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 June 30, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number 1-8704
HOWELL CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 74-1223027
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
1111 Fannin, Suite 1500, Houston, Texas 77002
(Address of principal executive offices) (Zip Code)
(713) 658-4000
(Registrant's telephone number, including area code)
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 reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
--- ---
Indicate the number of shares outstanding on each of the issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding at July 31, 1998
- --------------------------------- ------------------------------------
Common Stock, $1.00 par value 5,471,782
================================================================================
This report contains 15 pages
<PAGE>
HOWELL CORPORATION AND SUBSIDIARIES
Form 10-Q
INDEX
Page No.
--------
Part I. Financial Information
Item 1. Consolidated Statements of Operations --
Three and six months ended June 30, 1998 and 1997 (unaudited)... 3
Consolidated Balance Sheets --
June 30, 1998 (unaudited) and December 31, 1997................. 4
Consolidated Statements of Cash Flows --
Six months ended June 30, 1998 and 1997 (unaudited)............ 5
Notes to Consolidated Financial Statements (unaudited)............ 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations...................................... 11
Part II. Other Information
Item 6. Exhibits and Reports on Form 8-K................................. 14
<PAGE>
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION
(ITEM 1)
====================================================================================================
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
Howell Corporation and Subsidiaries
- ----------------------------------------------------------------------------------------------------
Three Months Ended Six Months Ended
June 30, June 30,
1998 1997 1998 1997
---- ---- ---- ----
(In thousands, except
per share amounts)
<S> <C> <C> <C> <C>
Revenues ............................................ $ 12,267 $ 7,904 $ 26,534 $ 16,971
-------- -------- -------- --------
Cost and expenses:
Lease operating expenses ......................... 5,774 3,210 14,051 7,019
Depreciation, depletion, and amortization ........ 2,434 2,290 6,066 4,524
Ceiling test write-down .......................... -- -- 66,118 --
General and administrative expenses .............. 1,053 973 3,121 2,464
-------- -------- -------- --------
9,261 6,473 89,356 14,007
-------- -------- ------- -------
Other income (expense):
Interest expense ................................. (2,762) (441) (5,434) (854)
Interest income .................................. 35 26 47 51
Net earnings of investees ........................ 104 79 224 507
Other-net ........................................ (146) (39) (157) (173)
-------- -------- -------- --------
(2,769) (375) (5,320) (469)
-------- -------- -------- --------
Earnings (loss) before income taxes ................. 237 1,056 (68,142) 2,495
Income tax provision (benefit) ...................... 103 417 (23,120) 912
-------- -------- -------- --------
Net earnings (loss) from continuing operations ...... 134 639 (45,022) 1,583
-------- -------- -------- --------
Discontinued operations:
Net earnings from Howell Hydrocarbons
(less applicable income taxes of $(15), $53, $(15)
and $309, respectively)........................... (59) -- (59) 458
-------- -------- -------- --------
Net earnings (loss) ................................. 75 639 (45,081) 2,041
Less: Preferred stock dividends .................. (604) (604) (1,208) (1,208)
-------- -------- -------- --------
Net (loss) earnings applicable to common shares ..... $ (529) $ 35 $(46,289) $ 833
======== ======== ======== ========
Basic (loss) earnings per common share:
Continuing operations ............................ $ (0.09) $ 0.01 $ (8.45) $ 0.08
Discontinued operations .......................... (0.01) -- (0.01) 0.09
-------- -------- -------- --------
Net (loss) earnings per common share (basic) ..... $ (0.10) $ 0.01 $ (8.46) $ 0.17
======== ======== ======== ========
Weighted average shares outstanding(basic) .......... 5,472 5,020 5,468 5,003
======== ======== ======== ========
Diluted (loss) earnings per common share:
Continuing operations ............................ $ (0.09) $ 0.01 $ (8.45) $ 0.07
Discontinued operations .......................... (0.01) -- (0.01) 0.09
-------- -------- -------- --------
Net (loss) earnings per common share(diluted) .... $ (0.10) $ 0.01 $ (8.46) $ 0.16
======== ======== ======== ========
Weighted average shares outstanding (diluted) ....... 5,472 5,193 5,468 5,134
======== ======== ======== ========
Cash dividends per common share ..................... $ 0.04 $ 0.04 $ 0.08 $ 0.08
======== ======== ======== ========
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
<PAGE>
<TABLE>
<CAPTION>
========================================================================================================
CONSOLIDATED BALANCE SHEETS
Howell Corporation and Subsidiaries
- --------------------------------------------------------------------------------------------------------
June 30, December 31,
1998 1997
(Unaudited)
(In thousands, except share data)
Assets
<S> <C> <C>
Current assets:
Cash and cash equivalents .......................................... $ 1,123 $ 56
Trade accounts receivable, less allowance for doubtful accounts of
$150 in 1998 and $144 in 1997 .................................. 7,188 5,520
Accounts receivable from investees ................................. 2,300 2,300
Other current assets ............................................... 729 1,489
--------- ---------
Total current assets .............................................. 11,340 9,365
--------- ---------
Property, plant and equipment:
Oil and gas properties, utilizing the full-cost method of accounting 385,966 371,975
Unproven properties ................................................ 44,517 41,017
Fee mineral properties, unproven ................................... 18,123 18,123
Other .............................................................. 2,409 2,670
Less accumulated depreciation, depletion and amortization .......... (279,481) (207,557)
--------- ---------
Net property and equipment ........................................ 171,534 226,228
