UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
-----------------------
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number 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 October 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 nine months ended September 30,1998 and 1997(unaudited) 3
Consolidated Balance Sheets --
September 30, 1998 (unaudited) and December 31, 1997.......... 4
Consolidated Statements of Cash Flows --
Nine months ended September 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.............................. 15
<PAGE>
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION
(ITEM 1)
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
Howell Corporation and Subsidiaries
Three Months Ended Nine Months Ended
September 30, September 30,
1998 1997 1998 1997
---- ---- ---- ----
(In thousands, except
per share amounts)
<S> <C> <C> <C> <C>
Revenues ................................................... $ 12,525 $ 7,522 $ 39,059 $ 24,493
-------- -------- -------- --------
Cost and expenses:
Lease operating expenses ................................ 6,386 3,566 20,437 10,585
Depreciation, depletion, and amortization ............... 2,842 2,250 8,908 6,774
Ceiling test write-down ................................. -- -- 66,118 --
General and administrative expenses ..................... 91 1,192 3,212 3,656
-------- -------- -------- --------
9,319 7,008 98,675 21,015
-------- -------- -------- --------
Other income (expense):
Interest expense ........................................ (2,772) (210) (8,206) (1,064)
Interest income ......................................... 22 24 69 75
Net earnings of investees ............................... 227 229 451 736
Other-net ............................................... (78) 301 (235) 128
-------- -------- -------- --------
(2,601) 344 (7,921) (125)
-------- -------- -------- --------
Earnings (loss) before income taxes ........................ 605 858 (67,537) 3,353
Income tax provision (benefit) ............................. (60) 150 (23,180) 1,062
-------- -------- -------- --------
Net earnings (loss) from continuing operations ............. 665 708 (44,357) 2,291
Discontinued operations:
Net earnings from Howell Hydrocarbons
(less applicable income taxes of $235,$196,$220
and $505, respectively) ................................ 455 299 396 757
-------- -------- -------- --------
Net earnings (loss) ........................................ 1,120 1,007 (43,961) 3,048
Less: Preferred stock dividends .......................... (604) (604) (1,811) (1,811)
-------- -------- -------- --------
Net (loss) earnings applicable to common shares ............ $ 516 $ 403 $(45,772) $ 1,237
======== ======== ======== ========
Basic (loss) earnings per common share:
Continuing operations $ 0.01 $ 0.02 $ (8.44) $ 0.10
Discontinued operations 0.08 0.06 0.07 0.15
-------- -------- -------- --------
Net (loss) earnings per common share(basic) ............. $ 0.09 $ 0.08 $ (8.37) $ 0.25
======== ======== ======== ========
Weighted average shares outstanding(basic) ................. 5,472 5,096 5,469 5,034
======== ======== ======== ========
Diluted (loss) earnings per common share:
Continuing operations.................................... $ 0.01 $ 0.02 $ (8.44) $ 0.09
Discontinued operations ................................. 0.08 0.06 0.07 0.15
-------- -------- -------- --------
Net (loss) earnings per common share(diluted) ........... $ 0.09 $ 0.08 $ (8.37) $ 0.24
======== ======== ======== ========
Weighted average shares outstanding (diluted) .............. 5,472 5,393 5,469 5,220
======== ======== ======== ========
Cash dividends per common share ............................ $ 0.04 $ 0.04 $ 0.12 $ 0.12
======== ======== ======== ========
See accompanying Notes to Consolidated Financial Statements
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED BALANCE SHEETS
Howell Corporation and Subsidiaries
September 30, December 31,
1998 1997
---- ----
(Unaudited)
(In thousands, except share data)
Assets
<S> <C> <C>
Current assets:
Cash and cash equivalents ........................................... $ 232 $ 56
Trade accounts receivable, less allowance for doubtful accounts of
$153 in 1998 and $141 in 1997 ................................... 12,035 5,520
Accounts receivable from investees .................................. 2,300 2,300
Other current assets ................................................ 829 1,489
--------- ---------
Total current assets ............................................... 15,396 9,365
--------- ---------
Property, plant and equipment:
Oil and gas properties, utilizing the full-cost method of accounting 386,959 371,975
Unproven properties.................................................. 44,517 41,017
Fee mineral properties, unproven .................................... 18,123 18,123
Other ............................................................... 2,553 2,670
