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 March 31, 2003
--------------
[ ] 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
-------
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 [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act).
Yes [ X ] No [ ]
State the number of shares outstanding of each of the issuer's classes of
common equity, as of May 12, 2003: 67,209,384.
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
MAGNUM HUNTER RESSOURCES, INC. AND SUBSIDIAIRIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands of dollars)
March 31, December 31,
2003 2002
-------------------------------------------
ASSETS (Unaudited)
Current Assets
Cash and cash equivalents.............................................................. $ 3,557 $ 3,069
Restricted cash........................................................................ 754 682
Accounts receivable - trade, net of allowance of $4,573................................ 60,408 53,864
Deposits............................................................................... 600 8,856
Other current assets................................................................... 35,643 31,625
---------------- ----------------
Total Current Assets................................................................ 100,962 98,096
---------------- ----------------
Property, Plant, and Equipment
Oil and gas properties, full cost method
Unproved............................................................................. 166,976 165,676
Proved............................................................................... 1,113,792 1,053,426
Gas processing plants and pipelines.................................................... 33,954 33,951
Other property......................................................................... 6,681 6,636
---------------- ----------------
Total Property, Plant and Equipment..................................................... 1,321,403 1,259,689
Accumulated depreciation, depletion, amortization and impairment..................... (273,284) (258,080)
---------------- ----------------
Net Property, Plant and Equipment....................................................... 1,048,119 1,001,609
---------------- ----------------
Other Assets
Goodwill................................................................................ 50,568 50,710
Other assets............................................................................ 18,673 19,364
---------------- ----------------
Total Assets............................................................................ $ 1,218,322 $ 1,169,779
================ ================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Trade payables and accrued liabilities.................................................. $ 121,253 $ 114,079
Accrued interest........................................................................ 5,713 10,327
Due to affiliates....................................................................... 7,793 2,848
Current portion of long-term debt....................................................... 6,523 1,865
---------------- ----------------
Total Current Liabilities............................................................ 141,282 129,119
---------------- ----------------
Long-Term Liabilities
Long-term debt, less current maturities................................................. 573,083 569,086
Asset retirement obligations............................................................ 30,333 -
Derivative liabilities, noncurrent...................................................... 5,049 3,316
Deferred income taxes payable........................................................... 122,882 118,062
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 1
Common Stock - $.002 par value; 100,000,000 shares authorized,
71,713,697 and 71,707,897 shares issued, respectively................................ 143 143
Additional paid-in capital.............................................................. 423,388 423,364
Accumulated other comprehensive loss.................................................... (31,302) (26,902)
Accumulated deficit..................................................................... (13,124) (21,114)
Common stock in deferred compensation plan at cost (56,600 shares)...................... (318) -
Unearned common stock in KSOP, at cost (874,046 and 757,246 shares, respectively)....... (5,548) (4,888)
---------------- ----------------
373,240 370,604
Treasury stock, at cost (4,458,113 and 3,168,013 shares, respectively).................. (27,547) (20,408)
---------------- ----------------
Total Stockholders' Equity.............................................................. 345,693 350,196
---------------- ----------------
Total Liabilities and Stockholders' Equity.......................................... $ 1,218,322 $ 1,169,779
================ ================
The accompanying notes are an integral part of these consolidated financial
statements.
1
MAGNUM HUNTER RESOURCES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(in thousands, except for per share amounts)
Three Months Ended March 31,
2003 2002
------------- --------------
Operating Revenues:
Oil and gas sales........................................................... $ 69,590 $ 39,150
Gas gathering, marketing and processing..................................... 9,385 3,582
Oil field management services............................................... 1,079 392
------------ -------------
Total Operating Revenues............................................... 80,054 43,124
------------ -------------
Operating Costs and Expenses:
Oil and gas production lifting costs........................................ 12,948 8,948
Production taxes and other costs............................................ 9,177 4,303
Gas gathering, marketing and processing..................................... 6,546 2,680
Oil field services.......................................................... 857 276
Depreciation, depletion, amortization and accretion......................... 21,524 15,096
Gain on sale of assets...................................................... (94) -
General and administrative.................................................. 3,182 2,524
------------ -------------
Total Operating Costs and Expenses..................................... 54,140 33,827
Operating Profit................................................................. 25,914 9,297
Equity in earnings of affiliate............................................. 288 301
Other income................................................................ 118 57
Other non-cash hedging adjustments.......................................... 369 (593)
Costs associated with early retirement of debt.............................. (1,855) (1,000)
Interest expense............................................................ (12,578) (7,505)
------------ -------------
Income Before Income Tax......................................................... 12,256 557
Deferred income tax (expense) benefit....................................... (4,665) 6,889
------------ -------------
Income Before Cumulative Effect of a Change in Accounting Principle.............. 7,591 7,446
Cumulative effect of a change in accounting principle, net of income tax
expense of $244............................................................. 399 -
------------ -------------
Net Income....................................................................... $ 7,990 $ 7,446
============ =============
Income per Common Share - Basic
Income before cumulative effect of a change in accounting principle......... $ 0.11 $ 0.18
Cumulative effect of a change in accounting principle....................... 0.01 -
------------ -------------
Income per Common Share - Basic $ 0.12 0.18
============ =============
Income per Common Share - Diluted
Income before cumulative effect of a change in accounting principle........ $ 0.11 $ 0.17
Cumulative effect of a change in accounting principle...................... 0.01 -
------------- -------------
Income per Common Share - Diluted............................................... $ 0.12 $ 0.17
============= =============
Common Shares Used in Per Share Calculation
Basic...................................................................... 66,709,502 41,777,431
============= =============
Diluted.................................................................... 67,338,391 43,024,235
============= =============
The accompanying notes are an integral part of these consolidated financial
statements.
2
MAGNUM HUNTER RESOURCES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY AND OTHER COMPREHENSIVE INCOME
FOR THE THREE MONTHS ENDED March 31, 2003
(Unaudited)
(in thousands)
Additional
Preferred Common Treasury Paid in Accumulated
Stock Stock Stock Capital Deficit
----------------------------------------------------------------
Balance at December 31, 2002 $ 1 $ 143 $ (20,408) $ 423,364 $ (21,114)
Issuance of 6 shares of common stock pursuant to employee
stock option plan.................................................. 17
Deferred tax benefit on exercise of employee stock options........... 7
Purchase of 1,290 shares of treasury stock........................... (7,139)
Loan of 117 shares to KSOP...........................................
Purchase 57 shares for deferred compensation plan....................
Net Income........................................................... 7,990
Reclassification adjustment related to derivative contracts..........
Change in fair value of outstanding hedge positions..................
Amortization of purchased hedge positions............................
