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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGEACT OF 1934
For the quarterly period ended MARCH 31, 1998
--------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File Number: 1-10662
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CROSS TIMBERS OIL COMPANY
(Exact name of registrant as specified in its charter)
Delaware 75-2347769
---------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
810 Houston Street, Suite 2000, Fort Worth, Texas 76102
------------------------------------------------- -----
(Address of principal executive offices) (Zip Code)
(817) 870-2800
-----------------------------------------------------
(Registrant's telephone number, including area code)
NONE
------------------------------------------------------------
(Former name, former address and former fiscal year, if change since last
report)
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
----- -----
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date:
Class Outstanding as of May 1, 1998
----------------------------- -----------------------------
Common stock, $.01 par value 46,419,022
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<PAGE>
CROSS TIMBERS OIL COMPANY
FORM 10-Q FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1998
INDEX
Page
----
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets
at March 31, 1998 and December 31, 1997................... 3
Consolidated Statements of Operations
for the Three Months Ended March 31, 1998 and 1997........ 4
Consolidated Statements of Cash Flows
for the Three Months Ended March 31, 1998 and 1997........ 5
Notes to Consolidated Financial Statements.................. 6
Report of Independent Public Accountants.................... 11
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations............. 12
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K............................ 16
Signatures.................................................. 18
2
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PART I. FINANCIAL INFORMATION
CROSS TIMBERS OIL COMPANY
CONSOLIDATED BALANCE SHEETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
(in thousands) MARCH 31,
1998 DECEMBER 31,
(Unaudited) 1997
-------------- -------------
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents.......................$ 11,570 $ 3,816
Accounts receivable, net........................ 38,318 43,996
Investment in equity securities (Note 2)........ 6,884 -
Deferred income tax benefit..................... 362 445
Other current assets............................ 5,995 3,905
-------------- -------------
Total Current Assets......................... 63,129 52,162
-------------- -------------
Property and Equipment, at cost - successful
efforts method:
Producing properties............................ 987,459 931,259
Undeveloped properties.......................... 6,765 6,406
Gas gathering and other......................... 24,855 23,703
-------------- -------------
Total Property and Equipment................. 1,019,079 961,368
Accumulated depreciation, depletion and
amortization................................... (252,357) (237,532)
-------------- -------------
Net Property and Equipment................... 766,722 723,836
-------------- -------------
Other Assets..................................... 12,054 12,457
-------------- -------------
TOTAL ASSETS.....................................$ 841,905 $ 788,455
============== =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable and accrued liabilities........$ 53,162 $ 52,266
Payable to Royalty Trust........................ 1,398 2,073
Accrued stock incentive compensation............ 727 554
-------------- -------------
Total Current Liabilities.................... 55,287 54,893
-------------- -------------
Long-term Debt (Note 3).......................... 605,000 539,000
-------------- -------------
Deferred Income Taxes Payable.................... 18,883 21,320
-------------- -------------
Other Long-term Liabilities...................... 2,917 2,999
-------------- -------------
Commitments and Contingencies (Note 4)
Stockholders' Equity:
Series A convertible preferred stock ($.01 par
value, 25,000,000 shares authorized, 1,138,729
issued, at liquidation value of $25)........... 28,468 28,468
Common stock ($.01 par value, 100,000,000 shares
authorized, 46,634,494 and 46,310,710 shares
issued)....................................... 466 463
Additional paid-in capital...................... 212,578 210,954
Treasury stock (7,485,651 and 6,860,779 shares). (86,958) (76,656)
Retained earnings............................... 5,264 7,014
-------------- -------------
Total Stockholders' Equity................... 159,818 170,243
-------------- -------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY.......$ 841,905 $ 788,455
============== =============
</TABLE>
See Accompanying Notes to Consolidated Financial Statements.
3
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CROSS TIMBERS OIL COMPANY
CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
- --------------------------------------------------------------------------------
(in thousands, except per share data)
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
----------------------------
1998 1997
------------ ------------
<S> <C> <C>
REVENUES
Oil and condensate.................................. $ 15,062 $ 19,914
Gas and natural gas liquids......................... 32,992 29,524
Gas gathering, processing and marketing............. 1,652 2,733
Other............................................... 915 1,323
------------ ------------
Total Revenues...................................... 50,621 53,494
------------ ------------
EXPENSES
Production.......................................... 12,508 10,343
Exploration......................................... 1,368 -
Taxes on production and property.................... 5,104 4,177
Depreciation, depletion and amortization............ 15,582 10,969
General and administrative.......................... 2,014 3,535
Gas gathering and processing........................ 2,132 2,098
Interest, net....................................... 11,251 5,275
Trust development costs............................. 267 74
------------ ------------
Total Expenses...................................... 50,226 36,471
------------ ------------
INCOME BEFORE INCOME TAX............................. 395 17,023
------------ ------------
INCOME TAX
Current............................................. - 256
Deferred............................................ 134 5,672
------------ ------------
Total Income Tax.................................... 134 5,928
------------ ------------
NET INCOME........................................... 261 11,095
Preferred Stock Dividends........................... 445 445
------------ ------------
EARNINGS (LOSS) AVAILABLE TO COMMON STOCK............ $ (184) $ 10,650
============ ============
EARNINGS PER COMMON SHARE (Note 6)
Basic............................................... $ 0.00 $ 0.26
============ ============
Diluted............................................. $ 0.00 $ 0.25
============ ============
DIVIDENDS DECLARED PER COMMON SHARE.................. $ 0.04 $ 0.037
============ ============
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING........... 39,046 40,395
============ ============
</TABLE>
See Accompanying Notes to Consolidated Financial Statements.
