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 September 30, 2000
---- --- ----
[ ] 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 1100, 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 November 14, 2000: 24,078,036.
<PAGE>
PART I -- FINANCIAL INFORMATION
Item 1. Financial Statements
Magnum Hunter Resources, Inc. and Subsidiaries
Consolidated Balance Sheets
(in thousands of dollars)
<TABLE>
<CAPTION>
<S> <C> <C>
September 30, December 31,
2000 1999
(unaudited)
-----------------------------------------------
ASSETS
Current Assets
Cash and cash equivalents................................................ $ 1,269 $ 1,565
Restricted cash ......................................................... 2,151 2,145
Accounts receivable
Trade, net of allowance of $166 for 2000 and 1999................... 21,356 10,203
Due from affiliates................................................. 132 48
Notes receivable from affiliate.......................................... 572 902
Current portion of long-term notes receivable, net of allowance of $790
for 2000 and 1999........................................... 57 57
Prepaid and other........................................................ 1,443 1,296
-----------------------------------------------
Total Current Assets............................................... 26,980 16,216
-----------------------------------------------
Property, Plant, and Equipment
Oil and gas properties, full cost method
Unproved........................................................... 12,354 3,567
Proved............................................................. 328,397 349,510
Pipelines................................................................ 12,569 12,462
Other property........................................................... 2,277 1,964
-----------------------------------------------
Total Property, Plant and Equipment...................................... 355,597 367,503
Accumulated depreciation, depletion, amortization and impairment... (119,248) (102,308)
-----------------------------------------------
Net Property, Plant and Equipment........................................ 236,349 265,195
-----------------------------------------------
Other Assets
Deposits and other assets, net of allowance of $76 and $78
for 2000 and 1999 ..................................................... 7,835 5,698
Investment in unconsolidated affiliate................................... 6,830 4,163
Deferred tax asset ...................................................... 6,280 13,351
Long-term notes receivable, net of imputed interest...................... 1,772 1,487
-----------------------------------------------
Total Assets............................................................. $ 286,046 $ 306,110
===============================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Trade payables and accrued liabilities................................... $ 22,778 $ 15,111
Dividends payable........................................................ 333 552
Suspended revenue payable................................................ 1,748 1,357
Current maturities of long-term debt, with recourse...................... 18 6
-----------------------------------------------
Total Current Liabilities.......................................... 24,877 17,026
-----------------------------------------------
Long-Term Liabilities
Long-term debt, with recourse, less current maturities................... 171,525 193,000
Long-term debt, non recourse, less current maturities.................... 37,500 41,800
Production payment liability............................................. 384 460
Minority interest........................................................ 184 184
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 at December 31, 1999, 1,000,000 purchased
and held for remarketing by subsidiary at September 30, 2000,
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; 100,000,000 shares authorized,
21,755,262 and 21,738,320 shares issued, respectively............... 44 43
Additional paid-in capital............................................... 112,089 121,815
Accumulated other comprehensive loss..................................... (430) (2,046)
Accumulated deficit...................................................... (55,998) (62,542)
-----------------------------------------------
55,706 57,271
Treasury stock, at cost (1,567,151 and 1,512,719 shares of common stock,
respectively)................................................................... (4,130) (3,631)
-----------------------------------------------
Total Stockholders' Equity........................................................ 51,576 53,640
-----------------------------------------------
Total Liabilities and Stockholders' Equity........................................ $ 286,046 $ 306,110
===============================================
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
<PAGE>
Magnum Hunter Resources, Inc. and Subsidiaries
Consolidated Statements of Operations and Comprehensive Income (Loss)
(Unaudited)
(in thousands, except for per share amounts)
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Three Months Ended Nine Months Ended
September 30, September 30,
--------------------------------------------------------------------
2000 1999 2000 1999
--------------------------------------------------------------------
Operating Revenues:
Oil and gas sales............................................ $ 24,995 $ 17,575 $ 69,954 $ 42,263
Gas gathering, marketing and processing...................... 5,300 2,039 13,544 5,516
Oil field services and international sales................... 394 250 870 549
--------------------------------------------------------------------
Total Operating Revenues..................................... 30,689 19,864 84,368 48,328
--------------------------------------------------------------------
Operating Costs and Expenses:
Oil and gas production lifting costs.......................... 3,456 4,235 12,341 11,052
Production taxes and other costs.............................. 3,004 2,327 8,486 5,504
Gas gathering, marketing and processing....................... 4,266 1,442 10,558 4,024
Oil field services and international sales.................... 200 98 450 234
Depreciation and depletion.................................... 5,398 5,768 16,935 16,383
Gain on sale of assets........................................ (4) (228) (28) (228)
General and administrative.................................... 1,125 683 3,396 2,015
--------------------------------------------------------------------
Total Operating Costs and Expenses............................ 17,445 14,325 52,138 38,984
--------------------------------------------------------------------
Operating Profit ............................................... 13,244 5,539 32,230 9,344
Equity in earnings (loss) of affiliate, net of income tax..... 92 (3) 362 (100)
Other income.................................................. 165 53 394 341
Interest expense.............................................. (5,712) (5,377) (17,139) (16,588)
--------------------------------------------------------------------
Net Income (Loss) before income tax and minority interest....... 7,789 212 15,847 (7,003)
Provision for deferred income tax............................. (2,915) - (5,865) -
--------------------------------------------------------------------
Net Income (Loss) before minority interest...................... 4,874 212 9,982 (7,003)
Minority interest in subsidiary earnings...................... - 1 - (86)
--------------------------------------------------------------------
Net Income (Loss)............................................... 4,874 213 9,982 (7,089)
Dividends Applicable to Preferred Stock....................... (1,000) (1,241) (3,294) (3,291)
--------------------------------------------------------------------
Income (Loss) Applicable to Common Shares....................... $ 3,874 $ (1,028) $ 6,688 $ (10,380)
====================================================================
Net Income (Loss)............................................... $ 4,874 $ 213 $ 9,982 $ (7,089)
Other Comprehensive Income (Loss), net of tax
Unrealized Gain (Loss) on Investments......................... 942 (258) 1,616 (514)
--------------------------------------------------------------------
Comprehensive Income (Loss)..................................... 5,816 $ (45) $ 11,598 $ (7,603)
====================================================================
Income (Loss) per Common Share - Basic $ 0.19 $ (0.05) $ 0.33 $ (0.51)
====================================================================
Income (Loss) per Common Share - Diluted $ 0.15 $ (0.05) $ 0.31 $ (0.51)
====================================================================
Common Shares Used in Per Share Calculation
Basic......................................................... 20,130,815 20,114,261 20,187,955 20,165,315
====================================================================
Diluted....................................................... 32,788,409 20,114,261 31,139,950 20,165,315
====================================================================
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
2
<PAGE>
Magnum Hunter Resources, Inc. and Subsidiaries
Consolidated Statement of Stockholders' Equity
For the Period Ended September 30, 2000
(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, 1999.......................... 1,130,000 $ 1 21,738,320 $ 43 (1,512,719) $ (3,631)
Purchase of preferred stock by subsidiary...........
Exercise of employees' common stock options......... 16,942 1 74,600 1
Purchase of treasury stock.......................... (129,032) (500)
Dividends declared or accrued on preferred stock....
