UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended SEPTEMBER 30, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission File Number: 333-61547
CONTINENTAL RESOURCES, INC.
(Exact name of registrant as specified in its charter)
Oklahoma 73-0767549
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
302 N. Independence, Suite 300, Enid, Oklahoma 73701
(Address of principal executive offices) (Zip Code)
(580) 233-8955
(Registrant's telephone number, including area code)
NONE
(Former name, former address and former fiscal year, if
change since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act
of 1934 during the preceding 12 months(or for such shorter period that the
registrant was required to file such report(s), and (2) has been subject to
such filing requirements for the past 90 days.
Yes No X
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date:
Class Outstanding as of December 11, 1998
Common Stock, $1.00 par value 49,041
<PAGE>
INDEX
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Condensed Balance Sheets
for the period ended September 30, 1998 and
the year ended December 31, 1997
Consolidated Condensed Statements of Operations
for the 3 months ended September 30, 1998 and
the year ended December 31, 1997
Consolidated Condensed Statements of Operations
for the 9 months ended September 30, 1998 and
for the 9 months ended September 30, 1997
Consolidated Condensed Statements of Cash Flows
for the 9 months ended September 30, 1998 and
for the 9 months ended September 30, 1997
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Item 6. Exhibits and Reports on Form 8-K
SIGNATURES
<PAGE>
PART I. Financial Information
ITEM 1. FINANCIAL STATEMENTS
<TABLE>
CONTINENTAL RESOURCES, INC. AND SUBSIDIARY
CONSOLIDATED CONDENSED BALANCE SHEETS
(dollars in thousands)
ASSETS
<CAPTION>
(Unaudited)
September 30, December 31,
1998 1997
-------------- ------------
<S> <C> <C>
CURRENT ASSETS:
Cash $ 4,188 $ 1,301
Accounts receivable-
Oil and gas sales 6,366 11,432
Joint interest and other, net 7,838 13,711
Inventories 5,594 3,549
Prepaid expenses 211 383
Advances to affiliates 0 59
---------- ----------
Total current assets 24,197 30,435
---------- ----------
PROPERTY AND EQUIPMENT:
Oil and gas properties
Producing properties 238,664 195,785
Nonproducing leaseholds 48,495 17,047
Gas gathering and processing facilities 23,542 20,795
Service properties, equipment and other 14,121 12,849
---------- ----------
Total property and equipment 324,822 246,476
Less--Accumulated depreciation,
depletion and amortization (114,184) (88,559)
---------- ----------
Net property and equipment 210,638 157,917
---------- ----------
OTHER ASSETS:
Debt issuance costs 9,180 0
Other assets 540 34
---------- ----------
Total other assets 9,720 34
---------- ----------
Total assets $ 244,555 $ 188,386
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 9,822 $ 19,614
Current portion of long-term debt 315 315
Revenues and royalties payable 3,796 7,497
Accrued liabilities and other 4,453 3,165
---------- ----------
Total current liabilities 18,386 30,591
---------- ----------
LONG-TERM DEBT, net of current portion 156,405 79,317
OTHER NONCURRENT LIABILITIES 205 214
STOCKHOLDERS' EQUITY:
Common stock, $1 par value, 75,000 shares
authorized, 49,041 and 49,045 shares
issued at September 30, 1998, and
December 31, 1997, respectively
and 49,041 shares outstanding 49 49
Additional paid-in-capital 2,721 2,731
Treasury stock, 4 shares, at
December 31, 1997, at cost 0 (10)
Retained earnings 66,789 75,494
---------- ----------
Total stockholders' equity 69,559 78,264
---------- ----------
Total liabilities and
stockholders' equity $ 244,555 $ 188,386
========== ==========
</TABLE>
The accompanying notes are an integral part of these consolidated balance
sheets.
