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, 2002
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
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(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
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(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
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 14, 2002
----- ------------------------------
Common Stock, $.01 par value 14,368,919
TABLE OF CONTENTS
PART I. Financial Information
ITEM 1. FINANCIAL STATEMENTS. . . . . . . . . . . . . . . . . . . . . . . . . .3
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS. . . . . . . . . . . . . . . . . . 9
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK . . . . . .12
PART II. Other Information
ITEM 1. LEGAL PROCEEDINGS. . . . . . . . . . . . . . . . . . . . . . . . . . .13
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K. . . . . . . . . . . . . . . . . . . 14
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,
2001 2002
---- ----
CURRENT ASSETS:
Cash ..................................................... $ 7,225 $ 10,866
Accounts receivable-
Oil and gas sales.................................... 7,731 9,885
Joint interest and other, net........................ 10,526 8,558
Inventories............................................... 6,321 6,607
Prepaid expenses.......................................... 487 360
--------- ---------
Total current assets...................... 32,290 36,276
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PROPERTY AND EQUIPMENT:
Oil and gas properties
Producing properties................................. 395,559 412,722
Nonproducing leaseholds.............................. 50,889 51,132
Gas gathering and processing facilities................... 28,176 30,242
Service properties, equipment and other................... 17,427 17,522
--------- ---------
Total property and equipment.................. 492,051 511,618
Less--Accumulated depreciation, depletion and
amortization.................................. (174,720) (182,762)
--------- ---------
Net property and equipment.................... 317,331 328,856
--------- ---------
OTHER ASSETS:
Debt issuance costs, net.................................. 4,851 5,717
Other assets.............................................. 13 13
--------- ---------
Total other assets............................ 4,864 5,730
--------- ---------
Total assets.................................. $ 354,485 $ 370,862
========= =========
CONTINENTAL RESOURCES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(dollars in thousands, except per share data)
LIABILITIES AND STOCKHOLDERS' EQUITY
(Unaudited)
December 31, March 31,
2002 2001
---- ----
CURRENT LIABILITIES:
Accounts payable.......................................... $ 22,576 $ 19,010
Current debt.............................................. 5,400 --
Revenues and royalties payable............................ 3,404 3,790
Accrued liabilities and other............................. 9,906 7,722
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Total current liabilities..................... 41,286 30,522
---------- ----------
LONG-TERM DEBT, net of current portion........................ 177,995 207,650
OTHER NONCURRENT LIABILITIES.................................. 91 103
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......................................... 109,882 107,356
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Total stockholders' equity.................... 135,113 132,587
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Total liabilities and stockholders' equity.... $ 354,485 $ 370,862
========== ==========
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,
----------------------------
2001 2002
---- ----
REVENUES:
Oil and gas sales ....................................... $ 34,221 $ 22,729
Crude oil marketing...................................... 60,099 47,350
Gathering, marketing and processing...................... 12,990 7,164
Oil and gas service operations........................... 2,011 1,605
---------- ----------
Total revenues .......................................... 109,321 78,848
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OPERATING COSTS AND EXPENSES:
Production expenses ...................................... 6,476 6,489
Production taxes ......................................... 2,678 1,536
Exploration expenses...................................... 2,572 2,223
Crude oil marketing purchases and expenses................ 59,637 48,163
Gathering, marketing and processing....................... 10,562 5,137
Oil and gas service operations............................ 1,428 1,679
Depreciation, depletion and amortization.................. 5,242 8,475
General and administrative................................ 2,504 3,851
---------- ----------
Total operating costs and expenses................... 91,049 77,553
---------- ----------
OPERATING INCOME ............................................. 18,272 1,295
---------- ----------
OTHER INCOME AND EXPENSES
Interest income .......................................... 235 103
Interest expense ......................................... (3,637) (3,963)
Other income (expense), net............................... (184) 39
---------- ----------
Total other income and (expenses).................... (3,586) (3,821)
---------- ----------
NET INCOME (LOSS)............................................. $ 14,686 $ (2,526)
========== ==========
EARNINGS PER COMMON SHARE:
Basic ................................................... $ 1.02 $ (0.18)
