6,746
Receivables 25,287 25,028
Prepaid expenses and other 1,193 1,572
--------- ---------
28,393 33,346
--------- ---------
Oil and gas properties, on the basis of full cost accounting:
Proved properties 353,097 307,882
Unproved properties and properties under development,
not being amortized 21,441 21,284
--------- ---------
374,538 329,166
Less - accumulated depreciation, depletion and amortization (139,261) (120,337)
--------- ---------
235,277 208,829
--------- ---------
Other assets, net 1,649 1,979
--------- ---------
$ 265,319 $ 244,154
========= =========
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable $ 14,158 $ 16,963
Accrued exploration and development 6,399 4,726
Accrued lease operating expense and other 6,034 4,282
--------- ---------
26,591 25,971
--------- ---------
Long-term debt 34,000 44,000
--------- ---------
Deferred income taxes 43,124 35,548
--------- ---------
Other liabilities 577 548
--------- ---------
Stockholders' equity:
Common stock, $.25 par value, 50,000,000 shares authorized,
14,259,621 and 14,223,775 shares issued, respectively 3,565 3,556
Paid-in capital 71,954 71,122
Unearned compensation (358) --
Retained earnings 88,750 66,513
Treasury stock at cost, 280,955 and 303,138 shares, respectively (2,884) (3,104)
--------- ---------
161,027 138,087
--------- ---------
$ 265,319 $ 244,154
========= =========
See accompanying notes to consolidated financial statements.
5
KEY PRODUCTION COMPANY, INC.
Consolidated Statements of Stockholders' Equity
For the Six Months Ended June 30, 2001
(Unaudited)
Total
Common Paid-in Unearned Retained Treasury Stockholders'
Stock Capital Compensation Earnings Stock Equity
--------- --------- ------------ --------- --------- ---------
(In thousands)
Balance, December 31, 2000 $ 3,556 $ 71,122 $ -- $ 66,513 $ (3,104) $ 138,087
Net income -- -- -- 22,237 -- 22,237
Common stock issued for
options exercised 10 481 -- -- -- 491
Income tax benefit related to
stock options exercised -- 235 -- -- -- 235
Common stock issued as --
compensation -- 16 -- -- 65 81
Common stock reacquired (1) (174) -- -- (9) (184)
Unearned compensation
related to restricted stock awards -- 274 (438) -- 164 --
Amortization of unearned compensation -- -- 80 -- -- 80
--------- --------- --------- --------- --------- ---------
Balance, June 30, 2001 $ 3,565 $ 71,954 $ (358) $ 88,750 $ (2,884) $ 161,027
========= ========= ========= ========= ========= =========
See accompanying notes to consolidated financial statements.
6
KEY PRODUCTION COMPANY, INC.
Notes to Consolidated Financial Statements
June 30, 2001
(Unaudited)
(1) Basis of Presentation
The accompanying financial statements are unaudited and were prepared from
the Company's records. Management believes these financial statements
include all adjustments necessary for a fair presentation of the Company's
financial position and results of operations. All adjustments are of a
normal and recurring nature. The Company prepared these statements on a
basis consistent with the annual audited statements and Regulation S-X.
Regulation S-X allows the Company to omit some of the footnote and policy
disclosures required by accounting principles generally accepted in the
United States of America and normally included in annual reports on Form
10-K. These interim financial statements should be read in conjunction with
the financial statements, summary of significant accounting policies and
notes in the Company's most recent annual report on Form 10-K.
The accounts of Key and its subsidiaries are presented in the accompanying
consolidated financial statements. All intercompany accounts and
transactions were eliminated in consolidation.
Management relies on estimates and assumptions to prepare financial
statements in conformity with accounting principles generally accepted in
the United States of America. Those estimates and assumptions 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.
Certain amounts in the accompanying consolidated financial statements for
prior periods have been reclassified to conform to the current year
presentation.
