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 September 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 November 8, 2002: 68,358,749.
PART 1 - FINANCIAL INFORMATION
Item 1. Financial Statements
- -----------------------------
MAGNUM HUNTER RESOURCES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands of dollars)
September 30, December 31,
2002 2001
---------------------------------------------------
ASSETS (Unaudited)
Current Assets
Cash and cash equivalents.................................................... $ 4,646 $ 2,755
Restricted cash.............................................................. 329 -
Accounts receivable
Trade, net of allowance of $4,376 and $3,264 respectively................. 42,511 14,251
Due from affiliates....................................................... 50 235
Notes receivable............................................................. 2,450 -
Notes receivable from affiliate.............................................. 300 300
Deferred tax asset........................................................... 12,500 300
Derivative assets, current................................................... 267 5,045
Prepaid and other............................................................ 11,281 2,220
---------------------------------------------------
Total Current Assets 74,334 25,106
---------------------------------------------------
Property, Plant, and Equipment
Oil and gas properties, full cost method
Unproved.................................................................. 153,995 18,653
Proved.................................................................... 1,045,381 556,766
Pipelines.................................................................... 33,861 12,642
Other property............................................................... 6,441 3,640
---------------------------------------------------
Total Property, Plant and Equipment.......................................... 1,239,678 591,701
Accumulated depreciation, depletion, amortization and impairment.......... (234,810) (171,864)
---------------------------------------------------
Net Property, Plant and Equipment............................................ 1,004,868 419,837
---------------------------------------------------
Other Assets
Deposits and other assets.................................................... 13,503 4,420
Investment in unconsolidated affiliates...................................... 6,542 5,022
Goodwill..................................................................... 59,254 -
---------------------------------------------------
Total Assets.................................................................... $ 1,158,501 $ 454,385
===================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Trade payables and accrued liabilities....................................... $ 55,049 $ 41,446
Suspended revenue payable.................................................... 8,208 2,154
Derivative liabilities, current.............................................. 30,965 996
Current maturities of long-term debt, with recourse.......................... 1,945 73
Notes payable................................................................ 443 4,044
---------------------------------------------------
Total Current Liabilities................................................. 96,610 48,713
---------------------------------------------------
Long-Term Liabilities
Long-term debt, with recourse, less current maturities....................... 602,382 284,466
Long-term debt, non recourse................................................. 5,834 -
Production payment liability................................................. 134 203
Derivative liabilities, noncurrent........................................... 7,345 1,531
Deferred income taxes payable................................................ 94,836 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;
71,024,012 and 36,588,097 shares issued, respectively.................. 142 73
Additional paid-in capital................................................... 419,861 157,836
Accumulated other comprehensive income (loss)................................ (22,651) 1,632
Accumulated deficit.......................................................... (24,193) (36,636)
Receivable from stockholder.................................................. (442) (442)
Unearned common stock in ESOP, at cost (837,952 and 468,652 shares,
respectively).......................................................... (5,259) (2,576)
---------------------------------------------------
367,459 119,888
Treasury stock, at cost (2,385,113 and 441,813 shares of common
stock, respectively)................................................... (16,099) (1,914)
---------------------------------------------------
Total Stockholders' Equity................................................... 351,360 117,974
---------------------------------------------------
Total Liabilities and Stockholders' Equity...................................... $ 1,158,501 $ 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 Nine Months Ended
September 30, September 30,
--------------------------------------------------------------------
2002 2001 2002 2001
--------------------------------------------------------------------
Operating Revenues:
Oil and gas sales............................................ $ 66,364 $ 29,814 $ 176,057 $ 106,675
Gas gathering, marketing and processing...................... 5,456 3,775 13,634 15,707
Oil field management services................................ 1,013 273 2,456 1,394
--------------------------------------------------------------------
Total Operating Revenues................................ 72,833 33,862 192,147 123,776
--------------------------------------------------------------------
Operating Costs and Expenses:
Oil and gas production lifting costs......................... 14,031 5,389 38,417 14,995
Production taxes and other costs............................. 8,123 2,729 20,348 9,913
Gas gathering, marketing and processing...................... 4,026 3,083 10,172 14,086
Oil field management services................................ 728 201 1,547 955
Depreciation, depletion and amortization..................... 24,309 12,218 62,947 29,319
Gains on sale of assets...................................... (29) - (29) (4)
General and administrative................................... 2,872 2,040 9,619 5,817
--------------------------------------------------------------------
Total Operating Costs and Expenses...................... 54,060 25,660 143,021 75,081
--------------------------------------------------------------------
Operating Profit............................................... 18,773 8,202 49,126 48,695
Equity in earnings of affiliate.............................. 534 334 916 1,189
Other income................................................. 93 67 258 224
Provision for impairment of investments...................... - - (621) -
Other non-cash hedging adjustments........................... (1,507) (1,091) (5,430) 563
Interest expense............................................. (13,474) (4,340) (34,649) (14,328)
--------------------------------------------------------------------
Income before income tax benefit/(expense)..................... 4,419 3,172 9,600 36,343
Provision for income tax benefit/(expense)
Current................................................. - 1,885 - -
Deferred................................................ (1,673) (3,086) 3,464 (13,765)
--------------------------------------------------------------------
Total provision for income tax benefit/(expense)... (1,673) (1,201) 3,464 (13,765)
--------------------------------------------------------------------
Income before extraordinary loss............................... 2,746 1,971 13,064 22,578
Extraordinary loss from early extinguishment of debt, net
of income tax benefit of $379 in 2002 and $186 in 2001..... - - (621) (304)
--------------------------------------------------------------------
Net Income..................................................... $ 2,746 $ 1,971 $ 12,443 $ 22,274
====================================================================
Comprehensive Income:
Net Income................................................... $ 2,746 $ 1,971 $ 12,443 $ 22,274
Other Comprehensive Income (Loss), net of tax
Cumulative effect on prior years of a change in accounting
principle.................................................. - - - (1,757)
Reclassification adjustment related to derivative contracts.. 2,224 (380) 1,179 3,049
Change in fair value of outstanding hedge positions.......... (7,952) 64 (25,975) (211)
Unamortized cost basis of purchased hedges................... 513 - 513 -
Unrealized loss on investments............................... - (537) (323) (934)
Reclassification adjustment for loss on investments.......... - - 323 -
--------------------------------------------------------------------
Comprehensive Income (Loss).................................... $ (2,469) $ 1,118 $ (11,840) $ 22,421
====================================================================
Income per Common Share - Basic
Income before Extraordinary Loss............................. $ 0.04 $ 0.06 $ 0.22 $ 0.65
Extraordinary Loss........................................... - - (0.01) (0.01)
--------------------------------------------------------------------
Income per Common Share - Basic................................ $ 0.04 $ 0.06 $ 0.21 $ 0.64
====================================================================
Income per Common Share - Diluted
Income Before Extraordinary Loss............................. $ 0.04 $ 0.05 $ 0.22 $ 0.61
Extraordinary Loss........................................... - - (0.01) (0.01)
--------------------------------------------------------------------
Income per Common Share - Diluted.............................. $ 0.04 $ 0.05 $ 0.21 $ 0.60
====================================================================
Common Shares Used in Per Share Calculation
Basic........................................................ 67,679 34,897 59,411 34,790
====================================================================
Diluted...................................................... 68,553 36,806 60,524 37,179
====================================================================
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 NINE MONTHS ENDED September 30, 2002
(Unaudited)
(in thousands)
Preferred Stock Common Stock Treasury Stock
Shares Amount Shares Amount Shares Amount
---------------------------------------------------------------------------
Balance at December 31, 2001....................... 1,080 $ 1 36,588 $ 73 (442) $ (1,914)
Common stock and warrants issued in Prize
Energy Corp. merger, less fees................ 34,063 68
Exercise of employees' common stock options...... 373 1
Deferred tax benefit on exercise of employee
stock options.................................
Exercise of warrants............................. - -
Purchase of warrants.............................
Purchase of treasury stock....................... (1,943) (14,185)
Net income.......................................
Reclassification adjustment related to
derivative contracts...........................
Change in fair value of outstanding
hedging positions..............................
Unamortized cost basis of purchased
hedges.........................................
Unrealized loss on investments...................
Reclassification adjustment for loss on
investments....................................
Loan to ESOP.....................................
