SECURITIES AND EXCHANGE COMMISSION
Washington, D. C.20549
Form 10-Q
(Mark One)
[X] Quarterly report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the
quarterly period ended March 31, 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 No. 0-17267
MALLON RESOURCES CORPORATION
(Exact name of registrant as specified in its charter)
COLORADO 84-1095959
(State or other jurisdiction of (I.R.S. 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 April 30, 2000, 7,839,700 shares of the registrant's common stock, par
value $0.01 per share, were outstanding.
<PAGE>
PART I -- FINANCIAL INFORMATION
Item 1 - Financial Statements
MALLON RESOURCES CORPORATION
CONSOLIDATED BALANCE SHEETS
(In thousands)
ASSETS
<TABLE>
<CAPTION>
March 31, December 31,
2000 1999
(Unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 1,681 $ 1,230
Accounts receivable:
Oil and gas sales 1,448 1,315
Joint interest participants, net of allowance of
$43 and $43, respectively 355 559
Related parties 65 53
Other 123 153
Inventories 217 200
Other 229 83
Total current assets 4,118 3,593
Property and equipment:
Oil and gas properties, full cost method 107,420 103,315
Natural gas processing plant 8,341 8,341
Other property and equipment 1,097 1,084
116,858 112,740
Less accumulated depreciation, depletion and amortization (54,444) (53,428)
62,414 59,312
Notes receivable-related parties 14 84
Debt issuance costs 1,763 1,885
Other, net 555 552
Total Assets $ 68,864 $ 65,426
======== ========
</TABLE>
(Continued on next page)
The accompanying notes are an integral part of these consolidated
financial statements.
<PAGE>
MALLON RESOURCES CORPORATION
CONSOLIDATED BALANCE SHEETS - Continued
(In thousands, except share amounts)
LIABILITIES AND SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
March 31, December 31,
2000 1999
(Unaudited)
<S> <C> <C>
Current liabilities:
Trade accounts payable $ 5,829 $ 4,883
Undistributed revenue 825 934
Accrued taxes and expenses 71 55
Current portion of long-term debt 414 399
Total current liabilities 7,139 6,271
Long-term debt, net of unamortized discount of $2,982 and
$3,146, respectively 38,664 34,874
Total liabilities 45,803 41,145
Commitments and contingencies
Series B Mandatorily Redeemable Convertible Preferred Stock,
$0.01 par value, 500,000 shares authorized, 135,200 shares
issued and outstanding, respectively, liquidation preference
and mandatory redemption of $1,352 1,344 1,341
Mandatorily Redeemable Common Stock, $0.01 par value, 420,000
shares authorized, issued and outstanding, mandatory
redemption of $5,250 3,548 3,450
Shareholders' equity:
Common Stock, $0.01 par value, 25,000,000 shares
authorized; 7,417,300 and 7,413,300 shares issued
and outstanding, respectively 74 74
Additional paid-in capital 77,470 77,013
Accumulated deficit (56,646) (54,914)
Notes receivable from shareholders (2,729) (2,683)
Total shareholders' equity 18,169 19,490
Total Liabilities and Shareholders' Equity $ 68,864 $ 65,426
======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
<PAGE>
MALLON RESOURCES CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
For the Three Months
Ended March 31,
2000 1999
(Unaudited)
<S> <C> <C>
Revenues:
Oil and gas sales $ 3,920 $ 3,020
Interest and other 62 18
3,982 3,038
Costs and expenses:
Oil and gas production 1,663 1,345
Depreciation, depletion and amortization 1,441 1,306
General and administrative 1,190 700
Interest and other 1,319 558
5,613 3,909
Net loss (1,631) (871)
Dividends on preferred stock and accretion (30) (30)
Accretion of mandatorily redeemable common stock (98) --
Net loss attributable to common shareholders $(1,759) $ (901)
======= =======
Basic:
Net loss per share attributable to common shareholders $ (0.22) $ (0.13)
======= =======
Weighted average common shares outstanding 7,836 7,022
======= =======
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
<PAGE>
MALLON RESOURCES CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
For the Three Months
Ended March 31,
2000 1999
(Unaudited)
<S> <C> <C>
Cash flows from operating activities:
