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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 September 30, 1996
[x] 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
14,762,886 Common Shares were outstanding on November 4, 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, September 30,
1995 1996
----------------- ----------------
(unaudited)
ASSETS
Current assets
Cash and equivalents........................................ $ 3,047 $ 4,880
Accounts receivable......................................... 14,109 14,861
Marketable securities....................................... 829 13,176
Inventory and other......................................... 1,114 1,696
----------------- ----------------
19,099 34,613
----------------- ----------------
Oil and gas properties, successful efforts method............. 210,073 280,089
Accumulated depletion, depreciation and amortization....... (33,371) (48,025)
----------------- ----------------
176,702 232,064
----------------- ----------------
Gas transportation and field service assets................... 23,167 22,597
Accumulated depreciation................................... (4,304) (5,122)
----------------- ----------------
18,863 17,475
----------------- ----------------
$ 214,664 $ 284,152
================= ================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable............................................ $ 9,084 $ 16,752
Accrued liabilities......................................... 5,523 8,817
Current portion of debt (Note 4)............................ 53 -
----------------- ----------------
14,660 25,569
----------------- ----------------
Long-term debt (Note 4)....................................... 83,035 121,905
Deferred taxes (Note 10)...................................... 17,726 23,812
Commitments and contingencies (Note 6)........................
Stockholders' equity (Notes 7 and 8)
Preferred stock, $1 par, 4,000,000 shares authorized,
7-1/2% convertible preferred, 200,000 issued............ 200 -
$2.03 convertible preferred, 1,150,000 issued
(liquidation preference $28,750,000).................... 1,150 1,150
Common stock, $.01 par, 35,000,000 shares authorized,
13,322,738 and 14,705,293 issued........................ 133 147
Capital in excess of par value.............................. 101,773 109,915
Retained earnings (deficit)................................. (4,013) 1,654
----------------- ----------------
99,243 112,866
================= ================
$ 214,664 $ 284,152
================= ================
SEE ACCOMPANYING NOTES.
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LOMAK PETROLEUM, INC.
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Three Months Ended Nine months Ended
September 30, September 30,
--------------------------- ---------------------------
1995 1996 1995 1996
----------- ------------ ------------ -----------
(unaudited) (unaudited)
Revenues
Oil and gas sales...................................... $ 8,802 $ 16,623 $ 24,135 $ 49,878
Field services......................................... 2,216 3,638 7,109 10,483
Gas transportation and marketing....................... 817 1,660 2,332 4,137
Interest and other..................................... 301 391 1,052 1,102
----------- ------------ ------------ -----------
12,136 22,312 34,628 65,600
----------- ------------ ------------ -----------
Expenses
Direct operating....................................... 3,496 6,103 9,935 18,268
Field services......................................... 1,315 2,671 4,192 7,813
Gas transportation and marketing....................... 206 493 595 1,206
Exploration............................................ 197 345 473 836
General and administrative............................. 669 960 2,187 2,862
Interest............................................... 1,423 2,053 3,822 5,563
Depletion, depreciation and amortization............... 3,704 5,508 9,808 16,589
----------- ------------ ------------ -----------
11,010 18,133 31,012 53,137
----------- ------------ ------------ -----------
Income before taxes....................................... 1,126 4,179 3,616 12,463
Income taxes
Current................................................ 19 120 66 299
Deferred............................................... 210 1,340 832 4,061
----------- ------------ ------------ -----------
229 1,460 898 4,360
----------- ------------ ------------ -----------
Net income................................................ $ 897 $ 2,719 $ 2,718 $ 8,103
=========== ============ ============ ===========
Earnings per common share................................. $ .07 $ .14 $ .21 $ .43
=========== ============ ============ ===========
Weighted average shares outstanding....................... 12,130 15,158 11,588 14,615
=========== ============ ============ ===========
SEE ACCOMPANYING NOTES.
