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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 September 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
-------
PETROCORP INCORPORATED
(Exact name of registrant as specified in its charter)
Texas 76-0380430
(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
6733 South Yale 74136
Tulsa, Oklahoma (Zip Code)
(Address of Principal Executive Offices)
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 October 31, 2002:
Common Stock, $.01 par value 12,645,309
---------------------------- ----------
(Title of Class) (Number of Shares Outstanding)
PETROCORP INCORPORATED
INDEX
PAGE NO.
--------
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets at September 30, 2002 and December 31, 2001 1
Consolidated Statements of Operations for the three and nine months ended September 30, 2002 and 2001 2
Consolidated Statements of Cash Flows for the nine months ended September 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
Item 4. Controls and Procedures 14
PART II. OTHER INFORMATION 15
SIGNATURES 16
CERTIFICATIONS 17
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)
September 30, December 31,
2002 2001
--------------- ----------------
Assets
------
Current assets:
Cash and cash equivalents $ 3,944 $ 1,265
Accounts receivable, net 15,203 13,267
Other current assets 944 1,411
--------------- ----------------
Total current assets 20,091 15,943
--------------- ----------------
Property, plant and equipment:
Oil and gas properties, at cost, full cost method, net of
accumulated depreciation, depletion, amortization and impairment 116,827 126,925
Other, net 447 1,527
--------------- ----------------
117,274 128,452
--------------- ----------------
Deferred income taxes 22,864 18,261
Other assets, net 2,860 2,699
--------------- ----------------
Total assets $ 163,089 $ 165,355
=============== ================
Liabilities and Shareholders' Equity
------------------------------------
Current liabilities:
Accounts payable $ 10,359 $ 6,708
Accrued liabilities 3,502 3,877
Income tax payable 405 -
Current portion of long-term debt 871 1,327
--------------- ----------------
Total current liabilities 15,137 11,912
--------------- ----------------
Long-term debt 36,880 47,620
--------------- ----------------
Deferred income taxes 13,590 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,
12,645,309 and 12,556,109 shares outstanding as of
September 30, 2002 and December 31, 2001, respectively 130 128
Additional paid-in capital 111,905 111,114
Accumulated deficit (4,067) (9,666)
Accumulated other comprehensive loss (NOTE 2) (7,774) (7,311)
Treasury stock, at cost (305,907 and 264,607 shares respectively) (2,712) (2,350)
--------------- ----------------
Total shareholders' equity 97,482 91,915
--------------- ----------------
Total liabilities and shareholders' equity $ 163,089 $ 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 nine months
ended September 30, ended September 30,
---------------------- ----------------------
2002 2001 2002 2001
---------- ---------- ---------- ----------
Revenues:
Oil and gas $ 12,425 $ 12,867 $ 35,086 $ 37,747
Plant processing 538 468 1,594 1,381
Other 501 472 1,152 1,204
---------- -------- -------- --------
13,464 13,807 37,832 40,332
---------- -------- -------- --------
Expenses:
Production costs 4,089 3,972 11,322 8,447
Depreciation, depletion and amortization 3,876 3,988 12,743 9,163
General and administrative 782 739 2,139 1,729
Other operating expenses 333 379 1,022 1,080
---------- -------- -------- --------
9,080 9,078 27,226 20,419
---------- -------- -------- --------
Income from operations 4,384 4,729 10,606 19,913
---------- -------- -------- --------
Other income (expenses):
Investment income 24 17 115 111
Interest expense (529) (832) (1,884) (1,500)
Other income (expenses) (252) 1,077 202 1,302
---------- -------- -------- --------
(757) 262 (1,567) (87)
---------- -------- -------- --------
Income before income taxes 3,627 4,991 9,039 19,826
---------- -------- -------- --------
Income tax provision:
Current 1,559 1,670 2,586 5,373
Deferred (105) 272 854 2,599
---------- -------- -------- --------
1,454 1,942 3,440 7,972
---------- -------- -------- --------
Net income $ 2,173 $ 3,049 $ 5,599 $ 11,854
========== ======== ======== ========
Net income per common share - basic: $ 0.17 $ 0.24 $ 0.45 $ 1.14
========== ======== ======== ========
Net income per common share - diluted: $ 0.17 $ 0.24 $ 0.44 $ 1.12
========== ======== ======== ========
Weighted average number of common shares - basic 12,570 12,778 12,563 10,439
========== ======== ======== ========
Weighted average number of common shares - diluted 12,653 12,911 12,670 10,596
========== ======== ======== ========
The accompanying notes are an integral part of these financial statements.
