SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
----- EXCHANGE ACT OF 1934
For the Quarterly period ended September 30, 2001
------------------
OR
_____ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Transition period _________________ to _________________
Commission File Number 0-22650
-------
PETROCORP INCORPORATED
(Exact name of registrant as specified in its charter)
Texas 76-0380430
(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
6733 South Yale 74136
Tulsa, Oklahoma (Zip Code)
(Address of Principal Executive Offices)
Registrant's Telephone Number, Including Area Code: (918) 491-4500
Not Applicable
-------------------------------------------------------------------------
(Former Name, Former Address and Former Fiscal Year, if changed since last
report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.
Yes X No _____
-----
Indicate the number of shares outstanding of each of the Registrant's classes of
stock, as of October 30, 2001:
Common Stock, $.01 per value 12,818,316
------------------------------ ----------
(Title of Class) (Number of Shares Outstanding)
PETROCORP INCORPORATED
INDEX
-----
PAGE NO.
--------
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets at September 30, 2001 and December 31, 2000
(unaudited) 1
Consolidated Statements of Operations for the three and nine months ended
September 30, 2001 and 2000 (unaudited) 2
Consolidated Statements of Cash Flows for the nine months ended September 30,
2001 and 2000 (unaudited) 3
Notes to Consolidated Financial Statements (unaudited) 4
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations 11
Item 3. Quantitative and Qualitative Disclosures about Market Risk 15
PART II. OTHER INFORMATION 16
SIGNATURES 17
Certain matters discussed in this report, excluding historical information,
include forward-looking statements - statements that discuss the Company's
expected future results based on current and pending business operations. The
Company is making these forward-looking statements in reliance on the safe
harbor protections provided under the PRIVATE SECURITIES LITIGATION REFORM ACT
OF 1995.
Forward-looking statements can be identified by words such as "anticipates,"
"believes," "expects," "planned," "scheduled" or similar expressions. Although
the Company believes these forward-looking statements are based on reasonable
assumptions, statements made regarding future results are subject to numerous
assumptions, uncertainties and risks that may cause future results to be
materially different from the results stated or implied in this document.
Important risk factors (but not necessarily all important factors) that could
cause actual results to differ materially from those expressed in any forward-
looking statement made by, or on behalf of, the Company would include, but in no
way be limited by, the Company's ability to obtain agreements with co-venturers,
partners and governments; its ability to engage drilling, construction and other
contractors; its ability to obtain economical and timely financing; geological,
land, sea or weather conditions; world prices for oil, natural gas and natural
gas liquids; adequate and reliable transportation systems; and foreign and
United States laws, including tax laws. Additional information about issues
that could lead to material changes in performance is contained in the Company's
Form 10-K.
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements
PETROCORP INCORPORATED
----------------------
CONSOLIDATED BALANCE SHEETS
---------------------------
(in thousands, except share amounts)
(Unaudited)
September 30, December 31,
2001 2000
--------------- ---------------
Assets
------
Current assets:
Cash and cash equivalents $ 590 $ 21,946
Accounts receivable, net 13,269 13,332
Other current assets 1,141 609
--------------- ---------------
Total current assets 15,000 35,887
--------------- ---------------
Property, plant and equipment:
Oil and gas properties, at cost, full cost method, net
of accumulated depreciation, depletion and amortization 148,781 68,432
Plant and related facilities, net 1,699 2,451
Other, net 33 53
--------------- ---------------
150,513 70,936
--------------- ---------------
Deferred income taxes 7,862 10,254
Other assets, net 2,851 242
--------------- ---------------
Total assets $ 176,226 $ 117,319
=============== ===============
Liabilities and Shareholders' Equity
------------------------------------
Current liabilities:
Accounts payable $ 11,274 $ 17,732
Accrued liabilities 6,628 2,488
Income tax payable 26 5,444
Current portion of long-term debt 1,226 1,194
--------------- ---------------
Total current liabilities 19,154 26,858
--------------- ---------------
Long-term debt 37,249 29,992
--------------- ---------------
Deferred income taxes 15,866 6,192
--------------- ---------------
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,
12,810,716 and 8,703,719 shares outstanding as of
September 30, 2001 and December 31, 2000, respectively 128 87
Additional paid-in capital 111,051 71,614
Accumulated retained earnings (deficit) 142 (11,712)
Accumulated other comprehensive loss (7,280) (5,712)
Treasury stock, at cost (9,500 shares) (84) -
--------------- ---------------
Total shareholders' equity 103,957 54,277
--------------- ---------------
Total liabilities and shareholders' equity $ 176,226 $ 117,319
=============== ===============
The accompanying notes are an integral part of these financial statements.
See notes 4 and 7 specifically for information regarding the Southern Mineral
merger.
