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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, 1996
{ } 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
----- -----
14,684,824 Common Shares were outstanding on August 1, 1996.
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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, 1995 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 results of
operations.
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LOMAK PETROLEUM, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
December 31, June 30,
1995 1996
--------- ---------
(unaudited)
ASSETS
Current assets
Cash and equivalents ................................. $ 3,047 $ 1,901
Accounts receivable .................................. 14,938 23,232
Inventory and other .................................. 1,114 1,219
--------- ---------
19,099 26,352
--------- ---------
Oil and gas properties, successful efforts method ...... 210,073 273,179
Accumulated depletion, depreciation and amortization (33,371) (43,222)
--------- ---------
176,702 229,957
--------- ---------
Gas transportation and field service assets ............ 23,167 22,376
Accumulated depreciation ........................... (4,304) (4,644)
--------- ---------
18,863 17,732
--------- ---------
$ 214,664 $ 274,041
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable ..................................... $ 9,084 $ 12,901
Accrued liabilities .................................. 5,523 8,451
Current portion of debt (Note 5) ..................... 53 --
--------- ---------
14,660 21,352
--------- ---------
Long-term debt (Note 5) ................................ 83,035 119,380
Deferred taxes (Note 10) ............................... 17,726 22,547
Commitments and contingencies (Note 6) .................
Stockholders' equity (Notes 7 and 8)
Preferred stock, $1 par, 2,000,000 shares authorized,
7-1/2% convertible preferred, 200,000
and 0 issued...................................... 200 --
$2.03 convertible preferred, 1,150,000 issued
(liquidation preference $28,750,000) ............. 1,150 1,150
Common stock, $.01 par, 20,000,000 shares authorized,
13,322,738 and 14,657,574 issued ................. 133 147
Capital in excess of par value ....................... 101,773 109,657
Retained earnings (deficit) .......................... (4,013) (192)
--------- ---------
99,243 110,762
--------- ---------
$ 214,664 $ 274,041
========= =========
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,
-------------------------- ---------------------------
1995 1996 1995 1996
----------- ------------ ------------ -----------
(unaudited) (unaudited)
Revenues
Oil and gas sales ...................... $ 7,903 $17,166 $15,333 $33,254
Field services ......................... 2,350 3,546 4,893 6,846
Gas transportation and marketing ....... 729 1,448 1,515 2,476
Interest and other ..................... 606 614 751 711
------- ------- ------- -------
11,588 22,774 22,492 43,287
------- ------- ------- -------
Expenses
Direct operating ....................... 3,289 6,407 6,438 12,165
Field services ......................... 1,278 2,613 2,876 5,142
Gas transportation and marketing ....... 191 423 390 713
Exploration ............................ 145 311 275 491
General and administrative ............. 761 984 1,519 1,902
Interest ............................... 1,242 1,956 2,399 3,510
Depletion, depreciation and amortization 3,104 5,803 6,105 11,081
------- ------- ------- -------
10,010 18,497 20,002 35,004
------- ------- ------- -------
Income before taxes ....................... 1,578 4,277 2,490 8,283
Income taxes
Current ................................ 31 98 47 178
Deferred ............................... 521 1,399 622 2,721
------- ------- ------- -------
552 1,497 669 2,899
------- ------- ------- -------
Net income ................................ $ 1,026 $ 2,780 $ 1,821 $ 5,384
======= ======= ======= =======
Earnings per common share ................. $ .08 $ .15 $ .14 $ .29
======= ======= ======= =======
Weighted average shares outstanding ....... 12,075 14,962 11,315 14,323
======= ======= ======= =======
SEE ACCOMPANYING NOTES.
