<PAGE>
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1995
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _______________ to _______________
Commission file number 0-17162
---------------
KEY PRODUCTION COMPANY, INC.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 84-1089744
- --------------------------------------------------------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
One Norwest Center, 20th Floor
1700 Lincoln Street, Denver, Colorado 80203-4520
- --------------------------------------------------------------------------------
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code (303) 837-0779
---------------
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
------ ------
The number of shares of Key Production Company, Inc. common stock, $.25 par
value, outstanding as of September 30, 1995, is 9,178,659.
<PAGE>
PART I - FINANCIAL INFORMATION
------------------------------
ITEM 1 - FINANCIAL STATEMENTS
- -----------------------------
KEY PRODUCTION COMPANY, INC.
STATEMENT OF INCOME
(Unaudited)
<TABLE>
<CAPTION>
For the Quarter For the Nine Months
Ended September 30, Ended September 30,
-------------------- --------------------
(In thousands, except per share data) 1995 1994 1995 1994
-------- ---------- -------- ---------
<S> <C> <C> <C> <C>
REVENUES:
Oil and gas production revenues $4,747 $4,829 $14,168 $11,709
Other revenues 35 15 40 29
------ ------ ------- -------
4,782 4,844 14,208 11,738
------ ------ ------- -------
OPERATING EXPENSES:
Depreciation, depletion and
amortization 1,831 1,501 5,393 3,763
Operating costs 1,679 1,512 4,792 3,548
Administrative, selling and other 338 342 1,076 1,034
Financing costs:
Interest expense 55 58 164 86
Interest income (4) (4) (10) (103)
------ ------ ------- -------
3,899 3,409 11,415 8,328
------ ------ ------- -------
INCOME BEFORE INCOME TAXES 883 1,435 2,793 3,410
PROVISION FOR INCOME TAXES 106 545 600 1,296
------ ------ ------- -------
NET INCOME $ 777 $ 890 $ 2,193 $ 2,114
====== ====== ======= =======
NET INCOME PER COMMON AND COMMON
EQUIVALENT SHARE $ .08 $ .09 $ .23 $ .21
====== ====== ======= =======
WEIGHTED AVERAGE COMMON AND COMMON
EQUIVALENT SHARES OUTSTANDING 9,639 9,483 9,623 9,996
====== ====== ======= =======
</TABLE>
The accompanying notes to financial statements are
an integral part of this statement.
-2-
<PAGE>
KEY PRODUCTION COMPANY, INC.
STATEMENT OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
For the Nine Months
Ended September 30,
--------------------
(In thousands) 1995 1994
-------- --------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 2,193 $ 2,114
Adjustments to reconcile net
income to net cash provided by
operating activities:
Depreciation, depletion and
amortization 5,393 3,763
Deferred income taxes 488 1,160
Changes in operating assets and
liabilities:
(Increase) decrease in receivables 304 (381)
(Increase) decrease in prepaid
expenses (252) 61
Increase (decrease) in accounts
payable and accrued expenses (982) 533
Increase (decrease) in long-term
property liabilities and other (21) 544
------- --------
Net cash provided by operating
activities 7,123 7,794
------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Oil and gas exploration and
development expenditures (8,005) (4,307)
Acquisition of oil and gas
properties (543) (22,732)
Proceeds from sale of oil and gas
properties 351 68
Other capital expenditures (158) (292)
------- --------
Net cash used by investing
activities (8,355) (27,263)
------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Long-term borrowings 1,700 12,500
Payments on long-term debt (300) (1,000)
Payments to acquire treasury stock (5) (904)
------- --------
Net cash provided by financing
activities 1,395 10,596
------- --------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS 163 (8,873)
CASH AND CASH EQUIVALENTS AT BEGINNING
OF YEAR 281 9,215
------- --------
CASH AND CASH EQUIVALENTS AT END OF
PERIOD $ 444 $ 342
======= ========
</TABLE>
The accompanying notes to financial statements are
an integral part of this statement.
-3-
<PAGE>
KEY PRODUCTION COMPANY, INC.