========== ==========
Diluted ................................................. $ 1.02 $ (0.18)
========== ==========
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,
----------------------------
2001 2002
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income/(Loss) ............................................ $ 14,686 $ (2,526)
Adjustments to reconcile to net income/(loss) to
cash provided by operating activities--
Depreciation, depletion and amortization.................. 5,242 8,475
(Gain)/Loss on sale of assets............................. 107 (25)
Dry hole cost and impairment of undeveloped leases........ 634 1,075
Other noncurrent assets................................... 84 (101)
Other noncurrent liabilities.............................. (15) 12
Changes in current assets and liabilities--
(Increase)/Decrease in accounts receivable................ 830 (186)
Increase in inventories................................... (537) (286)
Decrease/(Increase) in prepaid expenses.................. (49) 127
Decrease in accounts payable.............................. (1,002) (3,566)
Increase/(Decrease) in revenues and royalties payable..... (529) 386
Decrease in accrued liabilities and other................. (3,009) (2,184)
---------- ----------
Net cash provided by operating activities..... 16,442 1,201
---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Exploration and development............................... (18,630) (18,726)
Gas gathering and processing facilities and
service properties, equipment and other.............. (856) (2,265)
Proceeds from sale of assets.............................. 258 42
---------- ----------
Net cash used in investing activities......... (19,228) (20,949)
---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from line of credit ............................. 2,500 93,830
Repayment of line of credit ............................. -- (69,575)
Debt issuance costs ...................................... -- (866)
---------- ----------
Net cash provided by financing activities..... 2,500 23,389
---------- ----------
NET INCREASE/(DECREASE) IN CASH............................... (286) 3,641
CASH AND CASH EQUIVALENTS, beginning of period................ 7,151 7,225
---------- ----------
CASH AND CASH EQUIVALENTS, end of period...................... $ 6,865 $ 10,866
========== ==========
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid ............................................ $ 7,084 $ 7,287
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, 2002, the
results of operations and cash flows for the three months ended March 31, 2001
and 2002. 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, 2001.
On June 19, 2001, the Company formed a new subsidiary, Continental
Resources of Illinois, Inc. (CRII), an Oklahoma corporation. On July 9, 2001,
the Company through CRII purchased the assets of Farrar Oil Company.
2. ACQUISITIONS:
On July 9, 2001, the Company's subsidiary, CRII, purchased the assets of
Farrar Oil Company, Inc. for $33.7 million using funds borrowed under the
Company's credit facility. This purchase was accounted for as a purchase and the
cost of the acquisition was allocated to the acquired assets and liabilities.
The allocation of the $33.7 million of purchase price on July 9, 2001, was as
follows:
Current assets $ 950
Producing properties 30,603
Non-producing properties 1,117
Service properties 1,000
--------
$ 33,670
The unaudited pro forma information set forth below includes the operations
of Farrar Oil Company, Inc. assuming the acquisition of Farrar Oil Company by
CRII occurred on January 1, 2001. The unaudited pro forma information is
presented for information purposes only and is not necessarily indicative of the
results of operations that actually would have achieved had the acquisition been
consummated at that time:
Pro Forma
---------
Three Months Ended March 31,
2001
----
($ in thousands, except per share data)
Revenue ..................................... $ 115,988
Net Income .................................. 18,235
Earnings Per Common Share
Basic ................................ $1.27
Diluted .............................. $1.27
3. LONG-TERM DEBT:
Long-term debt as of December 31, 2001 and March 31, 2002 consists of the
following:
December 31, 2001 March 31, 2002
----------------- --------------
(dollars in thousands)
Senior Subordinated Notes..................$ 127,150 $ 127,150
Credit facility ........................... 56,245 80,000
Note payable to principal stockholder...... -- 500
---------- ----------
Outstanding debt ..................... 183,395 207,650
Less current portion ...................... 5,400 --
---------- ----------
Total long-term debt..................$ 177,995 $ 207,650
========== ==========
During the quarter ended March 31, 2002, the Company executed a Fourth
Amended and Restated Credit Agreement in which a group of lenders agreed to
provide a $175.0 million senior secured revolving credit facility with a current
borrowing base of $140.0 million. Borrowings under the credit facility are
secured by liens on all oil and gas properties and associated assets of the
Company. Borrowings under the credit facility bear interest, payable quarterly,
at (a) a rate per annum equal to the rate at which eurodollar deposits for one,
two, three or six months are offered by the lead bank plus a margin ranging from
150 to 200 basis points, or (b) at the lead bank's reference rate plus an
applicable margin ranging from 25 to 50 basis points. The Company paid
approximately $1.2 million in debt issuance fees for the new credit facility.