Less accumulated depreciation, depletion and amortization ........... (282,320) (207,557)
--------- ---------
Net property and equipment ....................................... 169,832 226,228
--------- ---------
Investment in investees................................................. 16,764 16,432
Other assets ........................................................... 2,996 14,686
--------- ---------
Total assets ....................................................... $ 204,988 $ 266,711
========= =========
Liabilities and Shareholders' Equity
Current liabilities:
Current portion of long-term debt ................................... $ 30,000 $ 20,000
Accounts payable .................................................... 6,998 2,165
Accrued liabilities ................................................. 5,349 4,819
Income tax payable .................................................. (1,104) (1,411)
--------- ---------
Total current liabilities .......................................... 41,243 25,573
--------- ---------
Deferred income taxes .................................................. 3,668 25,071
--------- ---------
Other liabilities ...................................................... 1,304 1,428
--------- ---------
Long-term debt ......................................................... 107,500 117,000
--------- ---------
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
in 1998; 5,464,642 issued and outstanding in 1997.................. 5,472 5,465
Additional paid-in capital .......................................... 40,818 40,760
Retained earnings ................................................... 4,293 50,724
--------- ---------
Total shareholders' equity ......................................... 51,273 97,639
========= =========
Total liabilities and shareholders' equity ......................... $ 204,988 $ 266,711
========= =========
See accompanying Notes to Consolidated Financial Statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
Howell Corporation and Subsidiaries
Nine Months Ended September 30,
1998 1997
---- ----
(In thousands)
OPERATING ACTIVITIES:
<S> <C> <C>
Net (loss) earnings from continuing operations.......... $(44,357) $ 2,291
Adjustments for non-cash items:
Depreciation, depletion and amortization............. 75,026 6,773
Deferred income taxes................................ (21,403) (1,900)
Equity in earnings of investees - net of amortization (451) (736)
Gain on sale of assets............................... (2) (139)
--------- ---------
Earnings from continuing operations plus non-cash 8,813 6,289
operating items.........................................
Changes in components of working capital from operations:
(Increase) decrease in trade accounts receivable..... (6,515) 1,454
Decrease in other current assets..................... 660 619
Increase (decrease) in accounts payable.............. 4,874 (1,188)
Increase (decrease) in accrued and other liabilities. 918 (3,398)
Increase (decrease) in income tax payable............ 145 (957)
--------- ---------
Cash provided by continuing operations.................. 8,895 2,819
Cash provided by discontinued operations................ 5 1,250
--------- ---------
Cash provided by operating activities................... 8,900 4,069
--------- ---------
INVESTING ACTIVITIES:
Dividends received from investees....................... 119 298
Proceeds from the disposition of property............... 39 20,049
Additions to property, plant and equipment.............. (18,667) (7,515)
Refund of deposit for Amoco Acquisition................. 12,369 -
Other, net.............................................. (679) 33
--------- ---------
Cash (utilized in) investing activities................. (6,819) 12,865
--------- ---------
FINANCING ACTIVITIES:
Long-term debt:
Borrowings under revolving credit agreement,net-Bank of . 500 -
Repayments under revolving credit agreement,net- Bank One.. - (17,081)
Repayments to Department of Energy..................... - (2,418)
Cash dividends:
Common shareholders................................ (659) (603)
Preferred shareholders............................. (1,811) (1,811)
Exercise of stock options............................... 65 1,774
--------- ---------
Cash utilized in financing activities................... (1,905) (20,139)
--------- ---------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS.... 176 (3,205)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD.......... 56 3,257
--------- ---------
CASH AND CASH EQUIVALENTS, END OF PERIOD................ $ 232 $ 52
========= =========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION Net cash paid for:
Interest................................................ $ 6,976 $ 815
========= =========
Income taxes............................................ $ 66 $ 4,683
========= =========
See accompanying Notes to Consolidated Financial Statements.