---------------------------------------------------------------
Balance at March 31, 2003 $ 1 $ 143 $ (27,547) $ 423,388 $ (13,124)
===============================================================
Accumulated
Unearned Other Total Total
Deferred Shares in Comprehensive Stockholders' Comprehensive
Compensation KSOP Income (Loss) Equity Income (Loss)
------------------------------------------------------------------------
Balance at December 31, 2002 $ - $(4,888) $ (26,902) $ 350,196 $
Issuance of 6 shares of common stock pursuant to employee
stock option plan........................................... 17
Deferred tax benefit on exercise of employee stock options.... 7
Purchase of 1,290 shares of treasury stock.................... (7,139)
Loan of 117 shares to KSOP.................................... (660) (660)
Purchase 57 shares for deferred compensation plan............. (318) (318)
Net Income.................................................... 7,990 7,990
Reclassification adjustment related to derivative contracts... 18,837 18,837 18,837
Change in fair value of outstanding hedge positions........... (23,036) (23,036) (23,036)
Amortization of purchased hedge positions..................... (201) (201) (201)
---------------------------------------------------------------------
Balance at March 31, 2003 $ (318) $(5,548) $ (31,302) $ 345,693 $ 3,590
=====================================================================
The accompanying notes are an integral part of these consolidated financial
statements
3
MAGNUM HUNTER RESOURCES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
For the Three Months Ended
March 31,
2003 2002
----------------- --------------
CASH FLOW FROM OPERATING ACTIVITIES:
Net Income........................................................................... $ 7,990 $ 7,446
Adjustments to reconcile net income to cash provided by operating activities:
Cumulative effect of a change in accounting principle............................. (399) -
Depreciation, depletion, amortization and accretion............................... 21,524 15,096
Amortization of financing fees.................................................... 561 370
Costs relating to the redemption of notes......................................... 1,855 1,000
Imputed interest on debt due to merger............................................ - 108
Deferred income taxes (benefits).................................................. 4,665 (6,889)
Equity in income of unconsolidated affiliate...................................... (288) (301)
Non-cash hedging adjustments...................................................... (369) 593
Gain on sale of assets............................................................ (94) -
Changes in certain assets and liabilities, net of the effect of acquisitions:
Accounts and notes receivable............................................... (6,544) (3,316)
Deposits and other current assets........................................... 6,424 (4,261)
Accounts payable and accrued liabilities.................................... 1,962 (33,828)
Income taxes payable/receivable............................................. 482 -
-------------- ------------
Net Cash Provided (Used) by Operating Activities.................................. 37,769 (23,982)
-------------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of assets...................................................... 106 -
Additions to property and equipment............................................... (35,886) (18,989)
Cash paid in Prize merger net of cash acquired.................................... - (41,097)
Property sales price adjustments.................................................. (487) -
Increase in note receivable....................................................... - (2,350)
Distribution from unconsolidated affiliate........................................ 600 -
Investment in unconsolidated affiliate............................................ (600) -
-------------- ------------
Net Cash Provided (Used) by Investing Activities.................................. (36,267) (62,436)
-------------- ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of debt.................................................... 104,075 534,183
Fees paid related to financing activities......................................... (75) (11,732)
Redemption of notes payable....................................................... (29,074) -
Payments of principal on debt and production payment.............................. (67,768) (431,269)
Loan to KSOP...................................................................... (660) (2,492)
Purchase of common stock for deferred compensation plan........................... (318) -
Proceeds from issuance of common stock, net of offering costs..................... 17 145
Purchase of treasury stock........................................................ (7,139) (1,321)
Increase in restricted cash for payment of notes payable.......................... (72) -
-------------- ------------
Net Cash Provided (Used) by Financing Activities.................................. (1,014) 87,514
-------------- ------------
NET INCREASE IN CASH AND CASH EQUIVALENTS............................................... 488 1,096
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD........................................ 3,069 2,755
-------------- ------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD.............................................. $ 3,557 $ 3,851
============== ============
The accompanying notes are an integral part of these consolidated financial
statements
4
MAGNUM HUNTER RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2003
(Unaudited)
NOTE 1 - MANAGEMENT'S REPRESENTATION
In this quarterly report on Form 10-Q, the words "Magnum Hunter",
"company", "we", "our", and "us" refer to Magnum Hunter Resources, Inc. and its
consolidated subsidiaries unless otherwise stated or the context otherwise
requires. The consolidated balance sheet of Magnum Hunter Resources, Inc. and
subsidiaries as of March 31, 2003, the condensed consolidated statements of
operations for the three months ended March 31, 2003 and 2002, the condensed
consolidated statement of stockholders' equity and comprehensive income for the
three months ended March 31, 2003, and the condensed consolidated statements of
cash flows for the three months ended March 31, 2003 and 2002, 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 March 31, 2003, results of operations, changes in stockholders' equity and
comprehensive income and cash flows for the three month period.
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 our December 31, 2002 annual
report and on our Form 10-K. The results of operations for the three-month
period ended March 31, 2003, is not necessarily indicative of the operating
results for the full year.
The accompanying consolidated financial statements include the accounts of
the company and our 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, we 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.
Magnum Hunter is a holding company with no significant assets or operations
other than our investments in our subsidiaries. The wholly owned subsidiaries of
the company, except for Canvasback Energy, Inc. and Redhead Energy, Inc.,
collectively referred to as Canvasback, are direct guarantors of each of our 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 our direct and indirect subsidiaries (other than Canvasback), and we have
presented separate condensed consolidating financial statements and other
disclosures concerning each guarantor and Canvasback (See Note 9). Except for
Canvasback, there is no restriction on the ability of consolidated or
unconsolidated subsidiaries to transfer funds to the company in the form of cash
dividends, loans, or advances.
NOTE 2 - NEW ACCOUNTING STANDARDS
SFAS No. 143 - SFAS No. 143, "Accounting for Asset Retirement Obligations",
became effective beginning January 1, 2003. SFAS No. 143 requires the
recognition of a fair value liability for any retirement obligation associated
with long-lived assets in the period in which it is incurred if a reasonable
estimate of fair value can be made. The associated asset retirement costs are
capitalized as part of the carrying amount of the long-lived asset and
depreciated over the asset's useful life. See Note 4 for additional information
on our asset retirement obligations. Upon adoption of SFAS No. 143, we recorded
an addition to oil and gas properties of $25.4 million, an asset retirement
obligation of $30.4 million, a reduction of accumulated depletion of $5.6
million, and a pre-tax gain of $ 643 thousand.
SFAS No. 145 - SFAS No. 145 "Recission of FASB Statements No. 4, 44, and
64, Amendment of FASB Statement No. 13, and Technical Corrections" became
effective 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 requires us to reclassify extraordinary items
for debt extinguishment costs which did 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 expense.
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
5
MAGNUM HUNTER RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
March 31, 2003
(Unaudited)
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.
SFAS No. 148 - The FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure, an Amendment to FASB Statement No.
123", in December 2002. SFAS No. 148 provides alternative methods of transition
for a voluntary change to the fair value method of accounting for stock-based
employee compensation and amends the disclosure requirements of SFAS No. 123. We
have no plans at this time to change our method to the fair value based method
from the intrinsic value method. We account for our stock-based employee
compensation plans under the measurement and recognition principles of APB
Opinion No. 25, "Accounting for Stock Issued to Employees and Related
Interpretations". Accordingly, we do not reflect any stock-based compensation in
net income because all stock options granted under these plans had an exercise
price equal to the market value of our common stock on the date of grant. The
following table illustrates the effect on net income and earnings per share if
we had applied the fair value recognition provisions of SFAS 123 (in thousands,
except for per share amounts):
Three Months Ended March 31,
2003 2002
-----------------------------------
Net income, as reported......................................................... $7,990 $7,446
Deduct: Total stock-based employee compensation
determined under fair value-based method for all awards,
net of related tax effects.............................................. (671) (688)
---------- ----------
Pro forma net income............................................................ $7,319 $6,758
========== ==========
Earnings per share:
Basic - as reported........................................................ $ 0.12 $ 0.18
========== ==========
Basic - pro forma.......................................................... $ 0.11 $ 0.16
========== ==========
Diluted - as reported...................................................... $ 0.12 $ 0.17
========== ==========
Diluted - pro forma........................................................ $ 0.11 $ 0.16
========== ==========
FIN No. 45 - "Guarantor's Accounting and Disclosure Requirements for
Guarantees", was issued in November 2002. This interpretation addresses the
disclosures to be made by a guarantor in its interim and annual financial
statements about its obligations under guarantees. It also clarifies the
requirements related to the recognition of a liability by a guarantor at the
inception of a guarantee for the obligations the guarantor has undertaken in
issuing that guarantee. We adopted this statement in January 2003.
In the past we have provided trade guarantees on behalf of our 30% owned
affiliate, NGTS, LLC. In the event that NGTS, LLC is unable to fulfill its
obligations with certain vendors, we would be obligated for cash payments of up
to $5.6 million to these vendors. We have not recorded these as a liability on
our books at March 31, 2003 because we do not expect to have to perform under
these guarantees. The last of these guarantees expires in July 2003, and we do
not intend to issue any additional guarantees on behalf of NGTS, LLC. We have
provided no other guarantees on behalf of any unconsolidated entities and do not
intend to issue any.
NOTE 3 - GOODWILL
In June 2001, SFAS No. 141 "Business Combinations" and SFAS No. 142,
"Goodwill and other Intangible Assets" were issued to be effective for fiscal
years beginning after December 15, 2001. Under the new rules in these
statements, goodwill is no longer amortized, but it is subject to annual
impairment tests. We completed the first of these tests at December 31, 2002 and
found no impairment. Changes to the carrying value of goodwill during the three
months ended March 31, 2003 are as follows:
6
MAGNUM HUNTER RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
March 31, 2003
(Unaudited)
Balance at December 31, 2002................... $50,710
Purchase price adjustments..................... (142)
-----------
Balance at March 31, 2003...................... $50,568
===========
Our goodwill results from our merger with Prize, and the purchase price
allocation will be finalized during the second quarter of 2003.
