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, 1999
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 X No
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date:
Class Outstanding as of August 13, 1999
Common Stock, $1.00 par value 49,041
<PAGE>
TABLE OF CONTENTS
PART I. Financial Information
ITEM 1. FINANCIAL STATEMENTS
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
<PAGE>
PART I. Financial Information
ITEM 1. FINANCIAL STATEMENTS
<TABLE>
CONTINENTAL RESOURCES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(dollars in thousands, except per share data)
ASSETS
<CAPTION>
(Unaudited)
December 31, June 30,
1998 1999
------------ -----------
<S> <C> <C>
CURRENT ASSETS:
Cash $ 15,817 $ 10,757
Accounts receivable-
Oil and gas sales 7,255 7,165
Joint interest and other, net 7,733 4,780
Inventories 4,627 5,160
Prepaid expenses 168 2,881
Advances to affiliates 1 --
---------- ----------
Total current assets 35,601 30,743
---------- ----------
PROPERTY AND EQUIPMENT:
Oil and gas properties
Producing properties 241,358 244,472
Nonproducing leaseholds 47,583 45,020
Gas gathering and processing facilities 24,709 25,520
Service properties, equipment and other 15,989 15,899
---------- ----------
Total property and equipment 329,639 330,911
Less--Accumulated depreciation,
depletion and amortization (121,061) (129,855)
Net property and equipment 208,578 201,056
OTHER ASSETS:
Debt issuance costs 9,023 8,415
Other assets 537 354
---------- ----------
Total other assets 9,560 8,769
---------- ----------
Total assets $ 253,739 $ 240,568
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 10,532 $ 5,175
Current portion of long-term debt 337 326
Revenues and royalties payable . 5,855 4,846
Accrued liabilities and other. . 9,224 8,986
Short-term debt - stockholder. . 10,000 --
---------- ----------
Total current liabilities 35,948 19,333
---------- ----------
LONG-TERM DEBT, net of current portion 157,302 161,737
OTHER NONCURRENT LIABILITIES 205 203
COMMITMENTS AND CONTINGENCIES (Note 4)
STOCKHOLDERS' EQUITY:
Common stock, $1 par value, 75,000 share
authorized, 49,041 shares issued and
outstanding 49 49
Additional paid-in-capital 2,721 2,721
Retained earnings 57,514 56,525
---------- ----------
Total stockholders' equity 60,284 59,295
---------- ----------
Total liabilities and stockholders'
equity $ 253,739 $ 240,568
========== ==========
</TABLE>
The accompanying notes are an integral part of these consolidated balance
sheets.
<PAGE>
<TABLE>
CONTINENTAL RESOURCES, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS
(dollars in thousands, except per share data)
<CAPTION>
Three Months Ended June 30,
---------------------------
1998 1999
---- ----
<S> <C> <C>
REVENUES:
Oil and gas sales $ 15,208 $ 15,634
Crude oil marketing -- 34,194
Gathering, marketing and processing 3,165 3,758
Oil and gas service operations 1,596 1,752
---------- ----------
Total revenues 19,969 55,338
---------- ----------
OPERATING COSTS AND EXPENSES:
Production expenses 3,590 3,413
Production taxes 646 1,077
Exploration expenses 1,102 1,931
Crude oil marketing purchases and expenses -- 32,382
Gathering, marketing and processing 2,583 3,113
Oil and gas service operations 942 1,037
Depreciation, depletion and amortization 11,075 4,240
General and administrative 2,699 2,141
---------- ----------
Total operating costs and expenses 22,637 49,334
---------- ----------
OPERATING INCOME (2,668) 6,004
---------- ----------
OTHER INCOME AND EXPENSES
Interest income 537 101
Interest expense (3,169) (4,100)
Other income (expense), net 86 26
---------- ----------
Total other income and (expenses) ( 2,546) (3,973)
---------- ----------
NET INCOME (LOSS) ($5,214) $2,031
========== ==========
EARNINGS (LOSS) PER COMMON SHARE ($106.32) $41.41
========== ==========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE>
<TABLE>
CONTINENTAL RESOURCES, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS
(dollars in thousands, except per share data)
<CAPTION>
Six Months Ended June 30,
1998 1999
---- ----
<S> <C> <C>
REVENUES:
Oil and gas sales $ 31,291 $ 25,747
Crude oil marketing -- 124,334
Gathering, marketing and processing 9,804 7,194
Oil and gas service operations 3,062 3,094
---------- ----------
Total revenues 44,157 160,369
---------- ----------
OPERATING COSTS AND EXPENSES:
Production expenses 7,651 6,305
Production taxes 1,423 1,621
Exploration expenses 2,650 3,287
Crude oil marketing purchases and expenses -- 119,024
Gathering, marketing and processing 8,409 5,856
Oil and gas service operations 1,825 1,380
Depreciation, depletion and amortization 16,483 9,683
General and administrative 4,914 4,172
---------- ----------
Total operating costs and expenses 43,355 151,328
---------- ----------
OPERATING INCOME 802 9,041
---------- ----------
