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, 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 November 12, 1999
Common Stock, $1.00 par value 49,041
<PAGE>
TABLE OF CONTENTS
PART I. Financial Information
ITEM 1. FINANCIAL STATEMENTS . . . . . . . . . . . . . . . . . . . . . .-3-
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS. . . . . . . . . . . . . . . . . . . . . .-8-
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.. . -13-
PART II. Other Information
ITEM 1. LEGAL PROCEEDINGS. . . . . . . . . . . . . . . . . . . . . . . -13-
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K . . . . . . . . . . . . . . . -14-
<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, September 30,
1998 1999
---------- -----------
<S> <C> <C>
CURRENT ASSETS:
Cash $ 15,817 $ 8,578
Accounts receivable-
Oil and gas sales 7,255 9,845
Joint interest and other, net 7,733 4,794
Inventories 4,627 4,824
Prepaid expenses 168 2,504
Advances to affiliates 1 1
---------- ----------
Total current assets 35,601 30,546
---------- ----------
PROPERTY AND EQUIPMENT:
Oil and gas properties
Producing properties 241,358 248,042
Nonproducing leaseholds 47,583 44,194
Gas gathering and processing facilities 24,709 26,041
Service properties, equipment and other 15,989 16,103
---------- ----------
Total property and equipment 329,639 334,380
Less--Accumulated depreciation,
depletion and amortization (121,061) (133,680)
---------- ----------
Net property and equipment 208,578 200,700
OTHER ASSETS:
Debt issuance costs 9,023 8,154
Other assets 537 280
---------- ----------
Total other assets 9,560 8,434
---------- ----------
Total assets $ 253,739 $ 239,680
---------- ----------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 10,532 $ 6,711
Current portion of long-term debt 337 326
Revenues and royalties payable 5,855 6,193
Accrued liabilities and other 9,224 5,738
Short-term debt - stockholder 10,000 -
---------- ----------
Total current liabilities 35,948 18,968
---------- ----------
LONG-TERM DEBT, net of current portion 157,302 156,948
OTHER NONCURRENT LIABILITIES 205 166
COMMITMENTS AND CONTINGENCIES (Note 4)
STOCKHOLDERS' EQUITY:
Common stock, $1 par value, 75,000 shares
authorized, 49,041 shares issued and
outstanding 49 49
Additional paid-in-capital 2,721 2,721
Retained earnings 57,514 60,828
---------- ----------
Total stockholders' equity 60,284 63,598
---------- ----------
Total liabilities and stockholders'
equity $ 253,739 $ 239,680
========== ==========
</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 September 30,
--------------------------------
1998 1999
---- ----
<S> <C> <C>
REVENUES:
Oil and gas sales $ 14,316 $ 18,744
Crude oil marketing 123,586 49,158
Gathering, marketing and processing 3,808 5,164
Oil and gas service operations 1,928 1,698
---------- ----------
Total revenues 143,638 74,764
---------- ----------
OPERATING COSTS AND EXPENSES:
Production expenses 6,486 4,090
Production taxes 925 1,344
Exploration expenses 1,499 1,852
Crude oil marketing purchases and
expenses 119,859 48,133
Gathering, marketing and processing 3,702 4,270
Oil and gas service operations 614 979
Depreciation, depletion and amortization 10,817 4,105
General and administrative 2,423 1,842
---------- ----------
Total operating costs and expenses 146,325 66,615
---------- ----------
OPERATING INCOME (2,687) 8,149
---------- ----------
OTHER INCOME AND EXPENSES
Interest income 155 109
Interest expense (3,117) (4,032)
Other income (expense), net 443 78
---------- ----------
Total other income and (expenses) ( 2,519) (3,845)
---------- ----------
NET INCOME (LOSS) ($ 5,206) $ 4,304
========== ==========
EARNINGS (LOSS) PER COMMON SHARE ($ 106.15) $ 87.76
========== ==========
</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>
Nine Months Ended September 30,
-------------------------------
1998 1999
---- ----
<S> <C> <C>
REVENUES:
Oil and gas sales $ 45,606 $ 44,492
---------- ----------
Crude oil marketing 123,587 173,491
Gathering, marketing and processing 13,612 12,358
Oil and gas service operations 4,991 4,792
---------- ----------
Total revenues 187,796 235,133
---------- ----------
OPERATING COSTS AND EXPENSES:
Production expenses 13,748 10,395
Production taxes 2,737 2,965
Exploration expenses 4,149 5,139
Crude oil marketing purchases and expenses 119,859 167,157
Gathering, marketing and processing 12,111 10,126
Oil and gas service operations 2,439 2,358
Depreciation, depletion and amortization 27,300 13,789
General and administrative 7,338 6,015
---------- ----------
Total operating costs and expenses 189,681 217,944
---------- ----------
OPERATING INCOME (1,885) 17,189
---------- ----------
