United States
Securities and Exchange Commission
Washington, D. C. 20549
Form 10-Q
(Mark one)
[X] Quarterly Report Under Section 13 or 15(d) of the Securities Exchange
Act of 1934 For the Quarterly Period Ended March 31, 1999
[ ] Transition Report Under Section 13 or 15(d) of the Securities Exchange
Act of 1934 For the Transition Period from .......... to ..........
Commission File Number..........1-12508
MAGNUM HUNTER RESOURCES, INC.
Exact name of registrant as specified in its charter
Nevada 87-0462881
State or other jurisdiction of IRS employer identification No.
incorporation or organization
600 East Las Colinas Blvd., Suite 1200, Irving, Texas 75039
Address of principal executive offices
(972) 401-0752
Registrant's telephone number, including area code
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
State the number of shares outstanding of each of the issuer's classes of
common equity, as of May 14, 1999: 20,082,341.
<PAGE>
PART I -- FINANCIAL INFORMATION
Item 1. Financial Statements
The consolidated financial statements of Magnum Hunter Resources, Inc.
("Magnum Hunter"or the "Company") follow "Item 2. Management's Discussion and
Analysis of Financial Condition and Results of Operation".
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operation
The following discussion and analysis should be read in conjunction with
Magnum Hunter's consolidated financial statements and the notes associated with
them contained in its Form 10-K for the year ended December 31, 1998. This
discussion should not be construed to imply that the results discussed herein
will necessarily continue into the future or that any conclusion reached herein
will necessarily be indicative of actual operating results in the future. Such
discussion represents only the best present assessment by management of Magnum
Hunter.
On April 29, 1997 the Company received and accepted a new loan commitment
from Bankers Trust Company, as Agent, and other banks for a senior credit
facility for the Company and several of its subsidiaries. The new senior credit
facility was structured as a $130 million Credit Facility with a term of five
years. The Credit Facility provided the Company the flexibility of choosing a
range of either "LIBOR" or "Prime" based interest rate options. This Credit
Facility replaced the Company's previously existing $100 million revolving
credit facility.
On May 29, 1997, the Company placed, through a Rule 144A private placement
offering, $140 million in Senior Notes due 2007. The Notes have a 10% coupon,
with interest payable on June 1 and December 1, commencing on December 1, 1997.
Except for Bluebird Energy, Inc. ("Bluebird"), there is no restriction on the
ability of any consolidated or unconsolidated subsidiary to transfer funds to
the Company in the form of cash dividends, loans or advances. Net proceeds from
the sale of the Senior Notes were used to completely repay the Company's
outstanding bridge loan facility in the principal amount of $60 million with the
remaining proceeds used to repay a substantial portion of the Company's
outstanding revolving credit facility. At that time, the maximum commitment
under the revolving credit facility was reduced from $130 million to $75
million, with a borrowing base of $60 million. The credit facility was amended
as of September 30, 1997, to increase the maximum commitment from $75 million to
$125 million, increase the borrowing base by $5 million to $65 million, and
modify the interest expense coverage ratio test.
On January 28, 1998, the Company commenced a cash purchase offer for Units
of TEL Offshore Trust. Previous to the offer, the Company owned 161,500 Units
representing 3.4% of the Units outstanding. As amended, the offer was to
purchase between forty percent (40%) and sixty percent (60%) of the Trust's
outstanding Units at $5.50 per Unit. On March 27, 1998, the Company purchased
1,745,353 Units for $10.4 million pursuant to the tender offer and, together
with the Units it previously owned, became the owner of approximately 40% of the
total number of Units outstanding for an aggregate of $10.4 million.
On December 31, 1998, the Company through its newly formed 100% owned
subsidiary, Bluebird acquired from Spirit Energy 76 ("Spirit 76") natural gas
reserves and associated assets in producing fields located in Oklahoma and Texas
currently producing approximately 12 million cubic feet of natural gas
equivalent per day. The net purchase price was approximately $25 million after
certain purchase price adjustments, including preferential rights exercised by
third parties and other customary adjustments. As part of the capitalization of
Bluebird, the Company contributed 1,840,271 units of TEL Offshore Trust.
Bluebird, as an "unrestricted subsidiary" as defined under certain credit
agreements, is neither a guarantor of the Company's 10% Senior Notes due 2007
nor can it be included in the determining compliance with certain financial
covenants under the Company's credit agreements. To finance the Spirit 76
Acquisition, Bluebird borrowed $26 million under a bridge loan facility with
several banks. The maturity date of the bridge loan facility, as amended, is May
31, 1999. The loan is non-recourse to the Company. Bluebird has secured a
commitment for permanent financing from a bank providing for a revolving credit
facility of $75 million with an initial borrowing base of $30 million, due three
years from the date of closing (anticipated to be June 8, 1999) with interest
rates for either "LIBOR" or "Base Rate" (Prime).
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On February 3, 1999, the Company sold $50 million of its Convertible
Preferred Stock in a private placement to ONEOK, Inc. The Preferred Stock has a
liquidation value of $50 million and is convertible into the Company's common
stock at $5.25 per share. Dividends on the preferred stock are payable in cash
at the rate of 8% per annum and are cumulative. The Company used the net
proceeds from the transaction, approximately $46.3 million, to repay senior bank
indebtedness.
The Company uses the full cost method of accounting for its investment in
oil and gas properties. Under the full cost method of accounting, all costs of
acquisition, exploration and development of oil and gas reserves are capitalized
into a "full cost pool" as incurred, and properties in the pool are depleted and
charged to operations using the unit-of-production method based on the ratio of
current production to total proved oil and gas reserves. To the extent that such
capitalized costs (net of accumulated depreciation, depletion and amortization)
less deferred taxes exceed the SEC PV-10 of estimated future net cash flow from
Proved Reserves of oil and gas, and the lower of cost or fair value of unproved
properties after income tax effects, such excess costs are charged to
operations. Once incurred, a write-down of oil and gas properties is not
reversible at a later date even if oil or gas prices increase. The Company's
capitalized costs exceeded the SEC PV-10 limitation utilizing prices in effect
at March 31, 1999. However, as allowed by SEC rules, no write-down for
impairment of oil and properties was required as a result of the increase in oil
and gas prices subsequent to March 31, 1999. Significant downward revisions of
quantity estimates or declines in oil and gas prices, which are not offset by
other factors, could possibly result in write-down for impairment of oil and gas
properties in the future.