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LOMAK PETROLEUM, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
Nine months Ended September 30,
---------------------------------
1995 1996
-------------- ---------------
(unaudited)
Cash flows from operations:
Net income ............................................................... $ 2,718 $ 8,103
Adjustments to reconcile net income to net cash provided by operations:
Depletion, depreciation and amortization ............................ 9,808 16,589
Deferred income taxes ............................................... 832 4,061
Changes in working capital net of effects of purchases of businesses:
Accounts receivable ........................................ (768) (264)
Marketable Securities ...................................... (295) (12,342)
Inventory and other ........................................ 121 (659)
Accounts payable ........................................... (1,223) 7,703
Accrued liabilities and payroll and benefit costs .......... (698) 1,868
Gain on sale of assets and other .................................... (740) (724)
-------- --------
Net cash provided by operations .......................................... 9,755 24,335
Cash flows from investing:
Acquisition of businesses, net of cash .............................. -- (13,950)
Oil and gas properties .............................................. (56,913) (55,491)
Additions to gas transportation and field service assets ............ (7,733) (723)
Proceeds on sale of assets .......................................... 1,770 3,399
-------- --------
Net cash used in investing ........................................... (62,876) (66,765)
Cash flows from financing:
Proceeds from indebtedness, net of repayments ....................... 50,671 38,817
Stock dividends ..................................................... (281) (2,435)
Proceeds from common stock issuance, net of repurchases ............. 235 7,881
-------- --------
Net cash provided by financing ........................................... 50,625 44,263
-------- --------
Change in cash ........................................................... (2,496) 1,833
Cash and equivalents at beginning of period .............................. 4,897 3,047
-------- --------
Cash and equivalents at end of period .................................... $ 2,401 $ 4,880
======== ========
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 $34
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 rate per Mcfe produced was $.73
in both the third quarters of 1995 and 1996. Approximately $12.2 million ($11.5
million proved undeveloped properties and $.8 million - unproved acreage) and
$21.7 million ($20.6 million proved undeveloped properties and $1.1 million -
unproved acreage) of oil and gas properties were not subject to depletion as of
December 31, 1995 and September 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 of these systems 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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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.
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.
FINANCIAL INSTRUMENTS AND HEDGING ACTIVITIES
The following table sets for the book value and estimated fair values
of the Company's financial instruments:
December 31, September 30,
1995 1996
----------------------- ----------------------
(In thousands)
Book Fair Book Fair
Value Value Value Value
--------- --------- --------- ---------
Cash and equivalents...... $ 3,047 $ 3,047 $ 4,880 $ 4,880
Marketable securities..... 829 1,020 13,176 13,392
Senior debt .............. (83,035) (83,035) (121,905) (121,905)
Commodity swaps .......... -- 93 -- (129)
Interest rate swaps ...... -- 375 -- 88
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.
A portion of the Company's prices received in crude oil and natural gas
sales are periodically hedged against market risks through the use of futures,
option or swap contracts. The gains and losses on these instruments are included
in the valuation of the production being hedged in the contract month and are
included as an adjustment to oil and gas revenue. The Company also manages
interest rate risk on its credit facility through the use of interest rate swap
agreements. Gains and losses on swap agreements are included as an adjustment to
interest expenses.
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MARKETABLE SECURITIES
In 1996, the Company adopted Statement of Financial Accounting
Standards No. 115, "Accounting for Certain Investments in Debt and Equity
Securities." Under Statement No. 115, debt and marketable equity securities are
required to be classified in one of three categories: trading,
available-for-sale, or held to maturity. The Company's equity securities qualify
under the provisions of Statement No. 115 as available-for-sale. Such securities
are recorded at fair value, and unrealized holding gains and losses, net of the
related tax effect, are not reflected in earnings or as a separate component of
stockholders' equity because the amounts are immaterial. A decline in the market
value of an available-for-sale security below cost that is deemed other than
temporary is charged to earnings and results in the establishment of a new cost
basis for the security. Realized gains and losses are determined on the specific
identification method and are reflected in income.
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:
Since 1990, the Company has acquired over $256 million of oil and gas
properties. During 1995, the Company completed $71.1 million of acquisitions. In
the first nine months of 1996, acquisitions totaling $56.8 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
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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
September 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.