2
PETROCORP INCORPORATED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(Unaudited)
For the nine months
ended September 30,
--------------------------
2002 2001
---------- ---------
Cash flows from operating activities:
Net income $ 5,599 $ 11,854
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation, depletion and amortization 12,743 9,163
Deferred income tax expense 854 1,609
Gain realized on foreign currency translation - (948)
Other 97 142
Changes in operating assets and liabilities:
Accounts receivable (1,929) 6,363
Other current assets (413) (30)
Accounts payable 3,651 (9,879)
Accrued liabilities 137 3,989
Income tax payable 405 (5,537)
--------- ---------
Net cash provided by operating activities 21,144 16,726
--------- ---------
Cash flows from investing activities:
Additions to oil and gas properties (7,159) (11,408)
Additions to plant and related facilities (219) (260)
Purchase of Southern Mineral Corporation net assets - (21,192)
--------- ---------
Net cash used in investing activities (7,378) (32,860)
--------- ---------
Cash flows from financing activities:
Proceeds from long-term debt 8,013 120,527
Repayment of long-term debt (19,322) (125,571)
Other 334 634
--------- ---------
Net cash used in financing activities (10,975) (4,410)
--------- ---------
Effect of exchange rate changes on cash (112) (812)
--------- ---------
Net increase (decrease) in cash and cash equivalents 2,679 (21,356)
Cash and cash equivalents at beginning of period 1,265 21,946
--------- ---------
Cash and cash equivalents at end of period $ 3,944 $ 590
========= =========
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. Certain prior year balances
have been reclassified to conform with the current year financial statement
presentation.
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 nine months ended September 30, 2002 and 2001 is as follows (in
thousands):
For the three For the nine
------------- ------------
months ended months ended
------------ ------------
September 30, September 30,
------------- -------------
2002 2001 2002 2001
---- ---- ---- ----
Net income .................................. $ 2,173 $ 3,049 $ 5,599 $ 11,854
----------- ---------- ---------- -----------
Derivative hedging gain (loss) (net of
tax (expense) benefits of $378,
(389), $668 and ($613)) .................. (629) 531 (1,074) 921
Reclassification of hedging gain (loss)
to income (net of taxes of $147 and
$327) .................................... 244 - 527 -
Foreign currency translation gain (loss) .... (1,826) (2,538) 84 (2,489)
----------- ---------- ---------- -----------
$ (2,211) $ (2,007) $ (463) $ (1,568)
----------- ---------- ---------- -----------
Comprehensive income (loss) ................. $ (38) $ 1,042 $ 5,136 $ 10,286
=========== ========== ========== ===========
As of September 30, 2002, accumulated other comprehensive loss consisted of
$345 of derivative gain, net of taxes, and $8,119 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):
Per
Net Share
Income Shares Amount
---------- ---------- -----------
Three months ended September 30,
2002
Basic EPS:
Net income .......................... $ 2,173 12,570 $ 0.17
Effect of dilutive securities:
Options ............................. - 83 -
---------- --------- -----------
Diluted EPS:
Net income .......................... $ 2,173 12,653 $ 0.17
========== ========= ===========
2001
Basic EPS:
Net income .......................... $ 3,049 12,778 $ 0.24
Effect of dilutive securities:
Options ............................. - 133 -
---------- --------- -----------
Diluted EPS:
Net income .......................... $ 3,049 12,911 $ 0.24
========== ========= ===========
Nine months ended September 30,
2002
Basic EPS:
Net income .......................... $ 5,599 12,563 $ 0.45
Effect of dilutive securities:
Options ............................. - 107 (0.01)
---------- --------- -----------
Diluted EPS:
Net income .......................... $ 5,599 12,670 $ 0.44
========== ========= ===========
2001
Basic EPS:
Net income .......................... $ 11,854 10,439 $ 1.14
Effect of dilutive securities:
Options ............................. - 157 (0.02)
---------- --------- -----------
Diluted EPS:
Net loss ............................ $ 11,854 10,596 $ 1.12
========== ========= ===========
The net income per share amounts do not include the effect of potentially
dilutive securities of 306,000 and 420,000 for the three months ended September
30, 2002 and 2001, respectively, and 306,000 and 469,000 for the nine months
ended September 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. 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 September 30, 2002 was a liability of
$28,000 (included in other liabilities) related to the oil and gas hedges. The
ineffective portion of these hedges was not material as of September 30, 2002.