Results of Operations for the Three Month Periods in 1999 and 1998
The results of operations for the three month period ended March 31, 1999,
included three months of operations for Spirit 76 and TEL, while the
corresponding period in 1998 did not include any results of operations from
these acquisitions. Unless otherwise stated, the increases in the 1999 interim
period over the 1998 period were substantially the result of these acquisitions
as well as the Company's drilling activities during the remainder of 1998.
Oil and natural gas sales were $11,321,000, a seven percent increase over
1998 sales of $10,555,000. The Company sold 286,832 barrels of oil, a nine
percent increase over 1998 sales of 262,428 barrels of oil, and 4,551,407 Mcf of
gas, a 40% increase over 1998 sales of 3,261,217 Mcf. The price received for oil
was $10.93 per barrel and for natural gas was $1.80 per Mcf in 1999 versus an
oil price of $14.44 per barrel and a gas price of $2.07 per Mcf in 1998,
representing a 24% decrease in oil price and a 13% decrease in gas price. Oil
and natural gas production lifting costs decreased 13% to $3,193,000 in 1999
while production taxes and other costs decreased one percent to $1,465,000 in
1999 compared to 1998. The gross operating margin from oil and natural gas
production was $6,663,000 in 1999, a 24% increase over 1998 operating margin of
$5,380,000. On an equivalent unit basis, the gross margin was $1.06 per Mcfe in
1999 versus $1.11 in 1998, a 5% decrease. The sales price declined 17% to $1.80
per Mcfe in 1999 versus $2.18 per Mcfe while production lifting costs decreased
to $0.51 per Mcfe in 1999 from $0.76 per Mcfe in 1998, a 33% decrease.
Production taxes and other costs, including overhead, were $0.23 per Mcfe in
1999 versus $0.31 per Mcfe in 1998, a 26% decrease. Total Mcfe sold increased
30% to 6,272,399 Mcfe in 1999 from 4,835,785 Mcfe in 1998.
Gas gathering, marketing, and processing revenues were $1,626,000 in the
1999 period, a 19% decrease from 1998 revenues of $2,005,000, principally as a
result of the decline in natural gas and natural gas liquids prices. Costs from
these activities were $1,276,000 in 1999, a 18% decrease from 1998 costs of
$1,559,000. Gross operating margin was $350,000 in 1999 versus $446,000 in 1998,
a 22% decrease. Gathering system throughput decreased six percent to 19,633 Mcf
per day in 1999 compared to 20,899 Mcf per day in 1998. Natural gas plant
processing throughput was 15,085 Mcf per day in 1999 versus 15,813 Mcf per day
in 1998, a five percent decrease. Gross operating margin from gathering
operations was $0.14 per Mcf of throughput in 1999 versus $0.12 per Mcf of
throughput in 1998. The gross operating margin from natural gas processing was
$0.06 per Mcf of throughput in 1999 versus $0.17 per Mcf of throughput in 1998.
Revenues from oil field services and international sales were $158,000 in
1999 versus $193,000 in 1998. Operating costs decreased to $71,000 in 1999 from
$99,000 in 1998. The gross operating margin was $87,000 in 1999 versus
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$94,000 in 1998. Depreciation and depletion expense increased 33% to
$5,148,000 in 1999 versus $3,875,000 in 1998. General and administrative expense
was $686,000 in 1999, a 9% decrease from 1998. Operating profit decreased 2% to
$1,266,000 in 1999 from $1,295,000 in 1998. The Company booked equity in loss of
affiliate of $31,000 in 1999 versus $49,000 in 1998. Other income was $163,000
in 1999 versus $201,000 in 1998. Interest expense increased 49% to $6,317,000 in
1999 from $4,233,000 in 1998, due primarily to amortization of bridge loan fees
on the Spirit 76 acquisition previously mentioned. The Company provided for no
deferred income tax benefit on the loss before tax and minority interest of
$4,919,000 in 1999 versus a benefit of $1,040,000 on a loss of $2,786,000 in
1998, due to a valuation allowance on utilization of deferred tax amounts in
1999. The Company reported a net loss of $5,795,000, or $0.29 per common share,
in 1999 versus a loss of $1,966,000, or $0.09 per common share in 1998. The
Company accrued $833,000 in dividends on its preferred stock in 1999 versus
$219,000 in 1998.
Liquidity and Capital Resources
The Company has three principal operating sources of cash: (i) sales of oil
and gas, (ii) revenues from gas gathering, processing, and marketing, and (iii)
revenues from petroleum management and consulting services. The Company's cash
flow is highly dependent upon oil and gas prices. Decreases in the market price
of oil and gas could result in reductions of both cash flow and the Borrowing
Base under the Company's Credit Facility, which would result in decreased funds
available, including funds for capital expenditures.
In September 1998, the Company announced a stock repurchase program of up
to one million shares at a cost not to exceed $4 million. At December 31, 1998,
the Company had repurchased 625,600 shares for approximately $1.9 million. In
February 1999, the program was revised to remove the share limitation discussed
above. Since December 31, 1998, the Company has purchased an additional 601,472
shares for approximately $1.7 million.
In December 1998, the Company's 100% owned subsidiary, Bluebird, acquired
for approximately $25 million, certain natural gas reserves and related assets
from Spirit 76. Additionally, the Company capitalized Bluebird with 1,840,271
units of TEL Offshore Trust. To finance the Spirit 76 Acquisition, Bluebird
borrowed $26 million under a bridge loan facility with several banks. The
maturity date of the bridge loan facility, as amended, is May 31, 1999, and is
non-recourse to the Company. Bluebird has secured a commitment for permanent
financing from a bank providing for a revolving credit facility of $75 million
with an initial borrowing base of $30 million, due three years from the date of
closing (anticipated to be June 8, 1999) with interest rates for either "LIBOR"
or "Base Rate" (Prime).
