<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 June 30, 2000
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)
6733 South Yale 74136
Tulsa, Oklahoma (Zip Code)
(Address of Principal Executive Offices)
Registrant's Telephone Number, Including Area Code: (918) 491-4500
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 July 31, 2000:
Common Stock, $.01 per value 8,693,019
---------------------------- ---------
(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 Sheets at June 30, 2000 and December 31, 1999 1
Consolidated Statements of Operations for the three and six months ended June 30, 2000 and 1999 2
Consolidated Statements of Cash Flows for the six months ended June 30, 2000 and 1999 3
Notes to Consolidated Financial Statements 4
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 9
Item 3. Quantitative and Qualitative Disclosures about Market Risk 12
PART II. OTHER INFORMATION 13
SIGNATURES 15
</TABLE>
Certain matters discussed in this report, excluding historical information,
include forward-looking statements - statements that discuss the Company's
expected future results based on current and pending business operations. The
Company is making these forward-looking statements in reliance on the safe
harbor protections provided under the PRIVATE SECURITIES LITIGATION REFORM ACT
OF 1995.
Forward-looking statements can be identified by words such as "anticipates,"
"believes," "expects," "planned," "scheduled" or similar expressions. Although
the Company believes these forward-looking statements are based on reasonable
assumptions, statements made regarding future results are subject to numerous
assumptions, uncertainties and risks that may cause future results to be
materially different from the results stated or implied in this document.
Important risk factors (but not necessarily all important factors) that could
cause actual results to differ materially from those expressed in any forward-
looking statement made by, or on behalf of, the Company would include, but in no
way be limited by, the Company's ability to obtain agreements with co-venturers,
partners and governments; it ability to engage drilling, construction and other
contractors; its ability to obtain economical and timely financing; geological,
land, sea or weather conditions; world prices for oil, natural gas and natural
gas liquids, adequate and reliable transportation systems; and foreign and
United State laws, including tax laws. Additional information about issues that
could lead to material changes in performance is contained in the Company's Form
10-K.
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
PETROCORP INCORPORATED
CONSOLIDATED BALANCE SHEETS
(in thousands, except share amounts)
(Unaudited)
<TABLE>
<CAPTION> JUNE 30, DECEMBER 31,
2000 1999
-------- -----------
<S> <C> <C>
ASSETS
------
Current assets:
Cash and cash equivalents $ 8,186 $ 12,899
Accounts receivable, net 6,126 4,605
Other current assets 129 162
-------- --------
Total current assets 14,441 17,666
-------- --------
Property, plant and equipment:
Proved oil and gas properties, at cost, full cost method, net
of accumulated depreciation, depletion and amortization 63,707 63,998
Unproved oil and gas properties, not subject to depletion 6,721 6,154
Plant and related facilities, net 2,959 3,151
Other, net 221 403
-------- --------
73,608 73,706
-------- --------
Deferred income taxes 13,065 13,916
Other assets, net - 107
-------- --------
Total assets $101,114 $105,395
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 6,821 $ 6,138
Accrued liabilities 2,624 3,609
Income tax payable 1,419 -
Current portion of long-term debt 1,002 4,277
-------- --------
Total current liabilities 11,866 14,024
-------- --------
Long-term debt 37,916 43,410
-------- --------
Deferred income taxes 5,734 5,598
-------- --------
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,
8,693,019 shares outstanding as of June 30, 2000
and December 31, 1999 87 87
Additional paid-in capital 71,546 71,380
Accumulated deficit (20,690) (24,530)
Accumulated other comprehensive loss (5,345) (4,574)
-------- --------
Total shareholders' equity 45,598 42,363
-------- --------
Total liabilities and shareholders' equity $101,114 $105,395
======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
1
<PAGE>
PETROCORP INCORPORATED
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except share amounts)
(Unaudited)
<TABLE>
<CAPTION>