--------- ---------
Investment in investees ............................................... 16,577 16,432
Other assets .......................................................... 3,031 14,686
--------- ---------
Total assets ...................................................... $ 202,482 $ 266,711
========= =========
Liabilities and Shareholders' Equity
Current liabilities:
Current portion of long-term debt .................................. $ 30,000 $ 20,000
Accounts payable ................................................... 4,995 2,165
Accrued liabilities ................................................ 5,765 4,819
Income tax payable ................................................. (201) (1,411)
--------- ---------
Total current liabilities ......................................... 40,559 25,573
--------- ---------
Deferred income taxes ................................................. 2,592 25,071
--------- ---------
Other liabilities ..................................................... 1,355 1,428
--------- ---------
Long-term debt ........................................................ 107,000 117,000
--------- ---------
Shareholders' equity:
Preferred stock, $1 par value; 690,000 shares issued and
outstanding, liquidation value of $34,500,000 .................... 690 690
Common stock, $1 par value; 5,471,782 shares issued and outstanding 5,472 5,465
Additional paid-in capital ......................................... 40,818 40,760
Retained earnings .................................................. 3,996 50,724
--------- ---------
Total shareholders' equity ........................................ 50,976 97,639
--------- ---------
Total liabilities and shareholders' equity ........................ $ 202,482 $ 266,711
========= =========
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
<PAGE>
<TABLE>
==============================================================================================
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
Howell Corporation and Subsidiaries
- ----------------------------------------------------------------------------------------------
<CAPTION>
Six Months Ended June 30,
1998 1997
---- ----
(In thousands)
<S> <C> <C>
OPERATING ACTIVITIES:
Net (loss) earnings from continuing operations ..................... $(45,022) $ 1,583
Adjustments for non-cash items:
Depreciation, depletion and amortization ........................ 72,184 4,524
Deferred income taxes ........................................... (22,479) --
Equity in earnings of investees - net of amortization ........... (224) (507)
-------- --------
Earnings from continuing operations plus non-cash operating items .. 4,459 5,600
Changes in components of working capital from operations:
(Increase) decrease in trade accounts receivable ................ (1,668) 1,949
Decrease in other current assets ................................ 760 870
Increase (decrease) in accounts payable ......................... 2,873 (1,443)
Increase (decrease) in accrued and other liabilities ............ 1,233 (2,003)
Increase (decrease) in income tax payable ....................... 1,283 (1,878)
-------- --------
Cash provided by continuing operations ............................. 8,940 3,095
Cash (utilized in) provided by discontinued operations ............. (535) 2,693
-------- --------
Cash provided by operating activities .............................. 8,405 5,788
-------- --------
INVESTING ACTIVITIES:
Dividends received from investees .................................. 79 204
Additions to property, plant and equipment ......................... (17,527) (5,188)
Refund of deposit for Amoco Acquisition ............................ 12,369 --
Other, net ......................................................... (677) (173)
-------- --------
Cash (utilized in) investing activities ............................ (5,756) (5,157)
-------- --------
FINANCING ACTIVITIES:
Long-term debt:
Repayments under revolving credit agreement, net - Bank One ..... -- (3,001)
Repayments to Department of Energy .............................. -- (682)
Cash dividends:
Common shareholders ........................................... (439) (399)
Preferred shareholders ........................................ (1,208) (1,208)
Exercise of stock options .......................................... 65 1,425
-------- --------
Cash (utilized in) financing activities ............................ (1,582) (3,865)
-------- --------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS ............... 1,067 (3,234)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD ..................... 56 3,253
======== ========
CASH AND CASH EQUIVALENTS, END OF PERIOD ........................... $ 1,123 $ 19
======== ========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION Net cash paid for:
Interest ........................................................... $ 3,656 $ 615
======== ========
Income taxes ....................................................... $ 65 $ 1,449
======== ========
</TABLE>
See accompanying Notes to Consolidated Financial Statements
<PAGE>
================================================================================
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Howell Corporation and Subsidiaries
June 30, 1998 and 1997
- --------------------------------------------------------------------------------
Note 1 - Basis of Financial Statement Preparation
The unaudited consolidated financial statements included herein have been
prepared by Howell Corporation (the "Company"), pursuant to the rules and
regulations of the Securities and Exchange Commission and in accordance with
generally accepted accounting principles. In the opinion of management, all
adjustments (all of which are normal and recurring) have been made which are
necessary for a fair statement of the results of operations for the three and
six months ended June 30, 1998 and 1997. The results of operations for the three
and six months ended June 30, 1998, are not necessarily indicative of results to
be expected for the full year. The accounting policies followed by the Company
are set forth in Note 1 to the consolidated financial statements in its Annual
Report on form 10-K for the year ended December 31, 1997. These consolidated
financial statements should be read in conjunction with the financial statements
and notes thereto included in the Company's latest Form 10-K.
