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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 March 31, 2003
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 by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
Yes ___ No X
---
Indicate the number of shares outstanding of each of the Registrant's classes of
stock, as of April 30, 2003:
Common Stock, $.01 per value 12,687,686
---------------------------- ----------
(Title of Class) (Number of Shares Outstanding)
PETROCORP INCORPORATED
INDEX
PAGE NO.
--------
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets at March 31, 2003 and December 31, 2002 1
Consolidated Statements of Operations for the three months ended March 31, 2003 and 2002 2
Consolidated Statements of Cash Flows for the three months ended March 31, 2003 and 2002 3
Notes to Consolidated Financial Statements 4
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 9
Item 3. Quantitative and Qualitative Disclosures about Market Risk 13
Item 4. Controls and Procedures 13
PART II. OTHER INFORMATION 14
SIGNATURES 15
CERTIFICATIONS 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)
March 31, December 31,
2003 2002
------------ ------------
Assets
------
Current assets:
Cash and cash equivalents .............................................. $ 56,343 $ 3,087
Accounts receivable, net ............................................... 14,007 11,537
Receivable from sale of Canadian subsidiaries .......................... 28,822 -
Assets of discontinued operations ...................................... - 72,300
Other current assets ................................................... 918 1,107
------------ -----------
Total current assets ................................................ 100,090 88,031
------------ -----------
Property, plant and equipment:
Oil and gas properties, at cost, full cost method, net of
accumulated depreciation, depletion, amortization and impairment ..... 49,041 48,761
Deferred income taxes ....................................................... 8,438 22,066
Other assets, net ........................................................... 3,150 2,723
------------ -----------
Total assets ..................................................... $ 160,719 $ 161,581
============ ===========
Liabilities and Shareholders' Equity
------------------------------------
Current liabilities:
Accounts payable ....................................................... $ 7,827 $ 7,367
Accrued liabilities .................................................... 1,878 2,758
Current income tax payable ............................................. 1,750 -
Liabilities of discontinued operations ................................. - 22,111
------------ -----------
Total current liabilities ........................................... 11,455 32,236
------------ -----------
Long-term debt .............................................................. - 28,750
------------ -----------
Dismantlement obligation .................................................... 5,045 -
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,
12,652,686 and 12,645,309 shares outstanding as of
March 31, 2003 and December 31, 2002, respectively ................... 130 130
Additional paid-in capital ............................................. 112,003 111,905
Retained earnings (accumulated deficit) ................................ 34,843 (982)
Accumulated other comprehensive loss ................................... - (7,746)
Treasury stock, at cost (309,947 and 305,907 shares, respectively) .... (2,757) (2,712)
------------ -----------
Total shareholders' equity .......................................... 144,219 100,595
------------ -----------
Total liabilities and shareholders' equity ....................... $ 160,719 $ 161,581
============ ===========
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
ended March 31,
------------------------
2003 2002
----------- ----------
Revenues:
Oil and gas ........................................................ $ 9,803 $ 6,128
Other .............................................................. 38 48
----------- ----------
9,841 6,176
----------- ----------
Expenses:
Production costs ................................................... 2,528 2,584
Depreciation, depletion and amortization ........................... 1,525 2,320
General and administrative ......................................... 719 363
Other operating expenses ........................................... 34 32
----------- ----------
4,806 5,299
----------- ----------
Income from operations .................................................. 5,035 877
----------- ----------
Other income (expenses):
Investment income .................................................. 19 11
Interest expense ................................................... (335) (424)
Other income (expenses) ............................................ 216 33
----------- ----------
(100) (380)
----------- ----------
Income from continuing operations before income taxes and
accounting change ................................................... 4,935 497
----------- ----------
Income tax provision:
Current ............................................................ 1,750 (17)
Deferred ........................................................... 30 191
----------- ----------
1,780 174
----------- ----------
Income from continuing operations before accounting change .............. 3,155 323
Discontinued operations:
Income from discontinued Canadian operations (net of
applicable taxes of $1,530 and $432) ............................... 2,113 723
Gain on sale of Canadian subsidiaries (net of taxes of $19,691) .... 33,526 -
----------- ----------
Income before cumulative effect of a change in accounting
principle .......................................................... 38,794 1,046
Cumulative effect on prior years of accounting change, less
applicable income taxes of $1,743 ................................... (2,969) -
----------- ----------
Net income .............................................................. $ 35,825 $ 1,046
=========== ==========
Net income per common share - basic
Income from continuing operations .................................. $ 0.25 $ 0.02
Income from discontinued operations ................................ 2.82 0.06
Cumulative effect of change in accounting principle ................ (0.24) -
----------- ----------
Net income ......................................................... $ 2.83 $ 0.08
=========== ==========
Net income per common share - diluted
Income from continuing operations .................................. $ 0.24 $ 0.02
Income from discontinued operations ................................ 2.80 0.06
Cumulative effect of change in accounting principle ................ (0.23) -
----------- ----------
Net income ......................................................... $ 2.81 $ 0.08
=========== ==========
Weighted average number of common shares - basic ........................ 12,649 12,556
=========== ==========
Weighted average number of common shares - diluted ...................... 12,749 12,675
=========== ==========
The accompanying notes are an integral part of these financial statements.
