<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
----- EXCHANGE ACT OF 1934
For the Quarterly period ended September 30, 1997
OR
_____ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Transition period _________________ to _________________
Commission File Number 0-22650
PETROCORP INCORPORATED
(Exact name of registrant as specified in its charter)
Texas 76-0380430
(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
16800 Greenspoint Park Drive 77060-2391
Suite 300, North Atrium (Zip Code)
Houston, Texas
(Address of Principal Executive Offices)
Registrant's Telephone Number, Including Area Code: (281) 875-2500
Not Applicable
(Former Name, Former Address and Former Fiscal Year, if changed 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 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 Registrant's classes of
stock, as of October 31, 1997:
Common Stock, $.01 per value 8,586,519
---------------------------- ---------
(Title of Class) (Number of Shares Outstanding)
<PAGE>
PETROCORP INCORPORATED
INDEX
-----
<TABLE>
<CAPTION>
PAGE NO.
---------
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements.
<S> <C>
Consolidated Balance Sheet at September 30, 1997 and December 1
31, 1996
Consolidated Statement of Operations for the three and nine 2
months ended September 30, 1997 and 1996
Consolidated Statement of Cash Flows for the nine months ended 3
September 30, 1997 and 1996
Notes to Consolidated Financial Statements 4
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 6
Item 3. Quantitative and Qualitative Disclosure about Market Risk 12
PART II. OTHER INFORMATION 13
SIGNATURES 14
</TABLE>
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
PETROCORP INCORPORATED
CONSOLIDATED BALANCE SHEET
(dollar amounts in thousands, except per share data)
<TABLE>
<CAPTION>
SEPTEMBER 30, December 31,
1997 1996
------------- ------------
ASSETS (UNAUDITED)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 10,892 $ 8,859
Accounts receivable, net 5,420 8,114
Other current assets 383 312
-------- --------
Total current assets 16,695 17,285
-------- --------
Property, plant and equipment:
Proved oil and gas properties, at cost, full cost method, net
of accumulated depreciation, depletion and amortization 101,299 93,161
Unproved oil and gas properties, not subject to depletion 8,023 5,279
Plant and related facilities, net 4,175 4,585
Other, net 1,835 2,257
-------- --------
115,332 105,282
-------- --------
Other assets, net 361 297
-------- --------
Total assets $132,388 $122,864
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 4,813 $ 6,007
Accrued liabilities 3,050 3,569
Current portion of long-term debt 6,057 5,763
-------- --------
Total current liabilities 13,920 15,339
-------- --------
Long-term debt 43,331 33,462
-------- --------
Deferred revenue 843 1,395
-------- --------
Deferred income taxes 7,343 7,003
-------- --------
Commitments and contingencies (Note 5)
Shareholders' equity:
Preferred stock, $0.01 par value, 1,000,000 shares
authorized, none issued -- --
Common stock, $0.01 par value, 25,000,000 shares
authorized, 8,616,216 shares issued (8,586,519 shares
and 8,584,519 shares outstanding at September 30, 1997
and December 31, 1996, respectively) 86 86
Additional paid-in capital 71,168 71,170
Retained earnings (accumulated deficit) (353) (1,799)
Foreign currency translation adjustment (3,653) (3,475)
Treasury stock, at cost (29,697 shares at September 30, 1997
and 31,697 shares at December 31, 1996) (297) (317)
-------- --------
Total shareholders' equity 66,951 65,665
-------- --------
Total liabilities and shareholders' equity $132,388 $122,864
======== ========
</TABLE>
The accompanying notes are an integral part of this statement.