OTHER INCOME AND EXPENSES
Interest income 935 296
Interest expense (8,291) (12,236)
Other income (expense), net 536 113
---------- ----------
Total other income and (expenses) ( 6,820) ( 11,827)
---------- ----------
INCOME (LOSS) BEFORE CUMULATIVE
EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE ( 8,705) 5,362
---------- ----------
CUMULATIVE EFFECT OF CHANGE
IN ACCOUNTING PRINCIPLE - (2,048)
---------- ----------
NET INCOME (LOSS) ($ 8,705) $ 3,314
========== ==========
EARNINGS (LOSS) PER COMMON SHARE BEFORE
CUMULATIVE EFFECT OF CHANGE IN
ACCOUNTING PRINCIPLE ($ 177.51) $ 109.35
========== ==========
EARNINGS (LOSS) PER COMMON SHARE AFTER
CUMULATIVE EFFECT OF CHANGE IN
ACCOUNTING PRINCIPLE ($ 177.51) $ 67.58
========== ==========
</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>
Nine Months Ended September 30,
-------------------------------
1998 1999
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income (Loss) ($ 8,705) $ 3,314
---------- ----------
Adjustments to reconcile to net
cash provided by operating activities--
Depreciation, depletion and amortization 27,300 13,789
Gain on sale of assets (56) (9)
Dry hole cost and impairment of
undeveloped leases 1,262 4,003
Other noncurrent assets (22) 257
Other Noncurrent Liabilities - (38)
Changes in current assets and liabilities--
Decrease in accounts receivable 10,445 349
Increase in inventories (2,046) (197)
(Increase)/decrease in prepaid expenses 172 (2,336)
Decrease in accounts payable (9,791) (3,821)
Increase/(Decrease) in revenues and
royalties payable (3,701) 338
Decrease in accrued liabilities and other 1,289 (3,486)
---------- ----------
Net cash provided by operating activities 16,147 12,163
---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Exploration and development (34,688) (6,248)
Gas gathering and processing facilities and
service properties, equipment and other (4,136) (1,487)
Purchase of producing properties (85,100) (1,329)
Proceeds from sale of assets 42,972 26
Advances from affiliates 59 -
---------- ----------
Net cash used in investing activities (80,893) (9,038)
---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from line of credit and other 265,515 4,600
Repayment of line of credit and other (188,427) (4,964)
Debt issuance costs (9,455) -
Repayment of short-term note due to
stockholder - (10,000)
---------- ----------
Net cash provided by (used in) financing
activities 67,633 (10,364)
---------- ----------
NET INCREASE(DECREASE) IN CASH 2,887 (7,239)
CASH, beginning of period 1,301 15,817
---------- ----------
CASH, end of period $ 4,188 $ 8,578
========== ==========
SUPPLEMENTAL CASH FLOW INFORMATION:
Income taxes paid - -
Interest paid $ 8,291 $ 16,399
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 September 30, 1999,the results of
operations for the three months and nine months ended September
30, 1998 and 1999 and cash flows for the nine months ended
September 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 September 30, 1999
consists of the following:
<TABLE>
<CAPTION>
December 31, 1998 September 30, 1999
----------------- ------------------
(dollars in thousands)
<S> <C> <C>
Senior Subordinated Notes $ 150,000 $ 150,000
Credit Facility 4,000 4,000
Notes payable to General Electric
Capital Corporation 3,582 3,247
Capital lease agreements 57 27
---------- ----------
Outstanding debt 157,639 157,274
Less current portion 337 326
---------- ----------
Total long-term debt $ 157,302 $ 156,948
========== ==========
</TABLE>
In February 1999, the Company borrowed $4.6 million against its
revolving credit facility. Subsequent to September 30, 1999 the
Company has made payments of $4.0 million to reduce the
borrowings against its Credit Facility to $0. The current
borrowing base of the Credit Facility is $25 million until
May 1, 2000 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 September 30, 1999,
the Company had revenues of $49.2 million on purchases of $48.1
million, while incurring expenses of $0.1million, resulting in a
margin from crude oil marketing activities during the quarter of
$1.0 million. Year to date the Company has had revenues of
$173.5 million on purchases of $166.4 million, while incurring
expenses of $0.8 million, resulting in a year to date margin from
crude oil marketing activities of $6.3 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 $2.0. At September 30, 1999, the market value of
the Company's open energy trading contracts resulted in an
unrealized gain of $2.4 million which is recorded in crude oil
marketing revenues in the accompanying consolidated statement of
operations and prepaid expenses in the accompanying consolidated
balance sheet.