Reclassifications
Certain reclassifications have been made to the 1997 financial presentation to
conform with the 1998 presentation.
Note 2 - Adoption of New Accounting Standards
Comprehensive Income
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130, "Reporting Comprehensive Income," ("SFAS
130"). SFAS No. 130 is effective for periods beginning after December 15, 1997.
SFAS 130 establishes standards for reporting and displaying comprehensive income
and its components. The purpose of reporting comprehensive income is to report a
measure of all changes in equity of an enterprise that result from recognized
transactions and other economic events of the period other than transactions
with owners in their capacity as owners. The Company has adopted this standard
and as of March 31, 1998, there are no adjustments ("other comprehensive
income") to net income in deriving comprehensive income.
In June 1997, the Financial Accounting Standards Board issued Statement No. 131,
"Disclosures about Segments of an Enterprise and Related Information," (SFAS No.
131). SFAS No. 131 establishes standards for the way that public business
enterprises report information about operating segments. SFAS No. 131 is
effective for periods beginning after December 15, 1997, but need not be applied
to interim financial statements in the initial year of application. Management
of the Company is evaluating what, if any, additional disclosures may be
required when this statement is first applied.
Note 3 - Financial Instruments and Hedging Activities
In order to mitigate the effects of future price fluctuations, the Company uses
a limited program of hedging its crude oil production. Crude oil futures and
options contracts are used as the hedging tools. Changes in the market value of
the futures transactions are deferred until the gain or loss is recognized on
the hedged transactions. The Company is currently engaged in a nine-month
hedging program ending December 31, 1998, and was also engaged in a hedging
program during the first two months of 1997.
In 1998, the Company purchased a put option and sold a call option covering
4,800 barrels of oil per day for a nine-month period ended December 31, 1998.
The strike prices are $16.00 per barrel for the put option and $19.25 per barrel
for the call option. There is no premium associated with these options. During
the three months ended June 30, 1998, the Company received $0.6 million as a
result of the options. Without the options the average price per barrel of oil
for the three and six months ended June 30, 1998, would have been reduced from
$11.35 to $10.67 and $11.85 to $11.51, respectively.
<PAGE>
In 1996, the Company purchased a put option and sold a call option covering
100,000 barrels of oil per month for a six-month period ended February 28, 1997.
The strike prices were $16.50 per barrel for the put option and $21.10 per
barrel for the call option. There was no premium associated with these options.
In 1997, the monthly average price of crude oil on the organized exchange
exceeded the strike price for the call option during January and February, the
final two months of the options. The payments required in 1997 under the call
option totaled $0.5 million and were recorded as a reduction of revenue.
Note 4 - Accumulated Depreciation, Depletion and Amortization
During the first quarter of 1998 a pre-tax write-down of the Company's oil and
gas properties of $66.1 million was required as a result of lower energy prices.
On an after-tax basis, the write-down amounted to $43.6 million. When compared
to 1997, the Company's pre write-down depletion rate for the three and six
months ended June 30, 1998, dropped from $5.33 to $2.33 per equivalent barrel
and from $5.35 to $2.79 per equivalent barrel, respectively.