1
PETROCORP INCORPORATED
----------------------
CONSOLIDATED STATEMENTS OF OPERATIONS
-------------------------------------
(in thousands, except share amounts)
(Unaudited)
For the three months For the nine months
ended September 30, ended September 30,
------------------------ ------------------------
2001 2000 2001 2000
--------- --------- --------- ---------
Revenues:
Oil and gas $12,867 $10,956 $37,747 $26,847
Plant processing 468 668 1,381 1,526
Other 472 163 1,204 317
--------- --------- --------- ---------
13,807 11,787 40,332 28,690
--------- --------- --------- ---------
Expenses:
Production costs 3,972 2,396 8,447 6,144
Depreciation, depletion and amortization 3,988 2,474 9,163 6,748
General and administrative 739 428 1,729 1,389
Restructuring costs - - - (500)
Other operating expenses 379 67 1,080 253
--------- --------- --------- ---------
9,078 5,365 20,419 14,034
--------- --------- --------- ---------
Income from operations 4,729 6,422 19,913 14,656
--------- --------- --------- ---------
Other income (expenses):
Investment income 17 147 111 524
Interest expense (832) (813) (1,500) (2,831)
Other income (expenses) 1,077 105 1,302 293
--------- --------- --------- ---------
262 (561) (87) (2,014)
--------- --------- --------- ---------
Income before income taxes 4,991 5,861 19,826 12,642
--------- --------- --------- ---------
Income tax provision:
Current 1,670 1,079 5,373 2,511
Deferred 272 1,518 2,599 2,785
--------- --------- --------- ---------
1,942 2,597 7,972 5,296
--------- --------- --------- ---------
Net income before extraordinary item 3,049 3,264 11,854 7,346
Extraordinary item - extinguishment of debt (less
Applicable income taxes of $143,000) - - - 242
--------- --------- --------- ---------
Net income $ 3,049 $ 3,264 $11,854 $ 7,104
========= ========= ========= =========
Net income per common share - basic:
Income before extraordinary item $0.24 $0.38 $1.14 $ 0.85
Extraordinary item - - - (0.03)
--------- --------- --------- ---------
Net income $0.24 $0.38 $1.14 $ 0.82
========= ========= ========= =========
Net income per common share - diluted:
Income before extraordinary item $0.24 $0.37 $1.12 $ 0.84
Extraordinary item - - - (0.03)
--------- --------- --------- ---------
Net income $0.24 $0.37 $1.12 $ 0.81
========= ========= ========= =========
Weighted average number of common shares - basic 12,778 8,694 10,439 8,688
========= ========= ========= =========
Weighted average number of common shares - diluted 12,911 8,822 10,596 8,757
========= ========= ========= =========
The accompanying notes are an integral part of these financial statements.
See notes 4 and 7 specifically for information regarding the Southern Mineral
merger.
2
PETROCORP INCORPORATED
----------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
(in thousands)
(Unaudited)
For the nine months
ended September 30,
------------------------------
2001 2000
------------- ------------
Cash flows from operating activities:
Net income $ 11,854 $ 7,104
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation, depletion and amortization 9,163 6,748
Deferred income tax expense 1,609 2,785
Gain realized on foreign currency translation (948) -
Other 142 49
Changes in operating assets and liabilities:
Accounts receivable 6,363 (3,304)
Other current assets (30) (343)
Accounts payable (9,879) 3,403
Accrued liabilities 3,989 (1,353)
Income tax payable (5,537) 2,462
------------- -----------
Net cash provided by operating activities 16,726 17,551
------------- -----------
Cash flows from investing activities:
Additions to oil and gas properties (11,408) (5,573)
Additions to plant and related facilities (260) (464)
Purchase of treasury shares (84) -
Purchase of Southern Mineral Corporation net assets (21,192) -
------------- -----------
Net cash used in investing activities (32,944) (6,037)
------------- -----------
Cash flows from financing activities:
Proceeds from long-term debt 120,527 15,913
Repayment of long-term debt (125,571) (28,125)
Other 718 (114)
------------- -----------
Net cash used in financing activities (4,326) (12,326)
------------- -----------
Effect of exchange rate changes on cash (812) (178)
------------- -----------
Net increase (decrease) in cash and cash equivalents (21,356) (990)
Cash and cash equivalents at beginning of period 21,946 12,899
------------- -----------
Cash and cash equivalents at end of period $ 590 $ 11,909
============= ===========
The accompanying notes are an integral part of these financial statements.
See notes 4 and 7 specifically for information regarding the Southern Mineral
merger.
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, 2000, included in the Company's 2000 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.
NOTE 2 - RESTRUCTURING:
As part of a restructuring plan, on August 3, 1999, PetroCorp's Board of
Directors entered into a Management Agreement with its largest shareholder,
Kaiser-Francis Oil Company ("Kaiser-Francis"), under which Kaiser-Francis
provides management, technical, and administrative support services for all
PetroCorp operations in the United States and Canada. The following table shows
the change in accrued restructuring costs (in thousands):
Expenditures
Balance at charged Balance at
December 31, against Changes in September 30,
2000 accrual estimates 2001
------------ ------------ ---------- -------------
Office lease discontinuance and
other related costs $ 70 $ 44 - $ 26
============ ============ ========== =============
NOTE 3 - COMPREHENSIVE INCOME:
The Company follows SFAS No. 130, "Reporting Comprehensive Income." This
Statement establishes requirements for reporting comprehensive income and its
components which includes the Company's foreign currency translation adjustment
and derivative cash flow hedges.