1
<PAGE>
PETROCORP INCORPORATED
CONSOLIDATED STATEMENT OF OPERATIONS
(amounts in thousands, except per share data)
(Unaudited)
<TABLE>
<CAPTION>
For the three months For the nine months
ended September 30, ended September 30,
------------------------ ------------------------
1997 1996 1997 1996
-------- --------- ---------- ----------
<S> <C> <C> <C> <C>
REVENUES:
Oil and gas $8,337 $6,947 $24,478 $20,761
Plant processing 354 360 1,075 1,286
Other 47 (1) 165 178
------ ------ ------- -------
8,738 7,306 25,718 22,225
------ ------ ------- -------
EXPENSES:
Production costs 1,945 1,714 5,516 4,997
Depreciation, depletion and amortization 4,397 3,011 12,314 9,165
General and administrative 1,142 1,013 3,791 3,470
Other operating expenses 30 31 115 135
------ ------ ------- -------
7,514 5,769 21,736 17,767
------ ------ ------- -------
INCOME FROM OPERATIONS 1,224 1,537 3,982 4,458
------ ------ ------- -------
OTHER INCOME (EXPENSES):
Investment and other income 116 252 404 1,685
Interest expense (975) (795) (2,565) (2,595)
Other expenses (1) (10) (3) (17)
------ ------ ------- -------
(860) (553) (2,164) (927)
------ ------ ------- -------
INCOME BEFORE INCOME TAXES 364 984 1,818 3,531
Income tax provision 137 349 372 1,127
------ ------ ------- -------
NET INCOME $ 227 $ 635 $ 1,446 $ 2,404
====== ====== ======= =======
NET INCOME PER COMMON SHARE $ 0.03 $ 0.07 $ 0.17 $ 0.28
====== ====== ======= =======
WEIGHTED AVERAGE NUMBER OF COMMON SHARES 8,700 8,698 8,699 8,698
====== ====== ======= =======
</TABLE>
The accompanying notes are an integral part of this statement.
2
<PAGE>
PETROCORP INCORPORATED
CONSOLIDATED STATEMENT OF CASH FLOWS
(amounts in thousands)
(Unaudited)
<TABLE>
<CAPTION>
For the nine months
ended September 30,
--------------------------
1997 1996
---------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 1,446 $ 2,404
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation, depletion and amortization 12,314 9,165
Deferred income tax provision 372 1,127
Gain on sale of gas gathering system -- (999)
-------- -------
14,132 11,697
Change in operating assets and liabilities:
Accounts receivable 2,694 2,823
Other current assets (71) 1,148
Accounts payable (1,194) (358)
Accrued liabilities (519) 3,874
Other (534) (403)
-------- -------
NET CASH PROVIDED BY OPERATING ACTIVITIES 14,508 18,781
-------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to oil and gas properties (22,134) (9,339)
Additions to plant and related facilities (201) (212)
Additions to other property, plant and equipment (155) (240)
Additions to other assets (198) --
Proceeds from sale of oil and gas properties -- 6,317
Proceeds from sale of interest in plant and related facilities -- 1,211
Proceeds from sale of other property, plant and equipment -- 3,838
-------- -------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES (22,688) 1,575
-------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from long-term debt 13,145 86
Repayment of long-term debt (2,919) (4,493)
-------- -------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 10,226 (4,407)
-------- -------
EFFECT OF EXCHANGE RATE CHANGES ON CASH (13) (6)
-------- -------
NET INCREASE IN CASH AND CASH EQUIVALENTS 2,033 15,943
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 8,859 11,764
-------- -------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 10,892 $27,707
======== =======
</TABLE>
The accompanying notes are an integral part of this statement.
3
<PAGE>
PETROCORP INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1 - BASIS OF PRESENTATION:
The unaudited consolidated financial statements of PetroCorp Incorporated (the
"Company" or "PetroCorp") have been prepared in accordance with generally
accepted accounting principles for interim financial information and with
instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do
not include all of the information and footnotes required by generally accepted
accounting principles for complete financial statements. In the opinion of
management, all adjustments, consisting of normal and recurring adjustments
necessary for a fair presentation, have been included. For further information,
refer to the consolidated financial statements and footnotes thereto for the
year ended December 31, 1996, included in the Company's 1996 Annual Report on
Form 10-K pursuant to Section 13 or 15(d) of the Securities Exchange Act of
1934. Interim period results are not necessarily indicative of results of
operations or cash flows for a full-year period.
NOTE 2 - LONG-TERM DEBT:
The Company has entered into a $50.0 million revolving credit agreement dated
June 26, 1997 with the Toronto-Dominion Bank, the agent, and the Bank of Nova
Scotia. Initial borrowing availability under this new facility was $25.0
million. On June 30, 1997, the Company was advanced $13.0 million to primarily
fund a July 1, 1997 acquisition of producing oil and gas properties with an
adjusted purchase price of $9.1 million and to replace amortizing principal
payments under the Series A and B Notes of the Company. Such debt has been
classified as "long-term" on the accompanying consolidated balance sheet as of
June 30, 1997. The facility is for a five-year term through July 1, 2002 with
quarterly borrowing base amortization beginning September 30, 2000. The
interest spread is determined from a sliding scale based on the Company's
borrowing base percentage utilization in effect from time to time. The spread
ranges from 5/8% to 1-1/4% on Eurodollar loans and 1/8% to 1/4% on Prime loans.