For the three For the six months
months months
ended June 30, ended June 30,
---------------- --------------------
<S> <C> <C> <C> <C>
2000 1999 2000 1999
------ ------ ------- -------
REVENUES:
Oil and gas $8,746 $5,964 $15,891 $10,905
Plant processing 386 452 858 906
Other 71 44 154 54
------ ------ ------- -------
9,203 6,460 16,903 11,865
------ ------ ------- -------
EXPENSES:
Production costs 2,124 1,502 3,748 3,113
Depreciation, depletion and amortization 2,089 2,774 4,274 5,467
General and administrative 577 821 961 1,875
Restructuring costs (NOTE 2) (500) - (500) 1,090
Other operating expenses 73 90 186 153
------ ------ ------- -------
4,363 5,187 8,669 11,698
------ ------ ------- -------
INCOME (LOSS) FROM OPERATIONS 4,840 1,273 8,234 167
------ ------ ------- -------
OTHER INCOME (EXPENSES):
Investment income 184 79 377 167
Interest expense (992) (924) (2,018) (1,859)
Other income (expenses) 188 - 188 (1)
------ ------ ------- -------
(620) (845) (1,453) (1,693)
------ ------ ------- -------
INCOME (LOSS) BEFORE INCOME TAXES 4,220 428 6,781 (1,526)
------ ------ ------- -------
Income tax provision (benefit):
Current 1,432 - 1,432 -
Deferred 216 (55) 1,267 (888)
------ ------ ------- -------
1,648 (55) 2,699 (888)
------ ------ ------- -------
NET INCOME (LOSS) BEFORE EXTRAORDINARY ITEM 2,572 483 4,082 (638)
Extraordinary item - extinguishment of debt (less applicable
taxes of $143,000) 242 - 242 -
------ ------ ------- -------
NET INCOME (LOSS) $2,330 $ 483 $ 3,840 $ (638)
====== ====== ======= =======
Net income (loss) per common share - basic:
Income (loss) before extraordinary item $ 0.30 $ 0.06 $ 0.47 $(0.07)
Extraordinary item (0.03) - (0.03) -
------ ------ ------- -------
Net income (loss) $ 0.27 $ 0.06 $ 0.44 $(0.07)
====== ====== ======= =======
Net income (loss) per common share - diluted:
Income (loss) before extraordinary item $ 0.30 $ 0.06 $ 0.47 $(0.07)
Extraordinary item (0.03) - (0.03) -
------ ------ ------- -------
Net income (loss) $ 0.27 $ 0.06 $ 0.44 $(0.07)
====== ====== ======= =======
Weighted average number of common shares - basic 8,686 8,656 8,685 8,656
====== ====== ======= =======
Weighted average number of common shares - diluted 8,733 8,667 8,721 8,667
====== ====== ======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
2
<PAGE>
PETROCORP INCORPORATED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(Unaudited)
<TABLE>
<CAPTION>
For the six months
ended June 30,
----------------------
<S> <C> <C>
2000 1999
--------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 3,840 $ (638)
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Depreciation, depletion and amortization 4,274 5,467
Deferred income tax expense (benefit) 1,267 (888)
Other 187 (177)
Changes in operating assets and liabilities:
Accounts receivable (1,521) 940
Other current assets 33 (51)
Accounts payable 683 (564)
Accrued liabilities (2,242) (1,809)
Income tax payable 1,419 -
-------- -------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES 7,940 2,280
-------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to oil and gas properties (3,383) (1,228)
Additions to plant and related facilities (408) (62)
Additions to other property, plant and equipment - (13)
Additions to other assets - (156)
-------- -------
NET CASH USED IN INVESTING ACTIVITIES (3,791) (1,459)
-------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from long-term debt 9,169 2,170
Repayment of long-term debt (17,861) (2,525)
Other 64 -
-------- -------
NET CASH USED IN FINANCING ACTIVITIES (8,628) (355)
-------- -------
Effect of exchange rate changes on cash (234) 78
-------- -------
Net increase (decrease) in cash and cash equivalents (4,713) 544
Cash and cash equivalents at beginning of period 12,899 7,786
-------- -------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 8,186 $ 8,330
========= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
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, 1999, included in the Company's 1999
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 - RESTRUCTURING:
As part of a restructuring plan, on August 3, 1999, PetroCorp's Board of
Directors entered into a Management Agreement with its largest shareholder,
Kaiser-Francis Oil Company ("Kaiser-Francis"), under which Kaiser-Francis
provides management, technical, and administrative support services for all
PetroCorp operations in the United States and Canada.