---------------------------------------------------------------------------
Balance at September 30, 2002...................... 1,080 $ 1 71,024 $ 142 (2,385) $ (16,099)
===========================================================================
Accumulated
Additional 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) (469) $ (2,576)
Common stock and warrants issued in Prize
Energy Corp. merger, less fees.............. 260,454
Exercise of employees' common stock options.... 1,419
Deferred tax benefit on exercise of employee
stock options............................... 249
Exercise of warrants........................... 1
Purchase of warrants........................... (98)
Purchase of treasury stock.....................
Net income..................................... 12,443
Reclassification adjustment related to
derivative contracts......................... 1,179
Change in fair value of outstanding
hedging positions............................ (25,975)
Unamortized cost basis of purchased
hedges....................................... 513
Unrealized loss on investments................. (323)
Reclassification adjustment for loss on
investments.................................. 323
Loan to ESOP................................... (369) (2,683)
----------------------------------------------------------------------------------
Balance at September 30, 2002.................... $ 419,861 $ (22,651) $ (24,193) $ (442) (838) $ (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)
Nine Months Ended
September 30,
----------------------------------------------
2002 2001
----------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income.................................................................... $ 12,443 $ 22,274
Adjustments to reconcile net income to cash provided by operating activities:
Extraordinary loss....................................................... 621 304
Depreciation, depletion and amortization................................. 62,947 29,319
Amortization of financing fees........................................... 1,431 961
Imputed interest on debt due to merger................................... 108 -
Deferred income taxes.................................................... (3,464) 13,765
Equity in income of unconsolidated affiliate............................. (916) (1,189)
Gain on sale of assets................................................... (29) (4)
Provision for impairment of investments.................................. 621 -
Other non-cash hedging adjustments....................................... 5,430 (563)
Changes in certain assets and liabilities:
Accounts and notes receivable....................................... (9,711) 10,683
Derivative assets................................................... 3,600 208
Refund (payment) of income taxes.................................... 87 (731)
Other current assets................................................ (7,695) (1,384)
Accounts payable and accrued liabilities............................ (26,196) 5,515
-------------------------------------------
Net Cash Provided By Operating Activities..................................... 39,277 79,158
-------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sale of assets.................................................. 56,592 706
Additions to property and equipment........................................... (98,241) (153,259)
Cash paid in Prize merger, net of cash on hand in Prize....................... (41,097) -
Increase in note receivable................................................... (2,450) -
Payments received on note receivable.......................................... - 66
Distribution from unconsolidated affiliate.................................... 161 1,589
Investment in unconsolidated affiliate........................................ (765) (2,000)
-------------------------------------------
Net Cash Used In Investing Activities......................................... (85,800) (152,898)
-------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from the issuance of long-term debt.................................. 610,683 231,980
Fees paid related to financing activities..................................... (11,899) (825)
Payments of principal on long-term debt and production payment................ (534,496) (157,539)
Loan made to stockholder...................................................... (300) (300)
Repayment of note receivable from affiliate................................... 300 360
Loan made to ESOP............................................................. (2,683) (749)
Proceeds from issuance of common stock, net of offering costs................. 1,421 3,248
Purchase of warrants.......................................................... (98) -
Purchase of treasury stock.................................................... (14,185) (1,015)
(Increase)/decrease in restricted cash for payment of notes payable........... (329) 1,820
Cash dividends paid........................................................... - (169)
-------------------------------------------
Net Cash Provided By Financing Activities..................................... 48,414 76,811
-------------------------------------------
NET INCREASE IN CASH AND CASH EQUIVALENTS....................................... 1,891 3,071
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD................................ 2,755 9
-------------------------------------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD...................................... $ 4,646 $ 3,080
===========================================
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash interest paid............................................................ $ 40,222 $ 10,613
===========================================
The accompanying notes are an integral part of these consolidated financial
statements.
4
MAGNUM HUNTER RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2002
(Unaudited)
NOTE 1 - MANAGEMENT'S REPRESENTATION
The consolidated balance sheet of Magnum Hunter Resources, Inc. and
subsidiaries (the "Company") as of September 30, 2002, the consolidated
statements of income and comprehensive income for the three and nine months
ended September 30, 2002 and 2001, the consolidated statement of stockholders'
equity for the nine months ended September 30, 2002, and the consolidated
statements of cash flows for the nine months ended September 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 September 30, 2002, results of operations, changes in
stockholders' equity and cash flows for the three and nine 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 nine month periods ended September 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"), a publicly traded 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 nine months ended September 30,
2002, include three months and seven 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 since Redhead Energy, Inc. is a wholly-owned subsidiary of
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., a wholly-owned subsidiary of Magnum Hunter Resources, Inc.
Effective September 1, 2002, the Company sold approximately 41 billion
cubic feet equivalent of proved producing reserves to a new private limited
partnership in which the Company is the general partner with a 5% initial
ownership interest. The sales proceeds of $49.0 million ($46.6 million to the
Company) were used to reduce bank debt. Also, effective September 1, 2002, the
Company sold approximately 7.1 billion cubic feet equivalent of proved producing
reserves at various auctions for $8.0 million, the proceeds of which were used
to reduce bank debt. Total proceeds from the sale of oil and gas properties
through September 30, 2002, have been $56.6 million, of which $53.9 million is
attributable to properties acquired in the Prize merger. These sales are part of
the Company's plan to sell up to $95 million of non-core oil and gas assets
during fiscal 2002, with proceeds used to reduce overall indebtedness as the
Company seeks to improve its debt-to-equity ratio and streamline its operations.
Additional non-core properties are expected to be sold in the fourth quarter of
2002 and the first quarter of 2003.
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
5
MAGNUM HUNTER RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
September 30, 2002
(Unaudited)
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, a publicly traded
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 the 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 price allocation, which will be made on or before March 31,
2003, 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 (000's) as of September 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............................................ (145,929)
-------------------
Excess purchase price..................................................... 185,513
Adjustment of proved oil and gas properties to fair value................. (58,223)
Adjustment of unproved oil and gas properties to fair value............... (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.......................... $ 63,210
===================
During the third quarter of 2002, the Company divested of a number of
properties that were acquired in the Prize merger. Total proceeds received on
the Prize divestitures were approximately $53.9 million. In accordance with SFAS
142, the Company attached $4.0 million of goodwill to the divested properties.
Proceeds (net of goodwill) of approximately
6
MAGNUM HUNTER RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
September 30, 2002
(Unaudited)
$49.9 million were applied against the full cost pool. The remaining
goodwill balance at September 30, 2002 was $59.3 million. Also in accordance
with SFAS 142, the Company performed a goodwill impairment test at September 30,
2002. Test results showed no impairment of goodwill.
The following summary, prepared on a pro forma basis, presents the results
of operations for the three and nine month periods ended September 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.