The credit facility matures on March 28, 2005. As of March 31, 2002, the Company
had $80.0 million outstanding debt on its line of credit.
4. 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, 2002, the Company had revenues from
the sale of crude oil and expenses for the purchase of crude oil of $47.4
million and $48.2 million, respectively, resulting in a loss from crude oil
marketing activities during the quarter of $0.8 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.
5. 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 2001 and 2002. The weighted-average number of
shares used to compute diluted EPS was 14,393,132 for 2001. The effect of common
stock equivalents at March 31, 2002, was anti-diluted.
6. GUARANTOR SUBSIDIARIES:
The Company's wholly owned subsidiaries, Continental Gas, Inc. (CGI),
Continental Resources of Illinois, Inc. (CRII), and Continental Crude Co. (CCC),
have guaranteed the Company's outstanding Senior Subordinated Notes and its bank
credit facility. The following is a summary of the condensed consolidating
financial information of CGI and CRII as of December 31, 2001, and March 31,
2002, and for the three month periods ended March 31, 2001, and 2002. As Farrar
Oil Company was acquired by CRII in July 2001, the March 31, 2001, activity does
not include any activity of CRII. Since its incorporation, CCC has had no
operations, has acquired no assets and has incurred no liabilities.
Condensed Consolidating Balance Sheet
as of December 31, 2001
(dollars in thousands)
Guarantor
Subsidiaries Parent Eliminations Consolidated
------------- ------------ ------------ ------------
Current Assets $ 6,310 $ 51,915 $ (25,935) $ 32,290
Noncurrent Assets 42,063 280,143 (11) 322,195
------------ ------------ ------------- ------------
Total Assets $ 48,373 $ 332,058 $ (25,946) $ 354,485
============ ============ ============ ============
Current Liabilities $ 11,039 $ 38,629 $ (8,382) $ 41,286
Noncurrent Liabilities 17,553 178,086 (17,553) 178,086
Stockholder's Equity 19,781 115,343 (11) 135,113
------------ ------------ ------------- ------------
Total Liabilities and
Stockholder's Equity $ 48,373 $ 332,058 $ (25,946) $ 354,485
============ ============ ============ ============
Condensed Consolidated Balance Sheet
as of March 31, 2002
(dollars in thousands)
Guarantor
Subsidiaries Parent Eliminations Consolidated
------------- ------------ ------------ ------------
Current Assets $ 6,129 $ 54,409 $ (24,262) $ 36,276
Noncurrent Assets 43,229 291,371 (14) 334,586
------------ ------------ ------------- ------------
Total Assets $ 49,358 $ 345,780 $ (24,276) $ 370,862
============ ============ ============ ============
Current Liabilities $ 3,654 $ 26,696 $ 172 $ 30,522
Noncurrent Liabilities 24,811 207,253 (24,311) 207,753
Stockholder's Equity 20,893 111,831 (137) 132,587
------------ ------------ ------------ ------------
Total Liabilities and
Stockholder's Equity $ 49,358 $ 345,780 $ (24,276) $ 370,862
============ ============ ============ ============
Condensed Consolidating Statements of Operations
For the Three Months Ended March 31, 2001
(dollars in thousands)
Guarantor
Subsidiaries Parent Eliminations Consolidated
------------- ------------ ------------ ------------
Total Revenues $ 14,494 $ 96,110 $ (1,283) $ 109,321
Operating Costs and Expenses 12,728 79,604 (1,283) 91,049
Other Income (Expense) (102) (3,484) 0 (3,586)
------------- ------------ ------------ ------------
Net Income $ 1,664 $ 13,022 $ 0 $ 14,686