During the third quarter of 1999, the Company entered into forward
fixed price sales contracts in accordance with its hedging policy,
to mitigate its exposure to the price volatility associated with
its crude oil production. The monthly contracts range from
90,000 to 100,000 barrels per month and extend through February 2000.
The Company accounts for changes in the market value of its hedging
instruments as deferred gains or losses until the production month of
the hedged transaction, at which time the realized gain or loss is
recognized in the results of operations. At September 30, 1999, the
Company had open contracts totaling approximately 480,000 barrels with
unrealized deferred losses of approximately $1.9 million.
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 September 30, 1999 and for the three
month and nine month periods ended September 30, 1998 and 1999.
AS OF:
<TABLE>
(dollars in thousands)
<CAPTION>
December 31, 1998 September 30, 1999
----------------- ------------------
<S> <C> <C>
Current assets $ 2,493 $ 1,708
Noncurrent assets 22,263 21,961
---------- ----------
Total assets $ 24,756 $ 23,669
========== ==========
Current liabilities $ 13,503 $ 12,502
Noncurrent liabilities 616 -0-
Stockholder's equity 10,637 11,167
---------- ----------
Total liabilities and stockholder's
equity $ 24,756 $ 23,669
========== ==========
</TABLE>
<TABLE>
FOR THE THREE MONTH AND NINE MONTH PERIOD ENDED SEPTEMBER 30,
(dollars in thousands)
<CAPTION>
1998 1999
---- ----
3 month 9 month 3 month 9 month
------- ------- ------- -------
<S> <C> <C> <C> <C>
Total revenues $ 4,422 $ 16,106 $ 6,225 $ 14,976
Operating costs and expenses 5,101 16,602 6,021 14,998
-------- -------- -------- --------
Operating income (loss) (679) (496) 204 (22)
Other expenses (179) (446) (179) (564)
-------- -------- -------- --------
Net loss $ (858) $ (942) $ 25 $ (586)
======== ======== ======== ========
</TABLE>
At September 30, 1999, current liabilities payable to the
Company by CGI totaled approximately $9.5 million. For the three
months ended September 30, 1998 and 1999, depreciation, depletion
and amortization included in CGI's operating costs totaled
approximately $0.6 million and $0.5 million, respectively. For
the nine month periods ended September 30, 1998 and 1999
depreciation, depletion and amortization included in operating
costs totaled $1.5 million and $1.6 million, respectively. A
corresponding entry was made on the parents books. This entry
was made to transfer prior year deferred tax liabilities and
other noncurrent liabilities to the parent company. During the third
quarter of 1999 approximately $1.1 million of current and noncurrent
liabilities were transferred to CRI and reflected as additional
stockholder's equity of CGI.
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 NINE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED
TO THREE MONTHS AND NINE MONTHS ENDED SEPTEMBER 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 $5.6
million, or 28%, to $25.6 million during the three months ended
September 30, 1999 from $20.0 million during the comparable
period in 1998. The increase is attributable to higher oil
prices and higher gas prices which more than offset lower oil and
gas production. During the third quarter of 1998, the Company began
marketing crude oil that had been purchased from third parties.