Hedging transactions for the three and nine months ended September 30, 2002
increased oil and gas revenues by $27,000 and $290,000, respectively,
(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 September 30, 2002 was a
liability of $204,000 (included in other current assets). The ineffective
portion of these swaps was not material as of September 30, 2002. Swap
transactions for the three and nine months ended September 30, 2002 increased
oil and gas revenues by $364,000 and $564,000, respectively, (reclassified from
comprehensive income).
The Company offsets any gain or loss on the natural gas and crude oil swap
and collar 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 September 30, 2002 is
a liability (included in other liabilities) of $170,000.
6
NOTE 6 - PROPERTY, PLANT AND EQUIPMENT
Investments in property, plant and equipment were as follows at September
30, 2002 and December 31, 2001 (amounts in thousands):
2002 2001
----------- -----------
Oil and gas properties:
Proved .................................................. $ 316,794 $ 315,935
Unproved ................................................ 1,710 1,223
----------- -----------
318,504 317,158
Plant and related facilities ................................ 9,988 9,743
Gas gathering facilities .................................... 1,698 1,698
Furniture, fixtures and equipment ........................... - 95
----------- -----------
330,190 328,694
Less - accumulated depreciation, depletion,
amortization and impairment ............................... (212,916) (200,242)
----------- -----------
$ 117,274 $ 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. 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 agreement was amended in August 2002 to extend its term,
increase the borrowing base, and partially change the lenders. The amended term
of the facility is through May 1, 2004 and the amended borrowing base set at $70
million. The current lenders are TD Bank, as agent, and Fortis Capital Corp. and
Bank of Oklahoma, N.A., whose largest beneficial owner is also the primary
beneficial owner of Kaiser-Francis Oil Company. Approximately 38% of the Company
is owned by Kaiser-Francis Oil Company.
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 rate 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 September 30, 2002, the
weighted average interest rate for loans outstanding under this facility was
approximately 3.5%.
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.
7
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 September 30, 2002:
Revenues ............................. $ 6,635 $ 6,829 $ - $ 13,464
Income (loss) from operations ........ 2,653 2,513 (782) 4,384
Three months ended September 30, 2001:
Revenues ............................. $ 6,119 $ 7,688 $ - $ 13,807
Income (loss) from operations ........ 602 4,868 (741) 4,729
Nine months ended September 30, 2002:
Revenues ............................. $ 20,605 $ 17,227 $ - $ 37,832
Income (loss) from operations ........ 6,397 6,348 (2,139) 10,606
Long-lived assets at September 30 .... 58,444 61,410 280 120,134
Nine months ended September 30, 2001:
Revenues ............................. $ 19,160 $ 21,172 $ - $ 40,332
Income (loss) from operations ........ 7,999 13,644 (1,730) 19,913
Long-lived assets at September 30..... 94,379 66,687 160 161,226
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.
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 anticipates the
adoption of FAS No. 145 and 146 will not affect the Company's current financial
position or results of operations.
8
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 September 30, 2002, 305,907 shares have been purchased at a cost of
$2,712,000, which shares are held in treasury.
NOTE 11 - SUBSEQUENT EVENT
In October 2002, the Company sold non-operated interests in properties and
a plant located in Alabama for approximately $11.5 million. Under full cost
accounting, sales of properties less than 25% of the reserves of the total pool
are recorded as credits to the full cost pool rather than as a gain or loss.
Consequently, this sale will not have a significant effect on the results of
operations for the year.
9
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
Critical Accounting Policies
There have been no changes from the Critical Accounting Policies described
in the Company's 2001 Annual Report on form 10-K/A.
