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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, 1997
{ } 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
20,447,727 Common Shares were outstanding on August 5, 1997.
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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, 1996 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,
1996 1997
--------- ---------
(unaudited)
ASSETS
Current assets
Cash and equivalents ................................. $ 8,625 $ 13,317
Accounts receivable ................................. 18,121 20,926
Marketable securities ............................... 7,658 1,380
Inventory and other ................................. 799 2,210
--------- ---------
35,203 37,833
--------- ---------
Oil and gas properties, successful efforts method ..... 279,975 633,054
Accumulated depletion ............................. (53,102) (74,819)
--------- ---------
226,873 558,235
--------- ---------
Transportation, processing and field assets ........... 21,139 71,329
Accumulated depreciation .......................... (4,997) (7,188)
--------- ---------
16,142 64,141
--------- ---------
Investments and other ................................. 4,329 14,626
--------- ---------
$ 282,547 $ 674,835
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable .................................... $ 14,433 $ 21,954
Accrued liabilities ................................. 4,603 14,160
Accrued payroll and benefit cost .................... 3,245 2,186
Current portion of debt (Note 4) .................... 26 27
--------- ---------
22,307 38,327
--------- ---------
Senior debt (Note 4) .................................. 61,780 206,711
Senior subordinated notes (Note 4) .................... -- 125,000
Convertible subordinated debentures (Note 4) .......... 55,000 55,000
Deferred taxes (Note 10) .............................. 25,931 30,028
Commitments and contingencies (Note 6) ................ -- --
Stockholders' equity (Notes 7 and 8)
Preferred stock, $1 par, 10,000,000 shares authorized,
$2.03 convertible preferred, 1,150,000 issued
(liquidation preference $28,750,000) ............ 1,150 1,150
Common stock, $.01 par, 50,000,000 shares authorized,
14,750,537 and 20,336,249 issued ................ 148 203
Capital in excess of par value ...................... 110,248 206,022
Retained earnings ................................... 5,291 12,249
Unrealized gain on marketable securities ............. 692 145
--------- ---------
117,529 219,769
========= =========
$ 282,547 $ 674,835
========= =========
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,
-------------------- --------------------
1996 1997 1996 1997
------- ------- ------- -------
(unaudited) (unaudited)
Revenues
Oil and gas sales ...................... $17,166 $26,629 $33,254 $60,967
Transportation, processing and marketing 1,448 2,777 2,476 5,551
Interest and other ..................... 614 3,375 711 4,013
------- ------- ------- -------
19,228 32,781 36,441 70,531
------- ------- ------- -------
Expenses
Direct operating ....................... 5,474 7,512 10,461 15,284
Transportation, processing and marketing 423 712 713 1,581
Exploration ............................ 311 178 491 1,178
General and administrative ............. 984 1,051 1,902 2,133
Interest ............................... 1,956 7,225 3,510 11,184
Depletion, depreciation and amortization 5,803 12,015 11,081 24,666
------- ------- ------- -------
14,951 28,693 28,158 56,026
------- ------- ------- -------
Income before taxes ....................... 4,277 4,088 8,283 14,505
Income taxes
Current ................................ 98 539 178 1,476
Deferred ............................... 1,399 1,181 2,721 4,097
------- ------- ------- -------
1,497 1,720 2,899 5,573
------- ------- ------- -------
Net income ................................ $ 2,780 $ 2,368 $ 5,384 $ 8,932
=+====== ======= ======= =======
Earnings per common share ................. $ .15 $ .09 $ .29 $ .40
======= ======= ======= =======
Weighted average shares outstanding ....... 14,962 20,921 14,323 19,327
======= ======= ======= =======
SEE ACCOMPANYING NOTES.