Net income..........................................
Unrealized gain on investment.......................
------------------------------------------------------------------------------
Balance at September 30, 2000......................... 1,130,000 $ 1 21,755,262 $ 44 (1,567,151) $ (4,130)
==============================================================================
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Additional Accumulated Other
Paid-In Comprehensive Accumulated
Capital Loss Deficit
-------------------------------------------------------------------------
Balance at December 31, 1999.......................... $ 121,815 $ (2,046) $ (62,542)
Purchase of preferred stock by subsidiary........... (10,035)
Exercise of employees' common stock options......... 309
Purchase of treasury stock..........................
Dividends declared or accrued on preferred stock.... (3,438)
Net income.......................................... 9,982
Unrealized gain on investment....................... 1,616
-------------------------------------------------------------------------
Balance at September 30, 2000......................... $ 112,089 $ (430) $ (55,998)
=========================================================================
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
3
<PAGE>
Magnum Hunter Resources, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(Unaudited)
(in thousands)
<TABLE>
<CAPTION>
<S> <C> <C>
Nine Months Ended
September 30,
-------------------------------------------
2000 1999
-------------------------------------------
CASH FLOW FROM OPERATING ACTIVITIES:
Net Income (loss).................................................................. $ 9,982 $ (7,089)
Adjustments to reconcile net income (loss) to cash provided by
operating activities:
Depreciation and depletion................................................. 16,935 16,383
Amortization of financing fees............................................. 837 1,852
Decrease in reserve for doubtful accounts.................................. (2) -
Deferred income taxes...................................................... 5,865 -
Equity in unconsolidated affiliate......................................... (362) 100
Minority interest.......................................................... - 86
Gain on sale of assets..................................................... (28) (228)
Changes in certain assets and liabilities
Accounts and notes receivable...................................... (11,237) (5,763)
Other current assets............................................... (147) 586
Accounts payable and accrued liabilities........................... 8,058 2,564
-------------------------------------------
Net Cash Provided By Operating Activities.......................................... 29,901 8,491
-------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of assets....................................................... 43,609 1,125
Additions to property and equipment................................................ (31,569) (47,066)
Loan made for promissary note receivable........................................... (1,414) -
Payments received on promissory note receivable.................................... 1,459 (523)
Investment in unconsolidated affiliate............................................. (2,090) -
-------------------------------------------
Net Cash Provided By (Used In) Investing Activities................................ 9,995 (46,464)
-------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from the issuance of long-term debt and production payment................ 48,556 86,000
Fees paid related to financing activities.......................................... (466) (1,791)
Payments of principal on long-term debt and production payment..................... (74,395) (87,886)
Payment of short-term notes payable................................................ - (2,000)
Proceeds from issuance of common and preferred stock, net of offering costs........ 310 46,334
Purchase of preferred stock by subsidiary.......................................... (10,035) -
Purchase of treasury stock......................................................... (499) (1,722)
Increase in restricted cash for payment of notes payable........................... (6) (963)
Cash dividends paid................................................................ (3,657) (2,958)
-------------------------------------------
Net Cash Provided By (Used In) Financing Activities................................ (40,192) 35,014
-------------------------------------------
NET DECREASE IN CASH AND CASH EQUIVALENTS.......................................... (296) (2,959)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD................................... 1,565 4,853
-------------------------------------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD......................................... $ 1,269 $ 1,894
===========================================
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash payments for interest expense............................................... $ 14,390 $12,178
===========================================
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
4
<PAGE>
MAGNUM HUNTER RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2000
(Unaudited)
NOTE 1 - MANAGEMENT'S REPRESENTATION
The consolidated balance sheet as of September 30, 2000, the consolidated
statements of operations and comprehensive income for the three and nine months
ended September 30, 2000 and 1999, the consolidated statement of stockholders'
equity for the period ended September 30, 2000 and the consolidated statements
of cash flows for the nine months ended September 30, 2000 and 1999, 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 at September 30, 2000, results of operations for the three
and nine month periods, and changes in stockholders' equity and cash flows for
the nine month periods.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with accounting principles generally accepted
in the United States of America 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, 1999 annual
report on Form 10-K for the Company. The results of operations for the three and
nine month periods ended September 30, 2000, 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, 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 the Company has presented
separate condensed consolidating financial statements and other disclosures
concerning each Guarantor and Bluebird (See Note 7). 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 - EARNINGS PER SHARE INFORMATION
The following is a reconciliation of the basic and diluted earnings per
share computations.
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
Three Months Ended
----------------------------------------------------------------------------
September 30, 2000 September 30, 1999
------------------------------------ ------------------------------------
Per Share Per Share
Income Shares Amount Income Shares Amount
----------------------------------------- ----------- ----------- ------------ ------------ ---------- ------------
(Thousands, except per share amounts)
----------------------------------------------------------------------------
Basic EPS
Income (loss) available to common
stockholders....................... $3,874 20,131 $ 0.19 $ (1,028) 20,114 $ (0.05)
========== ==========
Effect of Dilutive Securities
Warrants............................. - 1,234 - -
Options.............................. - 1,899 - -
Convertible Preferred stock.......... 1,000 9,524 - -
------------------------------------------------------------------------------
Diluted EPS
Income (loss)available to common
stockholders and assumed
conversions........................ $4,874 32,788 $ 0.15 $ (1,028) 20,114 $ (0.05)
==============================================================================
</TABLE>
5
<PAGE>
MAGNUM HUNTER RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
September 30, 2000
(Unaudited)
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
Nine Months Ended
----------------------------------------------------------------------------
September 30, 2000 September 30, 1999
----------------------------------- -- -------------------------------------
Per Share Per Share
Income Shares Amount Income Shares Amount
----------- ----------- ----------- ------------- ---------- ------------
(Thousands, except per share amounts)
----------------------------------------------------------------------------
Basic EPS
Income (loss) available to common
stockholders....................... $6,688 20,188 $ 0.33 $ (10,380) 20,165 $ (0.51)
======== ==========
Effect of Dilutive Securities
Warrants............................. - 411 - -
Options.............................. - 1,017 - -
Convertible Preferred stock.......... 3,000 9,524 - -
----------------------------------------------------------------------------
Diluted EPS
Income (loss) available to common
stockholders and assumed
conversions........................ $9,688 31,140 $ 0.31 $ (10,380) 20,165 $ (0.51)
============================================================================
</TABLE>
NOTE 3 - HEDGING ACTIVITY
Crude Oil and Natural Gas Hedges
Periodically, the Company enters into futures, options, and swap contracts
to mitigate the effects of significant fluctuations in crude oil and natural gas
prices. At September 30, 2000, the Company had the following open contracts:
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Type Volume/Month Duration Avg. Price
---------------------------------------------------------------------------------------------------
Oil
---
Swap........... 30,000 Bbl Oct 00 - Dec 00 $17.60
Collar......... 10,000 Bbl Oct 00 - Dec 00 Floor - $19.00
Cap - $26.21
Collar......... 45,000 Bbl Jan 01 - Jun 01 Floor - $25.00
Cap - $33.50
Collar......... 15,000 Bbl Jan 01 - Jun 01 Floor - $25.00
Cap - $35.50
Collar......... 15,000 Bbl Jan 01 - Jun 01 Floor - $25.00
Cap - $36.80
Gas
---
Collar ........ 300,000 MMBtu Oct 00 Floor - $ 1.80
Cap - $ 2.25
</TABLE>
Net losses related to crude oil and natural gas derivative transactions for
the three month periods ended September 30, 2000 and 1999 were $4,308,000 and
$2,087,000, respectively, and for the nine month periods ended September 30,
2000 and 1999 were $8,809,000 and $1,022,000, respectively. At September 30,
2000, the unrealized loss from derivative transactions was $2,708,000. Based
upon daily natural gas production and daily crude oil (including natural gas
liquids) production at September 30, 2000, approximately 19% and 43%,
respectively, of the Company's total daily production mix was subject to some
form of hedging activity.