</TABLE>
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Howell Corporation and Subsidiaries
September 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
nine months ended September 30, 1998 and 1997. The results of operations for the
three and nine months ended September 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 - New Accounting Standards
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 September 30, 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.
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities" ("SFAS 133"). SFAS 133 establishes accounting and
reporting standards for derivative instruments and hedging activities that
require an entity to recognize all derivatives as an asset or liability measured
at its fair value. Depending on the intended use of the derivative, changes in
its fair value will be reported in the period of change as either a component of
earnings or a component of other comprehensive income. SFAS 133 is effective for
all fiscal quarters of fiscal years beginning after June 15, 1999. Earlier
application of SFAS 133 is encouraged, but not prior to the beginning of any
fiscal quarter that begins after issuance of the Statement. Retroactive
application to periods prior to adoption is not allowed. The Company has not
qualified the impact of adoption on its financial statements or the date it
intends to adopt.
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 January 8, 1999, 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 January 8, 1999. 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 and nine months ended September 30, 1998, the Company received $0.8
million and $1.4 million, respectively, as a result of the options. These
amounts were recorded as additional revenues. Without the options the average
price per barrel of oil for the three and nine months ended September 30, 1998,
would have been reduced from $10.92 to $9.95 and $11.53 to $10.98, respectively.
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 nine
months ended September 30, 1998, dropped from $5.33 to $2.64 per equivalent
barrel and from $5.35 to $2.74 per equivalent barrel, respectively.
Note 5 - Income Taxes
The effective tax rate from Continuing Operations was 34% and 32% for the nine
months ended September 30, 1998 and 1997, respectively.
Note 6 - Acquisitions & Dispositions
On December 17, 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 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 on the following page 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 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 Nine Months Ended
September 30, 1997 September 30, 1997
------------------- ------------------
(In thousands, except per share data)
<S> <C> <C>
Revenues ....................................................... $ 21,641 $ 64,791
Net earnings from continuing operations ........................ 3,534 10,868
Net earnings from continuing operations per common share - basic 0.58 1.80
Net income from continuing operations per common share - diluted 0.47 1.49
</TABLE>
On July 31, 1997, the Company completed the previously announced sale and
disposition of Howell Hydrocarbons & Chemicals, Inc. ("HHCI") 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
gain of $0.4 million for the nine months ended September 30, 1998, primarily due
to payments received from the purchaser of the assets of Howell Hydrocarbons &
Chemicals, Inc. (HHCI), the amount of which was determined in accordance with a
formula contained in the sales agreement based on the post-closing earnings of
the HHCI facility before interest, income taxes, depreciation and amortization.
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. 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.
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 - Earnings (Loss) 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 nine months ended September 30, 1997 have been restated following
the standards in Statement of Financial Accounting Standards No. 128, "Earnings
Per Share".
The following tables 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.
<TABLE>
<CAPTION>
Three Months Ended September 30, 1998
<S> <C> <C> <C>
Earnings
Increase per
Increase in Number Incremental
in Income of Shares Share
----------- ----------- ----------
Options.................................... - 543 -
Dividends on convertible preferred stock... $ 603,750 2,090,909 $ 0.29
</TABLE>
<TABLE>
<CAPTION>
Computation of Diluted Earnings per Share
<S> <C> <C> <C> <C>
Income
Available
from
Continuing Common
Operations Shares Per Share
----------- ----------- ----------
$ 61,250 5,471,782 $ 0.01
Common stock options....................... - 543
----------- ---------- ----------
$ 61,250 5,472,325 $ 0.01 Dilutive
Dividends on convertible preferred stock... 603,750 2,090,909
----------- ----------- ----------
$ 665,000 7,563,234 $ 0.09 Antidilutive
=========== =========== ==========
</TABLE>
Note: Because diluted EPS increases from $0.01 to $0.09 when convertible
preferred shares are included in the computation, those convertible preferred
shares are antidilutive and are ignored in the computation of diluted EPS.