NOTE 4 - ASSET RETIREMENT OBLIGATIONS
SFAS No. 143, "Accounting for Asset Retirement Obligations", became
effective beginning January 1, 2003. SFAS No. 143 requires the recognition of a
fair value liability for any retirement obligations associated with long-lived
assets in the period in which it is incurred if a reasonable estimate of fair
value can be made. The associated asset retirement costs are capitalized as part
of the carrying amount of the long-lived asset and depreciated over the asset's
useful life. Prior to adopting SFAS No. 143 on January 1, 2003, we accounted for
asset retirement obligations in accordance with SFAS No. 19.
Our long-lived assets that are captured under SFAS No. 143 are developed
oil and gas properties, production and distribution facilities, and natural gas
processing plants. Our asset retirement obligations include plugging,
abandonment, decommission and remediation costs.
The following is a reconciliation of the Asset Retirement Obligation
Liability at March 31, 2003 (in thousands):
Beginning balance at January 1, 2003....................... $ -
Cumulative effect adjustment............................... 30,391
Liabilities settled........................................ (696)
Accretion expense.......................................... 638
---------------
Ending balance at March 31, 2003........................... $ 30,333
===============
The following pro forma data summarizes our net income (loss) and net
income (loss) per share as if we had adopted SFAS No. 143 on January 1, 2002.
The associated pro forma asset retirement obligation was $16.9 million on
January 1, 2002 and an additional asset retirement obligation of $12.9 million
would have been recorded at March 1, 2002 in conjunction with the Prize
acquisition.
Three Months Ended March 31,
2003 2002
-------------- ------------
Net income, as reported........................................... $7,990 $7,446
Pro forma adjustment to reflect retroactive adoption of
SFAS No. 143, net of related tax effects..................... (399) 99
----------- -----------
Pro forma net income.............................................. $7,591 $7,545
=========== ===========
Earnings per share:
Basic - as reported............................................ $0.12 $0.18
=========== ===========
Basic - pro forma.............................................. $0.11 $0.18
=========== ===========
Diluted - as reported.......................................... $0.12 $0.17
=========== ===========
Diluted - pro forma............................................ $0.11 $0.18
=========== ===========
7
MAGNUM HUNTER RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
March 31, 2003
(Unaudited)
NOTE 5 - EARNINGS PER SHARE INFORMATION
The following is a reconciliation of the basic and diluted earnings per
share computations (in thousands of dollars, except for per share amounts):
Three Months Ended
March 31, 2003 March 31, 2002
---------------------------------- ---------------------------------
Per Share Per Share
Income Shares Amount Income Shares Amount
- -----------------------------------------------------------------------------------------------------------------------------------
Basic EPS
Income available to common stockholders.................... $7,990 66,710 $0.12 $ 7,446 41,777 $ 0.18
====== ======
Effect of Dilutive Securities
Warrants................................................ - - - 66
Options................................................. - 628 - 1,181
------ ------ ------- ------
Diluted EPS
Income available to common stockholders and
assumed conversions..................................... $7,990 67,338 $0.12 $ 7,446 43,024 $ 0.17
====== ====== ====== ======= ====== ======
At March 31, 2003, warrants representing 7,873,206 shares of common stock
and stock options representing 5,976,866 shares of common stock were
outstanding. At March 31, 2002, warrants representing 12,145,019 shares of
common stock and stock options representing 5,284,384 shares of common stock
were outstanding. For the three month period ended March 31, 2003, 7,873,206
shares representing warrants and 3,130,100 shares representing stock options
were excluded from the diluted earnings per share calculations because they were
anti-dilutive. For the three month period ending March 31, 2001, 11,446,697
shares representing warrants and 3,313,200 shares representing stock options
were excluded from the diluted earnings per share calculations because they were
anti-dilutive.
NOTE 6 - DEBT
Notes payable and long-term debt at March 31, 2003 and December 31, 2002
consisted of the following:
3/31/2003 12/31/2002
----------- ------------
Long-Term Debt:
Bank debt under revolving credit agreements due
May 2, 2006.................................................. $164,175 $125,000
Term note payable due March 7, 2004, non-recourse.............. 4,652 7,000
Production payment liability, non-recourse..................... 87 114
Capital lease obligations...................................... 8,878 9,371
10% Senior unsecured notes, due June 1, 2007................... 101,814 129,466
9.6% Senior unsecured notes, due March 15, 2012................ 300,000 300,000
---------- ---------
579,606 570,951
Less: Current portion of capital lease obligations............ 1,871 1,865
Less: Current portion of term note payable, non-recourse...... 4,652 -
---------- ---------
Total Long-Term Debt $573,083 $569,086
========== =========
On January 27, 2003, we redeemed $30 million in principal of our 10% Senior
Notes at a redemption price of 105%. We paid the holders of the redeemed Notes
$31.5 million plus accrued and unpaid interest of $467 thousand. Of the $30
million redeemed, Canvasback received $2.3 million.
8
MAGNUM HUNTER RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
March 31, 2003
(Unaudited)
We amended our Senior Bank Credit Facility (the "Facility") on May 2, 2003.
The amended Facility provides for a borrowing base of $300 million, up from $250
million. Additionally, the expiration date of the Facility was extended to May
2, 2006. We will use the increased borrowing capacity to fund the Note
repurchase announced on May 2, 2003, under which we will redeem $50 million in
principal amount of our outstanding 10% Senior Notes on June 2, 2003. We will
pay a redemption price of 103.3% of par plus accrued interest, or approximately
$51.7 million.
NOTE 7 - 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 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.
We were obligated to seven crude oil derivatives, eighteen natural gas
derivatives, and two interest rate derivatives on March 31, 2003. All
outstanding derivatives qualify for cash flow hedge accounting treatment as
defined within SFAS No. 133, which requires derivative assets and liabilities to
be recorded at their fair value on the balance sheet with an offset to other
comprehensive income. Hedge ineffectiveness on cash-flow hedges is recorded in
earnings.
At March 31, 2003, the fair value of the company's derivatives were as
follows (in thousands):
Derivative Liabilities
--------------------------------------------------
Natural gas collars............................... $ 33,294
Natural gas swaps................................. 13,508
Crude oil collars................................. 3,089
Crude oil swaps................................... 2,157
Interest rate swaps............................... 758
-------------
Total derivative liabilities...................... $ 52,806
=============
Of the $52.8 million derivative liability, $47.8 million is included in
trade payables and accrued liabilities on our condensed consolidated balance
sheet at March 31, 2003.
For the three month period ended March 31, 2003, the statement of
operations includes a non-cash hedging ineffectiveness gain of $45 thousand
related to the crude oil and natural gas derivatives and a non-cash gain of $324
thousand 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 operations statement in
years 2003 and 2004 are a $1.0 million gain and $0.8 million gain, respectively.
It is estimated at this time that $28.6 million of other comprehensive loss will
be reclassified into the operations statement during the next 12 months.
NOTE 8 - SEGMENT DATA
We have 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.
Our 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 six geographic areas that are aggregated. The Gas
Gathering, Marketing and Processing segment includes the activities of the three
gathering systems and four natural gas liquids processing plants in four
geographic areas that are aggregated. The Oil Field Services segment has six
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.
9
MAGNUM HUNTER RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
March 31, 2003
(Unaudited)
The accounting policies of the segments are the same as those for the
company as a whole. We evaluate performance based on profit or loss from
operations before income taxes. The accounting for intersegment sales and
transfers is done as if the sales or transfers were to third parties, that is,
at current market prices.
