United States
Securities and Exchange Commission
Washington, D. C. 20549
Form 10-Q
(Mark one)
[X] Quarterly Report Under Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the Quarterly Period Ended June 30, 2002
-------------
[ ] Transition Report Under Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the Transition Period from .......... to ..........
Commission File Number..........1-12508
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MAGNUM HUNTER RESOURCES, INC.
-----------------------------
Exact name of registrant as specified in its charter
Nevada 87-0462881
------ -----------
State or other jurisdiction of IRS employer identification No.
incorporation or organization
600 East Las Colinas Blvd., Suite 1100, Irving, Texas 75039
-----------------------------------------------------------
Address of principal executive offices
(972) 401-0752
------------------------------------------------
Registrant's telephone number, including area code
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 [ ]
State the number of shares outstanding of each of the issuer's classes of
common equity, as of August 9, 2002: 68,461,997.
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
MAGNUM HUNTER RESOURCES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands of dollars)
June 30, December 31,
2002 2001
---------------------------------------
ASSETS (Unaudited)
Current Assets
Cash and cash equivalents............................................................. $ 7,934 $ 2,755
Restricted cash....................................................................... 432 -
Accounts receivable
Trade, net of allowance of $4,376 and $3,264 respectively........................... 41,673 14,251
Due from affiliates................................................................. 262 235
Notes receivable...................................................................... 2,350 -
Notes receivable from affiliate....................................................... - 300
Deferred tax asset.................................................................... 12,500 300
Derivative assets, current............................................................ 992 5,045
Prepaid and other..................................................................... 7,873 2,220
--------------------------------------
Total Current Assets................................................................ 74,016 25,106
--------------------------------------
Property, Plant, and Equipment
Oil and gas properties, full cost method
Unproved............................................................................ 153,586 18,653
Proved.............................................................................. 1,055,173 556,766
Pipelines............................................................................. 33,814 12,642
Other property........................................................................ 5,987 3,640
--------------------------------------
Total Property, Plant and Equipment................................................... 1,248,560 591,701
Accumulated depreciation, depletion, amortization and impairment.................... (210,502) (171,864)
--------------------------------------
Net Property, Plant and Equipment..................................................... 1,038,058 419,837
Other Assets
Deposits and other assets............................................................. 14,067 4,420
Investment in unconsolidated affiliates............................................... 5,404 5,022
Goodwill.............................................................................. 61,758 -
--------------------------------------
Total Assets.......................................................................... $ 1,193,303 $ 454,385
======================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Trade payables and accrued liabilities................................................ $ 39,816 $ 41,446
Suspended revenue payable............................................................. 9,265 2,154
Derivative liabilities, current....................................................... 17,938 996
Current maturities of long-term debt, with recourse................................... 1,935 73
Notes payable......................................................................... 1,320 4,044
--------------------------------------
Total Current Liabilities 70,274 48,713
--------------------------------------
Long-Term Liabilities
Long-term debt, with recourse, less current maturities................................ 656,078 284,466
Long-term debt, non recourse.......................................................... 5,834 -
Production payment liability.......................................................... 185 203
Derivative liabilities, noncurrent.................................................... 11,075 1,531
Deferred income taxes payable......................................................... 96,820 1,498
Stockholders' Equity
Preferred stock - $.001 par value; 10,000,000 shares authorized, 216,000
designated as Series A;
80,000 issued and outstanding, liquidation amount $0............................... - -
1,000,000 designated as 1996 Series A Convertible; 1,000,000 purchased and held for
remarketing by subsidiary, liquidation amount $10,000,000.......................... 1 1
Common Stock - $.002 par value; 100,000,000 shares authorized;
70,797,010 and 36,588,097 shares issued, respectively.............................. 141 73
Additional paid-in capital............................................................ 418,859 157,836
Accumulated other comprehensive income (loss)......................................... (17,436) 1,632
Accumulated deficit................................................................... (26,938) (36,636)
Receivable from stockholder........................................................... (617) (442)
Unearned common stock in ESOP, at cost (837,952 and 468,652 shares, respectively)..... (5,259) (2,576)
--------------------------------------
368,751 119,888
Treasury stock, at cost (2,327,013 and 441,813 shares of common stock, respectively) (15,714) (1,914)
--------------------------------------
Total Stockholders' Equity............................................................ 353,037 117,974
--------------------------------------
Total Liabilities and Stockholders' Equity............................................ $ 1,193,303 $ 454,385
======================================
The accompanying notes are an integral part of these consolidated financial
statements.
1
MAGNUM HUNTER RESOURCES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME and COMPREHENSIVE INCOME
(Unaudited)
(in thousands, except for per share amounts)
Three Months Ended Six Months Ended
June 30, June 30,
2002 2001 2002 2001
-------------------------------------------------------------------
Operating Revenues:
Oil and gas sales.......................................... $ 70,543 $ 33,908 $ 109,693 $ 76,861
Gas gathering, marketing and processing................... 4,596 4,830 8,178 11,932
Oil field management services............................. 1,051 606 1,443 1,121
---------------------------------------------------------------------
Total Operating Revenues.......................... 76,190 39,344 119,314 89,914
---------------------------------------------------------------------
Operating Costs and Expenses:
Oil and gas production lifting costs........................ 15,438 4,956 24,386 9,606
Production taxes and other costs............................ 7,922 3,169 12,225 7,184
Gas gathering, marketing and processing..................... 3,466 4,431 6,146 11,003
Oil field management services............................... 543 392 819 754
Depreciation, depletion and amortization.................... 23,542 9,686 38,638 17,101
Gains on sale of assets..................................... - (2) - (4)
General and administrative.................................. 4,223 2,065 6,747 3,777
---------------------------------------------------------------------
Total Operating Costs and Expenses.................. 55,134 24,697 88,961 49,421
---------------------------------------------------------------------
Operating Profit ............................................. 21,056 14,647 30,353 40,493
Equity in earnings of affiliate............................. 81 237 382 855
Other income................................................ 108 63 165 157
Provision for impairment of investments..................... (621) - (621) -
Other non-cash hedging adjustments........................ (3,330) 765 (3,923) 1,654
Interest expense.......................................... (13,670) (5,122) (21,175) (9,988)
---------------------------------------------------------------------
Income before income tax...................................... 3,624 10,590 5,181 33,171
Provision for income tax benefit/(expense):
Current................................................ - (602) - (1,885)
Deferred............................................... (1,373) (3,409) 5,138 (10,679)
---------------------------------------------------------------------
Total provision for income tax benefit/(expense).... (1,373) (4,011) 5,138 (12,564)
Income before extraordinary loss.............................. 2,251 6,579 10,319 20,607
Extraordinary loss from early extinguishment of debt,
net of income tax benefit of $379 in 2002 and $186
in 2001 ................................................... - (304) (621) (304)
---------------------------------------------------------------------
Net Income.................................................... $ 2,251 $ 6,275 $ 9,698 $ 20,303
=====================================================================
Comprehensive Income:
Net Income.................................................... $ 2,251 $ 6,275 $ 9,698 $ 20,303
Other Comprehensive Income (Loss), net of tax
Cumulative effect on prior years of a change in
accounting principle...................................... - - - (1,757)
Change in fair value of outstanding hedge position.......... (3,610) 1,526 (18,429) 3,429
Reclassification adjustment related to derivative contracts. 1,482 (138) (639) (275)
Unrealized loss on investments.............................. (251) (193) (323) (397)
Reclassification adjustment for loss on investments......... 323 - 323 -
---------------------------------------------------------------------
Comprehensive Income (Loss)................................... $ 195 $ 7,470 $ (9,370) $ 21,303
=====================================================================
Income per Common Share - Basic
Income before Extraordinary Loss............................ $ 0.03 $ 0.19 $ 0.19 $ 0.59
Extraordinary Loss.......................................... - (0.01) (0.01) (0.01)
---------------------------------------------------------------------
Income per Common Share - Basic............................... $ 0.03 $ 0.18 $ 0.18 $ 0.58
=====================================================================
Income per Common Share - Diluted
Income before Extraordinary Loss............................ $ 0.03 $ 0.18 $ 0.18 $ 0.55
Extraordinary Loss.......................................... - (0.01) (0.01) (0.01)
---------------------------------------------------------------------
Income per Common Share - Diluted............................. $ 0.03 $ 0.17 $ 0.17 $ 0.54
=====================================================================
Common Shares Used in Per Share Calculation
Basic....................................................... 68,490,021 34,879,318 55,207,518 34,736,166
=====================================================================
Diluted..................................................... 69,710,567 37,307,219 56,441,193 37,364,030
=====================================================================
The accompanying notes are an integral part of these consolidated financial
statements.
2
MAGNUM HUNTER RESOURCES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE SIX MONTHS ENDED JUNE 30, 2002 (Unaudited)
(dollars in thousands)
Preferred Stock Common Stock Treasury Stock
Shares Amount Shares Amount Shares Amount
- ----------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 2001......................... 1,080,000 $ 1 36,588,097 $ 73 (441,813) $ (1,914)
Common stock and warrants issued in Prize
Energy Corp. merger, less fees............... 34,062,963 68
Exercise of employees' common stock options...... 145,950 -
Deferred tax benefit on exercise of employees'
common stock options...........................
Purchase of warrants.............................
Purchase of treasury stock....................... (1,885,200) (13,800)
Net income.......................................
Change in fair value of outstanding hedging
positions.....................................
Reclassification adjustment related to
derivative contracts...........................
Unrealized loss on investments...................
Reclassification adjustment for loss on
investments..................................
Loan to stockholder..............................
Loan to ESOP.....................................
-----------------------------------------------------------------------------
Balance at June 30, 2002 1,080,000 $ 1 70,797,010 $ 141 (2,327,013) $(15,714)
=============================================================================
Additional Accumulated Other Receivable Unearned Shares in
Paid-In Comprehensive Accumulated from ESOP
Capital Income-(Loss) Deficit Stockholder Shares Amount
- ------------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 2001.....................$ 157,836 $ 1,632 $ (36,636) $ (442) (468,652) $ (2,576)
Common stock and warrants issued in Prize
Energy Corp. merger, less fees............ 260,454
Exercise of employees' common stock options... 592
Deferred tax benefit on exercise of employees'
common stock options........................ 75
Purchase of warrants.......................... (98)
Purchase of treasury stock....................
Net income.................................... 9,698
Change in fair value of outstanding hedging
positions.................................. (18,429)
Reclassification adjustment related to
derivative contracts........................ (639)
Unrealized loss on investments................ (323)
Reclassification adjustment for loss on
investments............................... 323
Loan to stockholder........................... (175)
Loan to ESOP.................................. (369,300) (2,683)
------------------------------------------------------------------------------------
Balance at June 30, 2002 $ 418,859 $ (17,436) $ (26,938) $ (617) (837,952) $ (5,259)
====================================================================================
The accompanying notes are an integral part of these consolidated financial
statements.
3
MAGNUM HUNTER RESOURCES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(in thousands)
Six Months Ended
June 30,
------------------------------------
2002 2001
------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income........................................................................ $ 9,698 $ 20,303
Adjustments to reconcile net income to cash provided by operating activities:
Extraordinary loss....................................................... 621 304
Depreciation, depletion and amortization................................. 38,638 17,101
Amortization of financing fees........................................... 920 735
Imputed interest on debt due to merger.................................... 108 -
Deferred income taxes.................................................... (5,138) 10,679
Equity in income of unconsolidated affiliate............................. (382) (855)
Gain on sale of assets................................................... - (4)
Provision for impairment of investments................................... 621 -
Other non-cash hedging adjustments....................................... 3,923 (1,654)
Other..................................................................... (82) -
Changes in certain assets and liabilities
Accounts and notes receivable................................... (8,989) 9,011
Derivative assets................................................ 3,600 1,002
Refund of income taxes........................................... 300 -
Other current assets............................................ (4,287) (32)
Accounts payable and accrued liabilities...................... (39,014) 3,921
Current income taxes payable.................................. - 1,150
-----------------------------------------
Net Cash Provided By Operating Activities....................................... 537 61,661
-----------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of assets.................................................... 1,681 4
Additions to property and equipment............................................. (56,197) (84,528)
Cash paid in Prize merger, net of cash on hand in Prize.......................... (41,097) -
Increase in note receivable..................................................... (2,350) -
Payments received on note receivable ........................................... - 65
Distribution from unconsolidated affiliate...................................... - 1,013
Investment in unconsolidated affiliate.......................................... - (2,000)
-----------------------------------------
Net Cash Used In Investing Activities........................................... (97,963) (85,446)
-----------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from the issuance of long-term debt.................................... 592,183 171,480
Fees paid related to financing activities....................................... (11,899) (731)
Payments of principal on long-term debt and production payment.................. (461,383) (148,516)
Loan made to stockholder ....................................................... (175) (300)
Repayment of note receivable from affiliate..................................... 300 360
Loan made to ESOP............................................................... (2,683) -
Proceeds from issuance of common stock, net of offering costs................... 592 2,317
Purchase of warrants ........................................................... (98) -
Purchase of treasury stock ..................................................... (13,800) (621)
(Increase)/decrease in restricted cash for payment of notes payable ............ (432) 1,820
Cash dividends paid............................................................. - (169)
-----------------------------------------
Net Cash Provided By Financing Activities....................................... 102,605 25,640
-----------------------------------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS..................................... 5,179 1,855
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD......................................... 2,755 9
-----------------------------------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD............................................... $ 7,934 $ 1,864
=========================================
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash interest paid.............................................................. $ 23,121 $ 9,231
=========================================
Cash taxes (received) paid...................................................... $ (271) $ 735
=========================================
The accompanying notes are an integral part of these consolidated financial
statements.