2
PETROCORP INCORPORATED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(Unaudited)
For the three months
ended March 31,
----------------------------
2003 2002
------------- ------------
Cash flows from operating activities:
Net income .......................................................... $ 35,825 $ 1,046
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation, depletion and amortization ........................ 1,525 2,320
Deferred income tax expense ..................................... 30 191
Gain on sale of Canadian subsidiaries ........................... (33,526) -
Cumulative effect of change in accounting principal ............. 2,969 -
Other ........................................................... 125 31
Changes in operating assets and liabilities:
Accounts receivable ............................................. (2,470) (774)
Other current assets ............................................ 189 4
Accounts payable ................................................ 460 (781)
Accrued liabilities ............................................. 499 (832)
Income tax payable .............................................. 1,750 -
Net change provided by discontinued operations .................. (99) 1,301
------------ -----------
Net cash provided by operating activities .................... 7,277 2,506
------------ -----------
Cash flows from investing activities:
Additions to oil and gas properties ................................. (2,888) (665)
Proceeds received on sale of Canadian subsidiaries (SEE NOTE 3) ..... 80,152 -
Net investing activities of discontinued operations ................. (1,596) (1,763)
Other ............................................................... (521) -
------------ -----------
Net cash used in investing activities ........................ 75,147 (2,428)
------------ -----------
Cash flows from financing activities:
Proceeds from long-term debt ........................................ - 300
Repayment of long-term debt ......................................... (28,750) -
Other ............................................................... 53 16
Net financing activities of discontinued operations ................. (471) (226)
------------ -----------
Net cash used in financing activities ........................ (29,168) 90
------------ -----------
Effect of exchange rate changes on cash ............................... - 94
------------ -----------
Net increase (decrease) in cash and cash equivalents .................. 53,256 262
Cash and cash equivalents at beginning of period ...................... 3,087 1,265
------------ -----------
Cash and cash equivalents at end of period ............................ $ 56,343 $ 1,527
============ ===========
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, 2002, included in the Company's 2002 Annual Report on
Form 10-K pursuant to Section 13 or 15(d) of the Securities Exchange Act of
1934. Interim period results are not necessarily indicative of results of
operations or cash flows for a full-year period.
Accounting for Stock-Based Compensation
At March 31, 2003, the Company has a stock-based compensation plan, which
is more fully described in Notes 1 and 9 of the Company's Annual Report on Form
10-K. The Company accounts for this plan under the recognition and measurement
principles of APB Opinion No. 25, Accounting for Stock Issued to Employees,
and related Interpretations. The following table illustrates the effect on net
income and earnings per share if the Company had applied the fair value
recognition provisions of FASB Statement No. 123, Accounting for Stock-Based
Compensation, (in thousands, except per share amounts):
Quarter Ended March 31,
----------------------------
2003 2002
----------- -----------
Net income, as reported .................................... $ 35,825 $ 1,046
Deduct: Total stock-based employee compensation
expense determined under fair value based method for
all awards, net of related tax effects ..................... 80 166
----------- -----------
Pro forma net income ....................................... $ 35,745 $ 880
=========== ===========
Earnings per share:
Basic - as reported ................................... $ 2.83 $ 0.08
Basic - pro forma ..................................... $ 2.83 $ 0.07
Diluted - as reported ................................. $ 2.81 $ 0.08
Diluted - pro forma ................................... $ 2.80 $ 0.07
No options were granted during the quarter ended March 31, 2003.