Segment data for the periods ended March 31, 2003 and 2002 follows (in
thousands):
Gas Gathering,
Exploration & Marketing & Oil Field
Three Months Ended March 31, 2003: Production Processing Services All Other Elimination Consolidated
- ----------------------------------------------------------------------------------------------------------------------------------
Revenue from external customers................ $ 69,590 $9,385 $1,079 $ - $ $ 80,054
Intersegment revenue........................... 400 6,416 3,485 - (10,301) -
Depreciation, depletion, amortization and
accretion.................................... 20,597 576 146 205 21,524
Segment profit (loss).......................... 26,869 2,263 75 (3,293) 25,914
Equity in earnings of affiliates............... 288 288
Interest expense............................... (12,578) (12,578)
Costs relating to early retirement of debt..... (1,855) (1,855)
Other income................................... 487 487
--------
Income before income taxes..................... 12,256
Provision for income tax expense............... (4,665) (4,665)
Cumulative effect of a change in accounting 399 399
principle.................................... --------
Net income..................................... $ 7,990
========
Gas Gathering,
Exploration & Marketing & Oil Field
Three Months Ended March 31, 2002: Production Processing Services All Other Elimination Consolidated
- ---------------------------------------------------------------------------------------------------------------------------------
Revenue from external customers............... $ 39,150 $ 3,582 $ 392 $ - $ $ 43,124
Intersegment revenues......................... 2,483 417 - (2,900) -
Depreciation, depletion, amortization and
accretion................................... 14,542 370 105 79 15,096
Segment profit (loss)......................... 10,451 472 (77) (1,549) 9,297
Equity in earnings of affiliates.............. 301 301
Interest expenses............................. (7,505) (7,505)
Costs relating to early retirement of debt.... (1,000) (1,000)
Other income (expense)........................ (536) (536)
------------
Income before income taxes.................... 557
Provision for income tax benefit.............. 6,889 6,889
------------
Net income.................................... $ 7,446
============
NOTE 9 - CONDENSED CONSOLIDATING FINANCIAL STATEMENTS
The company and our wholly owned subsidiaries, except Canvasback, are
direct guarantors of our 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 our 10% Senior Notes and 9.6% Senior Notes,
Canvasback cannot be included in determining compliance with certain financial
covenants under our credit agreements. We have 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
March 31, 2003 and December 31, 2002, and for the three-month period ended March
31, 2003 and 2002 were as follows:
10
MAGNUM HUNTER RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
March 31, 2003
(Unaudited)
Magnum Hunter Resources, Inc. and Subsidiaries
Condensed Consolidating Balance Sheets
As of March 31, 2003
- -----------------------------------------------------------------------------------------------------------------------------------
Magnum Hunter Canvasback Magnum Hunter
Resources, Inc. and Energy, Inc. Resources, Inc.
Amounts in Thousands Guarantor Subs (Non Guarantor) Eliminations Consolidated
---------------------------------------------------------------------------------------------------------------------------------
ASSETS
Current assets................................... $ 117,930 $ 4,328 $ (21,296) $ 100,962
Property and equipment
(using full cost accounting).................. 1,040,676 7,443 - 1,048,119
Investment in subsidiaries
(equity method)............................... 16,136 - (16,136) -
Investment in Parent............................. - 42,040 (42,040) -
Other assets..................................... 68,640 601 - 69,241
------------- ----------- ----------- ------------
Total assets $1,243,382 $ 54,412 $ (79,472) $1,218,322
============= =========== =========== ============
LIABILITIES AND STOCKHOLDERS'
EQUITY
Current liabilities.............................. $ 136,568 $ 26,010 $ (21,296) $ 141,282
Long-term liabilities............................ 727,267 12,266 (8,186) 731,347
Stockholders' equity............................. 379,547 16,136 (49,990) 345,693
------------- ----------- ----------- ------------
Total liabilities and stockholders' equity.... $1,243,382 $ 54,412 $ (79,472) $1,218,322
============= =========== =========== ============
As of December 31, 2002
- -----------------------------------------------------------------------------------------------------------------------------------
Magnum Hunter Canvasback Magnum Hunter
Resources, Inc. and Energy, Inc. Resources, Inc.
Amounts in Thousands Guarantor Subs (Non Guarantor) Eliminations Consolidated
---------------------------------------------------------------------------------------------------------------------------------
ASSETS
Current assets.................................... $ 110,584 $ 4,036 $ (16,524) $ 98,096
Property and equipment
(using full cost accounting)................... 994,766 6,843 - 1,001,609
Investment in subsidiaries
(equity method)................................ 15,431 - (15,431) -
Investment in Parent.............................. - 39,563 (39,563) -
Other assets...................................... 69,345 729 - 70,074
-------------- ------------ ----------- ------------
Total assets................................... $ 1,190,126 $ 51,171 $ (71,518) $1,169,779
============== ============ =========== ============
LIABILITIES AND STOCKHOLDERS'
EQUITY
Current liabilities............................... $ 129,092 $ 16,551 $ (16,524) $ 129,119
Long-term liabilities............................. 681,809 19,189 (10,534) 690,464
Stockholders' equity.............................. 379,225 15,431 (44,460) 350,196
-------------- ------------ ----------- ------------
Total liabilities and stockholders' equity..... $ 1,190,126 $ 51,171 $ (71,518) $1,169,779
============== ============ =========== ============
11
MAGNUM HUNTER RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
March 31, 2003
(Unaudited)
Magnum Hunter Resources, Inc. and Subsidiaries
Condensed Consolidating Statement of Operations
For the Three Months Ended March 31, 2003
- -----------------------------------------------------------------------------------------------------------------------------------
Magnum Hunter Canvasback Magnum Hunter
Resources, Inc. and Energy, Inc. Resources, Inc.
Amounts in Thousands Guarantor Subs (Non Guarantor) Eliminations Consolidated
- -----------------------------------------------------------------------------------------------------------------------------------
Revenues................................ $ 78,880 $ 1,174 $ - $ 80,054
Expenses................................ 67,814 272 - 68,086
-------------- ------------ ----------- ------------
Income before equity in sub earnings.... 11,066 902 - 11,968
Equity in net earnings of subsidiary.... 894 (121) (485) 288
-------------- ------------ ----------- ------------
Income before income taxes.............. 11,960 781 (485) 12,256
Income tax provision.................... (4,369) (296) - (4,665)
-------------- ------------ ----------- ------------
Income before cumulative change......... 7,591 485 (485) 7,591
Cumulative change....................... 399 - - 399
-------------- ------------ ----------- ------------
Net income........................... $ 7,990 $ 485 $ (485) $ 7,990
============== ============ =========== ============
For the Three Months Ended March 31, 2002
- -----------------------------------------------------------------------------------------------------------------------------------
Magnum Hunter Canvasback Magnum Hunter
Resources, Inc. and Energy, Inc. Resources, Inc.
Amounts in Thousands Guarantor Subs (Non Guarantor) Eliminations Consolidated
- -----------------------------------------------------------------------------------------------------------------------------------
Revenues............................... $ 42,862 $ 262 $ - $ 43,124
Expenses............................... 42,675 193 - 42,868
------------- ---------- --------- -----------
Income before equity in sub earnings... 187 69 - 256
Equity in net earnings of subsidiary... 344 - (43) 301
------------- ---------- --------- -----------
Income before income taxes............. 531 69 (43) 557
Income tax provision................... 6,915 (26) - 6,889
------------- ---------- --------- -----------
Net income.......................... $ 7,446 $ 43 $ (43) $ 7,446
============= ========== ========= ===========
Magnum Hunter Resources, Inc. and Subsidiaries
Condensed Consolidating Statements of Cash Flows
For the Three Months Ended March 31, 2003
- -----------------------------------------------------------------------------------------------------------------------------------
Magnum Hunter Canvasback Magnum Hunter
Resources, Inc. and Energy, Inc. Resources, Inc.
Amounts in Thousands Guarantor Subs (Non Guarantor) Eliminations Consolidated
- -----------------------------------------------------------------------------------------------------------------------------------
Cash flow from operating activities...... $ 31,858 $ 5,911 $ - $ 37,769
Cash flow from investing activities...... (35,376) (3,368) 2,477 (36,267)
Cash flow from financing activities...... 3,883 (2,420) (2,477) (1,014)
------------ ------------ ---------- ------------
Net increase in cash..................... 365 123 - 488
Cash at beginning of period.............. 2,540 529 - 3,069
------------ ------------ ---------- ------------
Cash at end of period................. $ 2,905 $ 652 $ - $ 3,557
============ ============ ========== ============
12
MAGNUM HUNTER RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
March 31, 2003
(Unaudited)
For the Three Months Ended March 31, 2002
- -----------------------------------------------------------------------------------------------------------------------------------
Magnum Hunter Canvasback Magnum Hunter
Resources, Inc. and Energy, Inc. Resources, Inc.
Amounts in Thousands Guarantor Subs (Non Guarantor) Eliminations Consolidated
- -----------------------------------------------------------------------------------------------------------------------------------
Cash flow from operating activities...... $ (26,058) $ 2,076 $ - $ (23,982)
Cash flow from investing activities...... (60,021) (2,415) - (62,436)
Cash flow from financing activities...... 88,616 (1,102) - 87,514
------------ ----------- -------- -------------
Net increase (decrease) in cash.......... 2,537 (1,441) - 1,096
Cash at beginning of period.............. 730 2,025 - 2,755
------------ ----------- -------- -------------
Cash at end of period................. $ 3,267 $ 584 $ - $ 3,851
============ =========== ======== =============
NOTE 10 - SUBSEQUENT EVENTS
On April 5, 2003, we reached an agreement for the sale of certain
properties, primarily located in southern Louisiana, considered to be non-core
assets. The preliminary purchase price, subject to certain purchase price
adjustments, has been set at $13.4 million. The sale is scheduled to close on or
before May 31, 2003.