<PAGE>
<TABLE>
CONTINENTAL RESOURCES, INC. AND SUBSIDIARY
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(Unaudited)
(dollars in thousands, except per share data)
<CAPTION>
Three Months Ended September 30,
--------------------------------
1998 1997
-------- --------
<S> <C> <C>
REVENUES:
Oil and gas sales $ 14,316 $ 18,798
Crude oil marketing 123,587 0
Gathering, marketing and processing 3,808 4,446
Oil and gas service operations 1,928 1,318
-------- --------
Total revenues 143,639 24,562
-------- --------
OPERATING COSTS AND EXPENSES:
Production expenses and taxes 7,410 4,232
Exploration expenses 1,499 1,333
Crude oil marketing purchases and
expenses 119,859 0
Gathering, marketing and processing 3,702 4,230
Oil and gas service operations 614 825
Depreciation, depletion and amortization 10,818 8,113
General and administrative 2,424 2,498
-------- --------
Total operating costs and expenses 146,326 21,231
-------- --------
OPERATING INCOME (LOSS) (2,687) 3,331
-------- --------
OTHER INCOME AND EXPENSES
Interest income 155 72
Interest expense (3,117) (879)
Other income (expense), net 443 7,411
-------- --------
Total other income and (expenses) (2,519) 6,604
-------- --------
INCOME (LOSS) BEFORE INCOME TAXES (5,206) 9,935
INCOME TAX 0 0
-------- --------
NET INCOME (LOSS) ($5,206) $ 9,935
======== ========
EARNING (LOSS) PER COMMON SHARE ($106.15) $202.59
======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE>
<TABLE>
CONTINENTAL RESOURCES, INC. AND SUBSIDIARY
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(Unaudited)
(dollars in thousands, except per share data)
<CAPTION>
Nine Months Ended September 30,
-------------------------------
1998 1997
-------- --------
<S> <C> <C>
REVENUES:
Oil and gas sales $ 45,606 $ 57,933
Crude oil marketing 123,587 0
Gathering, marketing and processing 13,612 19,968
Oil and gas service operations 4,991 5,033
-------- --------
Total revenues 187,796 82,934
-------- --------
OPERATING COSTS AND EXPENSES:
Production expenses and taxes 16,484 14,853
Exploration expenses 4,149 4,743
Crude oil marketing purchases and expenses 119,859 0
Gathering, marketing and processing 12,111 17,103
Oil and gas service operations 2,438 2,680
Depreciation, depletion and amortization 27,301 24,826
General and administrative 7,338 6,484
-------- --------
Total operating costs and expenses 189,680 70,689
-------- --------
OPERATING INCOME (LOSS) (1,884) 12,245
-------- --------
OTHER INCOME AND EXPENSES
Interest income 935 175
Interest expense (8,291) (3,192)
Other income (expense), net 535 8,097
-------- --------
Total other income and (expenses) (6,821) 5,080
-------- --------
INCOME (LOSS) BEFORE INCOME TAXES (8,705) 17,325
INCOME TAX BENEFIT 0 (8,941)
-------- --------
NET INCOME (LOSS) ($ 8,705) $ 26,266
======== ========
EARNINGS (LOSS) PER COMMON SHARE ($177.51) $535.57
======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE>
<TABLE>
CONTINENTAL RESOURCES, INC. AND SUBSIDIARY
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
(dollars in thousands)
<CAPTION>
Nine Months Ended September 30,
-------------------------------
1998 1997
--------- --------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income (loss) ($ 8,705) $ 26,266
Adjustments to reconcile net income to
net cash provided by operating
activities--
Depreciation, depletion and amortization 27,300 24,826
(Gain) loss on sale of assets (56) 127
Dry hole cost and impairment of
undeveloped leases 1,262 2,239
Deferred income taxes -- (11,343)
Other noncurrent assets (22) (332)
Changes in current assets and liabilities--
(Increase) decrease in accounts
receivable 10,445 (357)
(Increase) decrease in inventories (2,046) (69)
(Increase decrease in prepaid income
taxes and expenses 172 3,097
Increase (decrease) in accounts payable (9,791) 5,934
Increase (decrease) in revenues and
royalties payable (3,701) (1,974)
Increase (decrease) in accrued
liabilities and other 1,289 (479)
-------- --------
Net cash provided by operating
activities 16,147 47,935
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Exploration and development (34,688) (47,678)
Gas gathering and processing facilities
and service properties, equipment
and other (4,136) (14,067)
Purchase of producing properties (85,100) (205)
Proceeds from sale of assets 42,972 2,011
Advances from (to) affiliates 59 (2,960)
-------- --------
Net cash used in investing
activities (80,893) (62,899)
CASH FLOWS FROM FINANCING ACTIVITIES:
Purchase of treasury stock - (10)
Proceeds from line of credit and other 265,515 39,050
Repayment of line of credit and other (188,427) (26,000)
Debt issuance costs (9,455) -
-------- --------
Net cash provided by financing
activities 67,633 13,040
-------- --------
NET INCREASE (DECREASE) IN CASH 2,887 (1,924)
CASH, beginning of period 1,301 3,320
-------- --------
CASH, end of period $ 4,188 $ 1,396
======== ========
SUPPLEMENTAL CASH FLOW INFORMATION:
Income taxes paid -- $ 300
Interest paid $ 8,291 $ 3,192
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE>
CONTINENTAL RESOURCES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
1. CONTINENTAL RESOURCES, INC.'S FINANCIAL STATEMENTS
In the opinion of Continental Resources, Inc. ("CRI" or the "Company") the
accompanying unaudited consolidated condensed financial statements contain all
adjustments, consisting only of normal recurring adjustments, necessary to
present fairly the Company's financial position as of September 30, 1998 and
the results of operations for the three and nine month periods ended September
30, 1998 and 1997 and cash flows for the nine months ended September 30, 1998
and 1997. The financial statements for the interim periods presented do not
contain all information required by generally accepted accounting principles.
The results of operations for any interim period are not necessarily
indicative of the results of operations for the entire year. These
consolidated condensed financial statements should be read in conjunction with
the financial statements and notes thereto included in the Form S-4
Registration Statement (No. 333-61547), Inc. which was filed with the
Securities and Exchange Commission on Tuesday, November 9, 1998.