4
MAGNUM HUNTER RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2002
(Unaudited)
NOTE 1 - MANAGEMENT'S REPRESENTATION
The consolidated balance sheet of Magnum Hunter Resources, Inc. and
subsidiaries (the "Company") as of June 30, 2002, the consolidated statements of
income and comprehensive income for the three and six months ended June 30, 2002
and 2001, the consolidated statement of stockholders' equity for the six months
ended June 30, 2002, and the consolidated statements of cash flows for the six
months ended June 30, 2002 and 2001, are unaudited. In the opinion of
management, all necessary adjustments (which include only normal recurring
adjustments) have been made to present fairly the financial position at June 30,
2002, results of operations, changes in stockholders' equity and cash flows for
the three and six month periods.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with accounting principles generally accepted
in the United States of America have been condensed or omitted. It is suggested
that these condensed financial statements be read in conjunction with the
financial statements and notes thereto included in the December 31, 2001 annual
report and on Form 10-K for the Company. The results of operations for the three
and six month periods ended June 30, 2002, are not necessarily indicative of the
operating results for the full year.
The accompanying consolidated financial statements include the accounts of
the Company and its subsidiaries. All significant intercompany transactions and
balances have been eliminated in consolidation. Certain items have been
reclassified to conform with the current presentation.
During the first quarter of 2002, the Company merged with Prize Energy
Corp. ("Prize"), an independent oil and gas development and production company.
The merger with Prize closed on March 15, 2002, but for operating and financial
reporting purposes, was effective as of March 1, 2002. As such, the operating
results for the three and six months ended June 30, 2002, include three months
and four months of contributions from Prize, respectively. See Note 2 for
further discussion of the Prize merger.
On March 1, 2002, the Company created two unrestricted wholly-owned
subsidiaries, Canvasback Energy, Inc., and Redhead Energy, Inc. Canvasback
Energy, Inc. and Redhead Energy Inc. will hereafter be collectively referred to
as Canvasback. On March 15, 2002, Bluebird Energy, Inc. ("Bluebird") transferred
all of its assets to Canvasback, which effectively capitalized Canvasback. Upon
completion of this transfer, Bluebird was merged into Magnum Hunter Production,
Inc.
The Company is a holding company with no significant assets or operations
other than its investments in its subsidiaries. The wholly-owned subsidiaries of
the Company, except for Canvasback, are direct guarantors of each of the
Company's 10% Senior Notes and 9.6% Senior Notes, and have fully and
unconditionally guaranteed these Notes on a joint and several basis. The
guarantors comprise all of the direct and indirect subsidiaries of the Company
(other than Canvasback), and the Company has presented separate condensed
consolidating financial statements and other disclosures concerning each
guarantor and Canvasback (See Note 8). Except for Canvasback, there is no
restriction on the ability of consolidated or unconsolidated subsidiaries to
transfer funds to the Company in the form of cash dividends, loans, or advances.
NOTE 2 - MERGER WITH PRIZE ENERGY CORP.
On March 15, 2002, the Company merged with Prize, an independent oil and
gas development and production company based in Grapevine, Texas. The
transaction was accounted for as a purchase of Prize by the Company in
accordance with the provisions of Statement of Financial Accounting Standards
(SFAS) No. 141 "Business Combinations", which requires the use of the purchase
method of accounting for business combinations initiated and completed after
June 30, 2001. Under the terms of the merger, the Company distributed 2.5 shares
of common stock plus $5.20 in cash for each Prize share outstanding. The
purchase price, computed from the equity and cash consideration given at the
time of the merger, was allocated to the fair value of the net assets acquired.
The amount of purchase price in excess of the fair value of Prize's net assets
was assigned to goodwill. In accordance with SFAS No. 142 "Goodwill and Other
Intangible Assets", which was adopted by the Company on January 1, 2002, the
goodwill realized in the merger with Prize will not be amortized. However,
future evaluations of goodwill will be performed annually to determine whether
any impairment has occurred. The Company has not completed a final allocation of
the purchase price to the fair value of the specific assets and liabilities of
Prize and the related business integration plan. The Company expects that the
ultimate purchase
5
MAGNUM HUNTER RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
June 30, 2002
(Unaudited)
price allocation may include additional adjustments to the fair value of
the specific assets and the carrying values of certain liabilities. Accordingly,
to the extent that such assessments indicate that the fair value of certain
assets and liabilities differ from their preliminary purchase price allocation,
such differences would adjust the amounts allocated to the assets and
liabilities and would change the amounts allocated to goodwill. The following
table summarizes the total assumed purchase price and related preliminary
allocation to the net assets acquired (in thousands) as of June 30, 2002:
Total Purchase Price:
Fair Value of 34,062,963 shares of Magnum Hunter
common stock................................................. $ 257,175
Cash consideration........................................ 70,851
Fair Value of Prize warrants.............................. 3,416
----------
Total................................................ $ 331,442
==========
Net Preliminary Purchase Price Allocation:
Net purchase price........................................ $ 331,442
Historical net assets acquired............................ (146,192)
----------
Excess purchase price..................................... 185,250
Adjustment of proved oil and gas properties to fair value. (59,412)
Adjustment of unproved oil and gas properties to fair valu (124,766)
Adjustment of gas plant to fair value..................... (18,977)
Write-off of historical Prize deferred financing costs.... 2,386
Other fair value adjustments.............................. 2,163
Imputed interest on debt due to merger.................... (108)
Additional deferred income taxes.......................... 75,222
----------
Excess purchase price allocated to goodwill.......... $ 61,758
==========
The following summary, prepared on a pro forma basis, presents the results
of operations for the three and six month periods ended June 30, 2002 and 2001,
as if the acquisition of Prize occurred as of the beginning of the respective
periods. The pro forma information includes the effects of adjustments for
interest expense, depreciation, depletion and amortization, and income taxes.
The pro forma results are not necessarily indicative of what actually would have
occurred if the acquisition had been completed as of the beginning of each
period presented, nor are they necessarily indicative of future consolidated
results.
6
MAGNUM HUNTER RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
June 30, 2002
(Unaudited)
Pro Forma Results of Operations
(Unaudited)
(in thousands of dollars, except for per share amounts)
Three Months Ended June 30, Six Months Ended June 30,
---------------------------------------------------------------------
2002 2001 2002 2001
---------------------------------------------------------------------
Total Operating Revenues................. $ 76,190 $ 93,860 $ 146,318 $ 200,940
Total Operating Costs and Expenses....... (55,134) (67,357) (111,535) (124,857)
----------------------------------------------------------------
Operating Profit......................... 21,056 26,503 34,783 76,083
Interest expense and other............... (17,432) (9,967) (30,436) (16,626)
----------------------------------------------------------------
Income before income tax................. 3,624 16,536 4,347 59,457
Benefit (Provision) for income tax....... (1,373) (6,263) 5,455 (22,520)
Extraordinary loss from early
extinguishment of debt.............. - (304) (621) (304)
----------------------------------------------------------------
Net Income............................... $ 2,251 $ 9,969 $ 9,181 $ 36,633
================================================================
Net Income Per Common Share
Basic............................... $ 0.03 0.14 $ 0.13 $ 0.53
================================================================
Diluted............................. $ 0.03 $ 0.14 $ 0.13 $ 0.51
================================================================
7
MAGNUM HUNTER RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
June 30, 2002
(Unaudited)
NOTE 3 - EARNINGS PER SHARE INFORMATION
The following is a reconciliation of the basic and diluted earnings per
share computations:
Three Months Ended
June 30, 2002 June 30, 2001
Per Share Per Share
Income Shares Amount Income Shares Amount
- -----------------------------------------------------------------------------------------------------------------------------------
(Thousands, except per share amounts)
Income before extraordinary loss........... $ 2,251 $ 0.03 $ 6,579 $ 0.19
Less: Extraordinary loss................... - - (304) (0.01)
--------- --------- ----------- ----------
Basic EPS
Income available to common
stockholders............................. $ 2,251 68,490 $ 0.03 $ 6,275 34,879 $ 0.18
========= ==========
Effect of Dilutive Securities
Warrants................................... - 73 - 234
Options.................................... - 1,148 - 2,194
-------------------- -----------------------
Diluted EPS
Income available to common stockholders
and assumed conversions.................. $ 2,251 69,711 $ 0.03 $ 6,275 37,307 $ 0.17
Add Back: Extraordinary loss............... - - 304 0.01
---------------------------------- -------------------------------------
Income before Extraordinary Loss........... $ 2,251 69,711 $ 0.03 $ 6,579 37,307 $ 0.18
================================== =====================================
Six Months Ended
June 30, 2002 June 30, 2001
Per Share Per Share
Income Shares Amount Income Shares Amount
- -----------------------------------------------------------------------------------------------------------------------------------
(Thousands, except per share amounts)
Income before extraordinary loss............ $ 10,319 $ 0.19 $ 20,607 $ 0.59
Less: Extraordinary Loss.................... (621) (0.01) (304) (0.01)
-------- --------- --------- ----------
Basic EPS
Income available to common
stockholders.............................. $ 9,698 55,208 $ 0.18 $ 20,303 34,736 $ 0.58
========= ==========
Effect of Dilutive Securities
Warrants.................................... - 69 - 254
Options..................................... - 1,164 - 2,374
------------------ ---------------------
Diluted EPS
Income available to common stockholders
and assumed conversions................... $ 9,698 56,441 $ 0.17 $ 20,303 37,364 $ 0.54
Add Back: Extraordinary Loss................ 621 0.01 304 0.01
-------------------------------- -------------------------------------
Income before Extraordinary Loss............ $ 10,319 56,441 $ 0.18 $ 20,607 37,364 $ 0.55
================================ =====================================
At June 30, 2002, warrants representing 12,091,446 shares of common stock
and options representing 5,237,634 shares of common stock were outstanding. The
total outstanding warrants includes the remainder of the conversion of Prize
warrants in connection with the merger on March 15, 2002 (See Note 2) into
4,271,813 Magnum Hunter warrants. Additionally, the Company distributed on March
21, 2002, one warrant for every five shares of the Company's common stock owned
on January 10, 2002, for a total of 7,228,457 warrants. At June 30, 2001,
warrants representing 644,749 shares of common stock and options representing
4,212,313 shares of common stock were outstanding. On January 1, 2001, the
remaining $25.0 million (liquidation value) of the Company's 1999 Series A 8%
convertible preferred stock was converted into 4,761,904 shares of common stock.
For the three and six month periods ended June 30, 2002, 11,446,967 shares of
stock representing warrants and 3,300,700 shares and 3,285,350 shares of stock
representing options, respectively, were excluded from the diluted earnings per
share calculations because they were anti-dilutive. For the
8
MAGNUM HUNTER RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
June 30, 2002
(Unaudited)
three and six month periods ended June 30, 2001, no shares of stock
representing warrants and 25,000 shares of stock representing options were
excluded from the diluted earnings per share calculations because they were
anti-dilutive.
NOTE 4 - DEBT
The Company amended and restated its Senior Bank Credit Facility (the
"facility") in conjunction with the merger with Prize. The amended facility
provides for total borrowings of $500 million, up from $225 million, and raises
the borrowing base limit from $160 million to $300 million. Additionally, the
expiration date of the facility was amended and extended to March 2005. After
March 15, 2002, the facility was used to i) fund the cash component of the
merger consideration paid to the Prize shareholders, ii) pay certain costs
associated with the merger, and iii) for general corporate purposes.
The amended facility was treated as a new credit facility with respect to
the funds flow on the effective date of March 15, 2002. As such, the outstanding
balances on the facility prior to March 15, 2002 were paid off with the proceeds
received on March 15, 2002. The original capitalized debt issuance costs of $621
thousand, net of tax, related to the prior facility were written off as an
extraordinary loss from early extinguishment of debt during the quarter ended
March 31, 2002.