Pro Forma Results of Operations
(Unaudited)
(in thousands of dollars, except for per share amounts)
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------------------------------------------------------------
2002 2001 2002 2001
-------------------------------------------------------------------------
Total Operating Revenues...................... $ 72,833 $ 68,548 $ 219,151 $ 269,488
Total Operating Costs and Expenses............ (54,060) (51,313) (165,296) (176,170)
-------------------------------------------------------------------------
Operating Profit.............................. 18,773 17,235 53,855 93,318
Interest expense and other.................... (14,354) (13,719) (44,790) (30,345)
-------------------------------------------------------------------------
Income before income tax...................... 4,419 3,516 9,065 62,973
Benefit (Provision) for income tax............ (1,673) (1,331) 3,782 (23,851)
Extraordinary loss from early
extinguishment of debt................... - - (621) (304)
-------------------------------------------------------------------------
Net Income $ 2,746 $ 2,185 $ 12,226 $ 38,818
=========================================================================
Net Income Per Common Share
Basic.................................... $ 0.04 $ 0.03 $ 0.18 $ 0.56
=========================================================================
Diluted.................................. $ 0.04 $ 0.03 $ 0.18 $ 0.54
=========================================================================
7
MAGNUM HUNTER RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
September 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
----------------------------------------------------------------------------------
September 30, 2002 September 30, 2001
----------------------------------------------------------------------------------
Per Share Per Share
Income Shares Amount Income Shares Amount
- -----------------------------------------------------------------------------------------------------------------------------------
(Thousands, except per share amounts)
Basic EPS
Income available to common
stockholders............................ $ 2,746 67,679 $ 0.04 $ 1,971 34,897 $ 0.06
========= =========
Effect of Dilutive Securities
Warrants..................................... -0- -0- 156
Options...................................... 874 -0- 1,753
--------------------- -----------------------
Diluted EPS
Income available to common stockholders
and assumed conversions................. $ 2,746 68,553 $ 0.04 $ 1,971 36,806 $ 0.05
=================================================================================
Nine Months Ended
-------------------------------------------------------------------------------------
September 30, 2002 September 30, 2001
- ----------------------------------------------------------------------------------------------------------------------------------
(Thousands, except per share amounts)
Per Share Per Share
Income Shares Amount Income Shares Amount
-------------------------------------------------------------------------------------
Income before extraordinary loss........ $ 13,064 $ 0.22 $ 22,578 $ 0.65
Less: Extraordinary loss................ (621) (0.01) (304) (0.01)
------------ --------------------------- ---------
Basic EPS
Income available to common
stockholders....................... $ 12,443 59,411 $ 0.21 $ 22,274 34,790 $ 0.64
========== ========
Effect of Dilutive Securities
Warrants................................ -0- 46 -0- 222
Options................................. -0- 1,067 -0- 2,167
---------------------- -----------------
Diluted EPS
Income available to common stockholders
and assumed conversions............ $ 12,443 60,524 $ 0.21 $ 22,274 37,179 $ 0.60
Add Back: Extraordinary loss............ 621 0.01 304 0.01
-------------------------------------------------------------------------------------
Income before Extraordinary loss........ $ 13,064 60,524 $ 0.22 $ 22,578 37,179 $ 0.61
=====================================================================================
At September 30, 2002, warrants representing 12,091,294 shares of common
stock and options representing 6,791,534 shares of common stock were
outstanding. The total outstanding warrants includes the remainder of the
conversion of Prize warrants in connection with the merger into Magnum Hunter 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. During the three months ended September 30, 2002, the Company issued
1,836,250 stock options to its employees and directors at a weighted average
exercise price of $5.37 per share. At September 30, 2001, warrants representing
644,749 shares of common
8
MAGNUM HUNTER RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
September 30, 2002
(Unaudited)
stock and options representing 4,086,500 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 nine month periods ended
September 30, 2002, 12,091,394 shares and 11,661,563 shares of stock
representing warrants, respectively, and 3,289,600 shares and 3,286,767 shares
of stock representing options, respectively, were excluded from the diluted
earnings per share calculations because the exercise price exceeded the average
market price of the Company's stock for these periods. For the three and nine
month periods ended September 30, 2001, no shares of stock representing warrants
and 45,000 shares and 31,667 shares of stock representing options, respectively,
were excluded from the diluted earnings per share calculations because the
exercise price exceeded the average market price of the Company's stock for
these periods.
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 raised
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. In
connection with the divestiture of certain oil and gas properties described
below, the borrowing base was reduced to $250 million on September 3, 2002.
The amended Facility was treated as a new credit facility 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 September 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 had been earlier 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 LIBOR, currently yielding a cost of approximately 5.2%
per annum. For financial statement reporting purposes, this transaction was
accounted for as a capital lease and has been 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.
9
MAGNUM HUNTER RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
September 30, 2002
(Unaudited)
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 September 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. On September 12, 2002, the terms of the credit agreement were amended
to allow for additional advances of approximately $1.2 million. Canvasback may
use the additional availability of funds to purchase incremental 10% Senior
Notes of the Company or to make an advance or to pay a dividend to an affiliate.
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
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 twelve crude oil derivatives, sixteen natural
gas derivatives, and two interest rate derivatives on September 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. Hedge
ineffectiveness on the cash-flow hedges is recorded in earnings.
At September 30, 2002, the fair value of the Company's derivatives were as
follows (in thousands):
Derivative Assets
- -----------------------
Natural gas collars......................... $ 267
---------------------
Total derivative assets..................... $ 267
---------------------
Derivative Liabilities
- -----------------------
Natural gas collars......................... $ 13,390
Natural gas swaps........................... 16,831
Crude oil collars........................... 2,608
Crude oil swaps............................. 4,141
Interest rate swaps......................... 1,340
---------------------
Total derivative liabilities................ $ 38,310
---------------------
Net derivative liabilities.................. $ 38,043
---------------------
For the three and nine month periods ended September 30, 2002, the income
statement includes a non-cash hedging ineffectiveness loss of $245 thousand and
$622 thousand, respectively, related to the crude oil and natural gas
derivatives and a non-cash loss of $1.3 million and $4.8 million, respectively,
related to the amortization of hedge contracts acquired in the Prize merger. The
remaining amortization amounts relating to hedge contracts acquired in the Prize
merger that will be reclassified into the income statement in years 2002, 2003,
and 2004 are a $1.3 million loss, $1.3 million gain and $0.8 million gain,
respectively. It is estimated at this time that $18.7 million of other
comprehensive loss will be reclassified into the income statement during the
next 12 months.
10
MAGNUM HUNTER RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
September 30, 2002
(Unaudited)
NOTE 6 - INCOME TAXES
The Company realized a tax benefit of $3.5 million for the nine month
period ended September 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 September 30, 2002, the Company had a deferred tax asset of $12.5
million and a deferred tax liability of $94.8 million, for a net deferred tax
liability of $82.3 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 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. Subsequent to
September 30, 2002, the Company received a refund from the Internal Revenue
Service of approximately $3.1 million relating to this asset. Additional refunds
are anticipated upon filing of Prize's tax return for fiscal 2002.
NOTE 7 - SEGMENT DATA
The Company has three reportable segments. The Exploration and Production
segment is engaged in exploratory and developmental 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.
11
MAGNUM HUNTER RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
September 30, 2002
(Unaudited)
Segment data for the periods ended September 30, 2002 and 2001 follows (in
thousands):
Gas Gathering,
Exploration & Marketing & Oil Field
Three Months Ended September 30, 2002: Production Processing Services All Other Elimination Consolidated
- -----------------------------------------------------------------------------------------------------------------------------------
Revenue from external customers........... $ 66,364 $ 5,456 $ 1,013 $ - $ 72,833
Intersegment revenues..................... 3,480 4,199 - (7,679)
Depreciation, depletion and amortization.. 23,360 576 133 240 24,309
Segment profit (loss)..................... 20,848 928 1,447 (4,450) 18,773
Equity in earnings of affiliates.......... 534 534
Interest expense.......................... (13,474) (13,474)
Other income (expense).................... (1,414) (1,414)
-----------------
Income before income taxes................ $ 4,419
Provision for income tax (expense)........ (1,674) (1,673)
-----------------
Net income................................ $ 2,746
=================
Capital expenditures (net of asset sales). $ (9,383) $ 47 $ 125 $ 329 $ (8,882)
Gas Gathering,
Exploration & Marketing & Oil Field
Three Months Ended September 30, 2001: Production Processing Services All Other Elimination Consolidated
- -----------------------------------------------------------------------------------------------------------------------------------
Revenue from external customers........... $ 29,814 $ 3,775 $ 273 $ - $ 33,862
Intersegment revenues..................... 3,373 1,598 - (4,971) -
Depreciation, depletion and amortization.. 11,891 222 100 5 12,218
Segment profit (loss)..................... 9,806 480 (1,201) (883) 8,202
Equity in earnings of affiliates.......... 334 334
Interest expense.......................... (4,340) (4,340)
Other income.............................. (1,024) (1,024)
----------------