This activity generated $49.2 million in revenue to the Company
for the three month period ending September 30, 1999 compared to
$123.6 for the three month period ending September 30, 1998. The
third quarter of 1998 was the first quarter the Company engaged
in crude oil marketing. This activity generated $173.5 million
in revenue for the nine month period ended September 30, 1999
compared to $123.6 for the nine month period ended September 30,
1998. The company has scaled back on it's crude oil marketing
since the third and fourth quarters of 1998.
OIL AND GAS
Oil and gas sales revenue for the three months ended September
30, 1999 increased $4.4 million, or 31%, to $18.7 million from
$14.3 million during the comparable period in 1998. Oil
production decreased by 210 MBbls to 803 MBbls, or 21%, for the
three months ended September 30, 1999 from 1,013 MBbls for the
comparable period in 1998. The production decrease was mainly
due to the natural production declines for new wells. Oil prices
increased to an average of $19.73/Bbl, or 75%, during the three
months ended September 30, 1999 from $11.29/Bbl, for the
comparable 1998 period. Gas sales decreased $26 thousand for
the three month period in 1999 compared to 1998. Gas production
for the period decreased 177 Mmcf, or 10%, to 1, 678 Mmcf from
1,855 Mmcf in 1998. The decrease in production for the period
was partially offset by a 10% increase in realized gas sales
prices to $1.72/Mcf in 1999 from $1.57/Mcf in 1998.
The year to date oil and gas sales revenue for the period ended
September 30, 1999 decreased $1.1 million, or 2%, to $44.5 from
$45.6 million during the comparable period in 1998. Oil revenues
for the period decreased $0.8 million. Gas revenues for the nine
month period ended September 30, 1999 also decreased by $0.3
million, or 4% to $7.8 million from $8.1million in the comparable
period in 1998. The average realized price on gas sales
decreased to $1.56 per mcf in 1999 from $1.70 per mcf in 1998.
CRUDE OIL MARKETING
The Company began marketing crude oil purchased from third
parties in July 1998. During the three month period ended
September 30, 1999, the Company recognized revenues on crude oil
purchased for resale of $49.2 million compared to $123.6 for the
three month period ended September 30, 1998. For the year to
date period ended September 30, 1999 the Company has recognized
$173.5 million in revenue from these sales compared to $123.6 for
the nine month period ended September 30, 1998. The Company has
scaled back on it's crude oil marketing since the third and fourth
quarters of 1998.
GATHERING, MARKETING AND PROCESSING
Gathering, marketing and processing revenue in the third
quarter of 1999 was $5.2 million, an increase of $1.4 million,
or 36%, from $3.8 million in the same period in 1998. This
increase in revenue during the third quarter was attributable to
higher natural gas and liquids prices in the 1999 period.
Gathering, marketing and processing revenue for the nine months
ended September 30, 1999 were $12.4 million, a $1.2 million, or
9% decrease, from $13.6 million in the comparable 1998 period.
The decrease for the nine 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.
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 September 30, 1999 and September 30, 1998.
COSTS AND EXPENSES
PRODUCTION EXPENSES
Production expenses decreased by $2.4 million, or 37%, to $4.1
million during the three months ended September 30, 1999 from
$6.5 million during the comparable period in 1998. This
decrease is due to lower production volumes and greater operating
efficiencies.
Production expenses decreased by $3.3 million, or 24%, to $10.4
million for the year to date period ended September 30, 1999 from
$13.7 million during the comparable period in 1998. The decrease
was seen in all areas of direct costs associated with Company
operations including a reduction in labor costs.
PRODUCTION TAXES
Production taxes increased by $0.4 million , or 45%, to $1.3
million during the three months ended September 30, 1999 from
$0.9 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 nine month period ended September 30,
1999 have increased by $0.3 million, or 8%, to $3.0 million in
1999 compared to $2.7 million in the comparable period of 1998.
The expiration of lower tax rates on 45 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 rate. As
oil prices continue to rise, so will production taxes.
EXPLORATION EXPENSES
For the three month period ended September 30, 1999,
exploration expenses increased $0.4 million, or 24%, to $1.9
million from $1.5 million during the comparable period of 1998.
The increase was due to a $.4 million increase in expired lease
costs to $1.1 million in the three month period in 1999 from $0.7
million for the comparable period in 1998.