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1995 ACQUISITIONS
Mid-Continent
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Red Eagle Resources Corporation. In late 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.
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.
Nine months Ended September 30,
-------------------------------------
1995 1996
----------------- ----------------
(in thousands except per share data)
Revenues....................... $ 50,366 $ 67,303
Net income..................... 3,819 8,055
Earnings per share............. .29 .42
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.
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(4) INDEBTEDNESS:
The Company had the following debt outstanding as of the dates shown.
Interest rates at September 30, 1996 are shown parenthetically (in thousands):
December 31, September 30,
1995 1996
----------------- -----------------
(unaudited)
Bank credit facility (6.7%)..................... $ 83,035 $ 121,905
53 -
----------------- -----------------
83,088 121,905
Less amounts due within one year................ 53 -
----------------- -----------------
Long-term debt, net...................... $ 83,035 $ 121,905
================= =================
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 November 4, 1996, the borrowing base on the credit facility
was $150 million, of which $112 million was outstanding. The facility bears
interest at the 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 7.5% and 6.7% for the
nine months ended September 30, 1995 and 1996, respectively. The weighted
average interest rate gives effect to two $20 million 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 and October 1997, respectively, 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 in
cash during the nine months ended September 30, 1995 and 1996 totaled $3.5
million and $4.1 million, respectively.
(5) FINANCIAL INSTRUMENTS AND HEDGING ACTIVITIES:
The Company uses derivative financial instruments to manage
well-defined commodity price and interest rate risks and does not use them for
speculative purposes.
Periodically, the Company enters into futures, option and swap
contracts to reduce the effects of fluctuations in crude oil and natural gas
prices. At September 30, 1996, the Company had open contracts for oil and gas
price swaps of 280,000 barrels and 586,000 Mcfs. These swap contracts are
designed to set average prices of $23.09 per barrel and $1.98 per Mcf. While
these transactions have no carrying value, their fair value, represented by the
estimated amount that would be required to terminate the contracts, was a net
cost of approximately $129,000 at September 30, 1996. These contracts expire
monthly through March 1997. In October 1996, the Company entered into swap
contracts for an additional 250,000 barrels of oil at an average price per
barrel of $22.86. These contracts expire monthly through April 1997. The gains
or losses on the Company's hedging transactions is determined as the difference
between the contract price and a reference price, generally closing prices on
the New York Mercantile Exchange. The resulting transaction gains and losses are
determined monthly and are included in net income for the contract month as an
adjustment to oil and gas revenue. Net gains relating to these derivatives for
the nine months ended September 30, 1996 approximated $29,700.
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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 September 30, 1996, the Company had $40 million
of borrowings subject to two interest rate swap agreements at rates of 5.25% and
5.49% through July 1997 and October 1997, respectively, but may be extended at
the counterparties' option for two years. The agreements require that the
Company pay the counterparty interest at the above fixed swap rates and requires
the counterparty to pay the Company interest at the 30-day LIBOR rate. The
closing 30-day LIBOR rate on September 30, 1996 was 5.44%. The fair value of the
interest rate swap agreements at September 30, 1996, based upon current quotes
for equivalent agreements, amounted to $87,700, which represents the Company's
income if the agreements were terminated on this date. In October 1996, the
Company entered into a swap arrangement on an additional $20 million of the
credit facility at a rate of 5.7%, which will remain in effect through October
1998, but may be extended at the counterparties' option for two years.
These financial instruments are executed with major financial or
commodities institutions which expose the Company to acceptable levels of market
and credit risks and may at times be concentrated with certain counterparties or
groups of counterparties. The credit worthiness of counterparties is subject to
continuing review and full performance is anticipated.
(6) 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.
(7) 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 exercised in October 1996. Additionally, warrants to acquire 20,000 shares
of common stock at a price of $12.88 per share were outstanding at September 30,
1996 and will expire in December 1997.
