SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
Form 10-Q/A
(Mark One)
[X] Quarterly report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934 for the quarterly period ended
June 30, 1994.
- 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 No. 0-17267
MALLON RESOURCES CORPORATION
(Exact name of registrant as specified in its charter)
COLORADO 84-1095959
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
999 18th Street, Suite 1700
Denver, Colorado 80202
(Address of principal executive offices)
(303) 293-2333
(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
such shorter period of time Registrant was required to file such
reports), and (2) has been subject to such filing requirements for
the past 90 days.
YES [X] NO [ ]
As of August 12, 1994:
7,670,503 shares of Registrant's Common Stock were outstanding;
1,100,918 shares of Registrant's Series A Preferred Stock
(convertible into 1,113,173 shares of Common Stock) were
outstanding; and
400,000 shares of Registrant's Series B Mandatorily Redeemable
Convertible Preferred Stock (convertible into 941,177
shares of Common Stock) were outstanding.
MALLON RESOURCES CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited)
___________
<TABLE>
<CAPTION>
December 31,
1993 June 30, 1994
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 964,000 $ 196,000
Marketable securities -- 1,000,000
Accounts receivable, with no
allowance for doubtful accounts:
Joint interest participants 229,000 582,000
Related parties 13,000 10,000
Oil/gas sales 636,000 325,000
Inventories 24,000 32,000
Other 111,000 107,000
Total current assets 1,977,000 2,252,000
Property and equipment:
Oil and gas properties, under
full cost method 38,885,000 39,936,000
Mineral properties 3,470,000 3,460,000
Mining property and equipment 1,361,000 1,382,000
Other equipment 295,000 353,000
44,011,000 45,131,000
Less accumulated depreciation,
depletion and impairment (17,425,000) (18,013,000)
26,586,000 27,118,000
Other assets:
Notes receivable, related parties 41,000 42,000
Other, net 169,000 251,000
Total Assets $ 28,773,000 $ 29,663,000
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable and current portion
of long-term debt $ 10,000 $ 10,000
Trade accounts payable 1,354,000 1,580,000
Deferred revenues and drilling
advances 103,000 103,000
Accrued taxes and expenses 48,000 138,000
Total current liabilities 1,515,000 1,831,000
Notes payable 20,000 20,000
Drilling advances 316,000 316,000
Net profits interest 2,075,000 --
Deferred revenues 9,818,000 8,686,000
Series B Mandatorily Redeemable Convertible
Preferred Stock, $0.01 par value, 500,000
shares authorized, $400,000 shares issued
and outstanding, liquidation preference
and mandatory redemption of $4,000,000 -- 3,795,000
Stockholders' equity:
Series A Preferred Stock, $0.01 par
value, 1,467,890 shares authorized,
1,100,918 shares issued and out-
standing, liquidation preference
$6,000,000 5,730,000 5,730,000
Common Stock, $0.01 par value,
25,000,000 shares authorized;
7,597,725 and 7,670,503 shares
issued and outstanding, respectively 76,000 77,000
Additional paid-in capital 38,547,000 38,774,000
44,353,000 44,581,000
Accumulated deficit (29,324,000) (29,566,000)
Total stockholders' equity 15,029,000 15,015,000
Total Liabilities and Stockholders'
Equity $ 28,773,000 $ 29,663,000
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
MALLON RESOURCES CORPORATION AND SUBSIDIARIES
INTERIM CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
For the Six Months For the Three Months
Ended June 30, Ended June 30,
1993 1994 1993 1994
<S> <C> <C> <C> <C>
Revenues:
Oil and gas sales $ 690,000 $1,001,000 $ 347,000 $ 374,000
Deferred revenue amortization -- 1,132,000 -- 648,000
Mining management fee 81,000 -- -- --
Operating service revenue 74,000 201,000 37,000 96,000
Interest and other 29,000 39,000 27,000 17,000
874,000 2,373,000 411,000 1,135,000
Costs and expenses:
Oil and gas production 344,000 1,080,000 165,000 528,000
Mine operating expense 72,000 80,000 35,000 33,000
Depletion, depreciation and amortization 177,000 588,000 99,000 239,000
General and administrative 553,000 762,000 290,000 392,000
Interest and other 4,000 105,000 2,000 24,000
1,150,000 2,615,000 591,000 1,216,000
Net loss before dividends (276,000) (242,000) (180,000) (81,000)
Preferred stock dividends & accretion -- (67,000) -- (67,000)
Net loss available to common stockholders $ (276,000) $ (309,000) $(180,000) $ (148,000)
Net loss per share of common stock $ (0.06) $ (0.04) $ (.04) $ (.02)
Weighted average shares outstanding 4,960,000 7,656,000 5,057,000 7,658,000
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
MALLON RESOURCES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
For the Six Months
Ended June 30,
1993 1994
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (276,000) $ (242,000)
Adjustments to reconcile net loss to
net cash provided by operations:
Amortization of deferred revenue -- (1,132,000)
