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
For the Transition period _______ to _______
Commission File Number 0-22650
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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 April 30, 2002:
Common Stock, $.01 per value 12,559,609
---------------------------- ----------
(Title of Class) (Number of Shares Outstanding)
PETROCORP INCORPORATED
INDEX
PAGE NO.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets at March 31, 2002 and December 31, 2001 1
Consolidated Statements of Operations for the three months ended March 31, 2002 and 2001 2
Consolidated Statements of Cash Flows for the three months ended March 31, 2002 and 2001 3
Notes to Consolidated Financial Statements 4
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 8
Item 3. Quantitative and Qualitative Disclosures about Market Risk 11
PART II. OTHER INFORMATION 12
SIGNATURES 13
Certain matters discussed in this report, excluding historical information,
include forward-looking statements - statements that discuss the Company's
expected future results based on current and pending business operations. The
Company is making these forward-looking statements in reliance on the safe
harbor protections provided under the PRIVATE SECURITIES LITIGATION REFORM ACT
OF 1995.
Forward-looking statements can be identified by words such as "anticipates,"
"believes," "expects," "planned," "scheduled" or similar expressions. Although
the Company believes these forward-looking statements are based on reasonable
assumptions, statements made regarding future results are subject to numerous
assumptions, uncertainties and risks that may cause future results to be
materially different from the results stated or implied in this document.
Important risk factors (but not necessarily all important factors) that could
cause actual results to differ materially from those expressed in any
forward-looking statement made by, or on behalf of, the Company would include,
but in no way be limited by, the Company's ability to obtain agreements with
co-venturers, partners and governments; its ability to engage drilling,
construction and other contractors; its ability to obtain economical and timely
financing; geological, land, sea or weather conditions; world prices for oil,
natural gas and natural gas liquids; adequate and reliable transportation
systems; and foreign and United States laws, including tax laws. Additional
information about issues that could lead to material changes in performance is
contained in the Company's Form 10-K.
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements
PETROCORP INCORPORATED
CONSOLIDATED BALANCE SHEETS
(in thousands, except share amounts)
(Unaudited)
March 31, December 31,
2002 2001
--------- ------------
Assets
------
Current assets:
Cash and cash equivalents............................................ $ 1,527 $ 1,265
Accounts receivable, net............................................. 15,915 13,267
Other current assets................................................. 851 1,411
-------- --------
Total current assets.......................................... 18,293 15,943
-------- --------
Property, plant and equipment:
Oil and gas properties, at cost, full cost method, net of
accumulated depreciation, depletion, amortization and impairment.... 123,928 126,925
Other, net........................................................... 1,314 1,527
-------- --------
125,242 128,452
-------- --------
Deferred income taxes.................................................. 18,266 18,261
Other assets, net...................................................... 2,738 2,699
-------- --------
Total assets......................................... $164,539 $165,355
======== ========
Liabilities and Shareholders' Equity
------------------------------------
Current liabilities:
Accounts payable..................................................... $ 6,173 $ 6,708
Accrued liabilities.................................................. 3,016 3,877
Current portion of long-term debt.................................... 1,430 1,327
-------- --------
Total current liabilities..................................... 10,619 11,912
-------- --------
Long-term debt ........................................................ 47,570 47,620
-------- --------
Deferred income taxes.................................................. 13,768 13,908
-------- --------
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,
12,558,609 and 12,556,109 shares outstanding as of
March 31, 2002 and December 31, 2001, respectively.................. 128 128
Additional paid-in capital........................................... 111,248 111,114
Accumulated deficit.................................................. (8,620) (9,666)
Accumulated other comprehensive loss................................. (7,824) (7,311)
-------- --------
Treasury stock, at cost (264,607 shares).......................... (2,350) (2,350)
-------- --------
Total shareholders' equity.................................... 92,582 91,915
-------- --------
Total liabilities and shareholders' equity........... $164,539 $165,355
======== ========
The accompanying notes are an integral part of these financial statements.