The Company initially funded the $13.0 million advance with a Prime loan but
rolled-over the debt into a six-month Eurodollar loan on July 7, 1997 with an
interest rate of 6.8%.
NOTE 3 - DEFERRED REVENUE:
In March 1996, the Company's wholly-owned subsidiary, Fidelity Gas Systems,
Inc., sold its Southwest Oklahoma City Field gas gathering system for $3.8
million. The Company's total gain on the sale was $3.1 million, with $1.0
million being recognized in the first quarter of 1996 in "investment and other
income" on the consolidated statement of operations while the remaining $2.1
million of the gain was deferred. The $2.1 million deferred revenue will be
recognized in future periods as a component of gas revenues by partially
offsetting the gas gathering fees paid by the Company over the productive life
of the Company's Southwest Oklahoma City Field. Through September 30, 1997,
$1.3 million has been recognized, leaving a balance of $843,000 million in
"deferred revenue" on the consolidated balance sheet as of September 30, 1997.
4
<PAGE>
NOTE 4 - PENDING ACCOUNTING CHANGES:
In February 1997, the Financial Accounting Standards Board (the FASB) issued
Statement of Financial Accounting Standards No. 128 "Earnings Per Share" (SFAS
128), which established new guidelines for computing and presenting earnings per
share and is effective for financial statements issued for periods ending after
December 31, 1997. If SFAS 128 had been in effect for the three-month and nine-
month periods ended September 30, 1997 and 1996, basic and diluted net income
per common share would be unchanged compared to the previously reported amounts.
In June 1997, the FASB issued Statement of Financial Accounting Standards No.
130 "Reporting Comprehensive Income" (SFAS 130). This statement requires
disclosure of changes in equity from non-owner sources in a primary financial
statement and the accumulated balance of such items as a separate caption within
the shareholders' equity section of the balance sheet. SFAS 130 is effective
for periods beginning after December 15, 1997. This pronouncement will impact
the disclosure of the Company's foreign currency translation adjustment reported
on the accompanying consolidated balance sheet.
NOTE 5 - COMMITMENTS AND CONTINGENCIES:
There are claims and actions pending against the Company. In the opinion of
management, the amounts, if any, which may be awarded in connection with any of
these claims and actions would not be material to the Company's consolidated
financial position or results of operations.
5
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
GENERAL
The Company's principal line of business is the production and sale of its oil
and natural gas reserves located in North America. Results of operations are
dependent upon the quantity of production and the price obtained for such
production. Prices received by the Company for the sale of its oil and natural
gas have fluctuated significantly from period to period. Such fluctuations
affect the Company's ability to maintain or increase its production from
existing oil and gas properties and to explore, develop or acquire new
properties.
The following table reflects certain operating data for the periods presented:
<TABLE>
<CAPTION>
For the three For the nine
months ended months ended
September 30, September 30,
-------------- --------------
1997 1996 1997 1996
------ ------ ------ ------
<S> <C> <C> <C> <C>
PRODUCTION:
United States:
Oil (Mbbls)......................................... 160 163 451 499
Gas (MMcf).......................................... 1,356 1,312 3,528 4,036
Oil equivalents (MBOE).............................. 386 382 1,039 1,172
Canada:
Oil (Mbbls)......................................... 38 --- 108 ---
Gas (MMcf).......................................... 1,193 684 3,530 2,299
Oil equivalents (MBOE).............................. 237 114 696 383
Total:
Oil (Mbbls)......................................... 198 163 559 499
Gas (MMcf).......................................... 2,549 1,996 7,058 6,335
Oil equivalents (MBOE).............................. 623 496 1,735 1,555
AVERAGE SALES PRICES (including the effects of hedging):
United States:
Oil (per Bbl)....................................... $18.61 $20.21 $19.81 $18.60
Gas (Mcf)........................................... 2.36 2.15 2.46 2.15
Canada:
Oil (per Bbl)....................................... 15.81 --- 18.28 ---
Gas (per Mcf)....................................... 1.30 1.22 1.39 1.22
Weighted average:
Oil (per Bbl)....................................... 18.07 20.21 19.51 18.60
Gas (per Mcf)....................................... 1.87 1.83 1.92 1.81
SELECTED DATA PER BOE:
Average sales price.................................... $13.38 $14.01 $14.11 $13.35
Production costs....................................... 3.12 3.46 3.18 3.21
General and administrative expenses.................... 1.83 2.04 2.19 2.23
Oil and gas depreciation, depletion and amortization... 6.42 5.31 6.36 5.09
</TABLE>
6
<PAGE>
The Company completed the purchase of Millarville Oil and Gas Ltd., a
privately held Alberta corporation that owns and operates oil and gas properties
in Alberta, Canada in December 1996 for a cash acquisition price of $11.8
million (the Millarville Acquisition). On July 1, 1997, the Company completed
the purchase of producing properties in Louisiana and Alabama for $9.1 million
(the Gulf Coast Acquisition). These two acquisitions had a significant impact on
the Company's results of operations for the three and nine months ended
September 30, 1997.