Depletion, depreciation and
amortization 176,000 588,000
Stock issued for compensation 46,000 (5,000)
Other -- (1,000)
(54,000) (792,000)
Changes in operating assets and liabilities:
(Increase) decrease in:
Accounts receivable (128,000) (39,000)
Inventory and other asset (34,000) (86,000)
Increase (decrease) in:
Accounts payable 46,000 226,000
Accrued taxes and expenses 44,000 90,000
Deferred revenues and
drilling advances (8,000) --
Net cash used in operating
activities (134,000) (601,000)
Cash flows from investing activities:
Increase in notes receivable-related
party (7,000) --
Additions to property and equipment (171,000) (820,000)
Purchase of marketable securities -- (1,000,000)
Net cash used in investing
activities (178,000) (1,820,000)
Cash flows from financing activities:
Payments on long term debt (31,000) (2,075,000)
Net proceeds from sale of common stock 939,000 --
Net proceeds from sale of preferred
stock -- 3,795,000
Proceeds from stock options exercised 127,000 --
Deferred offering costs (274,000) --
Payment of dividends -- (67,000)
Net cash provided by activities 761,000 1,653,000
Net increase (decrease) in cash and
cash equivalents 449,000 (768,000)
Cash and cash equivalents,
beginning of period 223,000 964,000
Cash and cash equivalents,
end of period $ 672,000 $ 196,000
Supplemental cash flow information:
Cash paid for interest $ 1,000 $ 94,000
Cash paid for income taxes $ -- $ --
Non-cash transactions:
Issuance of common stock in exchange for:
Acquisition of property and
equipment $ 216,000 $ 300,000
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
MALLON RESOURCES CORPORATION AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1. General
General. The accompanying interim consolidated financial
statements have been prepared in accordance with the instructions
for Form 10-Q. The Company believes all adjustments (consisting
of normal recurring adjustments) necessary for a fair statement
have been included. These interim statements should be read in
conjunction with the consolidated financial statements and notes
thereto included in the Company's Annual Report on Form 10-K for
the year ended December 31, 1993.
Change in Manner of Reserve Reporting. Commencing with this
quarterly report, the Company has excluded from the Company's
reported reserve quantities those reserves that are to be
delivered to third parties in satisfaction of the Company's
obligations under volumetric production payments (see Note 5).
Also, in the Company's consolidated statement of cash flows, the
sale of the volumetric production payment and the amortization of
the deferred revenue was moved from financing activities to
operating activities. The Company's standardized measure of
discounted future net cash flows will no longer include deferred
revenues to be amortized as production and delivery of volumetric
production payment quantities occurs in the future.
Nevertheless, all costs relating to the production and delivery
of such reserves for which the Company is obligated, including
income taxes, are included in such calculations. The changes can
be summarized as follows:
<TABLE>
<CAPTION>
As Previously
Presented at As Revised at
December 31, December 31,
1993 1993
<S> <C> <C>
Total proved oil reserves (bbls) 1,069,000 860,000
Proved oil reserves (bbls)
attributable to volumetric
production payment 209,000
Total proved gas reserves (mcf) 25,909,000 22,334,000
Proved gas reserves (mcf)
attributable to volumetric
production payment 3,575,000
Proved developed oil reserves (bbls) 811,000 602,000
Proved developed oil reserves (bbls)
attributable to volumetric
production payment 209,000
Proved developed gas reserves (mcf) 21,573,000 17,999,000
Proved gas reserves (mcf)
attributable to volumetric
production payment 3,575,000
Standardized measure of discounted
future net cash flows $23,907,000 $16,397,000
</TABLE>
While the Company accepts that the foregoing treatment of
volumetric production payment reserve is appropriate from an
accounting presentation perspective, the Company believes that it
would be misleading to exclude such reserves from presentations
of the Company's reserves prepared for other purposes.
Accordingly, the Company will continue its policy of clearly
disclosing reserves that are to be delivered to third parties in
satisfaction of the Company's obligations under volumetric
production payments.
Change in Manner of Mandatorily Redeemable Convertible
Preferred Stock Reporting - Commencing with this quarterly
report, the Company has changed the accounting for its
Mandatorily Redeemable Convertible Preferred Stock. The balance
of the preferred stock has been reclassified from equity to a
separate line item. Further, the Company is recording accretion
for the difference between the net proceeds received and the
mandatory redemption amount of $4,000,000.
Note 2. Oil and Gas Properties
The Company's oil and gas activities are conducted primarily
in the United States.