As a result of the restructuring, fifty-two employees were terminated in 1999
with one employee terminated in 2000. Several employees elected to defer receipt
of their termination benefits until 2000. The Houston, Oklahoma City and Calgary
offices were closed but the Company was still liable under the lease agreements.
In the second quarter, the Company was able to find a replacement lessee for
some of the idle office space earlier than anticipated. The following table
shows the change in accrued restructuring costs:
<TABLE>
<CAPTION>
Expenditures
Balance at charged Balance at
December 31, against Changes in June 30,
1999 accrual estimates 2000
------------ ------------ ---------- ----------
<S> <C> <C> <C> <C>
Employee termination costs $1,341,000 $1,308,000 $ - $ 33,000
Office lease discontinuance and other
related costs 820,000 94,000 (500,000) 133,000
----------- ---------- --------- --------
$2,161,000 $1,402,000 $(500,000) $166,000
========== ========== ========= ========
</TABLE>
4
<PAGE>
NOTE 3 - COMPREHENSIVE INCOME OR LOSS:
The Company's comprehensive income (loss) for the three and six months ended
June 30, 2000 and 1999 is as follows (in thousands):
<TABLE>
<CAPTION>
For the three For the six
months ended months ended
June 30, June 30,
----------------- -----------------
2000 1999 2000 1999
------ ------ ------ ------
<S> <C> <C> <C> <C>
Net income (loss) $2,330 $ 483 $3,840 $ (638)
Foreign currency translation gain (loss) (657) 697 (771) 1,090
------ ------ ------ ------
Comprehensive income (loss) $1,673 $1,180 $3,069 $ 452
====== ====== ====== ======
</TABLE>
NOTE 4 - EARNINGS PER SHARE:
The following is a reconciliation of the numerators and denominators of the
basic and diluted per share computations for the periods presented (in
thousands, except share amounts):
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30, PER SHARE AMOUNTS
----------------------------------------
NET INCOME
NET (LOSS) BEFORE NET
INCOME EXTRAORDINARY EXTRAORDINARY INCOME
(LOSS) SHARES ITEM LOSS (LOSS)
------ ------ ------------- ------------- --------
<S> <C> <C> <C> <C> <C>
2000
Basic EPS:
Net income (a) $2,330 8,686 $0.30 $(0.03) $0.27
Effect of dilutive securities:
Options - 47 - - -
------ ----- ----- ------ -----
Diluted EPS:
Net income $2,330 8,733 $0.30 $(0.03) $0.27
====== ===== ===== ====== =====
1999
Basic EPS:
Net income $ 483 8,656 $0.06 $ - $0.06
Effect of dilutive securities:
Options - 11 - - -
------ ----- ----- ------ -----
Diluted EPS:
Net income $ 483 8,667 $0.06 $ - $0.06
====== ===== ===== ====== =====
</TABLE>
5
<PAGE>
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30, PER SHARE AMOUNTS
-----------------------------------------
NET INCOME
NET (LOSS) BEFORE NET
INCOME EXTRAORDINARY EXTRAORDINARY INCOME
(LOSS) SHARES ITEM LOSS (LOSS)
------ ------ ------------- ------------- ------
<S> <C> <C> <C> <C> <C>
2000
Basic EPS:
Net income (a) $3,840 8,685 $ 0.47 $(0.03) $ 0.44
Effect of dilutive securities:
Options - 36 - - -
------ ----- ------ ------ ------
Diluted EPS:
Net income $3,840 8,721 $ 0.47 $(0.03) $ 0.44
====== ===== ====== ====== ======
1999
Basic EPS:
Net loss $ (638) 8,656 $(0.07) $ - $(0.07)
Effect of dilutive securities:
Options - 11 - - -
------ ----- ------ ------ ------
Diluted EPS:
Net loss $ (638) 8,667 $(0.07) $ - $(0.07)
====== ===== ====== ====== ======
</TABLE>
(a) Net of extraordinary loss of $242,000.
The net income per share and net loss per share amounts do not include the
effect of potentially dilutive securities of 366,000 and 750,500 for the three
months ended June 30, 2000 and 1999, respectively, and 549,000 and 750,500 for
the six months ended June 30, 2000 and 1999, respectively, as the impact on
these outstanding options was antidilutive.
