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 June 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 July 30, 2001:
Common Stock, $.01 per value 12,738,096
---------------------------- ----------
(Title of Class) (Number of Shares Outstanding)
PETROCORP INCORPORATED
INDEX
PAGE NO.
--------
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets at June 30, 2001 and December 31, 2000 1
Consolidated Statements of Operations for the three and six months ended June 30, 2001 and 2000 2
Consolidated Statements of Cash Flows for the six months ended June 30, 2001 and 2000 3
Notes to Consolidated Financial Statements 4
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 10
Item 3. Quantitative and Qualitative Disclosures about Market Risk 13
PART II. OTHER INFORMATION 14
SIGNATURES 15
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)
JUNE 30, DECEMBER 31,
2001 2000
--------- ------------
ASSETS
------
Current assets:
Cash and cash equivalents $ 25,127 $ 21,946
Accounts receivable, net 14,089 13,332
Other current assets 936 609
-------- --------
Total current assets 40,152 35,887
-------- --------
Property, plant and equipment:
Oil and gas properties, at cost, full cost method, net
of accumulated depreciation, depletion and amortization 148,795 68,432
Plant and related facilities, net 1,963 2,451
Other, net 50 53
-------- --------
150,808 70,936
-------- --------
Deferred income taxes 7,944 10,254
Other assets, net 3,008 242
-------- --------
Total assets $201,912 $117,319
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 16,358 $ 17,732
Accrued liabilities 7,042 2,488
Income tax payable 111 5,444
Current portion of long-term debt 1,278 1,194
-------- --------
Total current liabilities 24,789 26,858
-------- --------
Long-term debt 58,362 29,992
-------- --------
Deferred income taxes 16,219 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,
12,738,096 and 8,703,719 shares outstanding as of
June 30, 2001 and December 31, 2000, respectively 127 87
Additional paid-in capital 110,595 71,614
Accumulated deficit (2,907) (11,712)
Accumulated other comprehensive loss (5,273) (5,712)
-------- --------
Total shareholders' equity 102,542 54,277
-------- --------
Total liabilities and shareholders' equity $201,912 $117,319
======== ========
The accompanying notes are an integral part of these financial statements.
See notes 6 and 8 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 six months
ended June 30, ended June 30,
-------------------------------------------------
2001 2000 2001 2000
-------------------------------------------------
REVENUES:
Oil and gas $11,655 $8,746 $24,880 $15,891
Plant processing 480 386 913 858
Other 621 71 732 154
------- ------ ------- -------
12,756 9,203 26,525 16,903
------- ------ ------- -------
EXPENSES:
Production costs 2,901 2,124 4,475 3,748
Depreciation, depletion and amortization 2,941 2,089 5,175 4,274
General and administrative 511 577 990 961
Restructuring costs - (500) - (500)
Other operating expenses 665 73 701 186
------- ------ ------- -------
7,018 4,363 11,341 8,669
------- ------ ------- -------
INCOME FROM OPERATIONS 5,738 4,840 15,184 8,234
------- ------ ------- -------
OTHER INCOME (EXPENSES):
Investment income 56 184 94 377
Interest expense (449) (992) (668) (2,018)
Other income (expenses) (1,053) 188 225 188
------- ------ ------- -------
(1,446) (620) (349) (1,453)
------- ------ ------- -------
INCOME BEFORE INCOME TAXES 4,292 4,220 14,835 6,781
------- ------ ------- -------
Income tax provision:
Current 1,453 1,432 3,703 1,432
Deferred 240 216 2,327 1,267
------- ------ ------- -------
1,693 1,648 6,030 2,699
------- ------ ------- -------
NET INCOME BEFORE EXTRAORDINARY ITEM 2,599 2,572 8,805 4,082
Extraordinary item - extinguishment of debt (less
applicable income taxes of $143,000) - 242 - 242
------- ------ ------- -------
NET INCOME $ 2,599 $2,330 $ 8,805 $ 3,840
======= ====== ======= =======
Net income per common share - basic:
Income before extraordinary item $ 0.27 $ 0.30 $ 0.95 $ 0.47
Extraordinary item 0.00 (0.03) 0.00 (0.03)
------- ------ ------- -------
Net income $ 0.27 $ 0.27 $ 0.95 $ 0.44
======= ====== ======= =======
Net income per common share - diluted:
Income before extraordinary item $ 0.26 $ 0.30 $ 0.93 $ 0.47
Extraordinary item 0.00 (0.03) 0.00 (0.03)
------- ------ ------- -------
Net income $ 0.26 $ 0.27 $ 0.93 $ 0.44
======= ====== ======= =======
Weighted average number of common shares - basic 9,783 8,686 9,253 8,685
======= ====== ======= =======
Weighted average number of common shares - diluted 9,966 8,733 9,427 8,721
======= ====== ======= =======
The accompanying notes are an integral part of these financial statements.