6
<PAGE>
MAGNUM HUNTER RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
September 30, 2000
(Unaudited)
Interest Rate Swaps
At September 30, 2000, the Company had the following open interest rate
swap contract:
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Type Notional Amount Termination Date Pay Rate Receive Rate
----------------------------------------------------------------------------------------------------------------------
Pay Variable/Received Fixed $50,000,000 06/01/02 LIBOR + 3.69% 10% fixed
from 10/01/00 to
06/01/02
</TABLE>
The Company recorded a loss of $89,000 on interest rate swaps for the three
months ended September 30, 2000 and recorded a gain on interest rate swaps of
$104,000 for the three months ended September 30, 1999. For the nine months
ended September 30, 2000 and 1999, the Company recorded a loss of $64,000 and a
gain of $104,000, respectively. The gains and losses from interest rate swaps
are included in interest expense for the appropriate periods. At September 30,
2000 the unrealized loss from interest derivative transactions was $835,000.
NOTE 4 - NEW ACCOUNTING STANDARD
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." The statement establishes accounting and
reporting standards that require every derivative instrument (including certain
derivative instruments embedded in other contracts) to be recorded in the
balance sheet as either an asset or liability measured at its fair market value
and that changes in the derivative's fair value be recognized currently in
earnings unless specific hedge accounting criteria are met. If those criteria
are met, the instruments are treated as cash flow or fair value hedges under
SFAS No. 133 creating volatility in equity through changes in other
comprehensive income or net income due to the marking to market of the hedging
contracts. We will adopt SFAS No. 133 on January 1, 2001.
The Company is currently obligated to four crude oil derivatives and one
interest rate derivative that extend beyond December 31, 2000. The Company is
currently evaluating the effect of the adoption of the statement on its
consolidated financial position and results of operations related to the crude
oil derivatives. The Company's crude oil derivatives are expected to result in
cash flow hedges, which require the Company to record the derivative assets or
liabilities at fair value in the statement of financial position with an offset
in Other Comprehensive Income to the extent the hedge is effective. Hedge
ineffectiveness will be recorded in earnings. The Company continues to evaluate
the impact of SFAS No. 133, as well as the ongoing implementation issues
currently being addressed by the Derivatives Implementation Group. As a result,
the direct financial impact of the application of hedge accounting and the
transition adjustment related to the crude oil derivatives on the Company's
financial position and results of operations has yet to be determined. We have
determined that the interest rate derivative will not qualify for treatment as a
fair value hedge as defined in the statement. If the Company had adopted the
statement on September 30, 2000, it would have recorded a liability of $835,000
on its balance sheet at that date representing the fair value of the interest
rate derivative with a resulting charge to income of $543,000, net of income
tax, as the cumulative effect of change in accounting method for the three and
nine month periods ending September 30, 2000.
NOTE 5 - SUBSEQUENT EVENTS
On October 17, 2000 public warrants for 3,174,600 common shares of the
Company were exercised at a price of $6.50 per share, resulting in net proceeds
of $20.6 million. On October 26, 2000 the Company announced the redemption of
all remaining outstanding public warrants on the redemption date of December 5,
2000. There are presently outstanding a total of 7,337,550 warrants, and the
redemption price is $0.01 per warrant. Each warrant is exercisable for the
purchase of one share of common stock at the exercise price of $6.50 per share.
The Company has agreed to use the first proceeds from the exercise of public
warrants to redeem up to 25,000 shares of its 1999 Series A 8% convertible
preferred stock with a liquidation value of $25,000,000.
7
<PAGE>
MAGNUM HUNTER RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
September 30, 2000
(Unaudited)
NOTE 6 - SEGMENT DATA
The Company has three reportable segments. The Exploration and Production
segment is engaged in exploratory and developmental drilling, and the
acquisition, production, and sale of crude oil, condensate, and natural gas. The
Gas Gathering, Marketing and Processing segment is engaged in the gathering,
compressing and processing of raw 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.
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 three gas
gathering systems and three natural gas liquids processing plants in three
geographic areas that are aggregated as of September 30, 2000. The Oil Field
Services segment has six geographic areas that are aggregated. The reason for
aggregating the segments, in each case, is 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 September 30, 2000 and 1999 follows (in
thousands):
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
Gas Gathering,
Exploration & Marketing & Oil Field
Three Months Ended September 30, 2000: Production Processing Services All Other Elimination Consolidated
----- ------ ----- --------- --- ----- ---------- ---------- -------- --- ----- ----------- ------------
Revenue from external customers......... $ 24,995 $ 5,300 $ 402 $ (8) $ - $ 30,689
Intersegment revenues................... 5,386 1,424 - (6,810) -
Depreciation, depletion, amortization
and impairment.......................... 5,095 220 78 5 5,398
Segment profit (loss)................... 12,799 788 508 (851) 13,244
Equity earnings (losses) of affiliates.. 92 92
Interest expense........................ (5,712) (5,712)
Other income............................ 165 165
-----------
Income before income taxes.............. 7,789
Provision for deferred income tax....... (2,915) (2,915)
Minority interest....................... -
-----------
Net income.............................. $ 4,874
===========
Capital expenditures (net of asset
sales).................................. $ (1,258) $ 40 $ 154 $ - $(1,064)
</TABLE>
8
<PAGE>
MAGNUM HUNTER RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
September 30, 2000
(Unaudited)
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
Gas Gathering,
Exploration & Marketing & Oil Field
Three Months Ended September 30, 1999: Production Processing Services All Other Elimination Consolidated
----- ------ ----- --------- --- ----- ---------- ---------- -------- --- ----- ----------- ------------
Revenue from external customers......... $ 17,575 $ 2,039 $ 250 - $ - $ 19,864
Intersegment revenues................... - 4,041 1,762 - (5,803) -
Depreciation, depletion, amortization
and impairment ......................... 5,563 148 51 6 5,768
Segment profit (loss)................... 4,128 408 799 204 5,539
Equity earnings (losses) of affiliates.. (3) (3)
Interest expense........................ (5,377) (5,377)
Other income............................ 53 53
-------------
Income before income taxes.............. 212
Provision for deferred income tax....... - -
Minority interest....................... 1 1
-------------
Net income.............................. $ 213
=============
Capital expenditures (net of asset
sales).................................. $ 5,930 $ (880) $ 104 - $ 5,154
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
Gas Gathering,
Exploration & Marketing & Oil Field
Nine Months Ended September 30, 2000: Production Processing Services All Other Elimination Consolidated
---- ------ ----- --------- --- ----- ---------- ---------- -------- --- ----- ----------- ------------
Revenue from external customers......... $ 69,954 $ 13,544 $ 870 $ - $ - $ 84,368
Intersegment revenues................... 13,082 4,695 - (17,777) -
Depreciation, depletion, amortization
and impairment.......................... 16,046 657 218 14 16,935
Segment profit (loss)................... 31,012 2,211 1,688 (2,681) 32,230
Equity earnings (losses) of affiliates.. 362 362
Interest expense........................ (17,139) (17,139)
Other income............................ 394 394
-----------