Net loss $(1,631) $ (871)
Adjustments to reconcile net loss to net cash provided by (used in)
operating activities:
Depreciation, depletion and amortization 1,441 1,306
Accrued interest expense added to long-term debt 912 --
Accrued interest income added to notes receivable from shareholders (46) --
Amortization of discount on long-term debt 163 --
Stock compensation expense 366 41
Changes in operating assets and liabilities:
Decrease (increase) in:
Accounts receivable 89 232
Inventory and other assets (168) (127)
Increase (decrease) in:
Trade accounts payable and undistributed revenue 837 (1,968)
Accrued taxes and expenses 17 68
Deferred revenue -- (227)
Net cash provided by (used in) operating activities 1,980 (1,546)
Cash flows from investing activities:
Additions to property and equipment (4,304) (2,785)
Other 70 6
Net cash used in investing activities (4,234) (2,779)
Cash flows from financing activities:
Proceeds from long-term debt 2,824 4,380
Payments of long-term debt (96) (325)
Payment of preferred dividends (27) (27)
Other 4 --
Net cash provided by financing activities 2,705 4,028
Net increase (decrease) in cash and cash equivalents 451 (297)
Cash and cash equivalents, beginning of period 1,230 1,733
Cash and cash equivalents, end of period $ 1,681 $ 1,436
======= =======
Supplemental cash flow information:
Cash paid for interest $ 206 $ 480
======= =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE>
MALLON RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
___________
Note 1. General
Mallon Resources Corporation (the "Company") engages in oil and gas
exploration and production through its wholly-owned subsidiary, Mallon Oil
Company ("Mallon Oil"), whose oil and gas operations are conducted primarily in
the State of New Mexico. The Company operates its business and reports its
operations as one business segment. All significant inter-company balances and
transactions have been eliminated from the consolidated financial statements.
These unaudited consolidated financial statements have been prepared in
accordance with generally accepted accounting principles for interim financial
information and with the instructions to Form 10-Q and Article 10 of Regulation
S-X. Accordingly, they do not include all of the information and footnotes
required by generally accepted accounting principles for complete financial
statements. In the opinion of management, such interim statements reflect all
adjustments (consisting of normal recurring adjustments) necessary to present
fairly the financial position and the results of operations and cash flows for
the interim periods presented. The results of operations for these interim
periods are not necessarily indicative of the results to be expected for the
full year. These interim statements should be read in conjunction with the
consolidated financial statements and notes thereto included in the Company's
1999 Form 10-K.
Certain prior year amounts in the consolidated financial statements have
been reclassified to conform to the presentation used in 2000.
Note 2. Long-term Debt
Long-term debt consists of the following:
<TABLE>
<CAPTION
March 31, December 31,
2000 1999
<S> <C> <C>
Note payable to Aquila Energy Capital Corporation, due 2003 $36,627 $32,890
Less unamortized discount (effective rate of 13.7%) (2,982) (3,146)
33,645 29,744
Lease obligation to Universal Compression, Inc. 5,298 5,390
8.5% unsecured note payable to Bank One, Colorado, N.A., due 2002 135 139
39,078 35,273
Less current portion (414) (399)
Total $38,664 $34,874
======= =======
</TABLE>
In September 1999, the Company established a credit agreement (the "Aquila
Credit Agreement") with Aquila Energy Capital Corporation ("Aquila"). The
initial amount available under the agreement is $45.7 million. The amount
available may be increased to as much as $60 million as new reserves are added
through the Company's planned development drilling program. At March 31, 2000,
the Company had drawn $36.6 million, including accrued interest, under the
Aquila Credit Agreement.