Income before income taxes................ $ 3,172
Provision for income tax expense.......... (1,201) (1,201)
Extraordinary loss........................ -
----------------
Net income................................ $ 1,971
-===============
Capital expenditures (net of asset sales). $ 67,878 $ 48 $ 103 $ - $ 68,029
12
MAGNUM HUNTER RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
September 30, 2002
(Unaudited)
Gas Gathering,
Exploration & Marketing & Oil Field
Nine Months Ended September 30, 2002: Production Processing Services All Other Elimination Consolidated
- -----------------------------------------------------------------------------------------------------------------------------------
Revenue from external customers............... $ 176,057 $ 13,634 $ 2,456 $ - $ 192,147
Intersegment revenues......................... 9,440 10,594 - (20,034) -
Depreciation, depletion and amortization...... 60,420 1,490 371 666 62,947
Segment profit (loss)......................... 56,871 1,986 539 (10,270) 49,126
Equity in earnings of affiliates.............. 916 916
Interest expense.............................. (34,649) (34,649)
Other income (expense)........................ (5,793) (5,793)
-------------
Income before income taxes.................... $ 9,600
Provision for income tax benefit.............. 3,464 3,464
Extraordinary loss............................ (621) (621)
-------------
Net income.................................... $ 12,443
=============
Capital expenditures (net of asset sales)..... $ 623,957 $ 21,219 $ 777 $ 2,024 $ 647,977
Gas Gathering,
Exploration & Marketing & Oil Field
Nine Months Ended September 30, 2001: Production Processing Services All Other Elimination Consolidated
- -----------------------------------------------------------------------------------------------------------------------------------
Revenue from external customers............ $ 106,675 $ 15,707 $ 1,394 $ - $ 123,776
Intersegment revenues...................... 16,191 4,570 - (20,761) -
Depreciation, depletion and amortization... 28,350 662 293 14 29,319
Segment profit (loss)...................... 53,421 964 (2,689) (3,001) 48,695
Equity in earnings of affiliates........... 1,189 1,189
Interest expense........................... (14,328) (14,328)
Other income............................... 787 787
---------------
Income before income taxes................. $ 36,343
Provision for income tax (expense)......... (13,765) (13,765)
Extraordinary loss......................... (304) (304)
---------------
Net income................................. $ 22,274
===============
Capital expenditures (net of asset sales).. $ 151,367 $ 61 $ 274 $ 855 $ 152,557
Gas Gathering,
Exploration & Marketing & Oil Field
As of September 30, 2002 Production Processing Services All Other Elimination Consolidated
- -----------------------------------------------------------------------------------------------------------------------------------
Segment assets.................... $ 1,081,191 $ 37,023 $ 17,401 $ 22,886 $ 1,158,501
Equity subsidiary investments..... $ 6,542 $ 6,542
As of September 30, 2001
- ----------------------------------
Segment assets.................... $ 372,213 $ 16,749 $ 31,961 $ 7,150 $ 428,073
Equity subsidiary investments..... $ 9,654 $ 9,654
13
MAGNUM HUNTER RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
September 30, 2002
(Unaudited)
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 September 30, 2002 and December
31, 2001, and for the three and nine month periods ended September 30, 2002 and
2001, was as follows:
Magnum Hunter Resources, Inc. and Subsidiaries
Condensed Consolidating Balance Sheets
September 30, 2002
- --------------------------------------------------------------------------------------------------------------------------------
Magnum Hunter Canvasback Magnum Hunter
Resources, Inc. Energy, Inc. Resources, Inc.
Amounts in Thousands and Guarantor Subs (Non Guarantor) Eliminations Consolidated
- --------------------------------------------------------------------------------------------------------------------------------
ASSETS
Current assets....................... $ 76,736 $ 4,440 $ (6,842) $ 74,334
Property and equipment
(using full cost accounting)...... 998,081 6,787 - 1,004,868
Investment in subsidiaries
(equity method) 15,735 - (15,735) -
Investment in Parent................. - 28,470 (28,470) -
Other assets......................... 78,499 800 - 79,299
=====================================================================================
Total assets...................... $ 1,169,051 $ 40,497 $ (51,047) $ 1,158,501
=====================================================================================
LIABILITIES AND STOCKHOLDERS'
EQUITY
Current liabilities......................... $ 96,543 $ 6,909 $ (6,842) $ 96,610
Long-term liabilities....................... 703,212 17,853 (10,534) 710,531
Stockholders' equity........................ 369,296 15,735 (33,671) 351,360
=====================================================================================
Total liabilities and stockholders' equity $ 1,169,051 $ 40,497 $ (51,047) $ 1,158,501
=====================================================================================
14
MAGNUM HUNTER RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
September 30, 2002
(Unaudited)
December 31, 2001
- ------------------------------------------------------------------------------------------------------------------------------------
Magnum Hunter Bluebird Magnum Hunter
Resources, Inc. Energy, Inc. Resources, Inc.
Amounts in Thousands and Guarantor Subs (Non Guarantor) Eliminations Consolidated
- ---------------------------------------------------------------------------------------------------------------------------------
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
Stockholders' equity............................ 129,024 14,963 (26,013) 117,974
---------------------------------------------------------------------------------
Total liabilities and stockholders' 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 September 30, 2002
- ----------------------------------------------------------------------------------------------------------------------------
Magnum Hunter Canvasback Magnum Hunter
Resources, Inc. Energy, Inc. Resources, Inc.
Amounts in Thousands and Guarantor Subs (Non Guarantor) Eliminations Consolidated
- ----------------------------------------------------------------------------------------------------------------------------
Revenues.................................... $ 72,138 $ 695 $ - $ 72,833
Expenses.................................... 68,199 215 - 68,414
--------------------------------------------------------------------------------
Income before 3,939 480 - 4,419
Equity in net earnings of subsidiary..... 298 - (298) -
--------------------------------------------------------------------------------
Income before income taxes.................. 4,237 480 (298) 4,419
Income tax provision (1,491) (182) - (1,673)
--------------------------------------------------------------------------------
Net income............................... $ 2,746 $ 298 $ (298) $ 2,746
-===============================================================================
For the Three Months Ended September 30, 2001
- ----------------------------------------------------------------------------------------------------------------------
Magnum Hunter Bluebird Magnum Hunter
Resources, Inc. Energy, Inc. Resources, Inc.
Amounts in Thousands and Guarantor Subs (Non Guarantor) Eliminations Consolidated
- ----------------------------------------------------------------------------------------------------------------------
Revenues..................................... $ 33,298 $ 570 $ (6) $ 33,862
Expenses..................................... 30,250 446 (6) 30,690
-------------------------------------------------------------------------
Income before 3,048 124 - 3,172
Equity in net earnings of subsidiary...... 77 - (77) -
-------------------------------------------------------------------------
Income before income taxes................... 3,125 124 (77) 3,172
Income tax provision......................... (1,154) (47) - (1,201)
-------------------------------------------------------------------------
Net income................................ $ 1,971 $ 77 $ (77) $ 1,971
=========================================================================
15
MAGNUM HUNTER RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
September 30, 2002
(Unaudited)
For the Nine Months Ended September 30, 2002
- ------------------------------------------------------------------------------------------------------------------------------
Magnum Hunter Canvasback Magnum Hunter
Resources, Inc. Energy, Inc. Resources, Inc.
Amounts in Thousands and Guarantor Subs (Non Guarantor) Eliminations Consolidated
- ------------------------------------------------------------------------------------------------------------------------------
Revenues...................................... $ 190,783 $ 1,364 $ - $ 192,147
Expenses...................................... 182,070 477 - 182,547
--------------------------------------------------------------------------------
Income before 8,713 887 - 9,600
Equity in net earnings of subsidiary....... 551 - (551) -
--------------------------------------------------------------------------------
Income before income taxes.................... 9,264 887 (551) 9,600
Income tax benefit (expense) provision........ 3,800 (336) - 3,464
--------------------------------------------------------------------------------
Income before extraordinary loss.............. 13,064 551 (551) 13,064
Extraordinary loss............................ (621) - - (621)
--------------------------------------------------------------------------------
Net income................................. $ 12,443 $ 551 $ (551) $ 12,443
================================================================================
For the Nine Months Ended September 30, 2001
- --------------------------------------------------------------------------------------------------------------------
Magnum Hunter Bluebird Magnum Hunter
Resources, Inc. Energy, Inc. Resources, Inc.
Amounts in Thousands and Guarantor Subs (Non Guarantor) Eliminations Consolidated
- --------------------------------------------------------------------------------------------------------------------
Revenues................................. $ 99,823 $ 24,160 $ (207) $ 123,776
Expenses................................. 76,373 11,267 (207) 87,433
---------------------------------------------------------------------------
Income before 23,450 12,893 - 36,343
Equity in net earnings of subsidiary.. 8,010 - (8,010) -
---------------------------------------------------------------------------
Income before income taxes............... 31,460 12,893 (8,010) 36,343
Income tax provision..................... (8,882) (4,883) - (13,765)
---------------------------------------------------------------------------
Income before extraordinary loss......... 22,578 8,010 (8,010) 22,578
Extraordinary loss....................... (304) - - (304)
---------------------------------------------------------------------------
Net income............................ $ 22,274 $ 8,010 $ (8,010) $ 22,274
===========================================================================
Magnum Hunter Resources, Inc. and Subsidiaries
Condensed Consolidating Statements of Cash Flows
For the Nine Months Ended September 30, 2002
- ------------------------------------------------------------------------------------------------------------------------------
Magnum Hunter Canvasback Magnum Hunter
Resources, Inc. Energy, Inc. Resources, Inc.