(2) Income Taxes
Income tax expense consisted of the following:
Three Months Ended Six Months Ended
June 30, June 30,
------------------ ------------------
2001 2000 2001 2000
------- ------- ------- -------
Current taxes:
Federal $ 2,304 $ -- $ 5,995 $ --
State 165 334 599 600
Deferred taxes 3,113 2,760 6,758 4,954
------- ------- ------- -------
$ 5,582 $ 3,094 $13,352 $ 5,554
======= ======= ======= =======
7
(3) Earnings Per Share
The calculations of basic and diluted earnings per common share for the
periods ended June 30, 2001 and 2000 are presented in the table below:
For the Three Months Ended For the Six Months Ended
-------------------------- ------------------------
2001 2000 2001 2000
--------- --------- --------- ---------
(In thousands, except per share data)
Basic earnings per share:
Income available to common
stockholders $ 8,917 $ 5,268 $22,237 $ 9,457
Weighted average basic shares
outstanding 13,977 11,901 13,969 11,748
Basic earnings per share $ 0.64 $ 0.44 $ 1.59 $ 0.81
Diluted earnings per share:
Income available to common
stockholders $ 8,917 $ 5,268 $22,237 $ 9,457
Incremental shares assuming the
exercise of stock options 473 321 431 464
Weighted average diluted shares
outstanding 14,450 12,222 14,400 12,212
Diluted earnings per share $ 0.62 $ 0.43 $ 1.54 $ 0.77
(4) Supplemental Disclosure of Cash Flow Information
For the Six Months Ended June 30,
---------------------------------
2001 2000
------- -------
(In thousands)
Cash paid during the period for:
Interest (net of interest capitalized of $657
and $735, respectively) $ 562 $1,509
Income taxes (net of refunds received) $4,328 $ 34
(5) Long-Term Debt
Key has a long-term credit agreement with a group of banks led by Banc of
America Securities LLC. The agreement specifies a maximum loan amount of
$150 million and provides that the lenders may periodically re-determine
the borrowing base depending upon the value of the Company's oil and gas
properties. Key may voluntarily select a borrowing base that is less than
the maximum value its properties would allow to reduce fees for unused
borrowing base capacity. If the borrowing base falls below the outstanding
loan amount, the banks may request repayment of the excess amount. At June
30, 2001, the Company had elected to accept a borrowing base of $90
million, of which $34 million was outstanding and $56 million was unused
and available.
8
The Company secured this debt with oil and gas assets owned by Key and its
subsidiaries. Key is also subject to customary covenants and restrictions
including limitations on additional borrowings and minimum working capital
and net worth maintenance requirements. Key is currently, and has been
since inception, in compliance with the covenants of the agreement.
The credit agreement has a maturity date of January 1, 2006, including a
revolving period that ends on July 1, 2002. If not amended before then, the
outstanding loan amount converts to a term loan and the Company must
commence quarterly principal payments.
(6) Pro Forma Financial Information - Acquisition of Columbus Energy Corp.
On December 29, 2000, the Company consummated a merger with Columbus Energy
Corp. (Columbus). In this transaction, the Company acquired all the
outstanding common stock of Columbus in a tax-free reorganization pursuant
to which Columbus became a wholly-owned subsidiary of Key.
The following unaudited pro forma financial information presents the
combined results of Key and Columbus, and was prepared as if the
acquisition had occurred at the beginning of 2000. The pro forma data
presented is based on numerous assumptions and is not necessarily
indicative of future results of operations.
For the Three Months For the Six Months
Ended June 30, 2000 Ended June 30, 2000
------------------------ ------------------------
As reported Pro forma As reported Pro forma
----------- --------- ----------- ---------
(In thousands, except per share amounts)
Revenues $ 21,744 $ 25,075 $ 41,077 $ 47,148
Net income $ 5,268 $ 5,573 $ 9,457 $ 9,808
Basic earnings per share $ .44 $ .43 $ .81 $ .75
Diluted earnings per share $ .43 $ .41 $ .77 $ .72
9
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
This report contains "forward-looking statements" within the meaning of the
federal securities laws. These forward-looking statements include, among others,
statements concerning Key's outlook for the remainder of 2001 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 or implied by the statements.
These risks and uncertainties include, but are not limited to, fluctuations in
the price we receive for 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 Key are discussed in greater detail
in this report and the Company's Annual Report on Form 10-K for the year ended
December 31, 2000.