Depletion of oil and gas property costs were $2.41 and $2.98
per equivalent barrel of oil production for the six months ended
June 30, 1993 and 1994, respectively.
On September 30, 1993, the Company closed the purchase of
what was to the Company a significant amount of oil and gas
properties. The operations of those properties have been
included with the Company's accompanying consolidated statement
of operations, beginning October 1, 1993.
Capitalized Costs Relating to Oil and Gas Activities:
<TABLE>
<CAPTION>
June 30,
1993 1994
<S> <C> <C>
Oil and gas properties $ 18,942,000 $ 39,936,000
Accumulated depreciation, depletion,
amortization and impairment (15,955,000) (17,225,000)
$ 2,987,000 $ 22,711,000
</TABLE>
The Company does not have significant costs of unproved
properties or costs excluded from the full cost pool amortization
base.
Costs Incurred in Oil and Gas Producing Activities:
<TABLE>
<CAPTION>
Six Months Ended June 30,
1993 1994
<S> <C> <C>
Property acquisition costs $ 97,000 $ 508,000
Exploration costs -- --
Development costs 177,000 640,000
Full cost pool credits -- (97,000)
$274,000 $1,051,000
</TABLE>
Results of Operations from Oil and Gas Producing Activities:
<TABLE>
<CAPTION>
Six Months Ended June 30,
1993 1994
<S> <C> <C>
Oil and gas sales $ 690,000 $ 1,001,000
Deferred revenue amortization -- 1,132,000
Lease operating expense (344,000) (1,080,000)
Depreciation and depletion (147,000) (543,000)
Results of operations - from producing
activities (excluding corporate
overhead, interest and income taxes) $ 199,000 $ 510,000
</TABLE>
Estimated Quantities of Proved Oil and Gas Reserves and
Discounted Future Net Cash Flows:
Set forth below is a summary of the quantities of the
Company's proved crude oil and natural gas reserves estimated by
an independent consulting petroleum engineering firm for the year
ended December 31, 1993. All of the Company's reserves are
located in the continental United States.
<TABLE>
<CAPTION>
Oil Gas
(Bbls) (Mcf)
<S> <C> <C>
Company proved reserves, December 31, 1993 860,000 22,334,000
Proved developed reserve attributable to
the volumetric production payment 209,000 3,574,000
Company proved developed reserves,
December 31, 1993 602,000 17,999,000
</TABLE>
The Standardized Measure of Future Net Cash Flows was
$16,397,000 as of December 31, 1993 and does not include the
estimated effects of $9,818,000 for the volumetric production
payment discussed in Note 5.
The above information represents estimates only and should
not be construed as the current market value of the Company's oil
and gas reserves or the costs that would be incurred to obtain
equivalent reserves.
Note 3. Mineral Properties
The Company's principal precious metals property is the Rio
Chiquito project located in Guanacaste Province, Costa Rica. The
Company, through its wholly owned subsidiary Laguna Gold Company
(LGC), holds exploration and exploitation concessions covering
approximately 45,000 acres. In order to achieve profitable
operations, management believes that an additional capital
investment is required for equipment and improvements. Such
equipment and improvements would include additional mining
equipment, installation of permanent electricity, and
improvements to the processing facilities.
Note 4. Net Profits Interest
The net profits interest (the "NPI") sold to Enron in
connection with the Company's September 1993 acquisition provided
that 80% of the net revenues generated from the acquired
properties (exclusive of production delivered in satisfaction of
the production payment) were payable to Enron until such payments
aggregated $1,998,000, plus interest thereon equal to 15% per
annum. The Company recorded the NPI as a borrowing and accrued
interest as incurred. Certain of the Company's obligations under
the NPI were collateralized by liens on all of the acquired
properties. The principal balance and accrued interest were paid
in April 1994 and the NPI was retired.
Note 5. Deferred Revenue
In connection with the September 1993 acquisition, the
Company sold a volumetric production payment from the Company's
interest in the acquired properties for net proceeds of
$10,002,000. The production payment covers approximately 4.3
MMBTU of natural gas at an average price of $1.98 per MMBTU and
215,000 barrels at an average price of $13.01 per barrel to be
delivered over eight years. The Company is responsible for
production costs associated with operating the properties subject
to the production payment agreement. The amount received is
recorded as deferred revenue. Annual amortization of deferred
revenue, calculated on a units-of-production method and based on
the scheduled deliveries under the production payment agreement,
is as follows:
<TABLE>
<CAPTION>
Scheduled Deliveries
Annual Natural Gas Oil
Amortization (MMBTU) (Bbl)
<S> <C> <C> <C>
1994 $2,366,000 1,057,000 48,000
1995 2,030,000 934,000 37,000
1996 1,485,000 676,000 28,000
1997 1,168,000 503,000 26,000
1998 943,000 386,000 23,000
1999 751,000 302,000 19,000
2000 611,000 246,000 16,000
2001 464,000 186,000 12,000
$9,818,000 4,290,000 209,000
</TABLE>
Note 6. Contingency
The Minerals Management Service has commenced an audit of
royalties payable on certain oil and gas properties in which the
Company owns an interest. The operator of the properties is
contesting certain assorted deficiencies. The audit is not
complete, and it is not possible for the Company to estimate any
potential liability. However, management of the Company does not
believe that the ultimate outcome of this matter will have a
material negative impact on the financial position, liquidity or
results of operations, of the Company.