BALANCE SHEET
<TABLE>
<CAPTION>
September 30, December 31,
(In thousands) 1995 1994
-------------- -------------
(Unaudited)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 444 $ 281
Receivables 3,072 3,376
Prepaid expenses 412 160
-------- -------
3,928 3,817
-------- -------
OIL AND GAS PROPERTIES, ON THE BASIS OF
FULL COST ACCOUNTING:
Proved properties 56,070 49,381
Unproved properties and properties
under development, not being amortized 9,607 7,953
-------- -------
65,677 57,334
Less - accumulated depreciation,
depletion and amortization (14,398) (9,105)
-------- -------
51,279 48,229
-------- -------
OTHER ASSETS, NET 623 565
-------- -------
$ 55,830 $52,611
======== =======
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 1,364 $ 2,193
Accrued lease operating expense and other 1,520 1,565
-------- -------
2,884 3,758
-------- -------
LONG-TERM DEBT 11,400 10,000
-------- -------
DEFERRED CREDITS AND OTHER NONCURRENT
LIABILITIES
Income taxes 3,144 2,656
Long-term property liabilities and
other 1,919 1,940
-------- -------
5,063 4,596
-------- -------
STOCKHOLDERS' EQUITY:
Common stock, $.25 par value, 50,000,000
shares authorized, 11,656,350 shares
issued 2,914 2,914
Paid-in capital 34,397 34,388
Retained earnings 8,628 6,435
Treasury stock at cost, 2,477,691 and
2,484,351 shares, respectively (9,456) (9,480)
-------- -------
36,483 34,257
-------- -------
$ 55,830 $52,611
======== =======
</TABLE>
The accompanying notes to financial statements are
an integral part of this statement.
-4-
<PAGE>
KEY PRODUCTION COMPANY, INC.
STATEMENT OF STOCKHOLDERS' EQUITY
(Unaudited)
<TABLE>
<CAPTION>
Total
Stock-
Common Paid-in Retained Treasury holders'
Stock Capital Earnings Stock Equity
--------- -------- -------- --------- ---------
<S> <C> <C> <C> <C> <C>
(In thousands, except per share data)
BALANCE, DECEMBER 31, 1994 $2,914 $34,388 $6,435 $(9,480) $34,257
Net income - - 2,193 - 2,193
Treasury stock issued - 9 - 29 38
Treasury stock purchased - - - (5) (5)
------ ------- ------ ------- -------
BALANCE, SEPTEMBER 30, 1995 $2,914 $34,397 $8,628 $(9,456) $36,483
====== ======= ====== ======= =======
</TABLE>
The accompanying notes to financial statements are
an integral part of this statement.
-5-
<PAGE>
KEY PRODUCTION COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
The financial statements included herein have been prepared by the Company,
without audit, pursuant to the rules and regulations of the Securities and
Exchange Commission, and reflect all adjustments which are, in the opinion of
management, necessary to a fair statement of the results for the interim
periods, on a basis consistent with the annual audited statements. All such
adjustments are of a normal, recurring nature except as disclosed herein.
Certain information, accounting policies, and footnote disclosures normally
included in financial statements prepared in accordance with generally accepted
accounting principles have been omitted pursuant to such rules and regulations,
although the Company believes that the disclosures are adequate to make the
information presented not misleading. These financial statements should be read
in conjunction with the financial statements and summary of significant
accounting policies and notes thereto included in the Company's latest annual
report on Form 10-K.
INCOME TAXES
Income tax expense consisted of the following:
Nine Months Ended September 30,
-------------------------------
1995 1994
----- -----
Current Taxes:
Federal $ - $ -
State 112 136
Deferred Taxes: 488 1,160
----- -----
$ 600 $1,296
===== =====
In connection with adoption of Statement of Financial Accounting Standards
(SFAS) No. 109, "Accounting for Income Taxes," effective January 1, 1993, the
Company established a valuation allowance for a portion of its deferred tax
asset. At that time, it was unknown whether the Company would be able to fully
utilize the net operating loss (NOL) carryforwards underlying the deferred tax
asset.
In 1994, a significant portion of the NOL carryforwards were utilized in
connection with a sale of non-producing leasehold and, based on current
projections, it appears likely that the Company will be able to utilize the
remaining NOL carryforwards before they expire. As a result, the Company has
determined that it is no longer necessary to provide a valuation allowance. The
Company expects this adjustment to decrease the combined federal and state
effective tax rate from 38 percent to approximately 12 percent for the remainder
of 1995. The provision for income taxes in the second and third quarters was
calculated using the lower rate.