OTHER INCOME AND EXPENSES
Interest income 780 187
Interest expense (5,174) (8,204)
Other income (expense), net 93 35
---------- ----------
Total other income and (expenses) (4,301) (7,982)
INCOME (LOSS) BEFORE CUMULATIVE
EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE (3,499) 1,059
CUMULATIVE EFFECT OF CHANGE
IN ACCOUNTING PRINCIPLE -- (2,048)
---------- ----------
NET INCOME (LOSS) ($3,499) ($989)
========== ==========
EARNINGS (LOSS) PER COMMON SHARE BEFORE
CUMULATIVE EFFECT OF CHANGE IN
ACCOUNTING PRINCIPLE ($71.36) $21.59
========== ==========
EARNINGS (LOSS) PER COMMON SHARE AFTER
CUMULATIVE EFFECT OF CHANGE IN
ACCOUNTING PRINCIPLE ($71.36) ($20.18)
========== ==========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE>
<TABLE>
CONTINENTAL RESOURCES, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollars in thousands)
<CAPTION>
Six Months Ended June 30,
-------------------------
1998 1999
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss ($ 3,499) ($ 989)
Adjustments to reconcile net income to net
cash provided by operating activities--
Depreciation, depletion and amortization 16,483 9,683
Gain on sale of assets (22) (8)
Dry hole cost and impairment of undeveloped leases 130 2,941
Other noncurrent assets (8) (3)
Changes in current assets and liabilities--
Decrease in accounts receivable 9,411 3,043
Increase in inventories (1,414) (533)
(Increase)/decrease in prepaid expenses 23 (2,713)
Decrease in accounts payable (7,379) (5,357)
Decrease in revenues and royalties payable (3,844) (1,009)
Decrease in accrued liabilities and other (213) (238)
---------- ----------
Net cash provided by operating activities 9,668 4,817
---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Exploration and development (28,866) (3,748)
Gas gathering and processing facilities and
service properties, equipment and other (2,568) (763)
Purchase of producing properties (85,100) --
Proceeds from note receivable -- 185
Proceeds from sale of assets 387 25
Advances from affiliates 16 --
----------- ----------
Net cash used in investing activities (116,131) (4,301)
----------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from line of credit and other 109,015 4,600
Repayment of line of credit and other (1,626) (176)
Repayment of short-term note due to stockholder (891) (10,000)
----------- ----------
Net cash provided by (used in)
financing activities 106,498 (5,576)
----------- ----------
NET (DECREASE) IN CASH 35 (5,060)
CASH, beginning of period 1,301 15,817
----------- ----------
CASH, end of period $ 1,336 $ 10,757
=========== ==========
SUPPLEMENTAL CASH FLOW INFORMATION:
Income taxes paid -- --
Interest paid $ 5,174 $ 8,502
NONCASH INVESTING AND FINANCING
ACTIVITIES:
Advance to affiliate made with sale of
50% interest in producing properties $ 19,581 --
Satisfaction of note payable to principal
stockholder through sale of 50%
interest in producing properties $ 22,969 --
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
<PAGE>
CONTINENTAL RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
1. CONTINENTAL RESOURCES, INC.'S FINANCIAL STATEMENTS
In the opinion of Continental Resources, Inc. ("CRI" or the
"Company") the accompanying unaudited consolidated financial
statements contain all adjustments, consisting only of normal
recurring adjustments, necessary to present fairly the Company's
financial position as of June 30, 1999, the results of operations
for the three months and six months ended June 30, 1998 and 1999
and cash flows for the six months ended June 30, 1998 and 1999.
The unaudited consolidated 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 financial statements should be read in conjunction
with the consolidated financial statements and notes thereto
included in the Company's annual report on form 10-K for the year
ended December 31, 1998.
2. LONG-TERM DEBT:
Long-term debt as of December 31, 1998 and June 30, 1999
consists of the following:
<TABLE>
<CAPTION>
December 31, 1998 June 30, 1999
----------------- -------------
(dollars in thousands)
<S> <C> <C>
Senior Subordinated Notes $150,000 $150,000
Credit Facility 4,000 8,600
Notes payable to General Electric
Capital Corporation 3,582 3,431
Capital lease agreements 57 32
------------- -------------
Outstanding debt 157,639 162,063
Less current portion 337 326
------------- -------------
Total long-term debt $157,302 $161,737
============= =============
In February 1999, the Company borrowed $4.6 million against its
revolving credit facility. Subsequent to June 30, 1999 the
Company has made payments of $1.6 million to reduce the
borrowings against its Credit Facility. The current borrowing
base of the Credit Facility is $25 million until October 1, 1999
when the next redetermination is expected to take place.