Financial Results
For the Three Months For the Six Months
Ended June 30, Ended June 30,
------------------------ ------------------------
Selected financial data 2001 2000 2001 2000
---------- ---------- ---------- ----------
(In thousands except per share amounts)
Revenues $ 29,886 $ 21,744 $ 69,657 $ 41,077
Net income 8,917 5,268 22,237 9,457
Per share - basic .64 .44 1.59 .81
Per share - diluted .62 .43 1.54 .77
Net Income
Key generated net income of $8.9 million, or $.62 per diluted share for the
second quarter of 2001. This represents a 69 percent increase compared with net
income of $5.3 million, or $.43 per diluted share, reported for the second
quarter of 2000. Results for these periods are based on revenues of $29.9 and
$21.7 million, respectively. A 15 percent increase in production volumes and
strong natural gas prices contributed to the increases.
For the first six months of 2001, net income and earnings per diluted share more
than doubled compared to the same period in 2000. Net income for the six-month
periods of 2001 and 2000 was $22.2 and $9.5 million, respectively. Revenue was
$69.7 and $41.1 million for the same periods.
10
Results of Operations
Information about oil and gas sales, production volumes and prices are presented
in the following table:
For the Three Months For the Six Months
Ended June 30, Ended June 30,
---------------------- ----------------------
2001 2000 2001 2000
--------- --------- --------- ---------
(In thousands)
Gas sales $ 19,700 $ 11,335 $ 48,471 $ 19,744
Oil sales 9,789 9,823 20,492 20,286
Plant product sales 388 476 637 838
--------- --------- --------- ---------
Total oil and gas sales $ 29,877 $ 21,634 $ 69,600 $ 40,868
========= ========= ========= =========
Gas volume - Mcf per day 44,418 36,562 43,378 37,308
Gas price - per Mcf $ 4.87 $ 3.41 $ 6.17 $ 2.91
Oil volume - barrels per day 4,150 3,932 4,288 4,100
Oil price - per barrel $ 25.92 $ 27.45 $ 26.40 $ 27.18
Oil and gas sales revenues climbed 38 percent, or $8.2 million between the
second quarters of 2001 and 2000 to reach $29.9 million. Compared to a year
earlier, gas sales increased $8.4 million, oil sales were essentially unchanged,
and plant product sales dropped slightly. We produced combined oil and gas
volumes of 69.3 MMcfe per day in the second quarter of 2001, a 15 percent
increase over the 60.2 MMcfe per day produced in the second quarter of 2000.
On a year-to-date basis, oil and gas sales grew by $28.7 million, or 70 percent.
Consistent with the quarter results, strong natural gas prices and higher
production volumes boosted sales for the first six months of 2001. For the first
half of 2001, combined oil and gas production averaged 69.1 MMcfe per day versus
61.9 MMcfe per day in the first half of 2000.
In the second quarter of 2001, gas sales increased $8.4 million, or 74 percent,
to $19.7 million. Approximately $5.9 million of the increase was related to
higher gas prices. The average realized gas price for the second quarter of 2001
was $4.87 per Mcf, compared to $3.41 per Mcf during the same three months of
2000. Daily gas production rose 21% to 44.4 MMcfe versus 36.6 MMcfe in the
second quarter of 2000.
Gas sales for the first six months of 2001 of $48.5 million were nearly two and
one-half times that of first half 2000. Gas prices increased to $6.17 per Mcf in
2001 from $2.91 per Mcf in 2000. Higher prices in 2001 added approximately $25.6
million to sales. Daily production increased 16 percent to 43.4 MMcf per day in
2001 from 37.3 MMcf per day in 2000. Gas volumes are higher in 2001 as a result
of new production from recent drilling projects and the Columbus acquisition in
the fourth quarter of 2000. Our second quarter 2001 gas production includes
nearly 4 MMcf per day from the Thomas #3-15 (100 percent working interest), a
new well we drilled in western Oklahoma.