RESULTS OF OPERATIONS
Comparison of Three Months Ended September 30, 1997 and Three Months Ended
September 30, 1996
Overview. Cash flow before changes in operating assets and liabilities
increased 19% to $4.8 million in the third quarter of 1997 from $4.0 million in
the third quarter of 1996. Net income decreased 64% to $227,000, or $0.03 per
share, in the third quarter of 1997 compared to $635,000, or $.07 per share,
recorded in the third quarter of 1996. Third quarter 1997 net income was
significantly impacted by increased DD&A largely due to the year-end 1996
reduction in proved reserves at the Company's Texas waterflood project.
Assuming the reduction in reserves occurred at the beginning of 1996 rather than
at the end, net income would have been level between quarters.
Revenues. Total revenues increased 20% to $8.7 million in the third quarter
of 1997 compared to $7.3 million in the third quarter of 1996. Oil production
increased 21% to 198 Mbbls from 163 Mbbls. Natural gas production increased 28%
to 2,549 MMcf in the third quarter of 1997 from 1,996 MMcf in the third quarter
of 1996, resulting in overall production increasing 26% to 623 MBOE from 496
MBOE. The increase in oil volume is primarily related to the Millarville and
Gulf Coast acquisitions. The increase in natural gas production also reflects
the impact of the two acquisitions coupled with an increase in the Company's
share of gas production in the Hanlan-Robb area in western Alberta as a result
of an increase in ownership following a February 1997 payout to its joint
venture partner.
The Company's average U.S. natural gas price increased 10% to $2.36 per Mcf in
the third quarter of 1997 from $2.15 per Mcf in the third quarter of 1996, while
the average Canadian natural gas price increased 7% to $1.30 from $1.22. The
Company's composite average oil price decreased 11% to $18.07 per barrel in the
third quarter of 1997 from $20.21 per barrel in the third quarter of 1996. As a
result of hedging transactions, the Company's third quarter 1996 average oil
price was reduced by $1.01 per barrel from the average price that would have
otherwise been received. No hedging transactions were in place during the third
quarter of 1997. Primarily as a result of the increase in production, oil and
gas revenues increased 20% to $8.3 million in the third quarter of 1997 from
$6.9 million in the third quarter of 1996.
Production Costs. Production costs increased 13% to $1.9 million in the third
quarter of 1997 compared to $1.7 million in the third quarter of 1996 primarily
as a result of the property acquisitions. However, costs per BOE decreased 10%
to $3.12 per BOE from $3.46 per BOE.
Depreciation, Depletion & Amortization (DD&A). Total DD&A increased 46% to
$4.4 million in the third quarter of 1997 from $3.0 million in the third quarter
of 1996, primarily as a result of the increase in the oil and gas DD&A rate to
$6.42 per BOE from $5.31 per BOE. The increase in the DD&A rate reflects the
impact of the year-end 1996 reduction in proved reserves due to the lack of
commercial oil response at the Company's Richardson-Mueller Caddo Unit
waterflood project in northern Texas.
General and Administrative Expenses. General and administrative expenses
increased 13% to $1.1 million in the third quarter of 1997 from $1.0 million in
the third quarter of 1996. This increase is largely due to an increase in
contract and temporary personnel associated with the producing property
7
<PAGE>
acquisitions and other ongoing projects and a decrease in the Company's
operating overhead recoveries which reduce general and administrative expenses.