4
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CROSS TIMBERS OIL COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
- --------------------------------------------------------------------------------
(in thousands)
(Note 5)
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
----------------------------
1998 1997
------------ ------------
<S> <C> <C>
OPERATING ACTIVITIES
Net income...........................................$ 261 $ 11,095
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation, depletion and amortization......... 15,582 10,969
Exploration...................................... 1,368 -
Stock incentive compensation..................... 173 266
Deferred income tax.............................. 134 5,672
Gain on investment in equity securities.......... (652) (1,209)
Other non-cash items............................. (62) 408
Changes in working capital (a)....................... (5,320) 11,939
------------ ------------
CASH PROVIDED BY OPERATING ACTIVITIES................ 11,484 39,140
------------ ------------
INVESTING ACTIVITIES
Proceeds from sale of equity securities.............. - 7,039
Investment in equity securities...................... - (6,479)
Proceeds from sale of property and equipment......... 89 501
Property acquisitions................................ (45,819) (21,462)
Exploration and development costs.................... (9,796) (17,368)
Gas plant, gathering and other additions............. (1,147) (860)
------------ ------------
CASH USED BY INVESTING ACTIVITIES.................... (56,673) (38,629)
------------ ------------
FINANCING ACTIVITIES
Proceeds from long-term debt......................... 162,500 62,500
Payments on long-term debt........................... (96,500) (47,130)
Dividends............................................ (1,895) (1,870)
Net proceeds (disbursements) related to stock option
exercises........................................... (1,023) 118
Purchase of treasury stock........................... (10,139) (17,763)
------------ ------------
CASH PROVIDED (USED) BY FINANCING ACTIVITIES......... 52,943 (4,145)
------------ ------------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS...... 7,754 (3,634)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD........ 3,816 3,937
------------ ------------
CASH AND CASH EQUIVALENTS, END OF PERIOD..............$ 11,570 $ 303
============ ============
(a) CHANGES IN WORKING CAPITAL
Accounts receivable..............................$ 6,126 $ 8,522
Investment in equity securities.................. (6,233) -
Inventory........................................ 93 (181)
Other current assets............................. (2,215) 1,051
Accounts payable, accrued liabilities and payable
to Royalty Trust................................ (3,091) 2,547
------------ ------------
DECREASE (INCREASE) IN WORKING CAPITAL........... $ (5,320) $ 11,939
============ ============
</TABLE>
See Accompanying Notes to Consolidated Financial Statements.
5
<PAGE>
CROSS TIMBERS OIL COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
1. INTERIM FINANCIAL STATEMENTS
The accompanying consolidated financial statements of Cross Timbers Oil
Company ("the Company"), with the exception of the consolidated balance sheet at
December 31, 1997, have not been audited by independent public accountants. In
the opinion of the Company's management, the accompanying financial statements
reflect all adjustments necessary to present fairly the financial position at
March 31, 1998 and the results of operations and cash flows of the Company for
the three months ended March 31, 1998 and 1997. All such adjustments are of a
normal recurring nature. Certain amounts presented in prior period financial
statements have been reclassified for consistency with current period
presentation. The results for interim periods are not necessarily indicative of
annual results.
Certain disclosures have been condensed or omitted from these financial
statements. Accordingly, these financial statements should be read with the
Company's consolidated financial statements included in the Company's 1997
annual report on Form 10-K.
2. INVESTMENT IN EQUITY SECURITIES
In accordance with Statement of Financial Accounting Standards No. 115,
Accounting for Certain Investments in Debt and Equity Securities, equity
securities acquired during first quarter 1998 have been recorded as trading
securities since such securities were principally held for resale in the near
future. Accordingly, such investment at March 31, 1998 has been recorded as a
current asset at market value, unrealized holding gains and losses have been
recognized in the consolidated statement of operations and cash flows from
purchases and sales of equity securities have been included in cash provided by
operating activities.
Prior to 1998, the Company's investments in equity securities were recorded
as available-for-sale securities. As a result, such investments were recorded
as long-term assets at market value, unrealized holding gains and losses were
recorded as a separate component of stockholders' equity and cash flows from
purchases and sales of equity securities were included in cash provided (used)
by investing activities. See Note 7. Realized gains on the sale of equity
securities were $48,000 and $1,208,000 during the three months ended March 31,
1998 and 1997, respectively.
3. LONG-TERM DEBT
On April 17, 1998, the Company entered into a new Revolving Credit Agreement
with commercial banks ("loan agreement"), the borrowings under which mature on
June 30, 2003. After the closing of the EEX Acquisition on April 24, 1998 (Note
10), the borrowing base and commitment was $560 million. Other provisions of
the loan agreement are generally the same as the prior Revolving Credit
Agreement.
