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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the Quarterly period ended June 30, 2002
-------------
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Transition period to
----------------- -----------------
Commission File Number 0-22650
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PETROCORP INCORPORATED
(Exact name of registrant as specified in its charter)
Texas 76-0380430
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
6733 South Yale
Tulsa, Oklahoma 74136
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code: (918) 491-4500
Not Applicable
---------------------------------------------------------------------
(Former Name, Former Address and Former Fiscal Year,
if changed since last report)
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 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 the number of shares outstanding of each of the Registrant's classes of
stock, as of July 31, 2002:
Common Stock, $.01 per value 12,545,109
---------------------------- ----------
(Title of Class) (Number of Shares Outstanding)
PETROCORP INCORPORATED
INDEX
PAGE NO.
--------
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets at June 30, 2002 and December 31, 2001 1
Consolidated Statements of Operations for the three and six months
ended June 30, 2002 and 2001 2
Consolidated Statements of Cash Flows for the six months
ended June 30, 2002 and 2001 3
Notes to Consolidated Financial Statements 4
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 10
Item 3. Quantitative and Qualitative Disclosures about Market Risk 14
PART II. OTHER INFORMATION 15
SIGNATURES 16
Certain matters discussed in this report, excluding historical information,
include forward-looking statements - statements that discuss the Company's
expected future results based on current and pending business operations. The
Company is making these forward-looking statements in reliance on the safe
harbor protections provided under the PRIVATE SECURITIES LITIGATION REFORM ACT
OF 1995.
Forward-looking statements can be identified by words such as "anticipates,"
"believes," "expects," "planned," "scheduled" or similar expressions. Although
the Company believes these forward-looking statements are based on reasonable
assumptions, statements made regarding future results are subject to numerous
assumptions, uncertainties and risks that may cause future results to be
materially different from the results stated or implied in this document.
Important risk factors (but not necessarily all important factors) that could
cause actual results to differ materially from those expressed in any
forward-looking statement made by, or on behalf of, the Company would include,
but in no way be limited by, the Company's ability to obtain agreements with
co-venturers, partners and governments; its ability to engage drilling,
construction and other contractors; its ability to obtain economical and timely
financing; geological, land, sea or weather conditions; world prices for oil,
natural gas and natural gas liquids; adequate and reliable transportation
systems; and foreign and United States laws, including tax laws. Additional
information about issues that could lead to material changes in performance is
contained in the Company's Form 10-K.
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements
PETROCORP INCORPORATED
CONSOLIDATED BALANCE SHEETS
(in thousands, except share amounts)
(Unaudited)
June 30, December 31,
2002 2001
-------------- ---------------
Assets
Current assets:
Cash and cash equivalents $ 3,593 $ 1,265
Accounts receivable, net 16,850 13,267
Other current assets 1,518 1,411
--------- ---------
Total current assets 21,961 15,943
--------- ---------
Property, plant and equipment:
Oil and gas properties, at cost, full cost method, net of
accumulated depreciation, depletion, amortization and
impairment 120,619 126,925
Other, net 912 1,527
--------- ---------
121,531 128,452
--------- ---------
Deferred income taxes 22,048 18,261
Other assets, net 2,701 2,699
--------- ---------
Total assets $ 168,241 $ 165,355
========= =========
Liabilities and Shareholders' Equity
Current liabilities:
Accounts payable $ 9,269 $ 6,708
Accrued liabilities 3,232 3,877
Current portion of long-term debt 1,288 1,327
--------- ---------
Total current liabilities 13,789 11,912
--------- ---------
Long-term debt 42,365 47,620
--------- ---------
Deferred income taxes 14,716 13,908
--------- ---------
Shareholders' equity:
Preferred stock, $0.01 par value, 1,000,000 shares authorized,
none issued
Common stock, $0.01 par value, 25,000,000 shares authorized,
12,585,109 and 12,556,109 shares outstanding as of
June 30, 2002 and December 31, 2001, respectively 129 128
Additional paid-in capital 111,395 111,114
Accumulated deficit (6,240) (9,666)
Accumulated other comprehensive loss (NOTE 2) (5,563) (7,311)
Treasury stock, at cost (264,607 shares) (2,350) (2,350)
--------- ---------
Total shareholders' equity 97,371 91,915
--------- ---------
Total liabilities and shareholders' equity $ 168,241 $ 165,355
========= ==========
The accompanying notes are an integral part of these financial statements.