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<PAGE>
STATEMENT OF CASH FLOWS
The Company considers all highly liquid debt instruments purchased with an
original maturity of three months or less to be cash equivalents. These
investments earned 5.5 percent and 5.3 percent rates of interest at September
30, 1995 and December 31, 1994, respectively, with cost approximating market.
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
For the Nine Months
Ended September 30,
-------------------
1995 1994
------ ------
(In thousands)
Cash paid during the period for:
Interest (net of amounts capitalized) $114 $35
Income taxes (net of refunds received) $361 $ 4
PRO FORMA FINANCIAL INFORMATION
On April 29, 1994, Key completed a transaction to purchase all the assets of a
privately-held oil and gas company for $22.75 million. The following unaudited
pro forma information was prepared as if the acquisition occurred on January 1,
1994. The pro forma data presented is based on numerous assumptions and is not
necessarily indicative of future operations.
Nine Months Ended
September 30, 1994
------------------
(In thousands, except per share data)
Revenues $14,249
Net income $ 2,409
Net income per share $ .24
SUBSEQUENT EVENT
On October 24, 1995, the Company purchased 331,000 shares of Key common stock
from Apache Corporation ("Apache") for $5.00 per share. The purchase was funded
using the Company's existing credit facility. Prospectively, the resulting
reduction in the number of shares outstanding will proportionately increase the
per share amounts Key reports. The transaction reduced Apache's ownership to
4.3% of Key's outstanding shares.
-7-
<PAGE>
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
FINANCIAL RESULTS
Key is reporting net income of $.08 per share, or $777,000 for the third
quarter of 1995. This is down slightly from the $.09 per share, or $890,000
reported for the same period of 1994. These results are based on revenues of
$4.8 million in the third quarters of 1995 and 1994.
On a year-to-date basis, earnings increased $.02 per share or 10 percent to
$.23 per share for 1995. Revenues for the nine-month time frame were $14.2
million and $11.7 million, respectively, for 1995 and 1994.
RESULTS OF OPERATIONS
<TABLE>
<CAPTION>
For the Quarter For the Nine Months
Ended September 30, Ended September 30,
-------------------- --------------------
1995 1994 1995 1994
-------- ------- ------- -------
Selected Oil and Gas
Operating Statistics
- --------------------
<S> <C> <C> <C> <C>
Gas Volume - Mcf per day 14,073 13,887 14,236 12,166
Gas Price - Per Mcf $ 1.65 $ 1.83 $ 1.67 $ 2.06
Oil Volume - Barrels per day 1,823 1,819 1,750 1,227
Oil Price - Per barrel $ 15.05 $ 14.73 $ 15.66 $ 14.31
Full Cost Amortization Rate 38.7% 30.6% 37.4% 31.6%
</TABLE>
Oil and gas revenues for the third quarters of 1995 and 1994 held steady at
$4.7 and $4.8 million, respectively. Lower gas prices more than offset the
positive effect of higher oil prices and increased production from new drilling.
Oil and gas revenues for the comparable nine month periods climbed 21 percent to
$14.2 million in 1995, from $11.7 million in 1994. This increase is attributable
to expanded production from a major acquisition in the second quarter of 1994
and successful drilling projects.
On a quarter basis, oil sales increased slightly between 1995 and 1994. Oil
prices increased from $14.73 per barrel to $15.05 per barrel in 1995, while
production was essentially unchanged.
The variance between the first nine months of 1995 and 1994 was much more
dramatic. Oil sales leaped 56 percent from $4.8 million in 1994 to $7.5 million
in 1995. Most of that increase, approximately $2 million, is the result of
production increases. Daily oil production averaged 1,750 barrels per day in
1995 compared to 1,227 per day in 1994. This is a result of the 1994 acquisition
which was predominantly oil. In the first nine months, oil revenues comprise 52
percent of total sales, compared to 41 percent in 1994. Key's average oil price
increased 9 percent to $15.66 per barrel in 1995.
Gas sales for the third quarter of 1995 declined approximately 8 percent to
$2.1 million. Gas production increased, but Key's average gas price dropped
from $1.83 per Mcf in 1994 to $1.65 per Mcf in 1995.
For the nine month periods, gas sales fell about five percent to $3.9 million.
Daily production jumped from 12,166 Mcf per day in 1994 to 14,236 Mcf per day in
1995, a 17 percent increase. The increase in production was due to an aggressive
drilling and recompletion program and the Company's 1994 acquisition. If prices
had remained constant between 1995 and 1994, the increase in gas volumes would
have resulted in a $1.2 million sales increase.