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LOMAK PETROLEUM, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
Six Months Ended June 30,
--------------------------------------
1995 1996
---------------- -----------------
(unaudited)
Cash flows from operations:
Net income ...................................................... $ 1,821 $ 5,384
Adjustments to reconcile net income to
net cash provided by operations:
Depletion, depreciation and amortization ................... 6,104 11,081
Deferred income taxes ...................................... 622 2,721
Changes in working capital net of
effects of purchases of businesses:
Accounts receivable ............................... 1,280 (7,380)
Inventory and other ............................... 174 (179)
Accounts payable .................................. (2,480) 3,760
Accrued liabilities and payroll and benefit costs . (2,041) 1,429
Gain on sale of assets and other ........................... (712) (370)
-------- --------
Net cash provided by operations ................................. 4,768 16,446
Cash flows from investing:
Acquisition of businesses, net of cash ..................... -- (13,950)
Oil and gas properties ..................................... (13,729) (47,349)
Additions to gas transportation and field service assets ... (1,373) (446)
Proceeds on sale of assets ................................. 1,741 1,727
-------- --------
Net cash used in investing .................................. (13,361) (60,018)
Cash flows from financing:
Proceeds from indebtedness, net of repayments .............. 9,066 36,292
Stock dividends ............................................ (187) (1,563)
Proceeds from common stock issuance, net of repurchases .... 124 7,697
-------- --------
Net cash provided by financing .................................. 9,003 42,426
-------- --------
Change in cash .................................................. 410 (1,146)
Cash and equivalents at beginning of period ..................... 4,897 3,047
-------- --------
Cash and equivalents at end of period ........................... $ 5,307 $ 1,901
======== ========
SEE ACCOMPANYING NOTES.
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LOMAK PETROLEUM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) ORGANIZATION:
Lomak Petroleum, Inc. ("Lomak" or the "Company") is an independent oil
and gas company engaged in the acquisition, production, development and
exploration of oil and gas in the United States. Lomak's core areas of operation
are located in the Mid-Continent and Appalachia regions. Since January 1, 1990,
the Company has made 68 acquisitions at a total cost of $256 million and $28
million has been expended on development and exploration activities. As a
result, proved reserves and production have each grown during this period at a
rate in excess of 80% per annum. At December 31, 1995, proved reserves totaled
298 Bcfe, having a pre-tax present value at constant prices of $229 million and
a reserve life of nearly 12 years.
Lomak's acquisition effort is focused on properties with 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, marketing and administration should
be realized. In 1992, Lomak began to exploit its growing inventory of
development projects. In 1994, the Company initiated exploration activities. In
the future, Lomak expects its growth to be driven by a combination of
acquisitions, development and exploration.
(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. Oil is converted to Mcfe
at the rate of six Mcf per barrel. The depletion rates per Mcfe produced were
$.73 and $.72 respectively, in the second quarters of 1995 and 1996.
Approximately $12.2 million and $12.3 million of oil and gas properties were
classified as proved undeveloped or unproved and, therefore, not subject to
depletion as of December 31, 1995 and June 30, 1996, respectively. These costs
are assessed periodically to determine whether their value has been impaired. If
they have, the amount of any impairment is expensed.
GAS TRANSPORTATION AND FIELD SERVICE ASSETS
The Company owns and operates over 1,900 miles of gas gathering systems
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.
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
buildings which are being depreciated over ten to twenty-five years.
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USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
NATURE OF BUSINESS
The Company operates in an environment with many financial risks,
including, but not limited to, the ability to acquire additional economically
recoverable oil and gas reserves, the inherent risks of the search for,
development of and production of oil and gas, the ability to sell oil and gas at
prices which will provide attractive rates of return, and the highly competitive
nature of the industry and worldwide economic conditions. The Company's ability
to expand its reserve base and diversify its operations is also dependent upon
the Company's ability to obtain the necessary capital through cash flow,
borrowings or equity funds.
FINANCIAL INSTRUMENTS
The Company's financial instruments include cash and equivalents,
accounts receivable, accounts payable and debt obligations. The book value of
cash and equivalents, accounts receivable and payable and short term debt are
considered to be representative of fair value because of the short maturity of
these instruments. The Company believes that the carrying value of its
borrowings under its bank credit facility approximates their fair value as they
bear interest at rates indexed at Libor. The Company's accounts receivable are
concentrated in the oil and gas industry. The Company does not view such a
concentration as an unusual credit risk.
Interest rate swap agreements, which are used by the Company in the
management of interest exposure, is accounted for on an accrual basis. Income
and expense resulting from these agreements are recorded in the same category as
expense arising from the related liability. Amounts to be paid or received under
interest rate swap agreements are recognized as an adjustment to expense in the
periods in which they accrue. At June 30, 1996, the Company had $40 million of
borrowings subject to two interest rate swap agreements at rates of 6.25% and
6.49% through July 1999 and October 1999, respectively.
The Company uses futures, option and swap contracts to reduce the
effects of fluctuations in crude oil and natural gas prices. At June 30, 1996,
the Company had open contracts for natural gas price swaps in the amount of
40,000 Mmbtu's and open contract for oil price calls of 100,000 barrels. These
contracts expire monthly through September 1996. The resulting transaction gains
and losses are included in net income and are determined monthly. Net gains for
the six months ended June 30, 1996 approximated $42,000 relating to these
derivatives.