1
PETROCORP INCORPORATED
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except share amounts)
(Unaudited)
For the three months For the six months
ended June 30, ended June 30,
------------------------- ------------------------
2002 2001 2002 2001
------------ ----------- ------------ ----------
Revenues:
Oil and gas $ 11,976 $ 11,655 $ 22,661 $ 24,880
Plant processing 567 480 1,056 913
Other 351 621 651 732
-------- -------- -------- --------
12,894 12,756 24,368 26,525
-------- -------- -------- --------
Expenses:
Production costs 3,431 2,901 7,233 4,475
Depreciation, depletion and amortization 4,381 2,941 8,867 5,175
General and administrative 671 511 1,357 990
Other operating expenses 368 665 689 701
-------- -------- -------- --------
8,851 7,018 18,146 11,341
-------- -------- -------- --------
Income from operations 4,043 5,738 6,222 15,184
-------- -------- -------- --------
Other income (expenses):
Investment income 61 56 91 94
Interest expense (626) (449) (1,355) (668)
Other income (expenses) 291 (1,053) 454 225
-------- -------- -------- --------
(274) (1,446) (810) (349)
-------- -------- -------- --------
Income before income taxes 3,769 4,292 5,412 14,835
-------- -------- -------- --------
Income tax provision:
Current 585 1,453 1,027 3,703
Deferred 804 240 959 2,327
-------- -------- -------- --------
1,389 1,693 1,986 6,030
-------- -------- -------- --------
Net income $ 2,380 $ 2,599 $ 3,426 $ 8,805
======== ======== ======== ========
Net income per common share - basic: $ 0.19 $ 0.27 $ 0.27 $ 0.95
======== ======== ======== ========
Net income per common share - diluted: $ 0.19 $ 0.26 $ 0.27 $ 0.93
======== ======== ======== ========
Weighted average number of common shares - basic 12,561 9,783 12,559 9,253
======== ======== ======== ========
Weighted average number of common shares - diluted 12,685 9,966 12,680 9,427
======== ======== ======== ========
The accompanying notes are an integral part of these financial statements.
2
PETROCORP INCORPORATED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(Unaudited)
For the six months
ended June 30,
----------------------------
2002 2001
---------- ----------
Cash flows from operating activities:
Net income $ 3,426 $ 8,805
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation, depletion and amortization 8,867 5,175
Deferred income tax expense 959 2,327
Other 64 142
Changes in operating assets and liabilities:
Accounts receivable (3,583) 4,569
Other current assets (406) 163
Accounts payable 2,561 (4,124)
Accrued liabilities 259 628
Income tax payable - (5,162)
--------- ---------
Net cash provided by operating activities 12,147 12,523
--------- ---------
Cash flows from investing activities:
Additions to oil and gas properties (4,132) (4,994)
Additions to plant and related facilities (206) (134)
Purchase of Southern Mineral Corporation net assets - (19,849)
--------- ---------
Net cash used in investing activities (4,338) (24,977)
--------- ---------
Cash flows from financing activities:
Proceeds from long-term debt 3,465 88,250
Repayment of long-term debt (9,106) (72,399)
Other 218 261
--------- ---------
Net cash used in financing activities (5,423) 16,112
--------- ---------
Effect of exchange rate changes on cash (58) (477)
--------- ---------
Net increase (decrease) in cash and cash equivalents 2,328 3,181
Cash and cash equivalents at beginning of period 1,265 21,946
--------- ---------
Cash and cash equivalents at end of period $ 3,593 $ 25,127
========= =========
The accompanying notes are an integral part of these financial statements.
3
PETROCORP INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1 - BASIS OF PRESENTATION
The unaudited consolidated financial statements of PetroCorp Incorporated
(the "Company" or "PetroCorp") have been prepared in accordance with generally
accepted accounting principles for interim financial information and with
instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do
not include all of the information and footnotes required by generally accepted
accounting principles for complete financial statements. In the opinion of
management, all adjustments, consisting of normal and recurring adjustments
necessary for a fair presentation, have been included. For further information,
refer to the consolidated financial statements and footnotes thereto for the
year ended December 31, 2001, included in the Company's 2001 Annual Report on
Form 10-K/A pursuant to Section 13 or 15(d) of the Securities Exchange Act of
1934 (10-K). Interim period results are not necessarily indicative of results of
operations or cash flows for a full-year period.
NOTE 2 - COMPREHENSIVE INCOME
The Company follows SFAS No. 130, "Reporting Comprehensive Income." This
Statement establishes requirements for reporting comprehensive income and its
components which includes the Company's foreign currency translation adjustment
and derivative cash flow hedges. The Company's comprehensive income for the
three and six months ended June 30, 2002 and 2001 is as follows (in thousands):
For the three For the six
months ended months ended
June 30, June 30,
--------------------- ---------------------
2002 2001 2002 2001
-------- -------- --------- --------
Net income ................................. $ 2,380 $ 2,599 $ 3,426 $ 8,805
------- ------- ------- -------
Derivative hedging gain (loss) (net of
taxes of ($83) and $290) ................ 153 390 (445) 390
Reclassification of hedging gain (loss)
to income (net of taxes of $68 and
$180) ................................... 115 - 283 -
Foreign currency translation gain (loss) ... 1,993 1,779 1,910 49
------- ------- ------- -------
$ 2,261 $ 2,169 $ 1,748 $ 439
------- ------- ------- -------
Comprehensive income (loss) ................ $ 4,641 $ 4,768 $ 5,174 $ 9,244
======= ======= ======= =======
As of June 30, 2002, accumulated other comprehensive loss consisted of $730
of derivative gain, net of taxes, and $6,293 of foreign currency translation
losses.