See notes 6 and 8 specifically for information regarding the
Southern Mineral merger.
2
PETROCORP INCORPORATED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(Unaudited)
For the six months
ended June 30,
--------------------
2001 2000
-------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 8,805 $ 3,840
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation, depletion and amortization 5,175 4,274
Deferred income tax expense 2,327 1,267
Other 142 187
Changes in operating assets and liabilities:
Accounts receivable 4,569 (1,521)
Other current assets 163 33
Accounts payable (4,124) 683
Accrued liabilities 628 (2,242)
Income tax payable (5,162) 1,419
-------- --------
NET CASH PROVIDED BY OPERATING ACTIVITIES 12,523 7,940
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to oil and gas properties (4,994) (3,383)
Additions to plant and related facilities (134) (408)
Purchase of Southern Mineral Corporation net assets (19,849) -
-------- --------
NET CASH USED IN INVESTING ACTIVITIES (24,977) (3,791)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from long-term debt 88,250 9,169
Repayment of long-term debt (72,399) (17,861)
Other 261 64
-------- --------
NET CASH USED IN FINANCING ACTIVITIES 16,112 (8,628)
-------- --------
Effect of exchange rate changes on cash (477) (234)
-------- --------
Net increase (decrease) in cash and cash equivalents 3,181 (4,713)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 21,946 12,899
-------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 25,127 $ 8,186
======== ========
The accompanying notes are an integral part of these financial statements.
See notes 6 and 8 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:
Expenditures
Balance at charged Balance at
December 31, against Changes in June 30,
2000 accrual estimates 2001
----------- ------------- ---------- ----------
Office lease discontinuance and other
related costs $70,000 $32,000 - $38,000
=========== ============= =========== ==========
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 six months ended June 30,
2001 and 2000 is as follows (in thousands):
For the three For the six
months ended months ended
June 30, June 30,
------------------ ---------------------
2001 2000 2001 2000
------ ------ ------ ------
Net income (loss) $2,599 $2,330 $8,805 $3,840
Derivative hedging gain (loss) (net of
taxes of $224) 390 - 390 -
Foreign currency translation gain (loss) 1,779 (657) 49 (771)
------ ------ ------ ------
Comprehensive income (loss) $4,768 $1,673 $9,244 $3,069
====== ====== ====== ======
4
NOTE 4 - EARNINGS PER SHARE:
The following is a reconciliation of the numerators and denominators of the
basic and diluted per share computations for the periods presented (in
thousands, except share amounts):
Per Share Amounts
--------------------------------------------
Net Income
Before
Net Extraordinary Extraordinary Net
Income Shares Item Loss Income
-------- -------- -------------- ------------- ---------
THREE MONTHS ENDED JUNE 30,
2001
Basic EPS:
Net income $2,599 9,783 $ 0.27 $ - $ 0.27
Effect of dilutive securities:
Options - 183 (0.01) - (0.01)
------ ------ ------ ------ ------
Diluted EPS:
Net income $2,599 9,966 $ 0.26 $ 0.00 $ 0.26
====== ====== ====== ====== ======
2000
Basic EPS:
Net income (A) $2,330 8,686 $ 0.30 $(0.03) $ 0.27
Effect of dilutive securities:
Options - 47 - - -
------ ------ ------ ------ ------
Diluted EPS:
Net income $2,330 8,733 $ 0.30 $(0.03) $ 0.27
====== ====== ====== ====== ======
SIX MONTHS ENDED JUNE 30,