Investment and Other Income. Investment and other income decreased 54% to
$116,000 in the third quarter of 1997 from $252,000 in the third quarter of 1996
as more cash was available for investing during the third quarter of 1996.
Interest Expense. Interest expense increased 23% to $975,000 in the third
quarter of 1997 from $795,000 in the third quarter of 1996 due to an increase in
average outstanding debt in the third quarter of 1997 as a result of increased
borrowings related to the producing property acquisitions.
Income Taxes. The Company recorded a $137,000 income tax provision on a pre-
tax income of $364,000 in the third quarter of 1997 with an effective tax rate
of 38% compared to an income tax provision of $349,000 on pre-tax income of
$984,000 in the third quarter of 1996 with an effective tax rate of 35%.
Comparison of Nine Months Ended September 30, 1997 and Nine Months Ended
September 30, 1996
Overview. As a result of increases in product prices and production, cash
flow before changes in operating assets and liabilities increased 21% to $14.1
million in the first nine months of 1997 compared to $11.7 million in the first
nine months of 1996. Net income decreased 19% to $1.4 million, or $0.17 per
share, compared to $1.8 million, or $0.20 per share (excluding a $629,000, or
$.07 per share, after-tax gain on the sale of a gas gathering system) for the
corresponding periods. Net income for the first nine months of 1997 was
significantly impacted by increased DD&A largely due to the year-end 1996
reduction in proved reserves at the Company's Texas waterflood project.
Assuming the reduction in reserves occurred at the beginning of 1996 rather than
at the end and excluding the gain on the 1996 sale of the gas gathering system,
net income for the first nine months of 1997 would have increased 113% from
$695,000, or $0.08 per share, that would have been reported in the first nine
months of 1996.
Revenues. Total revenues increased 16% to $25.7 million in the first nine
months of 1997 compared to $22.2 million in the first nine months of 1996. Oil
production increased 12% to 559 Mbbls from 499 Mbbls. Natural gas production
increased 11% to 7,058 MMcf in the first nine months of 1997 from 6,335 MMcf in
the first nine months of 1996, resulting in overall production increasing 12% to
1,735 MBOE from 1,555 MBOE. The increase in oil volume is primarily related to
the Millarville Acquisition. The increase in natural gas production reflects
the impact of the two acquisitions coupled with an increase in the Company's
share of gas production in the Hanlan-Robb area in western Alberta as a result
of an increase in ownership following a February 1997 payout to its joint
venture partner.
The Company's average U.S. natural gas price increased 14% to $2.46 per Mcf in
the first nine months 1997 from $2.15 per Mcf in the first nine months of 1996,
while the average Canadian natural gas price increased 14% to $1.39 from $1.22.
The Company's composite average oil price increased 5% to $19.51 per barrel in
the first nine months of 1997 from $18.60 per barrel in the first nine months of
1996. As a result of hedging transactions, the Company's first nine months of
1996 average oil and gas prices were reduced by $1.54 per barrel and $.02 per
Mcf, respectively, from the average prices that would have otherwise been
received. No hedging transactions were in place during the first nine months of
1997. As a result of the increases in product prices and production volumes,
oil and gas revenues increased 18% to $24.5 million in the first nine months of
1997 from $20.8 million in the first nine months of 1996. Plant processing
revenues decreased 16% to $1.1 million from $1.3 million primarily as a result
of the Company's sale of a portion of its interest in the Canadian Hanlan-Robb
gas processing plant in May 1996.
8
<PAGE>
Production Costs. Production costs increased 10% to $5.5 million in the first
nine months of 1997 compared to $5.0 million in the first nine months of 1996.
In line with the Company's forecasts, the increase in absolute dollars are
primarily the result of production costs related to the Millarville Acquisition
and initiation of waterflood operations in the Southwest Oklahoma City field.
Production costs per BOE slightly decreased to $3.18 per BOE from $3.21 per BOE.
Depreciation, Depletion & Amortization (DD&A). Total DD&A increased 34% to
$12.3 million in the first nine months of 1997 from $9.2 million in the first
nine months of 1996, primarily as a result of the increase in the oil and gas
DD&A rate to $6.36 per BOE from $5.09 per BOE. The increase in the DD&A rate
reflects the impact of the year-end 1996 reduction in proved reserves due to the
lack of commercial oil response at the Company's Richardson-Mueller Caddo Unit
waterflood project in northern Texas.