Therefore, diluted EPS is reported as $0.01.
<TABLE>
<CAPTION>
Three Months Ended September 30, 1997
<S> <C> <C> <C>
Earnings
Increase per
Increase in Number Incremental
in Income of Shares Share
----------- ----------- ----------
Options..................................... - 297,439 -
Dividends on convertible preferred stock.... $ 603,750 2,090,909 $ 0.29
</TABLE>
<TABLE>
<CAPTION>
Computation of Diluted Earnings per Share
<S> <C> <C> <C> <C>
Income
Available
from
Continuing Common
Operations Shares Per Share
----------- ----------- ----------
$ 104,250 5,095,818 $ 0.02
Common stock options........................ - 297,439
----------- ----------- ----------
$ 104,250 5,393,257 $ 0.02 Dilutive
Dividends on convertible preferred stock.... 603,750 2,090,909
----------- ----------- ----------
$ 708,000 7,484,166 $ 0.09 Antidilutive
=========== =========== ==========
</TABLE>
Note: Because diluted EPS increases from $0.02 to $0.09 when convertible
preferred shares are included in the computation, those convertible preferred
shares are antidilutive and are ignored in the computation of diluted EPS.
Therefore, diluted EPS is reported as $0.02.
<PAGE>
<TABLE>
<CAPTION>
Nine Months Ended September 30, 1998
<S> <C> <C> <C>
Earnings
Increase per
Increase in Number Incremental
in Income of Shares Share
----------- ----------- ----------
Options............................................... - 56,608 -
Dividends on convertible preferred stock.............. $1,811,250 2,090,909 $ 0.87
</TABLE>
<TABLE>
<CAPTION>
Computation of Diluted Earnings per Share
<S> <C> <C> <C> <C>
Net Loss
Available
from
Continuing Common
Operations Shares Per Share
----------- ----------- ----------
$(46,168,250) 5,469,428 $ (8.44)
Common stock options................................. - 56,608
----------- ----------- ----------
$(46,168,250) 5,526,036 $ (8.35) Antidilutive
Dividends on convertible preferred stock............. 1,811,250 2,090,909
------------ ----------- ----------
$(44,357,000) 7,616,945 $ (5.82) Antidilutive
============ =========== ==========
</TABLE>
Note: Because diluted EPS increases from ($8.44) to ($8.35) when common stock
options are included in the computation and because diluted EPS increases from
($8.25) to ($5.82) when convertible preferred shares are included in the
computation, both common stock options and convertible preferred shares are
ignored in the computation of diluted EPS. Therefore, diluted EPS from
continuing operations is reported as ($8.44).
<TABLE>
<CAPTION>
Nine Months Ended September 30, 1997
<S> <C> <C> <C>
Earnings
Increase per
Increase in Number Incremental
in Income of Shares Share
----------- ----------- ----------
Options................................................ - 186,692 -
Dividends on convertible preferred stock............... $1,811,250 2,090,909 $ 0.87
</TABLE>
<TABLE>
<CAPTION>
Computation of Diluted Earnings per Share
<S> <C> <C> <C> <C>
Income
Available
from
Continuing Common
Operations Shares Per Share
----------- ----------- ----------
$ 479,750 5,033,610 $ 0.10
Common stock options.................................... - 186,692
----------- ----------- ---------
$ 479,750 5,220,302 $ 0.09 Dilutive
Dividends on convertible preferred stock 1,811,250 2,090,909
----------- ----------- ---------
$2,291,000 7,311,211 $ 0.31 Antidilutive
=========== =========== ==========
</TABLE>
Note: Because diluted EPS increases from $0.09 to $0.31 when convertible
preferred shares are included in the computation, those convertible preferred
shares are antidilutive and are ignored in the computation of diluted EPS.
Therefore, diluted EPS is reported as $0.09.
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.
RESULTS OF CONTINUING OPERATIONS
The Company's principal business segment is oil and gas production. Results of
continuing operations for the three and nine months ended September 30, 1998 and
1997, are discussed below.