The Company's comprehensive income for the three and nine months ended
September 30, 2001 and 2000 is as follows (in thousands):
For the three For the nine
------------- ------------
months ended months ended
------------ ------------
September 30, September 30,
------------- -------------
2001 2000 2001 2000
----- ---- ---- ----
Net income (loss) $ 3,049 $ 3,264 $ 11,854 $ 7,104
Derivative hedging gain (loss) (net of
taxes of $389 and $613, respectively) 531 - 921 -
Foreign currency translation gain (loss) (2,538) (454) (2,489) (1,225)
---------- ---------- --------- ---------
Comprehensive income (loss) $ 1,042 $ 2,810 $ 10,286 $ 5,879
========== ========== ========= =========
4
NOTE 4 - MERGER WITH SOUTHERN MINERAL CORPORATION:
PetroCorp completed the acquisition of Southern Mineral on June 6, 2001.
Southern Mineral shareholders could elect to receive .471 shares of PetroCorp
common stock or cash of $4.71 or some combination thereof for each share of
Southern Mineral common stock they owned. Based on elections of Southern Mineral
shareholders, PetroCorp issued 4 million shares (valued at approximately $39
million) and paid cash of approximately $21.2 million. The cash consideration
includes cash due to warrant and option holders, net of cash received from the
exercise of Southern Mineral warrants and options. The totals do not reflect
800,336 shares of Southern Mineral purchased by PetroCorp in open market
transactions prior to the merger for $3.4 million. THE FOLLOWING INFORMATION IS
BASED ON A PRELIMINARY ANALYSIS OF THE TRANSACTION AND IS SUBJECT TO CHANGE WHEN
THE FINAL ANALYSIS IS COMPLETE.
The acquisition of Southern Mineral was accounted for using the purchase
method of accounting as of June 1, 2001 because as of that date, the company had
effective control, and the results of operations have been included since that
date. The purchase price allocation is (amounts in thousands):
Issuance of common stock (net of $380 registration costs) $ 38,618
Net cash to Southern Mineral stockholders and warrant holders 20,768
Legal, professional and other costs 424
Assumed liabilities and debt and liabilities incurred 29,169
----------
Total purchase consideration $ 88,979
==========
Fair value of assets and liabilities acquired
Current assets $ 5,666
Property, plant and equipment 80,150
Other assets 3,163
Current liabilities (6,608)
Debt assumed by PetroCorp (12,583)
Deferred income taxes (9,978)
----------
$ 59,810
==========
The following unaudited pro forma information has been prepared assuming
Southern Mineral had been acquired as of the beginning of the period presented.
The pro forma information is presented for information purposes only and is not
necessarily indicative of what would have occurred if the acquisition had been
made as of that date. In addition, the pro forma information is not intended to
be a projection of future results and does not reflect any efficiencies that may
result from the integration of Southern Mineral.
Pro Forma Information (Unaudited)
(In thousands, except per share data)
Nine Months Ended Nine Months Ended
September 30, 2001 September 30, 2000
------------------ ------------------
Revenues............................. $ 54,545 $ 52,757
Income before income taxes........... $ 20,771 $ 14,968
Net income........................... $ 12,430 $ 8,523
Earnings per common share - basic.... $ 0.98 $ 0.67
Earnings per common share - diluted.. $ 0.97 $ 0.67
The above pro forma data reflects $3,665 and $5,188, respectively, of
bankruptcy expenses and restructuring costs (primarily investment banker and
employee severance related costs) for Southern Mineral for the nine months ended
September 30, 2001 and 2000.
5
NOTE 5 - EARNINGS PER SHARE:
The following is a reconciliation of the numerators and denominators of the
basic and diluted per share computations for the periods presented (in
thousands, except share amounts):
Per Share Amounts
-------------------------------------------------------
Net income
before
Net extraordinary Extraordinary Net
Income Shares item loss Income
------ ------ ------------- ------------- ------
THREE MONTHS ENDED SEPTEMBER 30,
2001
Basic EPS:
Net income.................... $ 3,049 12,778 $ 0.24 $ - $ 0.24
Effect of dilutive securities:
Options....................... - 133 - - -
------- ------ ------ ------ ------
Diluted EPS:
Net income.................... $ 3,049 12,911 $ 0.24 $ - $ 0.24
======= ====== ====== ====== ======
2000
Basic EPS:
Net income.................... $ 3,264 8,694 $ 0.38 $ - $ 0.38
Effect of dilutive securities:
Options....................... - 128 (0.01) - $(0.01)
------- ------ ------ ------ ------
Diluted EPS:
Net income.................... $ 3,264 8,822 $ 0.37 $ - $ 0.37
======= ====== ====== ====== ======
NINE MONTHS ENDED SEPTEMBER 30,
2001
Basic EPS:
Net income.................... $11,854 10,439 $ 1.14 $ - $ 1.14
Effect of dilutive securities:
Options....................... - 157 (0.02) - (0.02)
------- ------ ------ ------ ------
Diluted EPS:
Net income.................... $11,854 10,596 $ 1.12 $ - $ 1.12
======= ====== ====== ====== ======
2000
Basic EPS:
Net income (A)................ $ 7,104 8,688 $ 0.85 $(0.03) $ 0.82
Effect of dilutive securities:
Options....................... - 69 (0.01) - (0.01)
------- ------ ------ ------ ------
Diluted EPS:
Net loss...................... $ 7,104 8,757 $ 0.84 $(0.03) $ 0.81
======= ====== ====== ====== ======
/(A)/ Net of extraordinary loss of $242,000 ($0.03 per share).