============= ============ ============ ============
Condensed Consolidating Statements of Operations
For the Three Months Ended March 31, 2002
(dollars in thousands)
Guarantor
Subsidiaries Parent Eliminations Consolidated
------------- ------------ ------------ ------------
Total Revenues $ 10,929 $ 68,726 $ (807) $ 78,848
Operating Costs and Expenses 9,377 68,983 (807) 77,553
Other Income (Expense) (443) (3,255) (123) (3,821)
------------ ---------- ------------ ------------
Net Income (Loss) $ 1,109 $ (3,512) $ (123) $ (2,526)
============ ============ ============ ============
At March 31, 2002, current liabilities payable to the Company by the
guarantor subsidiaries totaled approximately $24.3 million. For the three months
ended March 31, 2001 and 2002, depreciation, depletion and amortization included
in the guarantor subsidiaries operating costs were approximately $0.5 million
and $1.5 million, respectively.
In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations". SFAS No.143 will affect the Company's accrued
abandonment costs for oil and gas properties and will require that the fair
value of a liability for an asset retirement obligation be recognized in the
period in which it is incurred if a reasonable estimate of fair value can be
made. If a reasonable estimate of fair value cannot be made in the period the
asset retirement is incurred, the liability shall be recognized when a
reasonable estimate of fair value can be made. The associated asset retirement
costs are capitalized as part of the carrying amount of the long-lived asset.
Adoption of SFAS No. 143 is required for financial statements for periods
beginning after June 15, 2002. The Company will adopt this new standard
effective January 1, 2003. Management has not yet determined what the impact of
this new standard will be on its financial position or results of operation.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets". SFAS No. 144 requires that an
impairment loss be recognized only if the carrying amount of a long-lived asset
is not recoverable from its undiscounted cash flows and that the measurement of
an impairment loss be the difference between the carrying amount and fair value
of the asset. Adoption of SFAS No. 144 is required for financial statements for
periods beginning after December 15, 2001. The Company adopted this new standard
effective January 1, 2002. The adoption of this new standard did not have a
material impact on the Company's financial position or results of operation.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 2002 COMPARED TO THREE MONTHS ENDED MARCH 31, 2001
The following discussion and analysis should be read in conjunction with
our unaudited consolidated financial statements and the notes thereto appearing
elsewhere in this report. Our 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, decreased $17.7 million, or 36%,
to $31.5 million during the three months ended March 31, 2002, from $49.2
million during the comparable period in 2001. The decrease is attributable to
lower oil prices which averaged $19.60 Bbl in the first quarter of 2002 compared
to $27.46 Bbl in the first quarter of 2001 and lower gas prices which averaged
$1.87 Mcf in the first quarter of 2002 and $6.42 Mcf in the first quarter of
2001. Crude oil marketing generated $47.4 million in revenue for the three month
period ending March 31, 2002, compared to $60.1 million for the three month
period ending March 31, 2001.
