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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(MARK ONE)
{x} QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarter ended June 30, 1995
{ } TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transaction period from ______ to ________
COMMISSION FILE NUMBER 0-9592
LOMAK PETROLEUM, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 34-1312571
(State of incorporation) (I.R.S. Employer
Identification No.)
500 THROCKMORTON STREET, FT. WORTH, TEXAS 76102
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (817) 870-2601
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
--- ---
11,958,729 Common Shares were outstanding on August 7, 1995.
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PART I. FINANCIAL INFORMATION
The financial statements included herein have been prepared in
conformity with generally accepted accounting principles and should be read in
conjunction with the December 31, 1994 Form 10-K filing. The statements are
unaudited but reflect all adjustments which, in the opinion of management, are
necessary to fairly present the Company's financial position and the results of
operations.
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LOMAK PETROLEUM, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
December 31, June 30,
1994 1995
------------ ------------
(unaudited)
ASSETS
Current assets
Cash and equivalents . . . . . . . . . . . . . . . . . . $ 4,897 $ 5,307
Accounts receivable . . . . . . . . . . . . . . . . . . 9,431 8,216
Inventory and other . . . . . . . . . . . . . . . . . . 1,592 1,417
------------ -----------
15,920 14,940
------------ -----------
Oil and gas properties, successful efforts method . . . . 133,373 155,110
Accumulated depletion, depreciation and amortization . (20,409) (25,866)
------------ -----------
112,964 129,244
------------ -----------
Gas transportation and field service assets . . . . . . . 16,125 16,295
Accumulated depreciation . . . . . . . . . . . . . . . (3,241) (3,257)
------------ -----------
12,884 13,038
------------ -----------
$ 141,768 $ 157,222
============ ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable . . . . . . . . . . . . . . . . . . . . $ 8,421 $ 5,941
Accrued liabilities . . . . . . . . . . . . . . . . . . 5,790 3,750
Current portion of debt (Note 5) . . . . . . . . . . . . 707 503
------------ -----------
14,918 10,194
------------ -----------
Senior debt (Note 5) . . . . . . . . . . . . . . . . . . 61,885 71,132
Deferred taxes (Note 10) . . . . . . . . . . . . . . . . 16,390 17,012
Commitments and contingencies (Note 6) . . . . . . . . .
Minority interest . . . . . . . . . . . . . . . . . . . . 5,327 -
Stockholders' equity (Notes 7 and 8)
Preferred stock, $1 par, 2,000,000 shares authorized,
7-1/2% convertible preferred, 200,000 issued
(liquidation preference $5,000,000) . . . . . . . . 200 200
Common stock, $.01 par, 20,000,000 shares authorized,
9,754,010 and 11,928,047 issued . . . . . . . . . . 97 119
Capital in excess of par value . . . . . . . . . . . . . 50,495 64,476
Retained earnings (deficit) . . . . . . . . . . . . . . . (7,544) (5,911)
------------ -----------
43,248 58,884
------------ -----------
$ 141,768 $ 157,222
============ ===========
SEE ACCOMPANYING NOTES.
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LOMAK PETROLEUM, INC.
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Three Months Ended Six Months Ended
June 30, June 30,
---------------------- -----------------------
1994 1995 1994 1995
------- ------- ------- -------
(unaudited) (unaudited)
Revenues
Oil and gas sales . . . . . . . . . . . . . . . . $ 6,349 $ 7,903 $11,569 $15,333
Field services . . . . . . . . . . . . . . . . . . 2,216 2,350 4,261 4,893
Gas transportation and marketing . . . . . . . . . 503 729 908 1,515
Interest and other . . . . . . . . . . . . . . . . 207 606 243 751
------- ------- ------- -------
9,275 11,588 16,981 22,492
------- ------- ------- -------
Expenses
Direct operating . . . . . . . . . . . . . . . . . 2,640 3,289 4,818 6,438
Field services . . . . . . . . . . . . . . . . . . 1,662 1,278 3,271 2,876
Gas transportation and marketing . . . . . . . . . 115 191 216 390
Exploration . . . . . . . . . . . . . . . . . . . 95 145 142 275
General and administrative . . . . . . . . . . . . 583 761 1,057 1,519
Interest . . . . . . . . . . . . . . . . . . . . . 681 1,242 1,229 2,399
Depletion, depreciation and amortization . . . . . 2,689 3,104 5,016 6,105
------- ------- ------- -------
8,465 10,010 15,749 20,002
------- ------- ------- -------
Income before taxes . . . . . . . . . . . . . . . . . 810 1,578 1,232 2,490
Income taxes
Current . . . . . . . . . . . . . . . . . . . . . 64 31 66 47
Deferred . . . . . . . . . . . . . . . . . . . . . - 521 - 622
------- ------- ------- -------
64 552 66 669
------- ------- ------- -------
Net income . . . . . . . . . . . . . . . . . . . . . $ 746 $ 1,026 $ 1,166 $ 1,821
======= ======= ======= =======
Net income applicable to
common shares . . . . . . . . . . . . . . . . . . $ 652 $ 932 $ 979 $ 1,633
======= ======= ======= =======
Earnings per common share . . . . . . . . . . . . . . $ .07 $ .08 $ .11 $ .14
======= ======= ======= =======
Weighted average shares outstanding . . . . . . . . . 9,118 12,075 8,942 11,315
======= ======= ======= =======
SEE ACCOMPANYING NOTES.