Amounts in Thousands and Guarantor Subs (Non Guarantor) Eliminations Consolidated
- ------------------------------------------------------------------------------------------------------------------------------
Cash flow from operating activities....... $ 30,053 $ 9,224 $ - $ 39,277
Cash flow from investing activities....... (82,633) (3,167) - (85,800)
Cash flow from financing activities....... 55,569 (6,826) (329) 48,414
------------------------------------------------------------------------------------
Net increase (decrease) in cash........... 2,989 (769) (329) 1,891
Cash at beginning of period............... 730 2,025 - 2,755
------------------------------------------------------------------------------------
Cash at end of period..................... $ 3,719 $ 1,256 $ (329) $ 4,646
====================================================================================
16
MAGNUM HUNTER RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
September 30, 2002
(Unaudited)
For the Nine Months Ended September 30, 2001
- ---------------------------------------------------------------------------------------------------------------------------------
Magnum Hunter Bluebird Magnum Hunter
Resources, Inc. Energy, Inc. Resources, Inc.
Amounts in Thousands and Guarantor Subs (Non Guarantor) Eliminations Consolidated
- ---------------------------------------------------------------------------------------------------------------------------------
Cash flow from operating activities.... $ 65,397 $ 13,761 $ - $ 79,158
Cash flow from investing activities.... (175,127) 40,807 (18,578) (152,898)
Cash flow from financial activities.... 112,942 (54,709) 18,578 76,811
------------------------------------------------------------------------------------------
Net increase (decrease) in cash........ 3,212 (141) - 3,071
Cash at beginning of period............ (1,811) 1,820 - 9
------------------------------------------------------------------------------------------
Cash at end of period.................. $ 1,401 $ 1,679 $ - $ 3,080
==========================================================================================
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 recorded goodwill of $63.2
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. 143 - SFAS No. 143, "Accounting for Asset Retirement Obligations",
will be effective for the Company beginning January 1, 2003. SFAS No. 143
requires the recognition of a fair value liability for any retirement obligation
associated with long-lived assets. The offset to any liability recorded is added
to the recorded asset where the additional amount is depreciated over the same
period as the long-lived asset for which the retirement obligation is
established. SFAS No. 143 also requires additional disclosures. We are in the
process of evaluating the impact of the provisions of SFAS No. 143 to our
existing operations.
SFAS No. 144 - SFAS No. 144, "Accounting for the Impairment or Disposal of
Long-Lived Assets", became effective for the Company beginning January 1, 2002.
SFAS No. 144 establishes a single accounting model, based on the framework
established in SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to Be Disposed Of", for long-lived assets to be
disposed of by sale and resolves significant implementation issues related to
SFAS No. 121.
SFAS No. 145 - SFAS No. 145 "Recission 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.
17
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 fiscal 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 our critical accounting policies for the
three and nine month periods ended September 30, 2002, except for accounting for
goodwill. SFAS No. 142, "Goodwill and Other Intangible Assets", became effective
for the Company beginning 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 $63.2
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"), a publicly traded 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 nine month
periods ended September 30, 2002, include three months and seven 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, exploitation, and
development activities. Fluctuations in oil and gas prices have also had a
significant impact on our 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 Nine Months Ended
September 30, September 30,
------------------------------------------------------------------
Oil and Gas Operations 2002 2001 2002 2001
- ---------------------------------------------------------------------------------------------------------------------------
Reported Production:
Oil (Mbbls)........................................... 1,100 392 2,902 1,019
Gas (MMcf)............................................ 13,164 6,821 35,663 18,106
Oil and Gas (Mmcfe)................................... 19,764 9,174 53,076 24,221
Equivalent Daily Rate (Mmcfe/day)..................... 214.8 99.7 194.4 88.7
Average Sale Prices (after hedging)
Oil (per Bbl)......................................... $ 25.14 $ 25.07 $ 23.90 $ 25.79
Gas (per Mcf)......................................... 2.94 2.93 2.99 4.44
Oil and Gas (per Mcfe)................................ 3.36 3.25 3.32 4.40
Effect of hedging activities (per Mcfe).................. (0.10) 0.18 0.07 0.03
Lease Operating Expense (per Mcfe)
Lifting costs......................................... $ 0.71 $ 0.59 $ 0.73 $ 0.62
Production tax and other costs........................ 0.41 0.30 0.38 0.41
Gross margin (per Mcfe).................................. $ 2.24 $ 2.36 $ 2.21 $ 3.37
18
Three Months Ended Nine Months Ended
September 30, September 30,
---------------------------------------------------------------
Gas Gathering, Marketing and Processing Operations 2002 2001 2002 2001
- ------------------------------------------------------------------------------------------------------------------------
Throughput Volumes (Mcf per day)
Gathering............................................. 15,673 15,525 15,381 16,111
Processing............................................ 25,926 14,311 21,852 13,637
Gross margin (in thousands).............................. $ 1,430 $ 692 $ 3,462 $ 1,621
Gathering (per Mcf throughput)........................ $ 0.17 $ 0.19 $ 0.14 $ 0.08
Processing (per Mcf throughput)....................... $ 0.49 $ 0.32 $ 0.44 $ 0.34
Period-to-Period Comparison
For the Three Months Ended September 30, 2002 and 2001
We reported net income of $2.7 million for the three months ended September
30, 2002, as compared to net income of $2.0 million for the same period in 2001.
Total operating revenues increased 115% to $72.8 million and operating profit
increased 129% to $18.8 million in 2002, due primarily to the Prize merger. Both
basic and diluted earnings per share were $0.04 in the 2002 quarter versus basic
and diluted earnings per share of $0.06 and $0.05, respectively, in the 2001
quarter.
Oil and Gas Operations:
For the three months ended September 30, 2002, we reported oil production
of 1.1 million barrels and gas production of 13.2 billion cubic feet, which
represents an increase of 181% in oil produced and an increase of 93% 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 115%
to 214.8 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 $17.8 million, or 181%, in the third quarter of 2002
compared to the same period in 2001, due to production gains of 707 Mbbls. Oil
prices were essentially flat at $25.14 in 2002, compared to $25.07 for the same
period in 2001. Gas revenues increased $18.7 million, or 94%, in the third
quarter of 2002 versus the same period in 2001 due to production gains of 6.3
Bcf. Gas prices were essentially flat at $2.94 in 2002 compared to $2.93 for the
same period in 2001.
From time to time, the Company enters 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 $1.83 per barrel and had no effect on the average price we
received for gas. During the third quarter of 2002, the Company had
approximately 60.0 Mmcf/d hedged through fixed price swaps with a weighted
average price of $2.87 per MMbtu and approximately 8.0 Mmcf/d hedged through
cost-less collars with a weighted average floor price of $3.99 per MMbtu and a
weighted average ceiling price of $5.45 per MMbtu. Approximately 48% of third
quarter 2002 natural gas production was hedged. On the crude side, the Company
had approximately 5,000 Bbls/d hedged through fixed price swaps with a weighted
average price of $25.27 per barrel and approximately 3,800 Bbls/d hedged through
cost-less collars with a weighted average floor price of $21.00 per barrel and a
weighted average ceiling price of $26.70 per barrel. Approximately 74% of third
quarter 2002 crude oil production was hedged. For the fourth quarter of 2002,
the Company has 60.0 MMcf/d hedged through fixed price swaps with a weighted
average price of $2.87 per MMbtu and approximately 8.0 MMcf/d hedged through
cost-less collars with a weighted average floor price of $4.07 per MMbtu and a
weighted average ceiling price of $5.52 per MMbtu. In addition, the Company has
hedged 5,000 Bbls/d of fourth quarter 2002 crude production through fixed price
swaps with a weighted average price of $25.27 per barrel and 4,500 Bbls/d hedged
through cost-less collars with a weighted average floor price of $21.27 per
barrel and a weighted average ceiling price of $26.79 per barrel.
Lease operating expenses consist of two primary components, lifting costs
and production tax and other costs. For the 2002 period, lifting costs were
$14.0 million versus $5.4 million in the 2001 period, an increase of 160%.