Note 5 - Income Taxes
The effective tax rate from Continuing Operations was 43%, 34%, 39% and 37%,
respectively, for the three and six months ended June 30, 1998, and June 30,
1997. The rate variance is due to changes in state income tax estimates.
Note 6 - Acquisitions & Dispositions
On December 18, 1997, the Company purchased certain oil and gas producing
properties (the "Acquisition") in Wyoming from Amoco Production Company
("Amoco"), a subsidiary of Amoco Corporation, for approximately $115.4 million,
subject to purchase price adjustments. The effective date of the Acquisition was
December 1, 1997. The Acquisition was accounted for using the purchase method of
accounting, and accordingly, the purchase price has been preliminarily allocated
to the assets acquired based on estimated fair values at the date of
acquisition. The operating results of the assets acquired from Amoco have been
included in the Company's Statement of Operations since December 18, 1997. The
pro forma information shown below assumes that the Acquisition occurred at
January 1, 1997. Adjustments have been made to reflect changes in the Company's
results from revenues and direct operating expenses of the producing properties
acquired from Amoco, additional interest expense to reflect the acquisition,
depreciation, depletion and amortization based on fair values assigned to the
assets acquired and general and administrative expenses incurred from hiring
additional employees. The pro forma financial data are based on assumptions and
the actual recording of the Acquisition could differ. The unaudited pro forma
financial data are not necessarily indicative of financial results that would
have occurred had the Acquisition occurred on January 1, 1997, and should not be
viewed as indicative of operations in future periods.
<TABLE>
<CAPTION>
Pro Forma Pro Forma
Unaudited Unaudited
Three Months Ended Six Months Ended
June 30, 1997 June 30, 1997
------------------ ----------------
(In thousands, except per share data)
<S> <C> <C>
Revenues ........................................................... 20,650 43,150
Net earnings from continuing operations ............................ 3,496 7,334
Net earnings from continuing operations per common share - basic ... 0.58 1.22
Net income from continuing operations per common share - diluted ... 0.48 1.02
</TABLE>
<PAGE>
On July 31, 1997, the Company completed the previously announced sale and
disposition of Howell Hydrocarbons & Chemicals, Inc. which represented
substantially all of the assets of its research and reference fuels and custom
chemical manufacturing business. The results of the technical fuels and chemical
processing business have been classified as discontinued operations in the
accompanying consolidated financial statements. Discontinued Operations had a
loss of $0.1 million for the six months ended June 30, 1998, primarily due to
1997 franchise and state income taxes paid in 1998.
Note 7 - Litigation
On July 11, 1995, the Company received a demand letter from several working
interest owners in the North Frisco City Field and in the North Rome Field
indicating the Company had not paid according to the terms of a "call on
production." The Company was granted a call on a portion of this production but
has never exercised the call. Accordingly, the Company has filed petitions for
declaratory judgment to that effect in cases styled Howell Petroleum
Corporation, et al, vs. Shore Oil Company, et al, District Court of Harris
County, Texas; No. 95-037480 and Howell Petroleum Corporation, et al, vs.
Tenexco, Inc., et al, District Court of Harris County, Texas; No. 95-037970. The
defendants in this action have counterclaimed against the Company. These claims
are similar in nature to the Alabama and Mississippi royalty litigation. One of
the defendants, John Faulkinberry, has filed a counterclaim against the Company
seeking actual damages of $75,000 and punitive damages of $100,000,000.
Effective July 14, 1997, the Company settled with John Faulkinberry as well as
several other working interest owners. The terms of the settlement are
confidential, but the amounts paid in settlement were not material to the
Company's financial condition, results of operations or cash flows. The case (as
to the remaining interest owners) is currently set for trial on December 7,
1998.
Related to this matter, several royalty owners have filed lawsuits against the
Company in Alabama and Mississippi concerning pricing in the North Frisco City
Field. The lawsuits allege the Company violated its contracts with the
plaintiffs by not paying the plaintiffs ". . . the highest available price for
oil." Damages claimed by the plaintiffs include approximately $3.8 million and
are based on numerous damage theories including, but not limited to, allegations
of breach of contract and fraud. The complaints also seek unspecified punitive
damages in the Alabama lawsuits and $7 million in punitive damages in the
Mississippi lawsuit. The Company filed answers denying all charges. The Company
does not believe that the ultimate resolution of these matters will have a
materially adverse effect on the financial position, results of operations or
cash flows of the Company. On July 28, 1997, the Company settled the Mississippi
lawsuit. On March 30, 1998, a tentative settlement was reached with the Alabama
class representative; however, the settlement must be approved by the court. The
amounts to be paid in settlement are not material to the Company's financial
condition, results of operations or cash flows.