4
NOTE 3 - EARNINGS PER SHARE
The following is a reconciliation of the numerators and denominators of the
basic and diluted per share computations for the periods presented (in
thousands, except share amounts):
Net Per Share
Income Shares Amount
--------- -------- -----------
Three months ended June 30,
2002
Basic EPS:
Net income ..................... $ 2,380 12,561 $ 0.19
Effect of dilutive securities:
Options ........................ - 124 -
------- ------ -------
Diluted EPS:
Net income ..................... $ 2,380 12,685 $ 0.19
======= ====== =======
2001
Basic EPS:
Net income ..................... $ 2,599 9,783 $ 0.27
Effect of dilutive securities:
Options ........................ - 183 (0.01)
------- ------ -------
Diluted EPS:
Net income ..................... $ 2,599 9,966 $ 0.26
======= ====== =======
Six months ended June 30,
2002
Basic EPS:
Net income ................... $ 3,426 12,559 $ 0.27
Effect of dilutive securities:
Options ...................... - 121 -
------- ------ -------
Diluted EPS:
Net income ................... $ 3,426 12,680 $ 0.27
======= ====== =======
2001
Basic EPS:
Net income ................... $ 8,805 9,253 $ 0.95
Effect of dilutive securities:
Options ...................... - 174 (0.02)
------- ------ -------
Diluted EPS:
Net loss ..................... $ 8,805 9,427 $ 0.93
======= ====== =======
The net income per share amounts do not include the effect of potentially
dilutive securities of 405,610 and 176,117 for the three months ended June 30,
2002 and 2001, respectively, and 405,610 and 540,117 for the six months ended
June 30, 2002 and 2001, respectively, as the impact of these outstanding options
was antidilutive.
5
NOTE 4 - MERGER WITH SOUTHERN MINERAL CORPORATION
PetroCorp completed the acquisition of Southern Mineral Corporation
("Southern Mineral") on June 6, 2001. The acquisition of Southern Mineral was
accounted for using the purchase method of accounting as of June 1, 2001 because
as of that date, the company had effective control, and the results of
operations have been included since that date.
The following unaudited pro forma information has been prepared assuming
Southern Mineral had been acquired as of the beginning of the period presented.
The pro forma information is presented for information purposes only and is not
necessarily indicative of what would have occurred if the acquisition had been
made as of that date. In addition, the pro forma information is not intended to
be a projection of future results and does not reflect any efficiencies that may
result from the integration of Southern Mineral.
Pro Forma Information (Unaudited)
(In thousands, except per share data)
Six Months Ended
June 30, 2001
-----------------
Revenues ..................................... $ 40,738
Income before income taxes ................... $ 15,780
Net income ................................... $ 9,395
Earnings per common share - basic ............ $ 0.75
Earnings per common share - diluted .......... $ 0.74
The above pro forma data reflects $3,665 of bankruptcy expenses and
restructuring costs (primarily investment banker and employee severance related
costs) for Southern Mineral for the six months ended June 30, 2001. Based on
evaluations in connection with tax returns to be filed in 2002, the Company
adjusted prior estimates of the deferred taxes attributable to the assets
acquired. Accordingly, proved oil and gas properties were reduced by $4.5
million and Deferred tax assets increased by the same amount.
NOTE 5 - HEDGING ACTIVITIES
To reduce the impact of fluctuations in the market prices of oil and
natural gas, the Company periodically utilizes hedging strategies such as
futures transactions or swaps to hedge the price of a portion of its future oil
and natural gas production. Results of these hedging transactions are reflected
in oil and natural gas sales in the month of the hedged production.
As part of PetroCorp's acquisition of Southern Mineral, the Company
obtained crude oil and natural gas costless collars with a fair value
(liability) at the date of acquisition of $821,000. The estimated fair value of
the derivative instruments, which fair values were obtained from the
counter-parties, held by the Company at June 30, 2002 were a liability of
$74,000 (included in other liabilities) related to the oil and gas hedges. The
ineffective portion of these hedges was not material as of June 30, 2002.
Hedging transactions for the three months ended June 30, 2002 decreased oil and
gas revenues by $20,000; hedging transactions for the six months ended June 30,
2002 increased oil and gas revenues by $263,500 (reclassified from comprehensive
income). All obtained oil and gas hedging transactions will expire by the fourth
quarter of 2002.