2001
Basic EPS:
Net income $8,805 9,253 $ 0.95 $ - $ 0.95
Effect of dilutive securities:
Options - 174 (0.02) - (0.02)
------ ------ ------ ------ ------
Diluted EPS:
Net income $8,805 9,427 $ 0.93 $ 0.00 $ 0.93
====== ====== ====== ====== ======
2000
Basic EPS:
Net income (A) $3,840 8,685 $ 0.47 $(0.03) $ 0.44
Effect of dilutive securities:
Options - 36 - - -
------ ------ ------ ------ ------
Diluted EPS:
Net loss $3,840 8,721 $ 0.47 $(0.03) $ 0.44
====== ====== ====== ====== ======
(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 176,117 and 366,000 for the three months ended June 30,
2001 and 2000, respectively, and 540,117 and 549,000 for the six months ended
June 30, 2001 and 2000, respectively, as the impact of these outstanding options
was antidilutive.
5
NOTE 5 - 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 in the second quarter of 2000 includes $69,000 received and
$60,000 in settlement of swap transactions through June 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 June 30, 2000 was not
significant.
As part of PetroCorp's acquisition of Southern Mineral Corporation ("Southern
Mineral"), the Company has assumed the following crude oil and natural gas
costless collars:
Oil Hedges
U.S. $
NYMEX WTI
TOTAL MONTHLY ---------------------
PERIOD BBL BBL FLOOR CAP
----------------- ----------- ----------- ------- -------
UNITED STATES
May-01--Dec-01 86,300 10,788 $22.00 $32.20
Jan-02--Sep-02 88,200 9,800 $22.00 $25.60
CANADA
May-01--Dec-01 71,800 8,975 $22.00 $33.30
Jan-02--Sep-02 70,300 7,811 $22.00 $27.00
Gas Hedges
U.S. $
HOUSTON SHIP CHANNEL
TOTAL MONTHLY --------------------
PERIOD MMBBL MMBBL FLOOR CAP
----------------- ----------- ----------- ------- -------
UNITED STATES
May-01--Oct-01 509,000 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 GIGAIOULES GIGAIOULES FLOOR CAP
----------------- ----------- ----------- ------- -------
CANADA
May-01--Sep-02 850,000 50,000 $ 4.05 $ 6.15
Based on June 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 six months ended June 30, 2001
reduced oil and gas revenues by $29,000
6
(reclassified from comprehensive income). The estimated fair value at June 30,
2001 of the crude oil and natural gas collars was a liability of $169,000.
The Company uses the deferral method of accounting for its natural gas and oil
price swaps and collars and, therefore, 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 June 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 June 30, 2001 is $188,000.
NOTE 6 - PROPERTY, PLANT AND EQUIPMENT:
Investments in property, plant and equipment were as follows at June 30, 2001
and December 31, 2000 (amounts in thousands):
2001 2000
--------- ---------
Oil and gas properties $ 313,544 $ 228,845
Plant and related facilities 10,000 9,969
Gas gathering facilities 1,698 1,698
Furniture, fixtures and equipment 50 -
--------- ---------
325,292 240,512
Less - accumulated depreciation, depletion
and amortization (174,484) (169,576)
--------- ---------
$ 150,808 $ 70,936
========= =========
These values include the preliminary allocation of the purchase price of
Southern Mineral and are subject to change. See Note 8.
NOTE 7 - LONG-TERM DEBT:
In July 2000, the Company entered into a $75 million revolving credit
agreement with the Toronto-Dominion Bank (TD Bank), the agent, and the Bank of
Nova Scotia. The 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 June 30, 2001, the weighted average interest rate under this
facility was approximately 7.5%.