3. CRUDE OIL MARKETING:
On July 1, 1998, the Company began entering into third party
contracts to purchase and resell crude oil at prices based on
current month NYMEX prices, current posting prices or at a stated
contract price. Purchases and sales are recorded at the stated
contract price. During the quarter ended June 30, 1999, the
Company had revenues of $34.2 million on purchases of $32.0
million, while incurring expenses of $.4 million, resulting in a
margin from crude oil marketing activities during the quarter of
$1.8 million. Year to date the Company has had revenues of
$124.3 million on purchases of $118.3 million, while incurring
expenses of $0.7 million, resulting in a year to date margin from
crude oil marketing activities of $5.3 million.
In December 1998, the Emerging Issues Task Force ("EITF")
released their consensus on EITF 98-10 "Accounting for Energy
Trading and Risk Management Activities." This statement requires
that contracts for the purchase and sale of energy commodities
which are entered into for the purpose of speculating on market
movements or otherwise generating gains from market price
differences to be recorded at their market value, as of the
balance sheet date, with any corresponding gains or losses
recorded as income from operations. The Company adopted EITF 98-
10 effective January 1, 1999. As a result, the Company recorded
an expense for the cumulative effect of change in accounting
principle of $2,048,000. At June 30, 1999, the market value of
the Company's energy trading contracts resulted in an unrealized
gain of $2,750,500, which is recorded in Crude Oil Marketing
Revenues and offset in prepaid expenses in the accompanying
consolidated balance sheet.
4. COMMITMENTS AND CONTINGENCIES:
On May 15, 1998, the Company and an unrelated third party
entered into a definitive agreement to exchange undivided
interests in approximately 65,000 gross (59,000 net) leasehold
acres in the northern half of the Cedar Hills Field. On August
19, 1998, the Company instituted a declaratory judgment action
against the unrelated third party in the District Court of
Garfield County, Oklahoma. The Company seeks a declaratory
judgment determining that it is excused from further performance
under its exchange agreement with the third party. The third
party has denied the Company's allegations and seeks specific
performance by the Company, plus monetary damages of an
unspecified amount. The Cedar Hills unitization process is
expected to continue. On March 31, 1999, the North Dakota
Industrial Commission (NDIC) held a hearing to discuss the status
of the unitization process. As a result of the hearing, effective
August 1, 1999, the NDIC will require the Company to curtail
production on less than ten wells. This will result in an
estimated reduction of less than 100 barrels a day of crude oil
production of the estimated production by the Company in the
field of a total of 5,500 barrels a day.
5. GUARANTOR SUBSIDIARIES
The Company's wholly owned subsidiaries, Continental Gas, Inc.
(CGI) and Continental Crude Co. (CCC), have guaranteed the Senior
Subordinated Notes and the Credit Facility. The following is a
summary of the financial information of Continental Gas, Inc. as
of December 31, 1998 and June 30, 1999 and for the three month
and six month periods ended June 30, 1998 and 1999.
</TABLE>
<TABLE>
AS OF:
- -----
(dollars in thousands)
<CAPTION>
December 31, 1998 June 30, 1999
----------------- -------------
<S> <C> <C>
Current assets $ 2,493 $ 2,598
Noncurrent assets 22,263 21,975
---------- ----------
Total assets $ 24,756 $ 24,573
========== ==========
Current liabilities $ 13,503 $ 13,931
Noncurrent liabilities 616 616
Stockholder's equity 10,637 10,026
---------- ----------
Total liabilities and stockholder's
equity $ 24,756 $ 24,573
========== ==========
</TABLE>
<TABLE>
FOR THE THREE MONTH AND SIX MONTH PERIOD ENDED JUNE 30,
- -------------------------------------------------------
(dollars in thousands)
<CAPTION>
1998 1999
--------------------- -----------------------
3 month 6 month 3 month 6 month
--------- --------- ---------- ----------
<S> <C> <C> <C> <C>
Total revenues $ 4,900 $ 11,684 $ 4,632 $ 8,751
Operating costs and expenses 4,922 11,501 4,706 8,977
--------- --------- ---------- ----------
Operating income (loss) (22) 183 (74) (226)
Other expenses (143) (266) (199) (385)
--------- --------- ---------- ----------
Net loss $ (165) $ (83) $ (273) $ (611)
========= ========= ========== ==========
</TABLE>
At June 30, 1999, current liabilities payable to the Company by
CGI totaled approximately $10.0 million. For the three months
ended June 30, 1998 and 1999, depreciation, depletion and
amortization included in CGI's operating costs totaled
approximately $0.4 million and $0.6 million, respectively. For
the six month periods ended June 30, 1998 and 1999 depreciation,
depletion and amortization included in operating costs totaled
$0.9 million and $1.1 million, respectively.