The borrowing base is subject to redetermination annually on or before
April 30. Aquila has delayed its April 2000 redetermination until certain
wells drilled by the Company during the first four months of 2000 are completed
and their reserves are evaluated. The Company had delayed its completion of the
wells pending receipt of approval from the Jicarilla Apache Tribe to commingle
gas from different zones. The approval was received in April 2000.
<PAGE>
Principal payments on the four-year loan are based on the Company's cash
flow from operations, as defined, less advances for the Company's development
program. As of March 31, 2000, the advances exceeded cash flow from operations
and the Company had not made any principal payments.
During first quarter 2000, the Company repaid $92,000 of lease obligation
to Universal Compression and $4,000 of unsecured note payable to Bank One.
Note 3. Earnings (Loss) per Share
Under the provisions of Statement of Financial Accounting Standards
("SFAS") No. 128, basic earnings per share is computed by dividing income
available to common shareholders by the weighted average number of common
shares outstanding for the period. Diluted earnings per share reflects the
potential dilution that could occur if the Company's outstanding stock options
and warrants were exercised (calculated using the treasury stock method) or if
the Company's Series B Mandatorily Redeemable Convertible Preferred Stock were
converted to common stock.
The consolidated statements of operations for the three months ended
March 31, 2000 and 1999 reflect only basic earnings per share because the
Company was in a loss position for all periods presented and all common stock
equivalents are anti-dilutive.
Note 4. Hedging Activities
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities." SFAS No. 133
establishes accounting and reporting standards requiring that every derivative
instrument (including certain derivative instruments embedded in other
contracts) be recorded in the balance sheet as either an asset or liability
measured at its fair value. SFAS No. 133 requires that changes in the
derivative's fair value be recognized currently in earnings unless specific
hedge accounting criteria are met. Special accounting for qualifying hedges
allows a derivative's gains and losses to offset related results on the hedged
item in the income statement, and requires that a company must formally
document, designate, and assess the effectiveness of transactions that receive
hedge accounting. SFAS No. 133 is effective for all fiscal quarters of fiscal
years beginning after June 15, 2000, but early adoption is permitted. SFAS No.
133 cannot be applied retroactively.
The Company has not yet quantified the impact of adopting SFAS No. 133 on
its financial statements and has not determined the timing or method of
adoption of SFAS No. 133. However, SFAS No. 133 could increase volatility in
earnings and other comprehensive income.
Note 5. Subsequent Events
In April 2000, the Company redeemed 55,200 shares of its Series B
Mandatorily Redeemable Convertible Preferred Stock at the mandatory redemption
price of $10 per share by issuing a convertible promissory note for $552,000.
Interest on the note accrues at 11.3% and is payable quarterly beginning on
June 30, 2000. The note and all unpaid accrued interest is payable in full on
April 15, 2001. The holder of the note may at any time cause any part of the
unpaid principal and accrued interest due to be converted into shares of the
Company's common stock using the same conversion price applicable to the
remaining Series B Preferred Stock shares, currently $10.28. After this
transaction, 80,000 shares of Series B Preferred Stock remain outstanding, all
of which the Company is required to redeem in April 2001.
In April 1999, Mallon Oil filed a civil action to collect approximately
$265,000 of unpaid joint-interest billings from Wadi Petroleum, Inc. relating
to certain oil and gas properties operated by the Company. In April 2000, the
Company settled the matter for a payment to the Company of $150,000 and the
assignment to the Company of certain oil and gas properties.
In April 2000, the Government of Costa Rica awarded the Company a
concession to explore for oil and natural gas on approximately 2.3 million
acres in the northeast quadrant of Costa Rica. The concession acreage is
contained in six large contiguous onshore acreage blocks. The Company must
complete an environmental assessment of its proposed operations within the next
four months, and expects to sign final contracts thereafter. The work program
will require the expenditure of $8.8 million (including the drilling of six
wells) over a three-year period, with a possible extension of three more years.