Eighty-nine thousand options, at an exercise price of $9.25 were granted in the
corresponding quarter of 2002. These options, when priced under a Black-Scholes
option pricing model calculate a "fair value" of $479,000 as of the grant date.
The Black-Scholes model was developed to price options with terms and conditions
significantly different from the terms and conditions of the Company's options;
accordingly, any use for this "fair value" resultant is problematic.
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
adjustments. The Company's comprehensive income for the three months ended March
31, 2003 and 2002 is as follows (in thousands):
4
For the three
-------------
months ended
------------
March 31,
--------
2003 2002
---- ----
Net income ........................................ $ 35,825 $ 1,046
----------- ----------
Derivative hedging loss (net of tax benefit of
$373) ........................................... - (598)
Reclassification of hedging loss to income
(net of taxes of $112)........................... - 168
Reclassification of translation loss to income .... 4,939 -
Foreign currency translation gain (loss) (2003
gain covers period from January 1 through
March 5) ........................................ 2,807 (83)
----------- ----------
$ 7,746 $ (513)
----------- ----------
Comprehensive income .............................. $ 43,571 $ 533
=========== ==========
As of March 31, 2002, accumulated other comprehensive loss consisted of $462 of
derivative gain, net of taxes, and $8,286 of foreign currency translation
losses.
NOTE 3 - SALE OF CANADIAN SUBSIDIARIES
On December 24, 2002, PetroCorp signed an agreement to sell its two
Canadian subsidiaries, PCC Energy Inc. and PCC Energy Corp. for C$167.6 million
(approximately US$112 million), with an economically effective date of October
1, 2002. This is subject to post closing adjustments for certain working capital
items. On March 5, 2003, PetroCorp received approximately 75% of the sale
proceeds. The remaining $28.8 million will be received upon completion of
certain tax documentation with the government of Canada. The financial
statements reflect the results of the Canadian operations and the sale of
Canadian subsidiaries as discontinued operations. Prior year statements of
operations have been restated to conform to the current year presentation. The
sale was recorded as follows (amounts in thousands):
Cash proceeds received, net of $4,350 Canadian taxes withheld $ 80,152
Receivable recorded 28,822
--------
Net proceeds received 108,974
--------
Net assets sold 55,168
Translation loss reclassified from comprehensive income 4,939
Deferred income taxes 15,341
--------
75,448
--------
Gain on sale of Canadian subsidiaries $ 33,526
========
Net sales and income of the discontinued operations are as follows (amounts in
thousands):
Quarter ended March 31,
-----------------------------
2003 2002
-------------- -------------
Net sales ....................................... $ 5,937 $ 5,298
============== =============
Pre-tax income from discontinued operations ..... $ 3,643 $ 1,146
Income tax expense .............................. 1,530 423
-------------- -------------
Income from discontinued operations, net of
tax .......................................... $ 2,113 $ 723
============== =============
5
Assets and liabilities of the discontinued operations were as follows
(amounts in thousands):
March 5, 2003
---------------
Cash ................................................ $ 5,961
Accounts receivable ................................. 11,332
Property, plant and equipment ....................... 66,205
Other Assets ........................................ 64
Accounts Payable .................................... (9,388)
Accrued liabilities ................................. (1,759)
Deferred tax liability .............................. (17,247)
---------------
$ 55,168
===============
NOTE 4 - 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 per share amounts).