Since its incorporation, CCC has had no operations, has acquired
no assets and has incurred no liabilities.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
THREE MONTHS AND SIX MONTHS ENDED JUNE 30, 1999 COMPARED TO THREE
MONTHS AND SIX MONTHS ENDED JUNE 30, 1998
The following discussion and analysis should be read in
conjunction with the Company's unaudited consolidated 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, increased $1.1
million, or 6%, to $21.1 million during the three months ended
June 30, 1999 from $20.0 million during the comparable period in
1998. The increase is attributable to higher oil prices and gas
production volumes which more than offset lower oil production
and lower gas prices. During the third quarter of 1998, the
Company began marketing crude oil that had been purchased from
third parties. This activity generated $34.2 million in revenue
to the Company for the three month period ending June 30, 1999
and $124.3 million in revenue for the sixth month period ended
June 30, 1999.
OIL AND GAS
Oil and gas sales revenue for the three months ended June 30,
1999 increased $0.4 million, or 3%, to $15.6 million from $15.2
million during the comparable period in 1998. Oil production
decreased by 141 MBbls to 866 MBbls, or 14%, for the three months
ended June 30, 1999 from 1,007 MBbls for the comparable period in
1998. The production decrease was mainly due to the natural
production declines for new wells and the shutting in of wells
which had become uneconomic due to lower oil prices. This
decline was partially offset by the addition of approximately 125
MBbls of production from properties acquired in the Worland Field
Acquisition during the third quarter of 1998. Oil prices
increased to an average of $14.88/Bbl, or 18%, during the three
months ended June 30, 1999 from $12.64/Bbl, for the comparable
1998 period price. Gas sales increased $0.3 million, or 11%, to
$2.7 for the three month period in 1999 from $2.4 million
during the period in 1998. Gas production for the period
increased 314 Mmcf, or 22%, to 1,753 Mmcf from 1,439 Mmcf in
1998. The increase in production for the period, 193 Mmcf of
which came from properties acquired in the Worland acquisition,
was offset by a 9% decrease in realized gas sales prices to
$1.57/Mcf in 1999 from $1.72/Mcf in 1998.
The year to date oil and gas sales revenue for the period ended
June 30, 1999 decreased $5.6 million, or 18%, to $25.7 from $31.3
million during the comparable period in 1998. Oil revenues for
the period decreased $5.3 million. A 327 MBbl, or 16%, decrease
to 1,656 MBbl in the 1999 period from 1,983 MBbl in the
comparable 1998 period, resulted in a $4.4 million decrease in
oil sales. A 354 MBbl decrease in production in the Cedar Hills
field due to the decline in production associated with new wells
drilled in 1997 and early 1998, a 62 MBbl decrease in production
from the High Pressure Air Injection Units due to the natural
decline in field production and reduction in operations due to
crude oil prices, an estimated 55 MBbl decrease due to shut in
production on other uneconomic wells, and a 22 MBbl decrease due
to the sale of the Illinois properties were partially offset by
the addition of 181 MBbls of production from properties acquired
in the Worland Field Acquisition in the third quarter of 1998.
In addition to the decrease due to reduced volumes, oil revenues
decreased $0.9 million because of a $0.59/Bbl, or 4%, decrease
in average oil sales prices to $12.55/Bbl in 1999 from $13.14/Bbl
in 1998. Gas revenues for the six month period ended June 30,
1999 also decreased by $0.3 million, or 5% to $4.9 million from
$5.2 million in the comparable period in 1998. The average
realized price on gas sales declined to $1.48 per mcf in 1999
from $1.79 per mcf in 1998. This decline in average sales price
is mainly due to the addition of approximately 396 Mmcf of gas
sales from the Worland properties. Because of the quality of this
gas, it sells at a much lower price than the Company's other gas
production. During 1999 the Company has realized a sales price
of $0.56 per mcf from these properties compared to $1.61 per mcf
for the Company's other gas production.
Subsequent to June 30, 1999, in accordance with its hedging
policy, the Company hedged 60,000 barrels (bbl) a month of its
production at $19.18/bbl NYMEX for August through December of
1999 and 40,000 bbls a month at $20.43/bbl for September, 1999
through February, 2000.
CRUDE OIL MARKETING
The Company began marketing crude oil purchased from third
parties in July, 1998. During the three month period ended June
30, 1999, the Company recognized revenues on crude oil purchased
for resale of $34.2 million. For the year to date period ended
June 30, 1999 the Company has recognized $124.3 million in
revenue from these sales.
GATHERING, MARKETING AND PROCESSING
Gathering, marketing and processing revenue in the second
quarter of 1999 was $3.8 million, an increase of $0.6 million, or
19%, from $3.2 million in the same period in 1998. This increase
in revenue during the second quarter was attributable to higher
natural gas and liquids prices in the 1999 period.
