United States
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, 2001
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission File Number: 333-61547
CONTINENTAL RESOURCES, INC.
(Exact name of registrant as specified in its charter)
Oklahoma 73-0767549
-------- ----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
302 N. Independence, Suite 300, Enid, Oklahoma 73701
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(Address of principal executive offices) (Zip Code)
(580) 233-8955
----------------
(Registrant's telephone number, including area code)
NONE
------
(Former name, former address and former fiscal year, if
change 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 for such shorter period that the registrant
was required to file such report(s), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
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Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date:
Class Outstanding as of May 10, 2001
----- ------------------------------
Common Stock, $.01 par value 14,368,919
TABLE OF CONTENTS
PART I. Financial Information
ITEM 1. FINANCIAL STATEMENTS
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
PART II. Other Information
ITEM 1. LEGAL PROCEEDINGS
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
PART I. Financial Information
ITEM 1. FINANCIAL STATEMENTS
CONTINENTAL RESOURCES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(dollars in thousands, except per share data)
ASSETS
(Unaudited)
December 31, March 31,
2000 2001
---- ----
CURRENT ASSETS:
Cash ........................................ $ 7,151 $ 6,865
Accounts receivable-
Oil and gas sales ........................... 15,778 14,527
Joint interest and other, net ............... 9,839 10,260
Inventories ................................. 4,988 5,526
Prepaid expenses ............................ 209 259
--------- ---------
Total current assets ........................ 37,965 37,437
--------- ---------
PROPERTY AND EQUIPMENT:
Oil and gas properties
Producing properties ........................ 321,197 335,394
Nonproducing leaseholds ..................... 44,544 45,959
Gas gathering and processing facilities ..... 25,051 25,525
Service properties, equipment and other ..... 15,917 16,072
--------- ---------
Total property and equipment ................ 406,709 422,950
Less--Accumulated depreciation, depletion and
amortization ................................ (151,899) (154,730)
--------- ---------
Net property and equipment .................. 254,810 268,220
--------- ---------
OTHER ASSETS:
Debt issuance costs, net .................... 5,842 5,591
Other assets ................................ 6 6
--------- ---------
Total other assets .......................... 5,484 5,597
--------- ---------
Total assets ................................ $ 298,623 $ 311,254
========= =========
CONTINENTAL RESOURCES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share information)
LIABILITIES AND STOCKHOLDERS' EQUITY
(Unaudited)
December 31, March 31,
2001 2000
---- ----
CURRENT LIABILITIES:
Accounts payable ......................................... $ 17,164 $ 16,162
Current debt ............................................. 10,200 12,700
Revenues and royalties payable ........................... 7,181 6,651
Accrued liabilities and other ............................ 10,375 7,367
-------- --------
Total current liabilities ................................ 44,920 42,880
-------- --------
LONG-TERM DEBT, net of current portion ................... 130,150 130,150
OTHER NONCURRENT LIABILITIES ............................. 107 92
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Preferred stock, $0.01 par value, 1,000,000 shares
authorized, 0 shares issued and outstanding...........
Common stock, $0.01 par value, 20,000,000 shares
authorized, 14,368,919 shares issued and outstanding . 144 144
Additional paid-in-capital ............................. 25,087 25,087
Retained earnings ...................................... 98,215 112,901
-------- --------
Total stockholders' equity .......................... 123,446 138,132
-------- --------
Total liabilities and stockholders' equity .......... $298,623 $311,254
======== ========
The accompanying notes are an integral part of these consolidated balance
sheets.
CONTINENTAL RESOURCES, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS
(dollars in thousands, except per share data)
Three Months Ended March 31,
----------------------------
2000 2001
---- ----
REVENUES:
Oil and gas sales ....................... $ 27,828 $ 34,221
Crude oil marketing ..................... 61,805 60,099
Gathering, marketing and processing ..... 6,904 12,990
Oil and gas service operations .......... 2,063 2,011
--------- ---------
Total revenues ..................... 98,600 109,321
--------- ---------
OPERATING COSTS AND EXPENSES:
Production expenses ...................... 4,779 6,476
Production taxes ......................... 2,144 2,628
Exploration expenses ..................... 993 2,572
Crude oil marketing purchases and expenses 60,748 59,637
Gathering, marketing and processing ...... 5,304 10,562
Oil and gas service operations ........... 1,183 1,428
Depreciation, depletion and amortization . 5,551 5,242
General and administrative ............... 2,132 2,504
--------- ---------
Total operating costs and expenses .. 82,834 91,049
--------- ---------
OPERATING INCOME ............................. 15,766 18,272
--------- ---------
OTHER INCOME AND EXPENSES
Interest income .......................... 159 235
Interest expense ......................... (4,083) (3,637)
Other income (expense), net .............. 3,474 (184)
--------- ---------
Total other income and (expenses) ... (450) (3,586)
--------- ---------
NET INCOME ................................... $ 15,316 $ 14,686
========= =========
EARNINGS PER COMMON SHARE:
Basic ................................... $ 1.07 $ 1.02
========= =========
Diluted ................................. $ 1.07 $ 1.02
========= =========
The accompanying notes are an integral part of these consolidated financial
statements.