Per Share Amounts
-----------------------------------------------------------
Income Income Cumulative
(Loss) from from Effect of
Continuing Discontinued Accounting
Income Shares Operations Operations Change Net Income
-------------- -------------- -------------- -------------- -------------- --------------
Quarter ended March 31, 2003
Basic EPS:
Net income ..................... $ 35,825 12,649 $ 0.25 $ 2.82 $ (0.24) $ 2.83
Effect of dilutive securities:
Options ........................ - 100 (0.01) (0.02) 0.01 (0.02)
-------------- -------------- -------------- -------------- -------------- --------------
Diluted EPS:
Net income ..................... $ 35,825 12,749 $ 0.24 $ 2.80 $ (0.23) $ 2.81
============== ============== ============== ============== ============== ==============
Quarter ended March 31, 2002
Basic EPS:
Net income ..................... $ 1,046 12,556 $ 0.02 $ 0.06 $ - $ 0.08
Effect of dilutive securities:
Options ........................ - 119 - - - -
-------------- -------------- -------------- -------------- -------------- --------------
Diluted EPS:
Net income ..................... $ 1,046 12,675 $ 0.02 $ 0.06 $ - $ 0.08
============== ============== ============== ============== ============== ==============
The net income per share amounts do not include the effect of potentially
dilutive securities of nil and 470,000 for the three months ended March 31, 2003
and 2002, respectively, as the impact of these outstanding options was
antidilutive.
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
collars 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 hedged production.
No oil or natural gas hedges were outstanding during 2003. Hedging
transactions for the three months ended March 31, 2002 increased oil and gas
revenues by $102,000 (reclassified from comprehensive income). All oil and gas
hedging transactions expired in the fourth quarter of 2002.
6
The Company offsets any gain or loss on the swaps 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,
this also limits the Company's gains from increases in the market price.
NOTE 6 - PROPERTY, PLANT AND EQUIPMENT:
Investments in property, plant and equipment were as follows at March 31,
2003 and December 31, 2002 (amounts in thousands):
2003 2002
-------------- --------------
Oil and gas properties:
Proved ........................................ $ 230,300 $ 225,414
Unproved ...................................... 353 233
-------------- --------------
230,653 225,647
Gas gathering facilities .......................... 1,698 1,698
-------------- --------------
232,351 227,345
Less - accumulated depreciation, depletion,
amortization and impairment ...................... (183,310) (178,584)
-------------- --------------
$ 49,041 $ 48,761
============== ==============
As more fully described in the Company's Form 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 was set at
$70 million. In March 2003, and in conjunction with the sale of Canadian
subsidiaries described in Note 3, the Company amended its revolving credit
agreement to adjust the borrowing base to $25 million, allocated entirely to
United States borrowing. The Canadian lenders were released from the agreement.
All outstanding debt was paid off with proceeds from the sale. The current
lenders are TD Bank, as agent, and Fortis Capital Corp. and Bank of Oklahoma,
N.A. (Bank of Oklahoma, N. A.'s 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.) Effective April 28, 2003 the other
lenders to revolving credit agreement assigned their interests to the Bank of
Oklahoma, N.A.
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 March 31, 2003, there
were no loans outstanding under this facility.
The revolving credit agreement prohibits the declaration and payment of
dividends on the common stock of the Company. Also, the debt agreement requires
the Company to maintain a minimum current ratio, a minimum tangible net worth,
and a minimum interest coverage ratio. The Company obtained waivers of certain
covenants relating to the sale of some of its Alabama properties and the sale of
Canadian operations.
7
NOTE 8 - RECENT ACCOUNTING PRONOUNCEMENTS
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). The effect of the adoption of this standard on the
Company's results of operations and financial condition was an unaudited
increase in liabilities of approximately $5 million; an unaudited net increase
in property, plant and equipment of approximately $259 thousand; and an
unaudited after tax charge to income for the cumulative effect of adopting the
new standard of approximately $3 million and a deferred tax asset of
approximately $1.7 million. The new standard had no material impact on income
before the cumulative effect of adoption in the first quarter of 2003, nor would
it have had a material impact in the first quarter of 2002 assuming an adoption
of this accounting standard on a proforma basis.
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. The adoption of FAS No. 146 did
not materially affect the Company's current financial position or results of
operations.