2. LONG-TERM DEBT:
Long-term debt as of September 30, 1998 and December 31, 1997 consists
of the following:
<TABLE>
<CAPTION>
1998 1997
---- ----
(dollars in thousands)
<S> <C> <C>
Senior subordinated notes $150,000 $ 0
Line of credit agreement 3,000 53,725
Notes payable to majority stockholder 0 21,950
Notes Payable to General Electric Capital
Corporation 3,655 3,866
Capital Lease agreements 65 91
-------- --------
Outstanding Debt 156,720 79,632
Less--Current portion 315 315
-------- --------
Total long-term debt $156,405 $79,317
======== ========
On July 24, 1998, the Company issued $150.0 million of 10.25% Senior
Subordinated Notes due August 1, 2008 (the "Notes") in a private offering
pursuant to Rule 144A. Upon issuance of the Notes and payment of the
outstanding line of credit of $160.3 million, the line of credit agreement was
amended to a $75.0 million revolving credit facility (the "Credit Facility")
with a $75.0 million borrowing base. As of November 1, 1998 the Company has
borrowed $3.0 million against this Credit Facility. The next scheduled
borrowing base determination date is December 1, 1998.
3. CRUDE OIL MARKETING:
On July 1, 1998, the Company began entering into third party contracts
to purchase and resale crude oil at prices based on current month NYMEX
prices, current posting prices or at a stated contract price. Purchases and
sales are recorded at the stated contract price. During the third quarter
ended September 30, 1998, the Company had revenues of $123.6 million on
purchases of $119.7 million, while incurring expenses of $.2 million,
resulting in a margin from crude oil marketing activities during the quarter
of $3.7 million. Due to current market conditions the Company expects
purchases and expenses to equal revenues, resulting in no income for the
fourth quarter of 1998.
4. GUARANTOR SUBSIDIARIES
The Company's wholly owned subsidiaries have guaranteed the Notes and
the Credit Facility. The following is a summary of the financial information
of guarantor subsidiaries as of September 30, 1998.
</TABLE>
<TABLE>
<CAPTION>
AS OF SEPTEMBER 30, 1998
(dollars in thousands)
<S> <C>
Current assets $ 2,989
Noncurrent assets 21,622
-------------
Total assets $ 24,611
=============
Current liabilities $ 12,823
Stockholder's equity 11,788
-------------
Total liabilities and
stockholder's equity $ 24,611
=============
</TABLE>
<TABLE>
<CAPTION>
FOR THE PERIOD ENDED SEPTEMBER 30, 1998 3 Months 9 Months
(dollars in thousands)
<S> <C> <C>
Total revenues $ 4,422 $ 16,106
Operating costs and expenses 5,101 16,602
-------- --------
Operating income (679) (496)
Other income and (expenses) (180) (446)
-------- --------
Net income $ (859) $ (942)
======== ========
</TABLE>
At September 30, 1998, current liabilities payable to the Company
totaled approximately $8.9 million. For the three months and nine ended
September 30, 1998, depreciation, depletion and amortization included in
operating costs totaled approximately $0.6 million and $1.5 million,
respectively.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with
the Company's unaudited consolidated condensed financial statements and the
notes thereto appearing elsewhere in this report. The Company's operating
results for the periods discussed may not be indicative of future performance.
In the text below, financial statement numbers have been rounded, however, the
percentage changes are based on unrounded amounts.
RESULTS OF OPERATIONS
REVENUES
GENERAL
Revenues, excluding crude oil marketing, have decreased $5.3 million, or
21%, to $20.0 million during the three months ended September 30, 1998 from
$25.3 million during the comparable period in 1997. The decrease is
attributable to lower oil prices. During the three month period ended
September 30, 1998, the Company began marketing crude oil that had been
purchased from third parties. This activity generated an additional $123.6
million in revenue to the Company for the period.
Revenues from operations, excluding crude oil marketing, in the nine
month period ended September 30, 1998 were $64.2 million, a decrease of $19.5
million, or 23%, compared to September 30, 1997 year to date revenues of $83.7
million. Revenues from third party crude oil marketing were $123.6 million.
OIL AND GAS
Oil and gas sales revenue for the three months ended September 30, 1998
decreased $4.5 million, or 24%, to $14.3 million from $18.8 million during the
comparable period in 1997. Oil production increased by 121 MBbls to 1,013
MBbls, or 14%, for the three months ended September 30, 1998 from 892 MBbls
for the comparable period in 1997. The production increase was mainly due to
the acquisition of the Worland Field properties (the "Worland Field
Acquisition") which was effective as of June 1, 1998 and contributed 96 MBbls
of oil production during the third quarter of 1998. The additional increase
in oil volumes is due to production from wells drilled and completed during
the second half of 1997 and during 1998. Oil prices decreased to a ten year
low of $11.25/Bbl, or 36%, during the three months ended September 30, 1998
from $17.60/Bbl, the comparable 1997 period price. Gas sales decreased $0.2
million, or 6%, from $3.1 million during the period in 1997 to $2.9 million
during the period in 1998. Gas production for the period increased 199 mmcf,
or 14%, due to the Worland Field Acquisition. Gas production in other areas
increased 284 mmcf to 1,655 mmcf in 1998 from 1,371 mmcf in 1997, a 21%
increase. The increase in production for the period was offset by a 26%
decrease in gas prices to $1.70/mcf in 1998 from $2.31/mcf in 1997.