On December 3, 1997, Snyder Oil Corporation sued Amoco Production Company and
Howell Petroleum Corporation to enjoin the sale of the Beaver Creek Unit to
Howell Petroleum until such time as Amoco complies with Snyder's preferential
right to purchase the unit. Snyder Oil Corporation v. Amoco Production Company
and Howell Petroleum Corporation; District Court, Ninth Judicial District,
Fremont County, Wyoming; Civil Action No. 29861. The lawsuit is based upon two
theories: (i) the Beaver Creek Unit should not have been sold in a package with
other properties, and (ii) Amoco and Howell Petroleum inflated the value of the
unit in order to make it too costly for Snyder to buy the unit. On May 26, 1998,
the Company settled this case. In connection with the settlement, the Company
agreed to relinquish its contractual rights to purchase the Beaver Creek unit
and acquired, effective May 1, 1998, additional gas properties from Amoco for
$11.0 million.
There are various other lawsuits and claims against the Company, none of which,
in the opinion of management, will have a materially adverse effect on the
Company.
Note 8 - (Loss) Earnings per Share
Basic earnings per common share amounts are calculated using the average number
of common shares outstanding during each period. Diluted earnings per share
assumes conversion of dilutive convertible preferred stocks and exercise of all
stock options having exercise prices less than the average market price of the
common stock using the treasury stock method. The earnings per share data for
the three and six months ended June 30, 1997 has been restated following the
standards in Statement of Financial Accounting Standards No. 128, "Earnings Per
Share".
<PAGE>
The tables below present the reconciliation of the numerators and denominators
in calculating diluted earnings per share ("EPS") from continuing operations in
accordance with Statement of Financial Accounting Standards No. 128.
Three Months Ended June 30, 1998
Earnings
Increase in per
Increase in Number of Incremental
Income Shares Share
----------- ----------- -----------
Options.................................... - 24,371 -
Dividends on convertible preferred stock... $ 603,750 2,090,909 $0.29
<TABLE>
<CAPTION>
Computation of Diluted Earnings per Share
Net Loss
Available
from
Continuing Common
Operations Shares Per Share
----------- ----------- ----------
<S> <C> <C> <C> <C>
$(469,750) 5,471,782 $(0.09)
Common stock options....................... - 24,371
----------- ----------- ----------
$(469,750) 5,496,153 $(0.09) Antidilutive
Dividends on convertible preferred stock... 603,750 2,090,909
---------- ----------- ----------
$ 134,000 7,587,062 $ 0.02 Antidilutive
========== =========== ==========
</TABLE>
Note: Because diluted EPS from continuing operations increases from $(0.09) to
$0.02 when common stock options and convertible preferred shares are included in
the computation, the common stock options and convertible preferred shares are
antidilutive and are ignored in the computation of diluted EPS from continuing
operations. Therefore, diluted EPS from continuing operations is reported as
$(0.09).
Three Months Ended June 30, 1997
Earnings
Increase in per
Increase in Number of Incremental
Income Shares Share
----------- ----------- -----------
Options.................................... - 172,435 -
Dividends on convertible preferred stock... $ 603,750 2,090,909 $0.29
<TABLE>
<CAPTION>
Computation of Diluted Earnings per Share
Income
Available
from
Continuing Common
Operations Shares Per Share
----------- ----------- ----------
<S> <C> <C> <C> <C>
$ 35,250 5,020,372 $0.01
Common stock options....................... - 172,435
----------- ----------- ----------
$ 35,250 5,192,807 $0.01 Dilutive
Dividends on convertible preferred stock... 603,750 2,090,909
----------- ----------- ----------
$ 639,000 7,283,716 $0.09 Antidilutive
=========== =========== ==========
</TABLE>
Note: Because diluted EPS from continuing operations increases from $0.01 to
$0.09 when convertible preferred shares are included in the computation, the
convertible preferred shares are antidilutive and are ignored in the computation
of diluted EPS from continuing operations. Therefore, diluted EPS from
continuing operations is reported as $0.01.
<PAGE>
<TABLE>
<CAPTION>
Six Months Ended June 30, 1998
Earnings
Increase in per
Increase in Number of Incremental
Income Shares Share
----------- ----------- -----------
<S> <C> <C> <C>
Options.................................... - 84,641 -
Dividends on convertible preferred stock... $1,207,500 2,090,909 $0.58
</TABLE>
<TABLE>
<CAPTION>
Computation of Diluted Earnings per Share
Net Loss
Available
from
Continuing Common
Operations Shares Per Share
----------- ----------- ---------
<S> <C> <C> <C> <C>
$(46,229,500) 5,468,232 $(8.45)
Common stock options....................... - 84,641
------------ --------- --------
$(46,229,500) 5,552,873 $(8.33) Antidilutive
Dividends on convertible preferred stock... 1,207,500 2,090,909
============ ========= ========
$(45,022,000) 7,643,782 $(5.89) Antidilutive
============ ========= ========
</TABLE>
Note: Because diluted EPS from continuing operations increases from $(8.45) to
$(8.33) when common stock options are included in the computation and because
diluted EPS increases from $(8.33) to $(5.89) when convertible preferred shares
are included in the computation, both common stock options and convertible
preferred shares are antidilutive and are ignored in the computation of diluted
EPS from continuing operations. Therefore, diluted EPS from continuing
operations is reported as $(8.45).