In November 2002, the FASB issued FASB Interpretation ("FIN") 45,
Guarantor's Accounting and Disclosure Requirements for Guarantees, including
Indirect Guarantee of Indebtedness of Others. FIN 45 requires that upon
issuance of a guarantee, the guarantor must recognize a liability for the fair
value of the obligation it assumes under that guarantee. FIN 45's provisions for
initial recognition and measurement should be applied on a prospective basis to
guarantees issued or modified after December 31, 2002. The guarantor's previous
application may not be revised or restated to reflect the effect of the
recognition and measurement provisions of the interpretation. The disclosure
requirements are effective for financial statements of both interim and annual
periods that end after December 15, 2002. The Company is not a guarantor under
any significant guarantees and thus the adoption of this interpretation did not
have a significant effect on the Company's financial position or results of
operations.
On December 31, 2002, the FASB issued FAS No. 148, Accounting for
Stock-Based Compensation -- Transition and Disclosure -- an amendment of FAS
123, Accounting For Stock-Based Compensation. FAS 148 does not change the
provisions of FAS 123 that permit entities to continue to apply the intrinsic
value method of APB 25, Accounting for Stock Issued to Employees. FAS 148 does
require certain new disclosures in both annual and interim financial statements.
The required disclosures have been included in Note 1 of the Company's financial
statements.
On January 17, 2003, the FASB issued FIN 46, Consolidation of Variable
Interest Entities, An Interpretation of Accounting Research Bulletin No. 51.
The primary objectives of FIN 46 are to provide guidance on how to identify
entities for which control is achieved thought means other than through voting
rights (variable interest entities "VIE" and how to determine when and which
business enterprise should consolidate the VIE. This new model for consolidation
applies to an entity in which either (1) the equity investors do not have a
controlling financial interest on (2) the equity investment at risk is
insufficient to finance that entity's activities without receiving additional
subordinated financial support from other parties. The adoption of this standard
had no impact on the financial position or results of operations of the Company.
In April 2003, the FASB issued FAS No. 149, Amendment of Statement 133 on
Derivative Instruments and Hedging Activities. This Statement amends and
clarifies financial accounting and reporting for derivative instruments,
including certain derivative instruments embedded in other contracts
(collectively referred to as derivatives) and for hedging activities under FASB
Statement No. 133, Accounting for Derivative Instruments and Hedging Activities.
The Company is currently evaluating the impact of FAS No. 149 on financial
position and results of operations.
NOTE 9 - COMMON STOCK REPURCHASES
On September 14, 2001, the Board of Directors authorized the purchase of up
to 1,000,000 shares of the Company's common stock. On March 5, 2003, the Board
of Directors increased the number of shares authorized for purchase up to 25% of
the outstanding shares of the Company. Through March 31, 2003, 309,947 shares
have been purchased at a cost of $2,757,000.
8
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 2002 Annual Report on form 10-K.
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
-------
three months
-------------
ended March 31,
---------------
2003 2002
---- ----
Production:
Oil (MBbls) ................................................ 114 125
Gas (MMcf) ................................................. 938 1,467
Total gas equivalents (MMcfe) .............................. 1,622 2,217
Average sales prices:
Oil (per Bbl) .............................................. $32.88 $19.84
Gas (per Mcf) .............................................. 6.46 2.49
Selected data per Mcfe:
Average sales price ........................................ $ 6.04 $ 2.76
Production costs ........................................... 1.56 1.17
General and administrative expenses ........................ 0.44 0.16
Oil and gas depreciation, depletion and amortization ....... 0.92 1.04
9
Results of Operations
Three Months Ended March 31, 2003 Compared to Three Months Ended March 31, 2002
Revenues. Total revenues increased 59% to $9.8 million in the first quarter
of 2003 compared to $6.2 million in the first quarter of 2002, primarily due to
commodity price increases. The Company's natural gas production decreased 36% to
938 MMcf from 1,467 MMcf and oil production decreased 9% to 114 MBbls from 125
MBbls, resulting in the Company's overall equivalent production decreasing 27%
to 1,622 MMcfe from 2,217 MMcfe. The decrease in oil and gas production reflects
the impact of the October 2002 sale of Alabama properties and plant, along with
normal production declines.
The Company's average natural gas price increased 159% to $6.46 per Mcf in
the first quarter of 2003 from $2.49 per Mcf in the corresponding quarter in
2002. The Company's average oil price increased 66% to $32.88 per barrel in the
first quarter of 2003 from $19.84 per barrel in 2002. Of the $3,675,000 increase
in oil and gas sales in the first quarter of 2003, approximately $3.7 million
and $1.5 million, respectively, were attributable to increased average gas
pricing and oil pricing, and these were partially offset by a $1.5 million of
decreased oil and gas production.