Oil and gas sales for the nine months ended September 30, 1998 decreased
$12.3 million, or 21%, to $45.6 million from $57.9 million for the comparable
period in 1997. Oil price decreased from an average of $19.20/Bbl in the
period during 1997 to $12.50/Bbl in 1998 which resulted in a $16.8 million
reduction in revenues. The effects of the price reduction was partially
offset by a 489 MBbl increase in oil production in 1998 compared to 1997. The
increased production was realized from the Worland Field Acquisition which
contributed 134Mmbls of oil production and from the further development of
the Cedar Hills field through drilling which contributed an additional 331
Mmbls of oil to production. The increase in production resulted in $6.1
million of additional revenue for the nine month period. Gas revenues for the
nine months ended September 30, 1998 decreased by $1.6 million, or 16%, to
$8.2 million from $9.8 million during the comparable period in 1997. Gas
production from the Worland Field Acquisition, increased production by 270
Mmcf and from drilled wells increased production by 242 Mmcf. This increase
in production generated additional revenues of $.6 million dollars which
partially offset the $2.5 million decline in revenues due to a 26% price
decrease to $1.70/mcf in 1998 from $2.31/mcf in 1997.
CRUDE OIL MARKETING
The Company began marketing crude oil purchased from third parties in
July 1998. During the three month and nine month periods ended September 30,
1998 the Company recognized revenues on crude oil purchased for resale of
$123.6 million.
GATHERING, MARKETING AND PROCESSING
Gathering, marketing and processing revenue in the third quarter of 1998
was $3.8 million, a decrease of $.6 million, or 14%, from $4.2 million in the
same period in 1997. This reduction in revenue was attributable to the
elimination of purchases and resales of third party gas for marketing purposes
and a refocus on purchases to supply the Company's gas plants.
As a result of the elimination of gas sales associated with purchases of
gas to be sold for marketing purposes unrelated to gas processing, for the
nine months ended September 30, 1998, gathering, marketing and processing
revenues decreased $6.4 million, or 32%, to $13.6 million compared to $20.0
million for the first nine months of 1997.
OIL AND GAS SERVICE OPERATIONS
Oil and gas service operations revenues increased $0.6 million, or 46%,
to $1.9 million for the three months ended September 30, 1998 from $1.3
million for the third quarter of 1997. Revenues increased in the 1998 period
due to an increase in administrative income compared to the 1997 period
because of increased overhead reimbursement associated with the increased
maintenance activities performed during the 1998 period.
COSTS AND EXPENSES
PRODUCTION EXPENSES AND TAXES
Production expense and taxes increased by $3.2 million, or 76%, to $7.4
million during the three months ended September 30, 1998 from 4.20 million
during the comparable period in 1997. Maintenance costs included in
production expenses on the High Pressure Air Injection Units operating costs
increased because several air injection wells and production wells were
repaired at a non-recurring cost of $0.7 million, which are expected to result
in a reduction of operating costs. In the Mid-Continent Region, the Company
incurred approximately $0.7 million in repair work over, primarily on gas
wells. Production is expected to increase after the workovers. Production
expense also increased approximately $0.6 million due to the Worland Field
Acquisition and by $0.5 million due to operations of new wells drilled during
the fourth quarter of 1997 and during 1998.
Production expenses and taxes were $16.5 million for the nine months
ended September 30, 1998, a $1.6 million, or 11% increase from $14.9 million
during the comparable period in 1997, primarily as a result of the Worland
Field Acquisition. For the nine months ended September 30, 1998, the Company
has incurred $0.7 million in operating costs on the Worland Field properties
and increased non-recurring maintenance costs by $1.0 million compared to the
same period in 1997.
EXPLORATION EXPENSES
For the three months ended September 30, 1998, exploration expenses
increased $0.2 million, or 15%, to $1.5 million from $1.3 million during the
comparable period of 1997. The increase was due to a $0.2 million increase in
expired lease costs.
For the nine months ended September 30, 1998, exploration expenses
decreased $0.6 million, or 13%, to $4.1 million from $4.7 million during the
comparable period in 1997. This decrease in exploration expense resulted from
a reduction of expired lease cost of $0.1 million and a decrease of $0.5
million in geological expense.
The Company, as operator, participated in the drilling of the Schubert
1-130 well in Nueces County, Texas during 1998. Initial production tests
indicate that the well is uneconomical as completed. The Company's investment
in the well is approximately $0.8 million. An offset well to the Schubert 1-
130 has been successfully completed in other producing zones and the Schubert
1-130 will be reevaluated for recompletion of the well in other zones. If the
other zones do not prove to be economical then the Company's $0.8 million
investment in the well will be written off.
During the last three months of 1998, leases on approximately 14,500 net
leasehold acres, in which the Company has an investment of $0.8 million and
during 1999 leases on 40,000 net acres in which the Company has an investment
of $2.2 million are scheduled to expire. The Company has not determined if
these leases will be drilled, renewed, or allowed to expire.
CRUDE OIL MARKETING
The Company began marketing crude oil purchased from third parties
during the quarter ended September 30, 1998. For the three months and nine
months ended September 30, 1998, the Company recognized expense for the
purchases of crude oil purchased for resale of $119.7 million, and marketing
expenses of $0.2 million.
GATHERING, MARKETING, AND PROCESSING
During the three months ended September 30, 1998 the Company incurred
gathering, marketing and processing expenses of $3.7 million, representing a
$.5 million, or 12% decrease from $4.2 million incurred in the third quarter
of 1997 due to the elimination of purchases of third party gas not used for
gas plant supply, but sold as part of the Company's gas marketing activities.
For the nine months ended September 30, 1998 gathering, marketing, and
processing expense was $12.1 million representing a $5.0 million, or 29%
decrease from the same period in 1997 due to the elimination of purchases of
third party gas used in gas marketing activities.