Oil and Gas Production
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues (in thousands):
Sales of oil and natural gas........... $11,689 $6,268 $36,751 $20,142
Sales of LaBarge other products........ 468 413 1,250 1,258
Gas marketing.......................... 198 560 683 2,291
Minerals leasing and other............. 170 281 375 802
-------- ------- --------- --------
Total revenues.................... $12,525 $7,522 $ 39,059 $24,493
======== ======= ========= ========
Operating profit (loss) (in thousands). $ 3,206 $ 514 $(59,616) $ 3,478
======== ======= ========= ========
Operating information:
Average net daily production:
Oil and NGL (Bbls)................. 9,467 3,039 9,684 3,108
Natural gas (Mcf).................. 12,626 8,894 12,571 8,723
Average sales prices:
Oil and NGL (per Bbl).............. $ 10.98 $16.71 $ 11.46 $ 17.50
Natural gas (per Mcf).............. $ 1.83 $ 1.95 $ 1.88 $ 2.22
</TABLE>
Revenues
Revenues for three and nine months ended September 30, 1998, increased $5.0
million and $14.6 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 212% when compared to the three and nine months ended September 30,
1997. Also contributing to the increase in revenues for the three and nine
months ended September 30, 1998, was an increase in the daily production of
natural gas of 42% and 44%, respectively.
Increased revenues due to these volume increases were partially offset by lower
energy prices. The Company's average realized oil price declined 36% and 35% for
the three and nine months ended September 30, 1998, and the Company's average
realized natural gas price declined 6% and 15% for the three and nine months
ended September 30, 1998, respectively. Revenues for the nine months ended
September 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.
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 January 9,
1999. 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 and nine months ended September 30, 1998, the Company received
$0.8 million, and $1.4 million respectively, which was recorded as revenue, as a
result of the options. Without the options the average realized oil price for
the three and nine months ended September 30, 1998, would have been reduced from
$10.92 to $9.95 and from $11.53 to $10.98, respectively.
The Company's average realized sales price of its crude oil production during
the nine months ended September 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 $18.44 instead of
$17.79.
Operating Profit
During the first nine months of 1998, operating profit decreased $63.1 million
when compared to the first nine 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 $7.97 per common share. The operating profit before the write-down for
the nine months was $6.5 million, an increase of $3.0 million when compared to
the nine months ended September 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 September 30, 1998, increased $2.7
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 $2.64 per equivalent barrel for the three months ended September
30, 1998, when compared to the same period in 1997.
Also contributing to the increase in operating profit for the three months ended
September 30, 1998, was a decrease in general and administrative expenses as a
result of the additional transition expense adjustments associated with assuming
operations of the new Wyoming properties. General and administrative expenses
decreased $1.1 million when comparing the third quarter 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 $0.5 million during the first nine months
of 1998. This represents a decrease of $0.3 million from the first nine months
of 1997.
Net Interest Expense
Net interest expense for the three and nine months ended September 30, 1998,
increased $2.5 million and $7.1 million, respectively, above the 1997 level as a
result of increased debt of $134 million. The primary 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 September 30, 1998
and 1997 was (10%) and 17%, respectively. An adjustment to the state income tax
provision resulted in a tax benefit for 1998. The percentage depletion deduction
resulted in a lower 1997 effective rate. For the nine months ended September 30,
1998 and 1997, the effective tax rate was 34% and 32%, respectively.
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. ("HHCI") 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 resulted in net earnings of $0.5 million and
$0.4 million, respectively, for the three and nine months ended September 30,
1998, due to payments received from the purchaser of the assets of HHCI, the
amount of which was determined in accordance with a formula contained in the
sales agreement based on the post-closing earnings of the HHCI facility before
interest, income taxes, depreciation and amortization. Net earnings from
discontinued operations were $0.8 million for the nine months ended September
30, 1997. Discontinued operations for 1997 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 nine months
ended September 30, 1997 was $112,000.