1
PETROCORP INCORPORATED
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except share amounts)
(Unaudited)
For the three months
ended March 31,
--------------------
2002 2001
-------- --------
Revenues:
Oil and gas........................................ $10,685 $13,225
Plant processing................................... 489 433
Other.............................................. 300 407
------- -------
11,474 14,065
------- -------
Expenses:
Production costs................................... 3,802 1,574
Depreciation, depletion and amortization........... 4,486 2,234
General and administrative......................... 686 479
Other operating expenses........................... 321 332
------- -------
9,295 4,619
------- -------
Income from operations 2,179 9,446
------- -------
Other income (expenses):
Investment income.................................. 30 38
Interest expense................................... (729) (219)
Other income (expenses)............................ 163 1,278
------- -------
(536) 1,097
------- -------
Income before income taxes 1,643 10,543
------- -------
Income tax provision:
Current............................................ 442 2,250
Deferred........................................... 155 2,087
------- -------
597 4,337
------- -------
Net income........................................... $ 1,046 $ 6,206
======= =======
Net income per common share - basic.................. $ 0.08 $ 0.71
======= =======
Net income per common share - diluted................ $ 0.08 $ 0.70
======= =======
Weighted average number of common shares - basic..... 12,556 8,714
======= =======
Weighted average number of common shares - diluted... 12,675 8,879
======= =======
The accompanying notes are an integral part of these financial statements.
2
PETROCORP INCORPORATED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(Unaudited)
For the three months
ended March 31,
--------------------
2002 2001
-------- --------
Cash flows from operating activities:
Net income........................................... $ 1,046 $ 6,206
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation, depletion and amortization........... 4,486 2,234
Deferred income tax expense........................ 155 2,087
Other.............................................. 31 142
Changes in operating assets and liabilities:
Accounts receivable................................ (2,648) 3,079
Other current assets............................... (61) 28
Accounts payable................................... (535) 4,236
Accrued liabilities................................ 32 (334)
Income tax payable................................. - (3,624)
------- --------
Net cash provided by operating activities........ 2,506 14,054
------- --------
Cash flows from investing activities:
Additions to oil and gas properties.................. (2,276) (1,707)
Additions to plant and related facilities............ (152) (113)
Investment in Southern Mineral Corporation........... - (3,410)
------- --------
Net cash used in investing activities............ (2,428) (5,230)
------- --------
Cash flows from financing activities:
Proceeds from long-term debt......................... 2,411 34,873
Repayment of long-term debt.......................... (2,337) (36,602)
Other................................................ 16 115
------- --------
Net cash used in financing activities............ 90 (1,614)
------- --------
Effect of exchange rate changes on cash................ 94 (514)
------- --------
Net increase (decrease) in cash and cash
equivalents........................................... 262 6,696
Cash and cash equivalents at beginning of period....... 1,265 21,946
------- --------
Cash and cash equivalents at end of period............. $ 1,527 $ 28,642
======= ========
The accompanying notes are an integral part of these financial statements.
3
PETROCORP INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1 - BASIS OF PRESENTATION:
The unaudited consolidated financial statements of PetroCorp Incorporated
(the "Company" or "PetroCorp") have been prepared in accordance with generally
accepted accounting principles for interim financial information and with
instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do
not include all of the information and footnotes required by generally accepted
accounting principles for complete financial statements. In the opinion of
management, all adjustments, consisting of normal and recurring adjustments
necessary for a fair presentation, have been included. For further information,
refer to the consolidated financial statements and footnotes thereto for the
year ended December 31, 2001, included in the Company's 2001 Annual Report on
Form 10-K/A 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.
As further described in Note 1 in the Company's 2001 Annual Report on Form
10-K/A, the Company changed its accounting for transportation and gathering
costs. Revenues and operating expenses for 2001 have been increased by $296,000
to conform to the new presentation.
NOTE 2 - COMPREHENSIVE INCOME:
The Company follows SFAS No. 130, "Reporting Comprehensive Income." This
Statement establishes requirements for reporting comprehensive income and its
components which includes the Company's foreign currency translation
adjustments. The Company's comprehensive income for the three months ended March
31, 2002 and 2001 is as follows (in thousands):
For the three
months ended
March 31,
---------------
2002 2001
------- -------
Net income $1,046 $ 6,206
------ -------
Derivative hedging loss (net of tax benefit of $373) (598) -
Reclassification of hedging gain to income (net of taxes
of $112) 168 -
Foreign currency translation gain (loss) (83) (1,730)
------ -------
$ (513) $(1,730)
------ -------
Comprehensive income $ 533 $ 4,476
====== =======
Accumulated other comprehensive loss was comprised solely of foreign
currency translation loss through March 31, 2001. As of March 31, 2002,
accumulated other comprehensive loss consisted of $462 of derivative gain, net
of taxes, and $8,286 of foreign currency translation losses.