Income before income taxes.............. 15,847
Provision for deferred income tax ...... (5,865) (5,865)
Minority interest....................... - -
-----------
Net income.............................. 9,982
===========
Capital expenditures (net of asset
sales).................................. $ (12,460) $ 107 $ 257 $ 56 $ - $ (12,040)
</TABLE>
9
<PAGE>
MAGNUM HUNTER RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
September 30, 2000
(Unaudited)
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
Gas Gathering,
Exploration & Marketing & Oil Field
Nine Months Ended September 30, 1999: Production Processing Services All Other Elimination Consolidated
---- ------ ----- --------- --- ----- ---------- ---------- -------- --- ----- ----------- ------------
Revenue from external customers......... $ 42,263 $ 5,516 $ 549 $ - $ - $ 48,328
Intersegment revenues................... - 10,212 4,485 - (14,697) -
Depreciation, depletion, amortization
and impairment.......................... 15,748 474 147 14 16,383
Segment profit (loss)................... 7,209 879 2,541 (1,285) 9,344
Equity earnings (losses) of affiliates.. (100) (100)
Interest expense........................ (16,588) (16,588)
Other income............................ 341 341
-----------
Loss before income taxes................ (7,003)
Provision for deferred income tax ...... -
Minority interest....................... (86) (86)
-----------
Net loss................................ $ (7,089)
===========
Capital expenditures (net of asset
sales).................................. $ 46,638 $ (850) $ 236 $ - $ 46,024
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
Gas Gathering,
Exploration & Marketing & Oil Field
As of September 30, 2000: Production Processing Services All Other Elimination Consolidated
-- -- --------- --- ----- ---------- ---------- -------- --- ----- ----------- ------------
Segment assets.......................... $ 236,684 $ 18,459 $ 18,046 $ 12,857 $ 286,046
Equity subsidiary investments........... 6,830 6,830
As of December 31, 1999:
-- -- -------- --- -----
Segment assets.......................... $ 278,652 $ 12,416 $ 4,252 $ 10,790 $ 306,110
Equity subsidiary investments........... 4,163 4,163
</TABLE>
10
<PAGE>
MAGNUM HUNTER RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
September 30, 2000
(Unaudited)
NOTE 7 -- CONDENSED CONSOLIDATING FINANCIAL STATEMENTS
The Company and its wholly-owned subsidiaries, except 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. Bluebird was formed in
December 1998 and first reported results of operations in fiscal 1999. In
addition to not being a guarantor of the Company's 10% Senior Notes, it cannot
be included in determining compliance with certain financial covenants under
certain of the Company's credit agreements. The Company has concluded that
separate financial statements related to the Guarantors are not included because
management has determined that they are not material to investors. Condensed
consolidating financial information for Magnum Hunter Resources, Inc. and
subsidiaries as of September 30, 2000 and December 31, 1999, condensed
consolidating statements of operations for the three and nine months ended
September 30, 2000 and 1999, and condensed consolidating statements of cash
flows as of September 30, 2000 and 1999 were as follows:
Magnum Hunter Resources, Inc. and Subsidiaries
Condensed Consolidating Balance Sheets
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
September 30, 2000
-------------------------------------------------------------------------------------------------------------------------
Magnum Hunter Bluebird Magnum Hunter
Resources, Inc. Energy, Inc. Resources, Inc.
Amounts in Thousands And Guarantor Subs (Non Guarantor) Eliminations Consolidated
-------------------------------------------------------------------------------------------------------------------------
ASSETS
Current assets.............................. $ 20,759 $ 6,221 $ - $ 26,980
Property and equipment
(using full cost accounting).............. 189,572 46,777 - 236,349
Investment in subsidiaries
(equity method)........................... 21,139 - (21,139) -
Investment in parent's preferred and
common stock.............................. - 10,535 (10,535) -
Other assets................................ 26,834 527 (4,644) 22,717
-----------------------------------------------------------------------
Total assets............................. $ 258,304 $ 64,060 $(36,318) $ 286,046
=======================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities......................... $ 24,100 $ 777 $ - $ 24,877
Long-term liabilities....................... 172,093 42,144 (4,644) 209,593
Shareholders' equity........................ 62,111 21,139 (31,674) 51,576
-----------------------------------------------------------------------
Total liabilities and shareholders'
equity...................................... $ 258,304 $ 64,060 $(36,318) $ 286,046
=======================================================================
</TABLE>
11
<PAGE>
MAGNUM HUNTER RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
September 30, 2000
(Unaudited)
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
December 31, 1999
--------------------------------------------------------------------------------------------------------------------------------
Magnum Hunter Bluebird Magnum Hunter
Resources, Inc. Energy, Inc. Resources, Inc.
Amounts in Thousands And Guarantor Subs (Non Guarantor) Eliminations Consolidated
--------------------------------------------------------------------------------------------------------------------------------
ASSETS
Current assets.............................. $ 15,076 $ 3,741 $ (2,601) $ 16,216
Property and equipment
(using full cost accounting).............. 211,159 54,036 - 265,195
Investment in subsidiaries
(equity method)............................ 13,302 - (13,302) -
Other assets................................ 24,189 510 - 24,699
-------------------------------------------------------------------------
Total assets............................. $ 263,726 $ 58,287 $ (15,903) $ 306,110
=========================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities......................... $ 16,442 $ 3,185 $ (2,601) $ 17,026
Long-term liabilities....................... 193,644 41,800 - 235,444
Shareholders' equity........................ 53,640 13,302 (13,302) 53,640
-------------------------------------------------------------------------
Total liabilities and shareholders'
equity................................. $ 263,726 $ 58,287 $ (15,903) $ 306,110
=========================================================================
</TABLE>
Magnum Hunter Resources, Inc. and Subsidiaries
Condensed Consolidating Statement of Operations
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Three Months Ended September 30, 2000
-------------------------------------------------------------------------------------------------------------------------------
Magnum Hunter Bluebird Magnum Hunter
Resources, Inc. Energy, Inc. Resources, Inc.
Amounts in Thousands And Guarantor Subs (Non Guarantor) Eliminations Consolidated
-------------------------------------------------------------------------------------------------------------------------------
Revenues................................... $ 19,309 $ 11,476 $ (96) $ 30,689
Expenses................................... 16,792 6,204 (96) 22,900
----------------------------------------------------------------------------
Income before.............................. 2,517 5,272 - 7,789
Equity in net earnings of subsidiary...... 3,275 - (3,275) -
----------------------------------------------------------------------------
Income before income taxes................. 5,792 5,272 (3,275) 7,789
Provision for deferred income tax.......... (918) (1,997) - (2,915)
----------------------------------------------------------------------------
Net income............................... $ 4,874 $ 3,275 $ (3,275) $ 4,874
============================================================================
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Three Months Ended September 30, 1999
---------------------------------------------------------------------------------------------------------------------------------
Magnum Hunter Bluebird Magnum Hunter
Resources, Inc. Energy, Inc. Resources, Inc.