Note 7. Mandatorily Redeemable Convertible Preferred Stock
On April 15, 1994, the Company completed the private
placement (the "Placement") of 400,000 shares of its new Series B
Mandatorily Redeemable Convertible Preferred Stock, $0.01 par
value per share (the "Series B Stock"). The newly created Series
B Stock bears an 8% dividend payable quarterly, and is
convertible into shares of the Company's common stock at a
conversion price of $4.25 per share. Gross proceeds from the
Placement were $4,000,000. Mandatory redemption of this stock
begins on April 1, 1997, when 20% of the total outstanding shares
will be redeemed. An additional 20% per year will be redeemed on
each April 1 thereafter until all $4,000,000 of the Series B
Stock has been redeemed. The first $2,152,000 of net proceeds
(which are approximately $3,795,000) were applied to retire the
net profits interest held by Enron (see Note 4) that burdened
certain of the Company's producing oil and gas properties. The
remaining net proceeds will be used to drill development wells
and engage in other production enhancement operations on the
Company's properties. In connection with the Series B Stock,
dividends of $67,000 were paid on June 30, 1994.
Note 8. Income Taxes
At December 31, 1993, for tax purposes the Company's
remaining net operating loss carryforward was approximately
$4,500,000. This tax loss carryforward is in addition to net
operating losses arising from the operations of LGC prior to
1989, which can be utilized only to the extent of LGC's future
taxable income, but limited to consolidated taxable income.
The primary differences between the accumulated deficit and
tax loss carryforwards is due to amortization of syndication
costs, which are not deductible for tax purposes, foreign
subsidiaries which are not included in the consolidated tax
return, intangible drilling costs, the impairment of oil and gas
properties and depreciation and depletion.
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Liquidity, Capital Resources and Capital Expenditures:
Effective September 30, 1993, the Company acquired certain
oil and gas properties. As a part of the financing of the
acquisition, the Company undertook substantial obligations to
deliver oil and gas in satisfaction of its production payment
(see Note 5 to the consolidated financial statements) payable to
Enron Reserve Acquisition Corp. ("Enron"). This obligation will
not require all of the production or cash flows expected to be
generated from the acquired properties. The Company has started,
and will continue, to enhance the operations of the acquired
properties. The Company intends to spend approximately
$1,100,000 for these purposes.
As explained in previous filings, enhancement and drilling
programs initially have a negative impact on cash flows. To be
enhanced, the wells must be shut-in while procedures to improve
future production are performed. While shut-in, the properties
do not provide cash flows and also require the use of cash flows
to finance the enhancement procedures. The effect of this
combination of factors is seen in the results of the second
quarter and for the six months ended June 30, 1994, in which the
Company recorded negative cash flows.
The Company has obtained drilling permits for 6 locations
and will permit an additional 3 locations by the end of
September. Drilling on the first well began in early August and
drilling on other locations will begin immediately after work on
the first well has been completed. Production generally begins
within 30 days of drilling. As has been noted previously,
additional cash flows from new drilling is not expected to be
realized by the Company until the third and fourth quarters of
this year.
If, as intended, the Company pursues additional acquisitions
of proven oil and gas properties, it will require additional
acquisition capital. The source of any such capital is not yet
known, nor are any such acquisitions arranged. If an acquisition
is contracted, the Company would expect to finance it with a
combination of debt and equity capital, although the details of
such financing cannot be predicted at this time. No assurance
can be given that additional acquisitions will be arranged or
that the acquisition capital necessary to complete them will be
available.
On April 15, 1994, the Company completed the private
placement (the "Placement") of 400,000 shares of its Series B
Mandatorily Redeemable Convertible Preferred Stock, $0.01 par
value per share (the "Series B Stock"). The newly created Series
B Stock bears an 8% dividend payable quarterly, and is
convertible into shares of the Company's common stock at a
conversion price of $4.25 per share. Mandatory redemption of
this stock begins on April 1, 1997, when 20% of the total
outstanding shares will be redeemed. An additional 20% per year
will be redeemed on each April 1 thereafter until all $4,000,000
of the Series B Stock has been redeemed. Gross proceeds from the
Placement were $4,000,000; net proceeds were $3,795,000. The
first $2,100,000 of net proceeds were applied to retire the net
profits interest held by Enron (see Note 4 to the consolidated
financial statements) that burdened certain of the Company's
producing oil and gas properties. The remaining net proceeds
will be used to drill development wells and engage in other
production enhancement operations on the Company's properties.