The amended facility requires the Company to comply with certain financial
tests and maintain certain financial ratios. The Company was not in compliance
with the Funded Debt to EBITDA Ratio (as defined by the facility) at March 31,
2002. The Company obtained a waiver from its lenders as of March 31, 2002 and
negotiated an amendment dated July 3, 2002 which adjusted the Funded Debt to
EBITDA Ratio (as defined by the facility) to be less restrictive for the next
four successive quarters ending March 31, 2003. The Company was in compliance
with all financial covenants under the amended facility at June 30, 2002, and
believes it will be able to comply with the revised financial covenants in the
future.
On March 15, 2002, the Company completed a private placement in the amount
of $300 million of new unsecured Senior Notes due 2012 to institutional
investors. Interest on these Senior Notes bears a fixed annual rate of 9.6% due
semi- annually, commencing September 15, 2002. Funds received from the issuance
of these notes were used to i) retire outstanding indebtedness under the Prize
commercial bank credit facility, ii) pay fees related to the issuance of the new
Senior Notes, and iii) for general corporate purposes.
On January 15, 2002, the Company entered into a sale-leaseback transaction
on three newly constructed production platforms and associated pipelines located
in the Gulf of Mexico that were recently placed into service. The Company
received total proceeds of $11.2 million in new funding which was used for
general corporate purposes. The production platforms are being leased from a
syndicate group of lenders over a term of three years and at a cost of funds
based on the one month LIBO rate, currently yielding a cost of approximately
5.27% per annum. For financial statement reporting purposes, this transaction
was accounted for as a capital lease and was included in long-term debt.
On March 15, 2002, the Company repaid its 7% notes payable to certain
vendors in the total amount of $4.0 million plus accrued interest. On March 14,
2002, the Company borrowed an additional $2.5 million to finance its insurance
premium for the year under a new note bearing a fixed interest rate of 4.25% per
annum and with a maturity date of December 14, 2002.
On March 7, 2002, Canvasback entered into a $10.0 million revolving credit
agreement with a financial institution. The credit agreement provides for both
LIBOR and prime based interest rate options ( 6.5% interest rate at June 30,
2002). On June 30, 2002, the remaining revolving loan balance of $5.8 million
converted to a term loan, repayable on March 7, 2004, together with accrued
interest. Proceeds from the loan were used to purchase the same amount in face
value of the Company's 10% Senior Notes, which were acquired in 2001 by the
Company and were being held as an investment. These 10% Senior Notes, together
with $4.7 million of 10% Senior Notes formerly owned by Bluebird and contributed
to Canvasback in its initial capitalization, serve as the only collateral for
the loan. The loan is non-recourse to the Company.
NOTE 5 - HEDGING
SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities", as extended by SFAS No. 137 (June 1999) and amended by SFAS No. 138
(June 2000), was effective for the Company beginning January 2001. SFAS No. 133
9
MAGNUM HUNTER RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
June 30, 2002
(Unaudited)
establishes accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts, and for
hedging activities. It requires the recognition of derivatives in the balance
sheet and the measurement of those instruments at fair value.
The Company was obligated to nine crude oil derivatives, sixteen natural
gas derivatives, and two interest rate derivatives on June 30, 2002. The Company
has determined that all outstanding derivatives qualify as cash flow hedges and
for hedge treatment as defined within SFAS No. 133, which requires the Company
to record the derivative assets or liabilities at their fair value on its
balance sheet with an offset to other comprehensive income. However, in
connection with the merger with Prize on March 15, 2002, the Company purchased
$7.6 million in hedge assets from Prize at fair value on that date, with no
corresponding offset to other comprehensive income. During June 2002, the
Company sold its position in one natural gas collar purchased in the Prize
acquisition, realizing proceeds of $3.6 million which was charged against hedge
assets. Consequently, this net hedge balance of $4.0 million will amortize as a
charge to other non-cash hedging adjustments over 33 months (30 remaining as of
June 30, 2002). Future hedge ineffectiveness on the cash-flow hedges will be
recorded in earnings.
At June 30, 2002, the fair value of the Company's derivatives were as
follows (in thousands):
Derivative Assets
- ----------------------------------------------
Natural gas collars........................... $ 992
-----------
Total derivative assets....................... $ 992
-----------
Derivative Liabilities
- ----------------------------------------------
Natural gas collars........................... $ 11,882
Natural gas swaps............................. 12,952
Crude oil collars............................. 851
Crude oil swaps............................... 2,140
Interest rate swaps........................... 1,188
-----------
Total derivative liabilities.................. $ 29,013
-----------
Net derivative liabilities.................... $ 28,021
===========
For the three and six month periods ended June 30, 2002, the income
statement includes a non-cash loss of $219 thousand and $377 thousand,
respectively, related to the crude oil and natural gas derivatives and a
non-cash loss of $3.1 million and $3.5 million, respectively, related to the
amortization of hedge assets purchased in the Prize merger. The Company expects
that the remaining balances in other comprehensive income at June 30, 2002 will
be reclassified into the income statement within the next 30 months. During the
next 12 months, $1.9 million of amortization of hedge assets purchased in the
Prize merger will be expensed on the income statement. Additionally, $8.0
million of other comprehensive loss will be reclassified into the income
statement during the next 12 months.
NOTE 6 - INCOME TAXES
The Company realized a tax benefit of $5.1 million for the six month period
ended June 30, 2002. This benefit was realized as a result of the reversal of
the $7.1 million valuation allowance for the Company's net operating losses and
tax credit carryforwards from 2001 and earlier years. The Company believes that
due to the merger with Prize, it will be possible to generate future taxable
income to utilize these prior losses and carryforwards and that the valuation
allowance is no longer needed.
At June 30, 2002, the Company had a deferred tax asset of $12.5 million and
a deferred tax liability of $96.8 million, for a net deferred tax liability of
$84.3 million. The majority of this balance was booked as a result of the Prize
merger; $41.0 million related to Prize's historical deferred tax liability and
$75.2 million related to the deferred taxes computed on the purchase price in
excess of historical net assets, excluding goodwill. Additionally, the $12.5
million deferred tax asset is related to the portion of Prize's total net
operating loss and tax assets that may be used by the Company as
10
MAGNUM HUNTER RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
June 30, 2002
(Unaudited)
carrybacks, to the extent of available offsetting prior operating profits
generated by Prize. This deferred tax asset was included in the Company's
original goodwill allocation resulting from the Prize merger.
NOTE 7 - SEGMENT DATA
The Company has three reportable segments. The Exploration and Production
segment is engaged in exploratory and development drilling and acquisition,
production, and sale of crude oil, condensate, and natural gas. The Gas
Gathering, Marketing and Processing segment is engaged in the gathering and
compression of natural gas from the wellhead, the purchase and resale of natural
gas which it gathers, and the processing of natural gas liquids. The Oil Field
Services segment is engaged in the managing and operation of producing oil and
gas properties for interest owners.
The Company's reportable segments are strategic business units that offer
different products and services. They are managed separately because each
business requires different technology and marketing strategies. The Exploration
and Production segment has three geographic areas that are aggregated. The Gas
Gathering, Marketing and Processing segment includes the activities of the two
gathering systems and four natural gas liquids processing plants in two
geographic areas that are aggregated. The Oil Field Services segment has three
geographic areas that are aggregated. The reason for aggregating the segments,
in each case, is due to the similarity in nature of the products, the production
processes, the type of customers, the method of distribution, and the regulatory
environments.
The accounting policies of the segments are the same as those for the
Company as a whole. The Company evaluates performance based on profit or loss
from operations before income taxes. The accounting for intersegment sales and
transfers is done as if the sales or transfers were to third parties, that is,
at current market prices.
Segment data for the periods ended June 30, 2002 and 2001 follows (in
thousands):
Gas Gathering,
Exploration & Marketing & Oil Field
Three Months Ended June 30, 2002: Production Processing Services All Other Elimination Consolidated
- -----------------------------------------------------------------------------------------------------------------------------------
Revenue from external customers........... $ 70,543 $ 4,596 $ 1,051 $ - $ 76,190
Intersegment revenues..................... 3,477 5,978 - (9,455) -
Depreciation, depletion and amortization.. 22,518 544 133 347 23,542
Segment profit (loss)..................... 25,572 586 (831) (4,271) 21,056
Equity in earnings of affiliates.......... 81 81
Interest expense.......................... (13,670) (13,670)
Other income (expense).................... (3,843) (3,843)
--------
Income before income taxes................ 3,624
Provision for income tax (expense)........ (1,373) (1,373)
--------
Net income................................ 2,251
========
Capital expenditures (net of asset sales). $ 29,436 $ 39 $ 221 $ - $ 29,696
11
MAGNUM HUNTER RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
June 30, 2002
(Unaudited)
Gas Gathering,
Exploration & Marketing & Oil Field
Three Months Ended June 30, 2001: Production Processing Services All Other Elimination Consolidated
- -----------------------------------------------------------------------------------------------------------------------------------
Revenue from external customers.......... $ 33,908 $ 4,830 $ 606 $ - $ 39,344
Intersegment revenues.................... - 5,258 1,533 - (6,791) -
Depreciation, depletion and amortization. 9,362 220 100 4 9,686
Segment profit (loss).................... 17,010 173 (932) (1,604) 14,647
Equity in earnings of affiliates......... 237 237
Interest expense......................... (5,122) (5,122)
Other income............................. 828 828
---------------
Income before income taxes............... $ 10,590
Provision for income tax expense......... (4,011) (4,011)
Extraordinary loss....................... (304) (304)
---------------
Net income............................... $ 6,275
===============
Capital expenditures (net of asset sales) $ 54,622 $ 7 $ 38 $ - $ 54,667
Gas Gathering,
Exploration & Marketing & Oil Field
Six Months Ended June 30, 2002: Production Processing Services All Other Elimination Consolidated
- -----------------------------------------------------------------------------------------------------------------------------------
Revenue from external customers............$ 109,693 $ 8,178 $ 1,443 $ - $ 119,314
Intersegment revenues...................... 5,960 6,395 - (12,355) -
Depreciation, depletion and amortization... 37,060 914 238 426 38,638
Segment profit (loss)...................... 36,023 1,058 (908) (5,820) 30,353
Equity in earnings of affiliates........... 382 382
Interest expense........................... (21,175) (21,175)
Other income (expense)..................... (4,379) (4,379)
-------------
Income before income taxes................. 5,181
Provision for income tax benefit........... 5,138 5,138
Extraordinary loss......................... (621) (621)
-------------
Net income................................. 9,698
=============
Capital expenditures (net of asset sales)..$ 633,340 $ 21,172 $ 2,214 $ 133 $ 656,859
Gas Gathering,
Exploration & Marketing & Oil Field
Six Months Ended June 30, 2001: Production Processing Services All Other Elimination Consolidated
- -----------------------------------------------------------------------------------------------------------------------------------
Revenue from external customers............ $ 76,861 $ 11,932 $ 1,121 $ - $ 89,914
Intersegment revenues...................... - 12,818 2,972 - (15,790) -
Depreciation, depletion and amortization... 16,459 440 193 9 17,101
Segment profit (loss)...................... 44,385 484 (1,488) (2,888) 40,493
Equity earnings of affiliates.............. 855 855
Interest expense........................... (9,988) (9,988)
Other income............................... 1,811 1,811
-------------
Loss before income taxes................... $ 33,171
Provision for income tax (expense)......... (12,564) (12,564)
Extraordinary loss......................... (304) (304)
-------------
Net income................................. $ 20,303
=============
Capital expenditures (net of asset sales).. $ 83,485 $ 13 $ 172 $ 854 $ 84,524
12
MAGNUM HUNTER RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
June 30, 2002
(Unaudited)
Gas Gathering,
Exploration & Marketing & Oil Field
As of June 30, 2002: Production Processing Services All Other Elimination Consolidated
- -----------------------------------------------------------------------------------------------------------------------------
Segment assets................... $ 1,116,493 $ 36,977 $ 17,276 $ 22,557 $ 1,193,303
Equity subsidiary investments.... 5,404 5,404
As of June 30, 2001
- ---------------------------------
Segment assets................... $ 318,309 $ 18,072 $ 28,469 $ 7,192 $ 372,042
Equity subsidiary investments.... 9,896 9,896
NOTE 8 - CONDENSED CONSOLIDATING FINANCIAL STATEMENTS
The Company and its wholly-owned subsidiaries, except Canvasback, are
direct guarantors of the Company's 10% Senior Notes and 9.6% Senior Notes and
have fully and unconditionally guaranteed the Notes on a joint and several
basis. In addition to not being a guarantor of the Company's 10% Senior Notes
and 9.6% Senior Notes, Canvasback cannot be included in determining compliance
with certain financial covenants under the Company's credit agreements. The
Company has concluded that separate financial statements related to the
guarantors are not included because management has determined that they are not
material to investors. Condensed consolidating financial information for Magnum
Hunter Resources, Inc. and subsidiaries as of June 30, 2002 and December 31,
2001, and for the three and six month periods ended June 30, 2002 and 2001, was
as follows:
Magnum Hunter Resources, Inc. and Subsidiaries
Condensed Consolidating Balance Sheets
June 30, 2002
---------------------------------------------------------------------------------------------------------------------------------
Magnum Hunter Canvasback Magnum Hunter
Resources, Inc. Energy, Inc. Resources, Inc.