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(8) 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 nine months ended September 30, 1996, options covering 109,750 shares were
exercised at prices ranging from $3.38 to $8.25 per share. At September 30,
1996, options covering a total of 1.2 million shares were outstanding under the
plan, of which 504,000 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 September 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 $13.88 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 nine months ended September
30, 1996, the Company sold 100,000 unregistered common shares to officers and
outside directors. From inception of the 1989 Plan through September 30, 1996, a
total of 488,000 unregistered shares had been sold, for a total consideration of
approximately $2.8 million at prices equal to 75% of market value at the time of
the sale.
(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. Company
contributions for 1995 totaled $346,000.
(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 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 nine months ended September 30, 1995 and 1996, the Company made
a provision for federal income taxes of $898,000 and $4.4 million, respectively.
At September 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 $8.2 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.
(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.
Approximately 60% of the Company's gas production is currently sold under market
sensitive contracts which do not contain floor price provisions. For the nine
months ended September 30, 1996, no one customer accounted for 10% or more 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 88% of its oil production through
April 1997. 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.
13
14
(12) OIL AND GAS ACTIVITIES:
The following summarizes selected information with respect to oil and
gas activities (in thousands):
December 31, September 30,
1995 1996
----------- -----------
(unaudited)
Capitalized costs:
Proved properties .................................. $ 209,310 $ 279,001
Unproved properties ................................ 763 1,088
--------- ---------
Total .......................................... 210,073 280,089
Accumulated depletion, depreciation and
amortization .................................... (33,371) (48,025)
--------- ---------
Net capitalized costs .......................... $ 176,702 $ 232,064
========= =========
Nine months
Year Ended Ended
December 31, September 30,
1995 1996
----------- ------------
(unaudited)
Costs incurred:
Property acquisition ........................... $ 69,244 $ 63,538
Development .................................... 9,968 8,621
Exploration .................................... 216 638
--------- ---------
Total costs incurred ....................... $ 79,428 $ 72,797
========= =========
(13) RELATED PARTY TRANSACTIONS:
Mr. Edelman, Chairman of the Company, is also an executive officer and
shareholder of Snyder Oil Corporation ("SOCO"). At September 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.
14
15
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with
management's discussion and analysis contained in the Company's 1995 annual
report on Form 10-K as well as with the consolidated financial statements and
notes thereto included in this quarterly report on Form 10-Q.
OIL AND GAS PRODUCTION, PRODUCT PRICES AND COSTS
- ------------------------------------------------
Quarter Ended September 30, Nine Months Ended September 30,
---------------------------------------- ----------------------------------------
Increase Increase
1995 1996 (Decrease) 1995 1996 (Decrease)
--------- ---------- ------------- --------- ---------- --------------
Total production
Oil (MBbl).............. 236 262 11% 649 801 23%
Gas (MMcf).............. 3,059 5,341 75% 7,825 15,968 104%
Equivalents (MMcfe)..... 4,477 6,914 54% 11,722 20,776 77%
Average daily production
Oil (Bbl)............... 2,569 2,850 11% 2,379 2,925 23%
Gas (Mcf)............... 33,246 58,023 75% 28,663 58,266 104%
Equivalents (Mcfe)...... 48,660 75,126 54% 42,936 75,813 77%
Average sales price
Oil (Bbl)............... $16.20 $20.08 24% $16.58 $18.60 12%
Gas (Mcf)............... 1.63 2.13 31% 1.71 2.19 28%
Equivalents (Mcfe)...... 1.97 2.40 13% 2.06 2.40 17%
Direct operating cost
per Mcfe................ $0.78 $0.88 22% $0.85 $0.88 4%
- ---------------------------
Bbl - Barrel
Mcf - Thousand cubic feet
Mcfe - Thousand cubic feet equivalent (one Bbl equals six Mcf)
Total oil and gas production is increased from comparable 1995 periods
due to acquisitions and the successful results of the 1995 and 1996 development
programs, partially offset by well dispositions and the natural decline of well
production.
Direct operating costs per Mcfe increased in the third quarter of 1996
compared to 1995 primarily due to the assimilation of acquisitions, the
reworking of wells and repairs to gathering systems.