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.
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RECLASSIFICATIONS
Certain reclassifications have been made to prior period presentations
to conform with current period classifications.
(3) ACQUISITIONS:
Since 1990, the Company has acquired over $256 million of oil and gas
properties and field service assets. During 1995, the Company completed $71.1
million of acquisitions. In the first six months of 1996, acquisitions totaling
approximately $57 million were completed. The purchases were funded by working
capital, advances under a revolving credit facility and the issuance of common
and preferred stock. These acquisitions are discussed below.
1996 ACQUISITIONS
MID-CONTINENT
Bannon Interests. In April 1996, the Company acquired
interests in approximately 270 producing wells and 108 proven recompletion and
development drilling opportunities for $37.0 million. Also included were 17,300
net undeveloped acres located in east and south Texas.
The Company purchased incremental interests in approximately 40
properties located in the Laura La Velle Field of east Texas for $.8 million.
APPALACHIA
Eastern Petroleum Company. In January 1996, the Company acquired proved
oil and gas reserves and 40 miles of gas gathering lines in Ohio for $13.7
million. In the second quarter of 1996, the Company initiated a program
extending purchase offers to other interest owners in these properties. Through
June 30, 1996, interests in 61 wells had been purchased for approximately
$100,000.
The Company purchased incremental interests in approximately 440
operated properties in Pennsylvania and Ohio for $5.2 million.
1995 ACQUISITIONS
MID-CONTINENT
Red Eagle Resources Corporation. In December 1994, the Company acquired
effective control of Red Eagle through the purchase of two stockholders'
holdings. In early 1995, the remaining stockholders of Red Eagle 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
additional equity of Red Eagle acquired in February 1995 was reflected as
minority interest on the Company's balance sheet at December 31, 1994.
Acquisition costs of approximately $46.5 million were capitalized in regards to
this acquisition. Red Eagle's assets included interests in approximately 370
producing wells located primarily in the Okeene Field of Oklahoma's Anadarko
Basin. Subsequently, the Company acquired additional interests in 70 Red Eagle
wells for $1.7 million.
The Company purchased interests in 52 wells in the Caddo and Canadian
Counties of Oklahoma for $4.8 million. The Company assumed operation of half of
these wells.
Additional interests in properties acquired from Red Eagle in 1994 were
purchased for $3.2 million.
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The Company purchased interests in 140 wells located primarily in the
Big Lake Area of west Texas and the Laura La Velle Field of east Texas for $2.8
million.
APPALACHIA
Transfuel Interests. In September 1995, the Company acquired proved
oil and gas reserves, 1,100 miles of gas gathering lines and 175,000
undeveloped acres of Ohio, Pennsylvania and New York from Transfuel, Inc. for
$21 million.
Parker & Parsley Interests. In August, the Company purchased
proved oil and gas reserves, 300 miles of gas gathering lines and 16,400
undeveloped acres in Pennsylvania and West Virginia from Parker & Parsley
Petroleum Company for $20.2 million.
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 certain oil and
gas properties from a subsidiary of Parker & Parsley Petroleum, Co., (ii) the
purchase of certain oil and gas properties from Transfuel, Inc., (iii) the
purchase of certain oil and gas properties from Bannon Energy Inc. and (iv) the
private placement of preferred and common stock of the Company and the
application of the net proceeds, therefrom.
Six Months Ended June 30,
-------------------------------------
1995 1996
----------------- ----------------
(in thousands except per share data)
Revenues....................... $ 33,902 $ 44,990
Net income..................... 2,744 5,336
Earnings per share............. 0.13 0.28
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.
(4) INDEBTEDNESS:
The Company had the following debt outstanding as of the dates shown.
Interest rates at June 30, 1996 are shown parenthetically (in thousands):
December 31, June 30,
1995 1996
------------ --------
(unaudited)
Bank credit facility (6.8%) .... $ 83,035 $119,380
Other .......................... 53 --
-------- --------
83,088 119,380
Less amounts due within one year 53 --
-------- --------
Long-term debt, net ..... $ 83,035 $119,380
======== ========
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The Company maintains a $250 million revolving bank credit facility.