and Gurantor Subs (Non Guarantor) Eliminations Consolidated
---------------------------------------------------------------------------------------------------------------------------------
Amounts in Thousands
ASSETS
Current assets..................................$ 75,667 $ 5,040 $ (6,691) $ 74,016
Property and equipment
(using full cost accounting).................. 1,031,355 6,703 - 1,038,058
Investment in subsidiaries
(equity method)............................... 15,434 - (15,434) -
Investment in Parent............................ - 28,085 (28,085) -
Other assets.................................... 81,188 41 - 81,229
-----------------------------------------------------------------------------------
Total assets..................................$ 1,203,644 $ 39,869 $ (50,210) $ 1,193,303
===================================================================================
LIABILITIES AND SHAREHOLDERS'
EQUITY
Current liabilities.............................$ 70,200 $ 6,765 $ (6,691) $ 70,274
Long-term liabilities........................... 762,856 17,670 (10,534) 769,992
Shareholders' equity............................ 370,588 15,434 (32,985) 353,037
-----------------------------------------------------------------------------------
Total liabilities and shareholders' equity....$ 1,203,644 $ 39,869 $ (50,210) $ 1,193,303
===================================================================================
13
MAGNUM HUNTER RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
June 30, 2002
(Unaudited)
December 31, 2001
---------------------------------------------------------------------------------------------------------------------------------
Magnum Hunter Bluebird Magnum Hunter
Resources, Inc. Energy, Inc. Resources, Inc.
and Gurantor Subs (Non Guarantor) Eliminations Consolidated
---------------------------------------------------------------------------------------------------------------------------------
Amounts in Thousands
ASSETS
Current assets.................................. $ 21,196 $ 3,910 $ - $ 25,106
Property and equipment
(using full cost accounting)................... 412,720 7,117 - 419,837
Investment in subsidiaries
(equity method)................................ 14,963 - (14,963) -
Investment in Parent............................ - 15,750 (15,750) -
Other assets.................................... 9,442 - - 9,442
-----------------------------------------------------------------------------------
Total Assets................................ $ 458,321 $ 26,777 $ (30,713) $ 454,385
===================================================================================
LIABILITIES AND STOCKHOLDERS'
EQUITY
Current liabilities............................. $ 48,561 $ 152 $ - $ 48,713
Long-term liabilities........................... 280,736 11,662 (4,700) 287,698
Shareholders' equity............................ 129,024 14,963 (26,013) 117,974
-----------------------------------------------------------------------------------
Total liabilities and shareholders' equity.. $ 458,321 $ 26,777 $ (30,713) $ 454,385
===================================================================================
Magnum Hunter Resources, Inc. and Subsidiaries
Condensed Consolidating Statement of Operations
For the Three Months Ended June 30, 2002
---------------------------------------------------------------------------------------------------------------------------------
Magnum Hunter Canvasback Magnum Hunter
Resources, Inc. Energy, Inc. Resources, Inc.
and Gurantor Subs (Non Guarantor) Eliminations Consolidated
---------------------------------------------------------------------------------------------------------------------------------
Amounts in Thousands
Revenues......................................... $ 75,783 $ 407 $ - $ 76,190
Expenses......................................... 72,497 69 - 72,566
-----------------------------------------------------------------------------------
Income before 3,286 338 - 3,624
Equity in net earnings of subsidiary........... 210 - (210) -
-----------------------------------------------------------------------------------
Income before income taxes....................... 3,496 338 (210) 3,624
Income tax (expense) provision................... (1,245) (128) - (1,373)
-----------------------------------------------------------------------------------
Net income................................... $ 2,251 $ 210 $ (210) $ 2,251
===================================================================================
For the Three Months Ended June 30, 2001
---------------------------------------------------------------------------------------------------------------------------------
Magnum Hunter Bluebird Magnum Hunter
Resources, Inc. Energy, Inc. Resources, Inc.
and Gurantor Subs (Non Guarantor) Eliminations Consolidated
---------------------------------------------------------------------------------------------------------------------------------
Amounts in Thousands
Revenues........................................ $ 34,082 $ 5,308 $ (46) $ 39,344
Expenses........................................ 25,760 3,040 (46) 28,754
---------------------------------------------------------------------------------
Income before 8,322 2,268 - 10,590
Equity in net earnings of subsidiary.......... 1,409 - (1,409) -
---------------------------------------------------------------------------------
Income before income taxes...................... 9,731 2,268 (1,409) 10,590
Income tax (expense) provision.................. (3,152) (859) - (4,011)
---------------------------------------------------------------------------------
Income before extraordinary loss................ 6,579 1,409 (1,409) 6,579
Extraordinary loss.............................. (304) - - (304)
---------------------------------------------------------------------------------
Net income.................................. $ 6,275 $ 1,409 $ (1,409) $ 6,275
=================================================================================
14
For the Six Months Ended June 30, 2002
---------------------------------------------------------------------------------------------------------------------------------
Magnum Hunter Canvasback Magnum Hunter
Resources, Inc. Energy, Inc. Resources, Inc.
and Gurantor Subs (Non Guarantor) Eliminations Consolidated
---------------------------------------------------------------------------------------------------------------------------------
Amounts in Thousands
Revenues......................................... $ 118,645 $ 669 $ - $ 119,314
Expenses......................................... 113,871 262 - 114,133
------------------------------------------------------------------------------
Income before 4,774 407 - 5,181
Equity in net earnings of subsidiary........... 253 - (253) -
------------------------------------------------------------------------------
Income before income taxes....................... 5,027 407 (253) 5,181
Income tax benefit (expense) provision........... 5,292 (154) - 5,138
------------------------------------------------------------------------------
Income before extraordinary loss................. 10,319 253 (253) 10,319
Extraordinary loss............................... (621) - - (621)
------------------------------------------------------------------------------
Net income................................... $ 9,698 $ 253 $ (253) $ 9,698
==============================================================================
For the Six Months Ended June 30, 2001
---------------------------------------------------------------------------------------------------------------------------------
Magnum Hunter Bluebird Magnum Hunter
Resources, Inc. Energy, Inc. Resources, Inc.
and Gurantor Subs (Non Guarantor) Eliminations Consolidated
---------------------------------------------------------------------------------------------------------------------------------
Amounts in Thousands
Revenues........................................... $ 66,525 $ 23,590 $ (201) $ 89,914
Expenses........................................... 46,123 10,821 (201) 56,743
----------------------------------------------------------------------------
Income before 20,402 12,769 - 33,171
Equity in net earnings of subsidiary............. 7,933 - (7,933) -
----------------------------------------------------------------------------
Income before income taxes......................... 28,335 12,769 (7,933) 33,171
Income tax (expense) provision..................... (7,728) (4,836) - (12,564)
----------------------------------------------------------------------------
Income before extraordinary loss................... 20,607 7,933 (7,933) 20,607
Extraordinary loss................................. (304) - - (304)
----------------------------------------------------------------------------
Net income..................................... $ 20,303 $ 7,933 $ (7,933) $ 20,303
============================================================================
Magnum Hunter Resources, Inc. and Subsidiaries
Condensed Consolidating Statements of Cash Flows
For the Six Months Ended June 30, 2002
---------------------------------------------------------------------------------------------------------------------------------
Magnum Hunter Canvasback Magnum Hunter
Resources, Inc. Energy, Inc. Resources, Inc.
and Gurantor Subs (Non Guarantor) Eliminations Consolidated
---------------------------------------------------------------------------------------------------------------------------------
Amounts in Thousands
Cash flow from operating activities...............$ (8,133) $ 8,670 $ - $ 537
Cash flow from investing activities............... (96,036) (1,927) - (97,963)
Cash flow from financing activities............... 109,360 (6,323) (432) 102,605
-----------------------------------------------------------------------------------
Net increase (decrease) in cash................... 5,191 420 (432) 5,179
Cash at beginning of period....................... 730 2,025 - 2,755
-----------------------------------------------------------------------------------
Cash at end of period.............................$ 5,921 $ 2,445 $ (432) $ 7,934
===================================================================================
For the Six Months Ended June 30, 2001
---------------------------------------------------------------------------------------------------------------------------------
Magnum Hunter Bluebird Magnum Hunter
Resources, Inc. Energy, Inc. Resources, Inc.
and Gurantor Subs (Non Guarantor) Eliminations Consolidated
---------------------------------------------------------------------------------------------------------------------------------
Amounts in Thousands
Cash flow from operating activities............... $ 47,472 $ 14,189 $ - $ 61,661
Cash flow from investing activities............... (106,869) 40,001 (18,578) (85,446)
Cash flow from financial activities............... 61,596 (54,534) 18,578 25,640
-----------------------------------------------------------------------------
Net increase (decrease) in cash................... 2,199 (344) - 1,855
Cash at beginning of period....................... (1,811) 1,820 - 9
-----------------------------------------------------------------------------
Cash at end of period............................. $ 388 $ 1,476 $ - $ 1,864
=============================================================================
15
MAGNUM HUNTER RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
June 30, 2002
(Unaudited)
NOTE 9 - NEW ACCOUNTING STANDARDS
SFAS No. 142 - SFAS No. 142, "Goodwill and Other Intangible Assets", became
effective for the Company January 1, 2002. SFAS No. 142 requires, among other
things, the discontinuance of goodwill amortization. Any goodwill resulting from
acquisitions completed after June 30, 2001, will not be amortized. In addition,
SFAS No. 142 establishes a new method of testing goodwill that could reduce the
fair value of a reporting unit below its carrying value. Any goodwill impairment
loss will be recorded in operations. The Company incurred goodwill of $61.8
million as the result of our merger with Prize Energy Corp. on March 15, 2002.
The adoption of SFAS No. 142 did not have an impact on our consolidated
financial statements on January 1, 2002.
SFAS No. 145 - SFAS No. 145 "Rescission of FASB Statements No. 4, 44, and
64, Amendment of FASB Statement No. 13, and Technical Corrections" will be
effective for the Company beginning January 1, 2003. The Statement rescinds,
updates, clarifies and simplifies various existing accounting pronouncements.
SFAS No. 145 rescinds SFAS No. 4, "Reporting Gains and Losses from
Extinguishment of Debt", which required all gains and losses from extinguishment
of debt to be aggregated and, if material, classified as an extraordinary item,
net of related income tax effect. As a result, SFAS No. 145 will require the
Company to reclassify extraordinary items for debt extinguishment costs which do
not meet the criteria as described in APB Opinion No. 30 "Reporting the Results
of Operations - Reporting the Effects of Disposal of a Business, and
Extraordinary, Unusual and Infrequently Occurring Events and Transactions", as
additional interest expense. The Company plans to adopt this statement beginning
January 1, 2003.
SFAS No. 146 - In July 2002, the FASB issued Statement of Financial
Accounting Standards No. 146 ("SFAS No. 146"), "Accounting for Costs Associated
with Exit or Disposal Activities." SFAS No. 146 requires companies to recognize
costs associated with exit or disposal activities when they are incurred rather
than at the date of a commitment to an exit or disposal plan. SFAS No. 146
supercedes EITF Issue No. 94-3, "Liability Recognition for Certain Employee
Termination Benefits and Other Costs to Exit an Activity (including Certain
Costs Incurred in a Restructuring)." Statement 146 is to be applied
prospectively to exit or disposal activities initiated after December 31, 2002.
The Company has not yet determined the impact of this standard.
NOTE 10 - SUBSEQUENT EVENT
On July 31, 2002, the Company announced that it had entered into a mutually
binding commitment to sell certain non-core oil and gas assets to a new private
limited partnership in the approximate amount of $50 million. The Company will
be the general partner with a 5% initial ownership. The anticipated effective
date of the sale is August 1, 2002. The proceeds from the sale will be used to
reduce indebtedness and for general corporate purposes.
16
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operation
Results of Operations
The following discussion and analysis should be read in conjunction with
the Company's consolidated financial statements and the notes associated with
them contained in its Form 10-K for the year ended December 31, 2001. This
discussion should not be construed to imply that the results discussed herein
will necessarily continue into the future or that any conclusion reached herein
will necessarily be indicative of actual operating results in the future. Such
discussion represents only the best present assessment by management of the
Company.