DEPRECIATION, DEPLETION AND AMORTIZATION (DD&A)
For the three months ended September 30, 1998, DD&A expense increased
$2.8 million, or 35%, to $10.9 million from $8.1 million during the comparable
period in 1997. For the nine months ended September 30, 1998, DD&A expense
was $27.3 million, which was an increase of $2.5 million, or 10%, over DD&A
expense of $24.8 million in 1997. Increased production rates in the first
nine months production generated a $.8 million, or 11%, increase in lease and
well DD&A from $7.3 million in 1997 to $8.1 million in 1998. The Company also
recognized additional DD&A expense related to an impairment in accordance with
FASB 121 of $1.3 million of its investment in certain High Pressure Air
Injection Units in South Dakota due to their low profitability at current oil
prices. When the Company performed a DD&A analysis in September 1998 as of
June 30, 1998, NYMEX prices were rising and exceeded $16.00 per barrel Other
DD&A for the period increased by $0.4 million due to the investment in
additional assets during the last quarter of 1997 and 1998. $0.2 million of
this increase was attributable to the Worland Field Acquisition. The 1998
period also reflects $0.3 million of amortization of offering costs
associated with the Company's $150.0 million debt offering.
For the nine months ended September 30, 1998, DD&A expense increased
$2.5 million, or 10%, to $27.3 million from $24.8 million for the comparable
period in 1997. Lease and well amortization and depreciation increased $1.5
million primarily due to the recognition of a FASB 121 impairment of $1.3
million. Other DD&A for the year increased by $.7 million due to the
investment in additional assets during the last quarter of 1997 and 1998 and
$0.3 million of amortization expense associated with the Company's $150
million debt offering.
GENERAL AND ADMINISTRATIVE ("G&A")
For the three months ended September 30, 1998 G&A expense was $1.3
million, net of overhead reimbursement of $1.1 million, or a decrease of $1.1
million or 46%, from G&A expense of $2.4 million net of overhead reimbursement
of $0.1 million during the comparable period in 1997. This decrease was
primarily due to increased overhead reimbursement in the three months ended
September 30, 1998 due to increased maintenance activity. G&A expenses per
Boe for third quarter of 1998 was $1.00 compared to $2.11 for the third
quarter of 1997.
For the nine months ended September 30, 1998 G&A expense was $5.2
million, net of overhead reimbursement of $2.1 million, an increase of $0.6
million, or 13%, from $4.6 million, net of overhead reimbursement of 1.9
million for the comparable period in 1997. The increase is attributable to
lower overhead reimbursement and increased employment and benefits costs of
$0.6 million and $0.7 million , respectively, for the nine months.
INTEREST INCOME
Interest income for the three months ended September 30, 1998 was $0.2
million, an increase of $0.1 million compared to negligible interest income
for the comparable period in 1997. Interest income for the nine months ended
September 30, 1998 was $0.9 million compared to $0.2 million for the first
nine months of 1997, a $0.7 million, or 434% increase. The increases in the
1998 periods are attributable primarily to higher levels of cash invested
during 1998.
INTEREST EXPENSE
Interest expense for the three months ended September 30, 1998 was $3.1
million, an increase of $2.2 million, or 255%, from $0.9 million in the
comparable 1997 period. Interest expense for the nine months ended September
30, 1998 was $8.3 million, an increase of $5.1 million, or 160%, from $3.2
million for the first nine months of 1997. The increases in the 1998 interest
expense are attributable primarily to higher levels of indebtedness
outstanding during 1998.
In May 1998, the Company entered into a forward interest rate swap
contract to hedge its exposure to changes in the prevailing interest rates in
connection with its planned debt offering. Due to the change in treasury note
rates, the Company paid $3.9 million to settle the forward interest rate swap
contract, which will result in an effective increase of approximately 0.5% to
the Company's interest costs on the Notes, or an increase in interest expense
of approximately $0.4 million per year through 2008.
OTHER INCOME
Other income for the three months ended September 30, 1998 decreased
$7.0 million, or 94%, to $0.4 million from $7.4 million for the 1997 three
month period. The decrease was due to lower gains on the sale of assets and
the recognition of the certain litigation settlements in 1997.
Other income decreased $7.6 million, or 93%, to $0.5 million for the
nine months ended September 30, 1998 from $8.1 million for the comparable 1997
period. The decrease was due to lower gains on the sale of assets and the
recognition of certain litigation settlements in 1997.
Subsequent to September 30, 1998, the Company has sold interests in
certain Illinois properties to the operator of the properties. Based on a
sales price of $3.5 million, the Company will recognize a gain of
approximately $2.7 million during the fourth quarter of 1998.
INCOME BEFORE INCOME TAXES
For the three months ended September 30, 1998, income before income
taxes was a loss of $5.2 million, a decrease in net income before taxes of
$15.1 million, or 152%, from $9.9 million of income during the comparable
period in 1997. This decrease was due to (i) substantially lower oil and gas
prices which reduced revenues from all segments of the Company's operations,
(ii) increased production expenses and taxes due to increased maintenance
costs, (iii) higher DD&A associated with oil and gas properties due to higher
production rates and lower reserves and a $1.3 million asset impairment
charge, (iv) higher interest expense due to the higher levels of indebtedness,
(v) and the recognition of certain litigation settlements in 1997. The lower
revenues, increased production expenses, higher DD&A, and higher interest
expense were partially offset by the income generated by the crude oil
marketing activities.