In December 1998 the Company announced a letter of intent for a strategic
alliance with ONEOK, Inc., to include the purchase by this company of $50
million of the Company's Convertible Preferred Stock. In February 1999 this
transaction was consummated. The Preferred Stock has a liquidation value of $50
million and is convertible into the Company's common stock at $5.25 per share.
Dividends on the Preferred Stock will be payable in cash beginning August of
1999 at the rate of 8% per annum and will be cumulative. The net proceeds of
$46.3 million received from the sale of Preferred Stock was used to repay senior
bank indebtedness.
For the three months ended March 31, 1999, the Company had a net decrease
in cash of $4.4 million. The Company's operating activities provided net cash of
$1.0 million, principally from operating income before depreciation and
depletion. The Company used $2.2 million in investing activities, principally
for additions to property and equipment of $1.8 million. Financing activities
used $3.2 million of cash, principally from the aggregate proceeds from the
issuance of preferred stock of $46.3 million, less principal payments of $48.1
million on long-term debt. The Company also paid $219,000 in cash dividends on
preferred stock and accrued an additional $614,000 for dividends earned through
March 1999 but not payable until August 1999.
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Capital Requirements
For fiscal 1999, the Company has budgeted approximately $25 million for
development and exploration activities, including $15 million for participation
in a new drilling program in twelve separate OCS blocks in the shallow water
shelf area of the Gulf of Mexico. Commencement of the drilling of the first well
in this program was in May 1999. The Company is not contractually obligated to
proceed with any of its budgeted capital expenditures. The amount and allocation
of future capital expenditures will depend on a number of factors that are not
entirely within the Company's control or ability to forecast, including drilling
results and changes in oil and gas prices. Due to the decline in oil prices
experienced over the past year, the Company redirected a significant portion of
its budgeted funds from oil projects to natural gas. As a result, actual capital
expenditures may vary significantly from current expectations.
On April 30, 1999, the Company executed an agreement to purchase from
Vastar Resources, Inc. oil and gas reserves and related equipment, a gas
processing plant and two gas gathering systems, located in Texas, Oklahoma and
Arkansas for approximately $33.9 million. The closing is scheduled on or before
June 8, 1999, with an April 1, 1999 effective date.
Based upon the Company's anticipated level of operations, the Company
believes that cash flow from operations together with the availability under the
Credit Facility (approximately $44 million as of March 31, 1999) will be
adequate to meet its anticipated requirements for working capital, capital
expenditures and scheduled interest payments for the foreseeable future.
In the normal course of business, the Company reviews opportunities for the
possible acquisition of oil and gas reserves and activities related thereto.
When potential acquisition opportunities are deemed consistent with the
Company's growth strategy, bids or offers in amounts and with terms acceptable
to the Company may be submitted. It is uncertain whether any such bids or offers
which may be submitted by the Company from time to time will be acceptable to
the sellers. In the event of a future significant acquisition, the Company may
require additional financing in connection therewith.
Inflation and Changes in Prices
During 1997, the Company received lower oil prices (13%) and slightly lower
gas prices (1%) for the natural resources produced from its properties. In 1998,
the Company experienced a more significant erosion in prices of 28% for oil and
10% for gas. Due to the severity of the decline in commodity prices, the Company
experienced a loss due primarily from the write-down of its full cost pool. The
results of operations and cash flow of the Company have been, and will continue
to be, affected by the volatility in oil and gas prices. Should the Company
experience a significant increase in oil and gas prices that is sustained over a
prolonged period, it would expect that there would also be a corresponding
increase in oil and gas finding costs, lease acquisition costs, and operating
expenses. Periodically the Company enters into futures, options, and swap
contracts to reduce the effects of fluctuations in crude oil and gas prices. It
is the policy of the Company not to enter into any such arrangements which
exceed 75% of the Company's oil and gas production during the next 12 months.
Subsequent to year-end 1998, oil prices rose significantly while gas prices
declined slightly.
The Company markets oil and gas for its own account, which exposes the
Company to the attendant commodities risk. A substantial portion of the
Company's gas production is currently sold to NGTS, LLC or end-users either on
the spot market on a month-to-month basis at prevailing spot market prices or
under long-term contracts based on current spot market prices. The Company
normally sells its oil under month-to-month contracts to a variety of
purchasers.
5
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Hedging Activity
Periodically, the Company enters into futures, options, and swap contracts
to mitigate the effects of significant fluctuations in crude oil and gas prices.
At March 31, 1999, the Company had the following open contracts:
Type Volume/Month Duration Avg. Price
Oil
Collar........... 15,000 Bbl Apr 99 - Dec 99 Floor - $15.00
Cap - $19.20
Call Option...... 15,000 Bbl Apr 99 - Dec 99 $19.20
Swap............. 15,000 Bbl Apr 99 - Dec 99 $14.80
Swap............. 15,000 Bbl Apr 99 - Dec 99 $15.12
Collar........... 15,000 Bbl Apr 99 - Dec 99 Floor - $14.00
Cap - $16.50
Collar........... 15,000 Bbl Apr 99 - Dec 99 Floor - $15.00
Cap - $17.12
Gas
Swap............. 600,000 MMBtu Apr 99 - Oct 99 $ 2.04
Collar........... 300,000 MMBtu Apr 99 - Oct 99 Floor - $ 1.70
Cap - $ 2.05
Net gains related to derivative transactions for the periods ended March
31, 1999 and 1998 were $1,444,000 and $724,000, respectively. At March 31, 1999,
the unrealized loss from derivative transactions was $1,761,000.