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 nine months
ended September 30, ended September 30,
--------------------- -----------------------
2002 2001 2002 2001
-------- --------- --------- ----------
Production:
United States:
Oil (MBbls) ........................................ 121 112 367 269
Gas (MMcf) ......................................... 1,184 1,247 3,970 2,907
Total gas equivalents (MMcfe) ...................... 1,910 1,919 6,172 4,521
Canada:
Oil (MBbls) ........................................ 72 77 206 147
Gas (MMcf) ......................................... 1,403 1,360 4,547 3,795
Total gas equivalents (MMcfe) ...................... 1,835 1,822 5,783 4,677
Total:
Oil (MBbls) ........................................ 193 189 573 416
Gas (MMcf) ......................................... 2,587 2,607 8,517 6,702
Total gas equivalents (MMcfe) ...................... 3,745 3,741 11,955 9,198
Average sales prices:
United States:
Oil (per Bbl) ...................................... $26.55 $25.14 $ 23.47 $26.18
Gas (per Mcf) ...................................... 3.31 2.55 2.96 4.08
Canada:
Oil (per Bbl) ...................................... 25.27 21.62 22.01 22.59
Gas (per Mcf) ...................................... 2.48 3.81 2.24 4.09
Weighted average:
Oil (per Bbl) ...................................... 26.07 23.71 22.95 24.91
Gas (per Mcf) ...................................... 2.86 3.21 2.58 4.09
Selected data per Mcfe:
Average sales price .................................... $ 3.32 $ 3.44 $ 2.93 $ 4.10
Production costs ....................................... 1.09 1.06 0.95 0.92
General and administrative expenses .................... 0.21 0.20 0.18 0.19
Oil and gas depreciation, depletion and amortization ... 0.91 0.92 0.96 0.86
10
Results of Operations
Three Months Ended September 30, 2002 Compared to Three Months Ended September
30, 2001
Overview. The Company recorded third quarter 2002 net income of $2,173,000,
or $0.17 per share. This compares to net income of $3,049,000 or $0.24 per share
recorded in the third quarter of 2001. The decrease in net income results from
lower oil and gas prices in 2002 and the impact of realized translation gains in
2001 and losses in 2002. Net cash provided by operating activities was $9.0
million for the quarter ended September 30, 2002 compared to net cash provided
of $4.2 million for the corresponding quarter of 2001.
Revenues. Total revenues decreased 2% to $13.5 million in the third quarter
of 2002 compared to $13.8 million in the third quarter of 2001 as a result of
lower Canadian gas prices coupled with a slight decrease in U.S. gas production.
The Company's natural gas production decreased less than 1% to 2,587 MMcf from
2,607 MMcf and oil production increased 2% to 193 MBbls from 189 MBbls,
resulting in the Company's overall equivalent production increasing less than 1%
to 3,745 MMcfe from 3,741 Mmcfe.
The Company's composite average oil price increased 10% to $26.07 per
barrel in the third quarter of 2002 from $23.71 per barrel in the third quarter
of 2001. The Company's average U.S. natural gas price increased 30% to $3.31 per
Mcf in the third quarter of 2002 from $2.55 per Mcf in the prior year quarter,
while the average Canadian natural gas price decreased 35% to $2.48 per Mcf in
the third quarter of 2002 from $3.81 per Mcf for 2001. The significant decrease
in Canadian gas prices, offset by the increase in oil and U.S. gas prices,
resulted in a 3% decrease in oil and gas revenues to $12.4 million in the third
quarter of 2002 from $12.9 million in the prior year.
Production Costs. Production costs increased 3% overall to $4.1 million and
3% on a production cost per Mcfe basis to $1.09 per Mcfe in the third quarter of
2002. These increases are primarily due to general price increases and higher
processing costs in Canada.
Depreciation, Depletion & Amortization (DD&A). Total DD&A decreased 3% to
$3.9 million in the third quarter of 2002. The composite oil and gas DD&A rate
decreased 1% to $0.91 per Mcfe from $0.92 per Mcfe.
General and Administrative Expenses. General and administrative expenses
increased 6% to $782,000 in the third quarter of 2002 from $739,000 in the third
quarter of 2001 primarily due to higher franchise taxes.
Interest Expense. Interest expense decreased 36% to $529,000 in the third
quarter of 2002 from $832,000 in the prior year quarter, reflecting decreased
outstanding debt as well as lower interest rates. The Liquidity and Capital
Resources section further describes changes in debt.
Other Income. Other income decreased to a loss of $252,000 in the third
quarter of 2002 compared to income of $1,077,000 in the prior year quarter. The
2002 loss includes $0.2 million realized translation losses and 2001 income
includes $0.6 million realized translation gains.