<PAGE>
Item 2 - Management's Discussion and Analysis of Financial Condition and
Results of Operations
The following discussion is intended to assist in understanding our
consolidated financial position at March 31, 2000 and December 31, 1999, and
results of operations and cash flows for the three months ended March 31, 2000
and 1999. Our Consolidated Financial Statements and notes thereto should be
referred to in conjunction with the following discussion.
Overview
Our revenues, profitability and future growth rates will be substantially
dependent upon our drilling success in the San Juan and Delaware Basins, and
prevailing prices for oil and gas, which are in turn dependent upon numerous
factors that are beyond our control, such as economic, political and regulatory
developments and competition from other sources of energy. The energy markets
have historically been volatile, and oil and gas prices can be expected to
continue to be subject to wide fluctuations in the future. A substantial or
extended decline in oil or gas prices could have a material adverse effect on
our financial position, results of operations and access to capital, as well as
the quantities of oil and gas reserves that we may produce economically.
Liquidity and Capital Resources
Our operations are capital intensive. Historically, our principal sources
of capital have been cash flow from operations, advances from our fixed-term
credit facility, a revolving line of credit and proceeds from sales of common
and preferred stock. Our principal uses of capital have been for the
acquisition, exploration and development of oil and gas properties and related
facilities.
During first quarter 2000, our capitalized costs incurred in oil and gas
producing activities were $4.1 million. Our 2000 capital expenditure budget is
$23.4 million. During first quarter 2000, we drilled 14 wells of the total 50
wells we plan to drill during the year. One well drilled was completed, one is
completing and the remaining 12 wells are awaiting completion, as discussed
below. We expect to fund our capital requirements for the next 12 months out of
cash flow from operations and borrowings, as described below.
In September 1999, we established a credit agreement with Aquila Energy
Capital Corporation (the "Aquila Credit Agreement"). The initial amount
available under the agreement was $45.7 million. As of May 1, 2000, we had
drawn $40.1 million, including accrued interest, under the Aquila Credit
Agreement. The amount available under the Aquila Credit Agreement may be
increased to as much as $60 million as new reserves are added through our
development drilling program. Our planned capital expenditures during 2000
anticipate that at least $53 million will be available to us under this credit
agreement. We expect these additional funds to be made available as our
drilling program proceeds. The borrowing base is subject to redetermination
annually on or before April 30. Aquila has delayed its April 2000
redetermination until certain wells we drilled during the first four months of
2000 are completed and their reserves are evaluated. We had delayed completion
of the wells pending receipt of approval from the Jicarilla Apache Tribe to
commingle gas from different zones. The approval was received in April 2000.
Principal payments on the four-year loan are based on the Company's cash flow
from operations, as defined, less advances for the Company's development
program. As of March 31, 2000, the advances exceeded cash flow from operations
and the Company had not made any principal payments.
We do not anticipate making any principal payments for the remainder of
this year because we expect drilling expenditures to equal or surpass defined
cash flow from operations during that period. The Aquila Credit Agreement is
secured by substantially all of our oil and gas properties. Interest on the
Aquila Credit Agreement accrues at prime plus 2% and will be added to the loan
balance. The outstanding loan balance is due in full on September 9, 2003. As
part of the transaction, we also entered into a four year agency agreement with
Aquila under which we pay a marketing fee equal to 1% of the net proceeds from
the sale of all of our oil and gas production. In addition, we also issued to
Aquila 420,000 shares of common stock. Aquila also has a one-time right to
require us to purchase 420,000 of our common shares from Aquila at $12.50 per
share during the 30-day period beginning September 9, 2003.
In April 2000, the Government of Costa Rica awarded us a concession to
explore for oil and natural gas on approximately 2.3 million acres in the
northeast quadrant of Costa Rica. The concession acreage is contained in six
<PAGE>
large contiguous onshore acreage blocks. We must complete an environmental
assessment of our proposed operations within the next four months, and we
expect to sign final contracts thereafter. The work program will require the
expenditure of $8.8 million (including the drilling of six wells) over a three-
year period, with a possible extension of three more years.