Oil sales for both the second quarters of 2001 and 2000 were $9.8 million. A six
percent increase in our production offset a six percent decline in the average
price received. We produced an average of 4,150 barrels per day in 2001 compared
to 3,932 barrels per day in 2000. We realized an average price of $25.92 per
barrel in 2001, compared to $27.45 per barrel in 2000.
Oil sales for the first six months of 2001 increased slightly to $20.5 million.
Daily oil production in 2001 reached 4,288 barrels per day from 4,100 barrels
per day in 2000, for an additional $.8 million of sales. At the same time
production was climbing, prices dipped to an average of $26.40 per barrel from
$27.18 per barrel in 2000. Decreased prices had a negative impact of $.6 million
on six-month oil sales. Our results for 2001 include oil production from the
Columbus acquisition as well as new production from our drilling program.
11
Product sales from gas processing plants decreased 19 percent between the second
quarters of 2001 and 2000, and decreased 24 percent between the first six months
of 2001 and 1999. Lower prices are the primary reason for the reduction in plant
product sales.
We have not entered into any derivative contracts or hedges with respect to our
production. As a result, the prices we receive reflect market conditions. We
remain unhedged.
As the prices for oil and gas rise and fall, the components of our oil and gas
sales fluctuate. In the first six months of 2001, our revenues came from the
following product mix: 29 percent oil, 70 percent gas and one percent plant
products. This compares to the following mix for the first six months of 2000:
50 percent oil, 48 percent gas and two percent plant products. On a volumetric
basis, we produced 37 percent oil and 63 percent gas in 2001. Production for the
same period of 2000 was 40 percent oil and 60 percent gas.
Our most significant source of other revenues has been income from our two gas
gathering systems in California. The decrease in gathering income between 2001
and 2000 reflects the continued decline in production from our northwest Blosser
and northwest Malton wells.
Costs and Expenses
Depreciation, depletion and amortization (DD&A) expense decreased by one percent
between the second quarters of 2001 and 2000 even though second quarter oil and
gas sales increased by 38 percent. The decrease in DD&A was the direct result of
a decrease in the depletion rate. Our depletion rate as a percentage of oil and
gas sales decreased to 26.6 percent from 37.3 percent between the second
quarters of 2001 and 2000. DD&A for the six-month period increased 19 percent
between 2001 and 2000. The depletion rate as a percentage of oil and gas sales
averaged 27.2 percent and 38.7 percent for 2001 and 2000, respectively. We use
the future gross revenue method and rolling average prices to compute DD&A
expense. Higher product prices over the last year, for both oil and gas, have
brought the depletion rate down. We also include a small amount of fixed asset
depreciation and amortization of financing costs associated with our credit
facility in this income statement line.
Between the second quarters of 2001 and 2000, our lease operating expense (LOE)
increased by 49 percent. On a unit of production basis, second quarter LOE
increased to $.69 per Mcfe in 2001 from $.53 per Mcfe in 2000. Second quarter
2001 LOE included $.7 million of workover expense and $.4 million of estimated
ad valorem taxes. Excluding workover expenses, our routine operating expenses on
a unit of production basis would be $.58 per Mcfe for the second quarter. For
the six months, LOE increased 47 percent between 2001 and 2000. Compared on a
unit of production basis, year to date expenses increased 33 percent to $.66 per
Mcfe. In summary, LOE increased because: 1) we paid expenses on more wells as a
result of the Columbus acquisition and our drilling program, 2) we did more
workovers, repairs and maintenance to boost production, 3) high prices at the
end of 2000 increased property values and, as a result, we will be paying more
ad valorem taxes, and 4) upward cost pressures resulted from heightened
competition for oilfield services.
Production taxes for the second quarter of 2001 increased 139 percent to $1.8
million from $.8 million last year. The tax for 2001 equates to 6.2 percent of
oil and gas sales, or $.29 per Mcfe. This compares to 3.6 percent of oil and gas
sales, or $.14 per Mcfe in 2000. For the six-month periods, production taxes
increased to $.35 per Mcfe in 2001 from $.12 per Mcfe in 2000. The rise in
production taxes for the quarter and six months was a result of: 1) the 146
percent increase in six-month gas revenues, 2) as an outgrowth of the Columbus
merger, a greater proportion of our gas sales are from properties in Texas,
where the production/severance tax rate is higher than our previous blended
average, and 3) non-recurring adjustments in 2000 reduced second quarter and
six-month expense by $.4 million and $.8 million, respectively.