The year to date exploration expense as of September 30, 1999
increased $1.0 million, or 24%, to $5.1 million from $4.1 million
incurred in the comparable period in 1998. The increase was due
to a $3.2 million increase in expired lease costs to $4.0 million
in the nine month period in 1999 from $0.8 million in the nine
month period in 1998. The increase in expired lease costs was
partially offset by a decrease in intangible drilling expense
and development costs related to repair work overs of $1.2
million to $1.0 million in 1999 from $2.2 million in the
comparable period of 1998. Other exploration costs were reduced by
an additional $1.0 million.
CRUDE OIL MARKETING
The Company began marketing crude oil purchased from third
parties in July 1998. For the three months ended September 30,
1999, the Company recognized expense for the purchases of crude
oil purchased for resale of $48.0 million, and marketing expenses
of $0.1 million compared to crude oil purchased for resale of
$119.7 million, and marketing expenses of $0.2 for the three
months ended September 30, 1998.
Year to date 1999 the Company has recognized expense of $166.4
million and $0.8 million respectively for the purchase of crude
oil and for marketing expenses compared to expense of $119.7
million and $0.2 million respectively for the purchase of crude
oil and for marketing expense for the nine month period ended
September 30, 1998. The Company has scaled back on it's crude
oil marketing since the third and fourth quarters of 1998.
GATHERING, MARKETING, AND PROCESSING
During the three months ended September 30, 1999, the Company
incurred gathering, marketing and processing expenses of $4.3
million, representing a $0.6 million, or 15% increase from the
$3.7 million incurred in the third quarter of 1998 due to higher
natural gas and liquids prices.
Gathering, marketing and processing expenses for the nine
months ended September 30, 1999 were $10.1 million, a $2.0
million, or 16% decrease, from $12.1 million in the comparable
1998 period. The decrease for the nine 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.
OIL AND GAS SERVICE OPERATIONS
During the three months ended September 30, 1999, the Company
incurred oil and gas service operations expense of $1.0 million,
a $0.4 million, or 59% increase over the $0.6 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 $0.1
million, or 3% to $2.3 million for the nine months ended
September 30, 1999 compared to $2.4 million for the same period
in 1998.
DEPRECIATION, DEPLETION AND AMORTIZATION (DD&A)
For the three months ended September 30,1999, DD&A expense
decreased $6.7 million, or 62%, to $4.1 million in 1999 from
$10.8 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 $8.18 compared to $3.05 for 1999.
For the nine months ended September 30, 1999, DD&A expense
decreased $14.3 million, or 52% to $13 million from $27.3 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 $7.20 compared to $3.94 for 1999. The 1998 DD&A
includes a write down under FASB 121 of $1.3 million.
GENERAL AND ADMINISTRATIVE ("G&A")
For the three months ended September 30, 1999 G&A expense was
$1.8 million, net of overhead reimbursement of $0.8 million, for
a period total of $1.0 million or a decrease of $0.3 million or
23%, from G&A expense of $2.4 million net of overhead
reimbursement of $1.1 million for a net of $1.3 million during
the comparable period in 1998. This decrease was primarily due
to decreased office expenses and reduced employment expense. G&A
expenses per BOE for the third quarter of 1999 was $.97 compared
to $1.00 for the third quarter of 1998.
For the nine month period ended September 30, 1999 G&A expense
was $6.0 million, net of overhead reimbursement of $2.2 million,
for a period total of $3.8 million or a decrease of $1.4 million,
or 27%, from G&A expense of $7.3 million net of overhead
reimbursement of $2.1 million for a total of $5.2 million during
the comparable period in 1998. The 1999 year to date G&A rate
per BOE sold is $1.14 compared to a 1998 rate of $1.38. 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 September 30, 1999
was $4.0 million, an increase of $0.9 million, or 29%, from $3.1
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 for the first month of the third
quarter 1998 period.
Interest expense for the year to date period ended September
30, 1999 was $12.2 million, an increase of $3.9 million, or 48%,
from $8.3 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 for
the first seven months of the 1998 period.
OTHER INCOME
Other income for the three months and year to date periods
ended September 30, 1999 and 1998 remained insignificant.