Production taxes and other costs were $8.1 million in the 2002 period versus
$2.7 million in the 2001 period, an increase of 198%. Both increases were
primarily attributable to the Prize merger. For the 2002 period, lifting costs,
on a unit of production basis,
19
were $0.71 per Mcfe as compared to $0.59 per Mcfe in the 2001 period, an
increase of 20% due to an increase in workover and remedial expense as well as
higher recurring costs associated with oil production acquired with the Prize
properties. Production tax and other costs were $0.41 per Mcfe in the 2002
period compared to $0.30 per Mcfe in the 2001period, an increase of 37%. The
increase is primarily due to higher production taxes associated with the Prize
properties which have a higher production mix of onshore properties.
Our gross margin for oil and gas operations (oil and gas revenues less
lease operating expenses) for the 2002 period was $44.2 million, or $2.24 per
Mcfe, compared to $21.7 million, or $2.36 per Mcfe in the 2001 period, a
decrease of 5% on a per unit of production basis, primarily a result of a 26%
increase in lease operating expense per Mcfe, partially offset by a 3% increase
in the product price received per Mcfe.
Gathering, Marketing and Processing Operations:
For the three months ended September 30, 2002, our gas gathering system
throughput was 15.7 MMcf/day versus 15.5 MMcf/day for the same period in 2001,
an increase of 1%. Gas processing throughput was 25.9 MMcf/day in 2002 versus
14.3 MMcf/day in 2001, an increase of 81%. This increase is primarily due to the
acquisition of a 100% owned interest in the Elmore City processing plant as a
result of the Prize merger.
Revenues from gas gathering, marketing and processing increased 45% to $5.5
million in 2002 versus $3.8 million in 2001. Operating costs for the gas
gathering, marketing and processing segment increased 31% to $4.0 million in
2002 from $3.1 million in 2001. Both the revenues and operating cost increases
were a product of increased gas processing throughput.
The gross margin realized from gas gathering, marketing and processing for
2002 was $1.4 million versus $692 thousand in 2001, an increase of 107%. The gas
gathering margin was $0.17 per Mcf gathered in 2002 versus $0.19 per Mcf in
2001. The gas processing margin was $0.49 per Mcf in 2002 compared to $0.32 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 271% to $1.0 million
in the third quarter of 2002 versus $273 thousand in the third quarter of 2001.
This increase is primarily due to the Prize merger. Operating costs increased to
$728 thousand in 2002 from $201 thousand in 2001, also due to the Prize merger.
The gross margin for this segment in 2002 was $285 thousand versus $72 thousand
in 2001, an increase of 296%, due to overhead costs charged.
Other Income and Expenses:
Depreciation and depletion expense was $24.3 million in the 2002 period
versus $12.2 million in the 2001 period, a result of increased production due to
the Prize merger. Depreciation and depletion of oil and gas properties was $1.18
per Mcfe produced in 2002 versus $1.30 per Mcfe produced in 2001. This 9%
decrease in the equivalent unit cost was due primarily to longer reserve life
associated with the Prize properties acquired when compared to the higher costs
in the 2001 period from the shorter life Gulf of Mexico activities.
General and administrative expense for 2002 increased 41% to $2.9 million
from $2.0 million in 2001. The primary cause for 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 recorded
equity in earnings of affiliate of $534 thousand in 2002 versus earnings of $334
thousand in 2001. This increase was due to net earnings from gas marketing
operations of the Company's 30% owned gas marketing affiliate. Other income was
$93 thousand for 2002 versus $67 thousand in 2001, caused by an increase in
interest income. The Company recognized a $1.5 million loss in other non-cash
hedging adjustments in 2002 versus a $1.1 million loss in 2001. In the 2002
period, $1.3 million of the hedging loss relates to the amortization of
commodity hedge assets acquired in the Prize merger, while $0.2 million was due
to recording hedge ineffectiveness.
20
Interest expense was $13.5 million for 2002 versus $4.3 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
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 $1.7 million on income before tax of $4.4
million in 2002 versus income tax expense of $1.2 million on income before tax
of $3.2 million in 2001, resulting in a 38% effective rate in both periods. The
2001 period provision included a $1.9 million current provision due to
alternative minimum tax regulations.
For the Nine Months Ended September 30, 2002 and 2001
We reported net income of $12.4 million for the nine months ended September
30, 2002, compared to net income of $22.3 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 $3.5 million being recognized in the 2002
period. Total operating revenues increased 55% to $192.1 million in 2002 on
higher volumes of oil and gas produced as a result of the Prize merger.
Operating profit was $49.1 million in 2002, versus $48.7 for the same period in
2001. Both basic and diluted earning per share were $0.21 in the 2002 period
versus $0.64 and $0.60, respectively, in the 2001 period.
Oil and Gas Operations
For the nine months ended September 30, 2002, we reported oil production of
2.9 million barrels and gas production of 35.7 billion cubic feet, which
represents an increase of 185% in oil produced and an increase of 97% 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 119%
to 194.4 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 $43.1 million or 164% for the nine months ended
September 30, 2002 compared to the same period in 2001. Production gains of 1.9
million barrels increased oil revenues by $45.0 million, while a price decline
of 7% decreased oil revenues by $1.9 million. Gas revenues increased $26.3
million in the nine month period in 2002, compared to the same period in 2001. A
gas price decrease of $1.45 per Mcf, or a 33% decline, decreased gas revenue by
$26.2 million in the 2002 period compared to the same period in 2001. The price
decreases were offset by an increase of $52.5 million in gas revenues as a
result of a 17.6 billion cubic feet increase in gas production for the 2002
period.
From time to time the Company enters into various 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 $0.83 per barrel and increased the average price we received for gas by $0.17
per Mcf. During the 2002 period, the Company had approximately 65.0 Mmcf/d
hedged through fixed price swaps with a weighted average price of $2.88 per
MMbtu and approximately 21.4 Mmcf/d hedged through cost-less collars with a
weighted average floor price of $3.82 per MMbtu and a weighted average ceiling
price of $4.67 per MMbtu. Approximately 66% of the 2002 period natural gas
production was hedged. On the crude side, the Company had approximately 3,800
Bbls/d hedged through fixed price swaps with a weighted average price of $25.37
per barrel and approximately 2,750 Bbls/d hedged through cost-less collars with
a weighted average floor price of $20.93 per barrel and a weighted average
ceiling price of $26.79 per barrel. Approximately 62% of the 2002 period crude
oil production was hedged. For the fourth quarter of 2002, the Company has 60.0
MMcf/d hedged through fixed price swaps with a weighted average price of $2.87
per MMbtu and approximately 8.0 MMcf/d hedged through cost-less collars with a
weighted average floor price of $4.07 per MMbtu and a weighted average ceiling
price of $5.52 per MMbtu. In addition, the Company has hedged 5,000 Bbls/d of
fourth quarter 2002 crude production through fixed price swaps with a weighted
average price of $25.27 per barrel and 4,500 Bbls/d hedged through cost-less
collars with a weighted average floor price of $21.27 per barrel and a weighted
average ceiling price of $26.79 per barrel.
Lease operating expenses consist of two primary components, lifting costs
and production tax and other costs. For the 2002 period, lifting costs were
$38.4 million versus $15.0 million in the 2001 period, an increase of 156%.
Production
21
taxes and other costs were $20.3 million in the 2002 period versus $9.9
million in the 2001 period, an increase of 105%. 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 $0.62 per Mcfe in the
2001 period, an increase of 18% due to an increase in workover and remedial
expense as well as higher recurring costs associated with oil production
acquired with the Prize properties. Production tax and other costs were $0.38
per Mcfe in the 2002 period compared to $0.41 per Mcfe in the 2001 period, a
decrease of 7% 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 $117.3 million, or $2.21 per
Mcfe, compared to $81.8 million, or $3.37 per Mcfe in the 2001 period, a
decrease of 34% on a per unit of production basis, primarily a result of a 25%
decline in the product price received per Mcfe and a 8% increase in lease
operating expense per Mcfe.
Gathering, Marketing and Processing Operations:
For the nine months ended September 30, 2002, our gas gathering system
throughput was 15.4 MMcfe/day compared to 16.1 MMcfe/day for the same period in
2001, a decline of 5% due to normal well production declines behind the system.