In April 2002, the Company entered into a swap transaction covering 8,000
MMBTU of natural gas per day at a price of $3.755 per MMBTU and covering the
period from May 2002 through December 2002. The swap index is NYMEX Henry Hub.
The estimated fair value of the swap transactions at June 30, 2002 was an asset
of $451,000 (included in other current assets). The ineffective portion of these
swaps was not material as of June 30, 2002. Swap transactions for the three
months ended June 30, 2002 increased oil and gas revenues by $199,000
(reclassified from comprehensive income).
6
The Company offsets any gain or loss on the swap and collars contracts with
the realized prices for its production. While the swaps and collars reduce the
Company's exposure to declines in the market price of natural gas and oil, they
also limit the Company's gains from increases in the market price.
As a result of the merger with Southern Mineral, the Company also obtained
an interest rate swap position that was originally intended to hedge the
variability of interest expense associated with Southern Mineral's variable rate
Canadian debt. Under the swap agreement, the Company receives a floating rate of
the Canadian prime rate and pays a fixed rate of 5.96% on a notional amount of
Canadian $15 million through August 29, 2003. The interest rate swap does not
qualify for hedge accounting. The estimated fair value at June 30, 2002 is a
liability (included in other liabilities) of $401,000.
NOTE 6 - PROPERTY, PLANT AND EQUIPMENT
Investments in property, plant and equipment were as follows at June 30,
2002 and December 31, 2001 (amounts in thousands):
2002 2001
----------- -----------
Oil and gas properties:
Proved ......................................... $ 318,505 $ 315,935
Unproved ....................................... 1,553 1,223
---------- ----------
320,058 317,158
Plant and related facilities ....................... 10,439 9,743
Gas gathering facilities ........................... 1,698 1,698
Furniture, fixtures and equipment .................. - 95
---------- ----------
332,195 328,694
Less - accumulated depreciation, depletion,
amortization and impairment ...................... (210,664) (200,242)
---------- ----------
$ 121,531 $ 128,452
========== ==========
As more fully described in the Company's 10-K, PetroCorp utilizes the full
cost method of accounting for costs related to its oil and natural gas
properties. Under this method, capitalized costs are subject to a ceiling test,
evaluated each quarter, which limits such pooled costs to the aggregate of the
present value of future net revenues attributable to proved oil and gas reserves
discounted at 10 percent plus the lower of cost or market value of unproved
properties. At June 30, 2002, the Company's unamortized costs of its Canadian
oil and gas properties exceeded this ceiling amount by approximately $4 million
(after tax) due to low gas prices in effect at that date. The cash spot price
for natural gas in the US and Canada was $3.21 and $1.34, respectively, on June
30, 2002. However, due to the subsequent recovery in the market prices for
natural gas the Company was not required to record a write-down of its oil and
gas properties. A decline in oil and gas prices from current levels, or other
factors, without other mitigating circumstances, could cause a future write-down
of capitalized costs and a non-cash charge against future earnings.
NOTE 7 - LONG-TERM DEBT
In July 2000, the Company entered into a $75 million revolving credit
agreement with the Toronto-Dominion Bank (TD Bank), the agent, and the Bank of
Nova Scotia. The term of the facility is through April 30, 2003 and the initial
borrowing base was set at $58 million. Borrowings can be funded by either
Eurodollar loans or Base Rate loans. The interest rate on the borrowings is
equal to an interest rate spread plus either the Eurodollar rate or the Base
Rate. The interest spread is determined from a sliding scale based on the
Company's borrowing base percentage utilization in effect from time to time. The
spread ranges from 1.25 to 2.25 on Eurodollar loans and .25 to 1.25 on Base Rate
loans. At June 30, 2002, the weighted average interest rate for loans
outstanding under this facility was approximately 4.0%.
7
The $75 million revolving credit agreement prohibits the declaration and
payment of dividends on the common stock of the Company. Also, the debt
agreement requires, along with other restrictions, the Company to maintain a
minimum current ratio, a minimum tangible net worth, and a minimum interest
coverage ratio.
Subsequent to quarter end, the Company negotiated a twelve-month extension
of the existing credit agreement with TD Bank, as agent, on substantially the
same terms as the existing agreement. The extension, which is subject to
mutually agreeable documentation, anticipates an increase in the borrowing base
to $70 million. Debt under the credit agreement is therefore reflected as a
long-term liability in the financial statements.