4
NOTE 3 - MERGER WITH SOUTHERN MINERAL CORPORATION
PetroCorp completed the acquisition of Southern Mineral Corporation
("Southern Mineral") on June 6, 2001. 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 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)
Three Months Ended
March 31, 2001
------------------
Revenues.............................. $22,596
Income before income taxes............ $13,190
Net income............................ $ 7,834
Earnings per common share - basic..... $ 0.62
Earnings per common share - diluted... $ 0.61
The above pro forma data reflects $484 of bankruptcy expenses and
restructuring costs (primarily investment banker and employee severance related
costs) for Southern Mineral for the three months ended March 31, 2001.
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):
Three months ended March 31,
Per
Net Share
Income Shares Amount
------- -------- ---------
2002
Basic EPS:
Net income .......................... $1,046 12,556 $ 0.08
Effect of dilutive securities:
Options.............................. - 119 -
------ ------ ------
Diluted EPS:
Net income........................... $1,046 12,675 $ 0.08
====== ====== ======
2001
Basic EPS:
Net income........................... $6,206 8,714 $ 0.71
Effect of dilutive securities:
Options.............................. - 165 (0.01)
------ ------ ------
Diluted EPS:
Net income........................... $6,206 8,879 $ 0.70
====== ====== ======
5
The net income per share amounts do not include the effect of potentially
dilutive securities of 470,000 and 364,000 for the three months ended March 31,
2002 and 2001, respectively, as the impact of these outstanding options was
antidilutive.
NOTE 5 - HEDGING ACTIVITIES:
To reduce the impact of fluctuations in the market prices of oil and
natural gas, the Company periodically utilizes hedging strategies such as
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 hedged production.
No hedge transactions were in place during the first quarter of 2001. Oil
and gas revenue includes no adjustment for settled hedging transactions for the
first quarter 2001.
As part of PetroCorp's acquisition of Southern Mineral, the Company assumed
crude oil and natural gas costless collars with a fair value (liability) at date
of acquisition of $821,000. The estimated fair value of the derivative
instruments, which fair values were obtained from the counter-parties, held by
the Company at March 31, 2002 were a liability of $46,000 (included in other
liabilities) related to the oil and gas hedges. The ineffective portion of these
hedges was not material as of March 31, 2002. Hedging transactions for the three
months ended March 31, 2002 increased oil and gas revenues by $280,000
(reclassified from comprehensive income). All assumed oil and gas hedging
transactions will expire by the fourth quarter of 2002.
Subsequent to March 31, 2002, the Company entered into a swap transaction
covering 8,000 MMBTU of natural gas per day at a price of $3.755 per MMBTU and
covering the period from May 2002 through December 2002. The swap index is NYMEX
Henry Hub.
The Company offsets any gain or loss on the swap and collars contracts with
the realized prices for its production. While the swaps and collars reduce the
Company's exposure to declines in the market price of natural gas and oil, this
also limits the Company's gains from increases in the market price.
As a result of the merger with Southern Mineral, the Company also 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 through August 29, 2003. The interest rate swap did not
qualify for hedge accounting. The estimated fair value at March 31, 2002 is a
liability (included in other liabilities) of $161,000.
NOTE 6 - PROPERTY, PLANT AND EQUIPMENT:
Investments in property, plant and equipment were as follows at March 31,
2002 and December 31, 2001 (amounts in thousands):
2002 2001
-------- --------
Oil and gas properties:
Proved............................. $ 316,789 $ 315,935
Unproved........................... 1,424 1,223
--------- ---------
318,213 317,158
Plant and related facilities........... 9,872 9,743
Gas gathering facilities............... 1,698 1,698
Furniture, fixtures and equipment...... 90 95
--------- ---------
329,873 328,694
Less - accumulated depreciation,
depletion, amortization and
impairment........................... (204,631) (200,242)
--------- ---------
$ 125,242 $ 128,452
========= =========
6
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 March 31, 2002, the weighted average interest rate under this facility
was approximately 3.9%.
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.