General and Administrative Expenses. General and administrative expenses
increased 9% to $3.8 million in the first nine months of 1997 from $3.5 million
in the first nine months of 1996. This increase is primarily due to an increase
in contract and temporary personnel associated with the producing property
acquisitions and other ongoing projects and a decrease in the Company's drilling
and operating overhead recoveries which reduce general and administrative
expenses.
Investment and Other Income. Investment and other income decreased 76% to
$404,000 in the first nine months of 1997 from $1.7 million in the first nine
months of 1996 primarily as a result of a $1.0 million pre-tax gain on the sale
of the Company's Oklahoma gas gathering system included in investment and other
income in the first quarter of 1996.
Interest Expense. Interest expense remained level at $2.6 million between
periods.
Income Taxes. The Company recorded a $372,000 income tax provision on pre-tax
income of $1.8 million with an effective tax rate of 20% in the first nine
months of 1997 compared to an income tax provision of $1.1 million on pre-tax
income of $3.5 million with an effective tax rate of 32% in the first nine
months of 1996. During the first nine months of 1997 the Company recorded an
income tax provision on its Canadian operations with an effective tax rate of
22% which was partially offset by an income tax benefit on its U.S. operations
with an effective tax rate of 26%, resulting in an overall effective tax rate of
20%.
LIQUIDITY AND CAPITAL RESOURCES
The Company has historically funded its capital expenditures and working
capital requirements with its cash flow from operations, debt and equity capital
and participation by institutional investors. As of September 30, 1997, the
Company had working capital of $2.8 million as compared to $1.9 million at
December 31, 1996. The increase in working capital was primarily the result of
net cash provided by operating activities before changes in operating assets and
liabilities plus proceeds from new bank borrowings in exceeding capital
expenditures for the period. Net cash provided by operating activities was
$14.5 million and $18.8 million for the first nine months of 1997 and 1996,
respectively, while net cash provided by operating activities before changes in
operating assets and liabilities for the same periods was $14.1 million and
$11.7 million, respectively.
The Company's total capital expenditures, including capitalized internal
costs, were $22.7 million and $9.8 million in the first nine months of 1997 and
1996, respectively. Expenditures in 1997 included $11.2 million related to
exploration and development activities and $9.5 related to producing property
acquisitions. Expenditures in 1996 included $5.3 million related to exploration
and development activities
9
<PAGE>
and $2.7 related to producing property acquisitions.
In March 1996, the Company's wholly-owned subsidiary, Fidelity Gas Systems,
Inc., sold its Southwest Oklahoma City Field gas gathering system for $3.8
million. The Company's total gain on the sale was $3.1 million, with $1.0
million being recognized in the first quarter of 1996 in "investment and other
income" on the consolidated statement of operations while the remaining $2.1
million of the gain was deferred. The $2.1 million deferred revenue will be
recognized in future periods as a component of gas revenues by partially
offsetting the gas gathering fees paid by the Company over the productive life
of the Company's Southwest Oklahoma City Field. Through September 30, 1997,
$1.3 million has been recognized, leaving a balance of $843,000 in "deferred
revenue" on the consolidated balance sheet as of September 30, 1997.
The Company has entered into a $50.0 million revolving credit agreement dated
June 26, 1997 with the Toronto-Dominion Bank, the agent, and the Bank of Nova
Scotia. Initial borrowing availability under this new facility was $25.0
million. On June 30, 1997, the Company was advanced $13.0 million to fund the
Gulf Coast Acquisition and to replace amortizing principal payments under the
Series A and B Notes of the Company. Such debt has been classified as "long-
term" on the accompanying consolidated balance sheet as of September 30, 1997.
The facility is for a five-year term through July 1, 2002 with quarterly
borrowing base amortization beginning September 30, 2000. The interest spread
is determined from a sliding scale based on the Company's borrowing base
percentage utilization in effect from time to time. The spread ranges from 5/8%
to 1 1/4% on Eurodollar loans and 1/8% to 1/4% on Prime loans. The Company
initially funded the $13.0 million advance with a Prime loan but rolled-over the
debt into a six-month Eurodollar loan on July 7, 1997 with an interest rate of
6.8%.