The $75 million revolving credit agreement prohibits the declaration and
payment of dividends on the common stock of the Company. Also, the debt
agreement requires 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 intends to
refinance these loans under the existing TD Bank or a new credit facility.
7
NOTE 8 - 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 $19.8 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 19,425
Legal, professional and other costs 424
Assumed liabilities and debt and liabilities incurred 30,512
--------
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 (7,951)
Debt assumed by PetroCorp (12,583)
Deferred income taxes (9,978)
--------
$ 58,467
========
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)
Six Months Ended Six Months Ended
June 30, 2001 June 30, 2000
---------------- ----------------
Revenues $40,738 $32,017
Income before income taxes $15,780 $ 8,152
Net income $ 9,395 $ 4,676
Earnings per common share - basic $ 0.75 $ 0.37
Earnings per common share - diluted $ 0.74 $ 0.37
The above pro forma data reflects $3,665 and $3,344, respectively, of
bankruptcy expenses and restructuring costs (primarily investment banker and
employee severance related costs) for Southern Mineral for the six months ended
June 30, 2001 and 2000.
8
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 June 30, 2001:
Revenues $ 6,447 $ 6,309 $ - $ 12,756
Income (loss) from operations 3,052 3,196 (510) 5,738
Three months ended June 30, 2000:
Revenues $ 4,999 $ 4,204 $ - $ 9,203
Income (loss) from operations 2,188 2,729 (77)(A) 4,840
Six months ended June 30, 2001:
Revenues $13,041 $13,484 $ - $ 26,525
Income (loss) from operations 7,397 8,776 (989) 15,184
Long-lived assets at June 30 91,459 70,082 219 161,760
Six months ended June 30, 2000:
Revenues $ 9,599 $ 7,304 $ - $ 16,903
Income (loss) from operations 4,289 4,406 (461)(A) 8,234
Long-lived assets at June 30 49,075 37,598 - 86,673
(A) Net of $500 restructuring cost reversal (credit).
NOTE 10 - RECENT ACCOUNTING PRONOUNCEMENTS:
In June 2001, the Financial Accounting Standards Board 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.
9
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 six months
ended June 30, ended June 30,
---------------------------------------
2001 2000 2001 2000
---------------------------------------
PRODUCTION:
United States:
Oil (MBbls) 91 72 157 154
Gas (MMcf) 905 853 1,660 1,790
Total gas equivalents (MMcfe) 1,451 1,285 2,602 2,714
Canada:
Oil (MBbls) 42 30 70 61
Gas (MMcf) 1,285 1,007 2,435 1,997
Total gas equivalents (MMcfe) 1,537 1,187 2,855 2,363
Total:
Oil (MBbls) 133 102 227 215
Gas (MMcf) 2,190 1,860 4,095 3,787
Total gas equivalents (MMcfe) 2,988 2,472 5,457 5,077
AVERAGE SALES PRICES:
United States:
Oil (per Bbl) $26.65 $27.72 $26.93 $27.61
Gas (per Mcf) 4.37 3.49 5.24 2.96
Canada:
Oil (per Bbl) 22.40 26.32 23.67 26.44
Gas (per Mcf) 3.37 2.94 4.23 2.36
Weighted average:
Oil (per Bbl) 25.31 27.31 25.92 27.28
Gas (per Mcf) 3.78 3.19 4.64 2.68
SELECTED DATA PER MCFE:
Average sales price $ 3.90 $ 3.54 $ 4.56 $ 3.13
Production costs 0.97 0.86 0.82 0.74
General and administrative expenses 0.17 0.23 0.18 0.19
Oil and gas depreciation, depletion and amortization 0.88 0.70 0.82 0.70
10
RESULTS OF OPERATIONS
Three Months Ended June 30, 2001 Compared to Three Months Ended June 30, 2000
Overview. The Company recorded second quarter 2001 net income of
$2,599,000, or $0.27 per share. This compares to net income of $2,330,000 or
$0.27 per share recorded in the second quarter of 2000. The improvement in net
income results from higher oil and gas prices and volume increases primarily due
to the merger with Southern Mineral. Net cash used by operating activities was
$1.5 million for the quarter ended June 30, 2001 compared to net cash provided
of $5.7 million for the corresponding quarter of 2000.