12
General and administrative (G&A) expense increased 21 percent between the second
quarters and 19 percent between the first six months of 2001 and 2000. On a unit
basis, second quarter G&A remained flat at $.13 per Mcfe due to the 15 percent
increase in production. G&A for the first six months increased slightly to $.14
per Mcfe in 2001 from $.13 per Mcfe in 2000. Most of the G&A variance was the
result of higher employee compensation and benefit expense. We had 70 employees
prior to the Columbus acquisition in the fourth quarter of 2000. We finished the
second quarter of 2001 with 90 employees. As prescribed by full cost accounting
rules, we capitalize direct overhead related to exploration and development
activities.
Interest expense before capitalization was $1.2 million and $2.2 million for the
first six months of 2001 and 2000, respectively. We capitalized interest of $.7
million in each of those periods. The capitalized amounts were for borrowings
associated with undeveloped leases. We paid less interest in the first six
months of 2001 because we have paid down $10 million of long-term debt since the
end of the year ($20 million since June of 2000).
Income tax expense totaled $13.4 million for the first six months of 2001 versus
$5.6 million a year earlier. Tax expense was calculated using combined federal
and state effective income tax rates of 37.5 percent and 37.0 percent in 2001
and 2000, respectively.
Liquidity and Capital Resources
Liquidity
The oil and gas business is a capital-intensive industry. As such, we
continually need cash to fund exploration, development, and acquisition
activities and to pay trade commitments related to operations. Our primary
sources of liquidity are cash flows from operating activities and proceeds from
financing activities.
We generated cash from operating activities of $48.7 million in the first six
months of 2001. This was almost twice the $25.8 million reported for the same
period of 2000. Most of the increase was the result of higher gas volumes and
prices in 2001.
Cash expenditures for exploration and development (E&D) in the first six months
of 2001 totaled $43.5 million, or 89 percent of cash from operating activities.
We participated in drilling 67 gross wells, with an overall success rate of 69
percent. Forty-three of the wells drilled so far in 2001 were in the
Mid-Continent region, primarily in the Anadarko basin. We also drilled 15 wells
in the Gulf Coast region and nine wells in the Western region, which includes
California, Wyoming and North Dakota. We funded these drilling projects with
cash from operating activities. In the first six months of 2000, we made cash
expenditures for E&D of $23.9 million, or 93 percent of cash from operating
activities.
We borrowed $2 million in the second quarter of 2001 to make an estimated
federal tax payment. Using cash flow from operating activities and cash on hand
at year-end 2000, we paid down $12 million of long-term debt during the first
six months of 2001. At June 30, 2001, we had outstanding debt of $34 million and
$56 million of unused borrowing capacity under our existing bank credit
facility.
We believe that net cash generated from operations and amounts available under
our existing line of credit will be adequate to meet future liquidity needs,
including satisfying our financial obligations and funding our operations and
exploration and development activities. At June 30, 2001, we had material
commitments of approximately $4.4 million. All of the commitments were routine
and were made in the normal course of our business.
13
Future Trends
We remain committed to the goals of growing the company profitably and
maximizing shareholder value. To these ends, we are working to develop
strategies, implementing plans to accomplish them, and adapt to an ever-changing
business environment. One of the things we have done recently is to hire
additional people with oil and gas expertise. We have new geologists and
engineers that will be working to help Key evaluate more drilling projects. We
also opened a district office in Elk City, Oklahoma. This office will oversee
production operations in western Oklahoma, north Texas, and Kansas. We want to
maximize the output and the profitability of all the wells we operate.