NOTE 5 - HEDGING ACTIVITIES:
In the first quarter of 2000, the Company entered into swap transactions in an
effort to lock in a portion of higher oil prices which currently exist. These
transactions apply to approximately 50 percent of the Company's projected oil
production from April 2000 through December 2000, at prices ranging from $23.57
to $29.00 per barrel. The fair value of the swap transactions, based on NYMEX
oil futures settlement prices as of June 30, 2000, would result in the company
paying $711,000. (As of August 3, settlement would result in a payment of
$426,000.) Oil and gas revenue in the second quarter includes $69,000 received
and $60,000 in settlement of swap transactions through June 30, 2000.
In the second quarter of 2000, the Company entered into a no-cost collar
arrangement by which 180,000 MMbtu for each of the months July through October
2000 are subject to a $4.96 ceiling and a $3.50 floor per MMbtu. At June 30,
2000 prices, the company estimates the fair value of this arrangement to be
nominal.
No hedge transactions were in place in 1999.
On June 15, 1998, the financial Accounting Standards board issued Statement of
financial Accounting Standards (SFAS) No. 133 "Accounting for Derivative
Instruments and Hedging Activities." SFAS 133, as amended by SFAS 137, is
effective for all fiscal quarters of all fiscal years beginning after June 15,
2000 for certain companies (January 1, 2001 for the Company). SFAS 133 requires
that all derivative instruments be recorded on the balance sheet at their fair
value. Changes in the fair value of derivatives will be recorded each period in
current earnings or other comprehensive income (only certain types of hedge
transactions are reported as a component of other
6
<PAGE>
comprehensive income). Additionally, for all hedge transactions the nature and
type of hedge will be disclosed. Based on the nature of the Company's
anticipated use of derivative instruments in 2000, the Company does not
anticipate that the adoption of SFAS 133 will have a significant effect on the
results of operations or financial position.
NOTE 6 - PROPERTY, PLANT AND EQUIPMENT:
Investments in property, plant and equipment were as follows at June 30, 2000
and December 31, 1999 (amounts in thousands):
<TABLE>
<CAPTION>
2000 1999
--------- ---------
<S> <C> <C>
Oil and gas properties:
Proved $ 219,921 $ 216,991
Unproved 6,721 6,154
--------- ---------
226,642 223,145
Plant and related facilities 9,977 9,806
Gas gathering facilities 1,698 1,698
Furniture, fixtures and equipment - 29
--------- ---------
238,317 234,678
Less - accumulated depreciation, depletion
and amortization (164,709) (160,972)
--------- ---------
$ 73,608 $ 73,706
========= =========
</TABLE>
NOTE 7 - LONG-TERM DEBT:
In June 2000, the revolving credit agreement was amended to increase the
current borrowing base to $40 million and change the termination date to July
31, 2000, pending a new loan agreement between Toronto-Dominion and the Company.
The new loan agreement was successfully completed in July, 2000, therefore
amounts under the facility are reflected in the financial statements as long-
term borrowings. Also in June 2000, the Company paid off the Series B fixed
rate notes, using available capital and borrowings under the revolving credit
agreement. Early termination payments required by the Series B agreement and
remaining unamortized debt costs were expensed and are reflected in the
financial statements as an extraordinary item of $385,000, net of applicable
taxes of $143,000.
In July 2000, the Company entered into a $75 million revolving credit
agreement with the Toronto-Dominion Bank (TD Bank), the agent, and the Bank of
Nova Scotia. The term of the facility is through April 30, 2003 and the initial
borrowing base was set at $58 million. Borrowings can be funded by either
Eurodollar loans or Base Rate loans. The interest rate on the borrowings is
equal to an interest rate spread plus either the Eurodollar rate or the Base
Rate. 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 1.25 to 2.25 on Eurodollar loans and .25 to 1.25 on Base
Rate loans.
NOTE 8 - STOCK OPTIONS:
On May 19, 2000, shareholders approved the Company's 2000 Stock Option Plan.
Grants of 82,000 shares at $6.13 and 24,650 shares at $7.06 have been issued.
These shares vest one year from date of grant. The weighted average exercise
price for options outstanding under the Plan at June 30, 2000 was $6.34. For
additional stock option information, see the Company's most recent 10-K.
