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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, 2000
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 001-11769
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KEY PRODUCTION COMPANY, INC.
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(Exact name of registrant as specified in its charter)
Delaware 84-1089744
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
707 Seventeenth Street, Suite 3300 Denver, Colorado 80202-3404
--------------------------------------------------------------------------------
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code 303/295-3995.
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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 _____
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The number of shares of Key Production Company, Inc. common stock, $.25 par
value, outstanding as of June 30, 2000, is 12,274,493.
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PART 1 - FINANCIAL INFORMATION
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ITEM 1 - FINANCIAL STATEMENTS
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KEY PRODUCTION COMPANY, INC.
CONSOLIDATED STATEMENT OF INCOME
(Unaudited)
<TABLE>
<CAPTION>
For the Quarter For the Six Months
Ended June 30, Ended June 30,
------------------------ ------------------------
(In thousands, except per share data) 2000 1999 2000 1999
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Revenues:
Gas sales $ 11,335 $ 6,724 $ 19,744 $ 12,811
Oil sales 9,823 4,890 20,286 8,544
Plant products 476 145 838 309
Other 110 125 209 225
-------- -------- -------- --------
21,744 11,884 41,077 21,889
-------- -------- -------- --------
Operating Expenses:
Depreciation, depletion and
amortization 8,320 6,653 16,264 11,932
Lease operating 3,000 1,993 5,714 3,973
Production taxes 680 766 1,244 1,401
General and administrative 701 671 1,421 1,218
Financing costs:
Interest expense 1,107 956 2,239 1,918
Capitalized interest (393) (328) (735) (647)
Interest income (33) (46) (81) (69)
-------- -------- -------- --------
13,382 10,665 26,066 19,726
-------- -------- -------- --------
Income Before Income Taxes 8,362 1,219 15,011 2,163
Provision for Income Taxes 3,094 463 5,554 822
-------- -------- -------- --------
Net Income $ 5,268 $ 756 $ 9,457 $ 1,341
======== ======== ======== ========
Basic Earnings Per Share $ .44 $ .07 $ .81 $ .12
======== ======== ======== ========
Diluted Earnings Per Share $ .43 $ .06 $ .77 $ .11
======== ======== ======== ========
Weighted Average Basic Shares 11,901 11,525 11,748 11,522
======== ======== ======== ========
Weighted Average Diluted Shares 12,222 12,133 12,212 12,064
======== ======== ======== ========
</TABLE>
The accompanying notes to consolidated financial statements
are an integral part of this statement.
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KEY PRODUCTION COMPANY, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
For the Six Months
June 30,
------------------------
(In thousands) 2000 1999
-------- --------
<S> <C> <C>
Cash Flows from Operating Activities:
Net income $ 9,457 $ 1,341
Adjustment to reconcile net income to net
cash provided by operating activities:
Depreciation, depletion and amortization 16,264 11,932
Deferred income taxes 4,954 735
Changes in operating assets and liabilities:
(Increase) decrease in receivables (3,633) 193
Increase in prepaid expenses and other (104) (53)
Decrease in accounts payable and
accrued expenses (1,447) (4,022)
Increase in long-term property
liabilities and other 307 12
-------- --------
Net cash provided by operating activities 25,798 10,138
-------- --------
Cash Flows from Investing Activities:
Oil and gas exploration and development
expenditures (23,872) (15,986)
Acquisition of proved oil and gas reserves (121) (80)
Proceeds from sale of oil and gas properties 127 206
Other capital expenditures (207) (49)
-------- --------
Net cash used by investing activities (24,073) (15,909)
-------- --------
Cash Flows From Financing Activities:
Long-term borrowings - 5,000
Payments on long-term debt (6,000) -
Payments to acquire treasury stock (4) (2)
Proceeds from issuance of common stock 2,294 -
-------- --------
Net cash provided (used) by financing
activities (3,710) 4,998
-------- --------
Net Decrease in Cash and Cash Equivalents (1,985) (773)
Cash and Cash Equivalents at Beginning of Year 6,087 4,720
-------- --------
Cash and Cash Equivalents at End of Period $ 4,102 $ 3,947
======== ========
</TABLE>
The accompanying notes to consolidated financial statements
are an integral part of this statement.