OIL AND GAS SALES
Oil and gas sales revenue for the three months ended March 31, 2002,
decreased $11.5 million, or 34%, to $22.7 million from $34.2 million during the
comparable period in 2001. Oil sales decreased $4.3 million, or 19%, to $18.3
million for the three months of 2002 from $22.6 million in 2001. Oil production
increased by 113 MBbls to 936 MBbls, or 14%, for the three months ended March
31, 2002 from 823 MBbls for the comparable period in 2001. The increased
production was due to the acquisition of the assets of Farrar Oil Company in
July 2001 offset by normal production declines. Oil prices, exclusive of
hedging, decreased $7.86/Bbl to an average of $19.60/Bbl, or 29%, during the
three months ended March 31, 2002, from $27.46/Bbl, for the comparable 2001
period. Gas sales decreased $7.3 million, or 63%, to $4.3 million for the three
month period in 2002 compared to $11.6 million in 2001. Gas production for the
period increased 490 Mmcf, or 27%, to 2,294 Mmcf from 1,804 Mmcf in 2001. The
increased production was due to the acquisition of the assets of Farrar Oil
Company in July 2001 offset by normal production declines. The decrease in
revenues is mainly attributable to lower gas prices which averaged $1.87 Mcf in
the first quarter of 2002 and $6.42 Mcf in the first quarter of 2001, or a
decrease of $4.55 per Mcf, or 71%.
CRUDE OIL MARKETING
During the three month period ended March 31, 2002, we recognized revenues
on crude oil purchased for resale of $47.4 million compared to $60.1 million for
the three month period ended March 31, 2001. A decrease in volume and a decrease
in prices made up the difference between 2002 and 2001. We have recorded a loss
of $1.2 million to reflect the mark-to-market exposure at March 31, 2002. This
is a financial derivative that pays $24.25 anytime the NYMEX price is between
$19.00 and $24.25. This derivative is effective from April 2002 to December
2003.
GATHERING, MARKETING AND PROCESSING
Gathering, marketing and processing revenue in the first quarter of 2002
was $7.2 million, a decrease of $5.8 million, or 45%, from $13.0 million in the
same period in 2001. This decrease in revenue during the first quarter was
attributable to lower natural gas and liquids prices in the 2002 period compared
to the 2001 period.
OIL AND GAS SERVICE OPERATIONS
Oil and gas service operations for the three months ended March 31, 2002,
was $1.6 million, a decrease of $0.4 million, or 20%, from $2.0 million for the
three months ended March 31, 2001. The decrease was primarily due to a decrease
in reclaimed oil income of $0.6 million due to lower prices and volumes received
at our central treating unit.
COSTS AND EXPENSES
PRODUCTION EXPENSES
Production expenses for the three months ended March 31, 2001, and March
31, 2002, remained constant at $6.5 million but resulted in a lowed LOE cost per
BOE in 2002 of $4.91 from $5.76 for the three months in 2001 due to increased
production.
PRODUCTION TAXES
Production taxes decreased $1.1 million, or 42%, to $1.5 million during
the three months ended March 31, 2002, from $2.6 million during the comparable
period in 2001. The decrease was due to lower prices in the three months ended
March 31, 2002, compared to the three months ended March 31, 2001.
EXPLORATION EXPENSES
For the three months ended March 31, 2002, exploration expenses decreased
$0.4 million, or 15%, to $2.2 million from $2.6 million during the comparable
period of 2001. The decrease was mainly due to a decrease in dry hole expense
and plugging expenses of $1.2 million offset by increases in expired leases and
other expenses of $0.7 million.
CRUDE OIL MARKETING
For the three months ended March 31, 2002, we recognized expenses for the
purchases of crude oil for resale of $48.2 million compared to purchases of
crude oil for resale of $59.6 million for the three months ended March 31, 2001.
A decrease in volume and a decrease in prices made up the difference between
2001 and 2002.
GATHERING, MARKETING, AND PROCESSING
During the three months ended March 31, 2002, we incurred gathering,
marketing and processing expenses of $5.1 million, representing a $5.5 million,
or 52%, decrease from $10.6 million incurred in the first quarter of 2001 due to
lower natural gas and liquids prices on natural gas we purchased for resale.