<TABLE>
<CAPTION>
Six Months Ended June 30, 1997
Earnings
Increase in per
Increase in Number of Incremental
Income Shares Share
----------- ----------- -----------
<S> <C> <C> <C>
Options.................................... - 131,319 -
Dividends on convertible preferred stock... $1,207,500 2,090,909 $0.58
</TABLE>
<TABLE>
<CAPTION>
Computation of Diluted Earnings per Share
Income
Available
from
Continuing Common
Operations Shares Per Share
----------- ----------- ---------
<S> <C> <C> <C> <C>
$ 375,500 5,002,605 $0.08
Common stock options....................... - 131,319
----------- ----------- ---------
$ 375,500 $5,133,924 $0.07 Dilutive
Dividends on convertible preferred stock... 1,207,500 2,090,909
----------- ----------- ---------
$1,583,000 7,224,833 $0.22 Antidilutive
=========== =========== =========
</TABLE>
Note: Because diluted EPS from continuing operations increases from $0.07 to
$0.22 when convertible preferred shares are included in the computation, the
convertible preferred shares are antidilutive and are ignored in the computation
of diluted EPS from continuing operations. Therefore, diluted EPS from
continuing operations is reported as $0.07.
<PAGE>
PART I. FINANCIAL INFORMATION
(ITEM 2)
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following is a discussion of the Company's financial condition, results of
operations, capital resources and liquidity. This discussion and analysis should
be read in conjunction with the Consolidated Financial Statements of the Company
and the notes thereto. Management's review may include certain forward-looking
statements reflecting the Company's expectations in the near future; however,
many factors which may affect the actual results, especially commodity prices
and changing regulations, are difficult to predict. Accordingly, there is no
assurance that the Company's expectations will be realized.
RESULTS OF CONTINUING OPERATIONS
The Company's principal business segment is oil and gas production. Results of
continuing operations for the three and six months ended June 30, 1998 and 1997,
are discussed below.
Oil and Gas Production
Three Months Ended Six Months Ended
June 30, June 30,
1998 1997 1998 1997
---- ---- ---- ----
Revenues (in thousands):
Sales of oil and natural gas........... $11,621 $6,366 $ 25,062 $13,885
Sales of LaBarge other products........ 291 415 782 846
Gas marketing.......................... 265 720 485 1,731
Minerals leasing and other............. 90 403 205 509
------- ------ -------- -------
Total revenues.................... $12,267 $7,904 $ 26,534 $16,971
======= ====== ======== =======
Operating profit(loss)(in thousands)... $ 3,006 $1,431 $(62,822) $2,964
======= ====== ======== =======
Operating information:
Average net daily production:
Oil and NGL (Bbls)................. 9,368 3,175 9,792 3,143
Natural gas (Mcf).................. 11,850 8,755 12,542 8,636
Average sales prices:
Oil and NGL (per Bbl).............. $ 11.18 $17.15 $ 11.70 $17.88
Natural gas (per Mcf).............. $ 1.94 $ 1.76 $ 1.91 $ 2.37
Revenues
Revenues for three and six months ended June 30, 1998, increased $4.4 million
and $9.6 million, respectively, when compared to 1997 primarily due to the
additional properties purchased from Amoco. As a result of the new properties
the Company's net daily production of oil and natural gas liquids increased 195%
and 212%, respectively, when compared to the three and six months ended June 30,
1997. Also contributing to the increase in revenues for the three months ended
June 30, 1998, was a 10% increase in the average realized natural gas price.
Increased revenues were partially offset by lower energy prices. The Company's
average realized oil price declined 35% for the three and six months ended June
30, 1998, and the Company's average realized natural gas price declined 19% for
the six months ended June 30, 1998. Revenues for the six months ended June 30,
1998, were also impacted by a decrease in production from the Company's Main
Pass 64/65 property due to storm-related downtime.
In order to mitigate the effects of future price fluctuations, the Company
periodically enters into a limited program of hedging its crude oil production.