NOTE 8 - 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 March 31, 2002:
Revenues............................. $ 6,176 $ 5,298 $ - $ 11,474
Income (loss) from operations........ 1,326 1,626 (773) 2,179
Long-lived assets at March 31........ 65,492 62,382 106 127,980
Three months ended March 31, 2001:
Revenues............................. $ 6,594 $ 7,471 $ - $ 14,065
Income (loss) from operations........ 4,345 5,580 (479) 9,446
Long-lived assets at March 31........ 36,978 34,812 165 71,955
NOTE 9 - RECENT ACCOUNTING PRONOUNCEMENTS
In June 2001, the Financial Accounting Standards Board ("FASB") issued FAS No.
142, Goodwill and Other Intangible Assets, and FAS No. 143, Accounting for Asset
Retirement Obligations, and in August 2001, FAS No. 144, Accounting for
Impairment or Disposal of Long-Lived Assets. Effective January 1, 2002, the
Company adopted FAS No. 142 and 144. The adoption had no effect on the Company's
financial position or results of operations. Management is currently evaluating
the impact of FAS No. 143 on financial position and results of operations.
7
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
three months
ended March 31,
------------------
2002 2001
------ ------
Production:
United States
Oil (MBbls).................................. 125 66
Gas (MMcf)................................... 1,467 755
Total gas equivalents (MMcfe)................ 2,217 1,151
Canada:
Oil (MBbls).................................. 66 28
Gas (MMcf)................................... 1,612 1,150
Total gas equivalents (MMcfe)................ 2,008 1,318
Total:
Oil (MBbls).................................. 191 94
Gas (MMcf)................................... 3,079 1,905
Total gas equivalents (MMcfe)................ 4,225 2,469
Average sales prices:
United States:
Oil (per Bbl)................................ $19.84 $27.31
Gas (per Mcf)................................ 2.49 6.27
Canada:
Oil (per Bbl)................................ 17.75 25.59
Gas (per Mcf)................................ 2.10 5.19
Weighted average:
Oil (per Bbl)................................ 19.12 26.80
Gas (per Mcf)................................ 2.29 5.62
Selected data per Mcfe:
Average sales price............................ $ 2.53 $ 5.36
Production costs............................... 0.90 0.64
General and administrative expenses............ 0.18 0.19
Oil and gas depreciation, depletion and
amortization................................. 0.97 0.76
8
Results of Operations
Three Months Ended March 31, 2002 Compared to Three Months Ended March 31,
2001
Overview. The Company recorded first quarter 2002 net income of $1,046,000,
or $0.08 per share. This compares to net income of $6,206,000 or $0.71 per share
recorded in the first quarter of 2001. This decrease results primarily from
lower oil and gas prices, partially offset by higher volumes resulting from the
merger with Southern Mineral. Net cash provided by operating activities was $2.5
million for the quarter ended March 31, 2002 compared to net cash provided of
$14.1 million for the corresponding quarter of 2001.
Revenues. Total revenues decreased 18% to $11.5 million in the first
quarter of 2002 compared to $14.1 million in the first quarter of 2001,
primarily due to commodity price decreases. The Company's natural gas production
increased 62% to 3,079 MMcf from 1,905 MMcf and oil production increased 103% to
191 MBbls from 94 MBbls, resulting in the Company's overall equivalent
production increasing 71% to 4,225 MMcfe from 2,469 MMcfe. The increase in oil
and gas production reflects the impact of the merger with Southern Mineral,
partially offset by normal production declines.
The Company's composite average oil price decreased 29% to $19.12 per
barrel in the first quarter of 2002 from $26.80 per barrel in the first quarter
of 2001. The Company's average U.S. natural gas price decreased 60% to $2.49 per
Mcf in the first quarter of 2002 from $6.27 per Mcf in the prior year quarter,
while the average Canadian natural gas price decreased 60% to $2.10 per Mcf in
the first quarter of 2002 from $5.19 per Mcf for 2001. The significant decrease
in prices, partially offset by the increase in production volumes, resulted in a
19% decrease in oil and gas revenues to $10.7 million in the first quarter of
2002 from $13.2 million in the prior year.
Production Costs. Production costs increased 142% to $3.8 million in the
first quarter of 2002 as a result of the addition of the Southern Mineral
properties, which have higher processing costs related to heavy oil in Canada
and high sulfur production in Alabama. Production costs per Mcfe increased to
$0.90 per Mcfe in the first quarter of 2002, compared to $0.64 in the
corresponding prior year period.
Depreciation, Depletion & Amortization (DD&A). Total DD&A increased 101% to
$4.5 million in the first quarter of 2002. The composite oil and gas DD&A rate
increased 28% to $0.97 per Mcfe from $0.76 per Mcfe. This reflects the impact of
the cost of the Southern Mineral properties added to the full cost pool.