OIL AND GAS SERVICE OPERATIONS
During the three months ended March 31, 2002, we incurred oil and gas
service operations expense of $1.7 million, a $0.3 million, or 21%, increase
over the $1.4 million for the comparable period in 2001. This increase was due
to increased expenses attributable to the assets of Farrar Oil Company that we
acquired in July 2001.
DEPRECIATION, DEPLETION AND AMORTIZATION (DD&A)
For the three months ended March 31, 2002, DD&A expense increased $3.2
million, or 62%, to $8.5 million in 2002 from $5.2 million for the comparable
period in 2001. In the first quarter of 2002, DD&A expense on oil and gas
properties was calculated at $5.57 per BOE compared to $3.67 per BOE for the
first quarter of 2001. The DD&A expense attributable to the assets of Farrar Oil
Company that we acquired in July 2001 and lower oil and gas prices resulting in
higher depletion rates were the main causes for this increase.
GENERAL AND ADMINISTRATIVE ("G&A")
For the three months ended March 31, 2002, net G&A expense was $3.2
million, or an increase of $1.2 million or 60%, from net G&A expense of $2.0
million during the comparable period in 2001. Overhead reimbursement of $0.6
million and $0.5 million for 2002 and 2001, respectively, was netted from G&A
expense. The increase was primarily due to increased employment expense of $0.7
million, a variety of smaller increases in other office expenses aggregating
$0.5 million, and G&A expenses resulting from the assets of Farrar Oil Company
that we acquired in July 2001. G&A expenses per BOE for the first quarter of
2002 was $2.43 compared to $1.79 for the first quarter of 2001.
INTEREST EXPENSE
For the three months ended March 31, 2002, interest expense was $4.0
million, an increase of $0.4 million, or 11%, from $3.6 million for the three
months ended March 31, 2001. This increase was due to additional interest paid
on our credit facility due to higher average debt balances outstanding.
OTHER INCOME
Other income for the three months ended March 31, 2002, was income of $0.04
million compared to an expense of $0.2 million for the same period in 2001. This
difference reflects a gain on the sale of assets in 2002 compared to a loss on
the sale of assets in 2001.
NET INCOME
For the three months ended March 31, 2002, net income was a loss of $2.5
million, a decrease of $17.2 million from profit of $14.7 million for the
comparable period in 2001. The decrease in net income was primarily due to lower
oil and gas prices and increased DD&A and G&A expenses of $3.2 million and $1.2
million, respectively.
LIQUIDITY AND CAPITAL RESOURCES
CASH FLOW FROM OPERATIONS
Net cash provided by operating activities for the three months ended March
31, 2002, was $1.2 million, a decrease of $15.2 million from $16.4 million
provided by operating activities during the comparable 2001 period. Cash as of
March 31, 2002, was $10.9 million, an increase of $3.5 million or 49%, from the
balance of $7.2 million held at December 31, 2001. Of the $10.7 million balance
at March 31, 2002, $2.2 million will be used to make the August 1, 2002,
interest payment on our 10.25% Senior Subordinated Notes.
DEBT
Our Long-term debt at December 31, 2001, was $178.0 million and at March
31, 2002, $207.7 million. During the quarter ended March 31, 2002, we entered
into a Fourth Amended and Restated Credit Agreement in which our syndicated bank
group agreed to provide a $175.0 million senior secured revolving credit
facility with a current borrowing base of $140.0 million. We have $80.0 million
of outstanding debt under this credit facility at March 31, 2002.
CREDIT FACILITY
Long-term debt outstanding at March 31, 2002, included $80.0 million of
revolving credit debt under our credit facility. The effective rate of interest
under the credit facility was 4.00% at March 31, 2002. The credit facility,
which matures March 28, 2005, charges interest based on a rate per annum equal
to the rate at which eurodollar deposits for one, two, three or six months are
offered by the lead bank plus an applicable margin ranging from 150 to 250 basis
points or the lead bank's reference rate plus an applicable margin ranging from
25 to 50 basis points. The borrowing base of our credit facility is $140.0
million and is re-determined semi-annually.