The facility provides for a borrowing base which is subject to semi-annual
redeterminations. At August 2, 1996, the borrowing base on the credit facility
was $150 million, of which $117 million was outstanding. The facility bears
interest at prime rate or LIBOR plus 0.75% to 1.25% depending upon the
percentage of the borrowing base drawn. Interest is payable quarterly and the
loan is payable in sixteen quarterly installments beginning February 1, 1999. 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
weighted average interest rate on these borrowings were 7.6% and 6.8% for the
three months ended June 30, 1995 and 1996, respectively. The weighted average
interest rate gives effect to interest rate swap arrangements which have the
effect of fixing the interest rate on $40 million of the credit facility at a
rate of 6.4%. The interest rate swaps will remain in effect through July 1997,
but may be extended at the counterparties' option for two years.
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, 1995 and 1996 totaled $2.4 million in both
periods.
(5) COMMITMENTS AND CONTINGENCIES:
The Company is involved in various 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.
(6) EQUITY SECURITIES
In 1993, $5 million of 7-1/2% cumulative convertible exchangeable
preferred stock (the "7-1/2% Preferred Stock") was privately placed. In April
and May 1996, the Company exercised it's option and converted the 7-1/2%
Preferred Stock into 576,945 shares of Common Stock.
In November 1995, the Company sold 1,150,000 shares of $2.03
convertible exchangeable preferred stock (the "$2.03 Preferred Stock") for $28.8
million. The $2.03 Preferred Stock is convertible into the Company's common
stock at a conversion price of $9.50 per share, subject to adjustment in certain
events. The $2.03 Preferred Stock is redeemable, at the option of the Company,
at any time on or after November 1, 1998, at redemption prices beginning at
105%. At the option of the Company, the $2.03 Preferred Stock is exchangeable
for the Company's 8-1/8% convertible subordinated notes due 2005. The notes
would be subject to the same redemption and conversion terms as the $2.03
Preferred Stock.
In December 1995, the Company privately placed 1.2 million shares of
its Common Stock for $10.2 million to a state employees retirement plan. In
April 1996, the Company privately placed 600,000 shares of its Common Stock to a
limited number of institutional investors for approximately $6.9 million.
Warrants to acquire 40,000 shares of common stock at a price of $7.50 per share
were outstanding at June 30, 1996 and will expire in December 1996.
Additionally, warrants to acquire 20,000 shares of common stock at a price of
$12.88 per share were outstanding at June 30, 1996 and will expire in December
1997.
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(7) STOCK OPTION AND PURCHASE PLAN
The Company maintains a Stock Option Plan which authorizes the grant of
options of up to 2.0 million shares of Common Stock. However, no new options may
be granted which would result in their being outstanding aggregate options
exceeding 10% of common shares outstanding plus those shares issuable under
convertible securities. 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, 1996, options covering 101,500 shares were
exercised at prices ranging from $3.38 to $8.25 per share. At June 30, 1996,
options covering a total of 1.2 million shares were outstanding under the plan,
of which 478,500 options were exercisable. The exercise prices of the
outstanding options range from $3.38 to $10.50.
In 1994, the stockholders approved the 1994 Outside Directors Stock
Option Plan (the "Directors Plan"). Only Directors who are not employees of the
Company are eligible under the Directors Plan. The Directors Plan covers a
maximum of 200,000 shares. At June 30, 1996, 76,000 options were outstanding
under the Directors Plan of which 16,800 were exercisable as of that date. The
exercise price of the options ranges from $7.75 to $13.75 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 plans are administered by
the Compensation Committee of the Board. During the six months ended June 30,
1996, the Company sold 75,000 unregistered common shares to officers and outside
directors. From inception of the 1989 Plan through June 30, 1996, a total of
463,000 unregistered shares had been sold, for a total consideration of
approximately $2.5 million at prices equal to 75% of market value at the time of
the sale.
(8) 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. Company
contributions for 1995 totaled $346,000.
(9) 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 and 1994, income taxes
were reduced from the statutory rate of 34% by approximately $.5 million and $.3
million, respectively, through realization of the valuation allowance that was
established.
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During 1993, the Company acquired Mark Resources Corporation, in a
taxable 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 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 combination accounted for as a purchase.
Deferred tax liabilities of $12.3 million and deferred tax assets of $.3 million
were recorded in this transaction. In 1996, the Company acquired Eastern
Petroleum Company in a taxable combination accounted for as a purchase. A net
deferred tax liability of $2.1 million was recorded in the transaction.
For the six months ended June 30, 1995 and 1996, the Company made a
provision for federal income taxes of $670,000 and $2.9 million, respectively.