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KEY PRODUCTION COMPANY, INC.
CONSOLIDATED BALANCE SHEET
(Unaudited)
<TABLE>
<CAPTION>
June 30, December 31,
(In thousands) 2000 1999
---------- ------------
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents $ 4,102 $ 6,087
Receivables 15,839 12,206
Prepaid expenses and other 1,327 1,223
---------- ----------
21,268 19,516
---------- ----------
Oil and Gas Properties, on the basis of
full cost accounting:
Proved properties 241,151 223,285
Unproved properties and properties
under development, not being amortized 24,218 18,104
---------- ----------
265,369 241,389
Less - accumulated depreciation,
depletion and amortization (101,808) (85,990)
---------- ----------
163,561 155,399
---------- ----------
Other Assets, net 1,703 1,942
---------- ----------
$ 186,532 $ 176,857
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 12,561 $ 13,189
Accrued exploration and development 2,502 2,388
Accrued lease operating expense and other 3,096 1,901
---------- ----------
18,159 17,478
---------- ----------
Long-Term Debt 54,000 60,000
---------- ----------
Non-current Liabilities:
Deferred income taxes 26,809 21,855
Long-term property liabilities and other 958 651
---------- ----------
27,767 22,506
---------- ----------
Stockholders' Equity:
Common stock, $.25 par value, 50,000,000
shares authorized, 12,580,039 and
11,820,190 shares issued, respectively 3,145 2,955
Paid-in capital 38,597 37,557
Retained earnings 47,975 38,518
Treasury stock at cost, 305,546, and
232,887 shares, respectively (3,111) (2,157)
---------- ----------
86,606 76,873
---------- ----------
$ 186,532 $ 176,857
========== ==========
</TABLE>
The accompanying notes to consolidated financial statements
are an integral part of this statement.
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KEY PRODUCTION COMPANY, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(Unaudited)
Total
Stock-
Common Paid-in Retained Treasury holders'
Stock Capital Earnings Stock Equity
------- ------- -------- -------- --------
(In thousands, except per share data)
Balance, December 31, 1999 $ 2,955 $37,557 $ 38,518 $ (2,157) $ 76,873
Net income - - 9,457 - 9,457
Common stock issued 190 1,016 - - 1,206
Treasury stock issued - 24 - 78 102
Treasury stock purchased - - - (1,032) (1,032)
------- ------- -------- -------- --------
Balance, June 30, 2000 $ 3,145 $38,597 $ 47,975 $ (3,111) $ 86,606
======= ======= ======== ======== ========
The accompanying notes to consolidated financial statements
are an integral part of this statement.
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KEY PRODUCTION COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Introduction
The accompanying financial statements are unaudited and were prepared from
our records. Our management believes these financial statements include all
adjustments necessary for a fair presentation of our financial position and
results of operations. All adjustments are of a normal and recurring nature
unless specifically noted. We prepared these statements on a basis consistent
with our annual audited statements and Regulation S-X. Regulation S-X allows us
to omit some of the footnote and policy disclosures required by generally
accepted accounting principles and normally included in annual reports on Form
10-K. You should read these interim financial statements together with the
financial statements, summary of significant accounting policies and notes in
our most recent annual report on Form 10-K.
Basis of Presentation
We included the accounts of Key and its subsidiaries in the accompanying
consolidated financial statements. All intercompany accounts and transactions
were eliminated in consolidation.