CAPITAL EXPENDITURES
Our 2002 capital expenditures budget, exclusive of acquisitions, is $91.3
million, of which $64.9 million is dedicated to our Cedar Hills secondary
recovery project. During the three months ended March 31, 2002, we incurred
$21.0 million of capital expenditures, exclusive of acquisitions, compared to
$19.5 million, exclusive of acquisitions, in the three month period of 2001. The
$1.5 million, or 8%, increase was the result of our increased drilling activity
in the Rocky Mountain and Gulf Coast regions.
We expect to fund the remainder of our 2002 capital budget through cash
flow from operations and borrowings under our 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 our financial position, business strategy,
plans and objectives of our management for future operations and industry
conditions, are forward-looking statements. Although we believe that the
expectations reflected in such forward-looking statements are reasonable, we can
give no assurance that such expectations will prove to have been correct.
Important factors that could cause actual results to differ materially from our
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
we filed with the Securities and Exchange Commission. All subsequent written and
oral forward-looking statements attributable to us or persons acting on our
behalf are expressly qualified in their entirety by the Cautionary Statements.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
We are exposed to market risk in the normal course of our business
operations. Our management believes that we are well positioned with our 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, we, from time
to time, have used derivative hedging and may do so in the future as a means of
controlling our exposure to price changes. Most of our purchases are made at
either a NYMEX based price or a fixed price. Forward sales contracts that will
result in the physical delivery of our production are deemed to be normal course
of business sales and are not accounted for as derivatives. As of March 31,
2002, we had the following fixed sales contracts in order to mitigate our price
risk exposure on our production:
Time Period Barrels per Month Price per Barrel
----------- ----------------- ----------------
11/01-03/03 60,000 $21.98
07/02-06/03 30,000 $24.01
07/02-01/04 30,000 $24.01
RISK MANAGEMENT
The risk management process we have established is designed to measure both
quantitative and qualitative risks in our businesses. We are exposed to market
risk, including changes in interest rates and certain commodity prices.
To manage the volatility relating to these exposures, periodically we enter
into various derivative transactions pursuant to our 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 our market risk-sensitive instruments and
positions is the potential loss in value arising from adverse changes in our
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, we may hedge (through the
utilization of derivatives) a portion of our production and sale contracts.
Because the commodities covered by these derivatives are substantially the same
commodities that we buy and sell 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 our crude oil, natural gas and natural gas liquids commodity
positions. Our 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 the estimated 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, we estimate the potential market risk loss, assuming a hypothetical
10% adverse change, to be approximately $1.5 million related to our crude
trading or hedging portfolios.
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 of our contracts to identify both
freestanding and embedded derivatives which meet the criteria set forth in SFAS
No. 133 and SFAS No. 138. We adopted the new standards effective January 1,
2001. We had no outstanding hedges or derivatives which had not been previously
marked to market through our accounting for trading activity. As a result, the
adoption of SFAS No. 133 and SFAS No. 138 had no significant impact.
INTEREST RATE RISK
Our exposure to changes in interest rates relates primarily to long-term
debt obligations. We manage our interest rate exposure by limiting ours
variable-rate debt to a certain percentage of total capitalization and by
monitoring the effects of market changes in interest rates. We 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 our long-term
debt maturities and the weighted-average interest rates by maturity date.