Revenues. Total revenues increased 39% to $12.8 million in the second quarter
of 2001 compared to $9.2 million in the second quarter of 2000, primarily due to
commodity price increases. The Company's natural gas production increased 18%
to 2,190 MMcf from 1,860 MMcf and oil production increased 30% to 133 MBbls from
102 MBbls, resulting in the Company's overall equivalent production increasing
21% to 2,988 MMcfe from 2,472 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 $25.31 per barrel
in the second quarter of 2001 from $27.31 per barrel in the second quarter of
2000. The Company's average U.S. natural gas price increased 25% to $4.37 per
Mcf in the second quarter of 2001 from $3.49 per Mcf in the prior year quarter,
while the average Canadian natural gas price increased 15% to $3.37 per Mcf in
the second quarter of 2001 from $2.94 per Mcf for 2000. The significant
increase in gas prices, as well as the increase in volumes from the merger with
Southern Mineral, resulted in a 34% increase in oil and gas revenues to $11.7
million in the second quarter of 2001 from $8.7 million in the prior year.
Production Costs. Production costs increased 38% to $2.9 million in the
second 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 13% to $0.97 per Mcfe in the second quarter of 2001.
Depreciation, Depletion & Amortization (DD&A). Total DD&A increased 41% to
$2.9 million in the second quarter of 2001. The composite oil and gas DD&A rate
increased 26% to $0.88 per Mcfe from $0.70 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
decreased 11% to $511,000 in the second quarter of 2001 from $577,000 in the
second quarter of 2000 as a result of efficiencies achieved through the
management agreement with Kaiser-Francis and PetroCorp's restructuring.
Investment Income. Investment income decreased 70% to $56,000 in the second
quarter of 2001 from $184,000 in the second quarter of 2000 due to excess cash
being used to pay down debt.
Interest Expense. Interest expense decreased 55% to $449,000 in the second
quarter of 2001 from $992,000 in the prior year quarter, reflecting the
reductions in outstanding debt prior to the merger with Southern Mineral. The
Liquidity and Capital Resources section further describes changes in debt.
Other Income. The Company recorded a $1.0 million realized translation loss
on the short-term investment of Canadian assets in US dollar denominated
accounts during the second quarter of 2001.
Income Taxes. The Company recorded a $1,639,000 income tax expense with an
effective tax rate of 39% on a pre-tax income of $4,292,000 in the second
quarter of 2001. This compares to an income tax expense of $1,648,000 with an
effective tax rate of 39% on pre-tax income of $4,220,000 million in the second
quarter of 2000.
11
Six Months Ended June 30, 2001 Compared to Six Months Ended June 30, 2000
Overview. The Company recorded a first half 2001 net income of $8,805,000,
or $0.95 per share. This compares to net income of $3,840,000, or $0.44 per
share recorded in the first half 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 $12.5 million
for the six months ended June 30, 2001 compared to $7.9 million for the
corresponding half of 2000.
Revenues. Total revenues increased 57% to $26.5 million in the first six
months of 2001 compared to $16.9 million in the first half of 2000, primarily
due to commodity price increases as well as volume increases from the merger
with Southern Mineral. The Company's natural gas production increased 8% to
4,095 MMcf from 3,787 MMcf and oil production increased 6% to 227 MBbls from 215
MBbls, resulting in the Company's overall equivalent production increasing 7% to
5,457 MMcfe from 5,077 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 5% to $25.92 per barrel
in the first half of 2001 from $27.28 per barrel in the first six months of
2000. The Company's average U.S. natural gas price increased 77% to $5.24 per
Mcf in the first six months of 2001 from $2.96 per Mcf in the prior year, while
the average Canadian natural gas price increased 79% to $4.23 per Mcf in the
first half of 2001 from $2.36 per Mcf in 2000. The significant increase in gas
prices, as well as the increased production volumes, resulted in a 57% increase
in oil and gas revenues to $24.9 million in the first six months of 2001 verses
$15.9 million in the prior year half.