-8-
<PAGE>
However, Key's average gas price dropped $.39 per Mcf. This had a negative
impact on sales of $1.5 million.
Depreciation, depletion and amortization (DD&A) expense for the third quarter
and first nine months of 1995 increased 43 percent and 22 percent, respectively,
from the comparable periods of 1994. Key's third quarter amortization rate as a
percentage of revenue increased from 30.6 percent to 38.7 percent. For the nine
months, the amortization rate increased from 31.6 percent to 37.4 percent. The
rate increases were primarily attributable to the effect of significantly lower
gas prices on the future gross revenue component of the DD&A calculation.
Operating expenses for the third quarter of 1995 rose 11 percent to $1.7
million. The quarterly variance is largely due to the expense associated with
workovers to maintain production on older, declining wells. Year-to-date
operating expenses are up 35 percent between 1995 and 1994. Expenses increased
between the nine-month periods due to the Company's 1994 acquisition and as a
result of the numerous workovers in 1995. On a unit of production basis, third
quarter 1995 operating expenses are $.73 per EMcf, compared to $.66 per EMcf for
the same period of 1994. For the first nine months of 1995, operating expenses
are $.71 per EMcf, compared to $.67 per EMcf in 1994. Key's expenses on a unit
of production basis should be higher because the newly acquired properties have
a higher oil percentage than Key's pre-acquisition properties and oil properties
generally have higher lifting costs than gas properties. (Oil is compared to
natural gas in terms of equivalent thousand cubic feet, "EMcf." One barrel of
oil is the energy equivalent of six Mcf of natural gas.)
Administrative, selling and other costs remained constant between the third
quarters of 1995 and 1994 in terms of absolute dollars and on a unit of
production basis. Quarterly administrative costs were approximately $.3 million,
or $.15 per EMcf. Between the nine months of 1995 and 1994, administrative
expense dropped from $.19 per EMcf to $.16 per EMcf. Actual expenses for this
same interval increased by 4 percent due to the added burden of administering
the larger post acquisition property base.
Interest expense increased from $275,000 in 1994 to $586,000 in 1995. In the
second quarter of 1994, Key entered into a $50 million credit facility with
NationsBank of Texas, N.A. At that time, the Company drew $12.5 million to fund
an acquisition. The 1994 results include five months of interest versus nine
months of interest incurred for the first nine months of 1995.
Interest of $422,000 was capitalized in the first nine months of 1995 for
borrowings associated with the undeveloped leasehold acquired in the second
quarter of 1994. Capitalized interest of $189,000 was recorded for the same
period of 1994.
Interest income of $10,000 and $103,000 was earned for the first nine months
of 1995 and 1994, respectively. The higher interest income in 1994 reflects the
investment of the large cash balance that existed before the 1994 acquisition.
As discussed in more detail under the heading "Income Taxes" in the notes to
the financial statements, the Company has determined that it is no longer
necessary to maintain a valuation allowance against its deferred tax asset. The
Company expects this adjustment to decrease the combined federal and state
effective tax rate from 38 percent to approximately 12 percent for the remainder
of 1995. Income taxes were calculated using the lower rate for second and third
quarter.
-9-
<PAGE>
CASH FLOW AND LIQUIDITY
Liquidity refers to the ability of an enterprise to generate adequate amounts
of cash to satisfy its financial commitments. Key's primary needs for cash are
for payment of existing financing obligations and trade commitments related to
oil and gas operations. The Company's primary sources of liquidity are cash
flows from operating activities and debt financing. Management believes that the
overall sources of funds available to Key, including cash on hand, will continue
to be more than sufficient to satisfy the Company's financial obligations.
Cash from operating activities decreased 9 percent to $7.1 million between the
first nine months of 1995 and 1994. Normal fluctuations in operating assets and
liabilities more than offset the increase in the other components of cash from
operating activities.
During the first nine months of 1995, the Company increased exploration and
development expenditures by 86 percent over 1994 expenditures for the same time
period. The 1995 nine month total of $8 million represents 112 percent of cash
from operating activities. This compares to $4.3 million (55 percent of cash
from operating activities) in 1994.
Since year-end 1994, long-term debt increased from $10 million to $11.4
million. Proceeds from long-term borrowings were used to fund exploration and
development expenditures in excess of cash provided by operating activities.