NOTE 8 - GEOGRAPHIC AREA INFORMATION
The principal business of the Company is oil and gas, which consists of the
exploration, development, acquisition, exploitation and operation of oil and gas
properties and the production and sale of crude oil and natural gas in North
America. Pertinent information with respect to the Company's oil and gas
business is presented in the following table (in thousands):
United General
States Canada Corporate Total
--------- --------- ----------- ----------
Three months ended June 30, 2002:
Revenues .............................. $ 7,794 $ 5,100 $ - $ 12,894
Income (loss) from operations.......... 2,505 2,209 (671) 4,043
Three months ended June 30, 2001:
Revenues .............................. $ 6,447 $ 6,309 $ - $ 12,756
Income (loss) from operations ......... 3,052 3,196 (510) 5,738
Six months ended June 30, 2002:
Revenues .............................. $ 13,970 $ 10,398 $ - $ 24,368
Income (loss) from operations ......... 3,744 3,835 (1,357) 6,222
Long-lived assets at June 30 .......... 59,867 64,283 82 124,232
Six months ended June 30, 2001:
Revenues .............................. $ 13,041 $ 13,484 $ - $ 26,525
Income (loss) from operations ......... 7,397 8,776 (989) 15,184
Long-lived assets at June 30 .......... 83,505 70,091 219 153,815
NOTE 9 - RECENT ACCOUNTING PRONOUNCEMENTS
In June 2001, the Financial Accounting Standards Board ("FASB") issued FAS
No. 142, Goodwill and Other Intangible Assets, and in August 2001, FAS No. 144,
Accounting for Impairment or Disposal of Long-Lived Assets. Effective January 1,
2002, the Company adopted FAS No. 142 and 144. The adoption had no effect on the
Company's financial position or results of operations.
In June 2001, the FASB issued FAS No. 143, Accounting for Asset Retirement
Obligations. FAS 143 is effective for fiscal years beginning after June 15, 2002
(January 1, 2003 for the Company) and establishes an accounting standard
requiring the recording of the fair value of liabilities associated with the
retirement of long-lived assets (mainly plugging and abandonment costs for
depleted wells) in the period in which the liability is incurred (at the time
the wells are drilled). Management is currently evaluating the impact of FAS No.
143 on the Company's financial position and results of operations.
8
In April 2002, the FASB issued FAS No. 145, Recission of FASB Statements
No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical
Corrections. FAS No. 145 is effective for fiscal years beginning after May 15,
2002. In July 2002, the FASB issued FAS No. 146, Accounting For Costs Associated
with Exit or Disposal Activities, which is effective for exit or disposal
activities initiated after December 31, 2002. Management is currently evaluating
the impact of FAS No. 145 and 146 on financial position and results of
operations.
NOTE 10 - COMMON STOCK REPURCHASES
On September 14, 2001 the Company announced that the Board of Directors
authorized the purchase of up to 1,000,000 shares of the Company's common stock.
Through June 30, 2002, 264,607 shares have been purchased at a cost of
$2,350,000, which shares are held in treasury. On July 31, 2002, the Company
purchased an additional 40,000 shares at a cost of $350,000.
9
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
General
The Company's principal line of business is the production and sale of its
oil and natural gas reserves located in North America. Results of operations are
dependent upon the quantity of production and the price obtained for such
production. Prices received by the Company for the sale of its oil and natural
gas have fluctuated significantly from period to period. Such fluctuations
affect the Company's ability to maintain or increase its production from
existing oil and gas properties and to explore, develop or acquire new
properties.
The following table reflects certain operating data for the periods
presented:
For the For the
three months six months
ended June 30, ended June 30,
---------------------- -----------------------
2002 2001 2002 2001
---------- --------- --------- ---------
Production:
United States:
Oil (MBbls) .............................. 121 91 246 157
Gas (MMcf) ............................... 1,319 905 2,786 1,660
Total gas equivalents (MMcfe) ............ 2,045 1,451 4,262 2,602
Canada:
Oil (MBbls) .............................. 68 42 134 70
Gas (MMcf) ............................... 1,532 1,285 3,144 2,435
Total gas equivalents (MMcfe) ............ 1,940 1,537 3,948 2,855
Total:
Oil (MBbls) .............................. 189 133 380 227
Gas (MMcf) ............................... 2,851 2,190 5,930 4,095
Total gas equivalents (MMcfe) ............ 3,985 2,988 8,210 5,457
Average sales prices:
United States:
Oil (per Bbl) ............................ $24.15 $26.65 $22.00 $26.93
Gas (per Mcf) ............................ 3.17 4.37 2.81 5.24
Canada:
Oil (per Bbl) ............................ 22.68 22.40 20.25 23.67
Gas (per Mcf) ............................ 2.17 3.37 2.13 4.23
Weighted average:
Oil (per Bbl) ............................ 23.62 25.31 21.38 25.92
Gas (per Mcf) ............................ 2.63 3.78 2.45 4.64
Selected data per Mcfe:
Average sales price .......................... $3.01 $3.90 $2.76 $4.56
Production costs ............................. 0.86 0.97 0.88 0.82
General and administrative expenses .......... 0.17 0.17 0.17 0.18
Oil and gas depreciation, depletion
and amortization ........................... 0.99 0.88 0.98 0.82
10
Results of Operations
Three Months Ended June 30, 2002 Compared to Three Months Ended June 30, 2001
Overview. The Company recorded second quarter 2002 net income of
$2,380,000, or $0.19 per share. This compares to net income of $2,599,000 or
$0.27 per share recorded in the second quarter of 2001. The decrease in net
income results from lower oil and gas prices. Net cash provided by operating
activities was $9.6 million for the quarter ended June 30, 2002 compared to net
cash used of $1.6 million for the corresponding quarter of 2001.