At June 30, 1996, the Company had available for federal income tax reporting
purposes net operating loss carryovers of approximately $16.9 million which are
subject to annual limitations as to their utilization and expire between 1996
and 2010. The Company has alternative minimum tax net operating loss carryovers
of $11.6 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
$500,000. The statutory depletion carryover and alternative minimum tax credit
carryover are not subject to limitation or expiration.
(10) 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.
Approximately 58% of the Company's gas production is currently sold under market
sensitive contracts which do not contain floor price provisions. For the six
months ended June 30, 1996, one customer accounted for 12% of the Company's
total oil and gas revenues. Management believes that the loss of any one
customer would not have a material adverse effect on the operations of the
Company. 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. Oil is sold on a basis of price and service.
The Company has currently hedged less than 3% of its production through
September 1996. These hedges involve fixed price arrangements and other price
arrangements at a variety of prices, floors and caps. Although these hedging
activities provide the Company some protection against falling prices, these
activities also reduce the potential benefits to the Company of price increases
above the levels of the hedges.
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(11) OIL AND GAS ACTIVITIES:
The following summarizes selected information with respect to oil and
gas activities (in thousands):
December 31, June 30,
1995 1996
--------------- ----------------
(unaudited)
Capitalized costs:
Proved properties ..................... $ 209,310 $ 272,338
Unproved properties ................... 763 841
--------- ---------
Total ............................. 210,073 273,179
Accumulated depletion, depreciation and
amortization ....................... (33,371) (43,222)
--------- ---------
Net capitalized costs ............. $ 176,702 $ 229,957
========= =========
Six Months
Year Ended Ended
December 31, June 30,
1995 1996
---------------- ----------------
(unaudited)
Costs incurred:
Property acquisition ... $69,244 $60,746
Development ............ 9,968 3,376
Exploration ............ 216 334
------- -------
Total costs incurred $79,428 $64,456
======= =======
(12) RELATED PARTY TRANSACTIONS:
Mr. Edelman, Chairman of the Company, is also an executive officer and
shareholder of Snyder Oil Corporation ("SOCO"). At June 30, 1996, Mr. Edelman
owned 5.7% of the Company's common stock. In 1995, the Company acquired SOCO's
interest in certain wells located in Appalachia for $4 million. The price was
determined based on arms-length negotiations through a third-party broker
retained by SOCO. Subsequent to the transaction, the Company and SOCO no longer
hold interests in any of the same properties.
During 1995, the Company incurred fees of $145,000 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 consistent with those paid by the Company to third parties for similar
services.
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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, 1996, the Company reached $274
million of assets and increased stockholders' equity to $111 million. The growth
was achieved primarily through acquisitions and development. Net income for the
second quarter of 1996 increased 171% to $2.8 million versus $1.0 million in the
prior year. The increases were primarily due to higher production volumes
attributable to acquisitions and development and higher product prices. Working
capital at June 30, 1996 was $5 million. During the quarter, long-term debt rose
from $95 million to $119 million.
At June 30, 1996, capitalization totaled $230 million, of which 48% was
represented by stockholders' equity and 52% by long-term debt. Essentially all
of the long-term debt is comprised of borrowings under a $250 million revolving
bank credit facility. The facility currently provides for quarterly payments of
interest with principal payments beginning February 1999. In April 1996, the
Company completed a $6.9 million private placement of common stock. The proceeds
were used to fund a portion of a $37.0 million acquisition which was completed
during April. The remaining portion of the acquisition was funded by borrowings
under the Company's existing revolving credit facility. In April and May 1996,
the Company exercised its option to convert the 7-1/2% Preferred Stock into
approximately 577,000 shares of common stock.
For the three months ended June 30, 1996 operating cash flow totaled
$10.3 million, a 115% increase over the prior year period. Cash flow plus bank
borrowings funded $64 million of acquisitions and development expenditures. The
Company expects to continue to fund its 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 cash requirements
include $2.3 million of preferred dividends and interest on the Company's credit
facility. Additionally, the Company expects to continue its acquisition and
development activities in 1996. Although these expenditures are principally
discretionary, the Company estimates that it will spend approximately $15
million on development activities in 1996, of which $3.4 million was incurred in
the first six months. Cash flow is expected to be more than sufficient to fund
development expenditures with the remainder available to fund acquisitions. In
1994, the Company instituted an annual program to repurchase its common stock
from stockholders who own less than 100 shares. From inception of the program,
through June 30, 1996 approximately 42,500 shares had been repurchased for
$385,100.