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LOMAK PETROLEUM, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
Six Months Ended June 30,
-------------------------------
1994 1995
-------- --------
(unaudited)
Cash flows from operations:
Net income . . . . . . . . . . . . . . . . . . . . . $ 1,166 $ 1,821
Adjustments to reconcile net income to
net cash provided by operations:
Depletion, depreciation and amortization . . . . 5,016 6,104
Deferred income taxes . . . . . . . . . . . . . 54 622
Changes in working capital net of
effects of purchases of businesses:
Accounts receivable . . . . . . . . . . . . . 857 1,280
Inventory and other . . . . . . . . . . . . . 7 174
Accounts payable . . . . . . . . . . . . . . 116 (2,480)
Accrued liabilities . . . . . . . . . . . . . (2,014) (2,041)
Gain on sale of assets and other . . . . . . . . (290) (712)
-------- --------
Net cash provided by operations . . . . . . . . . . . 4,912 4,768
Cash flows from investing:
Acquisition of businesses, net of cash . . . . . (7,992) -
Oil and gas properties . . . . . . . . . . . . . (10,967) (13,729)
Additions to property and equipment . . . . . . (538) (1,373)
Proceeds on sale of assets . . . . . . . . . . . 1,202 1,741
-------- --------
Net cash used in investing . . . . . . . . . . . . (18,295) (13,361)
Cash flows from financing:
Proceeds from indebtedness . . . . . . . . . . . 17,761 9,246
Repayments of indebtedness . . . . . . . . . . . (249) (180)
Preferred stock dividends . . . . . . . . . . . (187) (187)
Proceeds from common stock issuance . . . . . . 548 181
Repurchase of common stock . . . . . . . . . . . - (57)
-------- --------
Net cash provided by financing . . . . . . . . . . . 17,873 9,003
-------- --------
Change in cash . . . . . . . . . . . . . . . . . . . 4,490 410
Cash and equivalents at beginning of period . . . . . 2,019 4,897
-------- --------
Cash and equivalents at end of period . . . . . . . . $ 6,509 $ 5,307
======== ========
SEE ACCOMPANYING NOTES.
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LOMAK PETROLEUM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) ORGANIZATION:
Lomak Petroleum, Inc. ("Lomak"), is engaged in the acquisition,
development and enhancement of oil and gas properties in the United States.
The Company was founded in 1976. Until 1988, Lomak primarily pursued drilling
opportunities in the Appalachian Basin. In 1988, the Company shifted its focus
to growth through acquisitions and subsequently expanded its core operating
areas to include Texas and Oklahoma. In 1993, Lomak began to develop its
inventory of development projects. Since 1988, sixty-one acquisitions have
been consummated at a total cost of $138 million.
Lomak's acquisition effort is focused on properties with purchase
prices of less than $30 million within its core areas of operation. Management
believes these purchases are less competitive than those involving larger
property interests. To the extent purchases continue to be made primarily
within existing core areas, efficiencies in operations, drilling, gas marketing
and administration should be realized. In 1993, Lomak initiated a program to
exploit its inventory of over 500 development projects. In the future, Lomak
expects its growth to be driven by a combination of acquisitions and
development.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
BASIS OF PRESENTATION
The accompanying financial statements include the accounts of the
Company, all majority owned subsidiaries and its pro rata share of the assets,
liabilities, income and expenses of certain oil and gas properties. Temporary
investments with an initial maturity of ninety days or less are considered cash
equivalents.
OIL AND GAS PROPERTIES
The Company follows the successful efforts method of accounting.
Exploratory costs which result in the discovery of reserves and the cost of
development wells are capitalized. Geological and geographical costs, delay
rentals and costs to drill unsuccessful exploratory wells are expensed.
Depletion is provided on the unit-of-production method. Gas is converted to
equivalent barrels at the rate of six Mcf per barrel. The depletion rates per
equivalent barrel produced were $4.92 and $4.38 respectively, in the second
quarters of 1994 and 1995. Approximately $12.9 million and $10.5 million of
oil and gas properties were classified as proved undeveloped or unproved and,
therefore, not subject to depletion as of December 31, 1994 and June 30, 1995,
respectively. These costs are assessed periodically to determine whether their
value has been impaired, and if impairment is indicated, the amount of any
impairment is charged to expense.