7
<PAGE>
NOTE 9 - GEOGRAPHIC AREA INFORMATION:
The principal business of the Company is oil and gas, which consists of the
exploration, development, acquisition, exploitation and operation of oil and gas
properties and the production and sale of crude oil and natural gas in North
America. Pertinent information with respect to the Company's oil and gas
business is presented in the following table (in thousands):
<TABLE>
<CAPTION>
UNITED GENERAL
STATES CANADA CORPORATE TOTAL
-------- ------ --------- --------
<S> <C> <C> <C> <C>
Three months ended June 30, 2000:
Revenues $ 4,999 $ 4,204 $ - $ 9,203
Income (loss) from operations 2,188 2,729 (77)(b) 4,840
Three months ended June 30, 1999:
Revenues $ 3,759 $ 2,701 $ - $ 6,460
Income (loss) from operations 808 1,286 (821) 1,273
Six months ended June 30, 2000:
Revenues $ 9,599 $ 7,304 $ - $ 16,903
Income (loss) from operations 4,289 4,406 (461)(b) 8,234
Identifiable assets at June 30 53,581 47,533 - 101,114
Six months ended June 30, 1999:
Revenues $ 6,909 $ 4,956 $ - $ 11,865
Income (loss) from operations 1,037 2,095 (2,965)(a) 167
Identifiable assets at June 30 59,207 41,980 757 101,944
</TABLE>
(a) Includes $1,090 of restructuring costs.
(b) Net of $500 restructuring cost credit.
8
<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 For the
three months six months
ended June 30, ended June 30,
-------------------------------------
<S> <C> <C> <C> <C>
2000 1999 2000 1999
------ ------ ------ ------
PRODUCTION:
United States
Oil (MBbls) 72 76 154 164
Gas (MMcf) 853 1,152 1,790 2,388
Total gas equivalents (MMcfe) 1,285 1,608 2,714 3,372
Canada:
Oil (MBbls) 30 36 61 69
Gas (MMcf) 1,007 1,109 1,997 2,188
Total gas equivalents (MMcfe) 1,187 1,325 2,363 2,602
Total:
Oil (MBbls) 102 112 215 233
Gas (MMcf) 1,860 2,261 3,787 4,576
Total gas equivalents (MMcfe) 2,472 2,933 5,077 5,974
AVERAGE SALES PRICES:
United States:
Oil (per Bbl) $27.72 $15.61 $27.61 $13.14
Gas (per Mcf) 3.49 2.22 2.96 1.99
Canada:
Oil (per Bbl) 26.32 14.73 26.44 12.94
Gas (per Mcf) 2.94 1.52 2.36 1.42
Weighted average:
Oil (per Bbl) 27.31 15.33 27.28 13.08
Gas (per Mcf) 3.19 1.88 2.68 1.72
SELECTED DATA PER MCFE:
Average sales price $ 3.54 $ 2.03 $ 3.13 $ 1.83
Production costs 0.86 0.51 0.74 0.52
General and administrative expenses 0.23 0.28 0.19 0.31
Oil and gas depreciation, depletion and amortization 0.70 0.81 0.70 0.78
</TABLE>
9
<PAGE>
RESULTS OF OPERATIONS
Three Months Ended June 30, 2000 Compared to Three Months Ended June 30, 1999
Overview. The Company recorded a second quarter 2000 net income of
$2,330,000, or $0.27 per share. This compares to a net income of $483,000 or
$0.06 per share recorded in the second quarter of 1999. This improvement
results from higher oil and gas prices and lower general and administrative and
depreciation, depletion, and amortization expenses. The Company recorded a $0.5
million ($313,000 after-tax) credit against restructuring charges in the second
quarter of 2000. Net cash provided by operating activities was $5.7 million for
the quarter ended June 30, 2000 compared to net cash provided of $2.7 million
for the corresponding quarter of 1999.
Revenues. Total revenues increased 42% to $9.2 million in the second
quarter of 2000 compared to $6.5 million in the second quarter of 1999,
primarily due to commodity price increases. The Company's natural gas
production decreased 18% to 1,860 MMcf from 2,261 MMcf and oil production
declined 9% to 102 MBbls from 112 MBbls, resulting in the Company's overall
equivalent production declining 16% to 2,472 MMcfe from 2,933 MMcfe. The
decrease in natural gas production is primarily the result of normal production
declines coupled with temporary reductions due to workover and facility related
downtime and pipeline capacity constraints in Canada. The decrease in oil
production reflects normal production declines.