The Company is exploring several alternatives to realize the
value of its mining properties. Until a feasibility study
relating to putting the Rio Chiquito deposit on production as a
commercial gold and silver mine is completed, it is uncertain
what will be the Company's share of any costs related to that
undertaking. No assurance can be given that the Company will be
able to borrow its share of any capital required, although the
Company intends to attempt to do so.
As of June 30, 1994, the Company had working capital of
$421,000 compared to working capital of $494,000 at June 30,
1993, and $964,000 at December 31, 1993. The decrease from year
end was caused primarily by an increase accounts payable and
accrued expenses of $316,000. Accounts payable and accrued
expenses increased due primarily to costs incurred in reworking
and developing the oil and gas properties.
Results of Operations:
Six months ended June 30, 1994 compared to June 30, 1993
The Company used cash flows in operations of $601,000 in the
first half of 1994 compared to using cash flows of $134,000 for
the same period in 1993. Net loss was $242,000 in 1994 and
$276,000 in 1993. Included in these losses is depletion,
depreciation and amortization of $588,000 and $176,000,
respectively. In 1994, amortization of deferred revenue of
$1,132,000 in 1994 had a significant negative impact on cash
flows from operations. Other non-cash items were $(6,000) and
$46,000, respectively. An increase in accounts payable and
accrued expenses of $316,000 in 1994 increased cash flows from
operations, while increases in accounts receivable and other
assets of $125,000 decreased cash flows from operations.
The Company's investing activities used cash flows of
$1,820,000 in 1994 compared to $178,000 in 1993. To increase
earnings on its excess cash, the Company purchased an investment.
The market value of the investment approximated its cost basis as
of June 30, 1993. More importantly, the Company has invested
significantly more in reworking, recompleting, drilling and
developing properties in 1994 compared to 1993.
Financing activities provided cash flows of $1,653,000 in
1994 as the result of the sale of the Company's Series B Stock
resulting in net proceeds of $3,795,000. Dividends related to
the Series B Stock paid totaled $67,000. Also impacting cash
flows provided by financing activities was payment of the
Company's net profits interest and related accrued interest, a
change of $2,075,000 since year end. In 1993, financing
activities provided cash flows of $761,000 as a result of the
private placement of $939,000 of the Company's common stock and
$127,000 of proceeds from stock options exercised. Deferred
offering costs incurred of $274,000 and payments on long-term
debt of $31,000 decreased the cash provided by financing
activities.
The September 1993 acquisition of producing oil and gas
properties has had a significant impact on the results of the
Company's operations. The Company began recording the results of
operations from the acquired properties effective September 30,
1993. The results of operations from the acquired properties
were recorded as a reduction of the purchase price for the first
quarter of the prior year. The following table summarizes the
results of oil and gas operations for the first half of the
Company's fiscal year:
<TABLE>
<CAPTION>
For the Six Months For the Six Months
Ended Ended
June 30, 1993* June 30, 1994*
<S> <C> <C>
Gas revenues $333,000 $305,000
Gas production (mcf) 243,000 203,000
Average price per mcf $1.37 $ 1.51
Oil revenues $357,000 $696,000
Oil production (bbl) 19,000 47,000
Average price per bbl $ 18.26 $14.86
</TABLE>
* Does not include 472,000 mcf and 25,000 bbls. delivered to
Enron pursuant to the terms of the volumetric production payment
agreement.
Exclusive of quantities produced and delivered pursuant to
the Company's volumetric production payment, oil and gas sales
increased during the first half of 1994 to $1,001,000 from
$690,000 in 1993, representing a $311,000 (or 45%) increase.
This increase is due primarily to the September 1993 acquisition.
Oil production net to Mallon increased by 28,000 barrels or
approximately 150%. Average oil prices, however, decreased $3.40
per barrel (or 19%). Gas production net to Mallon decreased by
40,000 mcf (or 16%). Even though total gas production increased
over the same period of the prior year, the gas production
delivered to meet the demand of the volumetric production payment
increased substantially to 285,000 mcf in the second quarter,
thereby reducing the net amount to the Company. Further,
production was curtailed in the Company's Burns Ranch area, which
reduced gas production net to the Company's interest. Gas prices
improved slightly by $.14 per mcf (or 10%). The decrease in oil
prices have, obviously, decreased the Company's potential to
generate cash flows.