On March 31, 1998, outstanding bank borrowings and short-term borrowings were
$293 million and $12 million respectively. Short-term borrowings at March 31,
1998 are classified as long-term debt because of the Company's ability and
intent to refinance this debt on a long-term basis. After the closing of the
EEX Acquisition and repayment of bank debt from net proceeds of the sale of
common stock on April 27, 1998 (Note 5), outstanding bank debt and unused
borrowing capacity were $355 million and $205 million, respectively.
4. COMMITMENTS AND CONTINGENCIES
Gas Sales Commitments
In May 1998, the Company exchanged its floor prices for increased ceiling
prices on its outstanding gas price collars. As a result, the Company has
ceiling prices of $2.50 for 30,000 Mcf per day in July, $2.56 for 40,000 Mcf per
day in August, $2.50 for 30,000 Mcf per day in September, $2.98 for 20,000 Mcf
per day in October and $2.99 for 32,000 Mcf per day in February 1999. Gas price
collars had no effect on April gas prices; gas price collars for May and June
were effectively terminated.
6
<PAGE>
The Company has also entered into futures contracts to sell 60,000 Mcf per
day in May at a weighted average price of $2.51 per Mcf, 70,000 Mcf per day in
June through August at $2.54 per Mcf, 60,000 Mcf per day in September at $2.57
per Mcf and 30,000 Mcf per day in October at $2.65 per Mcf.
Prices to be realized by the Company for hedged production will be less than
these hedged prices because of location, quality and other adjustments. The
Company has entered into contracts to fix its Oklahoma delivery point
differential ("basis") at a weighted average of $0.15 per Mcf for 30,000 Mcf per
day in May and $0.18 per Mcf for 10,000 Mcf per day in June. The Company also
has entered into basis swap agreements that effectively fix the San Juan Basin
basis at $0.27 per Mcf for 20,000 Mcf per day in April through March 1999 and
10,000 Mcf per day from April 1999 through December 2000.
The Company has committed to sell all gas production from certain properties
in the EEX Acquisition (Note 10) to EEX Corporation at market prices from May 1,
1998 through the earlier of December 31, 2001, or until a total of approximately
34.3 billion cubic feet (27.8 billion cubic feet net to the Company's interest)
of gas has been delivered. Based on current production, this sales commitment is
approximately 24,700 Mcf (20,000 Mcf net to the Company's interest) per day.
Litigation
In June 1996, Holshouser v. Cross Timbers Oil Company, a class action
lawsuit, was filed in the District Court of Major County, Oklahoma. The action
was filed on behalf of all parties who, at any time since June 1991, have
allegedly had production or other costs deducted by the Company from royalties
paid on gas produced in Oklahoma when the royalty is based upon a specified
percentage of the proceeds received from the gas sold. On or about March 30,
1998, the plaintiffs dismissed the action without prejudice. On April 3, 1998,
the same plaintiffs, along with additional parties, filed a similar class action
lawsuit against the Company in the District Court of Dewey County, Oklahoma,
styled Booth, et al. v. Cross Timbers Oil Company. The action was filed on
behalf of all persons who, at any time since June 1991, have been paid royalties
on gas produced from any gas well within the State of Oklahoma under which the
Company has assumed the obligation to pay royalties. The plaintiffs allege that
the Company has reduced royalty payments by post-production deductions and has
entered into contracts with subsidiaries that were not arms-length transactions,
which reduced the royalties paid to the plaintiffs and those similarly situated,
and that such actions are a breach of the leases under which the royalties are
paid. The plaintiffs are seeking an accounting of the monies allegedly owed to
them. The Company has filed a motion to dismiss the action due to lack of proper
venue. Management believes it has strong defenses against this claim and intends
to vigorously defend the action. Management's estimate of the potential
liability from this claim has been accrued in the accompanying financial
statements.
5. COMMON STOCK OFFERING
On April 27, 1998, the Company completed a public offering of 7,500,000
shares of common stock, of which 7,203,450 shares were sold by the Company and
296,550 shares were sold by a stockholder. The Company's net proceeds from the
offering of $133.3 million were used to partially repay bank debt used to fund
the EEX Acquisition that closed on April 24, 1998 (Note 10). The offering was
made pursuant to a shelf registration statement filed with the Securities and
Exchange Commission on February 25, 1998. The shelf registration statement was
amended on April 8, 1998 to increase the maximum total price of securities to be
offered to $400 million.
6. COMMON SHARES OUTSTANDING AND EARNINGS PER COMMON SHARE
On February 25, 1998, the Company effected a three-for-two common stock
split. All share and per share amounts have been restated to reflect the stock
split on a retroactive basis.