The Company's composite average oil price increased 78% to $27.31 per
barrel in the second quarter of 2000 from $15.33 per barrel in the second
quarter of 1999. The Company's average U.S. natural gas price increased 57% to
$3.49 per Mcf in the second quarter of 2000 from $2.22 per Mcf in the prior year
quarter, while the average Canadian natural gas price increased 93% to $2.94 per
Mcf in the second quarter of 2000 from $1.52 per Mcf for 1999. The significant
increase in prices, partially offset by the decline in production volumes,
resulted in a 47% increase in oil and gas revenues to $8.7 million in the second
quarter of 2000 from $6.0 million in the prior year.
Production Costs. Production costs increased 41% to $2.1 million in
the second quarter of 2000 as a result of workover operations for repairs and to
enhance production and higher U.S. production taxes related to higher commodity
prices. Production costs per Mcfe increased 69% to $0.86 per Mcfe in the second
quarter of 2000 from $0.51 in the same quarter of 1999. Approximately $.22 per
Mcfe of increased costs are due to workover operations and increased production
taxes.
Depreciation, Depletion & Amortization (DD&A). Total DD&A decreased
25% to $2.1 million in the second quarter of 2000 from $2.8 million in the
second quarter of 1999. The decrease reflects the impact of higher oil and gas
reserves due to price increases and field extensions. The composite oil and gas
DD&A rate decreased 14% to $0.70 per Mcfe from $0.81 per Mcfe.
General and Administrative Expenses. General and administrative
expenses decreased 30% to $0.6 million in the second quarter of 2000 from $0.8
million in the second quarter of 1999 as a result of the Company's restructuring
efforts and the Management Agreement with Kaiser-Francis. See Note 2 to the
consolidated financial statements.
Restructuring Costs. The Company recorded a $0.5 million credit
against restructuring costs in the second quarter of 2000 primarily because the
Houston office space was leased to an outside party and the Company's obligation
ended. See Note 2 to the consolidated financial statements.
Investment Income. Investment income increased 133% to $184,000 in
the second quarter of 2000 from $79,000 in the second quarter of 1999 due to
more cash being available for investment.
Interest Expense. Interest expense increased 7% to $992,000 in the
second quarter of 2000 from $924,000 in the prior year quarter, reflecting the
impact of rate increases, as described in the Liquidity and Capital Resources
section.
Income Taxes. The Company recorded a $1,648,000 income tax expense
with an effective tax rate of 39% on a pre-tax income of $4,220,000 in the first
quarter of 2000. This compares to an income tax benefit of $55,000 on a pre-tax
income of $483,000 in the second quarter of 1999.
10
<PAGE>
Six Months Ended June 30, 2000 Compared to Six Months Ended June 30, 1999
Overview. The Company recorded a first half 2000 net income of
$3,840,000, or $0.44 per share. This compares to a net loss of $638,000 or $0.07
per share recorded in the first half of 1999. This improvement results from
higher oil and gas prices and lower general and administrative and depreciation,
depletion, and amortization expenses. Net cash provided by operating activities
was $7.9 million for the six months ended June 30, 2000 compared to $2.3 million
for the corresponding half of 1999.
Revenues. Total revenues increased 42% to $16.9 million in the first
six months of 2000 compared to $11.9 million in the first half of 1999,
primarily due to commodity price increases. The Company's natural gas production
decreased 17% to 3,787 MMcf from 4,576 MMcf and oil production declined 8% to
215 MBbls from 233 MBbls, resulting in the Company's overall equivalent
production declining 15% to 5,077 MMcfe from 5,974 MMcfe. The decrease in
natural gas production is primarily the result of normal production declines
coupled with temporary reductions due to workover and facility related downtime
and pipeline capacity constraints in Canada, as well as the shut down for
repairs, in March 2000, of the Minehead 8-13 well in Canada. The decrease in oil
production reflects normal production declines.