CONTINENTAL RESOURCES, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollars in thousands)
Three Months Ended March 31,
-----------------------------
2000 2001
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income ........................................................ $ 15,316 $ 14,686
Adjustments to reconcile to net income to
cash provided by operating activities--
Depreciation, depletion and amortization ...................... 5,551 5,242
(Gain)/Loss on sale of assets ................................. (3,298) 107
Dry hole cost and impairment of undeveloped leases ............ 377 634
Other noncurrent assets ....................................... 183 84
Other noncurrent liabilities ............................... -- (15)
Changes in current assets and liabilities--
(Increase)/Decrease in accounts receivable .................... (888) 830
Increase in inventories ....................................... (854) (537)
Decrease/(Increase) in prepaid expenses ...................... 260 (49)
Increase/(Decrease) in accounts payable ....................... 754 (1,002)
Decrease in revenues and royalties payable .................... (479) (529)
Decrease in accrued liabilities and other ..................... (3,530) (3,009)
-------- --------
Net cash provided by operating activities ......... 13,392 16,442
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Exploration and development ................................... (7,532) (18,630)
Gas gathering and processing facilities and
service properties, equipment and other .................. (230) (856)
Proceeds from sale of assets .................................. 6,793 258
-------- --------
Net cash used in investing activities ............. (969) (19,228)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from line of credit .................................. 12,600 2,500
Repayment of line of credit ................................... (25,223) 0
-------- --------
Net cash provided by (used in) financing activities (12,623) 2,500
-------- --------
NET DECREASE IN CASH .............................................. (200) (286)
CASH AND CASH EQUIVALENTS, beginning of period .................... 10,421 7,151
-------- --------
CASH AND CASH EQUIVALENTS, end of period .......................... $ 10,221 $ 6,865
======== ========
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid ................................................. $ 8,022 $ 7,084
The accompanying notes are an integral part of these consolidated financial
statements.
CONTINENTAL RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
1. CONTINENTAL RESOURCES, INC.'S FINANCIAL STATEMENTS
In the opinion of Continental Resources, Inc. ("CRI" or the "Company") the
accompanying unaudited consolidated financial statements contain all
adjustments, consisting only of normal recurring adjustments, necessary to
present fairly the Company's financial position as of March 31, 2001, the
results of operations and cash flows for the three months ended March 31, 2000
and 2001. The unaudited consolidated financial statements for the interim
periods presented do not contain all information required by accounting
principles generally accepted in the United States. The results of operations
for any interim period are not necessarily indicative of the results of
operations for the entire year. These consolidated financial statements should
be read in conjunction with the consolidated financial statements and notes
thereto included in the Company's annual report on form 10-K for the year ended
December 31, 2000.
On October 1, 2000, the Company's Board of Directors and shareholders
approved an Agreement and Plan of Recapitalization (the "Recapitalization Plan")
and the Amended and Restated Certificate of Incorporation to be filed with the
Oklahoma Secretary of State. As outlined in the Recapitalization Plan, the
authorized number of shares of capital stock were increased from 75,000 shares
of common stock to 21 million shares consisting of 20 million shares of common
stock and one million shares of $0.01 par value Preferred Stock. In addition,
the par value of common stock was adjusted from $1 per share to $0.01 per share
and 1.02 million shares of the common stock were reserved for issuance under the
2000 incentive Stock Plan.
Concurrent with the approval of the Recapitalization Plan, the Company
effected an approximate 293:1 stock split whereby the Company issued new
certificates for 14,368,919 shares of the newly authorized common stock in
exchange for the 49,041 previously outstanding shares of common stock. As a
result of the stock split, additional paid-in capital was reduced by
approximately $95,000, offset by an increase in the common stock at par. Per
share amounts for the three months ended March 31, 2000, have been restated to
give retroactive effect to the stock split.