NET INCOME
For the three months ended September 30, 1999 net income was
$4.3 million, an increase in net income of $9.5 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. Also, a reduction in
DD&A expense due to higher reserves and due to the fact that the
1998 DD&A includes a write down under FASB 121 of $1.3 million.
For the nine months ended September 30, 1999 net income was
$3.3 million, an increase in net income of $12 million from the
loss of $8.7 million for the nine months ended September 30,
1998.
LIQUIDITY AND CAPITAL RESOURCES
CASH FLOW FROM OPERATIONS
Net cash provided by operating activities for the nine months
ended September 30, 1999 was $12.2 million, a decrease of $3.9
million, or 24%, from $16.1 million provided by operating
activities during the comparable 1998 period. Cash as of
September 30, 1999 was $8.6 million, a decrease of $7.2 million
or 46% of the balance of $15.8 million held at December 31, 1998.
Of the $8.6 million balance at September 30, 1999, $2.5 million
has been set aside, and will be used by the Company to make its
February 1, 2000 interest payment on its 10.25% Senior
Subordinated Notes.
DEBT
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 September 30, 1999 was
$157.3 million and $156.9 million, respectively. Subsequent to
September 30, 1999 the Company made payments of $4.0 million
to pay off all outstanding borrowings against its Bank Line of
Credit.
CREDIT FACILITY
Long-term debt outstanding under the line of credit at
December 31, 1998 and September 30, 1999 included $4.0 million
and $4.0 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 September 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 November 1, 1999 when the next redetermination
is expected to take place. Management does not expect a change in
it's Credit Facility borrowing base.
CAPITAL EXPENDITURES
The Company's 1999 capital expenditures budget is $16.3
million, exclusive of acquisitions. During the three months ended
September 30, 1999, the Company incurred $2.8 million of capital
expenditures, for a year to date total of $7.7 million, exclusive of
acquisitions, compared to $38.8 million, exclusive of acquisitions,
in the nine month period of 1998. The $31.1 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
remainder of it's 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. The
financial software package utilized on the mainframe computer has
been tested and updated by the software vendor. The Company has
completed additional testing and believes the mainframe hardware
and operating 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 September 30, 1999 target date,
but will be completed during the fourth 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 September 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 $2.4 million. There are no net long or short fixed price
positions at September 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 Garfield County, 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.
Trial was held October 18, 1999 and testimony concluded October 29,
1999 in Garfield County, Oklahoma District Court. Trial briefs, closing
arguments and findings of fact and conclusions of law are due November
12, 1999 and a decision will be rendered subsequent thereto.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a). Exhibits
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 September 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: November 12, 1999
<PAGE>
<TABLE>
EXHIBIT INDEX
Exhibit
No. Description Method of Filing
- ------- ----------- ----------------
<S> <C> <C>
3.1 Amended and Restated Certificate of Incorporated herein by reference
Incorporation of Continental Resources,
Inc.
3.2 Amended and Restate 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., as Incorporated herein by reference
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, 1998 Incorporated herein by reference
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>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
unaudited consolidated balance sheet at September 30, 1999 and the unaudited
consolidated statement of operations at September 30, 1999 and is qualified in
its entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 8,578,154
<SECURITIES> 0
<RECEIVABLES> 14,638,898
<ALLOWANCES> 0
<INVENTORY> 4,823,767
<CURRENT-ASSETS> 30,546,558
<PP&E> 334,380,400
<DEPRECIATION> (133,680,720)
<TOTAL-ASSETS> 239,680,337
<CURRENT-LIABILITIES> 18,967,637
<BONDS> 150,000,000
0
0
<COMMON> 49,041
<OTHER-SE> 63,549,445
<TOTAL-LIABILITY-AND-EQUITY> 239,680,337
<SALES> 230,341,028
<TOTAL-REVENUES> 235,133,024
<CGS> 190,643,053
<TOTAL-COSTS> 217,943,593
<OTHER-EXPENSES> (409,125)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 12,235,924
<INCOME-PRETAX> 5,362,632
<INCOME-TAX> 0
<INCOME-CONTINUING> 5,362,632
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 2,048,455
<NET-INCOME> 3,314,177
<EPS-BASIC> 0
<EPS-DILUTED> 0
</TABLE>