There have been no changes to critical our accounting policies for the
period ended June 30, 2002, except for accounting for goodwill. SFAS No. 142,
"Goodwill and Other Intangible Assets", became effective for the Company January
1, 2002. SFAS No. 142 requires, among other things, the discontinuance of
goodwill amortization. Any goodwill resulting from acquisitions completed after
June 30, 2001, will not be amortized. In addition, SFAS No. 142 establishes a
new method of testing goodwill that could reduce the fair value of a reporting
unit below its carrying value. Any goodwill impairment loss will be recorded in
operations. The Company incurred goodwill of $61.8 million as the result of our
merger with Prize Energy Corp. on March 15, 2002. The adoption of SFAS No. 142
did not have an impact on our consolidated financial statements on January 1,
2002. For a discussion of our other critical accounting policies, refer to the
Company's Form 10-K for the period ended December 31, 2001.
During the first quarter of 2002, the Company merged with Prize Energy
Corp. ("Prize"), an independent oil and gas development and production company
based in Grapevine, Texas. The merger with Prize closed on March 15, 2002, but
for operating and financial reporting purposes, was effective as of March 1,
2002. As such, the results for the three and six month periods ended June 30,
2002, include three months and four months of operating contributions from
Prize, respectively.
Throughout this document we make statements that are classified as
"forward-looking." Please refer to the "Forward-Looking Statements" section of
this document for an explanation of these types of assertions.
The Company's results of operations have been significantly affected by our
past success in acquiring oil and gas properties and our ability to maintain or
increase oil and natural gas production through exploration and exploitation
activities. Fluctuations in oil and gas prices have also significantly affected
the results of operations.
The following table sets forth certain information with respect to our oil
and gas operations and our gas gathering, marketing and processing operations.
Three Months Ended Six Months Ended
June 30, June 30,
- -----------------------------------------------------------------------------------------------------------------------------------
Oil and Gas Operations 2002 2001 2002 2001
- -----------------------------------------------------------------------------------------------------------------------------------
Reported Production:
Oil (Mbbls)............................................... 1,132 325 1,802 627
Gas (MMcf)................................................ 13,431 5,748 22,499 11,285
Oil and Gas (Mmcfe)....................................... 20,223 7,697 33,312 15,048
Equivalent Daily Rate (Mmcfe/day)......................... 222.2 84.6 184.0 83.1
Average Sale Prices (after hedging)
Oil (per Bbl)............................................. $ 24.40 $ 24.98 $ 23.15 $ 26.23
Gas (per Mcf)............................................. 3.20 4.49 3.02 5.35
Oil and Gas (per Mcfe).................................... 3.49 4.41 3.29 5.11
Effect of hedging activities (per Mcfe)....................... - 0.03 0.17 (0.06)
Lease Operating Expense (per Mcfe)
Lifting costs............................................. $ 0.76 $ 0.64 $ 0.73 $ 0.64
Production tax and other costs............................ 0.39 0.41 0.37 0.48
Gross margin (per Mcfe)....................................... $ 2.34 $ 3.36 $ 2.19 $ 3.99
Gas Gathering, Marketing and Processing Operations
- -----------------------------------------------------------------------------------------------------------------------------------
Throughput Volumes (Mcf per day)
Gathering............................................... 15,207 16,571 15,232 16,409
Processing.............................................. 21,277 14,718 19,588 13,295
Gross margin (in thousands)................................... $ 1,130 $ 399 $ 2,032 $ 929
Gathering (per Mcf throughput).......................... $ 0.11 $ (0.09) $ 0.12 $ 0.02
Processing (per Mcf throughput)......................... $ 0.48 $ 0.21 $ 0.44 $ 0.31
17
Period to Period Comparison
For the Three Months Ended June 30, 2002 and 2001
We reported net income of $2.3 million for the three months ended June 30,
2002, as compared to net income of $6.3 million for the same period in 2001. Net
income was unfavorably impacted by lower average sale prices for oil and gas,
higher general and administrative expenses related to nonrecurring activities
associated with the Prize merger, and amortization expense incurred on
derivative instruments acquired in the Prize merger. Total operating revenues
increased 94% to $76.2 million and operating profit increased 44% to $21.1
million in 2002, due primarily to the Prize merger. We reported decreases in
revenues from our gas gathering, marketing and processing segment in the 2002
period compared to the 2001 period as a result of lower product prices. However,
gross margins for the segment increased, due to the acquisition of a gas plant
in the Prize merger and also due to the reduction of unfavorable gas imbalance
pricing effects experienced in the 2001 period. Oil field service revenue
increased 73% to $1.1 million for the three months in 2002 as compared to the
same period in 2001. This revenue increase is also attributable to the merger
with Prize. Both basic and diluted earnings per share were $0.03 in the 2002
quarter versus basic and diluted earnings per share of $0.18 and $0.17,
respectively, in the 2001 quarter.
Oil and Gas Operations:
For the three months ended June 30, 2002, we reported oil production of
1.132 million barrels and gas production of 13.431 billion cubic feet, which
represents an increase of 249% in oil produced and an increase of 134% in gas
produced from the comparable period in 2001. Our reported equivalent daily rate
of production on a million cubic feet per day basis (Mmcfe/day) increased 163%
to 222.2 Mmcfe/day in the 2002 period. These increases were primarily the result
of the merger with Prize and the success of our drilling program offsetting
normal production declines.
Oil revenues increased $19.5 million, or 240%, in the second quarter of
2002 compared to the same period in 2001, primarily attributable to production
gains of 807 Mbbls. Oil prices declined 2% to $24.40 per bbl in 2002 compared to
the same period in 2001. Gas revenues increased $17.1 million in the second
quarter of 2002 versus the same period in 2001. Gas price decreases of $1.29 per
Mcf, or a 29% decline, decreased gas revenue by $17.3 million in the second
quarter of 2002 compared to the same period in 2001. The price decreases were
offset by an increase of $34.4 million in gas revenues as the result of a 7.683
billion cubic feet increase in gas production for the 2002 period.
From time to time, we enter into various commodity hedging contracts in
order to reduce our exposure to the possibility of declining oil and gas prices.
During the 2002 period, hedging decreased the average price we received for oil
by $0.53 per barrel and increased the average price we received for gas by $0.05
per Mcf. During the second quarter of 2002, we had 70% of our natural gas
production hedged through a combination of fixed price swaps and cost-less
collars at a weighted average floor price of approximately $3.19 per Mcf and a
ceiling price of $3.47 per Mcf. We also had 68% of our crude oil hedged at a
weighted average floor price of $23.50 per bbl and a ceiling price of $25.90 per
bbl. From July 1, 2002 through the remainder of 2002, we have an average of
68,000 Mcf/day of natural gas hedged with a weighted average floor price of
approximately $3.01 per Mcf and a ceiling price of $3.18 per Mcf. For the same
period, we also have 8,500 bbls/day of crude hedged with a weighted average
floor price of $23.35 per bbl and a ceiling price of $25.74 per bbl.
Lease operating expenses consist of two primary components, lifting costs
and production tax and other costs. For the 2002 period, lifting costs were
$15.4 million versus $5.0 million in the 2001 period, an increase of 208%.
Production taxes and other costs were $7.9 million in the 2002 period versus
$3.2 million in the 2001 period, an increase of 147%. Both increases were
primarily attributable to the Prize merger. For the 2002 period, lifting costs,
on a unit of production basis, were $0.76 per Mcfe as compared to $0.64 per Mcfe
in the 2001 period, an increase of 19% due to an increase in workover and
remedial expense. Production tax and other costs were $0.39 per Mcfe in the 2002
period compared to $0.41 per Mcfe in the 2001 period, a decrease of 5% due to
lower production taxes, which are a function of lower oil and gas prices on a
unit basis.
Our gross margin for oil and gas operations (oil and gas revenues less
lease operating expenses) for the 2002 period was $47.2 million, or $2.34 per
Mcfe, compared to $25.8 million, or $3.36 per Mcfe in the 2001 period, a
decrease of 30% on a per unit of production basis, primarily a result of a 21%
decline in the product price received per Mcfe and a 10% increase in lease
operating expense per Mcfe.
Gathering, Marketing and Processing Operations:
For the three months ended June 30, 2002, our gas gathering system
throughput was 15.2 MMcf/day versus 16.6 MMcf/day for the same period in 2001, a
decline of 8% due to normal well production declines behind the systems. Gas
processing throughput was 21.3 MMcf/day in 2002 versus 14.7 MMcf/day in 2001, an
increase of 45%. This increase is primarily due to the acquisition of a 100%
owned interest in the Elmore City processing plant located in Oklahoma as a
result of the Prize merger.
18
Revenues from gas gathering, marketing and processing decreased 5% to $4.6
million in 2002 versus $4.8 million in 2001. We received lower prices for
natural gas liquids and plant products sold in the 2002 period compared to the
2001 period. Operating costs for the gas gathering, marketing and processing
segment decreased 22% to $3.5 million in 2002 from $4.4 million in 2001. Lower
natural gas prices paid also affected the cost of gas marketed and processed.
The 2001 period was also impacted by adverse gas imbalance pricing effects.
The gross margin realized from gas gathering, marketing and processing for
2002 was $1.1 million versus $399 thousand in 2001, an increase of 183%. The gas
gathering margin was $0.11 per Mcf gathered in 2002 versus a loss of $0.09 per
Mcf in 2001, due to an increase in marketing spreads and the reduction of
adverse gas imbalance pricing effects which occurred in 2001. The gas processing
margin was $0.48 per Mcf in 2002 compared to $0.21 per Mcf in 2001, due to the
addition of the Elmore City plant and improved plant processing spreads.
Oil Field Management Services Operations:
Revenues from oil field management services increased 73% to $1.1 million
in the second quarter of 2002 versus $606 thousand in the second quarter of
2001. This increase is primarily due to the Prize merger. Operating costs
increased to $543 thousand in 2002 from $392 thousand in 2001, also due to the
Prize merger. The gross margin for this segment in 2002 was $508 thousand versus
$214 thousand in 2001, an increase of 137%, due to overhead costs charged.
Other Income and Expenses:
Depreciation and depletion expense was $23.5 million in the 2002 period
versus $9.7 million in the 2001 period, primarily the result of higher depletion
expense calculated on a unit of production basis. Depreciation and depletion of
oil and gas properties was $1.11 per Mcfe produced in 2002 versus $1.22 per Mcfe
produced in 2001. This 8% decrease in the equivalent unit cost was due primarily
to the lower depletion rate associated with properties acquired in the Prize
merger.
General and administrative expense for 2002 increased 105% to $4.2 million
from $2.1 million in 2001. One cause of this increase was an increase in salary,
benefits and retirement plan expenses and an increase in the Company's overall
headcount associated with its merger with Prize. We also incurred approximately
$858 thousand in nonrecurring legal and accounting services involved with
various registration statements and $251 thousand in transitional payroll costs
associated with the Prize merger in the 2002 period. We recorded equity in
earnings of affiliate of $81 thousand in 2002 versus earnings of $237 thousand
in 2001. This decrease was due to reduced net earnings from gas marketing
operations of the Company's 30% owned gas marketing affiliate. Other income was
$108 thousand for 2002 versus $63 thousand in 2001, caused by an increase in
interest income. We recognized a permanent impairment loss of $621 thousand on
an investment held for resale in 2002 versus none in 2001. The Company
recognized a $3.3 million loss in other non-cash hedging adjustments in 2002
versus a $765 thousand gain in 2001. In the 2002 period, $3.1 million of the
hedging loss relates to the amortization of hedge assets acquired in the Prize
merger, while $200 thousand was due to recording hedge ineffectiveness.
Interest expense was $13.7 million for 2002 versus $5.1 million for 2001.
Interest expense increased as a result of the addition of $300 million in 9.6%
Senior Notes and an increase in the borrowing base and amount outstanding on the
Senior Bank Credit Facility, both created in connection with the Prize merger.
Additional interest expense was recorded as a result of new capital leases,
vendor financed loans, and non-recourse indebtedness.
We recorded income tax expense of $1.4 million on income before tax of $3.6
million in 2002 versus income tax expense of $4.0 million on income before tax
of $10.6 million in 2001, resulting in a 38% effective rate in both periods. The
2001 period provision included a $602 thousand current provision due to
alternative minimum tax regulations. We also incurred an extraordinary loss due
to early extinguishment of debt of $304 thousand in the 2001 period versus none
in the 2002 period.
For the Six Months Ended June 30, 2002 and 2001
We reported net income of $9.7 million for the six months ended June 30,
2002, compared to net income of $20.3 million for the same period in 2001. Net
income was unfavorably impacted in the 2002 period by lower average sale prices
for oil and gas, higher general and administrative expenses related to
nonrecurring activities associated with the Prize merger, and amortization
expense incurred on derivative instruments acquired in the Prize merger. The
unfavorable effects were partially offset in the 2002 period by the elimination
of a $7.1 million valuation allowance on the Company's deferred tax assets,
which resulted in a net tax benefit of $5.1 million being recognized in the 2002
period. Total operating revenues increased 33% to $119.3 million in 2002 on
higher volumes of oil and gas produced as a result of the Prize merger.