Year 2000 Compliance
Year 2000 issues relate to the ability of computer programs or equipment to
accurately calculate, store or use dates after December 31, 1999. These dates
can be handled or interpreted in a number of different ways, but the most common
errors are for the system to contain a two digit year which may cause the system
to interpret the year 2000 as 1900 or 1980, and the system will not recognize
the year 2000 as a leap year. Errors such as these can result in system
failures, miscalculations and the disruption of operations, including, among
other things, a temporary inability to process transactions, send invoices or
engage in similar normal business activities. In response to the Year 2000
issues, the Company has developed a strategic plan divided into the following
phases: inventory, product compliance based on vendor representations and
in-house testing, third party integration and development of a contingency plan.
All of the Company's processing needs are handled by third party systems,
none of which have been substantially modified and all of which have been
purchased or upgraded within the last few years. Therefore, the Company's
initial review of its in-house systems with regard to Year 2000 issues required
an inventory of its systems and a review of the vendor representations. The
Company has completed this initial review of its information systems, various
types of equipment and non-information technology have also been reviewed, and
based on vendor representations, are either compliant, will be compliant with
the next forthcoming software release or are systems that are not date specific.
The Company's non-information technology consists primarily of various oil
and gas exploration and production equipment. The initial review has established
that the primary non-information technology systems functions are either not
date sensitive or are Year 2000 compliant based on vendor representations, and
are therefore predicted to
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operate in customary manners when faced with Year 2000 issues. However, the
Company has determined that in the event such systems are unable to address the
Year 2000, employees can manually perform most, if not all, functions.
In anticipation of Year 2000 issues, the Company is also evaluating the
Year 2000 readiness status of its third party service suppliers. In addition to
reviewing Year 2000 readiness statements issued by the third parties handling
the Company's processing needs, to date the Company has received and is relying
upon, Year 2000 readiness reports periodically issued by its financial services
and electrical service providers, vendors and purchasers of the Company's oil
and natural gas products. The Company is continuing to review Year 2000
readiness of third party service suppliers and based on their representations,
does not currently foresee material disruptions in the Company's business as a
result of Year 2000 issues. Unanticipated prolonged losses of certain services,
such as electrical power, could cause material disruptions for which no
economically feasible contingency plan has been developed.
The Company is continuing to conduct in-house testing of the core systems
and non-information technology, and to date either all systems tested have
adequately addressed possible Year 2000 scenarios or the Company has a plan in
place to remedy the deficiency. The Company expects testing to be completed
during the second quarter of 1999. After the completion of its Year 2000 review
and testing, the Company will further develop a contingency plan as required,
including replacing or upgrading by December 31, 1999 any system incapable of
addressing the Year 2000 correctly. This final step is expected to be completed
during the third quarter of 1999.
Although the effects of Year 2000 issues cannot be predicted with
certainty, the Company believes that the potential impact, if any, of such
events will, at most, require employees to manually complete otherwise automated
tasks or calculations, other than those which might occur in a "worst case"
scenario as described below, which the Company does not anticipate will occur.
After considering Year 2000 effects on in-house operations, the company
expects a minimal level of additional training would be required to perform
these tasks on a manual basis due to the level of experience of its personnel
and the routine nature of the tasks being performed. If, based on the results of
its in-house testing, the Company should determine that certain systems are not
Year 2000 compliant and it appears as though the system is not likely to be
compliant within a reasonable time period, the Company will either elect to
perform the task manually or will attempt to purchase a different system for
that particular task and convert before December 31, 1999. The Company does not
believe that either option would impact the Company's ability to continue
exploration drilling, production or sales activities, although the tasks may
require additional time and personnel to complete the same functions or may
require incremental time and personnel during 1999 for a conversion to a new
system.
The Company's core business consists primarily of oil and gas acquisitions,
development and exploration activities. The equipment that is deemed "mission
critical" to the Company's activities requires external power sources such as
electricity supplied by third parties. Although the Company maintains limited
on-site secondary power sources such as generators, it is not economically
feasible to maintain secondary power supplies for any major component of its
"mission critical" equipment. Therefore, the most reasonably likely worst case
Year 2000 scenario for the Company would involve a disruption of third party
supplied electrical power, which would result in a substantial decrease in the
Company's oil production. Such event could result in a business interruption
that could materially affect the Company's operations, liquidity or capital
resources.
The Company has initiated the third party integration phase and will
continue to have formal communications with its significant suppliers, business
partners and key customers to determine the extent to which the Company is
vulnerable to either the third parties or its own failure to correct their Year
2000 issues. The Company has been communicating with such third parties to keep
them informed of the Company's internal assessment of its Year 2000 review and
plans. This portion of the review and discussions with third parties is expected
to be completed during the second quarter of 1999. To date, approximately
three-quarters of these third parties have provided certain favorable
representations as to their Year 2000 readiness and received similar
representations from the Company. There can be no guarantee that the systems of
other companies on which the Company relies will be timely converted or that the
conversion will be compatible with the Company's systems. However, after
reviewing and estimating the
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effects of such events, the Company's contingency plan involves identifying and
arranging for other vendors, purchasers and third party contractors to provide
such services, if necessary, in order to maintain its normal operations.
The Company has, and will continue to, utilize both internal and external
resources to complete tasks and perform testing necessary to address the Year
2000 issue. The Company has not incurred, and does not anticipate that it will
incur, any significant costs relating to the assessment and remediation of Year
2000 issues.
Recently Issued Accounting Pronouncements
In June 1998, the FASB issued SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities, which established a new model for accounting
for derivatives and hedging activities. SFAS No. 133, which will be effective
for the Company's fiscal year 2000, requires that all derivatives be recognized
in the balance sheet as either assets or liabilities and measured at fair value.
The Statement also requires that changes in fair value be reported in earnings
unless specific hedge accounting criteria are met. The Company is currently
evaluating the effect of the adoption of the Statement on its consolidated
financial position and results of operations.