7
<PAGE>
The following reconciles earnings (numerator) and shares (denominator) used
in the computation of basic and diluted earnings per share (in thousands, except
per share data):
<TABLE>
<CAPTION>
Three Months Ended March 31,
-----------------------------------------------------------------
1998 1997
------------------------------- ------------------------------
Earnings Earnings
Earnings Shares (a) per Share Earnings Shares per Share
--------- ---------- --------- -------- ------- ---------
<S> <C> <C> <C> <C> <C> <C>
Basic:
Net income....................... $ 261 $ 11,095
Preferred stock dividends........ (445) (445)
--------- --------
Earnings available to
common stock - basic....... (184) 39,046 $ 0.00 10,650 40,395 $ 0.26
========= =========
Diluted:
Effect of dilutive securities:
Stock options................. - 703 - 741
Preferred stock (b)........... - - 445 2,460
Warrants...................... - 60 - -
5 1/4% convertible
subordinated notes......... - - 46 459
--------- ---------- -------- -------
Earnings available to
common stock - diluted..... $ (184) 39,809 $ .00(c) $ 11,141 44,055 $ 0.25
========= ========== ========= ======== ======= =========
</TABLE>
(a) The Company sold 7,203,450 shares of common stock on April 27, 1998 (Note
5).
(b) Based on common shares outstanding at May 1, 1998, potential conversion of
Series A convertible preferred stock becomes dilutive to earnings per share
at annual and quarterly earnings to common stock levels exceeding
approximately $33.6 million and $8.4 million, respectively.
(c) Because of the loss, convertible securities have an antidilutive effect on
loss per share.
7. COMPREHENSIVE INCOME
In accordance with Statement of Financial Accounting Standards No. 130,
Reporting Comprehensive Income, the following are components of comprehensive
income (in thousands):
<TABLE>
<CAPTION>
Three Months Ended March 31,
----------------------------
1998 1997
----------- -----------
<S> <C> <C>
Net income................................. $ 261 $ 11,095
----------- -----------
Other comprehensive income -
Unrealized gain (loss) on securities:
Unrealized holding gain (loss)......... 604 (415)
Less unrealized holding gain included
in net income........................ (604) -
----------- -----------
Total other comprehensive income
(loss) before tax...................... - (415)
Income tax benefit related to items of
other comprehensive income (loss)...... - 141
----------- -----------
Total other comprehensive income (loss).... - (274)
----------- -----------
Total comprehensive income................. $ 261 $ 10,821
=========== ===========
</TABLE>
8
<PAGE>
8. SUPPLEMENTAL CASH FLOW INFORMATION
The following are total interest and income tax payments during each of the
periods (in thousands):
Three Months Ended March 31,
----------------------------
1998 1997
----------- -----------
Interest $ 4,476 $ 5,019
Income tax 64 392
The accompanying consolidated statements of cash flows excludes the
following non-cash equity transactions during the three-month periods ended
March 31, 1998 and 1997:
- Conversion of $29.7 million principal amount of 5 1/4% convertible
subordinated notes into 2,892,363 shares of common stock in January 1997
- Vesting of 81,000 and 154,125 performance shares in 1998 and 1997,
respectively, and issuance of 7,875 performance shares in 1997(Note 9)
- Receipt of 8,294 shares (valued at $162,000) and 16,939 shares (valued at
$222,000) of common stock for the option price of exercised stock options
in 1998 and 1997, respectively
9. STOCK INCENTIVE PLANS
In February 1998, 216,000 stock options were granted that vest and become
exercisable annually in equal amounts over a five-year period, with provision
for accelerated vesting of half the options when the common stock price first
closed above $20 on March 26, 1998 and of the remainder when the common stock
price first closes above $25. On March 26, 1998, 81,000 performance shares also
vested. All compensation related to these performance shares was recorded as of
December 31, 1997.
10. ACQUISITIONS
From July 1996 through January 1998, the Company purchased 1,360,000, or
22.7%, of the outstanding units of beneficial interest in the Cross Timbers
Royalty Trust ("Units") at a cost of $18.7 million, funded primarily with bank
debt. The Board of Directors has authorized the purchase of up to two million,
or 33%, of the outstanding Units.
On May 14, 1997, the Company acquired primarily gas-producing properties in
Oklahoma, Kansas and Texas for an estimated adjusted purchase price of $39
million from a subsidiary of Burlington Resources Inc. The properties are
primarily operated interests. The Company funded the acquisition with bank debt
and cash flow from operations.
On December 1, 1997, the Company acquired interests in certain producing oil
and gas properties in the San Juan Basin of New Mexico from a subsidiary of
Amoco Corporation ("Amoco") for $252 million, including warrants to purchase
937,500 shares of the Company's common stock at a price of $15.31 per share for
a period of five years. After adjustments for other acquisition costs, estimated
cash flows through date of closing and preferential purchase rights exercised by
third parties, the properties were purchased for approximately $195 million,
including approximately $5.7 million value for the warrants. Amoco elected to
accept certain producing properties owned by the Company valued at $15.7 million
in lieu of cash, reducing cash consideration to $173.6 million, which was funded
through bank lines of credit. Additional purchase price revisions may result
from customary post-closing adjustments.
On April 24, 1998, the Company acquired producing properties and undeveloped
acreage in the East Texas Basin from EEX Corporation ("EEX Acquisition") for
$265 million. The purchase price of $265 million is expected to be reduced to
$245 million by purchase price adjustments primarily resulting from net revenues
from the January 1, 1998 effective date through April 24,1998. A $26.5 million
deposit was paid to EEX Corporation in February 1998 and has been included in
producing properties in the accompanying consolidated balance sheet at March 31,
1998. In connection with the acquisition, the Company sold a production payment
to EEX Corporation for $30 million. The production
9
<PAGE>
payment is payable from production from certain properties acquired in the EEX
Acquisition during the 10-year period beginning January 1, 2002. EEX Corporation
effectively pays all taxes, royalties and production expenses related to such
production. Each December, beginning in 1998, the Company has the option to
repurchase a portion of this production payment. The cost of the EEX Acquisition
(net of the production payment sold) of $215 million was funded by borrowings
under the loan agreement (Note 3) which were partially repaid by proceeds from
the sale of common stock (Note 5).