Gathering, marketing and processing revenue for the six months
ended June 30, 1999 were $7.2 million, a $2.6 million, or 27%
decrease, from $9.8 million in the comparable 1998 period. The
decrease for the six month period was partially due 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 during the first three months of the period.
Natural Gas and liquids prices during the six month period of
1999 were still lower than during the comparable period in 1998,
even as the second quarter prices improved.
OIL AND GAS SERVICE OPERATIONS
There was no material change in the Company's revenues from Oil
and Gas Service Operations between the quarter or year to date
periods ended June 30, 1999 and June 30, 1998.
COSTS AND EXPENSES
PRODUCTION EXPENSES
Production expenses decreased by $.2 million, or 5%, to $3.4
million during the three months ended June 30, 1999 from $3.6
million during the comparable period in 1998. Operating
expenses increased by $0.4 million due to the Worland Field
Acquisition, while operating expenses for all other fields
decreased by $0.6 million.
Production expenses decreased by $1.4 million, or 18%, to $6.3
million for the year to date period ended June 30, 1999 from $7.7
million during the comparable period in 1998. Operating expenses
increased by $0.8 million due to the Worland Field Acquisition,
while operating expenses for all other fields decreased by $2.2
million. The decrease was seen in all areas of direct costs
associated with Company operations including a reduction in labor
costs of $0.3 million, or 14%; energy of $0.6 million, or 22%;
operating supplies and repairs of $0.9 million, or 39%; and salt
water disposal costs of $0.4 million, or 24%.
PRODUCTION TAXES
Production taxes increased by $0.4 million , or 67%, to $1.0
million during the three months ended June 30, 1999 from $0.6
million during the comparable period in 1998 due to higher oil
and gas prices and higher tax rates on wells in North Dakota that
have reached the expiration date of tax relief given on newly
drilled wells.
Production taxes for the six month period ended June 30, 1999
have increased by $0.2 million, or 14%, to $1.6 million in 1999
compared to $1.4 million in the comparable period of 1998. The
1999 year to date sales prices on oil and gas have been slightly
lower than the 1998 prices, resulting in a lower taxable revenue
amount. However, the expiration of lower tax rates on 34 newly
drilled wells in North Dakota since April 1, 1998 has increased
the tax rate to be applied to the sales prices on these wells,
resulting in a higher tax rate on these wells. The Company
expects the expiration of the remaining tax exemptions on newly
drilled wells to have minimal impact on the companies overall
production tax expenses.
EXPLORATION EXPENSES
For the three month period ended June 30, 1999, exploration
expenses increased $0.8 million, or 75%, to $1.9 million from
$1.1 million during the comparable period of 1998. The increase
was due to a $1.4 million increase in expired lease costs to $1.6
million in the three month period in 1999 from $0.2 million for
the comparable period in 1998. The increase in expired lease
costs was partially offset by a decrease in expensed intangible
drilling and development costs related to development work overs
of $0.6 million to $0.3 million in 1999 from $0.9 million in the
comparable period of 1998.
The year to date exploration expense as of June 30, 1999
increased $0.7 million, or 24%, to $3.3 million from $2.6 million
incurred in the comparable period in 1998. The increase was due
to a $2.9 million increase in expired lease costs to $2.9 million
in the six month period in 1999. Expired lease cost is a non
cash expense in the current period and is added to net income on
the cash flow statement to arrive at cash generated from
operating activities. The increase in expired lease costs was
partially offset by a decrease in expensed intangible drilling
and development costs related to development work overs of $1.9
million to $0.4 million in 1999 from $2.3 million in the
comparable period of 1998. Other miscellaneous exploration costs
were reduced by an additional $0.3 million.
CRUDE OIL MARKETING
The Company began marketing crude oil purchased from third
parties in July 1998. For the three months ended June 30, 1999,
the Company recognized expense for the purchases of crude oil
purchased for resale of $32.0 million, and marketing expenses of
$0.4 million.
Year to date 1999 the Company has recognized expense of $118.3
million and $0.7 million respectively for the purchase of crude
oil and for marketing expenses.
GATHERING, MARKETING, AND PROCESSING
During the three months ended June 30, 1999, the Company
incurred gathering, marketing and processing expenses of $3.1
million, representing a $0.5 million, or 21% increase from the
$2.6 million incurred in the second quarter of 1998 due to higher
natural gas and liquids prices.
Gathering, marketing and processing expenses for the six months
ended June 30, 1999 were $5.9 million, a $2.6 million, or 30%
decrease, from $8.4 million in the comparable 1998 period. The
decrease for the six month period was partially due to the
elimination of purchases for resale of third party gas for
marketing purposes and a refocus on purchases to supply the
Company's gas plants during the first three months of the period.
Natural Gas and liquids prices during the six month period of
1999 were still lower than during the comparable period in 1998,
even as the second quarter prices increased.