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MAGNUM HUNTER RESOURCES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited)
(in thousands of dollars)
<TABLE>
<CAPTION>
<S> <C> <C>
March 31, December 31,
1999 1998
--------------------------------------------------
ASSETS
Current Assets
Cash and cash equivalents..............................................$ 478 $ 4,853
Restricted cash ....................................................... 1,024 459
Accounts receivable
Trade, net of allowance of $166 for 1999 and 1998................. 6,152 5,686
Due from affiliates............................................... 56 310
Notes receivable from affiliate........................................ 690 747
Current portion of long-term notes receivable, net of allowance of $790
for 1999 and 1998.................................................... 57 57
Prepaid and other...................................................... 1,187 1,577
--------------------------------------------------
Total Current Assets............................................. 9,644 13,689
--------------------------------------------------
Property, Plant, and Equipment
Oil and gas properties, full cost method
Unproved......................................................... 1,737 1,655
Proved........................................................... 298,274 296,545
Pipelines.............................................................. 9,147 9,131
Other property......................................................... 1,583 1,554
--------------------------------------------------
Total Property, Plant and Equipment.................................... 310,741 308,885
Accumulated depreciation, depletion, amortization and impairment. (85,597) (80,449)
--------------------------------------------------
Net Property, Plant and Equipment...................................... 225,144 228,436
--------------------------------------------------
Other Assets
Deposits and other assets.............................................. 6,260 6,644
Investment in unconsolidated affiliate................................. 4,235 4,266
Deferred tax asset .................................................... 13,351 13,351
Long-term notes receivable, net of imputed interest.................... 1,221 756
--------------------------------------------------
Total Assets $ 259,855 $ 267,142
--------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Trade payables and accrued liabilities.................................$ 11,043 $ 11,821
Dividends payable...................................................... 833 219
Suspended revenue payable.............................................. 583 359
Current maturities of long-term debt................................... 11 13
Notes payable.......................................................... - 2,000
--------------------------------------------------
Total Current Liabilities........................................ 12,470 14,412
--------------------------------------------------
Long-Term Liabilities
Long-term debt, less current maturities................................ 187,004 231,007
Production payment liability........................................... 551 633
Minority interest...................................................... 141 98
Commitments and Contingencies
Stockholders' Equity
Preferred stock - $.001 par value; 10,000,000 shares authorized,
216,000 designated as Series A; 80,000 issued and outstanding,
liquidation amount $0................................................ - -
1,000,000 designated as 1996 Series A Convertible; 1,000,000
issued and outstanding, liquidation amount $10,000,000............... 1 1
50,000 designated as 1999 Series A 8% Convertible; 50,000 issued
and outstanding, liquidation amount $50,000,000...................... - -
Common Stock - $.002 par value; 50,000,000 shares authorized,
21,738,320 shares issued.............................................. 43 43
Additional paid-in capital............................................. 125,509 80,000
Accumulated other comprehensive income................................. (1,557) (1,429)
Accumulated deficit.................................................... (60,676) (55,714)
--------------------------------------------------
63,320 22,901
Treasury stock, at cost (1,655,979 and 1,054,507 shares
of common stock, respectively) (3,631) (1,909)
--------------------------------------------------
Total Stockholders' Equity...................................................... 59,689 20,992
--------------------------------------------------
Total Liabilities and Stockholders' Equity......................................$ 259,855 $ 267,142
--------------------------------------------------
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
F-1
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Magnum Hunter Resources, Inc. and Subsidiaries
Consolidated Statements of Operations and Comprehensive Income
(Unaudited)
(in thousands, except for per share amounts)
<TABLE>
<CAPTION>
<S> <C> <C>
Three Months Ended
March 31,
----------------------------------------------------
1999 1998
----------------------------------------------------
Operating Revenues:
Oil and gas sales....................................................... $ 11,321 $ 10,555
Gas gathering, marketing and processing................................. 1,626 2,005
Oil field services and international sales.............................. 158 193
----------------------------------------------------
Total Operating Revenues.......................................... 13,105 12,753
----------------------------------------------------
Operating Costs and Expenses:
Oil and gas production lifting costs.................................... 3,193 3,689
Production taxes and other costs........................................ 1,465 1,486
Gas gathering, marketing and processing................................. 1,276 1,559
Oil field services and international sales.............................. 71 99
Depreciation, depletion and amortization................................ 5,148 3,875
General and administrative.............................................. 686 750
----------------------------------------------------
Total Operating Costs and Expenses................................ 11,839 11,458
----------------------------------------------------
Operating Profit........................................................... 1,266 1,295
Equity in earnings (loss) of affiliate, net of income tax............... (31) (49)
Other income............................................................ 163 201
Interest expense........................................................ (6,317) (4,233)
----------------------------------------------------
Net Income (Loss) before income tax and minority interest.................. (4,919) (2,786)
Benefit (Provision) for deferred income tax............................. - 1,040
----------------------------------------------------
Net Income (Loss) before minority interest................................. (4,919) (1,746)
Minority interest in subsidiary earnings (loss)......................... (43) (1)
----------------------------------------------------
Net Income (Loss).......................................................... (4,962) (1,747)
Dividends Applicable to Preferred Stock................................. (833) (219)
----------------------------------------------------
Income (Loss) Applicable to Common Shares.................................. $ (5,795) $ (1,966)
----------------------------------------------------
Net Income (Loss) $ (4,962) $ (1,747)
Other Comprehensive Income, net of tax
Unrealized Gain (Loss) on Investments................................... (128) -
----------------------------------------------------
Comprehensive Income (Loss) $ (5,090) $ (1,747)
----------------------------------------------------
Income (Loss) per Common Share - Basic $ (0.29) $ (0.09)
----------------------------------------------------
Income (Loss) per Common Share - Diluted $ (0.29) $ (0.09)
----------------------------------------------------
Common Shares Used in Per Share Calculation
Basic .................................................................. 20,282,674 21,204,385
----------------------------------------------------
Diluted ................................................................ 20,282,674 21,204,385
----------------------------------------------------
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
F-2
<PAGE>
Magnum Hunter Resources, Inc. and Subsidiaries
Consolidated Statements of Stockholders' Equity
For the Period Ended March 31, 1999
(Unaudited)
(dollars in thousands)
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
Preferred Stock Common Stock Treasury Stock
Shares Amount Shares Amount Shares Amount
----------------------------------------------------------------------------
Balance at December 31, 1998........................ 1,080,000 $ 1 21,738,320 $ 43 (1,054,507) $(1,909)
---------------------------------------------------------------------------
Issuance of 1999 Series A 8% Convertible
Preferred Stock, net of offering costs......... 50,000 -
Purchase of treasury Stock....................... (601,472) (1,722)
Dividends declared or accrued on preferred
stock..........................................