GAS TRANSPORTATION AND FIELD SERVICE ASSETS
The Company owns and operates approximately 500 miles of gas gathering
lines in proximity to its principal gas properties. Depreciation is calculated
on the straight-line method based on estimated useful lives ranging from four
to fifteen years.
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The Company receives fees for providing field related services. These
fees are recognized as earned. Depreciation is calculated on the straight-line
method based on estimated useful lives ranging from one to five years, except
for two buildings which were sold in the first six months of 1995. In the
third quarter, the Company purchased a new larger office building, to replace
the two mentioned above, which will be depreciated over a twenty year period
ending in 2015.
In September 1994, the Company sold substantially all of its water
hauling and disposal and well servicing assets located in the Appalachian
region for $1.8 million, with the potential to earn an additional $400,000
million if certain conditions are met. These assets were used in the
operations of the Company's brine hauling and disposal and well servicing
subsidiaries.
NET INCOME PER SHARE
Net income per share is computed by subtracting preferred dividends
from net income and dividing by the weighted average number of common and
common equivalent shares outstanding. The calculation of fully diluted
earnings per share assumes conversion of convertible securities when the result
would be dilutive. Outstanding options and warrants are included in the
computation of net income per common share when their effect is dilutive.
RECLASSIFICATIONS
Certain reclassifications have been made to prior period presentations
to conform with current period classifications.
(3) ACQUISITIONS AND DEVELOPMENT:
Since 1988, the Company has acquired $138 million of oil and gas
properties and field service assets. During 1994, the Company completed $63
million of acquisitions. In the first six months of 1995, acquisitions
totaling $8 million were completed excluding the completion of the Red Eagle
Resources transaction in February. In July 1995, the Company announced the
acquisition of additional properties in Pennsylvania and West Virginia for
$20.2 million. The 1994 and 1995 acquisitions were funded by working capital,
advances under a revolving credit facility and the issuance of common stock.
These acquisitions are discussed below.
1995 ACQUISITIONS
Big Lake Area. The Company purchased interests in 135 wells in the
Big Lake area of West Texas for $1.9 million. The Company also assumed
operations of these properties.
Okeene Area. The Company purchased interests in 56 wells and a
waterflood project for $4.8 million. The Company assumed operations of these
properties.
Laura LaVelle Area. The Company purchased interests in 3 wells
located in the Gaston field of East Texas for $455,000.
Gulf Coast Area. The Company purchased interest in 2 wells located in
the Gulf Coast area of South Texas for $407,000.
Ohio Trend Area. The Company acquired certain interests in Lomak
managed partnerships for $151,000.
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1994 ACQUISITIONS
Red Eagle Resources Corporation. In December 1994, the Company had
acquired effective control of Red Eagle principally through the purchase of two
common stockholders' holdings. On February 15, 1995, the remaining
stockholders of Red Eagle common stock voted to approve the merger of Red Eagle
with a wholly owned subsidiary of the Company in exchange for approximately 2.2
million shares of the Company's common stock. The total purchase price was
approximately $31 million. The additional equity of Red Eagle acquired on
February 15, 1995 is reflected as minority interest on the Company's balance
sheet at December 31, 1994. Red Eagle's assets included interests in
approximately 370 producing wells located primarily in the Okeene Area of
Oklahoma's Anadarko Basin. At June 30, 1995, Red Eagle owned interests in 370
wells and managed thirty-three limited partnerships.
Grand Banks Energy Company. The Company purchased Grand Banks for
$3.7 million. Grand Banks' assets included interests in 182 producing wells
located in west Texas, essentially all are now operated by the Company. Grand
Banks owned an average working interest of 70% in the producing reserves, of
which 60% was oil. Approximately 40% of Grand Banks' proved reserves are
attributed to the Mills-Strain Unit located in the Sharon Ridge Field of
Mitchell County, Texas. The Mills-Strain Unit is a waterflood unit producing
from the Clearfork Formation at a depth of approximately 2,000 feet and has a
remaining reserve life of over 20 years. The Company also purchased, for $1.2
million, additional interests in a number of the Grand Banks properties.
Gillring Oil Company. The Company acquired Gillring for $11.5
million. Gillring's assets included $5.2 million of working capital and
interests in 106 producing oil and gas wells located in south Texas. Gillring
owned an average working interest of 80% in the producing reserves of which 80%
were gas. The Gillring properties are located principally in two fields
producing from the Wilcox and Vicksburg formations ranging in depths from 4,000
to 11,000 feet. Subsequent to the purchase of Gillring, the Company acquired,
for $2.1 million, the limited partner interests and associated debt of a
partnership for which Gillring acted as general partner.
Big Lake Area. The Company acquired from three parties interests in
51 producing wells in the Big Lake Area of west Texas for $1.7 million. The
Company became operator of 36 additional wells in connection with this
acquisition.