2. LONG-TERM DEBT
Long-term debt as of December 31, 2000 and March 31, 2001 consists of the
following:
December 31, 2000 March 31, 2001
----------------- ---------------
(dollars in thousands)
Senior Subordinated Notes............. $ 130,150 $ 130,150
Credit facility....................... 10,200 12,700
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Outstanding debt................. 140,350 142,850
Less current portion.................. 10,200 12,700
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Total long-term debt............. $ 130,150 $ 130,150
========== ==========
Subsequent to March 31, 2001 the Company made payments of $3.5 million to
reduce the outstanding debt against its credit facility to $9.2 million. The
current borrowing base of the credit facility is $25.0 million until May 31,
2001 when the credit agreement matures. The credit agreement is currently being
renegotiated and is expected to be extended for two years and the borrowing base
is expected to increase to $35 million.
3. CRUDE OIL MARKETING
The Company enters into third party contracts to purchase and resell crude
oil at prices based on current month NYMEX prices, current posting prices or at
a stated contract price. Purchases and sales are recorded at the stated contract
price. During the quarter ended March 31, 2001, the Company had revenues from
the resales of crude oil and expenses for the purchase of crude oil of $60.1
million and $59.6 million, respectively, resulting in a margin from crude oil
marketing activities during the quarter of $0.5 million.
The Company accounts for its crude oil marketing activities in accordance
with EITF 98-10 "Accounting for Energy Trading and Risk Management Activities."
This statement requires that contracts for the purchase and sale of energy
commodities which are entered into for the purpose of speculating on market
movements or otherwise generating gains from market price differences to be
recorded at their market value, as of the balance sheet date, with any
corresponding gains or losses recorded as income from operations. At March 31,
2001, the market value of the Company's open energy trading contracts resulted
in an unrealized gain of $0.04 million which is recorded in crude oil marketing
revenues in the accompanying consolidated statement of operations and accrued
liabilities in the accompanying consolidated balance sheet.
In June 1998, the Financial Accounting Standards Board ("FASB") issued
statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for
Derivative Instruments and for Hedging Activities", with an effective date for
periods beginning after June 15, 1999. In July 1999, the FASB issued SFAS No.
137, "Accounting for Derivative Instruments and Hedging Activities - Deferral of
the Effective Date of FASB Statement No. 133". As a result of SFAS No. 137,
adoption of SFAS No.133 is now required for financial statements for periods
beginning after June 15, 2000. In June 2000, the FASB issued SFAS No. 138,
"Accounting for Certain Derivative Instruments and Certain Hedging Activities",
which amends the accounting and reporting standards of SFAS No. 133 for certain
derivative instruments and hedging activities. SFAS No. 133 sweeps in a broad
population of transactions and changes the previous accounting definition of a
derivative instrument. Under SFAS No. 133, every derivative instrument is
recorded on the balance sheet as either an asset or liability measured at its
fair value. SFAS No. 133 requires that changes in the derivative's fair value be
recognized currently in earnings unless specific hedge accounting criteria are
met. During 2000, management reviewed all contracts throughout the Company to
identify both freestanding and embedded derivatives which meet the criteria set
forth in SFAS No. 133 and SFAS No. 138. The Company adopted the new standards
effective January 1, 2001. On January 1, 2001, the Company had no outstanding
hedges or derivatives which had not been previously marked to market through its
accounting for trading activity. As a result, the adoption of SFAS No. 133 and
SFAS No. 138 had no significant impact on the Company's financial position or
results of operations.
4. EARNINGS PER SHARE
Earnings per common share is computed by dividing income available to
common stockholders by the weighted-average number of shares outstanding for the
period. The weighted-average number of shares used to compute earnings per
common share was 14,368,919 in 2000 and 2001. The weighted-average number of
shares used to compute diluted EPS was 14,393,132 and 14,368,919 for 2001 and
2000, respectively. There were no common stock equivalents outstanding during
the three months ended March 31, 2001.
5. GUARANTOR SUBSIDIARIES
The Company's wholly owned subsidiaries, Continental Gas, Inc. (CGI) and
Continental Crude Co. (CCC), have guaranteed the Senior Subordinated Notes and
the Credit Facility. The following is a summary of the financial information of
Continental Gas, Inc. as of December 31, 2000 and March 31, 2001 and for the
three month periods ended March 31, 2000 and 2001.