Net income (loss)................................
Unrealized (loss) on investment..................
----------------------------------------------------------------------------
Balance at March 31, 1999........................... 1,130,000 $ 1 21,738,320 $ 43 (1,655,979) $(3,631)
----------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Additional Accumulated Other
Paid-In Comprehensive Accumulated
Capital Income (Loss) Deficit
----------------------------------------------------------------------------
Balance at December 31, 1998........................ $ 80,000 $ (1,429) $ (55,714)
----------------------------------------------------------------------------
Issuance of 1999 Series A 8% Convertible
Preferred Stock, net of offering costs......... 46,342
Purchase of treasury Stock.......................
Dividends declared or accrued on preferred
stock.......................................... (833)
Net income (loss)................................ (4,962)
Unrealized (loss) on investment.................. (128)
----------------------------------------------------------------------------
Balance at March 31, 1999........................... $ 125,509 $ (1,557) $ (60,676)
----------------------------------------------------------------------------
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
F-3
<PAGE>
Magnum Hunter Resources, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(Unaudited)
(in thousands)
<TABLE>
<CAPTION>
<S> <C> <C>
For the Three Months Ended
March 31,
----------------------------------------
1999 1998
----------------------------------------
CASH FLOW FROM OPERATING ACTIVITIES:
Net Income (loss)............................................................$ (4,962) $ (1,747)
Adjustments to reconcile net income (loss) to cash provided by
(used for) operating activities:
Depreciation and depletion............................................. 5,148 3,875
Amortization of financing fees......................................... 1,414 178
Deferred income taxes.................................................. - (1,040)
Equity in unconsolidated affiliate..................................... 31 49
Minority interest...................................................... 43 1
Other.................................................................. - 3
Changes in certain assets and liabilities
Accounts and notes receivable................................. (462) 2,805
Other current assets.......................................... 390 643
Accounts payable and accrued liabilities...................... (554) 3,742
----------------------------------------
Net Cash Provided By (Used By) Operating Activities.......................... 1,048 8,509
----------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of assets................................................. - 93
Additions to property and equipment.......................................... (1,834) (17,375)
Increase in deposits and other assets........................................ - (445)
Loan made for promissory note receivable..................................... (473) (35)
Payments received on promissory note receivable ............................. 66 14
Investment in unconsolidated affiliate....................................... - (50)
----------------------------------------
Net Cash Used In Investing Activities........................................ (2,241) (17,798)
----------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from the issuance of long-term debt and production payment.......... 4,000 13,500
Fees paid related to financing activities.................................... (931) -
Payments of principal on long-term debt and production payment............... (48,087) (2,537)
Payment of short-term notes payable ......................................... (2,000) -
Proceeds from issuance of preferred stock, net of offering costs............. 46,342 -
Purchase of treasury stock .................................................. (1,722) -
(Increase) Decrease in segregated funds for payment of notes payable ........ (565) -
Cash dividends paid.......................................................... (219) (219)
----------------------------------------
Net Cash Provided By (Used By) Financing Activities.......................... (3,182) 10,744
----------------------------------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS............................ (4,375) 1,455
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD................................ 4,853 3,030
----------------------------------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD......................................$ 478 $ 4,485
----------------------------------------
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
F-4
<PAGE>
MAGNUM HUNTER RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 1999
(Unaudited)
NOTE 1 - MANAGEMENT'S REPRESENTATION
The consolidated balance sheet as of March 31, 1999, the consolidated
statements of operations and comprehensive income for the three months ended
March 31, 1999 and 1998, the consolidated statement of stockholder's equity for
the period ended March 31, 1999 and the consolidated statements of cash flows
for the three months ended March 31, 1999 and 1998 are unaudited. In the opinion
of management, all necessary adjustments (which include only normal recurring
adjustments) have been made to present fairly the financial position, results of
operations, changes in stockholder's equity and changes in cash flows for the
three month periods.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted. It is suggested that these condensed financial
statements be read in conjunction with the financial statements and notes
thereto included in the December 31, 1998 annual report on Form 10-K for the
Company. The results of operations for the three month period ended March 31,
1999, are not necessarily indicative of the operating results for the full year.
The accompanying consolidated financial statements include the accounts of
the Company and its subsidiaries. All significant intercompany transactions and
balances have been eliminated in consolidation. Certain items have been
reclassified to conform with the current presentation.
The Company is a holding company with no significant assets or operations
other than its investments in its subsidiaries. The wholly-owned subsidiaries of
the Company, except for Bluebird Energy, Inc. ("Bluebird"), are direct
Guarantors of the Company's 10% Senior Notes and have fully and unconditionally
guaranteed the Notes on a joint and several basis. The Guarantors comprise all
of the direct and indirect subsidiaries of the Company (other than Bluebird and
inconsequential subsidiaries), and the Company has not presented separate
financial statements and other disclosures concerning each Guarantor because
management has determined that such information is not material to investors.
Except for Bluebird, there is no restriction on the ability of consolidated or
unconsolidated subsidiaries to transfer funds to the Company in the form of cash
dividends, loans, or advances.
NOTE 2 - RECENT EVENTS
On February 3, 1999, the Company sold $50 million of its Convertible
Preferred Stock in a private placement. The Preferred Stock has a liquidation
value of $50 million and is convertible into the Company's common stock at $5.25
per share. Dividends on the preferred stock are payable in cash at the rate of
8% per annum and are cumulative. The Company used the net proceeds from the
transaction, approximately $46.3 million, to repay senior bank debt.
On February 17, 1999, the Company revised its previously announced stock
repurchase program to spend up to $4 million without a share limitation.
Subsequent to December 31, 1998, the Company repurchased 601,472 shares of its
common stock for approximately $1.7 million.