Included in total revenues for 1994 is $1,132,000 from the
amortization of the Company's deferred revenues. Deferred
revenues were recorded from the sale of a volumetric production
payment covering approximately 4.3 MMBTU of gas and 215,000
barrels of oil. The deferred revenue is amortized based on the
units-of-production method as the scheduled deliveries are made
to the purchaser. The Company delivered approximately 472,000
mcf and 25,000 barrels to Enron in the first half of 1994. The
quantities to be delivered were at their highest level in the
second quarter of 1994. The Company incurs all costs related to
the production and delivery of these quantities.
Further limiting the Company's ability to generate cash
flows is the fact that certain of the Company's significant
properties, including the Mobil '12' well, the White Baby Comm.
#1 and #2, the Eddy '21' Federal #1, and the Allied '21' Federal
#1 were shut-in during the first part of 1994 while production
enhancement operations were performed. Also, the South Carlsbad
compressor was taken out of service for repairs. Of particular
note is the fact that the Mobil '12' recompletion was finalized
in late June, and is currently producing at 5,500,000 mcf per
day. Mallon owns a 58% interest in the Mobil '12'. While some
on-going reworking and recompleting operations will continue, the
bulk of this work has been completed, and the positive results of
this should be seen in the third and fourth quarters of this
year.
Lease operating expense per equivalent barrel average was
$5.93 in the first half of 1994 compared to $5.72 during the
first half of 1993. The increase of $.21 (or 4%), is due
primarily to workovers and repairs on the Company's properties.
The improvement in the gross margin generated from oil and
gas operations will enhance the Company's ability to further
improve and develop properties and meet its obligations.
There were no sales of gold and silver during the first half
of 1994 or 1993, and no sales are expected in the immediate
future. The Company recognized management fees of $81,000
associated with the Newmont operation in 1993. This agreement
expired as of March 31, 1993 and no additional revenues were
received from Newmont after this period. Direct costs related to
the mining operation were $80,000 in 1994 and $72,000 in 1993,
and no significant change in mining costs is anticipated.
Depletion, depreciation and amortization went to $2.98 per
barrel of oil equivalent for the first half of 1994, up from
$2.45 in 1993. The increase of $.53 (or 22%) is the result of an
increase in production in relation to the underlying reserve
basis.
Interest expense of $94,000 was up significantly in the
first half of 1994 ($3,000 was incurred in the first half of
1993) as the Company incurred interest at 15% on its net profits
interest. The net profits interest was paid in April 1994 and
interest will not be a significant factor in the future as the
Company has no other significant interest bearing debt.
Total general and administrative costs were $588,000 for
first half 1994, an increase of $35,000 (or 6%) over general and
administrative expenses of $553,000 for first half of 1993. The
increase is due primarily to increased salaries for additional
personnel (engineer, land man and treasurer) directly related to
the September 1993 acquisition, and an increase in legal fees.
The factors discussed above combined to result in a net loss
of $242,000 for the first half of 1994, compared to a net loss of
$276,000 for the comparable period in 1993. This represents a
$34,000 (or 12%) improvement in net loss over the first half of
the prior year.
The Company paid the 8% dividend on its $4,000,000 face
value Series B Stock. This amount totaled $67,000 for the period
from April 16, 1994 to June 30, 1994. The dividend is payable
quarterly and will total $80,000 per quarter in the future.
Three months ended June 30, 1994 compared to June 30, 1993
The Company used cash flows in operations of $1,149,000 in
the second quarter of 1994. Net loss was $81,000 in the second
quarter of 1994 . Included in this loss is amortization of
deferred revenues of $648,000, depletion, depreciation and
amortization of $243,000 and other non-cash items of $(7,000).
The primary reasons for the use of cash in operations in the
second quarter was due to reductions (payments) in accounts
payable and accrued expenses of $950,000 and amortization of the
deferred revenue related to the Company's volumetric production
payment of $648,000.
The Company's investing activities used cash flows of
$1,303,000 in the second quarter of 1994. As with the first half
of the year, the Company has invested significantly more
($303,000) in reworking and developing properties in 1994 than in
1993. The purchase of the marketable securities discussed
earlier occurred in the second quarter.
Financing activities provided cash flows of $1,576,000 in
1994 because the sale of the Series B Stock occurred in the
second quarter (net proceeds of $3,795,000) as did the payment of
the dividend on that preferred stock ($67,000) and the payment of
the net profits interest and accrued interest ($2,152,000).
The following table summarizes the results of oil and gas
operations for the second quarter:
<TABLE>
<CAPTION>
For the Quarter Ended For the Quarter Ended
June 30, 1993* June 30, 1994*
<S> <C> <C>
Gas revenues $ 167,000 $ 12,000
Gas production (mcf) 125,000 8,000
Average price per mcf $1.34 $1.51
Oil revenues $ 180,000 $ 363,000
Oil production (bbl) 10,000 24,000
Average price per bbl $18.04 $15.95
</TABLE>
* Does not include 285,000 mcf and 12,000 bbls. delivered to
Enron pursuant to the terms of the volumetric production payment
agreement.