The net income per share amounts do not include the effect of potentially
dilutive securities of 420,000 and 389,000 for the three months ended September
30, 2001 and 2000, respectively, and 469,000 and 549,000 for the nine months
ended September 30, 2001 and 2000, respectively, as the impact of these
outstanding options was antidilutive.
6
NOTE 6 - HEDGING ACTIVITIES:
On June 15, 1998, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards (SFAS) No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS 133, as amended, requires that all
derivative instruments be recorded on the balance sheet at their fair value.
Changes in the fair value of derivatives will be recorded each period in current
earnings or other comprehensive income (only certain types of hedge transactions
are reported as a component of other comprehensive income). Additionally, for
all hedging transactions the nature and type of hedge will be disclosed. The
Company adopted SFAS 133 in January 2001.
To reduce the impact of fluctuations in the market prices of oil and
natural gas, the Company periodically utilizes hedging strategies such as
futures transactions or swaps to hedge the price of a portion of its future oil
and natural gas production. Results of these hedging transactions are reflected
in oil and natural gas sales in the month of the hedged production.
In the first quarter of 2000, the Company entered into swap transactions in
an effort to lock in a portion of higher oil prices. These transactions applied
to approximately 50 percent of the Company's projected oil production from April
2000 through December 2000, at prices ranging from $23.57 to $29.00 per barrel.
Oil and gas revenue includes $69,000 received and $434,000 in settlement of swap
transactions through September 30, 2000. In the second quarter of 2000, the
Company entered into a no-cost collar arrangement by which 180,000 MMbtu for
each of the months July through October 2000 were subject to a $4.96 ceiling and
a $3.50 floor per MMbtu. The Company determined that the estimated fair value of
the outstanding hedges at September 30, 2000 was not significant.
As part of PetroCorp's acquisition of Southern Mineral Corporation
("Southern Mineral"), the Company assumed crude oil and natural gas costless
collars which have the following outstanding at September 30, 2001:
Oil Hedges U.S. $
NYMEX WTI
---------
Total Monthly
----- -------
Period Bbl Bbl Floor Cap
------ --- --- ----- ---
United States and Canada
Oct-01--Dec-01 59,289 19,763 $22.00 32.20 to $33.30
Jan-02--Sep-02 158,500 17,611 $22.00 25.60 to $27.00
Gas Hedges U.S. $
Houston Ship Channel
--------------------
Total Monthly
Period MMbtu MMbtu Floor Cap
------ ----- ----- ---- ---
United States
Oct-01 84,833 84,833 $ 2.75 $4.98
Nov-01--Mar-02 378,000 75,600 $ 2.75 $4.85
Apr-02--Oct-02 466,000 66,571 $ 2.75 $3.80
CDN $ Alberta
Spot - AECO
-----------
Total Monthly
Period Gigajoules Gigajoules Floor Cap
------ ---------- ---------- ----- ---
Canada
Oct-01--Sep-02 600,000 50,000 $ 4.05 $6.15
Based on September 30, 2001 prices, a 10% change in oil and gas prices will
not cause the Company's obligation under the costless collars to have a material
adverse effect on the financial position or results of operations of the
Company. Hedging transactions for the three and nine months ended September 30,
2001 reduced oil and gas revenues by $16,000 and $45,000, respectively
(reclassified from comprehensive income). The estimated fair value at September
30, 2001 of the crude oil and natural gas collars was a receivable of $704,000.
7
The Company offsets any gain or loss on the swap and collars contract 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.
As a result of the merger with Southern Mineral, the Company assumed an
interest rate swap position that was originally intended to hedge the
variability of interest expense associated with Southern Mineral's variable rate
Canadian debt. Under the swap agreement, the Company receives a floating rate of
the Canadian prime rate and pays a fixed rate of 5.96% on a notional amount of
Canadian $15 million. The interest rate swap does not qualify for hedge
accounting at September 30, 2001 and the Company has recorded the swap's fair
value of $192,000 as a liability at the date of the merger. The estimated fair
value at September 30, 2001 is a liability of $423,000.
NOTE 7 - PROPERTY, PLANT AND EQUIPMENT:
Investments in property, plant and equipment were as follows at September
30, 2001 and December 31, 2000 (amounts in thousands):
2001 2000
---- ----
Oil and gas properties............................. $ 316,412 $ 228,845
Plant and related facilities....................... 9,714 9,969
Gas gathering facilities........................... 1,698 1,698
Furniture, fixtures and equipment.................. 33 -
--------- ---------
327,857 240,512
Less - accumulated depreciation, depletion
And amortization................................. (177,344) (169,576)
--------- ---------
$ 150,513 $ 70,936
========= =========
These values include the preliminary allocation of the purchase price of
Southern Mineral and are subject to change. See Note 8.