We are currently considering options to secure additional capital to
continue our active drilling and development program through 2000, in the event
that our borrowing base under the Aquila Credit Agreement becomes insufficient.
The options include the issuance of preferred or other equity securities.
However, there is no assurance that we will be able to obtain additional
funding.
In September 1999 we also entered into a five-year, $5.5 million master
rental contract with Universal Compression, Inc. to refinance our East Blanco
gas sweetening plant. The proceeds from that financing were used to repay a
term loan from Bank One, Texas, N.A. that was secured by the plant. The master
rental contract bears interest at an imputed rate of 12.8%. We made principal
payments totaling $92,000 to Universal Compression during first quarter 2000.
In July 1998, we negotiated an unsecured term loan for up to $205,000 with
Bank One, Colorado, N.A. to finance the purchase of land and a building for our
field office. We drew $155,000 on this loan during 1998.We repaid $4,000 of
this loan during first quarter 2000.
Under the mandatory redemption feature of our Series B Mandatorily
Redeemable Convertible Preferred Stock we were required to redeem 55,200 shares
in April 2000, and will be required to redeem the remaining 80,000 shares in
April 2001. The mandatory redemption price is $10.00 per share, plus any
accrued but unpaid dividends. We made the April 2000 redemption by issuing a
convertible promissory note for $552,000. Interest on the note accrues at 11.3%
and is payable quarterly beginning on June 30, 2000. The note and all unpaid
accrued interest is payable in full on April 15, 2001. The holder of the note
may at any time cause any part of the unpaid principal and accrued interest due
to be converted into shares of Mallon's common stock, using the same conversion
price applicable to the remaining Series B Preferred Stock shares, currently
$10.28. The Series B Stock is convertible to common stock automatically if the
common stock trades at a price in excess of 140% of the then applicable
conversion price for each day in a period of 10 consecutive trading days.
Results of Operations
<TABLE>
<CAPTION>
Three Months Ended
March 31,
2000 1999
(In thousands,
except per unit data)
<S> <C> <C>
Operating Results from Oil and Gas Operations:
Oil and gas sales $3,920 $3,020
Production tax and marketing expense 557 445
Lease operating expense 1,106 900
Depletion 1,251 1,211
Depreciation 44 67
Net Production:
Oil (MBbl) 43 47
Natural gas (MMcf) 1,444 1,686
MMcfe 1,702 1,968
Average Sales Price Realized (1):
Oil (per Bbl) $23.84 $11.53
Natural gas (per Mcf) 2.00 1.47
Per Mcfe 2.30 1.53
<PAGE>
Three Months Ended
March 31,
2000 1999
(In thousands,
except per unit data)
<S> <C> <C>
Average Cost Data (per Mcfe):
Production tax and marketing expense $0.33 $0.22
Lease operating expense 0.65 0.46
Depletion 0.74 0.62
Depreciation 0.03 0.03
_________________
(1) Includes effects of hedging.
</TABLE>
Three Months Ended March 31, 1999 Compared to March 31, 1998
Revenues. Total revenues for first quarter 2000 increased 31% to $3,982,000
from $3,038,000 for first quarter 1999. Oil and gas sales for first quarter
2000 increased 30% to $3,920,000 from $3,020,000 for first quarter 1999
primarily due to higher oil and gas prices realized, partially offset by a
decline in oil and gas production. Average oil prices per barrel for first
quarter 2000 increased 107% to $23.84 from $11.53 for first quarter 1999.