On May 1, 2003, we closed 20,000 Mmbtu/d of natural gas collar hedges for
June through December 2003. In closing these contracts, we locked in a $5.7
million loss which will be recognized in earnings with the underlying forecasted
commodity sales transactions in June through December 2003.
On May 2, 2003, our Senior bank credit Facility was amended to allow for,
among other items, an increase in the borrowing base from $250 million to $300
million and the extension of the maturity of the Facility to May 2, 2006.
On May 2, 2003, we announced our election to redeem $50 million in
principal amount of our outstanding 10% Senior Notes on June 2, 2003. We will
pay a redemption price of 103.3% of par plus accrued interest, or approximately
$51.7 million.
13
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
our consolidated financial statements and the notes associated with them
contained in our Form 10-K for the fiscal year ended December 31, 2002. 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.
There have been no changes to our critical accounting policies for the
three month period ended March 31, 2003, except for accounting for asset
retirement obligations and accounting for gains and losses from extinguishment
of debt. SFAS No. 143, "Accounting for Asset Retirement Obligations", became
effective for us beginning January 1, 2003. SFAS No. 143 requires the
recognition of a fair value liability for any retirement obligations associated
with long-lived assets. The offset to any liability recorded is added to the
recorded asset and the additional amount is depreciated over the same period as
the long-lived asset for which the retirement obligation is established. SFAS
No. 145, "Recission of FASB Statements No. 4, 44 and 64, Amendment of FASB
Statement No. 13, and Technical Corrections", was effective for us beginning
January 1, 2003. SFAS No. 145 requires us to classify gains or losses from debt
extinguishment as additional interest expense. For a discussion of our other
critical accounting policies, refer to the Company's Form 10-K for the period
ended December 31, 2002.
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.
Our 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.
During the first quarter of 2002, we 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. Accordingly,
the results of operations for the three months ended March 31, 2002 include only
one month of activity related to Prize while the same period in 2003 includes
three months of activity related to Prize.
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
March 31,
-------------------------------
Oil and Gas Operations 2003 2002
- --------------------------------------------- ----------- --------
Reported Production:
Oil (Mbbls)................................ 957 670
Gas (MMcf)................................. 11,322 9,068
Oil and Gas (Mmcfe)........................ 17,063 13,089
Equivalent Daily Rate (Mmcfe/day).......... 189.6 145.4
Average Sale Prices (after hedging)
Oil (per Bbl).............................. $ 27.39 $ 21.04
Gas (per Mcf).............................. 3.83 2.76
Oil and Gas (per Mcfe)..................... 4.08 2.99
Effect of hedging activities (per Mcfe)....... (1.76) 0.44
Lease Operating Expense (per Mcfe)
Lifting costs.............................. 0.76 0.68
Production tax and other costs............. 0.54 0.33
Gross margin (per Mcfe)....................... 2.78 1.98
Depreciation and depletion (per Mcfe)......... $ 1.17 $ 1.11
14
Three Months Ended
March 31,
-----------------------
Gas Gathering, Marketing and Processing Operations 2003 2002
- ---------------------------------------------------- -------- --------
Throughput Volumes (Mcf per day)
Gathering.................................... 15,514 15,257
Processing................................... 22,768 17,880
Gross margin (in thousands)..................... $ 2,839 $ 902
Gathering (per Mcf throughput)............... $ 0.18 $ 0.13
Processing (per Mcf throughput).............. $ 1.25 $ 0.38
Period-to-Period Comparison
For the Three Months Ended March 31, 2003 and 2002
We reported net income of $8.0 million for the three months ended March 31,
2003, as compared to net income of $7.4 million for the same period in 2002, an
increase of 7%. Total operating revenues increased 86% to $80.1 million,
operating profit increased 179% to $25.9 million and net income before income
tax increased 2,100% to $12.3 million in the 2003 period, due primarily to the
Prize merger and increases in commodity prices in the 2003 period compared to
the 2002 period. We recorded deferred income tax expense of $4.7 million for the
three months in 2003 versus a deferred tax benefit of $6.9 million for the same
period in 2002. The 2002 period income tax benefit resulted from the elimination
of the $7.1 million valuation allowance that had been carried against deferred
tax assets derived from net operating loss carryovers. As a result of the Prize
merger, we believe that this tax asset can be fully realized. Additionally, the
2003 period includes the cumulative effect on prior years of a change in
accounting principle due to the adoption of SFAS No. 143 relating to asset
retirement obligations. The cumulative effect was a gain of $399 thousand, net
of income tax expense of $244 thousand, or $0.01 per share, both basic and
diluted. Basic and diluted earnings per share were $0.12 in the 2003 period
versus basic and diluted earnings per share of $0.18 and $0.17, respectively, in
the 2002 period. The decline in earnings per share was caused by an increase in
basic and diluted shares outstanding of 60% and 57%, respectively, primarily as
a result of the Prize merger.
Oil and Gas Operations:
For the three months ended March 31, 2003, we reported oil production of
957 thousand barrels and gas production of 11.3 billion cubic feet, which
represents an increase of 43% in oil produced and an increase of 25% in gas
produced from the comparable period in 2002. Our reported equivalent daily rate
of production on a million cubic feet per day basis (Mmcfe/day) increased 30% to
189.6 Mmcfe/day in the 2003 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 86% to $26.2 million in the first quarter of 2003
compared to the same period in 2002. The oil price received, after hedging
effects, was $27.39 per Bbl in the 2003 period compared to $21.04 per Bbl for
the same period in 2002, an increase of 30%. Gas revenues increased 73% to $43.4
million in the first quarter of 2003 versus the same period in 2002. The gas
price received, after hedging effects, was $3.83 per Mcf in 2003 compared to
$2.76 per Mcf for the same period in 2002, an increase of 39%.
From time to time, we enter into various commodity hedging contracts in
order to reduce our exposure to the possibility of declining oil and gas prices.
During the 2003 period, hedging decreased the average price we received for oil
by $5.07 per Bbl and decreased the average price we received for gas by $2.22
per Mcf. During the first quarter of 2003, we had approximately 60.0 MMcf/d of
gas of gas hedged through fixed price swaps with a weighted average price of
$3.01 per MMbtu and approximately 40.0 MMcf/d of gas hedged through cost-less
collars with a weighted average floor price of $3.06 per MMbtu and a weighted
average ceiling price of $4.30 per MMbtu. Approximately 79% of first quarter
2003 natural gas production was hedged. On the crude side, we had approximately
1,000 Bbls/d hedged through fixed price swaps with a weighted average price of
$21.25 per barrel and approximately 6,000 Bbls/d hedged through cost-less
collars with a weighted average floor price of $23.00 per Bbl and a weighted
average ceiling price of $27.00 per Bbl. Approximately 66% of first quarter 2003
crude oil production was hedged. For the second quarter of 2003, we have
approximately 60.0 MMcf/d of gas production hedged through fixed price swaps
with a weighted average price of $3.01 per MMbtu and approximately 40.0 MMcf/d
of gas production hedged through cost-less collars with a weighted average floor
price of $3.06 and a weighted average ceiling price of $4.30. For the third and
fourth quarters of 2003, we have approximately 10.0 MMcf/d hedged through fixed
price swaps with a weighted average price of $3.65 per MMbtu and approximately
90.0 MMcf/d hedged through cost-less collars with a weighted average floor price
of $2.89 and a weighted average ceiling price of $3.87. In addition, for the
remainder of 2003, we have hedged 1,000 Bbls/d of crude oil
15
production through a fixed price swap with a price of $21.25 per Bbl and
6,000 Bbls/d of crude oil production through cost-less collars with a weighted
average floor price of $23.00 per Bbl and a weighted average ceiling price of
$27.00 per Bbl.
On May 1, 2003, we closed 20,000 Mmbtu/d of natural gas collar hedges for
June through December 2003. In closing these contracts, we locked in a $5.7
million loss which will be recognized in earnings with the underlying forecasted
commodity sales transactions in June through December 2003.