Operating profit decreased 25% to $30.4 million in 2002, in part due to a 36%
decline in oil and gas prices received. We reported a 31% decrease in revenues
from our gas gathering, marketing and processing segment in the 2002 period
compared to the 2001 period, due to lower product prices. However, gross margins
for the segment increased, primarily as a result of the reduction of unfavorable
gas imbalance pricing effects experienced in the 2001 period, the acquisition of
a gas plant in the Prize merger, and improved plant processing spreads. Oil
field service revenue increased 29% to $1.4 million for the six months ended
June 30, 2002
19
compared to the same period in 2001, primarily the result of the Prize
merger. Income per common share, basic, was $0.18, and income per common share,
diluted, was $0.17 in the 2002 period versus $0.58 and $0.54, respectively, in
the 2001 period.
Oil and Gas Operations:
For the six months ended June 30, 2002, we reported oil production of 1.802
million barrels and gas production of 22.499 billion cubic feet, which
represents an increase of 187% in oil produced and an increase of 99% in gas
produced from the comparable period in 2001. Our reported equivalent daily rate
of production on a million cubic feet per day basis (MMcfe/day) increased 121%
to 184.0 MMcfe/day in the 2002 period. These increases were primarily the result
of the merger with Prize and the success of our drilling program offsetting
normal production declines.
Oil revenues increased $25.3 million or 154% for the six months ended June
30, 2002 compared to the same period in 2001. Production gains of 1.175 million
barrels increased oil revenues by $30.8 million, while a price decline of 12%
decreased oil revenues by $5.5 million. Gas revenues increased $7.6 million in
the six month period in 2002, compared to the same period in 2001. Gas price
decreases of $2.33 per Mcf, or a 44% decline, decreased gas revenue by $52.4
million in the 2002 period compared to the same period in 2001. The price
decreases were offset by an increase of $60.0 million in gas revenues as a
result of 11.214 billion cubic feet increase in gas production for the 2002
period.
From time to time we enter into various commodity hedging contracts in
order to reduce our exposure to the possibility of declining oil and gas prices.
During the 2002 period, hedging decreased the average price we received for oil
by $0.22 per barrel and increased the average price we received for gas by $0.28
per Mcf. During the 2002 period, we had 77% of our natural gas production hedged
through a combination of fixed price swaps and cost-less collars at a weighted
average floor price of approximately $3.28 per Mcf and a ceiling price of $3.56
per Mcf. We also had 54% of our crude oil hedged at a weighted average floor
price of $23.70 per bbl and a ceiling price of $26.18 per bbl. From July 1, 2002
through the remainder of 2002, we have an average of 68,000 Mcf/day of natural
gas hedged with a weighted average floor price of approximately $3.01 per Mcf
and a ceiling price of $3.18 per Mcf. For the same period, we also have 8,500
bbls/day of crude hedged with a weighted average floor price of $23.35 per bbl
and a ceiling price of $25.74 per bbl.
Lease operating expenses consist of two primary components, lifting costs
and production tax and other costs. For the 2002 period, lifting costs were
$24.4 million versus $9.6 million in the 2001 period, an incease of 154%.
Production taxes and other costs were $12.2 million in the 2002 period versus
$7.2 million in the 2001 period, an increase of 69%. Both increases were
primarily attributable to the Prize merger. For the 2002 period, lifting costs,
on a unit of production basis, were $0.73 per Mcfe as compared to $0.64 per Mcfe
in the 2001 period, an increase of 14% due to an increase in workover and
remedial expense. Production tax and other costs were $0.37 per Mcfe in the 2002
period compared to $0.48 per Mcfe in the 2001 period, a decrease of 23% due to
lower production taxes, which are a function of lower oil and gas prices on a
unit basis.
Our gross margin for oil and gas operations (oil and gas revenues less
lease operating expenses) for the 2002 period was $73.1 million, or $2.19 per
Mcfe, compared to $60.1 million, or $3.99 per Mcfe in the 2001 period, a
decrease of 45% on a per unit of production basis, primarily a result of a 36%
decline in the product price received per Mcfe and a 2% decrease in lease
operating expense per Mcfe.
Gathering, Marketing and Processing Operations:
For the six months ended June 30, 2002, our gas gathering systems
throughput was 15.2 MMcfe/day versus 16.4 MMcf/day for the same period in 2001,
a decline of 7% due to normal well production declines behind the systems. Gas
processing throughput was 19.6 MMcf/day in 2002 versus 13.3 MMcf/day in 2001, an
increase of 47%. This increase is primarily due to the acquisition of a 100%
owned interest in the Elmore City processing plant located in Oklahoma as a
result of the Prize merger.
Revenues from gas gathering, marketing and processing decreased 31% to $8.2
million in 2002 versus $11.9 million in 2001. We received lower prices for
natural gas liquids and plant products sold in the 2002 period compared to the
2001 period. Operating costs for the gas gathering, marketing and processing
segment decreased 44% to $6.1 million in 2002 from $11.0 million in 2001. Lower
natural gas prices paid also affected the cost of gas marketed and processed.
The 2001 period was also impacted by adverse gas imbalance pricing effects.
The gross margin realized from gas gathering, marketing and processing for
2002 was $2.0 million versus $929 thousand in 2001, an increase of 119%. The gas
gathering margin was $0.12 per Mcf gathered in 2002 versus $0.02 per Mcf in
2001, due to an increase in marketing spreads and due to the fact that the 2001
period was unfavorably impacted by adverse gas imbalance pricing. The gas
processing margin was $0.44 per Mcf in 2002 compared to $0.31 per Mcf in 2001,
due to the addition of the Elmore City plant and improved plant processing
spreads.
20
Oil Field Management Services Operations:
Revenues from oil field management services increased 29% to $1.4 million
for the 2002 period versus $1.1 million in the 2001 period. This increase is
primarily due to the Prize merger. Operating costs increased to $819 thousand in
2002 from $754 thousand in 2001, also due to the Prize merger. The gross margin
for this segment in 2002 was $624 thousand versus $367 thousand in 2001, an
increase of 70%, due to overhead costs charged.
Other Income and Expenses:
Depreciation and depletion expense was $38.6 million in the 2002 period
versus $17.1 million in the 2001 period, primarily the result of higher
depletion expense calculated on a unit of production basis. Depreciation and
depletion of oil and gas properties was $1.11 per Mcfe produced in 2002 versus
$1.09 per Mcfe produced in 2001. This 2% increase in the equivalent unit cost
was due primarily to the higher depletion rate associated with our properties
located in the Gulf of Mexico.
General and administrative expense for 2002 increased 79% to $6.7 million
from $3.8 million in 2001. One cause of this increase was an increase in salary,
benefits and retirement plan expenses and an increase in the Company's overall
headcount associated with its merger with Prize. We also incurred approximately
$858 thousand in nonrecurring legal and accounting services involved with
various registration statements and $251 thousand in transitional payroll costs
associated with the Prize merger in the 2002 period. We recorded equity in
earnings of affiliate of $382 thousand in 2002 versus earnings of $855 thousand
in 2001. This decrease was due to reduced net earnings from gas marketing
operations of the Company's 30% owned gas marketing affiliate. Other income was
$165 thousand for 2002 versus $157 thousand in 2001, caused by an increase in
interest income. We recognized a permanent impairment loss of $621 thousand on
an investment held for resale in 2002 versus none in 2001. The Company
recognized a $3.9 million loss in other non-cash hedging adjustments in 2002
versus a $1.7 million gain in 2001. In the 2002 period, $3.5 million of the loss
relates to the amortization of hedge assets acquired in the Prize merger, while
$400 thousand was the result of hedge ineffectiveness.
Interest expense was $21.2 million for 2002 versus $10.0 million for 2001.
Interest expense increased as a result of the addition of $300 million in 9.6%
Senior Notes and an increase in the borrowing base and amount outstanding on the
Senior Bank Credit Facility, both created in connection with the Prize merger.
Additional interest expense was recorded as a result of new capital leases,
vendor financed loans, and non-recourse indebtedness.
We recorded an income tax benefit of $5.1 million on income before tax of
$5.2 million in 2002 versus income tax expense of $12.6 million on income before
tax of $33.2 million in 2001, resulting in a negative 98% effective rate in the
2002 period compared to a 38% effective rate in the 2001 period.. In the 2002
period, the Company was able to eliminate the $7.1 million valuation allowance
on its NOL balances as a result of the merger with Prize. The 2001 period
provision included a $1.9 million current provision due to alternative minimum
tax regulations. We also incurred an extraordinary loss due to early
extinguishment of debt of $621 thousand in the 2002 period versus $304 thousand
in the 2001 period.
Liquidity and Capital Resources
CASH FLOW AND WORKING CAPITAL. Net cash provided by operating activities
for the six month periods in 2002 and 2001 was $537 thousand and $61.7 million,
respectively. The substantial decrease in our operating cash flows in 2002 over
2001 was primarily the result of a reduction of balances due on payables that
had accumulated at year-end and from the merger with Prize. Our net working
capital position at June 30, 2002 was $3.7 million. On that date, Magnum Hunter
also had $79.3 million available to be drawn under its Senior Bank credit
facility.
INVESTING ACTIVITIES. Net cash used in investing activities was $98.0
million in the 2002 period. We made capital expenditures of $56.2 million under
our capital budget during 2002. Our capital expenditures are discussed in
further detail below. For 2002, we also received proceeds from the sale of
assets of $1.7 million, made a loan of $2.4 million to an affiliate and used
$41.1 million associated with the merger of Prize.
In the 2001 period, net cash used in investing activities was $85.4
million. We made cash expenditures of $84.5 million under our capital budget
during 2001. Additionally, during 2001, we received a distribution of $1.0
million from an unconsolidated affiliate, and made an investment in an
unconsolidated affiliate of $2.0 million, received proceeds from sale of assets
of $4 thousand, and received payments on promissory notes receivable totaling
$65 thousand.
FINANCING ACTIVITIES. Net cash provided by financing activities was $102.6
million in the 2002 period. We borrowed a total of $592.2 million, including
$300 million in new 9.6% Senior Notes during the period. We also repaid
borrowings of $461.4 million, including $155.7 million to pay off the previous
bank credit facility, $245.8 million to pay off the Prize bank credit facility
in connection with the merger, and the remainder to pay off other indebtedness.
We paid $11.8 million in fees related to the newly issued Senior Notes and the
new Senior Bank credit facility, loaned $2.7 million to the ESOP, purchased
treasury stock for $13.8 million, purchased warrants for $98 thousand, made a
loan to a stockholder and executive officer for $175 thousand,
21
received payment on a loan to a stockholder and executive officer of $300
thousand, had an increase in restricted cash of $432 thousand, and had net
proceeds from the issuance of common stock of $523 thousand. Our financing
activities are discussed in further detail below.
Net cash provided by financing activities was $25.6 million in the six
months in 2001. We borrowed $171.5 million under our Senior Bank credit
facility. We repaid borrowings under our Senior Bank credit facility of $137.6
million, made payments of $138 thousand on production payment and other loans,
and repurchased $10.5 million principal value of our 10% Senior Notes on the
open market for $10.8 million. We received $2.3 million in cash from the
issuance of common stock. We paid $731 thousand for fees related to financing
activities, made a loan to stockholders of $300 thousand, received repayment of
stockholder loans of $360 thousand, had a decrease in restricted cash of $1.8
million, and purchased treasury stock for $621 thousand. Cash dividends paid
were $169 thousand in 2001.
CAPITAL RESOURCES. The following discussion of Magnum Hunter's capital
resources refers to the Company and its affiliates (not including Bluebird for
the 2001 period). Internally generated cash flow and the borrowing capacity
under its Senior Bank credit facility are the Company's major source of
liquidity. From time to time, the Company may also sell non- strategic
properties in order to increase liquidity. In addition, the Company may use
other sources of capital, including the issuance of additional debt securities
or equity securities, as sources to fund acquisitions or other specific needs.
In the past, the Company has accessed both the public and private capital
markets to provide liquidity for specific activities and general corporate
purposes.
The Company amended and restated its Senior Bank Credit Facility (the
"facility") in conjunction with the merger with Prize. The amended facility
provides for total borrowings of $500 million, up from $225 million, and raises
the borrowing base limit from $160 million to $300 million. Additionally, the
expiration date of the facility was amended and extended to March 2005. After
March 15, 2002, the facility was used to i) fund the cash component of the
merger consideration paid to the Prize shareholders, ii) pay certain costs
associated with the merger, and iii) for general corporate purposes.
On March 15, 2002, the Company completed a private placement in the amount
of $300 million of new unsecured Senior Notes due 2012. Interest on these Senior
Notes bears a fixed annual rate of 9.6% due semi-annually, commencing September
15, 2002. Funds received from the issuance of these notes were used to i) retire
outstanding indebtedness under the Prize commercial bank credit facility, ii)
pay fees related to the issuance of the Senior Notes, and iii) for general
corporate purposes.