AS OF:
------
(dollars in thousands)
December 31, 2000 March 31, 2000
----------------- --------------
Current assets ........................... $ 5,835 $ 6,004
Noncurrent assets ........................ 19,467 19,516
------- -------
Total assets ............................. $25,302 $25,520
======= =======
Current liabilities ...................... $10,972 $ 9,526
Noncurrent liabilities ................... -- --
Stockholder's equity ..................... 14,330 15,994
------- -------
Total liabilities and stockholder's equity $25,302 $25,520
======= =======
FOR THE THREE MONTH
PERIODS ENDED MARCH 31,
(dollars in thousands)
2000 2001
---- ----
Total revenues .............................. $ 7,783 $ 14,494
Operating costs and expenses ................ 6,836 12,728
-------- --------
Operating income (loss) ..................... 947 1,766
Other income (expenses) ..................... 697 (102)
-------- --------
Net income (loss) ........................... $ 1,644 $ 1,664
======== ========
At March 31, 2001, current liabilities payable to the Company by CGI totaled
approximately $5.5 million. For the three months ended March 31, 2000 and 2001,
depreciation, depletion and amortization included in CGI's operating costs
totaled approximately $0.5 million for each period. Other income for the three
months ended March 31, 2000 includes a gain from the sale of two gas systems of
$0.9 million offset by interest expense.
Since its incorporation, CCC has had no operations, has acquired no assets
and has incurred no liabilities.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 2001 COMPARED TO THREE MONTHS ENDED MARCH 31, 2000
The following discussion and analysis should be read in conjunction with
the Company's unaudited consolidated financial statements and the notes thereto
appearing elsewhere in this report. The Company's operating results for the
periods discussed may not be indicative of future performance. In the text
below, financial statement numbers have been rounded; however, the percentage
changes are based on unrounded amounts.
RESULTS OF OPERATIONS
REVENUES
GENERAL
Revenues, excluding crude oil marketing, increased $12.4 million, or 34%,
to $49.2 million during the three months ended March 31, 2001 from $36.8 million
during the comparable period in 2000. The increase is mainly attributable to
higher gas prices which averaged $1.97 Mcf in the first quarter of 2000 and
$6.42 Mcf in the first quarter of 2001, or a 226% increase. Crude oil marketing
generated $60.1 million in revenue to the Company for the three month period
ending March 31, 2001 compared to $61.8 million for the three month period
ending March 31, 2000.
OIL AND GAS SALES
Oil and gas sales revenue for the three months ended March 31, 2001
increased $6.4 million, or 23%, to $34.2 million from $27.8 million during the
comparable period in 2000. Oil sales decreased $1.7 million, or 7%, to $22.6
million for the three months of 2001 from $24.3 million in 2000. Oil sales in
the three months ended March 31, 2000 includes a price adjustment, paid by a
non-affiliated third party oil purchaser, for $1.1 million. Oil production
decreased by 31 MBbls to 823 MBbls, or 4%, for the three months ended March 31,
2001 from 854 MBbls for the comparable period in 2000. Oil prices, exclusive of
hedging and adjustments, decreased $0.98/Bbl to an average of $27.46/Bbl, or 3%,
during the three months ended March 31, 2001, from $28.44/Bbl, for the
comparable 2000 period. Gas sales increased $7.5 million, or 183%, to $11.6
million for the three month period in 2001 compared to $4.1 million in 2000. Gas
production for the period decreased 303 Mmcf, or 14%, to 1,804 Mmcf from 2,107
Mmcf in 2000. The increase is mainly attributable to higher gas prices which
averaged $1.97 Mcf in the first quarter of 2000 and $6.42 Mcf in the first
quarter of 2001, or a 226% increase.
CRUDE OIL MARKETING
During the three month period ended March 31, 2001, the Company recognized
revenues on crude oil purchased for resale of $60.1 million compared to $61.8
million for the three month period ended March 31, 2000. A decrease in volume
and a decrease in prices made up the difference between 2000 and 2001.
GATHERING, MARKETING AND PROCESSING
Gathering, marketing and processing revenue in the first quarter of 2001
was $13.0 million, an increase of $6.1 million, or 88%, from $6.9 million in the
same period in 2000. This increase in revenue during the first quarter was
attributable to higher natural gas and liquids prices in the 2001 period
compared to the 2000 period.
OIL AND GAS SERVICE OPERATIONS
Oil and gas service operations for the three months ended March 31, 2001
and March 31, 2000 remained constant at $2.0 million.
COSTS AND EXPENSES
PRODUCTION EXPENSES
Production expenses increased by $1.7 million, or 35%, to $6.5 million
during the three months ended March 31, 2001 from $4.8 million during the
comparable period in 2000. This increase is mainly due to increased energy
costs.