Amounts in Thousands And Guarantor Subs (Non Guarantor) Eliminations Consolidated
---------------------------------------------------------------------------------------------------------------------------------
Revenues................................... $ 14,387 $ 5,634 $ (157) $ 19,864
Expenses................................... 15,901 3,907 (157) 19,651
---------------------------------------------------------------------------
Income (loss) before....................... (1,514) 1,727 - 213
Equity in net earnings of subsidiary...... 1,727 - (1,727) -
---------------------------------------------------------------------------
Income before income taxes................. 213 1,727 (1,727) 213
Provision for deferred income tax.......... - - - -
---------------------------------------------------------------------------
Net income............................... $ 213 $ 1,727 $(1,727) $ 213
===========================================================================
</TABLE>
12
<PAGE>
MAGNUM HUNTER RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
September 30, 2000
(Unaudited)
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Nine Months Ended September 30, 2000
--------------------------------------------------------------------------------------------------------------------------------
Magnum Hunter Bluebird Magnum Hunter
Resources, Inc. Energy, Inc. Resources, Inc.
Amounts in Thousands And Guarantor Subs (Non Guarantor) Eliminations Consolidated
--------------------------------------------------------------------------------------------------------------------------------
Revenues................................... $ 54,549 $ 30,128 $ (309) $ 84,368
Expenses................................... 50,964 17,866 (309) 68,521
-----------------------------------------------------------------------------
Income before.............................. 3,585 12,262 - 15,847
Equity in net earnings of subsidiary...... 7,618 - (7,618) -
-----------------------------------------------------------------------------
Income before income taxes................. 11,203 12,262 (7,618) 15,847
Provision for deferred income tax.......... (1,221) (4,644) - (5,865)
-----------------------------------------------------------------------------
Net income............................... $ 9,982 $ 7,618 $(7,618) $ 9,982
=============================================================================
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Nine Months Ended September 30, 1999
-------------------------------------------------------------------------------------------------------------------------------
Magnum Hunter Bluebird Magnum Hunter
Resources, Inc. Energy, Inc. Resources, Inc.
Amounts in Thousands And Guarantor Subs (Non Guarantor) Eliminations Consolidated
-------------------------------------------------------------------------------------------------------------------------------
Revenues................................... $ 37,898 $ 10,729 $ (299) $ 48,328
Expenses................................... 45,364 10,352 (299) 55,417
-----------------------------------------------------------------------------
Income (loss) before....................... (7,466) 377 - (7,089)
Equity in net earnings of subsidiary...... 377 - (377) -
-----------------------------------------------------------------------------
Income (loss) before income taxes.......... (7,089) 377 (377) (7,089)
Provision for deferred income tax.......... - - - -
-----------------------------------------------------------------------------
Net income (loss) ....................... $ (7,089) $ 377 $ (377) $ (7,089)
=============================================================================
</TABLE>
Magnum Hunter Resources, Inc. and Subsidiaries
Condensed Consolidating Statements of Cash Flows
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Nine Months Ended September 30, 2000
-----------------------------------------------------------------------------------------------------------------------------
Magnum Hunter Bluebird Magnum Hunter
Amounts in Thousands Resources, Inc. Energy, Inc. Resources, Inc.
And Guarantor Subs (Non Guarantor) Eliminations Consolidated
-----------------------------------------------------------------------------------------------------------------------------
Cash flow from operating activities.......... $ 16,747 $ 13,154 $ - $ 29,901
Cash flow provided by investing activities... 8,133 1,862 - 9,995
Cash flow used by financing activities....... (25,176) (15,010) (6) (40,192)
---------------------------------------------------------------------------
Net increase (decrease) in cash.............. (296) 6 (6) (296)
Cash at beginning of period.................. 1,565 2,145 (2,145) 1,565
---------------------------------------------------------------------------
Cash at end of period........................ $ 1,269 $ 2,151 $(2,151) $ 1,269
===========================================================================
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Nine Months Ended September 30, 1999
--------------------------------------------------------------------------------------------------------------------------------
Magnum Hunter Bluebird Magnum Hunter
Resources, Inc. Energy, Inc. Resources, Inc.
Amounts in Thousands And Guarantor Subs (Non Guarantor) Eliminations Consolidated
--------------------------------------------------------------------------------------------------------------------------------
Cash flow from operating activities.......... $ 3,774 $ 4,717 $ - $ 8,491
Cash flow used by investing activities....... (29,610) (18,704) 1,850 (46,464)
Cash flow provided by financing activities... 22,877 14,950 (2,813) 35,014
--------------------------------------------------------------------------------
Net increase (decrease) in cash.............. (2,959) 963 (963) (2,959)
Cash at beginning of period.................. 4,853 459 (459) 4,853
--------------------------------------------------------------------------------
Cash at end of period........................ $ 1,894 $ 1,422 $(1,422) $ 1,894
================================================================================
</TABLE>
13
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
-----------------------------------------------------------
Throughout this document we make statements that are classified as
"forward-looking." Please refer to the "Forward-Looking Statements" section of
this document for an explanation of these types of assertions. We use the terms
"Magnum Hunter", "Company", "we", "us" and "our" to refer to Magnum Hunter
Resources, Inc. and its consolidated subsidiaries. We also use the term
"Bluebird" to refer to Bluebird Energy Inc., our wholly-owned subsidiary which
is not a guarantor of our 10% senior notes.
Results of Operations
---------------------
The following table sets forth certain information with respect to our oil
and gas operations and our gas gathering, marketing and processing operations.
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------------------------------------------
2000 1999 2000 1999
------------------------------------------------------------
Oil and Gas Operations
----------------------
Reported Production:
Oil (MBbls)...................................... 294 352 998 937
Gas (MMcf)....................................... 4,779 5,130 14,611 14,276
Oil and Gas (MMcfe).............................. 6,541 7,245 20,601 19,897
Underlying Production (*):
Oil (MBbls)...................................... 294 285 876 741
Gas (MMcf)....................................... 4,595 4,291 13,040 12,303
Oil and Gas (MMcfe).............................. 6,358 6,002 18,294 16,751
(*) Adjusted for the sale of properties in June and September 2000.