Use of Estimates
We rely on estimates and assumptions made by our management to prepare
financial statements in conformity with generally accepted accounting
principles. Those estimates and assumptions affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
Income Taxes
Income tax expense consisted of the following:
Six Months Ended June 30,
------------------------
2000 1999
-------- --------
Current Taxes:
Federal $ - $ -
State 600 87
Deferred Taxes 4,954 735
-------- --------
$ 5,554 $ 822
======== ========
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Earnings Per Share
The components of basic and diluted net income per common share for the
periods ended June 30, 2000 and 1999 are presented in the table below:
For the Three For the Six
Months Ended Months Ended
--------------- ----------------
2000 1999 2000 1999
------ ------ ------ ------
(In thousands, except per share data)
Basic earnings per share:
Income available to common
stockholders $5,268 $ 756 $9,457 $1,341
Weighted average basic shares
outstanding 11,901 11,525 11,748 11,522
Basic earnings per share $ 0.44 $ 0.07 $ 0.81 $ 0.12
Diluted earnings per share:
Income available to common
stockholders $5,268 $ 756 $9,457 $1,341
Incremental shares assuming
the exercise of stock options 321 608 464 542
Weighted average diluted shares
outstanding 12,222 12,133 12,212 12,064
Diluted earnings per share $ 0.43 $ 0.06 $ 0.77 $ 0.11
Cash and Cash Equivalents
We consider all highly liquid debt instruments purchased with an original
maturity of three months or less to be cash equivalents. These investments
earned 6.3 and 3.4 percent rates of interest at June 30, 2000 and December 31,
1999, respectively, with cost approximating market.
Supplemental Disclosure of Cash Flow Information
For the Six Months
Ended June 30,
----------------------
2000 1999
------ ------
(In thousands)
Cash paid during the period for:
Interest (net of amounts capitalized:
$735,000 and $647,000, respectively) $1,509 1,309
Income taxes (net of refunds received) $ 34 26
Long Term Debt
In November of 1999, we signed a new long-term credit agreement funded by a
group of banks led by Banc of America Securities LLC. It replaced our prior
credit arrangement with NationsBank of Texas. Our new agreement specifies a
maximum loan amount of $150 million. We set our initial borrowing base at $85
million and our outstanding balance was $54.0 million at June 30, 2000. The
lenders may periodically re-determine the borrowing base depending upon the
value of our oil and gas properties.
The agreement has a maturity date of January 1, 2006, including a revolving
period that ends on January 1, 2002. On the later date, if not amended before
then, the outstanding loan amount converts to a term loan and we must commence
quarterly principal payments.
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We secured this debt with oil and gas assets owned by Key and our
subsidiaries. We are also subject to customary covenants and restrictions
including: 1) limitations on additional borrowings, 2) working capital
requirements, and 3) net worth maintenance. We are currently, and have been
since inception, in compliance with the covenants of the agreement.
Please see our annual report on Form 10-K if you would like more
information about the terms of the agreement.
Reclassification
We reclassified a few prior year amounts to conform with the current year
presentation.
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ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Financial Results
We reported net income of $5.3 million and earnings per diluted share of
$.43 for the second quarter of 2000. Both are nearly seven times the $.8
million and $.06 per diluted share we reported for the same period a year ago.
Results for these periods are based on revenues of $21.7 and $11.9 million in
2000 and 1999, respectively.
For the first six months of 2000, we reported a 600 percent increase to net
income and earnings per diluted share. Net income for the six-month periods of
2000 and 1999 was $9.5 and $1.3 million, respectively. Revenue was $41.1 and
$21.9 million for the same periods. Strong oil and gas prices continue to be
the catalyst for our excellent financial results through the first six months of
2000.