As more fully described in the Company's 10-K, PetroCorp utilizes the full
cost method of accounting for costs related to its oil and natural gas
properties. Under this method, capitalized costs are subject to a ceiling test,
evaluated each quarter, which limits such pooled costs to the aggregate of the
present value of future net revenues attributable to proved gas and oil reserves
discounted at 10 percent plus the lower of cost or market value of unproved
properties. At September 30, 2001, the Company's unamortized costs of oil and
gas properties exceeded this ceiling amount by approximately $20 million due to
low gas prices in effect on that date. The cash spot price for natural gas in
the US and Canada was $1.86 and $1.18, respectively, on September 30, 2001.
However, due to the subsequent recovery in the market prices for natural gas the
Company was not required to record a write-down of its oil and gas properties. A
decline in gas and oil 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 8 - LONG-TERM DEBT:
In July 2000, the Company entered into a $75 million revolving credit
agreement with the Toronto-Dominion Bank (TD Bank), the agent, and the Bank of
Nova Scotia. The term of the facility is through April 30, 2003 and the initial
borrowing base was set at $58 million. Borrowings can be funded by either
Eurodollar loans or Base Rate loans. The interest rate on the borrowings is
equal to an interest rate spread plus either the Eurodollar rate or the Base
Rate. The interest spread is determined from a sliding scale based on the
Company's borrowing base percentage utilization in effect from time to time. The
spread ranges from 1.25 to 2.25 on Eurodollar loans and .25 to 1.25 on Base Rate
loans. At September 30, 2001, the weighted average interest rate under this
facility was approximately 6.7%.
8
The $75 million revolving credit agreement prohibits the declaration and
payment of dividends on the common stock of the Company. Also, the debt
agreement requires the Company to maintain a minimum current ratio, a minimum
tangible net worth, and a minimum interest coverage ratio.
As a result of the merger with Southern Mineral, the Company assumed
Southern Mineral's outstanding debt of $11.3 million subject to a US credit
facility with Bank One and $1.3 million subject to a Canadian loan facility with
the Canadian branch of the same lender. At the time of the merger, PetroCorp
obtained loan waivers which reduced the facility amounts to $15 million subject
to the US facility and C$3 million under the Canadian facility. The Company paid
off outstanding debt and closed these facilities in the third quarter of 2001.
NOTE 9 - GEOGRAPHIC AREA INFORMATION:
The principal business of the Company is oil and gas, which consists of the
exploration, development, acquisition, exploitation and operation of oil and gas
properties and the production and sale of crude oil and natural gas in North
America. Pertinent information with respect to the Company's oil and gas
business is presented in the following table (in thousands):
United General
States Canada Corporate Total
------ ------ --------- -----
Three months ended September 30, 2001:
Revenues............................... $ 6,119 $ 7,688 $ - $ 13,807
Income (loss) from operations.......... 602 4,868 (741) 4,729
Three months ended September 30, 2000:
Revenues............................... $ 6,782 $ 5,005 $ - $ 11,787
Income (loss) from operations.......... 3,804 3,046 (428) /(A)/ 6,422
Nine months ended September 30, 2001:
Revenues............................... $19,160 $21,172 $ - $ 40,332
Income (loss) from operations.......... 7,999 13,644 (1,730) 19,913
Long-lived assets at September 30...... 94,379 /(B)/ 66,687 160 161,226
Nine months ended September 30, 2000:
Revenues............................... $16,381 $12,309 $ - $ 28,690
Income (loss) from operations.......... 8,093 7,452 (889) /(A)/ 14,656
Long-lived assets at September 30...... 53,569 /(B)/ 50,159 203 103,931
/(A)/ Net of $500 restructuring cost reversal (credit).
/(B)/ Includes deferred tax assets of $7,862 and $11,817 for September 30, 2001
and 2000, respectively.
NOTE 10 - RECENT ACCOUNTING PRONOUNCEMENTS:
In June 2001, the Financial Accounting Standards Board ("FASB") issued FAS
No. 141 and 142. FAS No. 141, Business Combinations, requires the purchase
method of accounting be used for all business combinations initiated after June
30, 2001. FAS No. 142, Goodwill and Other Intangible Assets, changes the
accounting for goodwill from an amortization method to an impairment-only
approach and will be effective January, 2002. The Company believes that adoption
of these new standards will not have an effect on its results of operations or
its financial position. In June 2001, the FASB issued FAS No. 143, Accounting
for Asset Retirement Obligations, and in August 2001, FAS No. 144, Accounting
for Impairment or Disposal of Long-Lived Assets. Management is currently
evaluating the impact of FAS 143 and 144 on financial position and results of
operations.
9
NOTE 11 - COMMON STOCK REPURCHASES:
On September 14, 2001, the Company announced that the Board of Directors
authorized the purchase of up to 1,000,000 shares of the Company's stock.
Through October 31, 2001, 334,470 shares have been purchased at a cost of
$2,972,000.
10
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
General
The Company's principal line of business is the production and sale of its
oil and natural gas reserves located in North America. Results of operations are
dependent upon the quantity of production and the price obtained for such
production. Prices received by the Company for the sale of its oil and natural
gas have fluctuated significantly from period to period. Such fluctuations
affect the Company's ability to maintain or increase its production from
existing oil and gas properties and to explore, develop or acquire new
properties.