Average gas prices per Mcf for first quarter 2000 increased 36% to $2.00 from
$1.47 for first quarter 1999. Oil production for first quarter 2000 decreased
9% to 43,000 barrels from 47,000 barrels for first quarter 1999 and gas
production for first quarter 2000 decreased 14% to 1,444,000 Mcf from 1,686,000
Mcf for first quarter 1999. Production for first quarter 2000 is down because
the 1999 drilling and recompletion program was delayed for most of 1999 pending
the receipt of additional financing in September 1999. In addition, the
completion of certain wells in 2000 was delayed pending approval to commingle
gas from different zones. The approval was received in April 2000.
Oil and Gas Production Expenses. Oil and gas production expenses, including
production tax and marketing expenses, increased 24% to $1,663,000 from
$1,345,000 in 1999. Total oil and gas production expenses per Mcfe increased
$0.30, or 44%, to $0.98 for the 2000 quarter from $.68 for the 1999 quarter.
Production tax and marketing expense per Mcfe increased 50% to $0.33 from $.22
due to higher oil and gas prices in the 2000 quarter. Lease operating expense
per Mcfe increased 41% to $0.65 from $0.46 per Mcfe in the 2000 quarter due to
increased personnel and increases in salary, compression and well pulling
costs.
Depreciation, Depletion and Amortization. First quarter 2000 depreciation,
depletion and amortization increased 10% to $1,441,000 from $1,306,000 in first
quarter 1999. Depletion per Mcfe increased 19% to $0.74 from $0.62, due to a
higher ratio of increases in capital expenditures relative to increases in
reserves.
General and Administrative Expenses. Net general and administrative
expenses for first quarter 2000 increased 70% to $1,190,000 from $700,000 in
first quarter 1999, primarily due to higher stock compensation expense in the
2000 quarter, as a result of the issuance of employee stock options with a
below-market strike price.
Interest and Other Expenses. Interest and other expenses for first quarter
2000 increased 136% to $1,319,000 from $558,000 for first quarter 1999. The
increase was primarily due to a higher outstanding debt balance in the 2000
quarter.
Income Taxes. We incurred net operating losses ("NOLs") for U.S. Federal
income tax purposes in 2000 and 1999, which can be carried forward to offset
future taxable income. Statement of Financial Accounting Standards No. 109
requires that a valuation allowance be provided if it is more likely than not
that some portion or all of a deferred tax asset will not be realized. Our
ability to realize the benefit of our deferred tax asset will depend on the
generation of future taxable income through profitable operations and the
expansion of our oil and gas producing activities. The market and capital risks
associated with achieving the above requirement are considerable, resulting in
our decision to provide a valuation allowance equal to the net deferred tax
asset. Accordingly, we did not recognize any tax expense or benefit in the
consolidated statements of operations for the first quarters of 2000 and 1999.
Net Loss. We had a net loss of $1,631,000 for first quarter 2000 compared
to net loss of $871,000 for first quarter 1999 as a result of the factors
discussed above. We paid the 8% dividend of $27,000 on our $1,352,000 face
amount Series B Mandatorily Redeemable Convertible Preferred Stock in each of
the quarters ended March 31, 2000
<PAGE>
and 1999, and realized accretion of $3,000 in each period. In addition, during
first quarter 2000 we realized accretion of $98,000 on the Mandatorily
Redeemable Common Stock that we issued in September 1999. Net loss
attributable to common shareholders for the quarter ended March 31, 2000 was
$1,759,000 compared to $901,000 for the quarter ended March 31, 1999.
Hedging Activities
We use hedging instruments to manage commodity price risks. We have used
energy swaps and other financial arrangements to hedge against the effects of
fluctuations in the sales prices for oil and natural gas. Gains and losses on
such transactions are matched to product sales and charged or credited to oil
and gas sales when that product is sold. Management believes that the use of
various hedging arrangements can be a prudent means of protecting our financial
interests from the volatility of oil and gas prices. Under our Aquila Credit
Agreement, we agreed to maintain price hedging arrangements in place with
respect to up to 65% of our oil and gas production upon terms satisfactory to
us and Aquila. We recognized hedging (losses) gains of ($527,000) and $196,000
in first quarter 2000 and 1999, respectively. These amounts are included in oil
and gas sales in our consolidated statements of operations.