Exclusive of quantities produced and delivered pursuant to
the Company's volumetric production payment, oil and gas sales
increased during the second quarter of 1994 to $374,000 from
$347,000 in 1993, representing a $27,000 (or 8%) increase. This
increase is due primarily to the September 1993 acquisition. Oil
production net to Mallon increased by 14,000 barrels or
approximately 140%. Average oil prices, however, decreased $2.09
per barrel (or 12%). Gas production net to Mallon decreased by
117,000 mcf or approximately 94%. The decrease in gas production
net to Mallon is related to the increase in gas quantities
required to be delivered pursuant to the terms of the volumetric
production payment (which totaled 285,000 mcf in the second
quarter). Further, production was curtailed in the Company's
Burns Ranch area, which reduced gas production net to the
Company's interest. Gas prices improved by $.17 per mcf (or
13)%. The decrease in oil prices has, obviously, decreased the
Company's potential to generate cash flows.
Included in total revenues for the second quarter of 1994 is
$648,000 from the amortization of the Company's deferred
revenues. Deferred revenues were recorded from the sale of a
volumetric production payment covering approximately 4.3 MMBTU of
gas and 215,000 barrels of oil. The deferred revenue is
amortized based on the units-of-production method as the
scheduled deliveries are made to the purchaser. The Company
delivered approximately 285,000 mcf and 12,000 barrels to Enron
in the second quarter of 1994. The quantities delivered were at
their highest level in the second quarter of 1994. The Company
incurs all costs related to the production and delivery of these
quantities.
Further limiting the Company's ability to generate cash
flows is the fact that the Company's biggest well, the Mobil '12'
well, was shut-in during the second quarter of 1994 while
production enhancement operations were performed. Also, the
South Carlsbad compressor was taken out of service for repairs.
The Mobil '12' recompletion was finalized in late June, and that
well is currently producing at 5,500,000 mcf per day. Mallon
owns a 58% interest in the Mobil '12'. While some on-going
rework and recomplete operations will continue, the bulk of this
work has been completed, and the positive results of the
enhancement operations should be seen in the third and fourth
quarters of this year.
Lease operating expense per equivalent barrel average was
$6.13 in the second quarter of 1994 compared to $5.35 during the
first half of 1993. The increase of $.78 (or 14%) is due
primarily to the workovers and repairs on certain properties.
Depletion, depreciation and amortization increased to $2.55
per barrel of oil equivalent for the second quarter of 1994, up
from $2.49 in 1993. The increase of $.06 (or 2%) is the result
of an increase in production in relation to the underlying
reserve basis.
Interest expense of $17,000 was up significantly in the
second quarter of 1994 ($2,000 was incurred in the second quarter
of 1993) as the Company incurred interest at 15% on its net
profits interest. The net profits interest was paid in April
1994 and interest will not be a significant factor in the future
as the Company has no other significant interest bearing debt.
Total general and administrative costs were $392,000 for
first half 1994, an increase of $102,000 (or 35%) over general
and administrative expenses of $290,000 for the second quarter of
1993. The increase is due primarily to increased salaries for
additional personnel (engineer, land man and treasurer) directly
related to the September 1993 acquisition, and an increase in
legal fees.
The factors discussed above combined to result in a net loss
of $81,000 for the second quarter of 1994, compared to a net loss
of $180,000 for the comparable period in 1993. This represents a
$99,000 (or 120%) improvement in net loss over the second quarter
of the prior year.
As noted earlier, the Company paid the 8% dividend on its
$4,000,000 face value Series B Stock. This amount totaled
$67,000 for the period from April 16, 1994 to June 30, 1994. The
dividend is payable quarterly and will total $80,000 per quarter
in the future.
Miscellaneous:
Commencing with this quarterly report, the Company has
excluded from the Company's reported reserve quantities those
reserves that are to be delivered to third parties in
satisfaction of the Company's obligations under volumetric
production payments (see Note 5 to the consolidated financial
statements). The Company's standardized measure of discounted
future net cash flows will no longer include deferred revenues to
be amortized as production and delivery of volumetric production
payment quantities occurs in the future. Nevertheless, all costs
relating to the production and delivery of such reserves for
which the Company is obligated, including income taxes, are
included in such calculations. The changes can be summarized as
follows:
<TABLE>
<CAPTION>
As Previously
Presented at As Revised at
December 31, December 31,
1993 1993
<S> <C> <C>
Total proved oil reserves (bbls) 1,069,000 860,000
Proved oil reserves (bbls)
attributable to volumetric
production payment 209,000
Total proved gas reserves (mcf) 25,909,000 22,334,000
Proved gas reserves (mcf)
attributable to volumetric
production payment 3,575,000
Proved developed oil reserves (bbls) 811,000 602,000
Proved developed oil reserves (bbls)
attributable to volumetric
production payment 209,000
Proved developed gas reserves (mcf) 21,573,000 17,999,000
Proved gas reserves (mcf)
attributable to volumetric
production payment 3,575,000
Standardized measure of discounted
future net cash flows $23,907,000 $16,397,000
</TABLE>
While the Company accepts that the foregoing treatment of
volumetric production payment reserve is appropriate from an
accounting presentation perspective, the Company believes that it
would be misleading to exclude such reserves from presentations
of the Company's reserves prepared for other purposes.