Production Costs. Production costs increased 22% to $4.5 million in the
first half of 2001 as a result of additional wells acquired in the merger with
Southern Mineral and production tax increases related to higher commodity
prices. Production costs per Mcfe increased 11% to $0.82 per Mcfe in the first
half of 2001 from $0.74 in the same six months of 2000.
Depreciation, Depletion & Amortization (DD&A). Total DD&A increased 21% to
$5.2 million in the first half of 2001 from $4.3 million in the first six months
of 2000. The composite oil and gas DD&A rate increased 17% to $0.82 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 3% to $990,000 in the first six months of 2001 from $961,000 million
in the first half of 2000.
Restructuring Costs. The Company recorded a $0.5 million credit against
restructuring costs in the first six 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 75% to $94,000 in the first
half of 2001 from $377,000 in the first six months of 2000 due to lower interest
rates and excess cash being used to pay down debt.
Interest Expense. Interest expense decreased 67% to $668,000 in the first
six months of 2001 from $2,018,000 in the prior year first half, 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 $6,030,000 income tax expense with an
effective tax rate of 41% on pre-tax income of $14.8 million in the first half
of 2001. This compares to an income tax expense of $2,699,000 with an effective
tax rate of 40% on pre-tax income of $6.8 million in the first half of 2000.
12
LIQUIDITY AND CAPITAL RESOURCES
As of June 30, 2001, the Company had working capital of $15.3 million as
compared to $9.0 million at December 31, 2000. Net cash provided by operating
activities was $12.5 million for the six months ended June 30, 2001 compared to
$7.9 million for the corresponding six months of 2000.
The Company's total capital expenditures were $64.0 million, which includes
the Southern Mineral acquisition ($25.0 million cash expenditure), and $3.8
million for the six months ended June 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 six 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 June 30, 2001, the Company had a total of $44 million
outstanding under the revolver and $14 million available based on the current
borrowing base, as defined, subject to certain limitations. During the first
half of 2001, the average interest rate under this facility was approximately
7.8%.
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 8 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. At the time of the
merger, PetroCorp obtained loan waivers which reduced the facility amounts to
$15 million on the US facility and C$3 million for the Canadian facility. The
Company intends to refinance these loans under the existing TD Bank or a new
credit facility.
Other
In June 2001, the Financial Accounting Standards Board 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.
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.
13
As detailed in Note 5 to the financial statements, the merger with Southern
Mineral resulted in PetroCorp assuming crude oil and natural gas costless
collars. Based on June 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 six months ended June 30,
2001 was a reduction of oil and gas revenues by $29,000. The fair value at June
30, 2001 of the crude oil and natural gas collars was a liability of $169,000.
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 June 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 June 30, 2001 is $188,000.
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
(A) June 28, 2001 special meeting of shareholders.
(1) Election of Thomas N. Amonett, W. Neil McBean and Robert C. Thomas as
directors of the Company
Number of Votes
-----------------------------------------
Abstentions and
For Against Broker Non-Votes
--------------------- ------------------
6,860,614 -0- -0-
Item 5 - Other Information
Not Applicable
Item 6 -
(a) Exhibits
Not Applicable
(b) Reports on Form 8-K
Report dated June 6, 2001 concerning the completion of merger with Southern
Mineral Corporation.
14
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned duly authorized officer.
PETROCORP INCORPORATED
----------------------
(Registrant)
Date: August 13, 2001 /s/ STEVEN R. BERLIN
--------------- -------------------------------------
Steven R. Berlin
Chief Financial Officer and Secretary
(On behalf of the Registrant and as the
Principal Financial Officer)
15