-------------------------------------------------------------------------------------------------------------------
2002
(dollars in thousands) 2002 2003 2004 2005 Thereafter Total Fair Value
-------------------------------------------------------------------------------------------------------------------
Fixed rate debt:
Principal amount $127,150 $127,150 $127,150
Weighted-average
interest rate 10.25% 10.25% --
Variable-rate debt:
Principal amount -- -- -- $80,000 -- $80,000 $80,000
Weighted-average
interest rate -- -- -- -- -- 4.00% --
-------------------------------------------------------------------------------------------------------------------
PART II. Other Information
ITEM 1. LEGAL PROCEEDINGS
From time to time, we are a party to litigation or other legal proceedings
that we consider to be a part of the ordinary course of our business. We are not
involved in any legal proceedings nor are we a party to any pending or
threatened claims that could reasonably be expected to have a material adverse
effect on our 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 Restate 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)
4.1.2 Second Amended and Restated Credit Agreement among Continental
Resources, Inc., Continental Gas, Inc. and Continental Resources of
Illinois, Inc., as Borrowers, and MidFirst Bank, dated July 9,
2001.[10.1](5)
4.1.3 Third Amended and Restated Credit Agreement among Continental Resources,
Inc., Continental Gas, Inc. and Continental Resources of Illinois, Inc.,
as Borrowers, and MidFirst Bank, dated January 17, 2002.[4.13](7)
4.1.4 Fourth Amended and Restated Credit Agreement dated March 28, 2002, among
the Registrant, Union Bank of California, N.A., Guaranty Bank, FSB and
Fortis Capital Corp. [10.1](8)
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)
10.1 Unlimited Guaranty Agreement dated March 28, 2002.[10.2](8)
10.2 Security Agreement dated March 28, 2002, between Registrant and Guaranty
Bank, FSB, as Agent.[10.3](8)
10.3 Stock Pledge Agreement dated March 28, 2002, between Registrant and
Guaranty Bank, FSB, as Agent.[10.4](8)
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)
10.9 Purchase and Sales Agreement between Farrar Oil Company and Har-Ken Oil
Company, as Sellers, and Continental Resources of Illinois, Inc. as
Purchaser, dated May 14, 2001.[2.1](5)
10.10 Collateral Assignment of Contracts dated March 28, 2002, between
Registrant and Guaranty Bank, FSB, as Agent. [10.5](8)
12.1 Statement re computation of ratio of debt to Adjusted EBITDA[12.1](7)
12.2 Statement re computation of ratio of earning to fixed charges[12.2](7)
12.3 Statement re computation of ratio of Adjusted EBITDA to interest
expense[12.3](7)
21.0 Subsidiaries of Registrant.[21](6)
99.1 Letter to the Securities and Exchange Commission dated March 28, 2002,
regarding the audit of the Registrant's financial statements by Arthur
Andersen LLP.[99.1](7)
_________________________
+ Represents management compensatory plan
* Filed herewith
(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 herein by reference.
(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 Quarterly Report on Form 10-K for
the fiscal quarter ended December 31, 2000. The exhibit number is
indicated in brackets and is incorporated herein by reference.
(5) Filed as an exhibit to current report on Form 8-K dated July 18, 2001.
The exhibit number is indicated in brackets and is incorporated herein
by reference.
(6) Filed as an exhibit to the Company's Quarterly Report on Form 10-Q for
the fiscal quarter ended June 30, 2001. The exhibit number is indicated
in brackets and is incorporated herein by reference.
(7) Filed as an exhibit to the Company's Annual report on Form 10-K for the
fiscal year ended December 31, 2001. The exhibit number is indicated in
brackets and is incorporated herein by reference.
(8) Filed as an exhibit to current report on Form 8-K dated April 11, 2002.
The exhibit number is indicated in brackets and is incorporated herein
by reference.
(b.) REPORTS ON FORM 8-K
On July 18, 2001, the Registrant filed a current report on Form 8-K
describing the purchase of certain oil and gas properties from Farrar Oil
Company and Har-Ken Oil Company, and the Second Amended and Restated Credit
Agreement with MidFirst Bank.
On April 11, 2002, the Registrant filed a current report on Form 8-K
describing the execution of the Fourth Amended and Restated Credit Agreement.
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.
ROGER V. CLEMENT
Roger V. Clement
Senior Vice President
(Chief Financial Officer)
Date: May 14, 2002