Laura Lavelle Area. The Company purchased interests in 67 wells
located in Texas for 8 million. The majority of the acquisition related to the
Laura LaVelle Field located in east Texas, where the Company now operates sixty
wells.
Meadville Area. Additional interests in 436 wells operated by the
Company were purchased for $3.7 million.
Ohio Trend Area. The Company acquired interests in 49 wells located
in southern Ohio for $1.0 million and certain interests in Lomak managed
partnerships for $289,000.
Okeene Area. The Company acquired interests associated with Red Eagle
in 70 wells located in the Anadarko Basin of Oklahoma for $1.7 million.
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DEVELOPMENT
Beginning in late 1993, the Company instituted a development program
to compliment its acquisition activities. Approximately $3.7 million and $9.5
million of development expenditures were incurred in 1993 and 1994,
respectively. The 1994 activity included the drilling of 71 wells and the
recompletion of 20 wells. At year end 1994, over 500 proven recompletion and
drilling projects had been identified on the Company's properties. In 1995,
$10-$12 million is expected to be expended on development activities, of which
$3.5 million was spent in the first six months. During this period, sixteen
wells were drilled or recompleted.
The Company intends to continue to expand its asset base through
additional acquisitions of oil and gas properties within its areas of
operations. As the Company expands its inventory of development projects, a
larger portion of its growth will be derived from their exploitation. Lomak
has acquired oil and gas in a variety of forms. Besides acquiring direct
interests, Lomak has acquired companies and partnerships owning such assets.
After acquiring these entities, the Company then takes the action necessary to
acquire any remaining interests with the goal of dissolving the acquired entity
and owning the assets directly. All acquisitions to date have been accounted
for as purchases. Accordingly, the results of operations are included in the
accompanying financial statements from the respective dates of acquisition.
UNAUDITED PRO FORMA FINANCIAL INFORMATION
The following table presents unaudited, pro forma operating results as
if the transactions had occurred at the beginning of each period presented.
The pro forma operating results include the following acquisitions, all of
which were accounted for as purchase transactions; (i) the purchase of Grand
Banks Energy Company, (ii) the purchase of Gillring Oil Company, and (iii) the
purchase of Red Eagle Resources Corporation.
Six Months Ended June 30,
------------------------------------
1994 1995
---------------- ---------------
(in thousands except per share data)
Revenues . . . . . . . . . $ 24,514 $ 22,492
Net income . . . . . . . . 3,422 1,886
Earnings per share . . . . .27 .15
The pro forma operating results have been prepared for comparative
purposes only. They do not purport to present actual results had the
acquisitions been made at the beginning of each period presented or to
necessarily be indicative of future operations. Included in the 1994 pro forma
financial information are revenues regarding Red Eagle partnership activities
which contributed $.12 per share. These activities have been discontinued and
therefore are not reflected in the 1995 results.
(4) NOTES RECEIVABLE:
At June 30, 1995, the Company had $165,000 of notes receivable from
three of its officers, which were issued in connection with the exercise of
stock options held by them. In July 1995, notes from two of the officers
amounting to $105,000 were repaid. The remaining principal is due beginning in
March 1997. Interest on the remaining $60,000 of notes is payable quarterly at
a rate of prime plus one percent.
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(5) INDEBTEDNESS:
The Company had the following debt outstanding as of the dates shown.
Interest rates at June 30, 1995 are shown parenthetically and dollar amounts
are stated in thousands:
December 31, June 30,
1994 1995
---------- ------------
(unaudited)
Bank credit facility (7.71%) . . . . . . . $ 61,870 $ 71,100
Other (5.90% - 9.25%) . . . . . . . . . . . 722 535
---------- -----------
62,592 71,635
Less amounts due within one year . . . . . 707 503
---------- -----------
Senior debt, net . . . . . . . . . . $ 61,885 $ 71,132
========== ===========
The Company maintains a $150 million revolving bank credit facility.
The facility provides for a borrowing base which is subject to semi-annual
redeterminations. At August 11, 1995, the borrowing base on the credit
facility was $75 million. Upon completion of a pending acquisition, the
borrowing base will increase to $90 million. The facility bears interest at
prime rate or LIBOR plus 1.50% (which reduces to 1.25% in certain
circumstances) and is secured by substantially all of the Company's oil and gas
properties. Interest is payable quarterly and the loan is payable in sixteen
quarterly installments beginning October 1, 1997. A commitment fee of 3/8% of
the undrawn balance is payable quarterly. It is the Company's policy to extend
the term period of the credit facility annually.