OIL AND GAS SERVICE OPERATIONS
During the three months ended June 30, 1999 the Company
incurred oil and gas service operations expense of $1.0 million,
a $0.1 million, or 10% increase over the $0.9 million for the
comparable period in 1998. This increase was due to increased
maintenance and work over expense on salt water disposal wells.
Oil and gas service operations expenses decreased by $.4
million, or 24% to $1.4 million for the six months ended June 30,
1999 compared to $1.8 million for the same period in 1998. The
1998 expense included a number of complete salt water disposal
well work overs, including the Diamond 1-8 which cost the Company
$0.3 million.
DEPRECIATION, DEPLETION AND AMORTIZATION (DD&A)
For the three months ended June 30,1999, DD&A expense decreased
$6.8 million, or 62%, to $4.2 million in 1999 from $11.0 million
for the comparable period in 1998. The DD&A expense for oil and
gas producing properties in the 1998 period reflected a Unit of
Production depreciation rate based on reserves calculated at the
lower June 30, 1998 prices. Due to the lower reserves, higher
production rates, and higher net investment in oil and gas
producing properties in 1998 compared to 1999, the per barrel of
oil equivalent (BOE) DD&A rate for 1998 was $8.88 compared to
$3.66 for 1999.
For the six months ended June 30, 1999, DD&A expense decreased
$6.8 million, or 41% to $9.7 million from $16.5 for the
comparable period in 1998. The DD&A expense for oil and gas
producing properties in the 1998 period reflected a Unit of
Production depreciation rate based on reserves calculated at the
lower June 30, 1998 prices. Due to the lower reserves, higher
production rates, and higher net investment in oil and gas
producing properties in 1998 compared to 1999, the per BOE DD&A
rate for 1998 was $6.95 compared to $4.38 for 1999.
GENERAL AND ADMINISTRATIVE ("G&A")
For the three months ended June 30, 1999 G&A expense was $2.1
million, net of overhead reimbursement of $0.8 million, for a
period total of $1.3 million or a decrease of $0.6 million or
21%, from G&A expense of $2.7 million net of overhead
reimbursement of $0.8 million for a total of $1.9 million during
the comparable period in 1998. This decrease was primarily due
to increased overhead reimbursement and decreased office expenses
of $0.4 million. G&A expenses per Boe for the second quarter of
1999 was $1.19 compared to $1.52 for the second quarter of 1998.
For the six month period ended June 30, 1999 G&A expense was
$4.2 million, net of overhead reimbursement of $1.5 million, for
a period total of $2.7 million or a decrease of $1.2 million, or
31%, from G&A expense of $4.9 million net of overhead
reimbursement of $1.0 million for a total of $3.9 million during
the comparable period in 1998. This decrease was primarily due
to the decrease in overhead costs of $0.6 million, or 12%, to
$4.1 million in 1999 from $4.7 million in the comparable period
in 1998 and an increase in overhead reimbursement of $0.3
million, or 24% to $1.5 million in 1999 from $1.2 million in the
comparable 1998 period. The 1999 year to date G&A rate per BOE
sold is $1.22 compared to a 1998 rate of $1.42. Included in the
1999 year to date rate is $.31/BOE of overhead associated with
Oil Marketing, Oil and Gas Service Operations, and Gas Gathering,
Processing and Marketing activities, which was approximately the
same as the amount included in the 1998 year to date G&A.
INTEREST EXPENSE
Interest expense for the three months ended June 30, 1999 was
$4.1 million, an increase of $0.9 million, or 29%, from $3.2
million in the comparable 1998 period. The increase in the 1999
interest expense is attributable primarily to higher levels of
indebtedness outstanding through the period in 1999. The
interest rate on most of the debt during the 1999 period is at
10.25% compared to the lower Credit Facility rate of
approximately 8.5% incurred in the 1998 period.
Interest expense for the year to date period ended June 30,
1999 was $8.2 million, an increase of $3.0 million, or 59%, from
$5.2 million in the comparable 1998 period. The increase in the
1999 interest expense is attributable primarily to higher levels
of indebtedness outstanding through the period in 1999. The
interest rate on most of the debt during the 1999 period is at
10.25% compared to the lower credit Facility rate incurred in the
1998 period.
OTHER INCOME
Other income for the three months and year to date periods
ended June 30, 1999 and 1998 remained insignificant.
NET INCOME
For the three months ended June 30, 1999 net income was $2.0
million, an increase in net income of $7.2 million from the loss
of $5.2 million for the comparable period in 1998. This increase
in net income is due primarily to higher oil and gas prices,
improved margin on oil marketing activities and reduced operating
expenses discussed previously.