Lease operating expense consists of lifting costs and production tax and
other costs. For the 2003 period, lifting costs were $12.9 million versus $8.9
million in the 2002 period, an increase of 45%. Production taxes and other costs
were $9.2 million in the 2003 period versus $4.3 million in the 2002 period, an
increase of 113%. Both increases were primarily attributable to the Prize
merger. For the 2003 period, lifting costs, on a unit of production basis, were
$0.76 per Mcfe as compared to $0.68 per Mcfe in the 2002 period, an increase of
12% 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 $0.54 per Mcfe in the 2003
period compared to $0.33 per Mcfe in the 2002 period, an increase of 64%. The
increase is primarily due to higher production taxes caused by higher commodity
prices received in the 2003 period.
Our gross margin realized from oil and gas operations (oil and gas revenues
less lease operating expenses) for the 2003 period was $47.4 million, or $2.78
per Mcfe, compared to $25.9 million, or $1.98 per Mcfe in the 2002 period, an
increase of 40% on a per unit of production basis, as a result of a 36% increase
in revenue per Mcfe, offset by a 29% increase in lease operating expense per
Mcfe.
Depreciation, depletion and accretion of oil and gas properties was $20.0
million in 2003 versus $14.5 million in 2002. The 2003 period included accretion
expense relating to asset retirement obligations (due to the adoption of SFAS
No. 143) of $638 thousand. On a unit of production basis, depreciation and
depletion expense was $1.17 per Mcfe produced in the 2003 period versus $1.11
per Mcfe produced in the 2002 period. This 5% increase in the equivalent unit
cost was due primarily to an increase in development costs associated with our
activities in the Gulf of Mexico.
Segment profit for oil and gas operations was $26.9 million for the three
months of 2003 versus $10.5 million for the same period in 2002, an increase of
156%.
Gathering, Marketing and Processing Operations:
For the three months ended March 31, 2003, our gas gathering system
throughput was 15.5 MMcf/day versus 15.3 MMcf/day for the same period in 2002,
an increase of 2%. Gas processing throughput was 22.8 MMcf/day in 2003 versus
17.9 MMcf/day in 2002, an increase of 27%. 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 162% to
$9.4 million in 2003 versus $3.6 million in 2002. Operating costs for the gas
gathering, marketing and processing segment increased 144% to $6.5 million in
2003 from $2.7 million in 2002. Both the revenues and operating cost increases
were the result of increased gas processing throughput and higher commodity
prices.
The gross margin realized from gas gathering, marketing and processing for
the 2003 period was $2.8 million versus $902 thousand in the 2002 period, an
increase of 215%. The gas gathering margin was $0.18 per Mcf gathered in 2003
versus $0.13 per Mcf in 2002 due to higher gathering fees and commodity prices.
The gas processing margin was $1.25 per Mcf in 2003 compared to $0.38 per Mcf in
2002, due to the addition of the Elmore City plant and improved plant processing
spreads.
Depreciation expense for gas gathering, marketing and processing for the
2003 period was $576 thousand versus $370 thousand for the same period in 2002,
an increase of 56% due to the addition of the Elmore City plant in the Prize
merger.
Segment profit for the gas gathering, marketing and processing segment was
$2.3 million in the 2003 period versus $472 thousand for the 2002 period, an
increase of 387%.
Oil Field Management Services Operations:
Revenues from oil field management services increased 175% to $1.1 million
in the first quarter of 2003 versus $392 thousand in the first quarter of 2002.
This increase is primarily due to the Prize merger. Operating costs increased
211% to $857 thousand in 2003 from 2002, also due to the Prize merger. The gross
margin for this segment in 2003 was $222 thousand versus $116 thousand in 2002,
an increase of 91%, due to overhead costs charged. Depreciation expense was
16
$146 thousand in the 2003 period versus $105 thousand in the 2002 period,
an increase of 39% due to the Prize merger. Segment profit was $75 thousand for
the three months in 2003 versus a loss of $77 thousand for the same period in
2002.
Other Income and Expenses:
Total depreciation, depletion, amortization and accretion expense was $21.5
million in the 2003 period versus $15.1 million in the 2002 period, an increase
of 42% primarily a result of increased production due to the Prize merger.
General and administrative expense for 2003 increased 26% to $3.2 million
from $2.5 million in 2002. 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 $288 thousand in 2003 versus earnings of $301
thousand in 2002. This decrease was due to net losses from operations of our 32%
owned remote data gathering affiliate. Other income was $118 thousand for 2003
versus $57 thousand in 2002, caused by an increase in interest income. The
company recognized a $369 thousand gain in other non-cash hedging adjustments in
2003 versus a $593 thousand loss in 2002. In the 2003 period, $324 thousand of
the hedging gain relates to the amortization of commodity hedge assets acquired
in the Prize merger, while $45 thousand was due to recording hedge
ineffectiveness.
We incurred costs associated with the early retirement of debt of $1.9
million in the three months of 2003 versus $1.0 million in the same period of
2002. The 2003 period costs were associated with the $30.0 million redemption of
our 10% Senior Notes in January 2003. The 2002 period costs were associated with
the amendment of our senior bank credit facility in connection with the Prize
merger.
Interest expense was $12.6 million for 2003 versus $7.5 million for 2002,
as a result of the addition of $300 million in 9.6% Senior Notes in March 2002
in connection with the Prize merger. Our weighted average interest rate paid
under our senior bank credit facility was 3.3% in the 2003 period versus 4.4% in
the 2002 period.
The effective tax rate was 38.1% and (123.7)% for the three months ended
March 31, 2003 and 2002, respectively. The variance from the statutory rate of
35% was due to state income taxes in the 2003 period and to the release of the
valuation allowance on previously reserved deferred tax assets in the 2002
period.
Liquidity and Capital Resources
CASH FLOW AND WORKING CAPITAL. Net cash provided (used) by operating
activities for the three month period in 2003 and 2002 was $37.8 million and
$(24.0) million, respectively. The substantial increase in our operating cash
flows in 2003 from 2002 was primarily the result of large payments in the first
quarter of 2002 on payables that had accumulated at year-end as well as current
liability balances acquired in the merger with Prize. We also benefited in the
2003 period from the return of $8.9 million in margins we had posted on certain
commodity hedged positions. Our net working capital position at March 31, 2003
was a deficit of $40.3 million, which included a $47.8 million net current
derivative liability on commodity and interest rate hedges due to continued
increases in commodities prices over our hedged prices. If actual commodities
prices realized remain higher than our hedged prices during 2003, the resulting
higher cash proceeds from our production will offset any amounts ultimately paid
out on these derivative liabilities. At March 31, 2003, we had $83.3 million
available to be drawn under our Senior Bank credit facility (the "Facility").
Although there were higher commodities prices received on our production in
the first quarter of 2003 over the prior year's same period, our realized prices
(after commodity hedges) were lowered by approximately $1.76 per Mcfe for our
combined oil and gas production. Approximately 79% of our first quarter natural
gas production was hedged; 60% of these hedged volumes were through fixed price
swaps with a weighted average price of $3.01 per Mmbtu, and 40% were through
collars with a weighted average floor price of $3.06 per MMbtu and a weighted
average ceiling price of $4.30 per MMbtu. These gas hedges remain in effect
through June 2003; for the remainder of 2003, we have hedged approximately 72%
of our forecasted gas production. Approximately 10% of our hedged volumes are
through fixed price swaps with a weighted average price of $3.65 per MMbtu, and
90% are through collars with a weighted average floor price of $2.89 per Mmbtu
and a weighted average ceiling price of $3.87 per Mmbtu. Approximately 66% of
our first quarter crude oil production was hedged; approximately 14% of our
hedged volumes were through fixed price swaps with a weighted average price of
$21.25 per Bbl, and approximately 86% was hedged through collars with a weighted
average floor of $23.00 per Bbl and a weighted average ceiling of $27.00 per
Bbl. These hedges remain in effect through December 2003.
INVESTING ACTIVITIES. Net cash used in investing activities was $36.3
million for the three months ended March 31, 2003. We made capital expenditures
of $35.9 million under our $100 million capital budget during the first quarter
of 2003. Our capital expenditures are discussed in further detail below. For
2003, we also received proceeds from the sale of assets of $106 thousand and
paid out $487 thousand in revenues received on properties sold during 2002.
17
Net cash used in investing activities was $62.4 million for the three
months ended March 31, 2002. We made capital expenditures of $19 million during
the first three months of 2002. Additionally, we paid $41.1 million associated
with the Prize merger and made a loan of $2.4 million to a minority-owned
affiliate.