Results of Operations
For the Quarter For the Six Months
Ended June 30, Ended June 30,
------------------- --------------------
2000 1999 2000 1999
-------- -------- -------- --------
Selected Oil and Gas
Operating Statistics
--------------------
Gas Volume - Mcf per day 36,562 37,187 37,308 37,961
Gas Price - Per Mcf $ 3.41 $ 1.99 $ 2.91 $ 1.86
Oil Volume - Barrels per day 3,932 3,552 4,100 3,585
Oil Price - Per barrel $ 27.45 $ 15.13 $ 27.18 $ 13.16
Full Cost Amortization Rate 37.3% 55.7% 38.7% 54.1%
As generally used in the oil and gas business and in this Form 10-Q, the
following terms have the following meanings:
Mcf - Thousand cubic feet (of natural gas)
Mcfe - Thousand cubic feet equivalent
MMcfe - Million cubic feet equivalent
BBls - Barrels (of oil)
In calculating Mcf equivalents, we use a generally recognized standard in
which one BBl of oil is equal to six Mcf of gas.
Our oil and gas sales jumped 84 percent between the second quarters of 2000
and 1999 to reach $21.6 million. Breaking it down, oil increased $4.9 million,
gas increased $4.6 million and plant products rose $.3 million. Most of the
variance stems from the favorable prices we received during this time frame. We
produced combined oil and gas volumes of 60.2 MMcfe per day in 2000 compared to
58.5 MMcfe per day in 1999.
On a year-to-date basis, our sales were $40.9 million or 89 percent more
than 1999 sales for the same period. Higher oil sales account for more than 60
percent of the six-month sales increase. For the first half of 2000, production
averaged 61.9 MMcfe per day versus 59.5 MMcfe per day in the first half of 1999.
In response to rising natural gas prices, gas sales climbed to $11.3
million in 2000 from $6.7 million in 1999. Our average realized gas price was
$3.41 per Mcf in 2000 compared to $1.99 per Mcf in 1999. The $1.42 increment
added approximately $4.7 million to sales. Our gas production slipped to 36,562
Mcf per
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day in 2000 from 37,187 per day in 1999. The two percent decrease in production
reflects a pipeline disruption in California and natural field decline. In June,
we resolved the pipeline problem and added several new wells in the Mid-
Continent region resulting in production in excess of 39,000 Mcf per day for the
month.
Between the first six months of 2000 and 1999, our gas sales increased by
54 percent. Gas prices increased to $2.91 per Mcf in 2000 from $1.86 per Mcf in
1999. Favorable pricing in 2000 added approximately $7.1 million to sales.
Daily production was nearly unchanged at 37,308 and 37,961 Mcf per day in 2000
and 1999, respectively.
Fuelled by significantly higher prices in the second quarter of 2000, our
oil sales doubled between the second quarters of 2000 and 1999. Oil sales rose
to $9.8 million in 2000 from $4.9 million in 1999. We realized an average price
of $27.45 per barrel in 2000, compared to $15.13 per barrel in 1999. The price
difference between these two quarters added about $4.4 million to oil sales. We
also experienced 11 percent growth in production for the same timeframe. We
produced an average of 3,932 BBls per day in 2000 compared to 3,552 BBls per day
in 1999. Our increase in production is responsible for $.5 million of the
quarterly oil sales increase.
Oil sales for the first six months of 2000 reached $20.3 million, an
increase of 137 percent over the $8.5 million we reported for the first six
months of 1999. Our average price for this period increased to $27.18 per
barrel in 2000 from $13.16 per barrel in 1999 and had a huge impact on sales.
The price increase contributed approximately $10.5 million to 2000 sales. At
the same time, daily production in 2000 grew to 4,100 BBls per day from 3,585
BBls per day in 1999, for an additional $1.3 million of sales.
Product sales from gas processing plants increased 229 percent between the
second quarters of 2000 and 1999, and increased 171 percent between the first
six months of 2000 and 1999. Just like gas and oil, price was also the basis
for our improved plant product sales.
The source of our oil and gas revenues is changing right along with the
prices. In the first six months of 2000, our revenues came from the following
product mix: 50 percent oil, 48 percent gas and two percent plant products.
This compares to the following mix for the first six months of 1999: 39 percent
oil, 59 percent gas and two percent plant products. If you look at our total
production volumes for the first six months of 2000, 40 percent of our output is
oil and 60 percent is gas. Production for the same period of 1999 was 36
percent oil and 64 percent gas.
