Key Production Reports Revised Guidance and Other Matters
DENVER--Feb. 13, 2002--Key Production Company, Inc. (NYSE: KP) today
announced that fourth-quarter 2001 average daily production volumes increased by
20 percent to 76.2 million cubic feet (MMcf) equivalent versus 63.4 MMcf
equivalent in the fourth quarter of 2000.
Natural gas production rose 36 percent to 50.8 MMcf per day and oil output
decreased by 2 percent to 4,236 barrels per day. Compared to the previous
three-month period, fourth-quarter gas and oil volumes increased by 10 percent
and 5 percent, respectively. For the full year, aggregate output grew 13
percent, including a 21 percent rise in gas production.
Projected growth in 2002 aggregate production will be highly dependent on
capital investments and the outcome of wells that have not yet been drilled. At
the present time, management projects that 2002 expenditures for exploration and
development will range from $55-60 million and that the risk profile of the
wells drilled will be similar to the company's historical drilling program. By
comparison, 2001 capitalized costs totaled $73.7 million. It is also expected
that over 60 percent of planned 2002 expenditures will occur in the second half
of the year. As such, the level of budgeted expenditures may be modified. The
production and sale of oil and gas also involves many other complex processes
that are subject to numerous uncertainties, including reservoir risk, mechanical
failure, market conditions, transportation issues, human error, and weather.
Nonetheless, we currently assume that 2002 combined gas and oil production will
increase by approximately 5 percent compared to 2001 volumes.
The estimated present value of the future net cash flow before income taxes
from year-end 2001 proved reserves, calculated under guidelines established by
the Securities and Exchange Commission (SEC) and using a 10 percent discount
rate, is $182.9 million. For purposes of this calculation, Key's average gas
price was $2.59 per thousand cubic feet (Mcf) and its oil price was $17.30 per
barrel. By comparison, the commodity prices in effect a year earlier were $10.45
per Mcf of gas and $24.17 per barrel of oil.
In large part owing to the impact of low gas and oil prices at the end of
2001, Key expects to take an estimated after-tax, non-cash charge against its
2001 earnings of $27-32 million resulting from the ceiling test prescribed by
the SEC for companies that follow the full cost method of accounting for oil and
gas properties. Under the full cost method, a company's net book value of its
oil and gas properties, less related deferred income taxes, may not exceed a
calculated "ceiling." The ceiling is the present value of the projected
after-tax future net cash flow, discounted at 10 percent, from proved oil and
gas reserves using year-end prices held flat over the remaining life of the
estimated future production. Any excess in the carrying value of the property
base is written off as a non-cash expense in the period during which the ceiling
is exceeded.
Moreover, the expense may not be reversed in future periods, even if higher
gas and oil prices subsequently increase the ceiling. In contrast to companies
that use the alternative successful effort method of accounting for oil and gas
properties, full cost companies must use the prices in effect at the end of the
accounting period without escalation and must also estimate a present value of
the projected future cash flow stream using a 10 percent discount rate.
Fourth-quarter 2001 financial results will also include the cumulative
effect of changing the method of computing recurring depletion, depreciation and
amortization (DD&A) expense to the more common units-of-production (UOP) method.
Since its inception in 1988, Key has used the future gross revenue method.
However, in response to encouragement by investment analysts and shareholders,
the company has determined that a change in accounting method is appropriate.
On March 13, 2002, the company plans to release its audited financial
results for 2001. While the impact of the full cost ceiling test write-down and
the change to the UOP method of computing DD&A expense is expected to result in
a reported loss for both the fourth quarter and full year, management believes
that its earnings and cash flow absent these special items will be consistent
with Wall Street analysts' recent range of estimates. In addition, even after
allowing for the impact of the special items on Key's capital structure, it is
expected that the company's debt-to-capitalization ratio will approximate 20-22
percent.
Proved oil and gas reserves at December 31, 2001, estimated in accordance
with SEC guidelines, were 147.3 billion cubic feet equivalent (Bcfe).
Gas Oil Equivalent
2001 PROVED RESERVES DATA (1) (in MMcf) (in MBbls) (in Bcfe)
- ----------------------------- --------- ---------- ---------
Beginning of year 98,214 9,276 153.9
Revisions of previous estimates (6,397) 281 (4.7)
Extensions, discoveries,
and other additions 16,841 1,132 23.6
Acquisitions 131 63 .5
Sales of properties (36) - -
Production (16,775) (1,537) (26.0)
------- ------- -------
End of year 91,978 9,215 147.3
Proved developed reserves 91,441 9,176 146.5
2001 2000
---- ----
COSTS INCURRED DATA (1) ($ in thousands)
- -----------------------
Acquisition of proved properties $ 796 $ 27,571
Unproved acreage 7,331 1,488
Exploration 19,204 20,636
Development 46,327 38,423
------- -------
Total costs incurred $ 73,658 $ 88,118
Proceeds from sales of properties $ 69 $ 341
(1) Proved reserves and cost incurred data are preliminary unaudited disclosures
and subject to change. For final amounts refer to our Annual Report on Form
10-K for the year ended December 31, 2001, when filed.
This news release may contain projections and other forward-looking
statements within the meaning of Section 21E of the Securities Exchange Act of
1934, as amended. Any such projections or statements reflect the Company's
current views with respect to future events and financial performance. No
assurances can be given, however, that these events will occur or that such
projections will be achieved and actual results could differ materially from
those projected. A discussion of important factors that could cause actual
results to differ materially from those projected is included in the Company's
periodic reports filed with the Securities and Exchange Commission.
CONTACT: Key Production Company, Inc.
Paul Korus, 303/295-3995