PRODUCTION TAXES
Production taxes increased by $0.5 million, or 24%, to $2.6 million during
the three months ended March 31, 2001 from $2.1 million during the comparable
period in 2000. The increase is due to higher tax rates on wells in North Dakota
that have reached the expiration date of tax relief given on newly drilled wells
and due to higher natural gas prices.
EXPLORATION EXPENSES
For the three months ended March 31, 2001 exploration expenses increased
$1.6 million, or 160%, to $2.6 million from $1.0 million during the comparable
period of 2000. The increase was mainly due to a $1.5 million increase in dry
hole expenses.
CRUDE OIL MARKETING
For the three months ended March 31, 2001, the Company recognized expense
for the purchases of crude oil for resale of $59.6 million compared to purchases
of crude oil for resale of $60.7 million for the three months ended March 31,
2000. A decrease in volume and a decrease in prices made up the difference
between 2000 and 2001.
GATHERING, MARKETING, AND PROCESSING
During the three months ended March 31, 2001, the Company incurred
gathering, marketing and processing expenses of $10.6 million, representing a
$5.3 million, or 100%, increase from the $5.3 million incurred in the first
quarter of 2000 due to higher natural gas and liquids prices.
OIL AND GAS SERVICE OPERATIONS
During the three months ended March 31, 2001, the Company incurred oil and
gas service operations expense of $1.4 million, a $0.2 million, or 17%, increase
over the $1.2 million for the comparable period in 2000. This increase was due
to increased maintenance, work over expense on salt water disposal wells and
increased costs of oil for reclaimed at the central treating unit.
DEPRECIATION, DEPLETION AND AMORTIZATION (DD&A)
For the three months ended March 31, 2001, DD&A expense decreased $0.3
million, or 5%, to $5.2 million in 2001 from $5.5 million for the comparable
period in 2000. In the first quarter of 2000, DD&A expense amounted to $3.67 per
BOE and remained at $3.67 per BOE for the first quarter of 2001.
GENERAL AND ADMINISTRATIVE ("G&A")
For the three months ended March 31, 2001, G&A expense was $2.5 million,
net of overhead reimbursement of $0.5 million, for a period total of $2.0
million or an increase of $0.4 million or 25%, from G&A expense of $2.1 million
net of overhead reimbursement of $0.5 million for a net of $1.6 million during
the comparable period in 2000. This increase was primarily due to increased
employment expense of $0.3 million and a variety of smaller increases in other
expenses offset by a decrease in legal expense. G&A expenses per BOE for the
first quarter of 2001 was $1.79 compared to $1.32 for the first quarter of 2000.
INTEREST EXPENSE
For the three months ended March 31, 2001 interest expense was $3.6
million, a decrease of $0.5 million, or 12% from $4.1 million for the three
months ended March 31, 2000. This decrease was due to lower average debt
balances due primarily to the repurchase by the Company of $19.85 million of the
Senior Subordinated Notes in 2000.
OTHER INCOME
Other income for the three months ended March 31, 2001 was an expense of
$0.2 million compared to $3.5 million for the same period in 2000. This
difference reflects the gain on the sale of the Arkoma Basin properties which
was approximately $3.3 million and a gain on the repurchase of bonds of $170,000
during 2000.
NET INCOME
For the three months ended March 31, 2001 net income was $14.7 million, a
decrease of $0.6 million from $15.3 million for the comparable period in 2000.
Net income in 2000 includes a price adjustment, paid by a non-affiliated third
party oil purchaser, for $1.1 million.
LIQUIDITY AND CAPITAL RESOURCES
CASH FLOW FROM OPERATIONS
Net cash provided by operating activities for the three months ended March
31, 2001 was $16.4 million, an increase of $3.0 million from $13.4 million
provided by operating activities during the comparable 2000 period. Cash as of
March 31, 2001 was $6.9 million, a decrease of $0.3 million or 4%, from the
balance of $7.2 million held at December 31, 2000. Of the $6.9 million balance
at March 31, 2001, $2.2 million will be used by the Company to make its August
1, 2001 interest payment on its 10.25% Senior Subordinated Notes.
DEBT
Long-term debt at December 31, 2000 and March 31, 2001 remained the same at
$130.1 million. Subsequent to March 31, 2001, the Company made payments of $3.5
million to reduce its outstanding borrowings under its Credit Facility to $9.2
million.