The Company's other debt is comprised of a joint venture credit
facility and secured equipment financings. The joint venture credit facility
bears interest at prime rate plus 3/4% and is payable in quarterly installments
through October 1, 1995. At June 30, 1995 the Company owned 50% of the joint
venture and therefore included 50% (or $372,000) of the amount outstanding
under the joint venture credit facility. Until repaid in full in June 1995,
the Company was liable for an industrial revenue bond in connection with its
office building in Ohio. This bond bore interest at 70% of the prime rate.
The debt agreements contain various covenants relating to net worth,
working capital maintenance and financial ratio requirements. Interest paid
during the six months ended June 30, 1994 and 1995 totaled $1.1 million and
$2.4 million, respectively.
(6) COMMITMENTS AND CONTINGENCIES:
In January 1995, a lawsuit (the "Lawsuit") was filed in the Delaware
Court of Chancery, New Castle County, against Red Eagle Resources Corporation,
each of the members of the Board of Directors of Red Eagle and the Company.
The Plaintiff seeks to represent all holders (the "Class") of Red Eagle common
stock, excluding the Red Eagle Directors and Lomak. The Lawsuit seeks, among
other remedies, some of which are in the alternative, certification of the
Lawsuit as a class action, designation of the Plaintiff as representative of
the Class and Plaintiff's counsel as counsel to the Class; declaration that the
Red Eagle Directors breached their fiduciary duties owed to the Class; and
award of unspecified compensatory damages, prejudgment interest and costs and
disbursements of the Lawsuit including counsel fees.
The Company is involved in various other legal actions and claims
arising in the ordinary course of business. In the opinion of management, such
litigation and claims are likely to be resolved without material adverse effect
on the Company's financial position.
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(7) PREFERRED SHARES AND WARRANTS:
In June 1993, $5,000,000 (200,000 shares) of 7.5% cumulative
convertible exchangeable preferred stock ("7.5% Preferred") was privately
placed. The 7.5% Preferred is convertible, at the option of the holders, into
576,945 shares of common stock, at an average conversion price of $8.67 per
share. Beginning in July 1995, the Company may convert the 7.5% Preferred into
common stock if the closing price of the common stock has exceeded $11.475 per
share for at least twenty of the thirty preceding trading days. Beginning in
July 1996, the Company may redeem the 7.5% Preferred at a 7.5% premium to
liquidation value. Holders of the 7.5% Preferred are entitled to two votes per
share on matters presented to the shareholders. At the Company's option, it
can exchange the 7.5% Preferred for convertible subordinate notes due July 1,
2003. The notes carry the same conversion and redemption terms as the 7.5%
Preferred.
Warrants to acquire 40,000 shares of common stock at a price of $7.50
per share were outstanding at June 30, 1995. These warrants expire in December
1996.
(8) STOCK OPTION AND PURCHASE PLANS:
The Company maintains a Stock Option Plan which authorizes the grant
of options of up to 1.5 million shares of common stock. Under the plan,
incentive and non-qualified options may be issued to officers, key employees
and consultants. The plan is administered by the Compensation Committee of the
Board. All options issued under the plan vest 30% after one year, 60% after
two years and 100% after three years. During the six months ended June 30,
1995 options covering 20,001 shares were exercised at $3.75 per share. At June
30, 1995, a total of 933,149 options were outstanding under the plan, of which
370,994 options were exercisable. The exercise prices of outstanding options
in the plan range from $3.375 to $9.375 per share.
In 1994, the stockholders approved the 1994 Outside Directors Stock
Option Plan (the "Directors Plan"). The Directors Plan covers a maximum of
200,000 shares and only non-employee directors are eligible under it. At June
30, 1995, 44,000 options were outstanding under the Directors Plan and of which
3,600 were exercisable. The exercise price of the outstanding options is $7.75
per share.
In 1994, the stockholders approved the 1994 Stock Purchase Plan (the
"1994 Plan") which authorizes the sale of up to 500,000 shares of common stock
to officers, directors, key employees and consultants. Under the Plan, the
right to purchase shares at prices ranging from 50% to 85% of market value may
be granted. The Company had a 1989 Stock Purchase Plan (the "1989 Plan") which
was identical to the 1994 Plan except that it covered 333,333 shares. Upon
adoption of the 1994 Plan, the 1989 Plan was terminated. The plan is
administered by the Compensation Committee of the Board. During the six months
ended June 30, 1995, the Company sold 37,928 unregistered common shares to
officers and outside directors. Through June 30, 1995, a total of 340,000
unregistered shares of common stock had been sold under the stock purchase
plans, for a total consideration of approximately $1.5 million at prices equal
to 75% of market value at the time of the sale.
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(9) BENEFIT PLAN:
The Company maintains a 401(K) Plan for the benefit of its employees.
The Plan permits employees to make contributions on a pre-tax salary reduction
basis. The Company makes discretionary contributions to the Plan annually.
Company contributions for 1994 totaled $226,000.