LIQUIDITY AND CAPITAL RESOURCES
Cash provided by continuing operations for the nine months ended September 30,
1998, was $8.9 million. This compares to $2.8 million of cash provided by
continuing operations in the comparable 1997 period. During the 1997 period,
working capital changes resulted in cash utilization of $3.5 million. The
Company's debt increased $0.5 million during the first nine months of 1998
compared to a reduction in debt of $19.5 million during the first nine months of
1997. Capital expenditures for the nine months ended September 30, 1998, were
$18.7 million compared to $7.6 million for the 1997 period. Of the $18.7
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.
The Company's total debt at September 30, 1998, was $137.5 million, comprised of
$107.5 million in long-term and $30.0 million in current maturities due May 30,
1999. The Company's working capital deficit of $25.8 million at September, 30,
1998, included this $30.0 million of current maturities. At September 30, 1998,
the Company had $12.5 million in unused borrowing capacity under the terms of
its Credit Facility. The Company is currently undergoing a borrowing base
redetermination. Various refinancing alternatives, including selected asset
sales, to reduce the current maturities are under review; however, there can be
no assurance that sufficient capital will be available to the Company on terms
it considers reasonable.
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 would have been 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 which addressed this issue as noted in the 8-K filed June 12, 1998. If
oil prices remain at their current depressed levels, the Company may again be
required to impair the value of its oil and gas properties. If this impairment
occurs, the Company may not be able to satisfy certain covenants contained in
the Credit Facility.
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 $5.0 million for the remainder of 1998.
During the first nine months of 1998, the Company paid common dividends of $0.7
million and preferred dividends of $1.8 million.
Year 2000 Date Conversion
The Company has a plan in place that addresses the year 2000 ("Y2K") conversion
issue. The first step in the plan is to evaluate all computer systems used in
its operations. This includes accounting and financial systems, field and
production systems, and other field or office devices that may not be Y2K
compliant. This is followed by a determination of what remedial action is
necessary and initiation of that remedy. The Company has begun corrective action
on major systems both in the office and in the field and anticipates completion
in early to mid 1999.
The next step is to determine the Y2K status of relevant outside suppliers and
vendors. While the Company cannot control the Y2K corrective action of third
parties, it is in the process of identifying and contacting its critical
suppliers and vendors. Based on their status, the Company will develop
contingency plans. These should be completed by mid 1999.
The Company's plan to correct its in-house systems involves installation of new
software and hardware. 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. Most
of the replacement systems, in addition to being Y2K compliant, have
significantly enhanced capabilities which will benefit operations in future
periods.
Management believes it has an effective program in place to respond to the Y2K
situation. However, it is not possible to anticipate all possible variables,
especially concerning third parties. Achieving Y2K compliance is subject to
risks and uncertainties, such as those referred to above. If the Company, its
customers or vendors are unable to resolve these Y2K date conversion issues in a
timely manner, it could result in a material financial risk.
Forward-looking Statements
Statements contained in this Report and other materials filed or to be filed by
the Company with the Securities and Exchange Commission (as well as information
included in oral or other written statements made or to be made by the Company
or its representatives) that are forward-looking in nature are intended to be
"forward-looking statements" within the meaning of Section 27A of the Securities
Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934,
as amended, relating to matters such as anticipated operating and financial
performance, business prospects, developments and results of the Company. Actual
performance, prospects, developments and results may differ materially from any
or all anticipated results due to economic conditions and other risks,
uncertainties and circumstances partly or totally outside the control of the
Company, including rates of inflation, oil and natural gas prices, uncertainty
of reserve estimates, rates and timing of future production of oil and gas,
exploratory and development activities, acquisition risks, and changes in the
level and timing of future costs and expenses related to drilling and operating
activities.
Words such as "anticipated", "expect", "estimate", "project", and similar
expressions are intended to identify forward-looking statements.
<PAGE>
PART II. OTHER INFORMATION
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.
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: November 13, 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 nine months
ended September 30, 1998, and is qualified in its entirety by reference
to such financial statements.
</LEGEND>
<MULTIPLIER> 1000
<S> <C>
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<FISCAL-YEAR-END> Dec-31-1998
<PERIOD-END> Sep-30-1998
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<INCOME-PRETAX> (67537)
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