CREDIT FACILITY
Long-term debt outstanding under the line of credit at March 31, 2001
included $12.7 million of revolving credit debt under the Credit Facility. The
effective rate of interest under the Credit Facility is 8.62% at March 31, 2001.
The Credit Facility, which matures May 31, 2001, charges interest based on the
lead bank's prime rate or the London Interbank Offered Rate for 1, 2, 3 or
6-month offshore deposits as offered by the lead bank to major banks in the
London Interbank Market, rounded upwards, if necessary, to the nearest 1/16%,
and adjusted for maximum cost of reserves, if any. The borrowing base of the
credit facility is $25 million until May 31, 2001 when the agreement matures.
Currently, negotiations are under way to extend the credit agreement for two
more years and raise the borrowing base to $35 million.
CAPITAL EXPENDITURES
The Company's 2001 capital expenditures budget is $70.7 million, exclusive
of acquisitions. During the three months ended March 31, 2001, the Company
incurred $19.5 million of capital expenditures, exclusive of acquisitions,
compared to $7.8 million, exclusive of acquisitions, in the three month period
of 2000. The $11.7 million, or 150%, increase was the result of increased
drilling activity in the Rocky Mountain and Gulf Coast. The Company expects to
fund the remainder of its 2001 capital budget through cash flow from operations
and its credit facility.
DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS
This report includes "forward-looking statements". All statements other
than statements of historical fact, including, without limitation, statements
contained under "Management's Discussion and Analysis of Financial Condition and
Results of Operations" regarding the Company's financial position, business
strategy, plans and objectives of management of the Company for future
operations and industry conditions, are forward-looking statements. Although the
Company believes that the expectations reflected in such forward-looking
statements are reasonable, it can give no assurance that such expectations will
prove to have been correct. Important factors that could cause actual results to
differ materially from the Company's expectations ("Cautionary Statements")
include without limitation future production levels, future prices and demand
for oil and gas, results of future exploration and development activities,
future operating and development cost, the effect of existing and future laws
and governmental regulations (including those pertaining to the environment) and
the political and economic climate of the United States as discussed in this
quarterly report and the other documents of the Company filed with the
Securities and Exchange Commission (the "Commission"). All subsequent written
and oral forward-looking statements attributable to the Company or persons
acting on its behalf are expressly qualified in their entirety by the Cautionary
Statements.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to market risk in the normal course of its business
operations. Management believes that the Company is well positioned with its mix
of oil and gas reserves to take advantage of future price increases that may
occur. However, the uncertainty of oil and gas prices continues to impact the
domestic oil and gas industry. Due to the volatility of oil and gas prices, the
Company, from time to time, has used derivative hedging and may do so in the
future as a means of controlling its exposure to price changes. Most of the
Company's purchases are made at either a NYMEX based price or a fixed price. As
of March 31, 2001, the Company had entered into no fixed sales contracts in
order to hedge its price risk exposure on its production.
RISK MANAGEMENT
The risk management process established by the Company is designed to
measure both quantitative and qualitative risks in its businesses. The Company
is exposed to market risk, including changes in interest rates and certain
commodity prices.
To manage the volatility relating to these exposures, periodically the
Company enters into various derivative transactions pursuant to the Company's
policies on hedging practices. Derivative positions are monitored using
techniques such as mark-to-market valuation and value-at-risk and sensitivity
analysis.
COMMODITY PRICE EXPOSURE
The market risk inherent in the Company's market risk sensitive instruments
and positions is the potential loss in value arising from adverse changes in the
Company's commodity prices.
The prices of crude oil, natural gas, and natural gas liquids are subject
to fluctuations resulting from changes in supply and demand. To partially reduce
price risk caused by these market fluctuations, the Company may hedge (through
the utilization of derivatives) a portion of the Company's production and sale
contracts. Because the commodities covered by these derivatives are
substantially the same commodities that the Company buys and sells in the
physical market, no special studies other than monitoring the degree of
correlation between the derivative and cash markets, are deemed necessary.
A sensitivity analysis has been prepared to estimate the price exposure to
the market risk of the Company's crude oil, natural gas and natural gas liquids
commodity positions. The Company's daily net commodity position consists of
crude inventories, commodity purchase and sales contracts and derivative
commodity instruments. The fair value of such position is a summation of the
fair values calculated for each commodity by valuing each net position at quoted
futures prices. Market risk is estimated as the potential loss in fair value
resulting from a hypothetical 10 percent adverse change in such prices over the
next 12 months. Based on this analysis, the Company has no significant market
risk related to its crude trading or hedging portfolios. The Company has no oil
or gas hedging transactions for its production or net long or short fixed price
positions in respect to its crude oil marketing activities as of March 31, 2001.