On April 30, 1999, the Company executed an agreement to purchase oil and
gas reserves and related equipment, a gas processing plant and two gas gathering
systems, located in Texas, Oklahoma and Arkansas for approximately $33.9
million. The closing is scheduled on or before June 8, 1999, with an April 1,
1999 effective date.
NOTE 3 - SEGMENT DATA
The Company has three reportable segments. The Exploration and Production
segment is engaged in exploratory drilling and acquisition, production, and sale
of crude oil, condensate, and natural gas. The Gas Gathering, Marketing and
Processing segment is engaged in the gathering and compression of natural gas
from the wellhead, the purchase and resale of natural gas which it gathers, and
the processing of natural gas liquids. The Oil Field Services segment is engaged
in the managing and operation of producing oil and gas properties for interest
owners.
F-5
<PAGE>
MAGNUM HUNTER RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
March 31, 1998
(Unaudited)
The Company's reportable segments are strategic business units that offer
different products and services. They are managed separately because each
business requires different technology and marketing strategies. The Exploration
and Production segment has six geographic areas that are aggregated. The Gas
Gathering, Marketing and Processing segment includes the activities of the two
gathering systems and one natural gas liquids processing plant in two geographic
areas that are aggregated. The Oil Field Services segment has six geographic
areas that are aggregated. The reason for aggregating the segments, in each
case, was due to the similarity in nature of the products, the production
processes, the type of customers, the method of distribution, and the regulatory
environments.
The accounting policies of the segments are the same as those for the
Company as a whole. The Company evaluates performance based on profit or loss
from operations before income taxes. The accounting for intersegment sales and
transfers is done as if the sales or transfers were to third parties, that is,
at current market prices.
Segment data for the periods ended March 31, 1999 and 1998 follows (in
thousands):
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
Gas Gathering,
Exploration & Marketing & Oil Field
Three Months Ended March 31, 1999: Production Processing Services All Other Elimination Consolidated
---------------------------------- ---------- ---------- --------- --------- ----------- ---------------
Revenue from external customers........ $ 11,321 $ 1,626 $ 158 $ - $ - $ 13,105
Intersegment revenues.................. - 2,803 1,332 - (4,135) -
Depreciation, depletion and amortization 4,934 163 47 4 5,148
Segment profit (loss)................... 1,029 150 671 (584) 1,266
Equity earnings (losses) of affiliates.. (31) (31)
Interest expense........................ (6,317) (6,317)
Other income............................ 163 163
---------------
Loss before income taxes................ $ (4,919)
Provision for deferred income tax benefit - -
Minority interest....................... (43) (43)
---------------
Net loss................................ $ (4,962)
---------------
Segment assets..........................$ 232,146 $ 13,360 $ 4,327 $10,022 $ 259,855
Equity subsidiary investments........... 4,235 4,235
Capital expenditures (net of asset sales) 1,811 16 29 - 1,856
</TABLE>
Geographic Information: Revenues Long-Lived Assets
----------------------- --------- -----------------
United States.............. $ 13,105 $ 225,144
Foreign countries.......... - -
---------------------------------
Total...................... $ 13,105 $ 225,144
----------------------------------
F-6
<PAGE>
MAGNUM HUNTER RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
March 31, 1998
(Unaudited)
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
Gas Gathering,
Exploration & Marketing & Oil Field
Three Months Ended March 31, 1998: Production Processing Services All Other Elimination Consolidated
---------------------------------- ---------- ---------- --------- --------- ----------- ---------------
Revenue from external customers........ $ 10,555 $ 2,005 $ 193 $ - $ - $ 12,753
Intersegment revenues................... - 3,086 1,059 - (4,145) -
Depreciation, depletion and amortization 3,673 163 34 5 3,875
Segment profit (loss)................. 1,173 298 239 (415) 1,295
Equity earnings (losses) of affiliates.. (49) (49)
Interest expense........................ (4,233) (4,233)
Other income............................ 201 201
---------------
Loss before income taxes................ $ (2,786)
Provision for deferred income tax benefit 1,040 1,040
Minority interest....................... (1) (1)
---------------
Net loss................................ $ (1,747)
---------------
Segment assets..........................$ 229,217 $ 14,945 $ 6,244 $ 12,332 $ 262,738
Equity subsidiary investments........... 4,343 4,343
Capital expenditures (net of asset sales) 17,227 10 34 - 17,271
</TABLE>
Geographic Information: Revenues Long-Lived Assets
----------------------- --------- -----------------
United States.............. $ 12,753 $ 234,664
Foreign countries.......... - -
--------------------------------
Total...................... $ 12,753 $ 234,664
--------------------------------
F-7
<PAGE>
PART II -- OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
Number Description of Exhibit
3.1 & 4.1 Articles of Incorporation (Incorporated by reference to
Registration Statement on Form S-18, File No. 33-30298-D)
3.2 & 4.2 Articles of Amendment to Articles of Incorporation
(Incorporated by reference to Form 10-K for the year ended
December 31, 1990)
3.3 & 4.3 Articles of Amendment to Articles of Incorporation
(Incorporated by reference to Registration Statement on
Form SB-2, File No. 33-66190)
3.4 & 4.4 Articles of Amendment to Articles of Incorporation
(Incorporated by reference to Registration Statement on Form
S-3, File No. 333-30453)
3.5 & 4.5 By-Laws, as Amended (Incorporated by reference to Registration
Statement on Form SB-2, File No. 33-66190)
3.6 & 4.6 Certificate of Designation of 1996 Series A Preferred Stock
(Incorporated by reference to Form 8-K dated
December 26, 1996, filed January 3, 1997)
3.7 & 4.7 Amendment to Certificate of Designations for 1996 Series A
Convertible Preferred Stock (Incorporated by reference to
Registration Statement on Form S-3, File No. 333-30453)
3.8 & 4.8 Certificate of Designation for 1999 Series A 8%
Convertible Preferred Stock (Incorporated by reference to Form
8-K, dated February 3, 1999, filed February 11, 1999)
4.9 Indenture dated May 29, 1997 between Magnum Hunter Resources,
the subsidiary guarantors named therein and First Union
National Bank of North Carolina, as Trustee (Incorporated by
reference to Registration Statement on Form S-4,
File No. 333-2290)
4.10 Supplemental Indenture dated January 27, 1999 between Magnum
Hunter Resources, the subsidiary guarantors named therein and
First Union National Bank of North Carolina, as Trustee
(Incorporated by reference to Form 10-K for the year ended
December 31, 1998)
4.11 Form of 10% Senior Note due 2007 (Incorporated by reference to
Registration Statement on Form S-4, File No. 333-2290)
10.1 Amended and Restated Credit Agreement, dated April 30, 1997,
between Magnum Hunter Resources, Inc. and Bankers Trust
Company, et al. (Incorporated by reference to Registration
Statement on Form S-4, File No. 333-2290)
10.2 First Amendment to Amended and Restated Credit Agreement,
dated April 30, 1997, between Magnum Hunter Resources, Inc.