For the nine months ended September 30, 1998, income before income taxes
was a loss of $8.7 million, a decrease in net income before taxes of $26.0
million, or 150%, from $17.3 million of income for the comparable period in
1997. This decrease was due to the reduced revenues caused by lower oil and
gas sales prices, increased interest expense caused by higher levels of
indebtedness and the recognition of certain litigation settlements in 1997.
These reductions to income were partially offset by the income generated by
the crude oil marketing activities begun in 1998.
NET INCOME
For the three months ended September 30, 1998 net income was a loss of
$5.2 million, a decrease in net income of $15.1 million, or 152%, from $9.9
million of income for the comparable period in 1997. In addition to lower
income before taxes due to lower oil and gas prices discussed previously, the
1997 net income included $7.5 million in other income from the recognition of
certain litigation settlements in 1997.
For the nine months ended September 30, 1998 net income was a loss of
$8.7 million a decrease in net income of $35.0 million, or 133%, compared to
the same period in 1997. Net income for the period declined by a $12.3
million reduction in oil and gas sales revenues because of lower oil and gas
prices which was partially offset by a $3.7 million in crude oil marketing
income, and an increase of $5.1 million in interest expense. Net income for
1997 also included $7.5 million in other income from the recognition of
certain litigation settlements and $8.9 million tax benefit due to the "S"
election that did not have an impact on 1998 net income.
YEAR 2000
The Company is reviewing its computer software and hardware, telecommunica-
tions systems, process control systems and business relationships
to locate potential operational problems associated with the year 2000.
The Company's computer consultant has reviewed the Company's mainframe
hardware and operating software and updates to both have been performed. One
additional programming change has been provided for the operating system, and
it will be installed before the end of 1998. At that time the Company
believes the mainframe computer system will be year 2000 compatible. The
financial software package utilized on the mainframe computer has already been
tested and updated by the software vendor. The Company is in the process of
developing a plan to further test the financial software during the first
quarter of 1999 to insure the compatibility of the software with the year
2000. Assessment of other less critical software systems and various types of
computer equipment is continuing and should be completed by November 30, 1998.
The Company believes that the potential impact, if any, of these systems not
being year 2000 compliant may, at most, require employees to manually complete
otherwise automated tasks or calculations.
The telephone system billing software utilized in tracking telephone
usage is known to be incompatible with the year 2000. A plan is already in
place to increase the capacity of the telephone system and new software will
be installed at that time to make the system year 2000 compatible. The cost
of this update will be less than $15,000. The Company believes that the
radios being used for communications with field operations will not be
impacted. The Company also relies on various public telephone companies to
supply normal voice and electronic data service and service to operating
locations which utilize process control alarms. These alarms notify Company
personnel if there are operations abnormalities that need to be checked and,
if necessary, corrected. If the telephone service were disrupted, the
operations would need to be more closely monitored by Company personnel, but
because the operations are not actually controlled through the phone systems,
there should be no interruption in operations. Surveys will be made of all
telephone companies to determine their system readiness and contingency plans
will be developed for those areas where service that is year 2000 compliant
has not been verified.
The gas measurement systems and gas processing facilities that the
Company operates use various Program Logic Controllers (PLC's) and alarm
mechanisms. The Company has been verbally notified that the measurement
systems that it currently uses are year 2000 compatible and Company tests have
been done to verify that information. The dates on test meters were adjusted
to December 29, 1999 and the meters were ran for several days. When the
meters rolled to the year 2000, and for several days after the change to the
new year, there were no complications encountered. However, the Company
utilizes a third party for gas chart integration and has not verified the
readiness of that company to integrate charts which cross into the year 2000.
The Company will include the third party in surveys to be sent to vendors
prior to the end of March, 1999. At this time there has been no action taken
to evaluate the gas processing facilities for potential problem areas. The
management of these facilities has been notified of the need to evaluate the
systems and is in the process of putting together a plan of action which will
coincide with routine maintenance. The Company believes that the PLC and
alarms at its Medicine Pole Hills Gas Plant are the most likely to be at risk
for incompatibility and could be replaced at a cost of about $20,000.
There can be no assurance that the systems of other companies on which
the Company's systems rely will be timely converted, or that a failure to
convert by another company, or a conversion that is incompatible with the
Company's systems would not have a material adverse effect on the Company.
The Company will evaluate its relationships with third parties to determine
any critical services, suppliers, or customers. The third parties will
include financial services, utility services, oil and gas purchasers and parts
and supply vendors. Once critical relationships have been identified the
third parties will be surveyed and their preparedness for year 2000 evaluated.
If the Company believes that the third parties have not minimized risk
satisfactorily it will evaluate alternatives to the current relationships.
The survey and evaluation of preparedness should be completed by June 30,
1999.
The Company believes that there is minimal risk associated with internal
operating systems in relation to year 2000 compatibility. Plans are already
in place to address known areas of incompatibility at costs estimated to be
less than $100,000. Because of the immaterial nature of the expenditures on
an individual basis, the Company plans to finance all costs through normal
operating funds.