Gas processing throughput was 21.9 MMcf/day in 2002 versus 13.6 MMcf/day in
2001, an increase of 60%. This increase is primarily due to the acquisition of a
100% owned interest in the Elmore City processing plant as a result of the Prize
merger.
Revenues from gas gathering, marketing and processing decreased 13% to
$13.6 million in 2002 versus $15.7million 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 28% to $10.2 million in 2002 from $14.1 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 $3.5 million versus $1.6 million in 2001, an increase of 114%. The gas
gathering margin was $0.14 per Mcf gathered in 2002 versus $0.08 per Mcf
gathered 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 $0.34 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 76% to $2.5 million
for the 2002 period versus $1.4 million in the 2001 period. This increase is
primarily due to the Prize merger. Operating costs increased to $1.5 million in
2002 from $955 thousand in 2001, also due to the Prize merger. The gross margin
for this segment in 2002 was $909 thousand versus $439 thousand in 2001, an
increase of 107%, due to overhead costs charged.
Other Income and Expenses:
Depreciation and depletion expense was $62.9 million in the 2002 period
versus $29.3 million in the 2001 period, a result of increased production due to
the Prize merger. Depreciation and depletion of oil and gas properties was $1.19
per Mcfe produced in 2002 versus $1.21 per Mcfe produced in 2001. This 2%
decrease in the equivalent unit cost was due primarily to the lower depletion
rate as the result of the inclusion of the properties acquired in the Prize
merger.
General and administrative expense for 2002 increased 65% to $9.6 million
from $5.8 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 $916 thousand in 2002 versus earnings of $1.2 million
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
$258 thousand for 2002 versus $224 thousand in 2001, caused by an increase in
interest income. We recognized a permanent impairment loss of $621 thousand on
an investment
22
held for resale in 2002 versus none in 2001. The Company recognized a $5.4
million loss in other non-cash hedging adjustments in 2002 versus a $0.6 million
gain in 2001. In the 2002 period, $4.8 million of the loss relates to the
amortization of commodity hedge assets acquired in the Prize merger, while $0.6
million was the result of hedge ineffectiveness.
Interest expense was $34.6 million for 2002 versus $14.3 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
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 $3.5 million on income before tax of
$9.6 million in 2002 versus income tax expense of $13.8 million on income before
tax of $36.3 million in 2001, resulting in a negative 36% 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. 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 nine month periods in 2002 and 2001 was $39.2 million and $79.2 million,
respectively. The substantial decrease in our operating cash flows in 2002 from
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 September 30, 2002 was a deficit of $22.3 million, which
included a $30.7 million net current derivative liability on commodity and
interest rate hedges. On that date, the Company also had $82.4 million available
to be drawn under its Senior Bank credit facility (the "Facility").
INVESTING ACTIVITIES: Net cash used in investing activities was $85.8
million for the nine months in 2002. We made capital expenditures of $98.2
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 $56.6 million, made a loan of $2.4 million to a minority owned
affiliate, paid $4l.1 million associated with the merger of Prize, and made an
investment in an unconsolidated affiliate of $604 thousand.
Net cash used in investing activities was $152.9 million for the nine
months in 2001. We made capital expenditures of $153.3 million during the first
nine months of 2001. Our capital expenditures are discussed in further detail
below. Additionally, we received a distribution of $1.6 million from an
unconsolidated affiliate and we made an investment in an unconsolidated
affiliate of $2.0 million. We realized proceeds of $706 thousand from sale of
assets and received payments on promissory notes receivable totaling $66
thousand during the 2001 period.
FINANCING ACTIVITIES. Net cash provided by financing activities was $48.4
million for the nine months in 2002. We borrowed a total of $610.7 million,
including $300 million in new 9.6% Senior Notes during the period. We also
repaid borrowings of $534.5 million, including $155.7 million to pay off the
Company's 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
other indebtedness. We paid $11.9 million in fees related to the newly issued
Senior Notes and the new Facility, loaned $2.7 million to the ESOP, purchased
treasury stock for $14.2 million, purchased warrants for $98 thousand, made a
loan to a stockholder and executive officer for $300 thousand, received payment
on a loan to a stockholder and executive officer of $300 thousand, had an
increase in restricted cash of $329 thousand, and had net proceeds from the
issuance of common stock of $1.4 million. Our financing activities are discussed
in further detail below.
Net cash provided by financing activities was $76.8 million for the nine
months in 2001. We borrowed $232.0 million under our senior bank credit lines.
We repaid borrowings under our Facility of $146.6 million, made payments of $145
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 $3.2 million in cash from the issuance of common stock. We paid $825
thousand for fees related to financing activities, made a loan to stockholder of
$300 thousand, received repayment of stockholder loans of $360 thousand, made a
loan to the ESOP of $749 thousand and purchased treasury stock for $1.0 million.
Cash dividends paid were $169 thousand in 2001.
23
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 Facility are the Company's major sources 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 Facility in conjunction with the
merger with Prize. The amended Facility provides for total borrowings of $500
million, up from $225 million, and raised 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. In connection with the sale of oil and gas
properties described below, the borrowing base was voluntarily reduced to $250
million on September 3, 2002.
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 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 September 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 were 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 LIBOR, currently yielding a cost of approximately 5.2%
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 September 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. On September 12, 2002 the terms of the credit agreement were amended
to allow for additional advances of approximately $1.2 million. Canvasback may
use the additional advances to purchase incremental 10% Senior Notes of the
Company or to make an advance or pay a dividend to an affiliate. 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. By July 16, 2002, two million
shares had been repurchased under the program,
24
including 1,943,300 shares in 2002 at a cost of $14.2 million. On October
17, 2002, the Company's Board of Directors approved a new 3,000,000 share
repurchase program.
Effective September 1, 2002, the Company sold approximately 41 billion
cubic feet equivalent of proved producing reserves to a new private limited
partnership in which the Company is the general partner with a 5% initial
ownership interest. The sales proceeds of $49.0 million ($46.6 million net to
the Company) were used to reduce bank debt. Also, effective September 1, 2002,
the Company sold approximately 7.1 billion cubic feet equivalent of proved
producing reserves at various auctions for $8.0 million, the proceeds of which
were also used to reduce bank debt. Total proceeds from the sale of oil and gas
properties through September 30, 2002, have been $56.6 million, of which $53.9
million is attributable to properties acquired in the Prize merger. These sales
are part of the Company's plan to sell up to $95 million of non-core oil and gas
assets during fiscal 2002, with proceeds used to reduce overall indebtedness as
the Company seeks to improve its debt-to-equity ratio and streamline its
operations. Additional non-core properties are expected to be sold in the fourth
quarter of 2002 and the first quarter of 2003.
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 semi-annual basis, the Company's borrowing base under its 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 December 31, 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 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 $98.2 million, excluding the $602.3 million in properties
acquired through the Prize merger. Exploration activities accounted for $23.5
million, development activities accounted for $66.2 million, additions to
unproved properties not accounted for as exploration or development expenditures
accounted for $7.4 million, and additions to other assets accounted for $1.1
million of the capital expenditures. The Company participated in the drilling of
86 wells during the 2002 period, of which 70 were onshore and 16 were offshore
in the Gulf of Mexico. Fourteen of the offshore wells were considered
successful. Of the 86 wells drilled, 16 were exploratory wells, of which 13 were
successful, and 70 were development wells, of which 69 were successful. As of
September 30, 2002, the Company had total unproved oil and gas property costs of
$154.0 million, consisting of $125.7 million acquired in the merger with Prize
and $28.3 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 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.
25
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, other than required by law, 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.
Inflation and Changes in Prices
During the 2002 period, the Company experienced 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 hedging contracts to reduce the effects of
significant fluctuations in crude oil and gas prices. The Company may hedge the
greater of (i) 90% of its overall daily crude oil production and 75% of its
overall daily natural gas production or (ii) 75% of its combined oil and gas
production. 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. For the remainder of 2002, the Company has approximately 65% of
its combined crude oil and natural gas production hedged on a Mcfe basis.
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 twelve crude oil derivatives, sixteen natural
gas derivatives, and two interest rate derivatives on September 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. Hedge
ineffectiveness on the cash-flow hedges is recorded in earnings.