Production Costs. Production costs decreased overall 2% to $2.5 million in
the first quarter of 2003, with production costs per Mcfe increased to $1.56 per
Mcfe in the first quarter of 2003, compared to $1.17 in the corresponding prior
year period. This resulted from production volume decreases, both from normal
production declines and the October 2002 sale of Alabama properties and plant,
being almost fully offset by higher production taxes due to higher commodity
prices.
Depreciation, Depletion & Amortization (DD&A). Total DD&A decreased 34% to
$1.5 million in the first quarter of 2003. The composite oil and gas DD&A rate
decreased 12% to $0.92 per Mcfe from $1.04 per Mcfe. The decrease in the
composite rate results from the impact of adopting FASB Statement 143 (see Note
8 to the financial statements).
General and Administrative Expenses. General and administrative expenses
increased 98% to $719,000 in the first quarter of 2003 from $363,000 in the
first quarter of 2002 due to increased costs related to an increased company
stock price and its effect on certain stock options, higher legal costs
associated with ongoing litigation and the full cost of certain expenses which
previously had been partially absorbed of the Canadian operation now shown as
discontinued operations (see Note 3).
Interest Expense. Interest expense decreased 21% to $335,000 in the first
quarter of 2003 from $424,000 in the prior year quarter, reflecting pay down of
outstanding debt. All debt was paid off March 6, 2003.
Other Income. Other income increased to $216,000 in the first quarter of
2003 from $33,000 in the corresponding period of 2002 primarily as a result of
the increased exchange rate of the Canadian dollar against the United States
dollar.
Income Taxes. The Company recorded a $1,780,000 income tax expense with an
effective tax rate of 36% on a pre-tax income of $4,935,000 in the first quarter
of 2003. This compares to an income tax expense of $174,000 with an effective
tax rate of 35% on pre-tax income of $497 thousand in the first quarter of 2002.
Effective tax rates differ from statutory rates primarily due to statutory
depletion in the United States.
10
Liquidity and Capital Resources
As of March 31, 2003, the Company had working capital of $88.6 million as
compared to $55.8 million at December 31, 2002. Net cash provided by operating
activities was $7.3 million for the three months ended March 31, 2003 compared
to $2.5 million for the corresponding three months of 2002 primarily due to the
sale of the Canadian subsidiaries and increased oil and gas prices.
The Company's total capital expenditures were $2.9 million and $0.7 million
for the three months ended March 31, 2003 and 2002, respectively, primarily
related to exploration and development.
No sales of oil and gas properties occurred in the first three months of
either 2003 or 2002. However, as described in Note 3 to the financial
statements, the Company sold its Canadian subsidiaries, and the oil and gas
properties contained therein, for approximately $112 million, with a closing
date of March 5, 2003.
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 amended term of the facility is through May 1, 2004 and the
current borrowing base is set at $25 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 March 31, 2003, the Company had no debt outstanding under the revolver
and $25 million available based on the current borrowing base, as defined,
subject to certain limitations. During the first quarter of 2003, the average
interest rate under this facility was approximately 4.1%. Effective April 28,
2003 the other lenders to the revolving credit agreement assigned their
interests to the Bank of Oklahoma, N.A.
The Company has historically funded its capital expenditures, which are
discretionary, and working capital requirements with 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.
Other
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). The effect of the adoption of this standard on the
Company's results of operations and financial condition was an unaudited
increase in liabilities of approximately $5 million; an unaudited net increase
in property, plant and equipment of approximately $259 thousand; and an
unaudited after tax charge to income for the cumulative effect of adopting the
new standard of approximately $3 million and a deferred tax asset of
approximately $1.7 million. The new standard had no material impact on income
before the cumulative effect of adoption in the first quarter of 2003, nor would
it have had a material impact in the first quarter of 2002 assuming an adoption
of this accounting standard on a proforma basis.
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. The adoption of FAS No. 146 did
not materially affect the Company's current financial position or results of
operations.