Accordingly, the Company will continue its policy of clearly
disclosing reserves that are to be delivered to third parties in
satisfaction of the Company's obligations under volumetric
production payments.
The Company's oil and gas operations are significantly
affected by certain provisions of the Internal Revenue Code of
1986, as amended (the "Code"), applicable to the oil and gas
industry. Current law permits the Company to deduct currently,
rather than capitalize, intangible drilling and development costs
incurred or borne by it. The Company, as an independent
producer, is also entitled to a deduction for percentage
depletion with respect to the first 1,000 barrels per day of
domestic crude oil (and/or equivalent units of domestic natural
gas) produced by it (if such percentage depletion exceeds cost
depletion). Generally, this deduction is 15% of gross income
from an oil and gas property, without reference to the taxpayer's
basis in the property. The percentage depletion deduction may
not exceed 100% of the taxable income from a given property.
Further, percentage depletion is limited in the aggregate to 65%
of the Company's taxable income. Any depletion disallowed under
the 65% limitation, however, may be carried over indefinitely.
At December 31, 1993, the Company had a net operating loss
("NOL") carryforward of approximately $4,500,000, which will
begin to expire in 2005. The amount and availability of an NOL
carryforward is subject to a variety of interpretations and
restrictions. Under a provision of the Code, a corporation's
ability to utilize an NOL carryforward to offset income following
an "ownership change" is limited. As a result of the sale of
common stock in the private placement and the sale of the Series
B Stock, an "ownership change" may have occurred, although that
conclusion is not certain. If an ownership change occurred, the
ability of the Company to use its NOL carryforward will be
limited so that a portion of the Company's NOL carryforward will
not be available to offset the Company's taxable income in a
particular year.
The Company has in the past and may in the future engage in
hedging transactions (transactions in which a portion of the
Company's future oil and/or gas production is sold into the
futures market) when management believes it is in the Company's
interest to do so. Such transactions "lock-in" prices, thus
protecting against future price downturns, but they also limit
the Company's ability to benefit from future price increases.
Inflation has not historically had a material impact on the
Company's consolidated financial statements, and management does
not believe that the Company will be materially more or less
sensitive to the effects of inflation than other companies in the
oil and gas business.
When evaluating the Company, its operations, or its
expectations, the reader should bear in mind that the Company and
its operations are subject to numerous risks and uncertainties.
Among these are risks related to the oil and gas and the mining
businesses (including operating risks and hazards and the
plethora of regulations imposed thereon), risks and uncertainties
related to the volatility of the prices of oil and gas and
minerals, uncertainties related to the estimation of reserves of
oil and gas and minerals and the value of such reserves, the
effects of competition and extensive environmental regulation,
the uncertainties related to foreign operations, and many other
factors, many of which are necessarily out of the Company's
control.
PART II
OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
None.
(b) Reports on Form 8-K:
None.
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.
REGISTRANT:
MALLON RESOURCES CORPORATION
Date: August 12, 1994 By: /s/ Roy K. Ross
Roy K. Ross
Executive Vice President
Date: August 12, 1994 By: /s/ Duane C. Knight, Jr.
Duane C. Knight, Jr.
Treasurer
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1994
<PERIOD-END> JUN-30-1994
<CASH> 196
<SECURITIES> 1,000
<RECEIVABLES> 917
<ALLOWANCES> 0
<INVENTORY> 32
<CURRENT-ASSETS> 2,252
<PP&E> 45,131
<DEPRECIATION> (18,013)
<TOTAL-ASSETS> 29,663
<CURRENT-LIABILITIES> 1,831
<BONDS> 9,182
<COMMON> 77
3,795
5,730
<OTHER-SE> 9,208
<TOTAL-LIABILITY-AND-EQUITY> 29,663
<SALES> 2,133
<TOTAL-REVENUES> 2,373
<CGS> 1,080
<TOTAL-COSTS> 1,430
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 105
<INCOME-PRETAX> (242)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (242)
<EPS-PRIMARY> (.04)
<EPS-DILUTED> 0
</TABLE>