Crude oil futures and options contracts are used as the hedging tools. Changes
in the market value of the futures transactions are deferred until the gain or
loss is recognized on the hedged transactions.
<PAGE>
The Company has entered into a hedging program for the period April through
December 1998. The Company purchased a put option and sold a call option
covering 4,800 barrels of oil per day for a nine-month period ended December 31,
1998. The strike prices are $16.00 per barrel for the put option and $19.25 per
barrel for the call option. There is no premium associated with these options.
During the three months ended June 30, 1998, the Company received $0.6 million,
which was recorded as revenue, as a result of the options. Without the options
the average realized oil price for the three and six months ended June 30, 1998,
would have been reduced from $11.35 to $10.67 and from $11.85 to $11.51,
respectively.
The Company's average realized sales price of its crude oil production during
the six months ended June 30, 1997 was reduced by the effects of the put and
call options the Company had in place. The strike price of the call options was
exceeded for the first two months of 1997, resulting in a reduction of revenues
of $0.5 million. Without the effects of the options, the average sales price of
the Company's crude oil production would have been $19.09 instead of $18.12.
Operating Profit
During the first six months of 1998, operating profit decreased $65.8 million
when compared to the first six months of 1997. The decrease was primarily due to
a pre-tax non-cash write-down of $66.1 million of the Company's oil and gas
properties. On an after-tax basis, the write-down amounted to $43.6 million, or
a loss of $7.98 per common share. The operating profit before the write-down for
the six months was $3.3 million, an increase of $0.3 million when compared to
the six months ended June 30, 1997. Offsetting revenue was an increase in lease
operating expenses and pre write-down depletion expenses primarily due to the
additional production activity from the Wyoming properties.
Operating profit for the three months ended June 30, 1998, increased $1.6
million from the same period in 1997. The increase was primarily due to the
additional properties acquired from Amoco in December 1997. Also, as a result of
the write-down in the first quarter 1998, the Company's depletion rate dropped
from $5.33 to $2.33 per equivalent barrel for the three months ended June 30,
1998, when compared to the same period in 1997.
Also contributing to the decrease in operating profit was an increase in general
and administrative expenses as a result of the additional transition expenses
associated with assuming operations of the new Wyoming properties. General and
administrative expenses increased $0.7 million when comparing the first six
months of 1998 to 1997.
Crude Oil Marketing
The Company retains a direct and indirect interest in Genesis Crude Oil, L.P.,
Genesis Energy, L.P., and Genesis Energy, L.L.C. (collectively referred to
hereinafter as "Genesis"). As a result of the Company's interest, the Company
recognized net earnings in Genesis of $0.2 million during the first six months
of 1998. This represents a decrease of $0.3 million from the first six months of
1997.
Net Interest Expense
Net interest expense for the three and six months ended June 30, 1998, increased
$2.3 million and $4.6 million, respectively, above the 1997 level as a result of
increased debt of $114.2 million. The reason for this increase was the purchase
of the Wyoming properties from Amoco on December 17, 1997.
Provision for Income Taxes
The Company's effective tax rate for the three months ended June 30, 1998 and
1997 was 43% and 39%, respectively. For the six months ended June 30, 1998 and
1997, the effective tax rate was 34% and 37%, respectively. The rates reflect
the statutory federal rate and state income taxes less the effect of statutory
depletion deductions in excess of cost basis.
<PAGE>
RESULTS FROM DISCONTINUED OPERATIONS
Technical Fuels and Chemical Processing
On July 31, 1997, the Company completed the previously announced sale and
disposition of Howell Hydrocarbons & Chemicals, Inc. which represented
substantially all of the assets of its research and reference fuels and custom
chemical manufacturing business.
The results of the technical fuels and chemical processing business have been
classified as discontinued operations in the accompanying consolidated financial
statements. Discontinued operations incurred a net loss of $0.1 million for the
three and six months ended June 30, 1998, primarily as a result of 1997
franchise and state income taxes paid during 1998. Net earnings from
discontinued operations were $0.5 million for the six months ended June 30,
1997. Discontinued operations also includes the allocation of interest expense
(based on a ratio of net assets of discontinued operations to total consolidated
net assets). Interest expense allocated for the three and six months ended June
30, 1997 was $60,000 and $112,000, respectively.