FINANCING ACTIVITIES. Net cash used by financing activities was $1.0
million for the first quarter of 2003. We borrowed a total of $104.1 million
during the period, and repaid borrowings of $67.8 million. We paid $29.1 million
to redeem $30.0 million in principal of our 10% Senior Notes, at a price of 105%
of par. The $31.5 million paid to redeem the Notes was reduced by approximately
$2.4 million in redeemed Notes which were held by a wholly-owned subsidiary. We
also loaned our KSOP $660 thousand to purchase shares of our common stock and
paid $7.1 million to purchase an additional 1.3 million shares of treasury
stock. We also spent $318 thousand to purchase stock for our deferred
compensation plan.
Net cash provided by financing activities was $87.5 million in the 2002
period. We borrowed a total of $534.2 million, including $300 million in new
9.6% Senior Notes, $185.6 million under the new Senior Bank credit facility, and
the remainder under the previous credit facility and from other sources. During
the period we also repaid borrowings of $431.3 million, including $155.7 million
to pay off the previous credit facility, $245.8 million to pay off the Prize
credit facility in connection with the merger, and the remainder to pay off
other indebtedness. We paid $11.8 million in fees related to the newly issued
Senior Notes and the new Senior Bank credit facility, loaned $2.5 million to the
ESOP, purchased treasury stock for $1.3 million, and had net proceeds from the
issuance of common stock of $145 thousand. Our financing activities are
discussed in further detail below.
CAPITAL RESOURCES. The following discussion of Magnum Hunter's capital
resources refers to the company and our affiliates. Internally generated cash
flow and the borrowing capacity under our Facility are our major sources of
liquidity. From time to time, we may also sell non-strategic properties in order
to increase liquidity. In addition, we 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, we have
accessed both the public and private capital markets to provide liquidity for
specific activities and general corporate purposes.
We amended our Facility in May 2003. The amended Facility provides for
total borrowings of $300 million, up from $250 million. Additionally, the
expiration date of the Facility was extended to May 2006. The increase will be
used to retire an additional $50 million of our 10% Senior Notes at 103.3% of
par plus accrued interest, or approximately $51.7 million. At March 31, 2003, we
had $83.3 million available under this Facility.
On April 5, 2003, we reached an agreement for the sale of certain oil and
gas properties considered to be non-strategic assets. The preliminary purchase
price, subject to certain purchase price adjustments, has been set at $13.4
million. The sale is scheduled to close on or before May 31, 2003.
On March 7, 2002, Canvasback entered into a $10.0 million revolving credit
agreement with a financial institution. This loan is collateralized by the 10%
Senior Notes Canvasback holds. During 2002, this revolving loan was converted
into a $7 million term loan. The proceeds of $2.3 million received by Canvasback
by the bond redemption were used to reduce the outstanding balance to $4.7
million.
On May 1, 2002, our Board of Directors announced an expansion of our
existing stock repurchase program originally established in June 2001. The
company or our affiliates were authorized to repurchase up to 2.0 million shares
of our common stock. On October 17, 2002, our Board of Directors approved a new
3.0 million share repurchase program. Approximately 4.1 million shares have been
purchased through March 31, 2003 under these programs, and approximately 900
thousand remain available for repurchase.
On a semi-annual basis, our borrowing base under our Facility is
redetermined by the financial institutions who have committed to the company
based on their review of our 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 June 30, 2003.
Our internally generated cash flow, results of operations, and financing
for our operations are substantially dependent on oil and gas prices. To the
extent that oil and gas prices decline, our earnings and cash flows may be
adversely affected in spite of our commodity hedging activities. We believe that
our cash flow from operations, existing working capital and availability under
our Facility will be sufficient to meet interest payments and to fund the
capital expenditure budget for the year 2003.
CAPITAL EXPENDITURES. During the 2003 period, our total capital
expenditures were $35.9 million. Exploration activities accounted for $12.0
million, development activities accounted for $20.9 million, additions to
unproved
18
properties not accounted for as exploration or development expenditures
accounted for $2.9 million, and additions to other assets accounted for $125
thousand of the capital expenditures. We participated in the drilling of 29
wells during the 2003 period, of which 26 were considered successful. Of the 29
wells drilled, 7 were exploratory wells, of which 4 were successful, and 22 were
development wells, all of which were successful. As of March 31, 2003, we had
total unproved oil and gas property costs of $167.0 million.
For calendar year 2003, we have budgeted approximately $100 million for
exploration and development activities. We are not contractually obligated to
proceed with any of our material budgeted capital expenditures. The amount and
allocation of future capital expenditures will depend on a number of factors
that are not entirely within our 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, we review opportunities for the
possible acquisition of oil and gas reserves and activities related thereto.
When potential acquisition opportunities are deemed consistent with our growth
strategy, bids or offers in amounts and with terms acceptable to us may be
submitted. It is uncertain whether any such bids or offers which may be
submitted by us from time to time, will be acceptable to the sellers. In the
event of a future significant acquisition, we 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. 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 2003 period, we experienced significant increases in the price
for both oil and natural 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 natural gas prices. Should
we experience a significant increase in oil and natural gas prices that is
sustained over a prolonged period, we would expect that there would also be a
corresponding increase in oil and gas finding costs, lease acquisition costs,
and operating expenses. Periodically, we enter into hedging contracts to reduce
the effects of significant fluctuations in crude oil and natural gas prices. At
inception, commodity hedge positions may not exceed 75% of the natural gas and
90% of the crude oil forecasted current (18 months) commodity production. For
non-current (greater than 18 months) commodity production, at inception,
commodity hedge positions for natural gas and crude oil may not exceed 75%. A
portion of our oil and natural gas production will be subject to price
fluctuations unless we enter into additional hedging transactions. For the
remainder of 2003, we have approximately 70% of our combined crude oil and
natural gas production hedged.
We market oil and natural gas for our own account, which exposes us to the
attendant commodities risk. A large portion of our natural 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. We normally sell our
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
19
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.
We were obligated to seven crude oil derivatives, eighteen natural gas
derivatives, and two interest rate derivatives on March 31, 2003. All
outstanding derivatives qualify for cash flow hedge accounting treatment as
defined within SFAS No. 133, which requires derivative assets and liabilities to
be recorded at their fair value on the balance sheet with an offset to other
comprehensive income. Hedge ineffectiveness on cash-flow hedges is recorded in
earnings.
At March 31, 2003, the fair value of the company's derivatives were as
follows (in thousands):
Derivative Liabilities
-----------------------------------------
Natural gas collars...................... $ 33,294
Natural gas swaps........................ 13,508
Crude oil collars........................ 3,089
Crude oil swaps.......................... 2,157
Interest rate swaps...................... 758
------------
Total derivative liabilities............. $ 52,806
============
For the three month period ended March 31, 2003, the income statement
includes a non-cash hedging ineffectiveness gain of $45 thousand related to the
crude oil and natural gas derivatives and a non-cash gain of $324 thousand
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 2003 and
2004 are a $1.0 million gain and $0.8 million gain, respectively. It is
estimated at this time that $28.6 million of other comprehensive loss will be
reclassified into the income statement during the next 12 months.
On May 1, 2003, we closed 20,000 Mmbtu/d of natural gas collar hedges for
June through December 2003. In closing these contracts, we locked in a $5.7
million loss which will be recognized in earnings with the underlying forecasted
commodity sales transactions in June through December 2003.
New Accounting Standards
SFAS No. 143 - SFAS No. 143, "Accounting for Asset Retirement Obligations",
became effective beginning January 1, 2003. SFAS No. 143 requires the
recognition of a fair value liability for any retirement obligation associated
with long-lived assets in the period in which it is incurred if a reasonable
estimate of fair value can be made. The associated asset retirement costs are
capitalized as part of the carrying amount of the long-lived asset and
depreciated over the asset's useful life. Upon adoption of SFAS No. 143, we
recorded an addition to oil and gas properties of $25.4 million, an asset
retirement obligation of $30.4 million, a reduction of accumulated depletion of
$5.6 million, and a pre-tax gain of $ 643 thousand.
SFAS No. 145 - SFAS No. 145 "Recission of FASB Statements No. 4, 44, and
64, Amendment of FASB Statement No. 13, and Technical Corrections" became
effective 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 requires us to reclassify extraordinary items
for debt extinguishment costs which did 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 expense.
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.
SFAS No. 148 - The FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure, an Amendment to FASB Statement No.