The Company's composite average oil price increased 109% to $27.28 per
barrel in the first half of 2000 from $13.08 per barrel in the first six months
of 1999. The Company's average U.S. natural gas price increased 49% to $2.96 per
Mcf in the first six months of 2000 from $1.99 per Mcf in the prior year, while
the average Canadian natural gas price increased 66% to $2.36 per Mcf in the
first half of 2000 from $1.42 per Mcf for 1999. The significant increase in
prices, partially offset by the decline in production volumes, resulted in a 46%
increase in oil and gas revenues to $15.9 million in the first six months of
2000 verses $10.9 million in the prior year quarter.
Production Costs. Production costs increased 20% to $3.7 million in
the first half of 2000 as a result of workover operations for repairs and to
enhance production and production tax increases related to higher commodity
prices. Production costs per Mcfe increased 42% to $0.74 per Mcfe in the first
half of 2000 from $0.52 in the same six months of 1999. Approximately $.17 per
Mcfe of increased costs are due to workover operations and increased production
taxes.
Depreciation, Depletion & Amortization (DD&A). Total DD&A decreased
22% to $4.3 million in the first half of 2000 from $5.5 million in the first six
months of 1999. The decrease reflects the impact of higher U.S. oil and gas
reserves due to price increases and field extensions. The composite oil and gas
DD&A rate decreased 10% to $0.70 per Mcfe from $0.78 per Mcfe.
General and Administrative Expenses. General and administrative
expenses decreased 49% to $1.0 million in the first six months of 2000 from $1.9
million in the first half of 1999 as a result of the Company's restructuring
efforts and the Management Agreement with Kaiser-Francis. See Note 2 to the
consolidated financial statements.
Restructuring Costs. The Company recorded a $0.5 million credit
against restructuring costs in the first six months of 2000 primarily because
the Houston office space was leased to an outside party and the Company's
obligation ended. This compares to a $1.1 million restructuring charge in the
first six months of 1999 related to the Company's pursuit of strategic
alternatives to maximize shareholder value. See Note 2 to the consolidated
financial statements.
Investment Income. Investment income increased 126% to $377,000 in
the first half of 2000 from $167,000 in the first six months of 1999 due to more
cash being available for investment.
Interest Expense. Interest expense increased 9% to $2,018,000 in the
first six months of 2000 from $1,859,000 in the prior year first half,
reflecting the impact of rate increases, as described in the Liquidity and
Capital Resources section.
Income Taxes. The Company recorded a $2,699,000 income tax expense
with an effective tax rate of 40% on a pre-tax income of $6.8 million in the
first half of 2000. This compares to an income tax benefit of $888,000 with an
effective tax rate of 58% on a pre-tax loss of $1.5 million in the first half of
1999.
11
<PAGE>
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 June 30, 2000, the
Company had working capital of $2.6 million as compared to $3.6 million at
December 31, 1999. Net cash provided by operating activities was $7.9 million
for the six months ended June 30, 2000 compared to $2.3 million for the
corresponding half of 1999.
The Company's total capital expenditures were $3.8 million and $1.3
million for the six months ended June 30, 2000 and 1999, respectively, primarily
related to exploration and development.
No sales of non-strategic oil and gas properties occurred in the first
half of either 2000 or 1999.
In June 1997, the Company entered into a $50.0 million five-year
revolving credit agreement with the Toronto-Dominion Bank, the agent, and the
Bank of Nova Scotia. At June 30, 2000, the Company had a total of $36 million
outstanding under the revolver and $4 million available based on the current
borrowing base, as defined, subject to certain limitations. The facility was
amended in June 1998 to extend the initial five-year term an additional year to
July 1, 2003 with quarterly borrowing base amortization beginning September 30,
2001. The borrowings can be funded by either Eurodollar loans or Prime loans.
The interest rate on the borrowings is equal to an interest rate spread plus
either the Eurodollar rate or the Prime rate. 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 1-3/8% to 2% on
Eurodollar loans and 3/8% to 1% on Prime loans. The Company's average interest
rate under this facility was approximately 8.4% during the first half of 2000,
verses 6.3% during the first half of 1999.