26
At September 30, 2002, the fair value of the Company's derivatives were as
follows (in thousands):
Derivative Assets
- -----------------------
Natural gas collars........................ $ 267
------------------
Total derivative assets.................... $ 267
------------------
Derivative Liabilities
- -----------------------
Natural gas collars........................ $ 13,390
Natural gas swaps.......................... 16,831
Crude oil collars.......................... 2,608
Crude oil swaps............................ 4,141
Interest rate swaps........................ 1,340
------------------
Total derivative liabilities............... $ 38,310
------------------
Net derivative liabilities................. $ 38,043
==================
For the three and nine month periods ended September 30, 2002, the income
statement includes a non-cash hedging ineffectiveness loss of $245 thousand and
$622 thousand, respectively, related to the crude oil and natural gas
derivatives and a non-cash loss of $1.3 million and $4.8 million, respectively,
related to the amortization of hedge contracts purchased in the Prize merger.
The remaining amortization amounts relating to hedge contracts acquired in the
Prize merger that will be reclassified into the income statement in 2002, 2003
and 2004 are $1.3 million loss, $1.3 million gain and $0.8 million gain,
respectively. It is estimated that $18.7 million of other comprehensive loss
will be reclassified into the income statement during the next 12 months.
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 recorded goodwill of $63.2
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. 143 - SFAS No. 143, "Accounting for Asset Retirement Obligations",
will be effective for the Company beginning January 1, 2003. SFAS No. 143
requires the recognition of a fair value liability for any retirement obligation
associated with long-lived assets. The offset to any liability recorded is added
to the recorded asset where the additional amount is depreciated over the same
period as the long-lived asset for which the retirement obligation is
established. SFAS No. 143 also requires additional disclosures. We are in the
process of evaluating the impact of the provisions of SFAS No. 143 to our
existing operations.
SFAS No. 144 - SFAS No. 144, "Accounting for the Impairment or Disposal of
Long-Lived Assets", became effective for the Company beginning January 1, 2002.
SFAS No. 144 establishes a single accounting model, based on the framework
established in SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to Be Disposed Of", for long-lived assets to be
disposed of by sale and resolves significant implementation issues related to
SFAS No. 121.
SFAS No. 145 - SFAS No. 145, "Recission 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,
27
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.
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 hedging contracts for a
portion 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 Henry Hub natural gas, 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 counterparty to the agreement.
The Company does not anticipate any material impact to its results of operations
as a result of nonperformance by such parties.
Due to hedge contracts acquired in the Prize merger, 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. Margins
posted at September 30, 2002 totaled $3.2 million. The Company has not and does
not intend to enter into any new hedging contracts with institutions that
require margin deposits.
28
The following is a summary of the Company's open commodity hedge contracts
as of September 30, 2002:
Weighted average Weighted average
Period Volumes/day floor price ceiling price
----------------------------------------------------------------
Oil 2002 9,500 $ 23.38 $ 25.99
Gas 2002 68,000 $ 3.01 $ 3.18
Oil 2003 5,000 $ 22.65 $ 25.85
Gas 2003 100,000 $ 3.00 $ 3.69
Gas 2004 15,000 $ 3.00 $ 4.20
Based on future market prices at September 30, 2002, the fair value of open
contracts to the Company was a liability of $36.7 million. If future market
prices were to increase 10% from those in effect at September 30, 2002, the fair
value of open contracts to the Company would be a liability of $54.3 million. If
future market prices were to decline 10% from those in effect at September 30,
2002, the fair value of the open contracts to the Company would be a liability
of $16.4 million.
The Company may hedge the greater of (i) 90% of its overall daily crude oil
production and 75% of its overall daily natural gas production or (ii) 75% of
its combined oil and gas production. 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 1.77%)
Based on future market rates at September 30, 2002, the fair value of open
contracts to the Company was a liability of $1.3 million. If future market rates
were to increase 10% from those in effect at September 30, 2002, the fair value
of open contracts to the Company would be a liability of $1.3 million. If future
market rates were to decline 10% from those in effect at September 30, 2002, the
fair value of the open contracts to the Company would be a liability of $1.4
million.
Fixed and Variable Rate Debt. The Company uses fixed and variable rate 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 September 30, 2002.
29
Expected Maturity Dates 2002 2003-5 2007 2012 Total Fair Value
- ---------------------------------------------------------------------------------------------------------------------------------
(in thousands)
Variable Rate Debt:
Bank Debt with Recourse (a)........... $ - $ 165,000 $ - $ - $ 165,000 $ 165,000
Bank Debt without Recourse (b)........ $ - $ 5,834 $ - $ - $ 5,834 $ 5,834
Capital Leases (c).................... $ 1,945 $ 7,911 $ - $ - $ 9,856 $ 9,856
Fixed Rate Debt:
Senior Notes (d)...................... $ - $ - $ 129,466 $ - $ 129,466 $ 134,645
Senior Notes (e)...................... $ - $ - $ - $ 300,000 $ 300,000 $ 309,375
Note Payable (f)...................... $ 443 $ - $ - $ - $ 443 $ 443
Other................................. $ 5 $ - $ - $ - $ 5 $ 5
- ---------------
(a) The average interest rate on the bank debt with recourse is 4.0%.
(b) The average interest rate on the bank debt without recourse is 6.3%.
(c) The average interest rate on the two capital leases is 5.2%.
(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%.
Item 4. Controls and Procedures
The Company's chief executive officer and chief financial officer have
reviewed and evaluated the effectiveness of the Company's disclosure controls
and procedures [as defined in Rules 240.13a-14 (c) and 15d-14 (c) promulgated
under the Securities Exchange Act of 1934] as of a date within ninety days
before the filing date of this quarterly report. Based on that review and
evaluation, which included inquiries made to certain other employees of the
Company, the chief executive officer and chief financial officer have concluded
that the Company's current disclosure controls and procedures, as designed and
implemented, are reasonably adequate to ensure that they are provided with
material information relating to the Company required to be disclosed in the
reports the Company files or submits under the Securities Exchange Act of 1934.
There have not been any significant changes in the Company's internal controls
or in other factors that could significantly affect these controls subsequent to
the date of their evaluation. There were no significant deficiencies or material
weaknesses and, therefore, no corrective actions were taken.
30
PART III - 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, Inc., 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, Inc., 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, 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 (Incorporated by reference to Form 10-Q for the
period ended June 30, 2002)
10.3 Employment Agreement for Gary C. Evans (Incorporated by reference to Form 10-K for the fiscal
31
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)
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)
99.1* Certification pursuant to 18 U.S.C. Section 1350, signed by Gary C. Evans
99.2* Certification pursuant to 18 U.S.C. Section 1350, signed by Chris Tong
*Filed herewith
(b) Reports on Form 8-K
1) Form 8-K, filed July 2, 2002 under Item 5, including audited financial
statements of Prize Energy Corp.
32
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, hereunto duly
authorized.
MAGNUM HUNTER RESOURCES, INC.
By /s/ Gary C. Evans November 14, 2002
-------------------------------------------------
Gary C. Evans
Chairman, President and Chief Executive Officer
By /s/ Chris Tong November 14, 2002
--------------------------------------------------
Chris Tong
Senior Vice President and Chief Financial Officer
By /s/ David S. Krueger November 14, 2002
--------------------------------------------------
David S. Krueger
Vice President and Chief Accounting Officer
By /s/ Morgan F. Johnston November 14, 2002
--------------------------------------------------
Morgan F. Johnston
Vice President, General Counsel and Secretary
33
CERTIFICATION
I, Gary C. Evans, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Magnum Hunter
Resources, Inc.
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report.
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report.
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
(a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this quarterly report is being prepared;
(b) evaluated the effectiveness of the registrants' disclosure controls and
procedures as of a date within 90 days prior to filing date of this quarterly
report (the "Evaluation Date"); and
(c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date.
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
(a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
(b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: November 14, 2002
/s/ Gary C. Evans
---------------------------------
Gary C. Evans, Chairman
President and Chief Executive Officer
34
CERTIFICATION
I, Chris Tong, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Magnum Hunter
Resources, Inc.
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report.
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report.
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
(a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this quarterly report is being prepared;
(b) evaluated the effectiveness of the registrants' disclosure controls and
procedures as of a date within 90 days prior to filing date of this quarterly
report (the "Evaluation Date"); and
(c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date.
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
(a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
(b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: November 14, 2002
/s/ Chris Tong
---------------------------------
Chris Tong
Senior Vice President and Chief Financial Officer
35