These acquisitions have been recorded using the purchase method of
accounting. The following presents unaudited pro forma results of operations
for the three months ended March 31, 1998 and 1997 and the year ended December
31, 1997, as if these acquisitions and the April 1998 sale of common stock had
been consummated as of January 1, 1998 and 1997. These pro forma results are
not necessarily indicative of future results.
<TABLE>
<CAPTION>
Pro Forma (Unaudited)
--------------------------------------
Three Months Ended
March 31, Year Ended
-------------------- December 31,
1998 1997 1997
------- ------- ------------
<S> <C> <C> <C>
Revenues............................ $69,432 $94,052 $331,560
======= ======= ========
Net income.......................... $ 3,681 $20,877 $ 52,264
======= ======= ========
Earnings available to common stock.. $ 3,236 $20,432 $ 50,485
======= ======= ========
Earnings per common share
Basic............................ $ 0.07 $ 0.43 $ 1.07
======= ======= ========
Diluted.......................... $ 0.07 $ 0.41 $ 1.05
======= ======= ========
Weighted average shares outstanding 46,250 47,598 46,976
======= ======= ========
</TABLE>
10
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REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
Cross Timbers Oil Company:
We have reviewed the accompanying consolidated balance sheet of Cross Timbers
Oil Company (a Delaware Corporation) as of March 31, 1998 and the related
consolidated statements of operations and cash flows for the three-month periods
ended March 31, 1998 and 1997. These financial statements are the
responsibility of the Company's management.
We conducted our reviews in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical procedures to
financial data and making inquiries of persons responsible for financial and
accounting matters. It is substantially less in scope than an audit conducted
in accordance with generally accepted auditing standards, the objective of which
is the expression of an opinion regarding the financial statements taken as a
whole. Accordingly, we do not express such an opinion.
Based on our reviews, we are not aware of any material modifications that should
be made to the consolidated financial statements referred to above for them to
be in conformity with generally accepted accounting principles.
We have previously audited, in accordance with generally accepted auditing
standards, the consolidated balance sheet of Cross Timbers Oil Company as of
December 31, 1997 included in the Company's 1997 annual report on Form 10-K, and
in our report dated March 18, 1998, we expressed an unqualified opinion on that
statement. In our opinion, the information set forth in the accompanying
consolidated balance sheet as of December 31, 1997 is fairly stated, in all
material respects, in relation to the consolidated balance sheet included in the
Company's 1997 annual report on Form 10-K from which it has been derived.
ARTHUR ANDERSEN LLP
Fort Worth, Texas
April 20, 1998
11
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with
management's discussion and analysis contained in the Company's 1997 annual
report on Form 10-K, as well as with the consolidated financial statements and
notes thereto included in this quarterly report on Form 10-Q.
OIL AND GAS PRODUCTION AND PRICES
- ---------------------------------
THREE MONTHS ENDED MARCH 31,
----------------------------------
Increase
1998 1997 (Decrease)
--------- --------- ----------
TOTAL PRODUCTION
Oil (Bbls).................... 1,076,292 932,323 15.4%
Gas (Mcf)..................... 15,900,715 11,272,073 41.1%
Natural gas liquids (Bbls).... 209,876 - -
Mcfe.......................... 23,617,723 16,866,011 40.0%
AVERAGE DAILY PRODUCTION
Oil (Bbls).................... 11,959 10,359 15.4%
Gas (Mcf)..................... 176,675 125,245 41.1%
Natural gas liquids (Bbls).... 2,332 - -
Mcfe.......................... 262,419 187,400 40.0%
AVERAGE SALES PRICE
Oil per Bbl................... $ 13.99 $ 21.36 (34.5)%
Gas per Mcf................... $ 1.96 $ 2.62 (25.2)%
Natural gas liquids per Bbl... $ 8.47 - -
- --------------------------------
Bbl - Barrel
Mcf - Thousand cubic feet
Mcfe - Thousand cubic feet of natural gas equivalent (computed on an
energy equivalent basis of one Bbl equals six Mcf)
Total oil production increased primarily because of new wells drilled and
workovers. Increased gas production is primarily attributable to the 1997
acquisitions, new wells drilled and workovers, partially offset by sold
properties and natural decline.
The average posted price for West Texas Intermediate ("WTI"), a benchmark
crude, was $13.73 per barrel for first quarter 1998, compared to $21.01 for
first quarter 1997. The Company's average oil price includes oil marketing
margins, which are partially offset by lower priced sour crude sales and
transportation charges. During fourth quarter 1996 and first quarter 1997, oil
prices reached their highest levels since the 1990 Persian Gulf War. This is
contrasted against first quarter 1998 oil prices that hit a decade-low WTI price
of $11.00 in late March. Following the curtailment of production by some of the
major oil exporting countries, oil prices have partially rebounded, with an
average posted WTI price of $13.13 for April 1998. OPEC recently announced that
they would meet again in June 1998 to negotiate further curtailments if oil
prices did not improve in the interim.