On December 30, 1996, the Company, through a wholly-owned Canadian subsidiary,
entered into a long-term borrowing arrangement with the Royal Bank of Canada
(RBC) whereby the Company borrowed $3.6 million to partially fund the
Millarville Acquisition. The arrangement allows the Company to forego principal
payments during the first year. Additionally, the Company may elect to pay
interest only (Interest Only Period) in subsequent years if the Company's
Canadian subsidiary meets certain borrowing base tests. Otherwise, the loan
becomes payable over a three-year period as follows: $1,575,000 in the first
year, $1,200,000 in the second year and $873,000 in the third year (the Term
Period). The borrowings may be funded by RBC Prime loans or Bankers'
Acceptances (BA) loans. During the Interest Only Period, the Company pays
interest at the RBC prime rate plus 1/2% on Prime loans and pays the BA rate
plus 1/2% and an acceptance fee on BA loans. During the Term Period, the Company
pays interest at the RBC prime rate plus 3/4% on Prime loans and pays the BA
rate plus 3/4% and an acceptance fee on BA loans. The Company initially funded
the debt with a Prime loan but rolled-over the debt into a twelve-month BA loan
on January 9, 1997 with an effective interest rate of 5.8%.
In July 1993, PetroCorp refinanced its long-term debt through the issuance of
$40.0 million in senior notes. The Note Purchase Agreement established $10.0
million of Senior Adjustable Rate Notes Series A, due June 30, 1999 (the Series
A Notes), payable to a subsidiary of USF&G Corporation, and $30.0 million of
7.55% Senior Notes Series B, due June 30, 2008 (the Series B Notes), payable to
two wholly-owned subsidiaries of CIGNA Corporation and to four unaffiliated
institutional investors in amounts totaling $20.0 million and $10.0 million,
respectively. Mandatory redemptions commenced on December 31, 1994 for the
Series A Notes and commenced on December 31, 1995 for the Series B Notes. As of
September 30, 1997, the remaining principal balances for the Series A and B
Notes were $3.4 million and $25.1 million, respectively, for a total of $28.5
million of which $5.3 million was classified as current.
Interest on the Series A Notes is adjustable, based on a spread of 115 basis
points over the London Interbank Offered Rate (LIBOR). The Company may select a
rate which may be applicable for a one-,
10
<PAGE>
three- or six-month period. Interest is payable in arrears at the end of the
selected period. Interest on the Series B Notes is fixed at a rate of 7.55% and
is payable semiannually in arrears.
The Company's Canadian subsidiary redeemed its redeemable preferred stock on
August 9, 1994 for $7.0 million and simultaneously issued $7.0 million in
nonrecourse long-term notes payable with similar financial terms. At September
30, 1997, the nonrecourse long-term notes payable balance was $4.3 million, of
which $757,000 was classified as current.
From time to time, the Company has utilized hedging transactions to manage its
exposure to price fluctuations on its sales of oil and natural gas. Realized
gains and losses from the Company's hedging activities are included in oil and
gas revenues in the period of the hedged production. Normally, any realized and
unrealized gains and losses prior to the period when the hedged production
occurs are deferred. To date, the Company has used oil and natural gas futures
contracts or natural gas option contracts traded on the NYMEX to hedge its oil
and gas sales. The Company had no open hedging positions as of September 30,
1997, and has not hedged any of its production since October 1996.
The Company's Board of Directors has approved a capital budget of $26.0
million for 1997. The approved 1997 capital budget includes $16.0 million for
exploration and development projects and $10.0 million for producing property
acquisitions. However, actual levels of expenditures for planned exploration
and development projects and producing property acquisitions may vary
significantly due to many factors, including drilling results, oil and gas
prices, industry conditions and acquisition opportunities, among others.
The Company plans to finance its 1997 exploration and development expenditures
with its cash flow from operations while it plans to finance its 1997 producing
property acquisitions with new borrowings. If the Company increases its
exploration, development and acquisition activities in the future, capital
expenditures may require additional funding obtained through borrowings from
commercial banks and other institutional sources, public offerings of equity or
debt securities and existing and future relationships with institutional
investment partners.