(10) INCOME TAXES:
In 1993, the Company adopted FASB Statement No. 109, "Accounting for
Income Taxes". As permitted by Statement 109, the Company elected not to
restate prior year financial statements. As a result of tax basis in excess of
the basis on the financial statements at January 1, 1993, the Company estimated
deferred tax assets of $2.6 million and deferred tax liabilities of $900,000,
for net deferred tax assets of $1.7 million. Due to uncertainty as to the
Company's ability to realize the tax benefit, a valuation allowance was
established for the full amount of the net deferred tax assets. In 1993, 1994
and the first half of 1995, income taxes were reduced from the statutory rate
of 34% by approximately $500,000, $900,000 and $200,000, respectively through
realization of a portion of the valuation allowance.
During 1993, the Company acquired Mark Resources Corporation, a
taxable business combination accounted for as a purchase. Deferred tax assets
of $3.9 million and a deferred tax liability of $8.1 million were recorded in
the transaction. During 1994, the Company acquired Gillring Oil Company and
Grand Banks Energy Company, taxable business combinations accounted for as
purchases. Deferred tax assets of $3.5 million and deferred tax liabilities of
$3.4 million were recorded in these transactions. In late 1994, the Company
acquired Red Eagle Resources Corporation, a taxable business combination
accounted for as a purchase. Deferred tax liabilities of $12.7 million and
deferred tax assets of $500,000 were recorded in this transaction.
For the six months ended June 30, 1994 and 1995, the Company made a
provision for federal income taxes of $66,000 and $547,000, respectively. At
June 30, 1995, the Company had available for federal income tax reporting
purposes net operating loss carryovers of approximately $11.7 million which are
subject to annual limitations as to their utilization and expire between 1996
and 2009. The Company has alternative minimum tax net operating loss
carryovers of $6.9 million which are subject to annual limitations as to their
utilization and expire from 1996 to 2009. The Company has statutory depletion
carryover of approximately $8.5 million and an alternative minimum tax credit
carryover of $700,000. The statutory depletion carryover and alternative
minimum tax credit carryover are not subject to limitation or expiration.
(11) MAJOR CUSTOMERS:
The Company markets its oil and gas production on a competitive basis.
The type of contract under which gas production is sold varies but can
generally be grouped into three categories: (a) life-of-the-well; (b) long-term
(1 year or longer); and (c) short-term contracts which may have a primary term
of one year, but which are cancelable at either party's discretion in 30-120
days. Over 70% of developed gas reserves are sold under market sensitive
contracts or fixed price contracts which expire within the next twelve months.
For the six months ended June 30, 1995, no customer accounted for 10% or more
of the Company's total oil and gas revenues. Oil is sold on a basis such that
the purchaser can be changed on 30 days notice. The price received is
generally equal to a posted price set by the major purchasers in the area. The
Company sells to oil purchasers on a basis of price and service.
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(12) OIL AND GAS ACTIVITIES:
The following summarizes selected information with respect to oil and
gas activities (in thousands):
December 31, June 30,
1994 1995
---------- ----------
(unaudited)
Capitalized costs:
Proved properties . . . . . . . . . . . . . . . $ 132,775 $ 153,163
Unproved properties . . . . . . . . . . . . . . 598 1,947
---------- ----------
Total . . . . . . . . . . . . . . . . . . . 133,373 155,110
Accumulated depletion, depreciation and
amortization . . . . . . . . . . . . . . . . 20,409 25,866
---------- ----------
Net capitalized costs . . . . . . . . . . . $ 112,964 $ 129,244
========== ==========
Six Months
Year Ended Ended
December 31, June 30,
1994 1995
---------- ----------
(unaudited)
Costs incurred:
Property acquisition . . . . . . . . . . . . . $ 59,501 $ 18,561
Development . . . . . . . . . . . . . . . . . . 9,518 3,534
Exploration . . . . . . . . . . . . . . . . . . 192 123
---------- ----------
Total costs incurred . . . . . . . . . . . $ 69,211 $ 22,218
========== ==========
(13) SUBSEQUENT EVENT:
On June 30, 1995, Lomak Petroleum, Inc. ("Lomak") executed a purchase
and sale agreement with a subsidiary of Parker & Parsley Petroleum Company to
acquire properties in Pennsylvania and West Virginia for $20.2 million. The
acquisition includes approximately 825 producing gas wells, 300 miles of gas
gathering lines, 16,400 net acres of undeveloped leases and associated real
estate and equipment. Over 90% of the reserves are located in proximity to
Lomak's existing Pennsylvania operations. The properties are also estimated to
contain over 50 proven drilling locations.
(14) RELATED PARTY TRANSACTIONS:
Mr. Edelman, Chairman of the Company, is also an executive officer and
shareholder of Snyder Oil Corporation ("SOCO"). At June 30, 1995, Mr. Edelman
owned 6.4% of the Company's common stock. In 1994, the Company repurchased
30,000 shares of its common stock from SOCO for $240,000. The purchase price
was based upon the prior day's closing price for the stock as quoted on NASDAQ.