After reaching their highest levels since 1985, natural gas prices were
relatively high during most of 1997 until dropping in December. Prices remained
lower through most of first quarter 1998, primarily because of an abnormally
mild winter in the central and eastern U.S. and elevated storage levels. During
late March and April 1998, gas prices partially rebounded to levels above those
for comparable 1997 periods. The Company uses price-hedging arrangements to
reduce price-risk on a portion of its gas production; see Note 4 to Consolidated
Financial Statements.
12
<PAGE>
RESULTS OF OPERATIONS
First quarter 1998 net income was $300,000, compared to net income of $11.1
million for first quarter 1997. After preferred dividends, the loss available to
common stock was $200,000 for first quarter 1998, compared to earnings available
to common stock of $10.7 million for first quarter 1997. This large decline in
earnings was primarily the result of significantly lower oil and gas prices.
Total revenues for the 1998 quarter were $50.6 million, a 5% decrease from
first quarter 1997 revenues of $53.5 million. Oil revenue decreased $4.9
million (24%) because of the 35% decrease in average prices, partially offset by
the 15% increase in production. Gas and natural gas liquids revenue increased
$3.5 million (12%) as a result of gas liquids revenue of $1.8 million
attributable to the December 1997 Amoco Acquisition and the 41% increase in gas
production, largely offset by the 25% decrease in average prices. Gas gathering,
processing and marketing revenues decreased $1.1 million (40%) primarily because
of reduced gas processing and marketing margins.
Other revenues decreased from $1.3 million in first quarter 1997 to
$900,000 in first quarter 1998, primarily because of the gain on sale of equity
securities of $1.2 million in first quarter 1997 exceeding the unrealized
holding gain on securities of $600,000 in first quarter 1998. See Note 2 to
Consolidated Financial Statements.
Expenses for first quarter 1998 totaled $50.2 million, a 38% increase
compared to total expenses of $36.5 million for the first quarter of 1997.
Production expense increased $2.2 million (21%) and depreciation, depletion and
amortization ("DD&A") increased $4.6 million (42%) primarily because of the 1997
acquisitions and development program. Taxes on production and property
increased $900,000 (22%) primarily because of increased property taxes and gas
revenues related to the 1997 acquisitions. First quarter 1998 results also
include $1.4 million of exploration expense, which is primarily composed of
seismic and other geological and geophysical costs related to the 1998
exploration program. Exploration costs were not significant prior to second
quarter 1997.
General and administrative expense ("G&A") decreased $1.5 million (43%)
because of an increase in G&A allocated to production expense, partially offset
by increased salaries and expenses due to Company growth through acquisitions
and development activity. The increased allocation of G&A to production expense
is directly related to the Company's increased operated well count.
Interest expense increased $6.0 million (113%) because of borrowings to
fund the 1997 acquisitions and an increase in the weighted average interest rate
from 6.9% in first quarter 1997 to 8% in first quarter 1998. The increased
interest rate is primarily attributable to senior subordinated debt that was
issued in April and October 1997.
COMPARATIVE EXPENSES PER MCF EQUIVALENT PRODUCTION
The following are expenses on an Mcf equivalent (Mcfe) produced basis:
THREE MONTHS ENDED MARCH 31,
----------------------------
Increase
1998 1997 (Decrease)
----- ----- ----------
Production........................$0.53 $0.61 (13%)
Taxes on production and property.. 0.22 0.25 (12%)
Depreciation, depletion and
amortization (DD&A) (a)......... 0.63 0.62 2%
General and administrative (G&A).. 0.09 0.21 (57%)
Interest.......................... 0.48 0.31 55%
- --------------------------------
(a) Includes only DD&A directly related to oil and gas production.
13
<PAGE>
The following are explanations of variances of expenses on an Mcfe basis:
Production- Decreased production expense per Mcfe is because of lower
operating costs of gas-producing properties acquired in 1997, the timing of
workovers and operating efficiencies initiated after acquiring operated
properties.
Taxes on production and property- Decreased taxes per Mcfe are primarily
because of decreased production taxes resulting from lower oil and gas prices,
partially offset by an increase in purchaser deductions from gas revenue.
DD&A- Increased DD&A per Mcfe is primarily related to increased 1997
producing property acquisition and development costs and updated proved reserve
estimates as of December 31, 1997.
G&A- Decreased G&A per Mcfe is the result of production growth outpacing
Company personnel requirements and other administrative expenses. Excluding
stock incentive compensation, G&A per Mcfe was $0.08 and $0.19 for the first
quarter of 1998 and 1997, respectively.
Interest- Increased interest expense per Mcfe is because of an 89%
increase in the weighted average principal outstanding to fund the 1997
acquisitions, as well as a 16% increase in the weighted average interest rate.
The increased interest rate is primarily attributable to senior subordinated
debt that was issued in April and October 1997.