123", in December 2002. SFAS No. 148 provides alternative methods of transition
for a voluntary change to the fair value method of accounting for stock-based
employee compensation and amends the disclosure requirements of SFAS No. 123. We
have no plans at this time to change our method to the fair value based method
from the intrinsic value method. We account for our stock-based employee
compensation plans under
20
the measurement and recognition principles of APB Opinion No. 25,
"Accounting for Stock Issued to Employees and Related Interpretations".
Accordingly, we do not reflect any stock-based compensation in net income
because all options granted under these plans had an exercise price equal to the
market value of our stock on the date of grant. The following table illustrates
the effect on net income and earnings per share if we had applied the fair value
recognition provisions of SFAS 123 (in thousands, except for per share amounts):
Three Months Ended March 31,
2003 2002
---------- ---------
Net income, as reported................................................ $7,990 $7,446
Deduct: Total stock-based employee compensation
determined under fair value-based method for all awards,
net of related tax effects...................................... (671) (688)
---------- ---------
Pro forma net income................................................... $7,319 $6,758
========== =========
Earnings per share:
Basic - as reported............................................... $ 0.12 $ 0.18
========== =========
Basic - pro forma................................................. $ 0.11 $ 0.16
========== =========
Diluted - as reported............................................. $ 0.12 $ 0.17
========== =========
Diluted - pro forma............................................... $ 0.11 $ 0.16
========== =========
FIN No. 45 - "Guarantor's Accounting and Disclosure Requirements for
Guarantees", was issued in November 2002. This interpretation addresses the
disclosures to be made by a guarantor in its interim and annual financial
statements about its obligations under guarantees. It also clarifies the
requirements related to the recognition of a liability by a guarantor at the
inception of a guarantee for the obligations the guarantor has undertaken in
issuing that guarantee. We adopted this statement in January 2003.
In the past we have provided trade guarantees on behalf of our 30% owned
affiliate, NGTS, LLC. In the event that NGTS, LLC is unable to fulfill its
obligations with certain vendors, we would be obligated for cash payments of up
to $5.6 million to these vendors. We have not recorded these as a liability on
our books at March 31, 2003 because we do not expect to have to perform under
these guarantees. The last of these guarantees expires in July 2003, and we do
not intend to issue any additional guarantees on behalf of NGTS, LLC. We have
provided no other guarantees on behalf of any unconsolidated entities and do not
intend to issue any.
Item 3. Qualitative and Quantitative Disclosure About Market Risk
Our operations are exposed to market risks primarily as a result of changes
in commodity prices and interest rates. We do not use derivative financial
instruments for speculative or trading purposes.
Commodity Price Swaps and Options
We produce, purchase, and sell crude oil, natural gas, condensate, and
natural gas liquids. As a result, our financial results can be significantly
impacted as these commodity prices fluctuate widely in response to changing
market forces and conditions. We have previously engaged in oil and gas hedging
activities and intend to continue to consider various hedging arrangements to
realize commodity prices which we consider 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 crude oil and Henry Hub natural gas,
and the Inside FERC natural gas index price posting ("Index"). We have 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, we pay the spread, and to the extent the
contract price exceeds the Index price, we receive the spread. In addition, we
have combined option contracts which have agreed upon price floors and ceilings
("Costless collars"). To the extent the Index price exceeds the contract
ceiling, we pay the spread between the ceiling and the Index
21
price applied tothe related contract volumes. To the extent the contract
floor exceeds the Index, we receive the spread between the contract floor and
the Index price applied to the related contract volumes.
To the extent we receive the spread between the contract price and the
Index price applied to related contract volumes, we have a credit risk in the
event of nonperformance of the counterparty to the agreement. We do not
anticipate any material impact to its results of operations as a result of
nonperformance by such parties.
The following is a summary of our open commodity hedge contracts as of
March 31, 2003:
Weighted Average
Commodity Type Volume/Day Duration Price
- --------------- ------------- ------------------ --------------- ------------------
Natural Gas Swap 60,000 MMBTU Apr 03 - Jun 03 $3.01
Natural Gas Swap 10,000 MMBTU Jul 03 - Dec 03 $3.65
Natural Gas Collar 40,000 MMBTU Apr 03 - Jun 03 $3.06 - $4.30
Natural Gas Collar 90,000 MMBTU Jul 03 - Dec 03 $2.89 - $3.87
Natural Gas Collar 55,000 MMBTU Jan 04 - Dec 04 $3.64 - $4.93
Crude Oil Swap 1,000 BBL Apr 03 - Dec 03 $21.25
Crude Oil Collar 6,000 BBL Apr 03 - Dec 03 $23.00 - $27.00
Crude Oil Collar 1,000 BBL Jan 04 - Dec 04 $23.00 - $27.00
Based on future market prices at March 31, 2003, the fair value of open
commodity hedging contracts was a liability of $52.0 million. If future market
prices were to increase 10% from those in effect at March 31, 2003, the fair
value of open contracts would be a liability of $85.1 million. If future market
prices were to decline 10% from those in effect at March 31, 2003, the fair
value of the open contracts would be a liability of $27.3 million.
At inception, commodity hedge positions may not exceed 75% of natural gas
and 90% of crude oil forecasted current (18 months) commodity production. For
non-current (greater than 18 months) commodity production, at inception,
commodity hedge positions for natural gas and crude oil may not exceed 75%.
Unhedged portions of our natural gas and crude oil production will be subject to
market price fluctuations.
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 1.34%)
Based on future market rates at March 31, 2003, the fair value of open
contracts was a liability of $758 thousand. If future market rates were to
increase 10% from those in effect at March 31, 2003, the fair value of open
contracts would be a liability of $742 thousand. If future market rates were to
decline 10% from those in effect at March 31, 2003, the fair value of the open
contracts would be a liability of $774 thousand.
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 our 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 March 31,
2003.
22
Expected Maturity Dates 2003 2004-6 2007 2012 Total Fair Value
-------------------------------------------- -------------------------------------------------------------------------------
(in thousands)
Variable Rate Debt:
Bank Debt with Recourse (a)...................... $ - $164,175 $ - $ - $164,175 $164,175
Bank Debt without Recourse (b)................... $ - $ 4,652 $ - $ - $ 4,652 $ 4,652
Capital Leases (c)............................... $ 1,372 $ 5,324 $ 2,182 $ - $ 8,878 $ 8,878
Fixed Rate Debt:
Senior Notes (d)................................. $ - $ - $101,814 $ - $101,814 $105,887
Senior Notes (e)................................. $ - $ - $ - $300,000 $300,000 $324,000
Production Payment liability (f)................. $ - $ 87 $ - $ - $ 87 $ 87
- ---------------
(a) The average interest rate on the bank debt with recourse is 3.3%.
(b) The average interest rate on the bank debt without recourse is 5.9%.
(c) The average interest rate on the two capital leases is 4.7%.
(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 production payment liability is a fixed 13.5%.
Item 4. Controls and Procedures
Our 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 our 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 our 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.
23
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* Amendment to Fourth Amended and Restated Credit Agreement
10.4 Employment Agreement for Gary C. Evans (Incorporated by reference to Form 10-K for the fiscal
24
year-end December 31, 1999 filed March 30, 2000)
10.5 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)
10.6 Employment Agreement for Chris Tong (Incorporated by reference to Form 10-K for the year ended
December 31, 2002)
10.7 Employment Agreement for R. Douglas Cronk (Incorporated by reference to Form 10-K for the year
ended December 31, 2002)
10.8 Employment Agreement for Charles Erwin (Incorporated by reference to Form 10-K for the year
ended December 31, 2002)
10.9 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)
10.10 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)
10.11 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)
10.12 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 Section 906 of Sarbanes-Oxley Act of 2002, signed by Gary C. Evans
99.2* Certification pursuant to Section 906 of Sarbanes-Oxley Act of 2002, signed by Chris Tong
99.3* Certification pursuant to Section 302 of Sarbanes-Oxley Act of 2002, signed by Gary C. Evans
99.4* Certification pursuant to Section 302 of Sarbanes-Oxley Act of 2002, signed by Chris Tong
*Filed herewith
25
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 May 15, 2003
-------------------------------------------------------
Gary C. Evans
Chairman, President and Chief Executive Officer
By /s/ Chris Tong May 15, 2003
-------------------------------------------------------
Chris Tong
Senior Vice President and Chief Financial Officer
By /s/ Morgan F. Johnston May 15, 2003
-------------------------------------------------------
Morgan F. Johnston
Senior Vice President, General Counsel and Secretary
By /s/ David S. Krueger May 15, 2003
-------------------------------------------------------
David S. Krueger
Vice President and Chief Accounting Officer
26