LIQUIDITY AND CAPITAL RESOURCES
CASH FLOW FROM OPERATIONS
Net cash provided by operating activities for the nine months ended
September 30, 1998 was $16.2 million, a decrease of $31.7 million, or 66%,
from $47.9 million provided during the comparable 1997 period. Cash as of
September 30, 1998 was $4.2 million, an increase of $2.9 million or 200% of
the balance of $1.3 million held at December 31, 1997.
LONG-TERM DEBT
Long-term debt at December 31, 1997 and September 30, 1998 was $79.3
million and $156.4 million, respectively. The $77.1 million, or 97%, increase
was mainly due to the acquisition of approximately $86.5 million of producing
and non-producing oil and gas properties and certain other related assets in
the Worland Field effective as of June 1, 1998.
CREDIT FACILITY
Long-term debt outstanding under the line of credit at December 31,
1997 and September 30, 1998 included $53.7 million and $3.0 million,
respectively, of revolving credit debt under the line of credit agreement.
The effective rate of interest under the line of credit agreement was 7.7% at
December 31, 1997 and was 8.5% at September 30, 1998. On July 24, 1998 the
balance under the line of credit agreement was $162.8 million which was paid
off with $19.6 million in proceeds from the sale of a 50% interest in the
Worland properties and $143.2 million of the proceeds from the issuance of the
Notes. Upon issuance of the Notes and payment of the outstanding balance on
the line of credit agreement, the line of credit agreement was amended to a
$75.0 million revolving credit facility (the "Credit Facility") with a $75.0
million borrowing base. The Credit Facility matures May 14, 2001. The Credit
Facility provides for interest based on the prime rate of Bank One Oklahoma,
N.A., or the London Interbank Offered Rate for 1-2-3 or 6-month offshore
deposits as offered by Bank One to major banks in the London Interbank Market,
rounded upwards, if necessary, to the nearest 1/16%, and adjusted for maximum
cost of reserves, if any. As of November 1, 1998 the Company has borrowed
$3.0 million against this Credit Facility. The scheduled borrowing base
redetermination date is December 1, 1998.
CAPITAL EXPENDITURES
The Company's 1998 capital expenditures budget is $45.4 million, exclusive
of acquisitions. During the nine months ended September 30, 1998, the Company
incurred $38.8 million of capital expenditures, exclusive of acquisitions.
The Company expects to fund the 1998 capital budget through cash flow from
operations and its Credit Facility.
DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS
This report includes "forward-looking statements". All statements other
than statements of historical fact, including, without limitation, statements
contained under "Management's Discussion and Analysis of Financial Condition
and Results of Operations" regarding the Company's financial position,
business strategy, plans and objectives of management of the Company for
future operations and industry conditions, are forward-looking statements.
Although the Company believes that the expectations reflected in such forward-
looking statements are reasonable, it can give no assurance that such
expectations will prove to have been correct. Important factors that could
cause actual results to differ materially from the Company's expectations
("Cautionary Statements") include without limitation future production levels,
future prices and demand for oil and gas, results of future exploration and
development activities, future operating and development cost, the effect of
existing and future laws and governmental regulations (including those
pertaining to the environment) and the political and economic climate of the
United States as discussed in this quarterly report and the other documents of
the Company filed with the Securities and Exchange Commission (the
"Commission"). All subsequent written and oral forward-looking statements
attributable to the Company or persons acting on its behalf are expressly
qualified in their entirety by the Cautionary Statements.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
None
PART II.
ITEM 1. LEGAL PROCEEDINGS
From time to time, the Company is party to litigation or other legal
proceedings that it considers to be a part of the ordinary course of its
business. The Company is not involved in any legal proceedings nor is it
party to any pending or threatened claims that could reasonably be expected to
have a material adverse effect on its financial condition or results of
operations. However, the Company is engaged in litigation with Burlington
Resources Oil & Gas Company ("Burlington") with respect to an agreement to
exchange interests in the Cedar Hills Field. On May 15, 1998, the Company and
Burlington entered into a definitive agreement to exchange undivided interests
so that effective December 1, 1998 the Company will own working interests
ranging from 90% to 92% in approximately 65,000 gross (59,000 net) leasehold
acres in the northern half of the Cedar Hills Field. As a result of the
agreement, the Company will enhance its ability to unitize all interests in
the norther half of the Cedar Hills Field, which is necessary in order for the
Company to initiate the planned HPAI enhanced recovery operations in the Cedar
Hills Field. On August 19, 1998, the Company instituted a declaratory
judgment action against Burlington in the District Court of Garfield County,
Oklahoma (Case No. CJ-98-613-03) alleging that Burlington provided false and
misleading information regarding certain of Burlington's oil and gas
properties to a third party consultant charged with determining the relative