The Company's ratio of current assets to current liabilities was 1.4 to 1 at
September 30, 1995, an increase from the 1 to 1 ratio calculated at December 31,
1994.
FUTURE TRENDS
As discussed previously, the Company invested $8 million in exploration and
development activities during the first nine months of 1995 and continues to
pursue opportunities to expand its drilling program. To the extent Key is able
to identify attractive drilling opportunities in excess of cash generated by
operations, there is sufficient remaining capacity under the Company's existing
credit facility to capitalize on those opportunities. The Company expects that
its exploration and development expenditures will continue at a comparable pace
during the remainder of 1995.
The mid-continent region continues to be the strongest region in terms of
drilling activity. Approximately 60 percent of the drilling dollars invested
year-to-date were spent in this area and several additional projects are
scheduled for the remainder of 1995. The Company also continues to acquire
relatively larger working interests in certain projects in this region as other
companies become "capital constrained" due to lower product prices.
In March 1995, the Company entered into a joint venture with a major oil
company for the exploration of certain fields located in the gas-prone
Sacramento Basin of California. The drilling season in this area begins in early
fall and the Company expects to be able to report on the initial results of this
project by year end.
Although gas prices continue to be depressed, they appear to be improving
somewhat in the fourth quarter. Oil prices, however, continue to be weak and the
fourth quarter realized price will probably be flat or somewhat lower than the
third quarter. There is, however, no assurance to the future direction of either
oil or gas prices.
-10-
<PAGE>
The acquisition arena remains competitive. However, the Company continues to
evaluate acquisition, merger and joint venture opportunities as they arise and
would actively pursue entering into a transaction of this type if the economic
and strategic factors appeared favorable.
On October 24, 1995, the Company purchased 331,000 shares of Key common stock
from Apache Corporation ("Apache") for $5.00 per share. The purchase was funded
using the Company's existing credit facility. Prospectively, the resulting
reduction in the number of shares outstanding will proportionately increase the
per share amounts Key reports. The transaction reduced Apache's ownership to
4.3% of Key's outstanding shares.
Cash on hand at September 30, 1995, together with net cash provided by
operating activities and amounts available under the credit facility, are
expected to be adequate to meet future liquidity needs under current corporate
policies. Management believes that the overall sources of funds available to Key
will continue to be sufficient to satisfy the Company's financial obligations
and to provide resources for exploration, development and acquisition
activities.
-11-
<PAGE>
PART II. - OTHER INFORMATION
----------------------------
ITEM 1. LEGAL PROCEEDINGS
- -------------------------
None.
ITEM 2. CHANGES IN SECURITIES
- ------------------------------
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
- ----------------------------------------
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF THE SECURITY HOLDERS
- ----------------------------------------------------------------
None.
ITEM 5. OTHER INFORMATION
- --------------------------
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
- -----------------------------------------
(a) Exhibits filed herewith:
27.1 Financial Data Schedule for Commercial and Industrial
Companies per Article 5 of Regulation S-X for the quarter ended
September 30, 1995.
(b) Reports on Form 8-K:
No reports on Form 8-K were filed during the three months
ended September 30, 1995.
-12-
<PAGE>
SIGNATURES
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.
Dated: November 13, 1995
KEY PRODUCTION COMPANY, INC.
/s/ Monroe W. Robertson
------------------------------
Monroe W. Robertson
Senior Vice President and Secretary
(Principal Financial Officer)
/s/ Cathy L. Anderson
------------------------------
Cathy L. Anderson
Controller
(Principal Accounting Officer)
-13-
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JUL-01-1995
<PERIOD-END> SEP-30-1995
<CASH> 444
<SECURITIES> 0
<RECEIVABLES> 3,072
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 3,928
<PP&E> 65,677
<DEPRECIATION> 14,398
<TOTAL-ASSETS> 55,830
<CURRENT-LIABILITIES> 2,884
<BONDS> 11,400
<COMMON> 2,914
0
0
<OTHER-SE> 33,569
<TOTAL-LIABILITY-AND-EQUITY> 55,830
<SALES> 4,747
<TOTAL-REVENUES> 35
<CGS> 3,475
<TOTAL-COSTS> 3,475
<OTHER-EXPENSES> 373
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 55
<INCOME-PRETAX> 883
<INCOME-TAX> 106
<INCOME-CONTINUING> 777
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 777
<EPS-PRIMARY> .08
<EPS-DILUTED> .08
</TABLE>