Subsequent to the issuance of the consolidated financial statements for the
period ended March 31, 2002, the Company's management determined that the
Company was not in compliance with the Funded Debt to EBITDA Ratio (as defined
by the facility), of the amended and restated Senior Bank Credit Facility, at
March 31, 2002. The Company obtained a waiver from its lenders as of March 31,
2002 and negotiated an amendment dated July 3, 2002 which adjusted the Funded
Debt to EBITDA Ratio (as defined by the facility) to be less restrictive for the
next four successive quarters ending March 31, 2003. The Company was in
compliance with the revised financial covenants under the amended facility at
June 30, 2002, and believes it will be able to comply with the revised financial
covenants in the future.
On January 15, 2002, the Company entered into a sale-leaseback transaction
on three newly constructed production platforms and associated pipelines located
in the Gulf of Mexico that were recently placed into service. The Company
received total proceeds of $11.2 million in new funding which was used for
general corporate purposes. The production platforms are being leased from a
syndicate group of lenders over a term of three years and at a cost of funds
based on the one month LIBO rate, currently yielding a cost of approximately
5.27% per annum. For financial statement reporting purposes, this transaction
was accounted for as a capital lease and was included in long-term debt.
On March 15, 2002, the Company repaid its 7% notes payable to certain
vendors in the total amount of $4.0 million plus accrued interest. On March 14,
2002, the Company borrowed an additional $2.5 million to finance its insurance
premium for the year under a new note bearing a fixed interest rate of 4.25% per
annum and with a maturity date of December 14, 2002.
On March 7, 2002, Canvasback entered into a $10.0 million revolving credit
agreement with a financial institution. The credit agreement provides for both
LIBOR and prime based interest rate options ( 6.5% interest rate at June 30,
2002). On June 30, 2002, the remaining revolving loan balance of $5.8 million
converted to a term loan, repayable on March 7, 2004, together with accrued
interest. Proceeds from the loan were used to purchase the same amount in face
value of the Company's 10% Senior Notes, which were acquired in 2001 by the
Company and are being held as an investment. These 10% Senior Notes, together
with $4.7 million of 10% Senior Notes formerly owned by Bluebird and contributed
to Canvasback in its initial capitalization, serve as the only collateral for
the loan. The loan is non-recourse to the Company.
On May 1, 2002, the Company's Board of Directors announced an expansion of
the Company's existing stock repurchase program originally established in June
2001. The Company or its affiliates were authorized to repurchase up to two
million shares of the Company's common stock. At June 30, 2002, two million
shares had been repurchased under the program, including 1,885,200 shares in
2002 at a cost of $13.8 million.
22
On July 31, 2002, the Company announced that it had entered into a mutually
binding commitment to sell certain non-core oil and gas assets to a new private
limited partnership in the approximate amount of $50 million. The Company will
be the general partner with a 5% initial ownership. The anticipated effective
date of the sale is August 1, 2002. The proceeds from the sale will be used to
reduce indebtedness and for general corporate purposes.
In January 2001, the remaining 50% of the Company's outstanding 1999 Series
A 8% Convertible preferred stock was converted by the holder to the Company's
common stock at the conversion price of $5.25 per share. The Company no longer
has any dividend paying preferred stock outstanding to a non-affiliated entity.
On a semiannual basis, the Company's borrowing base under its Senior Bank
credit facility is redetermined by the financial institutions who have committed
to the Company based on their review of the Company's proved oil and gas
reserves. If the outstanding senior bank debt exceeds the redetermined borrowing
base, the Company must repay the excess. The next redetermination date will be
no later than September 15, 2002.
The Company's internally generated cash flow, results of operations, and
financing for its operations are substantially dependent on oil and gas prices.
To the extent that oil and gas prices decline, the Company's earnings and cash
flows may be adversely affected. The Company believes that its cash flow from
operations, existing working capital and availability under its new Senior Bank
credit facility will be sufficient to meet interest payments and to fund the
capital expenditure budget for the year 2002.
CAPITAL EXPENDITURES. During the 2002 period, the Company's total capital
expenditures were $56.2 million, excluding the $602.3 million in properties
acquired through the Prize merger. Exploration activities accounted for $17.0
million, development activities accounted for $34.6 million, additions to
unproved properties not accounted for as exploration or development expenditures
accounted for $3.9 million, and additions to other assets accounted for $700
thousand of the capital expenditures. The Company participated in the drilling
of 52 wells during the 2002 period, of which 41 were onshore and 11 were
offshore in the Gulf of Mexico. Nine of the 11 offshore wells were considered
successful. Of the 52 wells drilled, 10 were exploratory wells, of which 8 were
successful, and 42 were development wells, 41 of which were successful. As of
June 30, 2002, the Company had total unproved oil and gas property costs of
$153.6 million, consisting of $125.7 million acquired in the merger with Prize
and $27.9 million of other property acquisition costs.
For calendar year 2002, the Company has budgeted approximately $115 million
for exploration and development activities. The Company is not contractually
obligated to proceed with any of its material budgeted capital expenditures. The
amount and allocation of future capital expenditures will depend on a number of
factors that are not entirely within the Company's control or ability to
forecast, including drilling results, oilfield service costs, and changes in oil
and gas prices. As a result, actual capital expenditures may vary significantly
from current expectations. In the normal course of business, the Company reviews
opportunities for the possible acquisition of oil and gas reserves and
activities related thereto. When potential acquisition opportunities are deemed
consistent with the Company's growth strategy, bids or offers in amounts and
with terms acceptable to the Company may be submitted. It is uncertain whether
any such bids or offers which may be submitted by the Company from time to time
will be acceptable to the sellers. In the event of a future significant
acquisition, the Company may require additional financing in connection
therewith.
FORWARD-LOOKING STATEMENTS. This Form 10-Q and the information incorporated
by reference contain statements that constitute "forward-looking statements"
within the meaning of Section 27A of the Securities Act and Section 21E of the
Securities Exchange Act. The words "expect", "project", "estimate", "believe",
"anticipate", "intend", "budget", "plan", "forecast", "predict" and other
similar expressions are intended to identify forward-looking statements. These
statements appear in a number of places and include statements regarding our
plans, beliefs, or current expectations, including the plans, beliefs, and
expectations of our officers and directors.
When considering any forward-looking statement, you should keep in mind the
risk factors that could cause our actual results to differ materially from those
contained in any forward-looking statement. Important factors that could cause
actual results to differ materially from those in the forward-looking statements
herein include the timing and extent of changes in commodity prices for oil and
gas, operating risks and other risk factors as described in our Annual Report on
Form 10-K as filed with the Securities and Exchange Commission. Furthermore, the
assumptions that support our forward-looking statements are based upon
information that is currently available and is subject to change. We
specifically disclaim all responsibility to publicly update any information
contained in a forward-looking statement or any forward-looking statement in its
entirety and therefore disclaim any resulting liability for potentially related
damages.
All forward-looking statements attributable to Magnum Hunter Resources,
Inc. are expressly qualified in their entirety by this cautionary statement.
23
Inflation and Changes in Prices
During the 2002 period, the Company experienced substantial decreases in
the price for both oil and gas compared to the same period in the previous year.
The results of operations and cash flow of the Company have been, and will
continue to be, affected by the volatility in oil and gas prices. Should the
Company experience a significant increase in oil and gas prices that is
sustained over a prolonged period, it would expect that there would also be a
corresponding increase in oil and gas finding costs, lease acquisition costs,
and operating expenses. Periodically, the Company enters into futures, options,
and swap contracts to reduce the effects of fluctuations in crude oil and gas
prices. It is the policy of the Company not to enter into any such arrangements
which exceed 75% of the Company's oil and gas production during the projected
next 12 months. For the remainder of 2002, the Company has approximately 65% of
its crude oil production hedged and 42% of its natural gas production hedged.
The Company markets oil and gas for its own account, which exposes the
Company to the attendant commodities risk. A significant portion of the
Company's gas production is currently sold to a 30% owned affiliate, NGTS, LLC,
or end-users either on the spot market on a month-to-month basis at prevailing
spot market prices, or under long-term contracts based on current spot market
prices. The Company normally sells its oil under month-to-month contracts to a
variety of purchasers.
Hedging
SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities", as extended by SFAS No. 137 (June 1999) and amended by SFAS No. 138
(June 2000), was effective for the Company beginning January 2001. SFAS No. 133
establishes accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts, and for
hedging activities. It requires the recognition of derivatives in the balance
sheet and the measurement of those instruments at fair value.
The Company was obligated to nine crude oil derivatives, sixteen natural
gas derivatives, and two interest rate derivatives on June 30, 2002. The Company
has determined that all outstanding derivatives qualify as cash flow hedges and
for hedge treatment as defined within SFAS No. 133, which requires the Company
to record the derivative assets or liabilities at their fair value on its
balance sheet with an offset to other comprehensive income. However, in
connection with the merger with Prize on March 15, 2002, the Company purchased
$7.6 million in hedge assets from Prize at fair value on that date, with no
corresponding offset to other comprehensive income. During June 2002, the
Company sold its position in one natural gas collar purchased in the Prize
acquisition, realizing proceeds of $3.6 million which was char ged against hedge
assets. Consequently, this net hedge balance of $4.0 million will amortize as a
charge to other non-cash hedging adjustments over 33 months (30 remaining as of
June 30, 2002). Future hedge ineffectiveness on the cash-flow hedges will be
recorded in earnings.
At June 30, 2002, the fair value of the Company's derivatives was as
follows (in thousands):
Derivative Assets
- ------------------------------------------
Natural gas collars....................... $ 992
---------------
Total derivative assets................... $ 992
---------------
Derivative Liabilities
- ------------------------------------------
Natural gas collars....................... $ 11,882
Natural gas swaps......................... 12,952
Crude oil collars......................... 851
Crude oil swaps........................... 2,140
Interest rate swaps....................... $ 1,188
---------------
Total derivative liabilities.............. $ 29,013
---------------
Net derivative liabilities................ $ 28,021
===============
For the three and six month periods ended June 30, 2002, the income
statement includes a non-cash loss of $219 thousand and $377 thousand,
respectively, related to the crude oil and natural gas derivatives and a
non-cash loss of $3.1 million and $3.5 million, respectively, related to the
amortization of hedge assets purchased in the Prize merger. The Company expects
that the remaining balances in other comprehensive income at June 30, 2002 will
be reclassified into the income statement within the next 30 months. During the
next 12 months, $1.9 million of amortization of hedge assets purchased in the
Prize merger will be expensed on the income statement. Additionally, $8.0
million of other comprehensive loss will be reclassified into the income
statement during the next 12 months.
24
New Accounting Standards
SFAS No. 142 - SFAS No. 142, "Goodwill and Other Intangible Assets", became
effective for the Company January 1, 2002. SFAS No. 142 requires, among other
things, the discontinuance of goodwill amortization. Any goodwill resulting from
acquisitions completed after June 30, 2001, will not be amortized. In addition,
SFAS No. 142 establishes a new method of testing goodwill that could reduce the
fair value of a reporting unit below its carrying value. Any goodwill impairment
loss will be recorded in operations. The Company incurred goodwill of $61.8
million as the result of our merger with Prize Energy Corp. on March 15, 2002.
The adoption of SFAS No. 142 did not have an impact on our consolidated
financial statements on January 1, 2002.
SFAS No. 145 - SFAS No. 145 "Rescission of FASB Statements No. 4, 44, and
64, Amendment of FASB Statement No. 13, and Technical Corrections" will be
effective for the Company beginning January 1, 2003. The Statement rescinds,
updates, clarifies and simplifies various existing accounting pronouncements.
SFAS No. 145 rescinds SFAS No. 4, "Reporting Gains and Losses from
Extinguishment of Debt", which required all gains and losses from extinguishment
of debt to be aggregated and, if material, classified as an extraordinary item,
net of related income tax effect. As a result, SFAS No. 145 will require the
Company to reclassify extraordinary items for debt extinguishment costs which do
not meet the criteria as described in APB Opinion No. 30 "Reporting the Results
of Operations - Reporting the Effects of Disposal of a Business, and
Extraordinary, Unusual and Infrequently Occurring Events and Transactions", as
additional interest expense. The Company plans to adopt this statement beginning
January 1, 2003.
SFAS No. 146 - In July 2002, the FASB issued Statement of Financial
Accounting Standards No. 146 ("SFAS No. 146"), "Accounting for Costs Associated
with Exit or Disposal Activities." SFAS No. 146 requires companies to recognize
costs associated with exit or disposal activities when they are incurred rather
than at the date of a commitment to an exit or disposal plan. SFAS No. 146
supercedes EITF Issue No. 94-3, "Liability Recognition for Certain Employee
Termination Benefits and Other Costs to Exit an Activity (including Certain
Costs Incurred in a Restructuring)." Statement 146 is to be applied
prospectively to exit or disposal activities initiated after December 31, 2002.