The following table reflects certain operating data for the periods
presented:
For the For the
three months nine months
ended September 30, ended September 30,
-------------------------------------------------
2001 2000 2001 2000
-------------------------------------------------
Production:
United States:
Oil (MBbls)......................................... 112 74 269 228
Gas (MMcf).......................................... 1,247 1,162 2,907 2,952
Total gas equivalents (MMcfe)....................... 1,919 1,606 4,521 4,320
Canada:
Oil (MBbls)......................................... 77 25 147 86
Gas (MMcf).......................................... 1,360 1,180 3,795 3,177
Total gas equivalents (MMcfe)....................... 1,822 1,330 4,677 3,693
Total:
Oil (MBbls)......................................... 189 99 416 314
Gas (MMcf).......................................... 2,607 2,342 6,702 6,129
Total gas equivalents (MMcfe)....................... 3,741 2,936 9,198 8,013
Average sales prices:
United States:
Oil (per Bbl)....................................... $25.14 $25.76 $26.18 $27.01
Gas (per Mcf)....................................... 2.55 4.13 4.08 3.43
Canada:
Oil (per Bbl)....................................... 21.62 24.75 22.59 25.95
Gas (per Mcf)....................................... 3.81 3.06 4.09 2.62
Weighted average:
Oil (per Bbl)....................................... 23.71 25.50 24.91 26.72
Gas (per Mcf)....................................... 3.21 3.59 4.09 3.01
Selected data per Mcfe:
Average sales price................................... $ 3.44 $ 3.73 $ 4.10 $ 3.35
Production costs...................................... 1.06 0.82 0.92 0.77
General and administrative expenses................... 0.20 0.15 0.19 0.17
Oil and gas depreciation, depletion and amortization.. 0.92 0.71 0.86 0.70
11
Results of Operations
Three Months Ended September 30, 2001 Compared to Three Months Ended September
30, 2000
Overview. The Company recorded third quarter 2001 net income of $3,049,000,
or $0.24 per share. This compares to net income of $3,264,000 or $0.38 per share
recorded in the third quarter of 2000. The decrease in net income results from
lower oil and gas prices offset by volume increases primarily due to the merger
with Southern Mineral. Net cash provided by operating activities was $4.2
million for the quarter ended September 30, 2001 compared to net cash provided
of $9.6 million for the corresponding quarter of 2000.
Revenues. Total revenues increased 17% to $13.8 million in the third
quarter of 2001 compared to $11.8 million in the third quarter of 2000,
primarily due to volume increases associated with the merger with Southern
Mineral. The Company's natural gas production increased 11% to 2,607 MMcf from
2,342 MMcf and oil production increased 91% to 189 MBbls from 99 MBbls,
resulting in the Company's overall equivalent production increasing 27% to 3,741
MMcfe from 2,936 MMcfe. The increase in oil and gas production is primarily due
to the merger with Southern Mineral as well as several new wells coming on-line
in Canada.
The Company's composite average oil price decreased 7% to $23.71 per barrel
in the third quarter of 2001 from $25.50 per barrel in the third quarter of
2000. The Company's average U.S. natural gas price decreased 38% to $2.55 per
Mcf in the third quarter of 2001 from $4.13 per Mcf in the prior year quarter,
while the average Canadian natural gas price increased 25% to $3.81 per Mcf in
the third quarter of 2001 from $3.06 per Mcf for 2000. Increased volumes from
the merger with Southern Mineral, offset by price decreases, resulted in a 17%
increase in oil and gas revenues to $12.9 million in the third quarter of 2001
from $11.0 million in the prior year.
Production Costs. Production costs increased 67% to $4.0 million in the
third quarter of 2001 as a result of the costs associated with the additional
wells acquired in the merger with Southern Mineral and increased production
taxes related to higher commodity prices. Production costs per Mcfe increased by
29% to $1.06 per Mcfe in the third quarter of 2001.
Depreciation, Depletion & Amortization (DD&A). Total DD&A increased 60% to
$4.0 million in the third quarter of 2001. The composite oil and gas DD&A rate
increased 30% to $0.92 per Mcfe from $0.71 per Mcfe. This reflects the impact
of the Southern Mineral acquisition and previously unevaluated properties
evaluated in late 2000 and moved to the full cost pool.
General and Administrative Expenses. General and administrative expenses
increased 73% to $739,000 in the third quarter of 2001 from $428,000 in the
third quarter of 2000 as a result of costs associated with the transition of
processing from and the shut down of Southern Mineral offices.
Investment Income. Investment income decreased 88% to $17,000 in the third
quarter of 2001 from $147,000 in the third quarter of 2000 due to excess cash
being used to pay down debt.
Interest Expense. Interest expense increased 2% to $832,000 in the third
quarter of 2001 from $813,000 in the prior year quarter, reflecting additional
debt associated with the merger with Southern Mineral offset by lower interest
rates. The Liquidity and Capital Resources section further describes changes in
debt.