Revenues. Total revenues increased 1% to $12.9 million in the second
quarter of 2002 compared to $12.8 million in the second quarter of 2001 as a
result of increased volumes from the merger with Southern Mineral, offset by
lower commodity prices. The Company's natural gas production increased 30% to
2,851 MMcf from 2,190 MMcf and oil production increased 42% to 189 MBbls from
133 MBbls, resulting in the Company's overall equivalent production increasing
33% to 3,985 MMcfe from 2,988 MMcfe. The increase in oil and gas production is
primarily due to the merger with Southern Mineral as well as several new wells
coming on-line in Canada.
The Company's composite average oil price decreased 7% to $23.62 per barrel
in the second quarter of 2002 from $25.31 per barrel in the second quarter of
2001. The Company's average U.S. natural gas price decreased 27% to $3.17 per
Mcf in the second quarter of 2002 from $4.37 per Mcf in the prior year quarter,
while the average Canadian natural gas price decreased 36% to $2.17 per Mcf in
the second quarter of 2002 from $3.37 per Mcf for 2001. The significant decrease
in gas prices, offset by the increase in volumes from the merger with Southern
Mineral, resulted in a 3% increase in oil and gas revenues to $12.0 million in
the second quarter of 2002 from $11.7 million in the prior year.
Production Costs. Production costs increased 17% to $3.4 million in the
second quarter of 2002 as a result of the costs associated with the additional
wells acquired in the merger with Southern Mineral. Production costs per Mcfe
decreased by 11% to $0.86 per Mcfe in the second quarter of 2002, primarily due
to decreased production taxes related to lower commodity prices, processing
credits received in connection with the annual throughput evaluation for the
Hanlan plant in Canada, and lower non-recurring workover and maintenance costs.
Depreciation, Depletion & Amortization (DD&A). Total DD&A increased 49% to
$4.4 million in the second quarter of 2002. The composite oil and gas DD&A rate
increased 13% to $.99 per Mcfe from $0.88 per Mcfe. This reflects the impact of
the cost of the Southern Mineral properties added to the full cost pool.
General and Administrative Expenses. General and administrative expenses
increased 31% to $671,000 in the second quarter of 2002 from $511,000 in the
second quarter of 2001 due to higher fees paid to Kaiser-Francis for the
management of the additional Southern Mineral properties.
Investment Income. Investment income increased 9% to $61,000 in the second
quarter of 2002 from $56,000 in the second quarter of 2001.
Interest Expense. Interest expense increased 39% to $626,000 in the second
quarter of 2002 from $449,000 in the prior year quarter, reflecting the increase
in outstanding debt due to the merger with Southern Mineral. The Liquidity and
Capital Resources section further describes changes in debt.
Other Income. Other income increased to $291,000 in the second quarter of
2002 compared to a loss of $1,053,000 in the prior year quarter. The income and
loss, respectively, are primarily due to realized translation gains and losses.
Income Taxes. The Company recorded a $1,389,000 income tax expense with an
effective tax rate of 37% on a pre-tax income of $3,769,000 in the second
quarter of 2002. This compares to an income tax expense of $1,693,000 with an
effective tax rate of 39% on pre-tax income of $4,292,000 in the second quarter
of 2001. The lower effective tax rate is primarily due to reduced tax rates in
Canada.
11
Six Months Ended June 30, 2002 Compared to Six Months Ended June 30, 2001
Overview. The Company recorded a first half 2002 net income of $3,426,000,
or $0.27 per share. This compares to net income of $8,805,000, or $0.95 per
share recorded in the first half of 2001. This decrease results primarily from
lower oil and gas prices. Net cash provided by operating activities was $12.1
million for the six months ended June 30, 2002 compared to $12.5 million for the
corresponding half of 2001.
Revenues. Total revenues decreased 8% to $24.4 million in the first six
months of 2002 compared to $26.5 million in the first half of 2001, primarily
due to commodity price decreases. The Company's natural gas production increased
45% to 5,930 MMcf from 4,095 MMcf and oil production increased 67% to 380 MBbls
from 227 MBbls, resulting in the Company's overall equivalent production
increasing 50% to 8,210 MMcfe from 5,457 MMcfe. The increase in natural gas
production is primarily the result of the merger with Southern Mineral as well
as several new wells coming on-line in both Canada and the US. The increase in
oil production also reflects the merger with Southern Mineral.