LIQUIDITY AND CAPITAL RESOURCES
CASH FLOW FROM OPERATIONS
Net cash provided by operating activities for the six months
ended June 30, 1999 was $4.8 million, a decrease of $4.9 million,
or 50%, from $9.7 million provided by operating activities during
the comparable 1998 period. Cash as of June 30, 1999 was $10.8
million, a decrease of $5.0 million or 32% of the balance of
$15.8 million held at December 31, 1998. Of the $10.8 million
balance at June 30, 1999, $6.5 million had been set aside, and
was used by the Company to make its August 1, 1999 interest
payment on its 10 1/4% Senior Subordinated Notes.
DEBT
For tax planning purposes the Company borrowed $10.0 million
from their majority stockholder in December, 1998. The note was
repaid in January, 1999.
Long-term debt at December 31, 1998 and June 30, 1999 was
$157.3 million and $161.8 million, respectively. The $4.5
million, or 3%, increase was due to an advance on the Company's
line of credit in February 1999. Subsequent to June 30, 1999 the
Company has made payments of $1.6 million to reduce the
borrowings against its Bank Line of Credit.
CREDIT FACILITY
Long-term debt outstanding under the line of credit at
December 31, 1998 and June 30, 1999 included $4.0 million and
$8.6 million, respectively, of revolving credit debt under the
Credit Facility. The effective rate of interest under the line
of credit agreement was 7.75% at December 31, 1998 and 8.00% at
June 30, 1999. The Credit Facility, which matures May 14, 2001,
charges 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.
The borrowing base of the Credit Facility is $25 million until
October 1, 1999 when the next redetermination is expected to take
place.
CAPITAL EXPENDITURES
The Company's 1999 capital expenditures budget is $16.3
million, exclusive of acquisitions. During the three months ended
June 30, 1999, the Company incurred $2.8 million of capital
expenditures, for a year to date total of $4.5 million compared
to $31.0 million expended in the six month period of 1998. The
$26.5 million decrease was the result of the completion of the
Cedar Hills drilling program in the second quarter of 1998. The
Company expects to fund the 1999 capital budget through cash flow
from operations.
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.
YEAR 2000
The Company is reviewing its computer software and hardware,
telecommunications 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 at a cost of approximately $35,000.
Management 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 has completed additional testing
and believes the software to be compatible with the year 2000.
Assessment of other less critical software systems and various
types of computer equipment is continuing, however 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 was updated July 28, 1999 to make it year 2000
compatible at a cost of approximately $14,000. 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
operated by the Company 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.
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 has
been delayed from the original June 30, 1999 target date, but
should be completed during the third quarter of 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 other known areas of
incompatibility at costs estimated to be less than $50,000.
Because of the immaterial nature of the expenditures on
an individual basis, the Company plans to finance all costs
through normal operating funds.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK.
The Company is exposed to market risk in the normal course of
its business operations. Management believes that the Company is
well positioned with its mix of oil and gas reserves to take
advantage of future price increases that may occur. However, the
uncertainty of oil and gas prices continues to impact the
domestic oil and gas industry. Due to the volatility of oil and
gas prices, the Company, from time to time, has used derivative
hedging and may do so in the future as a means of controlling its
exposure to price changes. During 1998, the Company had no oil
or gas hedging transactions for its production, however, the
company did begin marketing crude oil. Most of the Company's
purchases are made at either a NYMEX based price or a fixed
price. As of June 30, 1999, for the periods July, 1999 through
July, 2000 the Company has fixed price purchase and sales
contracts in place that will result in a net gain to the Company
of $2.8 million. There are no net long or short fixed price
positions at June 30, 1999.
PART II. Other Information
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. Except as discussed below, 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.
On May 15, 1998, the Company and an unrelated third party
entered into a definitive agreement to exchange undivided
interests in approximately 65,000 gross (59,000 net) leasehold
acres in the northern half of the Cedar Hills Field. On August
19, 1998, the Company instituted a declaratory judgment action
against the unrelated third party in the Oklahoma District Court.