Miscellaneous
Our operations are significantly affected by certain provisions of the
Internal Revenue Code applicable to the oil and gas industry. Current law
permits our intangible drilling and development costs to be deducted currently,
or capitalized and amortized over a five-year period. We, as an independent
producer, are 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 (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 our taxable income. Any depletion disallowed under
the 65% limitation, however, may be carried over indefinitely.
Inflation has not historically had a material impact on our financial
statements, and management does not believe that we will be materially more or
less sensitive to the effects of inflation than other companies in the oil and
gas business.
The preceding information contains forward-looking statements, the
realization of which cannot be assured. Actual results may differ significantly
from those forecast. When evaluating us, our operations, or our expectations,
the reader should bear in mind that we and our operations are subject to
numerous risks and uncertainties. Among these are risks related to the oil and
gas business generally (including operating risks and hazards and the
regulations imposed thereon), risks and uncertainties related to the volatility
of the prices of oil and gas, uncertainties related to the estimation of
reserves of oil and gas and the value of such reserves, uncertainties relating
to geologic models and evaluations, the effects of competition and extensive
environmental regulation, and other factors, many of which are necessarily
beyond our control. These and other risk factors that affect our business are
discussed in our 1999 Form 10-K.
Item 3 - Quantitative and Qualitative Disclosures about Market Risk
We use commodity derivative financial instruments, including swaps, to
reduce the effect of natural gas and crude oil price volatility on a portion of
our natural gas and crude oil production. Commodity swap agreements are
generally used to fix a price at the natural gas or crude oil market location
or to fix a price differential between a benchmark price of natural gas and
crude oil and the price of gas or crude oil at its market location. Settlements
are based on the difference between a fixed and a variable price as specified
in the agreement. The following table summarizes our derivative financial
instrument position on our natural gas and crude oil production as of March 31,
2000. The fair value of these instruments reflected below is the estimated
amount that we would receive (or pay) to settle the contracts as of March 31,
2000. Actual settlement of these instruments when they mature will differ from
these estimates reflected in the table. Gains or losses realized from these
instruments hedging our production are expected to be offset by changes in the
actual sales price received by us for our natural gas and crude oil production.
See "Hedging Activities" above.
<PAGE>
<TABLE>
<CAPTION>
Natural Gas:
Fixed Price
Year MMBtu per MMBtu Fair Value
<S> <C> <C> <C>
2000 4,050,000 $2.02 $(3,017,000)
2001 1,452,000 $2.55 (359,000)
2002 1,188,000 $2.55 (183,000)
2003 996,000 $2.55 (178,000)
2004 852,000 $2.55 (185,000)
Crude Oil:
2000 63,000 $18.73-$20.86 $(384,000)
2001 60,000 $17.38-$18.61 (275,000)
2002 60,000 $17.40 (220,000)
2003 48,000 $17.40 (141,000)
2004 48,000 $17.40 (123,000)
</TABLE>
In addition, we entered into a basis swap to fix the differential between
the NYMEX price and the index price at which the hedged gas is to be sold for
4,488,000 MMBtu for 2001 - 2004 with a fair value of $(213,000).
PART II -- OTHER INFORMATION
Item 6 - Exhibits and Reports on Form 8-K
(a) Exhibits:
None.
(b) Reports on Form 8-K:
During first quarter 2000, the Company filed two Periodic Reports on Form
8-K dated February 22, 2000 and March 30, 2000, each related to an "Item 5.
Other Events" matter.
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.
MALLON RESOURCES CORPORATION
Registrant
Date: May 15, 2000 By: /s/ Roy K. Ross
Roy K. Ross
Executive Vice President
Date: May 15, 2000 By: /s/ Alfonso R. Lopez
Alfonso R. Lopez
Vice President, Finance/Treasurer
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THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED
FROM THE COMPANY'S FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
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