Average Sale Prices (after hedging)
Oil (per Bbl).................................... $ 21.31 $ 15.86 $ 22.07 $ 13.89
Gas (per Mcf).................................... 3.92 2.34 3.28 2.05
Oil and Gas (per Mcfe)........................... 3.82 2.43 3.40 2.12
Effect of hedging activities (per Mcfe)............. $ (0.66) $ (0.29) $ (0.43) $ (0.05)
Lease Operating Expense (per Mcfe)
Lifting costs.................................... $ 0.53 $ 0.58 $ 0.60 $ 0.56
Production tax and other costs................... 0.46 0.32 0.41 0.28
Gross margin (per Mcfe)............................. $ 2.83 $ 1.53 $ 2.39 $ 1.29
Gas Gathering, Marketing and Processing Operations
---------------------------------------------------
Throughput Volumes (Mcf per day)
Gathering........................................ 16,424 17,387 16,600 18,818
Processing....................................... 15,190 15,439 17,145 15,558
Gross margin (in thousands)......................... $ 1,034 $ 597 $ 2,986 $ 1,492
Gathering (per Mcf throughput)................... $ 0.17 $ 0.11 $ 0.17 $ 0.14
Processing (per Mcf throughput).................. 0.53 0.27 0.46 0.16
</TABLE>
14
<PAGE>
For the third quarter of 2000, we reported net income of $4,874,000
compared to net income of $213,000 for the third quarter of 1999. Net income
applicable to common shares was $3,874,000, or $0.19 per share-basic and $0.15
per share-diluted, for the third quarter of 2000. For the third quarter of 1999,
we reported a net loss applicable to common shares of $1,028,000, or $0.05 per
share basic and diluted. For the nine month period of 2000 we reported net
income of $9,982,000 versus a net loss of $7,089,000 for the nine month period
of 1999. Our net income applicable to common shares was $6,688,000, or $0.33 per
share-basic and $0.31 per share-diluted for the nine months of 2000, versus a
net loss applicable to common shares of $10,380,000, or $0.51 per share basic
and diluted for the nine months of 1999. The improvements in these reported
results are due to the following factors:
Oil and Gas Operations:
-----------------------
PRODUCTION. For the third quarter of 2000, we reported oil production of
294 Mbbls (thousand barrels) and gas production of 4,779 Mmcf (million cubic
feet), which represents a decline of 17% in oil and 7% in gas from the
comparable quarter in 1999. This decline was primarily due to the sale of
certain non-core oil and gas properties which took effect in June 2000 and
September 2000. Excluding the production of these properties from both periods,
our underlying oil production increased 3% to 294 Mbbls and our underlying gas
production increased 7% to 4,595 Mmcf for the third quarter of 2000 compared to
the third quarter of 1999. These increases were the result of the success of our
drilling program offsetting normal production declines. For the nine months of
2000, our reported production was 998 Mbbls of oil and 14,611 Mmcf of gas, an
increase of 7% and 2%, respectively, while our underlying production was 876
Mbbls of oil and 13,040 Mmcf of gas, an increase of 18% and 6%, respectively.
These increases in reported and underlying production can be attributed in part
to the success of our drilling programs and in part to the acquisition of
properties from Vastar effective June 1999.
PRICES. The increase in prices received for oil and gas was the most
significant factor affecting net income for both the three and nine month
periods in 2000. Prices realized during the third quarter of 2000 averaged
$21.31 per barrel of oil and $3.92 per Mcf of gas. This represents a 57%
increase, on a thousand cubic feet of gas equivalent (Mcfe) basis, over third
quarter of 1999 average realized prices of $15.86 per barrel of oil and $2.34
per Mcf of gas. Average realized prices during the first nine months of 2000
were $22.07 per barrel of oil and $3.28 per Mcf of gas, a 60% increase on an
Mcfe basis compared to $13.89 per barrel of oil and $2.05 per Mcf of gas
realized during the 1999 period. The unit prices realized include the effects of
hedging.
From time to time, we enter into various hedging contracts in order to
reduce our exposure to the possibility of declining oil and gas prices. During
the third quarter of 2000, hedging reduced the average price we received for oil
by $8.90 per barrel and for gas by $0.35 per Mcf as compared to net decreases of
$3.35 per barrel and $0.18 per Mcf for the third quarter of 1999. Hedging
transactions for the first nine months of 2000 reduced the average price we
received for oil by $6.26 per barrel and for gas by $0.17 per Mcf as compared to
a net decrease of $1.51 per barrel and a net increase of $0.03 per Mcf for the
comparable 1999 period.
During the third quarter of 2000, we had approximately 19% of our natural
gas production and 94% of our oil production hedged. For October 2000 we have
300,000 Mcf of gas hedged through cost-less collars with a price range of $1.80
to $2.25 per Mcf. Beginning November 1, 2000 we have no natural gas hedges for
the remainder of 2000 or thereafter. For the fourth quarter of 2000, the amount
of our oil hedged drops to approximately 43% of our current oil production at a
weighted average price using cost-less collars of $17.94 to $19.75 per barrel.
For the first six months of 2001 we have approximately 81% of our current oil
production hedged using cost-less collars with a weighted average price range of
$25.00 to $34.56 per barrel.
OIL AND GAS REVENUES. Primarily as a result of higher realized prices, oil
and gas revenues increased 42% to $24,995,000 compared to third quarter 1999 oil
and gas revenues of $17,575,000. Oil and gas revenues for the first nine months
of 2000 increased 66% to $69,954,000 as compared to $42,263,000 during the
comparable 1999 period, also primarily because of an increase in realized prices
received.
15
<PAGE>
LEASE OPERATING EXPENSE. We break out our lease operating expense into two
components, lifting costs and production tax and other costs. For the third
quarter of 2000, lifting costs, on a unit of production basis, were $0.53 per
Mcfe as compared to $0.58 per Mcfe in the comparable period of 1999. The
decrease in lifting costs per unit is attributable to the sale of properties
with higher than average lifting costs as well as the addition through drilling
of new gas production with lower than average lifting costs. Production tax and
other costs were $0.46 per Mcfe during the third quarter of 2000 versus $0.32
per Mcfe during the corresponding period in 1999. This increase was caused
primarily by higher production taxes and net profits interest expense due to
higher oil and gas prices. For the nine month period in 2000, lifting costs were
$0.60 per Mcfe versus $0.56 per Mcfe for the nine month period in 1999,
primarily the result of the acquisition of properties with higher than average
lifting costs in June 1999. Production tax and other costs were $0.41 per Mcfe
for the nine months in 2000 versus $0.28 per Mcfe for the corresponding period
in 1999. The increase is attributable to higher production taxes, net profits
interest expense and overhead charges.
GROSS MARGIN - OIL AND GAS. We define our gross margin for oil and gas
operations as oil and gas revenue less lease operating expenses. For the third
quarter of 2000, our gross margin was $18,535,000, or $2.83 per Mcfe, on a unit
of production basis. For the third quarter of 1999, our gross margin was
$11,013,000, or $1.53 per Mcfe. For the nine month period in 2000, our gross
margin was $49,127,000, or $2.39 per Mcfe, versus $25,707,000, or $1.29 per
Mcfe, for the comparable period in 1999. In the case of both the three and nine
month periods, the principal reason for the increase in our gross margin from
oil and gas operations was the increase in the realized prices for oil and gas
production.
Gas Gathering, Marketing and Processing Operations:
---------------------------------------------------
THROUGHPUT VOLUMES. For the third quarter of 2000, our gathering system
throughput was 16,424 Mcf per day versus 17,387 Mcf per day for the same quarter
in 1999. This decline was due to normal production declines behind the systems.
For the nine months in 2000, gathering system throughput was 16,600 Mcf per day
versus 18,818 Mcf per day for the nine months of 1999. This decline was partly
due to production declines and partly due to the sale of a gathering system in
June of 1999. Gas processing throughput was 15,190 Mcf per day for the third
quarter of 2000 versus 15,439 Mcf per day for the third quarter of 1999. For the
nine months in 2000, gas processing throughput was 17,145 Mcf per day versus
15,558 Mcf per day for the nine months in 1999. The increase in throughput for
the nine months in 1999 was the result of the acquisition of a processing plant
in June of 1999.