Other Income. Other income includes a $0.6 million realized translation
gain on the short-term investment of Canadian assets in US dollar denominated
accounts during the third quarter of 2001.
Income Taxes. The Company recorded a $1,942,000 income tax expense with an
effective tax rate of 39% on a pre-tax income of $4,991,000 in the third quarter
of 2001. This compares to an income tax expense of $2,597,000 with an effective
tax rate of 44% on pre-tax income of $5,861,000 million in the third quarter of
2000.
12
Nine Months Ended September 30, 2001 Compared to Nine Months Ended September 30,
2000
Overview. The Company recorded a first nine months 2001 net income of
$11,854,000, or $1.14 per share. This compares to net income of $7,104,000, or
$0.82 per share recorded in the first nine months of 2000. This improvement
results from higher oil and gas prices and volume increases primarily due to the
merger with Southern Mineral. Net cash provided by operating activities was
$16.7 million for the nine months ended September 30, 2001 compared to $17.6
million for the corresponding nine months of 2000.
Revenues. Total revenues increased 40% to $40.3 million in the first nine
months of 2001 compared to $28.7 million in the first nine months of 2000,
primarily due to volume increases from the merger with Southern Mineral. The
Company's natural gas production increased 9% to 6,702 MMcf from 6,129 MMcf and
oil production increased 32% to 416 MBbls from 314 MBbls, resulting in the
Company's overall equivalent production increasing 15% to 9,198 MMcfe from 8,013
MMcfe. The increase in natural gas production is primarily the result of the
merger with Southern Mineral as well as several new wells coming on-line in both
Canada and the US. The increase in oil production also reflects the merger with
Southern Mineral.
The Company's composite average oil price decreased 7% to $24.91 per barrel
in the first nine months of 2001 from $26.72 per barrel in the first nine months
of 2000. The Company's average U.S. natural gas price increased 19% to $4.08 per
Mcf in the first nine months of 2001 from $3.43 per Mcf in the prior year, while
the average Canadian natural gas price increased 56% to $4.09 per Mcf in the
first nine months of 2001 from $2.62 per Mcf in 2000. The significant increase
in gas prices, as well as the increased production volumes, resulted in a 41%
increase in oil and gas revenues to $37.7 million in the first nine months of
2001 verses $26.8 million in the prior year nine months.
Production Costs. Production costs increased 38% to $8.4 million in the
first nine months of 2001 as a result of additional wells acquired in the merger
with Southern Mineral. Production costs per Mcfe increased 19% to $0.92 per Mcfe
in the first nine months of 2001 from $0.77 in the same nine months of 2000.
Depreciation, Depletion & Amortization (DD&A). Total DD&A increased 37% to
$9.2 million in the first nine months of 2001 from $6.7 million in the first
nine months of 2000. The composite oil and gas DD&A rate increased 23% to $0.86
per MMcfe from $0.70 per MMcfe. This reflects the impact of the Southern Mineral
acquisition and previously unevaluated properties evaluated in late 2000 and
moved to the full cost pool.
General and Administrative Expenses. General and administrative expenses
increased 24% to $1,729,000 in the first nine months of 2001 from $1,389,000 in
the first nine months of 2000 as a result of costs associated with the
transition of processing from and the shut down of Southern Mineral offices.
Restructuring Costs. The Company recorded a $0.5 million credit against
restructuring costs in the first nine months of 2000 primarily because the
Houston office space was leased to an outside party and the Company's obligation
ended.
Investment Income. Investment income decreased 79% to $111,000 in the first
nine months of 2001 from $524,000 in the first nine months of 2000 due to lower
interest rates and excess cash being used to pay down debt.
Interest Expense. Interest expense decreased 47% to $1,500,000 in the first
nine months of 2001 from $2,831,000 in the prior year first nine months,
reflecting the impact of rate decreases and lower debt levels over most of the
period. The Liquidity and Capital Resources section further describes changes in
debt.
Income Taxes. The Company recorded a $7,972,000 income tax expense with an
effective tax rate of 40% on pre-tax income of $19.8 million in the first nine
months of 2001. This compares to an income tax expense of $5,296,000 with an
effective tax rate of 42% on pre-tax income of $12.6 million in the first nine
months of 2000.
13
Liquidity and Capital Resources
As of September 30, 2001, the Company had working capital of negative $4.2
million as compared to positive $9.0 million at December 31, 2000. Net cash
provided by operating activities was $16.7 million for the nine months ended
September 30, 2001 compared to $17.6 million for the corresponding nine months
of 2000.
The Company's total capital expenditures were $71.5 million ($32.9 million
cash expenditure), which includes the Southern Mineral acquisition, and $6.0
million for the nine months ended September 30, 2001 and 2000, respectively,
primarily related to the acquisition of Southern Mineral in 2001 and exploration
and development in both years.
No sales of oil and gas properties occurred in the first nine months of
either 2001 or 2000.