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
CASH FLOW AND WORKING CAPITAL
Cash provided by operating activities was $11.5 million for the first
quarter of 1998 compared to $39.1 million for the first quarter of 1997.
Operating cash flow (defined as cash provided by operating activities before
changes in working capital) decreased 38% from $27.2 million for the first
quarter of 1997 to $16.8 million for the same 1998 period primarily because of
the decline in oil and gas prices.
During the quarter ended March 31, 1998, proceeds from bank and short-term
borrowings of $162.5 million and operating activities of $11.5 million were used
to fund property acquisitions, development costs and other capital additions of
$56.7 million, debt payments of $96.5 million, treasury stock purchases of $10.1
million, net disbursements related to stock option exercises of $1 million and
dividends of $1.9 million. The resulting increase in cash and cash equivalents
for the period was $7.8 million.
Other significant changes in current assets during the first three months
of 1998 were a $6.9 million increase in investment in equity securities
resulting from purchases and market value appreciation, net of sales, and a $2.1
million increase in other current assets primarily because of increased tubular
stocks. Accounts receivable decreased $5.7 million because of lower product
prices, partially offset by increased production.
Total current liabilities increased $400,000 during first quarter 1998
primarily because of a $3 million increase in drilling and development related
payables, largely offset by lower gas gathering, processing and marketing
payables attributable to lower gas prices.
ACQUISITIONS AND DEVELOPMENT
Exploration and development costs incurred by the Company for the first
three months of 1998 were $12.8 million; cash expenditures for exploration and
development for this period totaled $9.8 million. This compares with cash
expenditures for development of $17.4 million and development costs incurred of
$11.7 million during the first quarter of 1997. Although actual exploration and
development expenditures may vary significantly due to many factors, the Company
anticipates its 1998 expenditures for exploration and development activities to
be $70 to $90 million, as budgeted, with exploration expenditures of 10% to 15%
of the total. Such expenditures are expected to be funded by
14
<PAGE>
cash flow from operations. During the quarter ended March 31, 1998, the Company
purchased equity securities (for trading purposes) at a total cost of $12.6
million; proceeds from sales of equity securities totaled $6.4 million. See Note
2 to Consolidated Financial Statements.
Since May 1996, the Board of Directors has authorized the purchase of 7.5
million shares of the Company's common stock on the open market. During first
quarter 1998, the Company purchased 582,343 shares at a cost of $9.5 million,
with 1.6 million remaining available to purchase.
On April 24, 1998, the Company acquired producing properties and
undeveloped acreage in the East Texas Basin from EEX Corporation ("EEX
Acquisition") for $265 million. The purchase price of $265 million is expected
to be reduced to $245 million by purchase price adjustments primarily resulting
from net revenues from the January 1, 1998 effective date through April 24,
1998. In connection with the acquisition, the Company sold a production payment
to EEX Corporation for $30 million. The production payment is payable from
production from certain properties acquired in the EEX Acquisition during the
10-year period beginning January 1, 2002. EEX Corporation effectively pays all
taxes, royalties and production expenses related to such production. Each
December, beginning in 1998, the Company has the option to repurchase a portion
of this production payment. The cost of the EEX acquisition (net of the
production payment sold) of $215 million was funded by bank borrowings which
were partially repaid by proceeds from the sale of common stock. See Note 5 to
Consolidated Financial Statements.
As of the end of March, the Company had completed drilling three oil wells
and six gas wells in 1998. A total of 10 recompletions and workovers were also
completed in the first quarter. Because of weak oil prices, first quarter
development was shifted to gas projects concentrated in Major County, Oklahoma
and the Fontenelle Unit in the Green River Basin of Wyoming.
DEBT AND EQUITY
During the first quarter of 1998, long-term debt increased $66 million to
fund property acquisitions, other capital additions, investments in equity
securities and treasury stock purchases. On April 17, 1998, the Company entered
into a new Revolving Credit Agreement with commercial banks, the borrowings
under which mature on June 30, 2003. After the closing of the EEX Acquisition on
April 24, 1998, the borrowing base and commitment under the Revolving Credit
Agreement was $560 million.
Stockholders' equity at March 31, 1998 decreased $10.4 million from year-
end primarily because of treasury stock purchases on the open market and shares
acquired upon stock option exercises. Net income and increased stockholders'
equity resulting from stock option exercises was offset by common and preferred
stock dividends.
A three-for-two common stock split was effected on February 25, 1998. All
share and per share amounts have been restated for the effect of this stock
split.
On April 27, 1998, the Company completed a public offering of 7,500,000
shares of common stock, of which 7,203,450 shares were sold by the Company and
296,550 shares were sold by a stockholder. The Company's net proceeds from the
offering of $133.3 million were used to partially repay bank debt used to fund
the EEX Acquisition that closed on April 24, 1998. The offering was made
pursuant to a shelf registration statement filed with the Securities and
Exchange Commission on February 25, 1998. The shelf registration statement was
amended on April 8, 1998 to increase the maximum total price of securities to be
offered to $400 million.
COMMON STOCK DIVIDENDS
In February 1998, the Board of Directors of the Company declared a first
quarter common stock dividend of $0.04 per share, or a total of $1.6 million,
paid in April 1998. Dividends paid by the Company or its predecessors were at
the rate of $0.033 per common share from September 1992 through 1996 and $0.037
per common share in 1997.