REVENUES. For the third quarter of 2000, revenues from gas gathering,
marketing and processing were $5,300,000 versus $2,039,000 for the third quarter
of 1999. For the nine months in 2000, revenues were $13,544,000 versus
$5,516,000 for the nine months in 1999. The increase in revenues for the third
quarter and nine month period in 2000 was primarily due to higher prices
received for plant products and residue gas and the plant acquisition completed
in 1999.
GROSS MARGIN. The gross margin we realized from gathering, marketing and
processing for the third quarter of 2000 was $1,034,000 versus $597,000 for the
third quarter of 1999. Gathering margin was $0.17 per Mcf in 2000 versus $0.11
per Mcf in 1999 due to an increase in marketing spreads. Processing margin was
$0.53 per Mcf for the third quarter of 2000 versus $0.27 per Mcf for the same
quarter in 1999 due to higher prices for plant products. For the nine months in
2000, gross margin was $2,986,000 versus $1,492,00 for the nine months in 1999.
Gathering margin was $0.17 per Mcf and processing margin was $0.46 per Mcf for
the nine months in 2000 versus gathering margin of $0.14 per Mcf and processing
margin of $0.16 per Mcf for the 1999 period. The increase in these margins in
2000 was due to greater marketing spreads and higher prices for plant products.
16
<PAGE>
Oil Field Services:
-------------------
Revenues from oil field services for the third quarter of 2000 were
$394,000 versus $250,000 for the third quarter of 1999, due to an increase in
operating services provided to third party clients. The gross margin for the
third quarter of 2000 was $194,000 versus $152,000 for the third quarter of
1999. For the nine months of 2000, revenues were $870,000 versus $549,000 for
the corresponding period in 1999, due to an increase in third party clients.
Gross margin for the nine month periods of 2000 and 1999 were $420,000 and
$315,000, respectively.
Total Operating Revenues:
-------------------------
Our total operating revenues for the third quarter of 2000 were $30,689,000
versus $19,864,000 for the third quarter of 1999, an increase of 54%. For the
nine months of 2000, our total operating revenues were $84,368,000 versus
$48,328,000 for the corresponding period in 1999, an increase of 75%. For both
periods in 2000, revenues were higher primarily due to higher realized prices
for oil, gas and plant products.
Other Income and Expenses:
--------------------------
DEPRECIATION AND DEPLETION. For the third quarter of 2000, our depreciation
and depletion expense was $5,398,000, or $0.83 per Mcfe of production versus
$5,768,000, or $0.80 per Mcfe of production in the third quarter of 1999. The
depletion rate per Mcfe was slightly higher in the 2000 period due to capital
costs incurred on our Gulf of Mexico exploration projects. For the nine months
of 2000, depreciation and depletion expense was $16,935,000, or $0.82 per Mcfe
of production versus $16,383,000, or $0.82 per Mcfe for the nine months of 1999.
GAIN ON SALE. For the third quarter of 2000, we recorded a gain on sale of
assets of $4,000 versus a gain on sale of assets of $228,000 for the similar
period in 1999. For the nine months of 2000 and 1999, we recorded gains on sale
of assets of $28,000 and $228,000, respectively.
GENERAL AND ADMINISTRATIVE EXPENSE. Our G&A expense was $1,125,000 for the
third quarter of 2000 versus $683,000 for the third quarter of 1999, an increase
of 65%. This increase was due to higher salary and benefits, office rent,
franchise taxes and other costs. Our employee headcount grew 8% when comparing
the two periods.
For the nine months of 2000, our G&A expense was $3,396,000 versus
$2,015,000 for the corresponding period in 1999, an increase of 69% due to the
same reasons that affected the quarterly change.
OPERATING PROFIT. Our operating profit for the third quarter of 2000 was
$13,244,000 versus $5,539,000 for the third quarter of 1999, an increase of
139%. For the nine months in 2000, our operating profit was $32,230,000 versus a
nine month operating profit of $9,344,000 in 1999, an increase of 245%.
EQUITY IN EARNINGS OF AFFILIATE. We recorded equity in affiliate earnings
of $92,000 for the third quarter of 2000 versus a loss of $3,000 for the third
quarter of 1999. For the nine month period in 2000, we recorded equity in
earnings of affiliate of $362,000 versus a loss of $100,000 for the nine months
of 1999. In both periods of 2000, the increase was due to increased net earnings
from gas marketing profits of the affiliate.
OTHER INCOME. Other income was $165,000 for the third quarter of 2000
versus $53,000 for the third quarter of 1999. For the nine months in 2000, other
income was $394,000 versus $341,000 for the nine months in 1999. In both cases
the increase was due to an increase in interest income.
INTEREST EXPENSE. For the third quarter of 2000, interest expense was
$5,712,000 versus $5,377,000 for the same period in 1999, due to higher rates on
our LIBOR-based senior bank credit lines and the effect of an interest rate
swap. Our interest expense for the nine month period in 2000 was $17,139,000
versus $16,588,000 for the corresponding period in 1999. The reasons for this
increase are the same as for the quarterly periods.
17
<PAGE>
PROVISION FOR DEFERRED INCOME TAXES. We provided for deferred income taxes
of $2,915,000 on pretax income of $7,789,000 in the third quarter of 2000,
versus no tax provision on pretax income of $212,000 in the third quarter of
1999. For the nine months in 2000, we made a provision for deferred income taxes
of $5,865,000 on pretax income of $15,847,000. For the nine months in 1999, we
did not provide any deferred tax benefits on a pretax loss of $7,003,000 because
of uncertainty at that time in our ability to realize additional tax benefits on
our net operating losses in the future.
DIVIDENDS APPLICABLE TO PREFERRED STOCK. We paid $1,000,000 in dividends on
our preferred stock during the third quarter of 2000 versus $1,241,000 during
the third quarter of 1999. The reduction is due to Bluebird's acquisition of
100% ($10,000,000) of our 1996 Series A Convertible preferred stock on June 30,
2000. For the nine month periods in 2000 and 1999, we paid preferred dividends
of $3,294,000 and $3,291,000, respectively.
Liquidity and Capital Resources
-------------------------------
CASH FLOW AND WORKING CAPITAL. Net cash flow provided by operating
activities for the nine month period in 2000 was $29,901,000 and for the nine
month period in 1999 was $8,491,000. The substantial increase in our operating
cash flows is primarily the result of higher realized oil and gas prices. Our
net working capital position at September 30, 2000 was $2,103,000. On that date,
Magnum Hunter also had available $18,500,000 under its senior bank credit line,
and Bluebird had $3,500,000 available under its senior bank credit line.
CAPITAL EXPENDITURES AND INVESTMENTS. Net cash flow provided by investing
activities was $9,995,000 for the nine month period in 2000. We realized
proceeds of $43,609,000 from the sale of non-core assets during the nine months,
of which approximately $11,893,000 was attributable to Bluebird. Both the
Company and Bluebird used these proceeds to repay senior bank indebtedness. We
made capital expenditures of $31,569,000 under our capital budget during the
nine months, of which $10,051,000 is attributable to Bluebird. Our capital
budget is discussed further below. Additionally, we made investments in two
unconsolidated affiliates totaling $2,090,000 and advanced funds totaling
$1,414,000 under promissory notes receivable. We received payments on promissory
notes receivable totaling $1,459,000 during the nine months.