The Company's composite average oil price decreased 18% to $21.38 per
barrel in the first half of 2002 from $25.92 per barrel in the first six months
of 2001. The Company's average U.S. natural gas price decreased 46% to $2.81 per
Mcf in the first six months of 2002 from $5.24 per Mcf in the prior year, while
the average Canadian natural gas price decreased 50% to $2.13 per Mcf in the
first half of 2002 from $4.23 per Mcf in 2001. The significant decrease in oil
and gas prices, partially offset by increased production volumes, resulted in a
9% decrease in oil and gas revenues to $22.7 million in the first six months of
2002 from $24.9 million in the same period of 2001.
Production Costs. Production costs increased 60% to $7.2 million in the
first half of 2002 as a result of additional wells acquired in the merger with
Southern Mineral. Production costs per Mcfe increased 7% to $0.88 per Mcfe in
the first half of 2002 from $0.82 in the same six months of 2001 primarily
because Southern Mineral properties acquired have higher processing costs
related to heavy oil in Canada and high sulfur production in Alabama.
Depreciation, Depletion & Amortization (DD&A). Total DD&A increased 71% to
$8.9 million in the first half of 2002 from $5.2 million in the first six months
of 2001. The composite oil and gas DD&A rate increased 20% to $.98 per MMcfe
from $0.82 per MMcfe. This reflects the impact of the cost of the Southern
Mineral properties added to the full cost pool.
General and Administrative Expenses. General and administrative expenses
increased 37% to $1,357,000 in the first six months of 2002 from $990,000 in the
first half of 2001 due to higher fees paid to Kaiser-Francis for the management
of the additional Southern Mineral properties.
Investment Income. Investment income decreased 3% to $91,000 in the first
half of 2002 from $94,000 in the first six months of 2001 due to lower interest
rates.
Interest Expense. Interest expense increased 103% to $1,355,000 in the
first six months of 2002 from $668,000 in the prior year first half, reflecting
the impact higher debt levels over most of the period. The Liquidity and Capital
Resources section further describes changes in debt.
Other Income. Other income increased 102% to $454,000 in the first half of
2002 from $225,000 for the corresponding period in 2001. The increase is
primarily due to a mark-to-market adjustment on the interest rate hedge.
Income Taxes. The Company recorded a $1,986,000 income tax expense with an
effective tax rate of 37% on pre-tax income of $5.4 million in the first half of
2002. This compares to an income tax expense of $6,030,000 with an effective tax
rate of 41% on pre-tax income of $14.8 million in the first half of 2001. The
lower effective tax rate is due to lower tax rates in Canada and the impact that
reduced commodity prices have on non-deductible Crown royalties and the resource
allowance deduction in the calculation of Canadian income taxes.
12
Liquidity and Capital Resources
As of June 30, 2002, the Company had working capital of $8.2 million as
compared to $4.0 million at December 31, 2001. Net cash provided by operating
activities was $12.1 million for the six months ended June 30, 2002 compared to
$12.5 million for the corresponding six months of 2001.
The Company's total capital expenditures were $4.3 million and $64.0
million, which includes the Southern Mineral acquisition ($25.0 million cash
expenditures, of which $19.8 relate to the Southern Mineral acquisition), for
the six months ended June 30, 2002 and 2001, respectively, primarily related to
the acquisition of Southern Mineral in 2001 and exploration and development in
both years.
In the first six months of 2002 sales of oil and gas properties totaled
$150,000. There were no corresponding sales in the first six months of 2001.
In July 2000, the Company entered into a $75 million revolving credit
agreement with the Toronto-Dominion Bank (TD Bank), the agent, and the Bank of
Nova Scotia. The term of the facility is through April 30, 2003 and the initial
borrowing base was set at $58 million. Borrowings can be funded by either
Eurodollar loans or Base Rate loans. The interest rate on the borrowings is
equal to an interest rate spread plus either the Eurodollar rate or the Base
Rate. The interest spread is determined from a sliding scale based on the
Company's borrowing base percentage utilization in effect from time to time. The
spread ranges from 1.25 to 2.25 on Eurodollar loans and .25 to 1.25 on Base Rate
loans. At June 30, 2002, the Company had a total of $42.4 million outstanding
under the revolver and $15.6 million available based on the current borrowing
base, as defined, subject to certain limitations. During the first half of 2002,
the average interest rate under this facility was approximately 4.2%.
Subsequent to quarter end, the Company negotiated a twelve-month extension
of the existing credit agreement with TD Bank, as agent, on substantially the
same terms as the existing agreement. The extension, which is subject to
mutually agreeable documentation, anticipates an increase in the borrowing base
to $70 million. Debt under the credit agreement is therefore reflected as a
long-term liability in the financial statements.
The Company has historically funded its capital expenditures and working
capital requirements with its cash flow from operations, debt and equity capital
and participation by institutional investors. If the Company increases its
capital expenditure level in the future or operating cash flow is not as
expected, capital expenditures may require additional funding, obtained through
borrowings from commercial banks and other institutional sources or by public or
private offerings of equity or debt securities.