The Company has not yet determined the impact of this standard.
Item 3. Qualitative and Quantitative Disclosure About Market Risk
The Company's operations are exposed to market risks primarily as a result
of changes in commodity prices and interest rates. The Company does not use
derivative financial instruments for speculative or trading purposes.
Energy swap agreements. The Company produces, purchases, and sells crude
oil, natural gas, condensate, and natural gas liquids. As a result, the
Company's financial results can be significantly impacted as these commodity
prices fluctuate widely in response to changing market forces and conditions.
The Company has previously engaged in oil and gas hedging activities and intends
to continue to consider various hedging arrangements to realize commodity prices
which it considers favorable. The Company engages in futures contracts with
certain of its oil and gas production through various contracts ("Swap
Agreements"). The primary objective of these activities is to protect against
significant decreases in price during the term of the hedge.
The Swap Agreements provide for separate contracts tied to the New York
Mercantile Exchange ("NYMEX") light sweet oil and the Inside FERC natural gas
index price posting ("Index"). The Company has contracts which contain specific
contracted prices ("Swaps") that are settled monthly based on the differences
between the contract prices and the specified Index prices for each month
applied to the related contract volumes. To the extent the Index exceeds the
contract price, the Company pays the spread, and to the extent the contract
price exceeds the Index price, the Company receives the spread. In addition, the
Company has combined contracts which have agreed upon price floors and ceilings
("Costless Collars"). To the extent the Index price exceeds the contract
ceiling, the Company pays the spread between the ceiling and the Index price
applied to the related contract volumes. To the extent the contract floor
exceeds the Index, the Company receives the spread between the contract floor
and the Index price applied to the related contract volumes.
To the extent the Company receives the spread between the contract floor
and the Index price applied to related contract volumes, the Company has a
credit risk in the event of nonperformance of the counter party to the
agreement. The Company does not anticipate any material impact to its results of
operations as a result of nonperformance by such parties.
The Company is contractually obligated to a counter-party to provide a
margin deposit in the form of cash or bank letter of credit should the aggregate
fair value of hedge contracts held with the counter-party exceed a predetermined
value.
25
The following is a summary of the Company's open commodity hedge contracts
as of June 30, 2002:
Weighted
Weighted average average ceiling
Period Volumes/day floor price price
---------------------------------------------------------------------
Oil 2002 8,500 $ 23.35 $ 25.74
Gas 2002 68,000 $ 3.01 $ 3.18
Oil 2003 1,000 $ 21.25 $ 21.25
Gas 2003 100,000 $ 3.00 $ 3.69
Gas 2004 15,000 $ 3.00 $ 4.20
Based on future market prices at June 30, 2002, the fair value of open
contracts to the Company was a liability of $26.8 million. If future market
prices were to increase 10% from those in effect at June 30, 2002, the fair
value of open contracts to the Company would be a liability of $41.2 million. If
future market prices were to decline 10% from those in effect at June 30, 2002,
the fair value of the open contracts to the Company would be a liability of
$11.1 million.
The Company currently intends to commit no more than 75% of its daily
production on a Bcfe basis to such arrangements at any point in time. A portion
of the Company's oil and natural gas production will be subject to price
fluctuations unless the Company enters into additional hedging transactions.
Interest Rate Swaps
On August 9, 2001, the Company entered into two interest rate swaps in
order to shift a portion of its variable rate bank debt to fixed rate debt. The
following table reflects the terms of these swaps:
Type Notional Amount Termination Date Pay Rate Receive Rate
- ---------------------------------------------------------------------------------------------------------------
Pay Fixed/Receive Variable $50,000,000 8/23/03 4.25% Fixed 3 month LIBOR
currently 1.90%
Based on future market rates at June 30, 2002, the fair value of open
contracts to the Company was a liability of $1.2 million. If future market rates
were to increase 10% from those in effect at June 30, 2001, the fair value of
open contracts to the Company would be a liability of $1.1 million. If future
market rates were to decline 10% from those in effect at June 30, 2001, the fair
value of the open contracts to the Company would be a liability of $1.3 million.
Fixed and Variable Debt. The Company uses fixed and variable debt to
partially finance budgeted expenditures. These agreements expose the Company to
market risk related to changes in interest rates.
The following table presents the carrying and fair value of the Company's
debt along with average interest rates. Fair values are calculated as the net
present value of the expected cash flows of the financial instruments, except
for the fixed rate Senior Notes, which are valued at their last traded value
before June 30, 2002.
Expected Maturity Dates 2002 2003-6 2006 2007 2012 Total Fair Value
- --------------------------------------------------------------------------------------------------------------------------------
(in thousands)
Variable Rate Debt:
Bank Debt with Recourse (a)..... $ - $ - $ 218,104 $ - $ - $ 218,104 $ 218,104
Bank Debt without Recourse (b).. $ - $ 5,834 $ - $ - $ - $ 5,834 $ 5,834
Capital Leases (c).............. $ 1,935 $ 8,498 $ - $ - $ - $ 10,433 $ 10,433
Fixed Rate Debt:
Senior Notes (d)................ $ - $ - $ - $ 29,466 $ - $ 129,466 $ 132,378
Senior Notes (e)................ $ - $ - $ - $ - $ 300,000 $ 300,000 $ 309,000
Note Payable (f)................ $ 1,320 $ - $ - $ - $ - $ 1,320 $ 1,320
Other........................... $ 10 $ - $ - $ - $ - $ 10 $ 10
- -------------
(a) The average interest rate on the bank debt with recourse is 3.9%.
(b) The average interest rate on the bank debt without recourse is 6.5%.
(c) The average interest rate on the two capital leases is 5.3%
(d) The interest rate on the senior notes due 2007 is a fixed 10%.
(e) The interest rate on the senior notes due 2012 is a fixed 9.6%
(f) The interest rate on the note payable to vendors is 4.25%
26
PART II -- OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Number Description of Exhibit
- ----------- -------------------------
3.1 & 4.1 Articles of Incorporation (Incorporated by reference to Registration Statement on Form S-18, File No.
33-30298-D)
3.2 & 4.2 Articles of Amendment to Articles of Incorporation (Incorporated by reference to Form 10-K for the year
ended December 31, 1990)
3.3 & 4.3 Articles of Amendment to Articles of Incorporation (Incorporated by reference to Registration Statement on
Form SB-2, File No. 33-66190)
3.4 & 4.4 Articles of Amendment to Articles of Incorporation (Incorporated by reference to Registration Statement on
Form S-3, File No. 333-30453)
3.5 & 4.5 Articles of Amendment to Articles of Incorporation (incorporated by reference to Form 10-K for the year
ended December 31, 2001)
3.6 & 4.6 By-Laws, as Amended (Incorporated by reference to Registration Statement on Form SB-2, File No. 33-66190)
3.7 & 4.7 Amendment to By-Laws (Incorporated by reference to Registration Statement on Form S-4, File No. 333-76774)
3.8 & 4.8 Certificate of Designation of 1996 Series A Preferred Stock (Incorporated by reference to Form 8-K dated
December 26, 1996, filed January 3, 1997)
3.9 & 4.9 Amendment to Certificate of Designations for 1996 Series A Convertible Preferred Stock (Incorporated by
reference to Registration Statement on Form S-3, File No. 333-30453)
4.10 Form of Warrant Agreement by and between Magnum Hunter Resources, Inc. and American Stock Transfer
& Trust Company, as warrant agent (Incorporated by reference to Registration Statement on Form S-3, File
No. 333-82552)
4.11 Form of Warrant Agreement by and between Midland Resources, Inc. and Stock Transfer Company of
America, Inc., as warrant agent, dated November 1, 1990 (Incorporated by reference to Registration Statement
on Form S-3, File No. 333-83376)
4.12 Form of Warrant Agreement by and between Vista Energy Resources, Inc. and American Stock Transfer &
Trust Company, as warrant agent, dated October 28, 1998 (Incorporated by reference to Registration
Statement on Form S-3, File No. 333-83376)
4.13 Indenture dated May 29, 1997 between Magnum Hunter Resources, the subsidiary guarantors named therein
and First Union National Bank of North Carolina, as Trustee (Incorporated by reference to Registration
Statement on Form S-4, File No. 333-2290)
4.14 Supplemental Indenture dated January 27, 1999 between Magnum Hunter Resources, the subsidiary
guarantors named therein and First Union National Bank of North Carolina, as Trustee (Incorporated by
reference to Form 10-K for the fiscal year-end December 31, 1998 filed April 14, 1999)
4.15 Form of 10% Senior Note due 2007 (Incorporated by reference to Registration Statement on Form S-4, File No.
333-2290)
4.16 Indenture, dated March 15, 2002, 2002, between Magnum Hunter Resources, Inc., the subsidiary guarantors
named therein and Bankers Trust Company, as Trustee (Incorporated by reference to Form 10-K for the year
ended December 31, 2001)
4.17 Shareholder Rights Agreement dated as of January 6, 1998 by and between Magnum Hunter Resources, Inc.
and Securities Transfer Corporation, as Rights Agent (Incorporated by reference to Form 8-K dated January 7,
1998, filed January 9, 1998)
10.1 Fourth Amended and Restated Credit Agreement, dated March 15, 2002, between Magnum Hunter
Resources, Inc. and Bankers Trust Company, et al (Incorporated by reference to Form 10-K for the year ended
December 31, 2001)
10.2* Amendment to Fourth Amended and Restated Credit Agreement.
10.3 Employment Agreement for Gary C. Evans (Incorporated by reference to Form 10-K for the fiscal year-end
December 31, 1999 filed March 30, 2000)
10.4 Employment Agreement for Richard R. Frazier (Incorporated by reference to Form 10-K for the fiscal year-end
December 31, 1999 filed March 30, 2000)
10.5 Employment Agreement for Chris Tong (Incorporated by reference to Form 10-K for the year ended December
31, 2001)
10.6 Employment Agreement for R. Douglas Cronk (Incorporated by reference to Form 10-K for the year ended
December 31, 2001)
10.7 Employment Agreement for Charles Erwin (Incorporated by reference to Form 10-K for the year ended
December 31, 2001)
27
10.8 Purchase and Sale Agreement, dated February 27, 1997 among Burlington Resources Oil and Gas Company,
Glacier Park Company and Magnum Hunter Production, Inc. (Incorporated by reference to Form 8-K, dated
April 30, 1997, filed May 12, 1997)
10.9 Purchase and Sale Agreement between Magnum Hunter Resources, Inc. , NGTS, et al., dated December 17,
1997 (Incorporated by reference to Form 8-K, dated December 17, 1997, filed December 29, 1997)
10.10 Purchase and Sale Agreement dated November 25, 1998 between Magnum Hunter Production, Inc. and
Unocal Oil Company of California (Incorporated by reference to Form 10-K for the fiscal year-end December
31, 1998 filed April 14, 1999)
10.11 Agreement of Limited Partnership of Mallard Hunter, L.P., dated May 23, 2000 (Incorporated by reference to
Form 10-Q/A for the period ended June 30, 2000 filed November 30, 2000)
* Filed herewith
(b) Reports on Form 8-K
1) Form 8-K filed April 22, 2002 under Item 9.
2) Form 8-K filed April 30, 2002 under Item 9.
28
SIGNATURE
In accordance with the requirements of the Exchange Act, the Registrant has
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
MAGNUM HUNTER RESOURCES, INC.
By /s/Gary C. Evans August 14, 2002
----------------------------------
Gary C. Evans
Chairman, President and Chief Executive Officer
By /s/ Chris Tong August 14, 2002
----------------------------------
Chris Tong
Senior Vice President and Chief Financial Officer
By /s/ David S. Krueger August 14, 2002
----------------------------------
David S. Krueger
Vice President and Chief Accounting Officer
By /s/ Morgan F. Johnston August 14, 2002
----------------------------------
Morgan F. Johnston
Vice President, General Counsel and Secretary
Informational Addendum to Report on Form 10-Q Filed
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
(Not Filed Pursuant to the Securities Exchange Act of 1934)
Solely for the purpose of meeting the apparent requirements of Section 906
of the Sarbanes-Oxley Act of 2002, and solely to the extent this certification
may be applicable to this quarterly report on Form 10-Q, the undersigned hereby
certify that:
(1) this quarterly report on Form 10-Q fully complies with the requirements
of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended;
and
(2) the information contained in this quarterly report on Form 10-Q fairly
presents, in all material respects, the financial condition and results of
operations of Magnum Hunter Resources, Inc.
/s/Gary C. Evans /s/Chris Tong
- --------------------------------- -----------------------------------
Gary C. Evans, Chairman Chris Tong
President and Chief Executive Officer Senior Vice President
(principal executive officer) and Chief Financial Officer
Date: August 14, 2002 (principal financial officer)
Date: August 14, 2002