Other revenues were approximately $209,000 and $225,000 for the first six
months of 2000 and 1999, respectively. For all periods presented, the primary
source of other revenue was income from our two gathering systems in California.
Costs and Expenses
Depreciation, depletion and amortization (DD&A) expense increased 25
percent between the second quarters of 2000 and 1999. A portion of this
increase can be attributed to the 84 percent increase in second quarter oil and
gas sales. Notably, the increase from higher sales is partially offset by a
decrease in the depletion rate. The depletion rate as a percentage of oil and
gas sales decreased to 37.3 percent from 55.7 percent between the second
quarters of 2000 and 1999. Similarly, DD&A for the first six months increased
36 percent between 2000 and 1999 while oil and gas sales for the same period
increased by 89 percent. The depletion rate as a percentage of oil and gas
sales was 38.7 percent and 54.1 percent for the first six months of 2000 and
1999, respectively. We use the future gross revenue
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method and rolling average prices to compute DD&A expense. Higher product prices
over the last year, for both oil and gas, are helping to bring the depletion
rate down. We also include a small amount of fixed asset depreciation and
amortization of financing costs associated with our credit facility in this
income statement line.
For the second quarters, our 2000 lease operating expense (LOE) exceeded
1999 LOE by 51 percent. Second quarter LOE was $3.0 million in 2000 and $2.0
million in 1999. LOE also increased on a unit basis. If you compare second
quarter LOE on a unit of production basis, 2000 LOE increased to $.55 per Mcfe
from $.37 per Mcfe in 1999. Year to date LOE increased 44 percent between 2000
and 1999. Compared on a unit of production basis, year to date expenses
increased 37 percent, or $.14 per Mcfe. A few of the many things that are
pushing LOE upward in 2000 are: 1) production from drilling is growing and we
are paying expenses on more wells, 2) commodity prices are very good and it is
becoming economical to do more workovers to further increase production, and 3)
higher prices are increasing property values and, as a result, ad valorem taxes.
Production taxes for the second quarters and six months are down by 11
percent between 2000 and 1999. On a unit basis, second quarter production taxes
decreased to $.12 per Mcfe in 2000 from $.14 per Mcfe in 1999. In the fourth
quarter of 1999, we realized that we had over estimated production tax expense
for the entire year. At that time, we made a downward adjustment reflecting a
decrease in our overall production tax rate and a change in our procedure for
accruing unpaid production taxes. You are seeing a difference between periods
because the first six months of 2000 are calculated using updated rates and
procedures, and production taxes reported for the first six months of 1999 were
overstated.
General and administrative expense (G&A) increased four percent between the
second quarters and 17 percent between the first six months of 2000 and 1999.
With a three percent increase in second quarter production, G&A remained flat at
$.13 per Mcfe for 2000 and 1999. For the first six months, G&A increased to
$.13 per Mcfe in 2000 from $.11 per Mcfe in 1999. As prescribed by full cost
accounting rules, we capitalize direct overhead related to exploration and
development activities.
Interest expense before capitalization was $2,239,000 and $1,918,000 for
the first six months of 2000 and 1999, respectively. Even though our long-term
debt balance is $11.0 million less than it was a year ago and $6.0 million less
than it was at yearend 1999, our interest expense is higher due to an increase
in interest rates. Our average interest rate was 7.9 percent on June 30, 2000.
On the same day a year earlier, our average interest rate was only 6.1 percent.
We capitalized interest of $735,000 and $647,000 in 2000 and 1999, respectively.
These capitalized amounts are for borrowings associated with undeveloped
leasehold.
We calculated our provision for income taxes using effective rates of 37
percent and 38 percent for 2000 and 1999, respectively.