In July 2000, the Company entered into a $75 million revolving credit
agreement with the Toronto-Dominion Bank (TD Bank), the agent, and the Bank of
Nova Scotia. The term of the facility is through April 30, 2003 and the initial
borrowing base was set at $58 million. Borrowings can be funded by either
Eurodollar loans or Base Rate loans. The interest rate on the borrowings is
equal to an interest rate spread plus either the Eurodollar rate or the Base
Rate. The interest spread is determined from a sliding scale based on the
Company's borrowing base percentage utilization in effect from time to time. The
spread ranges from 1.25 to 2.25 on Eurodollar loans and .25 to 1.25 on Base Rate
loans. At September 30, 2001, the Company had a total of $36.6 million
outstanding under the revolver and $21.4 million available based on the current
borrowing base, as defined, subject to certain limitations. During the first
nine months of 2001, the average interest rate under this facility was
approximately 6.9%.
The Company has historically funded its capital expenditures and working
capital requirements with its cash flow from operations, debt and equity capital
and participation by institutional investors. If the Company increases its
capital expenditure level in the future or operating cash flow is not as
expected, capital expenditures may require additional funding, obtained through
borrowings from commercial banks and other institutional sources or by public or
private offerings of equity or debt securities.
Merger with Southern Mineral
As indicated in Note 4 to the financial statements, PetroCorp completed its
merger with Southern Mineral Corporation on June 6, 2001. Funds needed to
complete this transaction were provided by cash on hand and borrowings under
existing lines of credit. As a result of the merger with Southern Mineral, the
Company assumed Southern Mineral's outstanding debt of $11.3 million subject to
a US credit facility with Bank One and $1.3 million subject to a Canadian loan
facility with the Canadian branch of the same lender. The Company paid off all
Bank One loans during the third quarter by utilizing the existing TD Bank credit
facility. The Bank One credit facilities were terminated during the third
quarter.
Common Stock Repurchases
On September 14, 2001, the Company announced that the Board of Directors
authorized the purchase of up to 1,000,000 shares of the Company's stock.
Through October 31, 2001, 334,470 shares have been purchased at a cost of
$2,972,000.
Other
In June 2001, the Financial Accounting Standards Board ("FASB") issued FAS
No. 141 and 142. FAS No. 141, Business Combinations, requires the purchase
method of accounting be used for all business combinations initiated after June
30, 2001. FAS No. 142, Goodwill and Other Intangible Assets, changes the
accounting for goodwill from an amortization method to an impairment-only
approach and will be effective January, 2002. The Company believes that adoption
of these new standards will not have an effect on its results of operations or
its financial position. In June 2001, the FASB issued FAS No. 143, Accounting
for Asset Retirement Obligations, and in August 2001, FAS No. 144, Accounting
for Impairment or Disposal of Long-Lived Assets. Management is currently
evaluating the impact of FAS 143 and 144 on financial position and results of
operations.
14
Item 3. Quantitative and Qualitative Disclosures about Market Risk
The Company's primary sources of market risk are from fluctuations in
commodity prices, interest rates and exchange rates.
Commodity Price Risk
The Company produces and sells natural gas, crude oil, condensate, natural
gas liquids and sulfur. As a result, the Company's financial results can be
significantly affected as these commodity prices fluctuate widely in response to
changing market forces. The Company has previously utilized hedging transactions
to manage its exposure to price fluctuations on its sales of oil and natural
gas.
As detailed in Note 6 to the financial statements, the merger with Southern
Mineral resulted in PetroCorp assuming crude oil and natural gas costless
collars. Based on September 30, 2001 prices, a 10% change in oil and gas prices
will not cause the Company's obligation under the costless collars to have a
material adverse effect on the financial position or results of operations of
the Company. The impact of hedging transactions for the nine months ended
September 30, 2001 was a reduction of oil and gas revenues by $45,000. The fair
value at September 30, 2001 of the crude oil and natural gas collars was a
receivable of $704,000.
Interest Rate Risk
As a result of the merger with Southern Mineral, the Company assumed an
interest rate swap position that was originally intended to hedge the
variability of interest expense associated with Southern Mineral's variable rate
Canadian debt. Under the swap agreement, the Company receives a floating rate
of the Canadian prime rate and pays a fixed rate of 5.96% on a notional amount
of Canadian $15 million. The interest rate swap does not qualify for hedge
accounting at September 30, 2001 and the Company has recorded the swap's fair
value of $192,000 as a liability at the date of the merger. The estimated fair
value at September 30, 2001 is a liability of $423,000.
15
PART II. OTHER INFORMATION
Item 1 - Legal Proceedings
--------------------------
Not Applicable
Item 2 - Changes in Securities
------------------------------
Not Applicable
Item 3 - Defaults upon Senior Securities
----------------------------------------
Not Applicable
Item 4 - Submission of Matters to Vote of Security Holders
-----------------------------------------------------------
Not Applicable
Item 5 - Other Information
--------------------------
Not Applicable
Item 6 -
---------
(a) Exhibits
--------
Not Applicable
(b) Reports on Form 8-K
-------------------
Not Applicable
16
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned duly authorized officer.
PETROCORP INCORPORATED
----------------------
(Registrant)
Date: November 6, 2001 /s/ STEVEN R. BERLIN
---------------- ------------------------------------------
Steven R. Berlin
Chief Financial Officer and Secretary
(On behalf of the Registrant and as the
Principal Financial Officer)
17