values of oil and gas properties owned by the Company and Burlington which
served as the basis for the exchange of interests. The Company also claims
that the consultant relied on such false and misleading information in
determining the relative fair values of the oil and gas interests. The
Company seeks a declaratory judgment determining that it is excused from
further performance under its exchange agreement with Burlington. Burlington
has denied the Company's allegations and seeks specific performance by the
Company, plus monetary damages of an unspecified amount. Burlington has
removed the action to the United States District Court for the Western
District of Oklahoma (CIV. 98-1253-W). The Company has requested that the
case be remanded to the Oklahoma state court, and the request has been
granted.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
Exhibits
DESCRIPTION
3.1 Amended and Restated Certificate of Incorporation of Continental
Resources Inc.* [3.1]
3.2 Amended and Restated Bylaws of Continental Resources Inc.* [3.2]
3.3 Certificate of Incorporation of Continental Gas, Inc.* [3.3]
3.4 Bylaws of Continental Gas, Inc., as amended and restated.* [3.4]
3.5 Certificate of Incorporation of Continental Crude Co.* [3.5]
3.6 Bylaws of Continental Crude Co.* [3.6]
4.1 Restated Credit Agreement dated May 12, 1998 among Continental
Resources, Inc. and Continental Gas, Inc., as Borrowers and Bank One,
Oklahoma, N.A. and the Institutions named therein as Banks and Bank
One, Oklahoma, N.A., as Agent (the "Credit Agreement")* [4.1]
4.2 Form of Revolving Note under the Credit Agreement* [4.2]
4.3 Indenture dated as of July 24, 1998 between Continental Resources,
Inc., as Issuer, the Subsidiary Guarantors named therein and United
States Trust Company of New York, as Trustee* [4.3]
4.4 Exchange and Registration Rights Agreement dated July 24, 1998 between
the Continental Resources, Inc., the Subsidiary Guarantors named therein
and Chase Securities, Inc.* [4.4]
10.1 Purchase and Sale Agreement dated March 28, 1998 by and between
Bass Enterprises Production Co., et al. as Sellers and Continental
Resources, Inc. as Buyer* [10.1]
10.2 Worland Area Purchase and Sale Agreement, as amended, dated June
25, 1998 by and between Continental Resources, Inc. as Seller and
Harold G. Hamm, Trustee of the Harold G. Hamm Revocable Intervivos
Trust dated April 23, 1984 as Buyer* [10.2]
27 Financial Data Schedule
_________________
* Filed as an exhibit to the Company's Form S-4 Registration Statement on
Form S-4, as amended (No. 333-61547) which was filed with the Securities
and Exchange Commission. The exhibit number is indicated in brackets and
incorporated by reference herein.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Company has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CONTINENTAL RESOURCES, INC.
ROGER V. CLEMENT
Roger V. Clement
Senior Vice President
(Chief Financial Officer)
Date: December 11, 1998
<PAGE>
<TABLE>
EXHIBIT INDEX
<CAPTION>
EXHIBIT NO. DESCRIPTION METHOD OF FILING
<S> <C> <C>
3.1 Amended and Restated Certificate of Incorporated herein by
Incorporation of Continental Resources reference
Inc.
3.2 Amended and Restated Bylaws of Incorporated herein by
Continental Resources Inc. reference
3.3 Certificate of Incorporation of Incorporated herein by
Continental Gas, Inc. reference
3.4 Bylaws of Continental Gas, Inc., Incorporated herein by
as amended and restated reference
3.5 Certificate of Incorporation of Incorporated herein by
Continental Crude Co. reference
3.6 Bylaws of Continental Crude Co. Incorporated herein by
reference
4.1 Restated Credit Agreement dated May 12, Incorporated herein by
1998 among Continental Resources, reference
Inc. and Continental Gas, Inc., as
Borrowers and Bank One, Oklahoma, N.A.
and the Institutions named therein as
Banks and Bank One, Oklahoma, N.A.,
as Agent (the "Credit Agreement")
4.2 Form of Revolving Note under the Incorporated herein by
Credit Agreement reference
4.3 Indenture dated as of July 24, 1998 Incorporated herein by
between Continental Resources, Inc., reference
as Issuer, the Subsidiary Guarantors
named therein and United States
Trust Company of New York, as Trustee
4.4 Exchange and Registration Rights Incorporated herein by
Agreement dated July 24, 1998 between reference
the Continental Resources, Inc.,
the Subsidiary Guarantors named therein
and Chase Securities, Inc.
10.1 Purchase and Sale Agreement dated Incorporated herein by
March 28, 1998 by and between Bass reference
Enterprises Production Co., et al.
as Sellers and Continental Resources,
Inc. as Buyer
10.2 Worland Area Purchase and Sale Incorporated herein by
Agreement, as amended, dated June 25, reference
1998 by and between Continental
Resources, Inc. as Seller and Harold
G. Hamm, Trustee of the Harold G.
Hamm Revocable Intervivos Trust
dated April 23, 1984 as Buyer
27 Financial Data Schedule Filed herewith electronically
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 4,188,318
<SECURITIES> 0
<RECEIVABLES> 14,203,317
<ALLOWANCES> 0
<INVENTORY> 5,594,619
<CURRENT-ASSETS> 24,197,234
<PP&E> 324,822,185
<DEPRECIATION> (114,183,790)
<TOTAL-ASSETS> 244,555,516
<CURRENT-LIABILITIES> 18,387,147
<BONDS> 150,000,000
0
0
<COMMON> 49,041
<OTHER-SE> 69,510,134
<TOTAL-LIABILITY-AND-EQUITY> 244,555,516
<SALES> 182,805,233
<TOTAL-REVENUES> 187,795,834
<CGS> 148,454,908
<TOTAL-COSTS> 189,680,491
<OTHER-EXPENSES> (535,400)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 8,291,137
<INCOME-PRETAX> (8,705,274)
<INCOME-TAX> 0
<INCOME-CONTINUING> (8,705,274)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (8,705,274)
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