RESULTS OF OPERATIONS
- ---------------------
QUARTER ENDED SEPTEMBER 30, 1996 COMPARED WITH QUARTER ENDED SEPTEMBER 30, 1995
The Company reported net income for the three months ended September
30, 1996 of $2.7 million a 203% increase over third quarter 1995. The increase
is principally the result of higher production volumes and higher product
prices.
15
16
Oil and gas revenues increased in the third quarter of 1996 principally
due to higher production levels which increased 54% to 6.9 Bcfe, an average of
75.1 MMcfe per day. Oil and gas revenues also benefited from a 22% price
increase per Mcfe from $1.97 to $2.40. The average oil price increased from
$16.20 to $20.08 per barrel and average gas prices increased 31% from $1.63 to
$2.13 per Mcf. Producing properties added through acquisitions caused operating
expenses to increase 75% to $6.1 million and operating cost per Mcfe produced to
increase from $.78 in 1995 to $.88 in 1996.
Gas transportation and marketing revenues rose 103% to $1.7 million
versus $.8 million in the third quarter of 1995. The higher revenues were due
primarily to expanded marketing activities and increased gas transportation on
pipelines added through recent acquisitions. The increase in gas transportation
and marketing expenses of 140% reflects higher administration costs associated
with the growth in gas marketing.
Field services revenues increased 64% in the third quarter of 1996 to
$3.6 million versus $2.2 million in the third quarter 1995. The higher revenues
were due primarily to a larger base of operated properties. Field services
expenses increased 103% in the third quarter of 1996 versus 1995, due to lower
operating margins on well services operations in Oklahoma. Exploration expense
rose 75% due to the Company's increased involvement in acreage acquisition,
seismic and exploratory drilling.
General and administrative expenses increased 43% from $.7 million in
1995 to $1.0 million in 1996. On a per Mcfe of production basis, general and
administrative expenses remained the same between quarters at $.15. Interest and
other income increased 30% principally due to gains realized on the sale of
marketable securities and a higher level of property sales. Interest expense
increased 44% to $2.1 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 49% as a result
of increased production volumes.
NINE MONTHS ENDED SEPTEMBER 30, 1996 COMPARED WITH NINE MONTHS ENDED
SEPTEMBER 30, 1995
The Company reported net income for the nine months ended September 30,
1996 of $8.1 million a 198% increase over the same period in 1995. The increase
is the result of higher production levels and product prices.
During the first nine months, oil and gas production volumes increased
77% to 20.8 Bcfe, an average of 75.8 MMcfe per day. Production revenues also
benefited from a 17% increase in the average price received per Mcfe of
production from $2.06 to $2.40. The average oil price increased from $16.58 to
$18.60 per barrel and average gas prices increased 28% from $1.71 to $2.19 per
Mcf. As a result of a larger base of producing properties, operating expenses
increased 84% to $18.3 million. However, the operating cost per Mcfe produced
increased only slightly from $.85 in 1995 to $.88 in 1996.
Gas transportation and marketing revenues rose 77% to $4.1 million
versus $2.3 million in the first nine months 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 103% reflects higher administration
costs associated with the growth in gas marketing.
Field services revenues increased 47% in the nine months of 1996 to
$10.5 million versus $7.1 million for the same period of 1995. The higher
revenues were due primarily to a larger base of operated properties. Field
services expenses increased 86% in the nine month period of 1996 versus 1995,
due to lower overall margins on the increasing revenue base. Exploration expense
rose 77% due to the Company's increased involvement in acreage acquisition,
seismic and exploratory drilling.
16
17
General and administrative expenses increased 31% from $2.2 million in
1995 to $2.9 million for the nine months in 1996. On a per Mcfe of production
basis, general and administrative expenses decreased from $.19 in the 1995
period to $.14 for the same period in 1996. Interest and other income increased
slightly primarily due to a higher level of property sales. Interest expense
increased 46% to $5.6 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 69% as a result
of increased production volumes.