Income Taxes. The Company recorded a $1,454,000 income tax expense with an
effective tax rate of 40% on a pre-tax income of $3,627,000 in the third quarter
of 2002. This compares to an income tax expense of $1,942,000 with an effective
tax rate of 39% on pre-tax income of $4,991,000 in the third quarter of 2001.
11
Nine Months Ended September 30, 2002 Compared to Nine Months Ended September 30,
2001
Overview. The Company recorded a first nine months 2002 net income of
$5,599,000, or $0.45 per share. This compares to net income of $11,854,000, or
$1.14 per share recorded in the first nine months of 2001. This decrease results
primarily from lower oil and gas prices and increased costs resulting from the
merger with Southern Mineral. Net cash provided by operating activities was
$21.1 million for the nine months ended September 30, 2002 compared to $16.7
million for the corresponding nine months of 2001.
Revenues. Total revenues decreased 6% to $37.8 million in the first nine
months of 2002 compared to $40.3 million in the first nine months of 2001,
primarily due to commodity price decreases more than offsetting increased
volumes. The Company's natural gas production increased 27% to 8,517 MMcf from
6,702 MMcf and oil production increased 38% to 573 MBbls from 416 MBbls,
resulting in the Company's overall equivalent production increasing 30% to
11,955 MMcfe from 9,198 MMcfe. The increase in production is primarily the
result of the merger with Southern Mineral.
The Company's composite average oil price decreased 8% to $22.95 per barrel
in the first nine months of 2002 from $24.91 per barrel in the first nine months
of 2001. The Company's average U.S. natural gas price decreased 27% to $2.96 per
Mcf in the first nine months of 2002 from $4.08 per Mcf in the prior year, while
the average Canadian natural gas price decreased 45% to $2.24 per Mcf in the
first nine months of 2002 from $4.09 per Mcf in 2001. The significant decrease
in oil and gas prices, partially offset by increased production volumes due to
the Southern Mineral merger, resulted in a 7% decrease in oil and gas revenues
to $35.1 million in the first nine months of 2002 from $37.7 million in the same
period of 2001.
Production Costs. Production costs increased 34% to $11.3 million in the
first nine months of 2002 as a result of additional wells acquired in the merger
with Southern Mineral. Production costs per Mcfe increased 3% to $0.95 per Mcfe
in the first nine months of 2002 from $0.92 in the same nine months of 2001
primarily because the acquired Southern Mineral properties 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 39% to
$12.7 million in the first nine months of 2002 from $9.2 million in the first
nine months of 2001. The composite oil and gas DD&A rate increased 12% to $0.96
per MMcfe from $0.86 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 24% to $2,139,000 in the first nine months of 2002 from $1,729,000 in
the first nine months of 2001 due to higher fees paid to Kaiser-Francis for the
management of the additional properties acquired in the Southern Mineral merger.
Investment Income. Investment income increased 4% to $115,000 in the first
nine months of 2002 from $111,000 in the first nine months of 2001.
Interest Expense. Interest expense increased 26% to $1,884,000 in the first
nine months of 2002 from $1,500,000 in the prior year, reflecting the impact of
higher average debt levels. The Liquidity and Capital Resources section further
describes changes in debt.
Other Income. Other income decreased 85% to $202,000 in the first nine
months of 2002 from $1,302,000 for the corresponding period in 2001, primarily
due to the impact of $1 million of realized translation gains in 2001.
Income Taxes. The Company recorded a $3,440,000 income tax expense with an
effective tax rate of 38% on pre-tax income of $9.0 million in the first nine
months of 2002. This compares to an income tax expense of $7,972,000 with an
effective tax rate of 40% on pre-tax income of $19.8 million in the first nine
months 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 September 30, 2002, the Company had working capital of $5.0 million
as compared to $4.0 million at December 31, 2001. Net cash provided by operating
activities was $21.1 million for the nine months ended September 30, 2002
compared to $16.7 million for the corresponding nine months of 2001, primarily
due to increased volumes resulting from the Southern Mineral acquisition, offset
by lower commodity prices.
For the nine months ended September 30, 2002 and 2001, respectively, the
Company's total capital expenditures were $7.4 million and $71.5 million, which
includes the Southern Mineral acquisition ($32.9 million cash expenditures, of
which $21.2 relate to the Southern Mineral acquisition). These expenditures are
primarily related to the acquisition of Southern Mineral in 2001 and exploration
and development in both years.