By June 30, 1995, SOCO had sold all of its shares of the Company's common
stock.
During 1994 and the six months ended June 30, 1995, the Company
incurred fees of $369,000 and $145,000, respectively, to the Hawthorne Company
in connection with acquisitions. Mr. Aikman, a director of the Company, is an
executive officer and a principal owner of the Hawthorne Company. The fees
were similar to those paid by the Company to third parties for similar
services.
13
14
MANAGEMENT'S DISCUSSION AND ANALYSIS
------------------------------------
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
------------------------------------------------
FACTORS AFFECTING FINANCIAL CONDITION AND LIQUIDITY
During the three months ended June 30, 1995, the Company added $5.4
million of assets and increased stockholders' equity by $1.2 million. The
growth was achieved primarily through acquisitions and development. Net income
for the second quarter of 1995 increased 38% to $1 million as compared to
$700,000 in the prior year. The increases were primarily due to higher
production volumes attributable to acquisitions and development projects.
Working capital at June 30, 1995 was $4.7 million, representing a $3.7 million
increase over the corresponding amount at December 31, 1994. At June 30, 1995,
the Company had $5.3 million in cash and total assets of $157 million. During
the quarter, senior debt rose from $66.8 million to $71.6 million.
At June 30, 1995, capitalization totaled $147 million, of which 40%
was represented by stockholders' equity, 48% by long-term debt and the
remainder by deferred taxes. Essentially all of the long-term debt is
comprised of borrowings under a $150 million revolving bank credit facility.
The facility currently provides for quarterly payments of interest with
principal payments beginning October 1997. On August 11, 1995, the available
borrowing base under the facility was $75 million, with $71.1 million
outstanding. Upon completion of a pending acquisition, the borrowing base will
increase to $90 million.
For the three months ended June 30, 1995, cash flow from operations
totaled $4.8 million, a 36% increase over the prior year period. Cash flow
plus bank borrowings funded $9.2 million of acquisitions and development
expenditures. The Company expects to continue to fund its acquisition and
development activities from internally generated funds, borrowings under its
credit facility and the issuance of debt and equity securities. During the
next twelve months, non-discretionary capital requirements include $375,000 of
preferred dividends and $503,000 of debt principal payments. Additionally, the
Company expects to continue its acquisition and development activities in 1995.
Although these expenditures are principally discretionary, the Company is
currently projecting that it will spend $10-$12 million on development
activities in 1995, of which $3.5 million was incurred in the first six months
of 1995. Cash flow from operations is expected to be more than sufficient to
fund development expenditures with the remainder available to fund
acquisitions. In 1994, the Company instituted a program to repurchase its
common stock from stockholders who own less than 100 shares. Through June 30,
1995, a total of 37,700 shares had been repurchased for $309,500, of which
8,600 were repurchased in 1995.
All oil and gas properties are subject to production declines over
time. Through acquisitions, the Company has increased its reserves in each of
the last five years. It is anticipated that the Company will continue to build
reserves primarily through acquisitions and development over the next several
years. The profitability of production and, to a lesser extent, other areas of
the Company's business are influenced by energy prices.
RESULTS OF OPERATIONS
The Company reported net income for the three months ended June 30,
1995 of $1 million, a 38% increase over second quarter 1994. The increase is
the result of higher production volumes attributable to acquisitions and
development.
14
15
During the quarter, oil and gas production volumes increased 35% to
615,000 equivalent barrels, an average of 6,762 BOE per day. The higher
production volumes were partially offset by an 8% decrease in the average price
received per BOE of production from $13.90 to $12.85. The average oil price
increased 10% from $15.56 to $17.19 per barrel while average gas prices dropped
19% from $2.17 to $1.75 per Mcf. As a result of the Company's larger base of
producing properties, operating expenses increased 25% to $3.3 million.
However, the average operating cost per BOE produced decreased 8% from $5.79 in
1994 to $5.34 in 1995.
Gas transportation and marketing revenues rose 45% to $729,000 versus
$503,000 in the second quarter of 1994. The higher revenues were due primarily
to the increasing activity in the marketing of oil and gas and increased gas
transportation revenues on its growing number of operated properties. Coupled
with this increase in gas transportation and marketing revenues was a 66%
increase in associated expenses for the year. The disproportionate increase in
expenses was entirely due to an increase in the amount of general and
administrative expenses allocated to these activities.
Field services revenues increased 6% in the second quarter of 1995,
despite the sale of virtually all well servicing and brine hauling and disposal
assets in Appalachia in late 1994. The revenues eliminated due to the sale
were offset by higher well operating revenues on properties acquired in 1994.