and Bankers Trust Company, et al. (Incorporated by reference
to Registration Statement on Form S-4, File No. 333-2290)
10.3 Second Amendment to Amended and Restated Credit Agreement,
dated April 30, 1997, between Magnum Hunter Resources, Inc.
and Bankers Trust Company, et al.(Incorporated by reference to
Form 10-K for the year ended December 31, 1998)
10.4 Third Amendment to Amended and Restated Credit Agreement,
dated April 30, 1997, between Magnum Hunter Resources, Inc.
and Bankers Trust Company, et al.(Incorporated by reference to
Form 10-K for the year ended December 31, 1998)
10.5 Employment Agreement for Gary C. Evans (Incorporated by
reference to Registration Statement on Form S-4,
File No. 333-2290)
10.6 Employment Agreement for Matthew C. Lutz (Incorporated by
reference to Registration Statement on Form S-4,
File No. 333-2290)
10.7 Stock Purchase Agreement among Magnum Hunter Resources, Inc.
and Trust Company of the West and TCW Asset Management
Company, in the capacities described herein, TCW Debt and
Royalty Fund IVB and TCW Debt and Royalty Fund IVC, dated as
of December 6, 1996 (Incorporated by reference to Form 8-K
dated December 26, 1996, filed January 3, 1997)
10.8 Registration Rights Agreement, dated May 29, 1997, between
Magnum Hunter Resources, Inc. and Bankers Trust Company,
et al. (Incorporated by reference to Registration Statement
on Form S-4, File No. 333-2290)
8
<PAGE>
10.9 Purchase and Sale Agreement, dated May 17, 1996 between
Meridian Oil, Inc. and ConMag Energy Corporation (Incorporated
by reference to Form 8-K, dated June 28, 1996, filed July 12,
1996)
10.10 Purchase and Sale Agreement, dated February 27, 1997 among
Burlington Resources Oil and Gas Company, Glacier Park Company
and Magnum Hunter Production, Inc. (Incorporated by reference
to Form 8-K, dated April 30, 1997, filed May 12, 1997)
10.11 Purchase and Sale Agreement between Magnum Hunter Resources,
Inc. , NGTS, et al., dated December 17, 1997 (Incorporated by
reference to Form 8-K, dated December 17, 1997, filed
December 29, 1997)
10.12 Purchase and Sale Agreement dated November 25, 1998 between
Magnum Hunter Production, Inc. and Unocal Oil Company of
California (Incorporated by reference to Form 10-K for the
year ended December 31, 1998)
10.13 Stock Purchase Agreement dated February 3, 1999 between ONEOK
Resources Company and Magnum Hunter Resources, Inc.
(Incorporated by reference to Form 8-K, dated
February 3, 1999, filed February 11, 1999)
27* Financial Data Schedule
* Filed herewith.
(B) Form 8-K's - An 8-K was filed on February 11, 1999 under Item 5. Other
Events concerning the Company's closing various transactions with ONEOK, Inc.
relating to ONEOK's purchase of $50 million of Convertible Preferred Stock of
the Company, ONEOK's ability to market certain of the Company's natural gas
production in the state of Oklahoma and ONEOK's ability to participate in future
acquisitions of the Company in the state of Oklahoma.
9
<PAGE>
SIGNATURE
In accordance with the requirements of the Exchange Act, the Registrant has
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
MAGNUM HUNTER RESOURCES, INC.
By /s/ Gary C. Evans May 14, 1999
-------------------------------------------------
Gary C. Evans
President and Chief Executive Officer
By /s/ Chris Tong May 14, 1999
-------------------------------------------------
Sr. Vice President and
Chief Financial Officer
By /s/ David S. Krueger May 14, 1999
-----------------------------------------------
David S. Krueger
Vice President and
Chief Accounting Officer
By /s/ Morgan F. Johnston May 14, 1999
------------------------------------------------
Morgan F. Johnston
Vice President, General Counsel and
Secretary
10
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-Mos
<FISCAL-YEAR-END> Dec-31-1999
<PERIOD-START> Jan-01-1999
<PERIOD-END> Mar-31-1999
<CASH> 1,502
<SECURITIES> 0
<RECEIVABLES> 6,374
<ALLOWANCES> (166)
<INVENTORY> 0
<CURRENT-ASSETS> 9,644
<PP&E> 310,741
<DEPRECIATION> (85,597)
<TOTAL-ASSETS> 259,855
<CURRENT-LIABILITIES> 12,470
<BONDS> 187,555
0
1
<COMMON> 43
<OTHER-SE> 59,645
<TOTAL-LIABILITY-AND-EQUITY>259,855
<SALES> 12,947
<TOTAL-REVENUES> 13,105
<CGS> 5,934
<TOTAL-COSTS> 11,839
<OTHER-EXPENSES> (132)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 6,317
<INCOME-PRETAX> (4,919)
<INCOME-TAX> 0
<INCOME-CONTINUING> (4,962)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (4,962)
<EPS-PRIMARY> (0.29)
<EPS-DILUTED> (0.29)
</TABLE>