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,
1996 of $2.8 million a 171% increase over second quarter 1995. The increase is
the result of higher production volumes, higher product prices and lower unit
costs.
14
15
During the quarter, oil and gas production volumes increased 98% to 7.3
Bcfe, an average of 80.4 Mmcfe per day. Production revenues also benefited from
a 10% increase in the average price received per Mcfe of production from $2.14
to $2.35. The average oil price increased from $17.19 to $18.45 per barrel while
average gas prices increased 22% from $1.75 to $2.13 per Mcf. As a result of a
larger base of producing properties, operating expenses increased 95% to $6.4
million. However, the operating cost per Mcfe produced decreased slightly from
$.89 in 1995 to $.88 in 1996.
Gas transportation and marketing revenues rose 99% to $1.4 million
versus $.7 million in the second quarter of 1995. The higher revenues were due
primarily to expanded marketing activities and increased gas transportation
revenues attributable to its larger pipeline network. The increase in gas
transportation and marketing expenses of 121% reflects higher administration
costs associated with the growth in gas marketing.
Field services revenues increased 51% in the second quarter of 1996 to
$3.5 million versus $2.4 million in the second quarter 1995. The higher revenues
were due primarily to a larger base of operated properties. Field services
expenses increased 104% in the second quarter of 1996 versus 1995, due to lower
overall margins on the increasing revenue base. Exploration expense rose 114%
due to the Company's increased involvement in acreage acquisition, seismic and
exploratory drilling.
General and administrative expenses increased 29% from $761,000 in 1995
to $984,000 in 1996. On a per Mcfe of production basis, general and
administrative expenses decreased from $.21 in the second quarter of 1995 to
$.13 for the same period in 1996. Interest and other income increased slightly
primarily due to a higher level of property sales. Interest expense increased
57% to $2.0 million as a result of the higher average outstanding debt balance
during the period due to the financing of acquisitions.
Depletion, depreciation and amortization expense rose 87% as a result
of increased production volumes. The impact of higher volumes was offset by a
reduction in the depletion rate to $.72 per Mcfe in the second quarter of 1996.
15
16
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
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, although an unfavorable outcome in any
reporting period could have a material impact on the Company's results of
operations for that period.
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, 1995 and 1996, filed herewith.
11.2 Statement re: computation of per share earnings for the six
months ended June 30, 1995 and 1996, filed herewith.
27 Financial data schedule
(b) Reports on Form 8-K
Current report on Form 8-K, dated April 19, 1996 regarding the
acquisition of oil and gas properties as amended on Form 8-K/A
dated May 31, 1996.
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: Thomas W. Stoelk
-----------------------------------
Thomas W. Stoelk
Vice President - Finance
Chief Financial Officer
August 12, 1996
17
18
EXHIBIT INDEX
Sequentially
Exhibit Number Description of Exhibit Numbered Page
- --------------------- ---------------------------------- --------------------
11.1 Statement re: computation of per 19
share earnings for the three
months ended June 30, 1995 and
1996, filed herewith.
11.2 Statement re: computation of per 20
share earnings for the six
months ended June 30, 1995 and
1996, 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,
--------------------------------------
1995 1996
----------------- -----------------
Average shares outstanding 11,901 14,486
Net effect of conversion of warrants and stock options 174 476
-------- -------
Total primary and fully diluted shares 12,075 14,962
======== =======
Net income $ 1,026 $ 2,780
Less preferred stock dividends (94) (609)
-------- -------
Net income applicable to common shares $ 932 $ 2,171
======== =======
Earnings per common share $ .08 $ .15
======== =======
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,
--------------------------------------
1995 1996
----------------- -----------------
Average shares outstanding 11,178 13,940
Net effect of conversion of warrants and stock options 137 383
-------- --------
Total primary and fully diluted shares 11,315 14,323
======== ========
Net income $ 1,821 $ 5,384
Less preferred stock dividends (187) (1,287)
-------- --------
Net income applicable to common shares $ 1,634 $ 4,097
======== ========
Earnings per common share $ .14 $ .29
======== ========
20
5
1,000
6-MOS
DEC-31-1996
JAN-01-1996
JUN-30-1996
1,901
0
23,232
0
1,219
26,352
295,555
(47,866)
274,041
21,352
0
147
0
1,150
109,465
274,041
33,254
43,287
12,165
18,511
16,493
0
3,510
8,283
2,899
5,384
0
0
0
5,384
0.29
0.29