The Company seeks a declaratory judgment determining that it is
excused from further performance under its exchange agreement
with the third party. The third party has denied the Company's
allegations and seeks specific performance by the Company, plus
monetary damages of an unspecified amount. The Cedar Hills
unitization process is expected to continue. On March 31, 1999,
the North Dakota Industrial Commission held a hearing to discuss
the status of the unitization process. As a result of this
hearing, effective August 1, 1999 the NDIC will require the
Company to curtail production on less than ten wells. This will
result in an estimated reduction of less than 100 barrels a day
of crude oil production of the estimated production by the
Company in the field of 5,500 barrels a day.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit
No. Description
- ------- -----------
3.1 Amended and Restated Certificate of Incorporation of
Continental Resources, Inc.(1) [3.1]
3.2 Amended and Restate Bylaws of Continental Resources, Inc.(1)
[3.2]
3.3 Certificate of Incorporation of Continental Gas, Inc.(1) [3.3]
3.4 Bylaws of Continental Gas, Inc., as amended and restated.(1)
[3.4]
3.5 Certificate of Incorporation of Continental Crude Co.(1) [3.5]
3.6 Bylaws of Continental Crude Co.(1) [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")(1) [4.1]
4.1.1 First Amendment to the Credit Agreement between
Registrant, the financial institutions named therein and
Bank One, Oklahoma, N.A., as Agent dated February 10,
1999.(2) [4.1.1]
4.2 Form of Revolving Note under the Credit Agreement(1) [4.2]
4.3 Indenture dated as of July 24, 1998 between Continental
Resources, Inc., as Issuer, the Subsidiary Guarantors named
therein and the United States Trust Company of New York, as
Trustee(1) [4.3]
4.4 Exchange and Registration Rights Agreement dated July 24,
1998 between Continental Resources, Inc., the Subsidiary
Guarantors named therein and Chase Securities, Inc.(1) [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(1) [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.(1)
[10.2]
10.3 Illinois Purchase and Sale Agreement dated October 7, 1998
by and between Continental Resources, Inc. as Seller and
Farrar Oil Company as Buyer(2) [10.3]
21.0 Subsidiaries (2) [21.0]
27* Financial Data Schedule
________________
* Filed herewith
(1) 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.
(2) Filed as an exhibit to the Company's 1998 Annual Report on
Form 10-K which was filed with the Securities and Exchange
Commission. The exhibit number is indicated in brackets and
incorporated by reference herein.
(b) Reports on Form 8-K
No reports on Form 8-K were filed by the Company during the three
months ended June 30, 1999.
<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: August 12, 1999
<PAGE>
EXHIBIT INDEX
Exhibit
No. Description Method of Filing
- --- ----------- ----------------
3.1 Amended and Restated Certificate of Incorporated herein by reference
Incorporation of Continental
Resources, Inc.
3.2 Amended and Restated Bylaws of Incorporated herein by reference
Continental Resources, Inc.
3.3 Certificate of Incorporation of Incorporated herein by reference
Continental Gas, Inc.
3.4 Bylaws of Continental Gas, Inc., Incorporated herein by reference
as amended and restated
3.5 Certificate of Incorporation of Incorporated herein by reference
Continental Crude Co.
3.6 Bylaws of Continental Crude Co. Incorporated herein by reference
4.1 Restated Credit Agreement dated May Incorporated herein by reference
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")
4.1.1 First Amendment to the Credit Incorporated herein by reference
Agreement between Registrant, the
financial institutions named therein
and Bank One, Oklahoma, N.A., as
Agent dated February 10, 1999
4.2 Form of Revolving Note under the Incorporated herein by reference
Credit Agreement
4.3 Indenture dated as of July 24, Incorporated herein by reference
1998 between Continental Resources,
Inc., as Issuer, the Subsidiary
Guarantors named therein and the
United States Trust Company of New
York, as Trustee
4.4 Exchange and Registration Rights Incorporated herein by reference
Agreement dated July 24, 1998
between Continental Resources,
Inc., the Subsidiary Guarantors
named therein and Chase Securities,
Inc.
10.1 Purchase and Sale Agreement dated Incorporated herein by reference
March 28, 1998 by and between Bass
Enterprises Production Co., et al.
as Sellers and Continental
Resources, Inc. as Buyer
10.2 Worland Area Purchase and Sale Incorporated herein by reference
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
10.3 Illinois Purchase and Sale Agreement Incorporated herein by reference
dated October 7, 1998 by and
between Continental Resources,
Inc. as Seller and Farrar Oil
Company as Buyer
21.0 Subsidiaries Incorporated herein by reference
27 Financial Data Schedule Filed herewith electronically
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
unaudited consolidated balance sheet at June 30, 1999 and the unaudited
consolidated statement of operations at June 30, 1999 and is qualified in its
entirety by reference to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 10,756,873
<SECURITIES> 0
<RECEIVABLES> 11,944,778
<ALLOWANCES> 0
<INVENTORY> 5,159,427
<CURRENT-ASSETS> 30,742,799
<PP&E> 330,911,677
<DEPRECIATION> (129,855,193)
<TOTAL-ASSETS> 240,568,143
<CURRENT-LIABILITIES> 19,332,662
<BONDS> 150,000,000
0
0
<COMMON> 49,041
<OTHER-SE> 59,245,682
<TOTAL-LIABILITY-AND-EQUITY> 240,568,143
<SALES> 157,274,671
<TOTAL-REVENUES> 160,368,702
<CGS> 132,805,628
<TOTAL-COSTS> 151,328,018
<OTHER-EXPENSES> (222,138)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 8,203,953
<INCOME-PRETAX> 1,058,869
<INCOME-TAX> 0
<INCOME-CONTINUING> 1,058,869
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 2,048,455
<NET-INCOME> (989,586)
<EPS-BASIC> 0
<EPS-DILUTED> 0
</TABLE>