COMPARATIVE EXPENSES PER EQUIVALENT UNIT OF PRODUCTION
The following are expenses on a net equivalent barrel (Mcfe) basis:
Quarter Ended September 30, Nine Months Ended September 30,
--------------------------------------- ---------------------------------------
Increase Increase
1995 1996 (Decrease) 1995 1996 (Decrease)
---------- --------- ------------- ---------- --------- ------------
Direct operating cost.......... $.78 $.88 13 % $.85 $.88 4 %
Depletion (a).................. .73 .73 - .73 .73 -
Depreciation, depletion and
amortization................... .76 .83 9 % .84 .80 (5)%
General and administrative..... .15 .15 - .19 .14 (26)%
Interest....................... .32 .30 (6)% .33 .27 (18)%
(a) Includes only depletion specifically related to oil and gas reserves produced.
Direct operating costs per Mcfe increased in the third quarter of 1996
compared to 1995 primarily due to the assimilation of acquisitions, the
reworking of wells and repairs to gathering systems.
Depreciation, depletion and amortization increased in the third quarter
of 1996 compared to 1995 due to the shorter depreciable lives of field service
assets added through recent acquisitions.
General and administrative expense decreased on a per Mcfe basis in
1996 relative to the comparable period in 1995 due to the costs being spread
over increased production volumes from a growing oil and gas property base.
Interest expense decreased on a per Mcfe basis in 1996 relative to the
comparable period in 1995 due to the costs being spread over increased
production volumes from a growing oil and gas property base.
ACQUISITION, DEVELOPMENT AND EXPLORATION
- ----------------------------------------
During the nine months ended September 30, 1996, the Company incurred
approximately $73.6 million in capital expenditures, including $63.5 million for
acquisitions, $8.6 million for development, $.6 million for exploration and $.9
million for corporate purposes.
17
18
The Company expended $63.5 million relating to acquisitions during the
nine months ended September 30, 1996. Of this amount, $54.5 million was for
producing properties and $9 million was for proved undeveloped reserves and
undeveloped acreage in or around the Company's operating hubs. Of the $54.5
million expended for producing properties, $28 million related to the
acquisition of the Bannon Interests and $15.4 million related to producing
properties obtained through the Eastern Petroleum acquisition.
Of the total development expenditures, $4.7 million was concentrated in
the Appalachia region, including 2 recompletions and 38 newly drilled wells.
At September 30, 1996, 14 of these wells were turned into production with an
additional 15 waiting to be connected into a pipeline and 6 more wells which
were drilled and were waiting on completion. Approximately $3.9 million of
development expenditures were concentrated in the Midcontinent region, including
26 recompletions and 11 newly drilled wells.
FACTORS AFFECTING FINANCIAL CONDITION AND LIQUIDITY
- ---------------------------------------------------
At September 30, 1996, the Company reached $284 million in total assets
and stockholders' equity of $113 million. The growth was primarily a result of
recent acquisition and development activities. Net income for the third quarter
of 1996 increased 203% to $2.7 million versus $0.9 million in the prior year.
The increases were primarily due to higher production levels from acquisition
and development activities and higher product prices. Working capital at
September 30, 1996 was $9.0 million. During the quarter, long-term debt rose
from $119 million to $122 million.
At September 30, 1996, capitalization totaled $235 million, of which
48% was represented by stockholders' equity and 52% by long-term debt. 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.
For the three months ended September 30, 1996 operating cash flow
totaled $9.9 million, a 98% increase over the prior year period. Cash flow, bank
borrowings and $7.9 million of proceeds from the issuance of common stock have
funded $73.6 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 $12-15
million on exploration and development activities in 1996, of which $8.7
million was incurred in the first nine months. Cash flow is expected to be
more than sufficient to fund exploration and 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 September 30, 1996
approximately 46,900 shares had been repurchased for $446,100.
The Company believes that its capital resources are adequate to meet
the requirements of its business. However, future cash flows are subject to a
number of variables including the level of production and oil and natural gas
prices, and there can be no assurance that operations and other capital
resources will provide cash in sufficient amounts to maintain planned levels of
capital expenditures or that increased capital expenditures will not be
undertaken.