Cash Flow and Liquidity
We primarily need cash to fund oil and gas exploration, development, and
acquisition activities and to pay existing obligations and trade commitments
related to oil and gas operations. Our primary sources of liquidity are cash
flows from operating activities and proceeds from financing activities.
We generated cash from operating activities of $25.8 million in the first
six months of 2000. This was a $15.7 million increase, or more than two and one
half times, the $10.1 million reported for the same period a year ago. Most of
this increase was related to higher oil and gas prices.
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In the first six months of 2000, we made cash expenditures for exploration
and development of $23.9 million, or 93 percent of cash from operating
activities. This was $7.9 million more than the $16.0 million we spent in the
first six months of 1999.
Using cash from operating activities and proceeds from the issuance of
common stock associated with the exercise of stock options, we paid down $6.0
million of our long-term debt balance in the first six months of 2000. The
payment brought our debt balance to $54 million at June 30, 2000. During the
first six months of 1999, we borrowed $5.0 million to help fund our exploration
and development projects. Please refer to the section titled "Long Term Debt"
for more information about our long-term credit arrangements.
We received cash proceeds of $2.3 million from the issuance of common stock
in the first six months of 2000. Stock was issued in connection with the
exercise of stock options granted to officers and directors between 1992 and
1994. The options exercised had exercise prices ranging from $2.50 to $12.00
per share.
Included in the $2.3 million mentioned above and pursuant to the
registration statement we filed on May 5, 2000, our chief executive officer (Mr.
Merelli) exercised options for 500,000 shares of our common stock. The options
were granted in 1992 in accordance with his employment contract. These options
had an exercise price of $3.00. We received proceeds valued at $1.5 million
from Mr. Merelli for the exercise price of the options. The proceeds were a
combination of cash and 70,000 mature shares of Key common stock. We issued
370,000 new shares of stock to him after withholding 130,000 shares to cover his
tax liability.
We believe that cash on hand, net cash generated from operations and
amounts available under our existing line of credit will be adequate to meet
future liquidity needs, including satisfying our financial obligations and
funding operations, exploration and development.
Year 2000 Compliance
We assessed the effects of Year 2000 computer issues and determined that
there was no material adverse impact on our business. We do not expect to
record any losses related to this event. Our computer systems for accounting,
land and lease records, and reservoir engineering did not have any interruption
in the transition between 1999 and 2000 and continue to operate normally in
2000. Further, we are not aware of any material problems experienced by the
various entities we do business with that would materially impact us.
Future Trends
Increasing shareholder value has always been, and will continue to be, our
top priority in the future. Our goal is simple; we want to grow the business
and do it profitably. Our strategy is to increase our oil and gas reserves and
production through our exploration and development efforts and to supplement
this growth with an acquisition or merger when we find a target that meets our
strict criteria.
In 2000, we anticipate spending up to $55 million on exploration and
development projects. This amount is up considerably from the $32.5 million
invested during 1999 and the $42-48 million exploration budget we previously
announced. So far, we spent almost $24 million in the first six months of 2000.
The decision to increase capital expenditures was made in the current price
environment and may change. The amount and allocation of our future capital
expenditures will always depend on a number of factors, including the impact of
oil and gas prices on investment opportunities and available cash flow, the
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availability of debt and equity capital, and the number and size of attractive
acquisition opportunities. We will fund these expenditures with cash provided
by operating activities, supplemented, if necessary, by borrowings under our
bank line of credit.
At the present time, we anticipate that the bulk of our exploration and
development spending will be concentrated in our four main exploration focus
areas: the Anadarko Basin of western Oklahoma, the Mississippi Salt Basin, south
Louisiana, and the Sacramento Basin of northern California. We will also
continue exploration of our undeveloped acreage and participate in lower-risk
exploitation projects in the Rocky Mountain region. We finished the second
quarter with seven wells in progress or awaiting completion and many wells
scheduled to spud in the third and fourth quarters. We look forward to a
heightened level of drilling activity in the second half of 2000.