In November 2002, the FASB issued FASB Interpretation ("FIN") 45,
Guarantor's Accounting and Disclosure Requirements for Guarantees, including
Indirect Guarantee of Indebtedness of Others." FIN 45 requires that upon
issuance of a guarantee, the guarantor must recognize a liability for the fair
value of the obligation it assumes under that guarantee. FIN 45's provisions for
initial recognition and measurement should be applied on a prospective basis to
guarantees issued or modified after December 31, 2002. The guarantor's previous
application may not be revised or restated to reflect the effect of the
recognition and measurement provisions of the interpretation. The disclosure
requirements are effective for financial statements of both interim and annual
periods that end after December 15, 2002. The Company is not a guarantor under
any significant guarantees and thus the adoption of this interpretation did not
have a significant effect on the Company's financial position or results of
operations.
11
On December 31, 2002, the FASB issued FAS No. 148, Accounting for
Stock-Based Compensation -- Transition and Disclosure -- an amendment of FAS
123, Accounting For Stock-Based Compensation. FAS 148 does not change the
provisions of FAS 123 that permit entities to continue to apply the intrinsic
value method of APB 25, Accounting for Stock Issued to Employees. FAS 148 does
require certain new disclosures in both annual and interim financial statements.
The required disclosures have been included in Note 1 of the Company's financial
statements.
On January 17, 2003, the FASB issued FIN 46, Consolidation of Variable
Interest Entities, An Interpretation of Accounting Research Bulletin No. 51.
The primary objectives of FIN 46 are to provide guidance on how to identify
entities for which control is achieved thought means other than through voting
rights (variable interest entities "VIE" and how to determine when and which
business enterprise should consolidate the VIE. This new model for consolidation
applies to an entity in which either (1) the equity investors do not have a
controlling financial interest on (2) the equity investment at risk is
insufficient to finance that entity's activities without receiving additional
subordinated financial support from other parties. The adoption of this standard
had no impact on the financial position or results of operations of the Company.
In April 2003, the FASB issued FAS No. 149, Amendment of Statement 133 on
Derivative Instruments and Hedging Activities. This Statement amends and
clarifies financial accounting and reporting for derivative instruments,
including certain derivative instruments embedded in other contracts
(collectively referred to as derivatives) and for hedging activities under FASB
Statement No. 133, Accounting for Derivative Instruments and Hedging Activities.
The Company is currently evaluating the impact of FAS No. 149 on financial
position and results of operations.
12
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 and
natural gas liquids. 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 has previously utilized hedging transactions
to manage its exposure to price fluctuations on its sales of oil and natural
gas.
No oil or natural gas hedges were outstanding during 2003. Hedging
transactions for the three months ended March 31, 2002 increased oil and gas
revenues by $102,000 (reclassified from comprehensive income). All oil and gas
hedging transactions expired in 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.
Common Stock Repurchases
On September 14, 2001, the Board of Directors authorized the purchase of up
to 1,000,000 shares of the Company's common stock. On March 5, 2003, the Board
of Directors increased the number of shares authorized for purchase up to 25% of
the outstanding shares of the Company. Through March 31, 2003, 309,947 shares
have been purchased at a cost of $2,757,000.
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.
13
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
Exhibit 99.1 Certification pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
Exhibit 99.2 Certification pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
(b) Reports on Form 8-K
Report dated March 5, 2003 concerning the sale of the Canadian
subsidiaries of PetroCorp Incorporated to 1022693 Alberta Ltd., an
affiliate of Enerplus Resources fund and the approval by PetroCorp
Incorporated's Board of Directors for the Company to purchase up to 25%
of the Company's stock.
14
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: May 7, 2003 /s/ STEVEN R. BERLIN
----------- -----------------------------
Steven R. Berlin
Chief Financial Officer and Secretary
(On behalf of the Registrant and as the
Principal Financial Officer)
15
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: May 7, 2003 /s/ STEVEN R. BERLIN
----------- ----------------------------
Steven R. Berlin
Chief Financial Officer and Secretary
16
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: May 7, 2003 /s/ GARY R. CHRISTOPHER
----------- ----------------------------
Gary R. Christopher
President and Chief Executive Officer
17