LIQUIDITY AND CAPITAL RESOURCES
Cash provided by continuing operations for the six months ended June 30, 1998,
was $8.9 million. Of this amount, $4.5 million was provided by a reduction in
working capital. This compares to $3.1 million of cash provided by continuing
operations in the comparable 1997 period. During the 1997 period, working
capital changes resulted in cash utilization of $2.5 million. The Company's debt
did not increase during the first six months of 1998 compared to a reduction in
debt of $3.0 million during the first six months of 1997. Capital expenditures
for the six months ended June 30, 1998, were $17.5 million compared to $5.2
million for the 1997 period. Of the $17.5 million, $11.0 million was associated
with the purchase of certain Amoco properties in place of the Beaver Creek Unit
involved in the Snyder and Amoco litigation. See Note 7 of Notes to the
Consolidated Financial Statements.
The Company's total debt at June 30, 1998, was $137.0 million, comprised of
$107.0 million in long-term and $30.0 million in current maturities due May 30,
1999. Various recapitalization alternatives are under review. The Company's
working capital deficit of $29.2 million at June 30, 1998, included this $30.0
million of current maturities. At June 30, 1998, the Company had $13.0 million
in unused borrowing capacity under the terms of its Credit Facility.
As a result of the impairment of the Company's oil and gas properties in the
first quarter of 1998 due to decreases in the price of oil, the Company's
Tangible Net Worth was less than the minimum required under the terms of the
Credit Facility. That impairment would have been an Event of Default, but for
the fact that Bank of Montreal waived the requirement. The Company successfully
negotiated revisions to its Credit Facility with Bank of Montreal as noted in
the 8-K filed June 12, 1998.
Budgeted capital expenditures have been reduced to compensate for the decreased
cash flow caused by reduced oil and gas prices. The Company anticipates spending
$3.0 million to $6.0 million for the remainder of 1998.
During the first six months of 1998, the Company paid common dividends of $0.4
million and preferred dividends of $1.2 million.
Year 2000 Date Conversion
The Company has a plan in place that addresses the 2000 year date conversion
matters. Based on preliminary estimates, the cost of implementing this plan is
not expected to have a material adverse impact on the Company's financial
position, results of operations or cash flows in future periods. However, if the
Company, its customers or vendors are unable to resolve these 2000 year date
conversion issues in a timely manner, it could result in a material financial
risk. Accordingly, the Company plans to devote the necessary resources to
resolve all significant year 2000 issues in a timely manner.
<PAGE>
PART II. OTHER INFORMATION
Item 4. Results of Votes of Security Holders.
The Annual Meeting of the Shareholders of the Company was held on April 29,
1998, for the following purposes:
To elect three members of the Board of Directors to serve a three-year term as
Class I Directors.
(a) The results of the voting for each of the nominees for director were
as follows:
Shares Shares Broker
For Withheld Non-Voters
------ -------- ----------
Paul N. Howell 4,937,459 6,220 -
Richard K. Hebert 4,939,979 3,700 -
Donald W. Clayton 4,939,979 3,700 -
A simple majority of the shares of common stock represented at the
meeting was required for each nominee to be elected. Therefore, all
nominees for director were elected.
(b) To ratify the appointment of Deloitte & Touche LLP as independent
auditors for the Company for the fiscal year ending December 31,
1998.
The results of the voting on this matter were as follows:
Shares For 4,937,274
Shares Against 5,200
Shares Abstaining 1,205
Broker Non-Votes -
A simple majority of the common shares represented was required for
ratification; therefore, the appointment was ratified.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits - none.
(b) Reports on Form 8-K
A report on Form 8-K was filed on January 2, 1998, announcing:
1) the acquisition of a group of producing oil and natural gas
properties located in Wyoming, Montana, Colorado and North
Dakota from Amoco Production Company for $115.4 million in cash,
2) the new credit agreement dated December 17, 1997 between Howell
Petroleum Corporation and Bank of Montreal, and
A report on Form 8-K/A was filed on March 3, 1998, disclosing the
financial statements and exhibits associated with the January 2,
1998, Form 8-K filing.
A report on Form 8-K/A was filed on June 5, 1998, announcing the
settlement of certain litigation brought by Snyder Oil Corporation
against the Company and Amoco Production Company.
A report on Form 8-K was filed on June 12, 1998, announcing the
amendment of the credit agreement between Howell Petroleum
Corporation and Bank of Montreal.
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Howell Corporation
------------------
(Registrant)
Date: August 14, 1998 /s/ J. Richard Lisenby
--------------------------------------------
J. Richard Lisenby
Vice President & Chief Financial Officer
(Principal Financial and Accounting Officer)
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
The financial data schedule contains summary financial information
extracted from the form 10-Q of Howell Corporation for the six months
ended June 30, 1998, and is qualified in its entirety by reference to
such financial statements.
</LEGEND>
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<PERIOD-END> Jun-30-1998
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