As part of our on-going business strategy, we will evaluate merger and
acquisition opportunities. Acquisition or merger candidates with the economic
and strategic attributes needed to facilitate profitable growth will be actively
pursued.
ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We use financial instruments, which inherently have some degree of market
risk. Our primary sources of market risk include fluctuations in commodity
prices and interest rates.
Price Fluctuations
Our results of operations are highly dependent upon the prices we receive
for natural gas and crude oil production, and those prices are constantly
changing in response to market forces. Nearly all of our revenue is from the
sale of gas and oil, so these fluctuations, positive and negative, can have a
significant impact.
If we wanted to attempt to smooth out the effect of commodity price
fluctuations, we could enter into: non-speculative hedge arrangements, commodity
swap agreements, forward sale contracts, commodity futures, options and other
similar agreements relating to natural gas and crude oil. To date, we have not
used any of these financial instruments to mitigate commodity price changes.
Changes in product prices also affect the limitation on capitalized costs
under the full cost accounting rules. To apply this rule, we determine a
"ceiling" by pricing future revenues at the unescalated prices in effect at the
end of the fiscal quarter. If the value of our capitalized costs exceeds the
ceiling, we would be required to do a write-down. We have never taken a full-
cost ceiling write-down.
Interest Rate Risk
Our reported earnings are impacted by changes in interest rates. Any
fluctuation in the rate will directly affect the amount of interest expense we
report. At June 30, 2000, we had $54 million of long-term debt outstanding at
an average interest rate of 7.9 percent. At our election, our interest charges
are based on either the prime rate or the LIBOR rate plus a margin predetermined
by our debt agreement. Assuming there is no change in the balance outstanding
during 2000, a ten percent change in the average interest rate would impact
interest expense by approximately $425,000. As the interest rate is variable
and is reflective of current market conditions, the carrying value approximates
the fair value.
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CAUTIONARY STATEMENT PURSUANT TO SAFE HARBOR PROVISION OF THE PRIVATE SECURITIES
LITIGATION REFORM ACT OF 1995
This report contains "forward-looking statements" within the meaning of the
federal securities laws. These forward-looking statements include, among
others, statements concerning Key's outlook for the remainder of 2000 with
regard to production levels, price realizations, expenditures for exploration
and development, plans for funding operations and capital expenditures, and
other statements of expectations, beliefs, future plans and strategies,
anticipated events or trends and similar expressions concerning matters that are
not historical facts. The forward-looking statements in this report are subject
to risks and uncertainties that could cause actual results to differ materially
from those expressed or implied by the statements.
These risks and uncertainties include, but are not limited to, fluctuations
in the price we receive for oil and gas production, reductions in the quantity
of oil and gas sold due to decreased industry-wide demand and/or curtailments in
production from specific properties due to mechanical, marketing or other
problems, operating and capital expenditures that are either significantly
higher or lower than anticipated because the actual cost of identified projects
varied from original estimates and/or from the number of exploration and
development opportunities being greater or fewer than currently anticipated and
increased financing costs due to a significant increase in interest rates.
These and other risks and uncertainties affecting Key are discussed in greater
detail in this report and the Form S-8 Registration Statement we filed with the
Securities and Exchange Commission on May 5, 2000.
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<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:
12.1 Statement RE: Computation of Ratio of Earnings to Fixed Charges.
27.1 Financial Data Schedule for Commercial and Industrial Companies
per Article 5 of Regulation S-X for the quarter ended June 30,
2000.
(b) Reports on Form 8-K:
None.
-15-
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly ca used this report to be signed on its behalf by the
undersigned thereunto duly authorized:
Dated August 14, 2000
KEY PRODUCTION COMPANY, INC.
/s/ Paul Korus
------------------------------------------------
Paul Korus
Vice President and Chief Financial Officer
(Principal Financial Officer)
/s/ Sherri M. Nitta
------------------------------------------------
Sherri M. Nitta
Director, Financial Reporting
(Principal Accounting Officer)
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