In June 1998, the Financial Accounting Standards Board ("FASB") issued
statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for
Derivative Instruments and for Hedging Activities", with an effective date for
periods beginning after June 15, 1999. In July 1999 the FASB issued SFAS No.
137, "Accounting for Derivative Instruments and Hedging Activities - Deferral of
the Effective Date of FASB Statement No. 133". As a result of SFAS No. 137,
adoption of SFAS No. 133 is now required for financial statements for periods
beginning after June 15, 2000. In June 2000, the FASB issued SFAS No. 138,
"Accounting for Certain Derivative Instruments and Certain Hedging Activities",
which amends the accounting and reporting standards of SFAS No. 133 for certain
derivative instruments and hedging activities. SFAS No. 133 sweeps in a broad
population of transactions and changes the previous accounting definition of a
derivative instrument. Under SFAS No. 133 every derivative instrument is
recorded on the balance sheet as either an asset or liability measured at its
fair value. SFAS No. 133 requires that changes in the derivative's fair value be
recognized currently in earnings unless specific hedge accounting criteria are
met. During 2000, management reviewed all contracts throughout the Company to
identify both freestanding and embedded derivatives which meet the criteria set
forth in SFAS No. 133 and SFAS No. 138. The Company adopted the new standards
effective January 1, 2001. The Company had no outstanding hedges or derivatives
which had not been previously marked to market through its accounting for
trading activity. As a result, the adoption of SFAS No. 133 and SFAS No. 138 had
no significant impact.
INTEREST RATE RISK
The Company's exposure to changes in interest rates relates primarily to
long-term debt obligations. The Company manages its interest rate exposure by
limiting its variable-rate debt to a certain percentage of total capitalization
and by monitoring the effects of market changes in interest rates. The Company
may utilize interest rate derivatives to alter interest rate exposure in an
attempt to reduce interest rate expense related to existing debt issues.
Interest rate derivatives are used solely to modify interest rate exposure and
not to modify the overall leverage of the debt portfolio. The fair value of
long-term debt is estimated based on quoted market prices and management's
estimate of current rates available for similar issues. The following table
itemizes the Company's long-term debt maturities and the weighted-average
interest rates by maturity date.
------------------------------------------------------------------------------------------
2001
(dollars in millions) 2001 2002 2003 2004 Thereafter Total Fair Value
------------------------------------------------------------------------------------------
Fixed rate debt:
Principal amount $ 130,150 $ 130,150 $ 130,150
Weighted-average
interest rate 10.25% 10.25% --
Variable-rate debt:
Principal amount $ 12,700 -- -- -- -- $ 12,700 $ 12,700
Weighted-average
interest rate 8.62% -- -- -- 8.62% 8.62% --
------------------------------------------------------------------------------------------
PART II. Other Information
ITEM 1. LEGAL PROCEEDINGS
From time to time, the Company is party to litigation or other legal
proceedings that it considers to be a part of the ordinary course of its
business. The Company is not involved in any legal proceedings nor is it party
to any pending or threatened claims that could reasonably be expected to have a
material adverse effect on its financial condition or results of operations.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a.) Exhibits:
DESCRIPTION
2.1 Agreement and Plan of Recapitalization of Continental Resources, Inc.
dated October 1, 2000. [2.1](4)
3.1 Amended and Restated Certificate of Incorporation of Continental
Resources, Inc. [3.1](1)
3.2 Amended and Restated Bylaws of Continental Resources, Inc. [3.2](1)
3.3 Certificate of Incorporation of Continental Gas, Inc. [3.3](1)
3.4 Bylaws of Continental Gas, Inc., as amended and restated. [3.4](1)
3.5 Certificate of Incorporation of Continental Crude Co. [3.5](1)
3.6 Bylaws of Continental Crude Co. [3.6](1)
4.1 Restated Credit Agreement dated April 21, 2000 among Continental
Resources, Inc. and Continental Gas, Inc., as Borrowers and MidFirst
Bank as Agent (the "Credit Agreement") [4.4](3)
4.1.1 Form of Consolidated Revolving Note under the Credit Agreement [4.4]
(3)
4.3 Indenture dated as of July 24, 1998 between Continental Resources,
Inc., as Issuer, the Subsidiary Guarantors named therein and the
United States Trust Company of New York, as Trustee [4.3](1)
10.4 Conveyance Agreement of Worland Area Properties from Harold G. Hamm,
Trustee of the Harold G. Hamm Revocable Intervivos Trust dated April
23, 1984 to Continental Resources, Inc. [10.4](2)
10.5 Purchase Agreement signed January 2000, effective October 1, 1999, by
and between Patrick Energy Corporation as Buyer and Continental
Resources, Inc. as Seller [10.5](2)
10.6 Continental Resources, Inc. 2000 Stock Option Plan.[10.6](4)
10.7 Form of Incentive Stock Option Agreement.[10.7](4)
10.8 Form of Non-Qualified Stock Option Agreement.[10.8](4)
12.1 Statement re computation of ratio of debt to Adjusted EBITDA [12.1](4)
12.2 Statement re computation of ratio of earning to fixed charges
[12.2](4)
12.3 Statement re computation of ratio of Adjusted EBITDA to interest
expense [12.3](4)
21.0 Subsidiaries of Registrant [21.0](2)
-------------------
(1) Filed as an exhibit to the Company's Registration Statement on Form S-4, as
amended (No. 333-61547) which was filed with the Securities and Exchange
Commission. The exhibit number is indicated in brackets and is incorporated
by reference herein.
(2) Filed as an exhibit to the Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 1999. The exhibit number is indicated in
brackets and is incorporated herein by reference.
(3) Filed as an exhibit to the Company's Quarterly Report on Form 10-Q for the
fiscal quarter ended March 31, 2000. The exhibit number is indicated in
brackets and is incorporated herein by reference.
(4) Filed as an exhibit to the Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 2000. The exhibit number is indicated in
brackets and is incorporated herein by reference.
(b.) Reports on Form 8-K:
No reports on Form 8-K were filed by the Company during the three months
ended March 31, 2001.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Company has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CONTINENTAL RESOURCES, INC.
/s/ Roger V. Clement
--------------------------------
Roger V. Clement
Senior Vice President
(Chief Financial Officer)
Date: May 10, 2001
INDEX TO EXHIBITS
Exhibit
No. Description Method of Filing
--- ----------- ----------------
2.1 Agreement and Plan of Incorporated herein by reference
Recapitalization of Continental
Resources, Inc. dated October 1,
2000
3.1 Amended and Restated Certificate of Incorporated herein by reference
Incorporation of Continental
Resources, Inc.
3.2 Amended and Restated Bylaws of Incorporated herein by reference
Continental Resources, Inc.
3.3 Certificate of Incorporation of Incorporated herein by reference
Continental Gas, Inc.
3.4 Bylaws of Continental Gas, Inc., as Incorporated herein by reference
amended and restated
3.5 Certificate of Incorporation of Incorporated herein by reference
Continental Crude Co.
3.6 Bylaws of Continental Crude Co. Incorporated herein by reference
4.1 Restated Credit Agreement dated Incorporated herein by reference
April 21, 2000 among Continental
Resources, Inc. and Continental
Gas, Inc., as Borrowers and
MidFirst Bank as Agent (the "Credit
Agreement")
4.1.1 Form of Consolidated Revolving Note Incorporated herein by reference
under the Credit Agreement
4.3 Indenture dated as of July 24, 1998 Incorporated herein by reference
between Continental Resources,
Inc., as Issuer, the Subsidiary
Guarantors named therein and the
United States Trust Company of New
York, as Trustee
10.4 Conveyance Agreement of Worland Incorporated herein by reference
Area Properties from Harold G.
Hamm, Trustee of the Harold G. Hamm
Revocable Intervivos Trust dated
April 23, 1984 to Continental
Resources, Inc.
10.5 Purchase Agreement signed January Incorporated herein by reference
2000, effective October 1, 1999, by
and between Patrick Energy
Corporation as Buyer and
Continental Resources, Inc. as
Seller
10.6 Continental Resources, Inc. 2000 Incorporated herein by reference
Stock Option Plan
10.7 Form of Incentive Stock Option Incorporated herein by reference
Agreement
10.8 Form of Non-Qualified Stock Option Incorporated herein by reference
Agreement
12.1 Statement re computation of ratio Incorporated herein by reference
of debt to Adjusted EBITDA
12.2 Statement re computation of ratio Incorporated herein by reference
of earning to fixed charges
12.3 Statement re computation of ratio Incorporated herein by reference
of Adjusted EBITDA to interest
expense
21.0 Subsidiaries of Registrant Incorporated herein by reference