In June 2000, the revolving credit agreement was amended to increase
the current borrowing base to $40 million and change the termination date to
July 31, 2000, pending a new loan agreement between Toronto-Dominion and the
Company. The new loan agreement was successfully completed in July, 2000, so
amounts under the facility are reflected in the financial statements as long-
term borrowings (see summary description of new loan agreement in Note 7 to the
financial statements.) Also in June 2000, the Company paid off the Series B
fixed rate notes, using available capital and borrowings under the revolving
credit agreement. Early termination payments required by the Series B agreement
and remaining unamortized debt costs were expensed and are reflected in the
financial statements as an extraordinary item of $385,000, net of applicable
taxes of $143,000.
Although 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, if the Company
increases its capital expenditure level in the future, or operating cash flow is
not as expected, capital expenditures may require additional funding, obtained
through borrowings from commercial banks and other institutional sources, public
or private offerings of equity or debt securities and existing and future
relationships with institutional investment partners.
YEAR 2000 ISSUES
PetroCorp had no Year 2000 computer problems. Minimal costs were
expended in this area.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's primary sources of market risk are from fluctuations in
commodity prices, interest rates and exchange rates.
Commodity Price Risk
The Company produces and sells natural gas, crude oil, condensate,
natural gas liquids and sulfur. As a result, the Company's financial results can
be significantly affected as these commodity prices fluctuate widely in response
to changing market forces. The Company has previously utilized hedging
transactions to manage its exposure to price fluctuations on its sales of oil
and natural gas. In the first quarter of 2000, the Company entered into swap
transactions
12
<PAGE>
in an effort to lock in a portion of higher oil prices which currently exist.
These transactions apply to approximately 50 percent of the Company's projected
oil production from April 2000 through December 2000, at prices ranging from
$23.57 to $29.00 per barrel. The fair value of the swap transactions, based on
NYMEX oil futures settlement prices as of June 30, 2000, would result in the
company paying $711,000. (As of August 3, settlement would result in a payment
of $426,000.) Oil and gas revenue in the second quarter includes $69,000
received and $60,000 in settlement of swap transactions through June 30, 2000.
In the second quarter of 2000, the Company entered into a no-cost
collar arrangement by which 180,000 MMbtu for each of the months July through
October 2000 are subject to a $4.96 ceiling and a $3.50 floor per MMbtu. At June
30, 2000 prices, the company estimates the fair value of this arrangement to be
nominal.
No hedge transactions were in place in 1999.
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
(a) May 19, 2000 annual meeting of shareholders.
(1) Election of Directors
<TABLE>
<CAPTION>
Number of Votes
----------------------------------------------------
Abstentions and
Nominee For Withheld Authority Broker Non-Votes
------- ------------ ------------------ ----------------
<S> <C> <C> <C>
Lealon L. Sargent 8,436,229 1,000 1,820
Mark W. Files 8,436,229 1,000 1,820
(2) Approval of Stock Option Plan
Number of Votes
----------------------------------------------------
Abstentions and
For Withheld Authority Broker Non-Votes
------------ ------------------ ----------------
8,389,717 49,032 300
</TABLE>
13
<PAGE>
Item 5 - Other Information
Not Applicable
Item 6 -
(a) Exhibits
10.2 Credit Agreement dated July 21, 2000 among PetroCorp Incorporated, PCC
Energy Limited, PCC Energy Corp., Toronto Dominion (Texas), Inc., The
Toronto-Dominion Bank, TD Securities (USA), Inc. and various lenders
signatory thereto.
27 Financial Data Schedule
(b) Reports on Form 8-K
Not Applicable
14
<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 duly authorized officer.
PETROCORP INCORPORATED
----------------------
(Registrant)
Date: August 11, 2000 /s/ STEVEN R. BERLIN
--------------- --------------------------------------------
Steven R. Berlin
Chief Financial Officer and Secretary
(On behalf of the Registrant and as the
Principal Financial Officer)
15
<PAGE>
EXHIBIT INDEX
Exhibit No. Description
----------- -----------
10.2 Credit Agreement dated July 21, 2000 among PetroCorp
Incorporated, PCC Energy Limited, PCC Corp., Toronto Dominion
(Texas), Inc., The Toronto-Dominion Bank, TD Securities (USA),
Inc. and various lenders signatory thereto.
27 Financial Data Schedule