Additionally, field service activities increased significantly in the second
quarter 1995 due to the Red Eagle acquisition. Field services expenses
decreased 23% in the second quarter of 1995 versus 1994. The increased costs
of well operations were more than offset by the elimination of costs resulting
from the 1994 sale of the well servicing and brine hauling and disposal
activities.
Exploration expense increased 53% due to the Company's increased
involvement in acreage acquisition, seismic and exploratory drilling. All of
these expenditures relate to further expanding the Company's existing core
operating areas.
General and administrative expenses increased 31% from $583,000 in
1994 to $761,000 in 1995. As a percentage of revenues, general and
administrative expenses were 7% in the second quarter 1995, level with 1994.
Interest and other income rose 193% primarily due to a higher level of
non-strategic property sales. Interest expense increased 82% to $1.2 million
primarily as a result of the higher average outstanding debt balance during the
period due to the financing of acquisitions and, to a lesser extent, rising
interest rates.
Depletion, depreciation and amortization expense rose 15% as a result
of increased production volumes. Offsetting the effect of higher production
volumes was an 11% reduction in the depletion rate to $4.38 per BOE in the
second quarter of 1995.
15
16
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
In January 1995, a lawsuit (the "Lawsuit") was filed in the Delaware
Court of Chancery, New Castle County, against Red Eagle Resources Corporation,
each of the members of the Board of Directors of Red Eagle and the Company.
The Plaintiff seeks to represent all holders (the "Class") of Red Eagle common
stock, excluding the Red Eagle Directors and Lomak. The Lawsuit seeks, among
other remedies, some of which are in the alternative, certification of the
Lawsuit as a class action, designation of the Plaintiff as representative of
the Class and Plaintiff's counsel as counsel to the Class; declaration that the
Red Eagle Directors breached their fiduciary duties owed to the Class; and
award of unspecified compensatory damages, prejudgment interest and costs and
disbursements of the Lawsuit including counsel fees.
Items 2 - 5. Not applicable
Item 6. Exhibits and Report on Form 8-K
(a) Exhibits
11.1 Statement re: computation of per share earnings for the three
months ended June 30, 1994 and 1995, filed herewith.
11.2 Statement re: computation of per share earnings for the six
months ended June 30, 1994 and 1995, filed herewith.
27 Financial data schedule
(b) Reports on Form 8-K
Current report on Form 8-K dated July 13, 1995 regarding the
acquisition of oil and gas property from a subsidiary of
Parker & Parsley Petroleum Company.
16
17
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.
LOMAK PETROLEUM, INC.
By: /s/ (Thomas W. Stoelk)
--------------------------------
Thomas W. Stoelk
Vice President - Finance
Chief Financial Officer
August 11, 1995
17
18
EXHIBIT INDEX
Sequentially
Exhibit Number Description of Exhibit Numbered Page
- -------------- ---------------------- -------------
11.1 Statement re: computation of 19
per share earnings for the
three months ended June 30,
1994 and 1995, filed herewith.
11.2 Statement re: computation of 20
per share earnings for the six
months ended June 30, 1994 and
1995, filed herewith.
27 Financial data schedule 21
18
1
EXHIBIT 11.1
LOMAK PETROLEUM, INC. AND SUBSIDIARIES
Computation of Earnings Per Common
and Common Equivalent Shares
(In thousands, except per share data)
Three Months Ended June 30,
-----------------------------
1994 1995
---------- ----------
Average shares outstanding 8,974 11,901
Net effect of conversion of warrants and stock options 144 174
---------- -----------
Total primary and fully diluted shares 9,118 12,075
========== ===========
Net income $ 746 $ 1,026
Less preferred stock dividends (94) (94)
---------- -----------
Net income applicable to common shares $ 652 $ 932
========== ===========
Earnings per common share $ .07 $ .08
========== ===========
19
1
EXHIBIT 11.2
LOMAK PETROLEUM, INC. AND SUBSIDIARIES
Computation of Earnings Per Common
and Common Equivalent Shares
(In thousands, except per share data)
Six Months Ended June 30,
-----------------------------
1994 1995
---------- ----------
Average shares outstanding 8,790 11,178
Net effect of conversion of warrants and stock options 152 137
---------- -----------
Total primary and fully diluted shares 8,942 11,315
========== ===========
Net income $ 1,166 $ 1,821
Less preferred stock dividends (187) (187)
---------- -----------
Net income applicable to common shares $ 979 $ 1,634
========== ===========
Earnings per common share $ .11 $ .14
========== ===========
20
5
1,000
6-MOS
DEC-31-1995
JAN-01-1995
JUN-30-1995
5,307
0
8,216
0
1,417
14,940
171,405
(29,123)
157,222
10,194
0
119
0
200
58,565
157,222
15,333
22,492
6,438
9,979
10,023
0
2,399
2,490
669
1,821
0
0
0
1,821
.14
.14