In the first nine months of 2002 sales of oil and gas properties totaled
$194,000. There were no corresponding sales in the first nine 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 agreement was amended in August 2002 to extend its term,
increase the borrowing base, and partially change the lenders. The amended term
of the facility is through May 1, 2004 and the amended borrowing base set at $70
million. The current lenders are TD Bank, as agent, and Fortis Capital Corp. and
Bank of Oklahoma, N.A., whose largest beneficial owner is also the primary
beneficial owner of Kaiser-Francis Oil Company. Approximately 38% of the Company
is owned by Kaiser-Francis Oil Company.
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 September 30, 2002, the Company had
a total of $36.9 million outstanding under the revolver and $33.1 million
available based on the current borrowing base, as defined, subject to certain
limitations. During the first nine months of 2002, the average interest rate
under this facility was approximately 4.1%. At September 30, 2002, the weighted
average interest rate for loans outstanding under this facility was
approximately 3.5%.
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 September 30, 2002, 305,907 shares have been purchased at a cost of
$2,712,000, which shares are held in treasury.
Subsequent Event
In October 2002, the Company sold non-operated interests in properties and
a plant located in Alabama for approximately $11.5 million. Under full cost
accounting, sales of properties less than 25%of the reserves of the total pool
are recorded as credits to the full cost pool rather than as a gain or loss.
Consequently, this sale will not have a significant effect on the results of
operations for the year.
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.
13
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.
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 anticipates the
adoption of FAS No. 145 and 146 will not affect the Company's current financial
position or 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 $1,597,000.
The merger with Southern Mineral resulted in PetroCorp assuming crude oil
and natural gas costless collars. The impact of hedging transactions for the
nine months ended September 30, 2002 was an increase in oil and gas revenues of
$290,000. The fair value at September 30, 2002 of the crude oil and natural gas
collars was a liability of $28,000. 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 impact of swap transactions for the nine months ended September 30, 2002 was
an increase in oil and gas revenues of $564,000. The estimated fair value of the
swap transactions at September 30, 2002 was a liability of $204,000.
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 did not
qualify for hedge accounting at the date of merger and the Company recorded the
swap's fair value of $192,000 as a liability at that date. The estimated fair
value at September 30, 2002 is a liability of $170,000. Changes in fair value
are recorded in the results of operations.
Item 4. Controls and Procedures
PetroCorp management, including the Chief Executive Officer and Chief
Financial Officer, have conducted an evaluation of the effectiveness of
disclosure controls and procedures pursuant to Exchange Act Rule 13a-14. Based
on that evaluation, the Chief Executive Officer and Chief Financial Officer
concluded that the disclosure controls and procedures are effective in ensuring
that all material information required to be filed in this quarterly report has
been made known to them in a timely fashion. There have been no significant
changes in internal controls, or in factors that could significantly affect
internal controls, subsequent to the date the Chief Executive Officer and Chief
Financial Officer completed their evaluation.
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
Not Applicable
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: November 11, 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
PETROCORP INCORPORATED
CERTIFICATION PURSUANT TO
SECTION 302 OF
THE SARBANES-OXLEY ACT OF 2002
CERTIFICATION
I, Steven R. Berlin, certify that:
1. I have reviewed this quarterly report on Form 10-Q of PetroCorp
Incorporated.
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make statements made, in light of circumstances under which such statements
were made, not misleading with respect to the period covered by this
quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this quarterly report is being
prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and material
weaknesses.
Date: November 11, 2002 /s/ STEVEN R. BERLIN
----------------- -------------------------------------
Steven R. Berlin
Chief Financial Officer and Secretary
17
PETROCORP INCORPORATED
CERTIFICATION PURSUANT TO
SECTION 302 OF
THE SARBANES-OXLEY ACT OF 2002
CERTIFICATION
I, Gary R. Christopher, certify that:
1. I have reviewed this quarterly report on Form 10-Q of PetroCorp
Incorporated.
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make statements made, in light of circumstances under which such statements
were made, not misleading with respect to the period covered by this
quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this quarterly report is being
prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have identified
for the registrant's auditors any material weaknesses in internal
controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and material
weaknesses.
Date: November 11, 2002 /s/ GARY R. CHRISTOPHER
----------------- -------------------------------------
Gary R. Christopher
President and Chief Executive Officer
18