FORWARD-LOOKING STATEMENTS AND RISK FACTORS
The information discussed herein includes "forward-looking statements" within
the meaning of Section 27A of the Securities Act of 1933, as amended (the
"Securities Act"), and Section 21E of the Securities Exchange Act of 1934, as
amended (the "Exchange Act"). All statements other than statements of
historical facts included herein regarding planned capital expenditures,
increases in oil and gas production, the number of anticipated wells to be
drilled after the date hereof, the Company's financial position, business
strategy and other plans and objectives for future operations, are forward-
looking statements. Although the Company believes that the expectations
reflected in such forward-looking statements are reasonable, they do involve
certain assumptions, risks and uncertainties, and the Company can give no
assurance that such expectations will prove to have been correct. The Company's
actual results could differ materially from those anticipated in these forward-
looking statements as a result of certain factors. Among the factors that could
cause actual results to differ materially are the timing and success of the
company's drilling activities, the volatility of the prices and supply and
demand for oil and gas, the numerous uncertainties inherent in estimating
quantities of oil and gas reserves and actual future production rates and
associated costs, the usual hazards associated with the oil and gas industry
(including blowouts, cratering, pipe failure, spills, explosions and other
unforeseen hazards), and increases in regulatory requirements, as well as other
risks described more fully in the Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 1996 filed with the SEC.
11
<PAGE>
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
Not Applicable
12
<PAGE>
PART II. OTHER INFORMATION
Item 1 - Legal Proceedings
- --------------------------
Not Applicable
Item 2 - Changes in Securities
- ------------------------------
Not Applicable
Item 3 - Defaults upon Senior Securities
- ----------------------------------------
Not Applicable
Item 4 - Submission of Matters to Vote of Security Holders
- -----------------------------------------------------------
Item 5 - Other Information
- --------------------------
Not Applicable
Item 6 -
- ---------
(a) Exhibits
--------
3.1* Amended and Restated Articles of Incorporation of PetroCorp
Incorporated. Incorporated by reference to Exhibit 3.2 to the
Registration Statement on Form S-1 (Registration No. 33-36972)
initially filed with the Securities and Exchange Commission on
August 26, 1993 (the "Registration Statement").
3.2* Amended and Restated Bylaws of PetroCorp Incorporated.
Incorporated by reference to Exhibit 3.2 to the Form 10-Q for
the quarterly period ended June 30, 1996.
27 Financial Data Schedule
______________________________
* Incorporated by reference.
(b) Reports on Form 8-K
-------------------
Report on Form 8-K dated July 1, 1997 relating to the acquisition of
oil and gas properties in Louisiana and Alabama.
Report on Form 8-K/A dated July 1, 1997 relating to certain financial
information relating to the acquisition of oil and gas properties in
Louisiana and Alabama.
13
<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.
PETROCORP INCORPORATED
---------------------------------------
(Registrant)
Date: November 12 , 1997 /s/ CRAIG K. TOWNSEND
--------------------------- ---------------------------------------
Craig K. Townsend
Vice President - Finance, Secretary
and Treasurer
(On behalf of the Registrant and as the
Principal Financial Officer)
14
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FORM 10Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITY
EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1997 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 9-MOS
<FISCAL-YEAR-END> DEC-31-1997 DEC-31-1997
<PERIOD-START> JUL-01-1997 JAN-01-1997
<PERIOD-END> SEP-30-1997 SEP-30-1997
<CASH> 10,892 10,892
<SECURITIES> 0 0
<RECEIVABLES> 5,470 5,470
<ALLOWANCES> (50) (50)
<INVENTORY> 0 0
<CURRENT-ASSETS> 16,695 16,695
<PP&E> 214,775 214,775
<DEPRECIATION> (99,443) (99,443)
<TOTAL-ASSETS> 132,388 132,388
<CURRENT-LIABILITIES> 13,920 13,920
<BONDS> 0 0
0 0
0 0
<COMMON> 86 86
<OTHER-SE> 66,865 66,865
<TOTAL-LIABILITY-AND-EQUITY> 132,388 132,388
<SALES> 8,377 24,478
<TOTAL-REVENUES> 8,738 25,718
<CGS> 0 0
<TOTAL-COSTS> 7,514 21,736
<OTHER-EXPENSES> 1 3
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 975 2,565
<INCOME-PRETAX> 364 1,818
<INCOME-TAX> 137 372
<INCOME-CONTINUING> 0 0
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 227 1,446
<EPS-PRIMARY> .03 .17
<EPS-DILUTED> .03 .17
</TABLE>