18
19
INFLATION AND CHANGES IN PRICES
- -------------------------------
While certain of its costs are affected by the general level of
inflation, factors unique to the oil and natural gas industry result in
independent price fluctuations. Over the past five years, significant
fluctuations have occurred in oil and gas prices. Although it is difficult to
estimate future prices of oil and natural gas, price fluctuations have had, and
will continue to have, a material effect on the Company.
The following table indicates the average oil and natural gas prices
received over the last five years and highlights the price fluctuations by
quarter for 1995 and 1996. Average prices per Mcfe indicate the composite impact
of changes in oil and natural gas prices. Oil production is converted to
thousand cubic feet equivalents at the rate of 6 Mcf per barrel.
Average Prices
----------------------------------------------------
Crude Oil and
Liquids Natural Gas Equivalents
--------------- --------------- --------------
(Per Bbl) (Per Mcf) (Per Mcfe)
Annual
- -------------------
1991 $ 18.91 $ 2.21 $ 2.56
1992 18.40 2.25 2.58
1993 16.07 2.32 2.47
1994 15.23 2.10 2.26
1995 16.57 1.79 2.08
1996 (9 months) 18.60 2.19 2.40
Quarterly
- -------------------
1995
- -------------------
First $ 16.36 $ 1.78 $ 2.09
Second 17.19 1.75 2.14
Third 16.20 1.63 1.97
Fourth 16.16 1.95 2.21
1996
- -------------------
First $ 17.43 $ 2.32 $ 2.46
Second 18.45 2.13 2.35
Third 20.08 2.13 2.40
- -------------------
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.
19
20
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 September 30, 1995 and 1996, filed
herewith.
11.2 Statement re: computation of per share earnings for the nine
months ended September 30, 1995 and 1996, filed herewith.
27 Financial data schedule
(b) Reports on Form 8-K
No reports on Form 8-K were filed with the Securities and
Exchange Commission during the period.
20
21
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
November 7, 1996
21
22
EXHIBIT INDEX
Sequentially
Exhibit Number Description of Exhibit Numbered Page
- --------------------- -------------------------------- ---------------
11.1 Statement re: computation of per 23
share earnings for the three
months ended September 30, 1995
and 1996, filed herewith.
11.2 Statement re: computation of per 24
share earnings for the nine
months ended September 30, 1995
and 1996, filed herewith.
27 Financial data schedule 25
22
1
EXHIBIT 11.1
LOMAK PETROLEUM, INC.
Computation of Earnings Per Common
and Common Equivalent Shares
(In thousands, except per share data)
Three Months Ended September 30,
--------------------------------------
1995 1996
----------------- -----------------
Average shares outstanding 11,939 14,674
Net effect of conversion of warrants and stock options 191 484
----------------- -----------------
Total primary and fully diluted shares 12,130 15,158
================= =================
Net income $ 897 $ 2,719
Less preferred stock dividends (94) (584)
----------------- ------------------
Net income applicable to common shares $ 803 $ 2,135
================= =================
Earnings per common share $ .07 $ .14
================= =================
23
1
EXHIBIT 11.2
LOMAK PETROLEUM, INC.
Computation of Earnings Per Common
and Common Equivalent Shares
(In thousands, except per share data)
Nine months Ended September 30,
--------------------------------------
1995 1996
----------------- -----------------
Average shares outstanding 11,434 14,190
Net effect of conversion of warrants and stock options 154 425
----------------- -----------------
Total primary and fully diluted shares 11,588 14,615
================= =================
Net income $ 2,718 $ 8,102
Less preferred stock dividends (281) (1,870)
----------------- ------------------
Net income applicable to common shares $ 2,437 $ 6,232
================= =================
Earnings per common share $ .21 $ .43
================= =================
5
1,000
US $
9-MOS
DEC-31-1996
JAN-01-1996
SEP-30-1996
1
4,880
13,176
14,861
0
1,696
34,613
302,686
(53,147)
284,152
25,569
0
147
0
1,150
111,569
284,152
49,878
65,600
18,268
28,123
25,014
0
5,563
12,463
4,360
8,103
0
0
0
8,103
0.43
0.43