15
<PAGE>
P A R T I I. O T H E R I N F O R M A T I O N
ITEMS 1. LEGAL PROCEEDINGS
In June 1996, Holshouser v. Cross Timbers Oil Company, a class action
lawsuit, was filed in the District Court of Major County, Oklahoma. The action
was filed on behalf of all parties who, at any time since June 1991, have
allegedly had production or other costs deducted by the Company from royalties
paid on gas produced in Oklahoma when the royalty is based upon a specified
percentage of the proceeds received from the gas sold. On or about March 30,
1998, the plaintiffs dismissed the action without prejudice. On April 3, 1998,
the same plaintiffs, along with additional parties, filed a similar class action
lawsuit against the Company in the District Court of Dewey County, Oklahoma,
styled Booth, et al. v. Cross Timbers Oil Company. The action was filed on
behalf of all persons who, at any time since June 1991, have been paid royalties
on gas produced from any gas well within the State of Oklahoma under which the
Company has assumed the obligation to pay royalties. The plaintiffs allege that
the Company has reduced royalty payments by post-production deductions and has
entered into contracts with subsidiaries that were not arms-length transactions,
which reduced the royalties paid to the plaintiffs and those similarly situated,
and that such actions are a breach of the leases under which the royalties are
paid. The plaintiffs are seeking an accounting of the monies allegedly owed to
them. The Company has filed a motion to dismiss the action due to lack of proper
venue. Management believes it has strong defenses against this claim and intends
to vigorously defend the action. Management's estimate of the potential
liability from this claim has been accrued in the Company's financial
statements.
ITEMS 2. THROUGH 5.
Not applicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit Number
and Description Page
--------------- ----
11 Computation of per share earnings
(included in Note 6 to Consolidated
Financial Statements)
15 Letter re unaudited interim financial
information
15.1 Awareness letter of Arthur Andersen LLP 19
(b) Reports on Form 8-K
The Company filed the following reports on Form 8-K during the quarter
ended March 31, 1998 and through May 13, 1998:
On February 17, 1998, the Company filed a report on Form 8-K/A
(Amendment No. 1 to Form 8-K dated December 1, 1997) to file
financial statements for the acquisition of certain producing oil
and gas properties in the San Juan Basin of New Mexico from a
subsidiary of Amoco Corporation.
On February 23, 1998, the Company filed a report on Form 8-K
dated February 18, 1998 regarding the issuance of news release
number 98-04 announcing earnings for the quarter and year ended
December 31, 1997.
16
<PAGE>
On February 25, 1998, the Company filed a report on Form 8-K
dated February 25, 1998 regarding its intent to acquire producing
properties and undeveloped acreage in the East Texas Basin from
EEX Corporation.
On April 14, 1998, the Company filed a report on Form 8-K dated
April 13, 1998 to file, as Exhibit 5.2 to Registration Statement
No. 333-46909, an opinion of counsel as to the legality of
securities being offered for sale pursuant to the Prospectus
Supplement dated April 13, 1998.
On April 20, 1998, the Company filed a report on Form 8-K dated
April 17, 1998 regarding the issuance of news release number 98-
08 announcing earnings for the quarter ended March 31, 1998.
On April 21, 1998, the Company filed a report on Form 8-K dated
February 12, 1998 to file financial statements for the
acquisition of producing properties and undeveloped acreage in
the East Texas Basin from EEX Corporation, anticipated to close
on April 24, 1998.
On April 23, 1998, the Company filed a report on Form 8-K dated
April 21, 1998 to file, as Exhibit 1.1 to Registration Statement
No. 333-46909, the U.S. and International Purchase Agreements and
related Term Sheets entered into as of April 21, 1998 in
connection with securities being offered for sale pursuant to the
Prospectus Supplement dated April 21, 1998.
On April 27, 1998, the Company filed a report on Form 8-K dated
April 24, 1998 regarding its acquisition of producing properties
and undeveloped acreage in the East Texas Basin from EEX
Corporation (including financial statements).
17
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this Report to be signed on its behalf by the
undersigned thereunto duly authorized.
CROSS TIMBERS OIL COMPANY
Date: May 14, 1998 By BENNIE G. KNIFFEN
-------------------------------------------
Bennie G. Kniffen
Senior Vice President and Controller
(Principal Accounting Officer and
Duly Authorized Officer)
18
<PAGE>
EXHIBIT 15.1
Cross Timbers Oil Company:
We are aware that Cross Timbers Oil Company has incorporated by reference in its
Registration Statements on Form S-8 (Nos. 33-64274, 33-65238, 33-81766, 333-
35229 and 333-36569) and on Form S-3 (No. 333-46909) its Form 10-Q for the
quarter ended March 31, 1998, which includes our report dated April 20, 1998,
covering the unaudited interim financial information contained therein.
Pursuant to Regulation C of the Securities Act of 1933, that report is not
considered a part of the registration statement prepared or certified by our
firm or a report prepared or certified by our firm within the meaning of
Sections 7 and 11 of the Act.
ARTHUR ANDERSEN LLP
Fort Worth, Texas
May 14, 1998
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