Common Stock Repurchases
On September 14, 2001 the Company announced that the Board of Directors
authorized the purchase of up to 1,000,000 shares of the Company's common stock.
Through June 30, 2002, 264,607 shares have been purchased at a cost of
$2,350,000, which shares are held in treasury. On July 31, 2002, the Company
purchased an additional 40,000 shares at a cost of $350,000.
Other
In June 2001, the Financial Accounting Standards Board ("FASB") issued FAS
No. 142, Goodwill and Other Intangible Assets, and in August 2001, FAS No. 144,
Accounting for Impairment or Disposal of Long-Lived Assets. Effective January 1,
2002, the Company adopted FAS No. 142 and 144. The adoption had no effect on the
Company's financial position or results of operations.
In June 2001, the FASB issued FAS No. 143, Accounting for Asset Retirement
Obligations. FAS 143 is effective for fiscal years beginning after June 15, 2002
(January 1, 2003 for the Company) and establishes an accounting standard
requiring the recording of the fair value of liabilities associated with the
retirement of long-lived assets (mainly plugging and abandonment costs for
depleted wells) in the period in which the liability is incurred (at the time
the wells are drilled). Management is currently evaluating the impact of FAS No.
143 on the Company's financial position and results of operations.
13
In April 2002, the FASB issued FAS No. 145, Recission of FASB Statements
No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical
Corrections. FAS No. 145 is effective for fiscal years beginning after May 15,
2002. In July 2002, the FASB issued FAS No. 146, Accounting For Costs Associated
with Exit or Disposal Activities, which is effective for exit or disposal
activities initiated after December 31, 2002. Management is currently evaluating
the impact of FAS No. 145 and 146 on financial position and results of
operations.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
The Company's primary sources of market risk are from fluctuations in
commodity prices, interest rates and exchange rates.
Commodity Price Risk
The Company produces and sells natural gas, crude oil, condensate, natural
gas liquids and sulfur. As a result, the Company's financial results can be
significantly affected as these commodity prices fluctuate widely in response to
changing market forces. The Company utilizes hedging transactions to manage a
portion of its exposure to price fluctuations on its sales of oil and natural
gas. A change in commodity prices of $.10 per MCF of natural gas and $1.00 per
barrel of oil would cause the company's annual income from operations to change
by $1,675,000.
The merger with Southern Mineral resulted in PetroCorp assuming crude oil
and natural gas costless collars. The impact of hedging transactions for the six
months ended June 30, 2002 was an increase in oil and gas revenues of $263,500.
The fair value at June 30, 2002 of the crude oil and natural gas collars was a
liability of $74,000. All assumed oil and gas hedging transactions will expire
by the fourth quarter of 2002.
In April 2002, the Company entered into a swap transaction covering 8,000
MMBTU of natural gas per day at a price of $3.755 per MMBTU and covering the
period from May 2002 through December 2002. The swap index is NYMEX Henry Hub.
The estimated fair value of the swap transactions at June 30, 2002 was an asset
of $451,000.
Interest Rate Risk
As a result of the merger with Southern Mineral, the Company assumed an
interest rate swap position that was originally intended to hedge the
variability of interest expense associated with Southern Mineral's variable rate
Canadian debt. Under the swap agreement, the Company receives a floating rate of
the Canadian prime rate and pays a fixed rate of 5.96% on a notional amount of
Canadian $15 million through August 29, 2003. The interest rate swap does not
qualify for hedge accounting at June 30, 2002 and the Company has recorded the
swap's fair value of $192,000 as a liability at the date of the merger. The
estimated fair value at June 30, 2002 is a liability of $401,000.
14
PART II. OTHER INFORMATION
Item 1 - Legal Proceedings
Not Applicable
Item 2 - Changes in Securities
Not Applicable
Item 3 - Defaults upon Senior Securities
Not Applicable
Item 4 - Submission of Matters to Vote of Security Holders
(A) May 23, 2002 Annual shareholders meeting
(1) Election of Gary R. Christopher and Steven R. Berlin as directors
of the Company
Number of Votes
----------------------------------------------------
Abstentions and
For Against Broker Non-Votes
-------------- -------------- -----------------
9,921,499 2,000 217,411
Item 5 - Other Information
Not Applicable
Item 6 -
(a) Exhibits
Not Applicable
(b) Reports on Form 8-K
Not Applicable
15
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned duly authorized officer.
PETROCORP INCORPORATED
----------------------
(Registrant)
Date: August 13, 2002 /s/ STEVEN R. BERLIN
--------------- ----------------------------------------
Steven R. Berlin
Chief Financial Officer and Secretary
(On behalf of the Registrant and as the
Principal Financial Officer)
16