General and Administrative Expenses. General and administrative expenses
increased 43% to $686,000 in the first quarter of 2002 from $479,000 in the
first quarter of 2001 due to higher fees paid to Kaiser-Francis for the
management of the additional Southern Mineral properties.
Investment Income. Investment income decreased 21% to $30,000 in the first
quarter of 2002 from $38,000 in the first quarter of 2001 due to excess cash
being used to pay down debt.
Interest Expense. Interest expense increased 233% to $729,000 in the first
quarter of 2002 from $219,000 in the prior year quarter, reflecting additions to
outstanding debt to finance the Southern Mineral acquisition.
Other Income. Other income decreased to $163,000 in the first quarter of
2002 from $1,278,000 in the corresponding period of 2001. This was primarily due
to a realized translation gain for the short-term investment of Canadian assets
in US dollar denominated accounts recorded during the first quarter of 2001.
Income Taxes. The Company recorded a $597,000 income tax expense with an
effective tax rate of 36% on a pre-tax income of $1,643,000 in the first quarter
of 2002. This compares to an income tax expense of $4,337,000 with an effective
tax rate of 41% on pre-tax income of $10.5 million in the first quarter of 2001.
The lower effective rate is due to the impact that reduced commodity prices have
on non-deductible Crown royalties and the resource allowance deduction used in
the calculation of Canadian income taxes.
9
Liquidity and Capital Resources
As of March 31, 2002, the Company had working capital of $7.7 million
as compared to $4.0 million at December 31, 2001. Net cash provided by operating
activities was $2.5 million for the three months ended March 31, 2002 compared
to $14.1 million for the corresponding three months of 2001 primarily due to
reduced oil and gas prices.
The Company's total capital expenditures were $2.4 million and $1.8
million for the three months ended March 31, 2002 and 2001, respectively,
primarily related to exploration and development.
No sales of oil and gas properties occurred in the first three months
of either 2002 or 2001.
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 March 31, 2002, the Company had a total of $48 million outstanding
under the revolver and $10 million available based on the current borrowing
base, as defined, subject to certain limitations. During the first quarter of
2002, the average interest rate under this facility was approximately 4.1%.
The Company has historically funded its capital expenditures, which are
discretionary, and working capital requirements with cash flow from operations,
debt and equity capital and participation by institutional investors. If the
Company increases its capital expenditure level in the future or operating cash
flow is not as expected, capital expenditures may require additional funding,
obtained through borrowings from commercial banks and other institutional
sources or by public or private offerings of equity or debt securities.
Other
In June 2001, the Financial Accounting Standards Board ("FASB") issued
FAS No. 142, Goodwill and Other Intangible Assets, and FAS No. 143, Accounting
for Asset Retirement Obligations, and in August 2001, FAS No. 144, Accounting
for Impairment or Disposal of Long-Lived Assets. Effective January 1, 2002, the
Company adopted FAS No. 142 and 144. The adoption had no effect on the Company's
financial position or results of operations. Management is currently evaluating
the impact of FAS No. 143 on financial position and results of operations.
10
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.
The merger with Southern Mineral resulted in PetroCorp assuming crude oil
and natural gas costless collars. The impact of hedging transactions for the
three months ended March 31, 2002 increased oil and gas revenues by $280,000.
The fair value at March 31, 2002 of the crude oil and natural gas collars was a
liability of $46,000. There were no outstanding hedges at March 31, 2001. All
assumed oil and gas hedging transactions will expire by the fourth quarter of
2002.
Subsequent to March 31, 2002, the Company entered into a swap transaction
covering 8,000 MMBTU of natural gas per day at a price of $3.755 per MMBTU and
covering the period from May 2002 through December 2002. The swap index is NYMEX
Henry Hub.
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 through August 29, 2003. The interest rate swap does not
qualify for hedge accounting at March 31, 2002 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 March 31, 2002 is a liability of $161,000.
11
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
12
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned duly authorized officer.
PETROCORP INCORPORATED
----------------------
(Registrant)
Date: May 7, 2002 /s/ STEVEN R. BERLIN
----------- --------------------------------------------
Steven R. Berlin
Chief Financial Officer and Secretary
(On behalf of the Registrant and as the
Principal Financial Officer)
13