We estimate that we will make exploration and development expenditures of $70-75
million for the year 2001. This investment is slightly higher than the amount
discussed in our first quarter 10-Q. Through the first half of 2001, our
expenditures for exploration and development were approximately $45 million. The
amount and allocation of our future capital expenditures will depend on a number
of factors, including the impact of oil and gas prices on investment
opportunities and available cash flow, the availability of drilling rigs and
other oilfield services, the rate at which we can evaluate potential drilling
projects, and the number and size of attractive acquisition opportunities. A
portion of this budget is also contingent on the success of certain exploratory
wells. We plan to fund these expenditures with cash provided by operating
activities, supplemented, if necessary, by borrowings under our bank line of
credit.
We plan to focus our drilling efforts in the following areas: the Anadarko Basin
of western Oklahoma, the Mississippi Salt Basin, south Louisiana, south Texas,
the Sacramento Basin of northern California, and Wyoming. Our strategy is to
drill a mixture of low, moderate, and high-risk wells.
We cannot predict where oil and gas prices will be for the remainder of 2001.
However, if oil and gas prices remain strong, we plan to use some of our
available cash flow to pay down additional long-term debt. We may also need to
use available cash resources to make estimated federal income tax payments. The
amount of taxes that we have to pay will depend on the level of prices we
receive for oil and gas, the amount of intangible drilling costs we incur and
many other factors. If payments are required for tax obligations, we expect to
fund those payments with cash provided by operating activities or funds
available under our existing credit facility.
Throughout the year, we plan to actively look for acquisition opportunities and
to pursue merger candidates with economic and strategic attributes that will
facilitate our profitable growth.
14
ITEM 3 - Quantitative and Qualitative Disclosures About Market Risk
Price Fluctuations
Our results of operations are highly dependent upon the prices we receive for
natural gas and crude oil production, and those prices are constantly changing
in response to market forces. Nearly all of our revenue is from the sale of gas
and oil, so these fluctuations, positive and negative, can have a significant
impact.
If we wanted to attempt to smooth out the effect of commodity price
fluctuations, we could enter into non-speculative hedge arrangements, commodity
swap agreements, forward sale contracts, commodity futures, options and other
similar agreements relating to natural gas and crude oil. To date, we have not
used any of these financial instruments to mitigate commodity price changes.
Interest Rate Risk
Our reported earnings are impacted by changes in interest rates. Any fluctuation
in the rate will directly affect the amount of interest expense we report. At
June 30, 2001, we had $34 million of long-term debt outstanding at an average
interest rate of 5.1 percent. At our election, our interest charges are based on
either the prime rate or the LIBOR rate plus a margin predetermined by our debt
agreement. Assuming there is no change in the balance outstanding during 2001, a
ten percent change in the average interest rate would impact annual interest
expense by approximately $86,000. As the interest rate is variable and is
reflective of current market conditions, the carrying value of our debt
approximates its fair value.
15
PART II - OTHER INFORMATION
ITEM 1. - LEGAL PROCEEDINGS
None.
ITEM 2. - CHANGES IN SECURITIES
None.
ITEM 3. - DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The following summarizes the votes at the Company's Annual Meeting of
stockholders held on June 14, 2001:
Election of Directors:
For Withheld
---------- ---------
F.H. Merelli 10,738,846 1,267,161
Cortlandt S. Dietler 11,943,692 62,315
L. Paul Teague 11,946,148 59,859
Paul D. Holleman 11,942,259 63,748
Approval of the 2001 Equity Incentive Plan:
For Abstain Against
--------- ----------- -----------
6,033,536 81,426 3,131,549
Ratification of Independent Auditors:
For Abstain Against
---------- ----------- -----------
11,944,887 45,155 15,965
ITEM 5. - OTHER INFORMATION
None.
ITEM 6. - EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
None.
16
(b) Reports on Form 8-K:
On April 30, the Company filed a report on Form 8-K. The Form 8-K
announced earnings for the quarter ended March 31, 2001.
17
SIGNATURE
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.
August 14, 2001
KEY PRODUCTION COMPANY, INC.
/s/ Paul Korus
----------------------------
Paul Korus
Vice President and Chief Financial Officer
(Principal Financial Officer)
/s/ Sherri M. Nitta
----------------------------
Sherri M. Nitta
Director, Financial Reporting
(Principal Accounting Officer)
18