FINANCING ACTIVITIES. Net cash flow used in financing activities was
$40,192,000 for the nine months of 2000. We borrowed a total of $48,556,000
under our senior bank credit lines of which $11,500,000 was attributable to
Bluebird. We repaid borrowings under our senior bank credit lines by
$74,395,000, of which $15,800,000 was attributable to Bluebird. We received
$310,000 from the exercise of employee stock options. We also paid $466,000 of
fees related to financing activities, of which $175,000 was attributable to
Bluebird. Bluebird also spent $10,534,000 to acquire Magnum Hunter preferred and
common stock.
BLUEBIRD'S CAPITAL RESOURCES. On May 23, 2000, Bluebird's commercial banks
agreed to allow it to acquire 100% of Magnum Hunter's 1996 Series A convertible
preferred stock at liquidation value, or $10 million, and to purchase up to $500
thousand of Magnum Hunter's common stock. Effective July 1, 2000, the commercial
banks set Bluebird's borrowing base under its senior credit line at $41 million
with provision to reduce the borrowing base to $38.5 million effective November
4, 2000. The bank agreement also provides that Bluebird may either re-market the
1996 Series A convertible preferred stock or raise additional equity in a
substantially similar amount by December 1, 2000. Bluebird is currently
exploring various ways to meet these financial conditions or alternatives that
will be satisfactory to all parties. Additionally, we believe that Bluebird's
commercial banks will be willing to reestablish its borrowing base to at least
the $41 million level based on reserve estimates as of June 30, 2000 provided by
Bluebird's third party engineering consultants. As of September 30, 2000,
Bluebird's borrowings under the senior credit line were $37.5 million. We
believe that this bank credit line, along with cash flow from operations,
provides Bluebird with sufficient liquidity to meet interest payments as well as
carry out its capital spending budget plans through the remainder of 2000 and
through 2001.
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MAGNUM HUNTER'S CAPITAL RESOURCES. Our borrowing base under our senior bank
credit line was $50 million at September 30, 2000 and our borrowings under this
line were $31.5 million on that date. On October 17, 2000, ONEOK Resources
Company exercised 100% of their public warrant shares (3,174,600 shares) of
Magnum Hunter at an exercise price of $6.50 per share, resulting in net proceeds
to us of $20.6 million. This increased their ownership interest in Magnum Hunter
to approximately 38%. In addition, another company exercised 450,000 restricted
common stock purchase warrants of Magnum Hunter resulting in net proceeds to us
of $2.4 million. We used the proceeds from these two equity transactions to
reduce our borrowing under our senior bank credit line. On October 26, 2000, we
announced the redemption of all remaining outstanding public warrants on the
redemption date of December 5, 2000. There are presently outstanding a total of
7,337,550 warrants, each exercisable for the purchase of one share of common
stock at the exercise price of $6.50 per share. If all of the warrants are
exercised, we would realize net proceeds of approximately $47.7 million. Under
an agreement we made with ONEOK Resources Company, we promised to utilize the
first proceeds received from the exercise of any public warrants to redeem up to
25,000 shares, or 50%, of our 1999 Series A 8% convertible preferred stock owned
by ONEOK. If all 25,000 shares were redeemed, we would pay ONEOK approximately
$30.5 million, which includes a redemption premium of $5.5 million. The
redemption premium would be treated as a dividend paid on preferred stock during
the fourth quarter of 2000. The net cash proceeds after exercising the warrants
and redeeming the preferred stock would be used to further reduce our borrowings
under our senior bank credit line.
BUDGETED CAPITAL EXPENDITURES AND LONG-TERM FINANCING. For the year 2000,
we have increased our capital expenditure budget to approximately $65 million
from the previously reported $45 million level. The new budget includes
approximately $41 million for participation in exploration projects in the
shallow water area of the Gulf of Mexico. Most of the risk capital on the
offshore program has already been expended earlier in the year and the larger
budget is specifically dedicated for completion of wells and the fabrication of
production platform facilities for the Gulf of Mexico. We are currently
evaluating a capital expenditures budget for 2001. Based upon our anticipated
production levels and oil and gas prices, we believe that our cash flow from
operations, existing working capital and availability under our senior bank
credit lines will be sufficient to meet interest payments and to fund the
current and expected capital expenditures budgets for 2000 and 2001.
FORWARD-LOOKING STATEMENTS. This Form 10-Q and the information incorporated
by reference contain statements that constitute "forward-looking statements"
within the meaning of Section 27A of the Securities Act and Section 21E of the
Securities Exchange Act. The words "expect", "project", "estimate", "believe",
anticipate, "intend", "budget", "plan", "forecast", "predict" and other similar
expressions are intended to identify forward-looking statements. These
statements appear in a number of places and include statements regarding our
plans, beliefs, or current expectations, including the plans, beliefs, and
expectations of our officers and directors.
When considering any forward-looking statement, you should keep in mind the
risk factors that could cause our actual results to differ materially from those
contained in any forward-looking statement. Important factors that could cause
actual results to differ materially from those in the forward-looking statements
herein include the timing and extent of changes in commodity prices for oil and
gas, operating risks and other risk factors as described in our Annual Report on
Form 10-K as filed with the Securities and Exchange Commission. Furthermore, the
assumptions that support our forward-looking statements are based upon
information that is currently available and is subject to change. We
specifically disclaim all responsibility to publicly update any information
contained in a forward-looking statement or any forward-looking statement in its
entirety and therefore disclaim any resulting liability for potentially related
damages.
All forward-looking statements attributable to Magnum Hunter Resources,
Inc. are expressly qualified in their entirety by this cautionary statement.
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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 fiscal year-end
December 31, 1998 filed April 14, 1999)
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 fiscal year-end December 31, 1998 filed April 14, 1999)
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 fiscal year-end December 31, 1998
filed April 14, 1999)
10.5 Employment Agreement for Gary C. Evans (Incorporated by
reference to Form 10-K for the fiscal year-end December 31,
1999 filed March 30, 2000)
10.6 Employment Agreement for Matthew C. Lutz (Incorporated by
reference to Form 10-K for the fiscal year-end
December 31, 1999 filed March 30, 2000)
10.7 Employment Agreement for Richard R. Frazier (Incorporated by
reference to Form 10-K for the fiscal year-end December 31, 1999
filed March 30, 2000)
10.8 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)
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10.9 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)
10.10 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)
10.11 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
fiscal year-end December 31, 1998 filed April 14, 1999)
10.12 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.
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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 November 14, 2000
---------------------
Gary C. Evans
President and Chief Executive Officer
By /s/ Chris Tong November 14, 2000
---------------------
Sr. Vice President and
Chief Financial Officer
By /s/ David S. Krueger November 14, 2000
---------------------
David S. Krueger
Vice President and
Chief Accounting Officer
By /s/ Morgan F. Johnston November 14, 2000
------------------------
Morgan F. Johnston
Vice President, General Counsel and
Secretary
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