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LOMAK PETROLEUM, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
Six Months Ended June 30,
-------------------------
1996 1997
--------- ---------
(unaudited)
Cash flows from operations:
Net income ........................................... $ 5,384 $ 8,932
Adjustments to reconcile net income to
net cash provided by operations:
Depletion, depreciation and amortization ........ 11,081 24,666
Amortization of deferred offering costs ......... -- 338
Deferred taxes .................................. 2,721 4,097
Changes in working capital net of
effects of purchases of businesses:
Accounts receivable .................... (7,380) (3,624)
Marketable securities .................. -- (1,189)
Inventory and other .................... (179) (1,412)
Accounts payable ....................... 3,760 7,511
Accrued liabilities .................... 1,429 8,008
Gain on sale of assets and other ................ (370) (2,685)
--------- ---------
Net cash provided by operations ...................... 16,446 44,642
Cash flows from investing:
Acquisition of businesses, net of cash .......... (13,950) --
Oil and gas properties .......................... (47,349) (329,041)
Additions to property and equipment ............. (446) (50,235)
Proceeds on sale of assets ...................... 1,727 9,260
--------- ---------
Net cash used in investing ........................... (60,018) (370,016)
Cash flows from financing:
Proceeds from indebtedness ...................... 36,345 400,217
Repayments of indebtedness ...................... (53) (134,008)
Preferred stock dividends ....................... (1,287) (1,167)
Common stock dividends .......................... (276) (807)
Proceeds from common stock issuance ............. 7,771 65,845
Repurchase of common stock ...................... (74) (14)
--------- ---------
Net cash provided by financing ....................... 42,426 330,066
--------- ---------
Change in cash ....................................... (1,146) 4,692
Cash and equivalents at beginning of period .......... 3,047 8,625
========= =========
Cash and equivalents at end of period ................ $ 1,901 $ 13,317
========= =========
Supplemental disclosures of non-cash investing and
financing activities:
Purchase of property and equipment financed with
common stock ..................................... $ - $ 30,000
Common stock issued in connection with benefit plans 38 225
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
company engaged in development, exploration and acquisitions primarily in the
Midcontinent, Gulf Coast and Appalachia regions. Historically, the Company has
increased its reserves and production through acquisitions, development and
exploration of its properties. Since January 1, 1991, $695 million has been
expended on acquisition, development and exploration activities. At December 31,
1996, pro forma for acquisitions completed through June 30, 1997, proved
reserves totaled 644 Bcfe, having a pre-tax present value at constant prices on
that date of $974 million and reserve life of approximately 13 years.
In January 1997, the Company acquired oil and gas properties from
American Cometra, Inc. (the "Cometra Acquisition") for $385 million. The Company
financed the Cometra Acquisition through borrowings under its bank facility and
the issuance of a $134 million note to Cometra. This note was repaid in March
1997. The Cometra Acquisition increased the Company's pro forma proved reserves
at December 31, 1996 by 68% to 644 Bcfe. This transaction is more fully
described in Note (3) Acquisitions.
Lomak's objective is to maximize shareholder value through growth in
its reserves, production, cash flow and earnings through a balanced program of
development, exploration and acquisition. In pursuing this strategy, the Company
has concentrated its activities in selected geographic areas. In each core area,
the Company has established separate operating, engineering, geology,
marketing, acquisition and other technical expertise. The Company believes
that this geographic focus provides it with a competitive advantage in
sourcing and evaluating new business opportunities within these areas, as well
as providing economies of scale in operating and developing its properties.
(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 partnerships and joint
ventures. Highly liquid 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 for oil
and gas properties. Exploratory costs which result in the discovery of reserves
and the cost of development wells are capitalized. Geological and geophysical
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. Depletion rates per Mcfe
were $0.72 and $0.98 in the second quarters of 1996 and 1997, respectively.
Approximately $20.3 million and $116.1 million of oil and gas properties were
not subject to depletion as of December 31, 1996 and June 30, 1997,
respectively.
The Company has adopted Statement of Financial Accounting Standards No.
121 "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed Of," which establishes accounting standards for the
impairment of long-lived assets, certain identifiable intangibles and goodwill.
SFAS No. 121 requires a review for impairment whenever circumstances indicate
that the carrying amount of an asset may not be recoverable. In performing the
review for recoverability, the Company would estimate future cash flows
(undiscounted and without interest charges) expected to result from the use of
an asset and its eventual disposition. Impairment is recognized only if the
carrying amount of an asset is
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greater than its expected future cash flows. The amount of the impairment is
based on the estimated fair value of the asset. The adoption of SFAS No. 121 had
no impact on the Company.
GAS IMBALANCES
The Company uses the sales method to account for gas imbalances. Under
the sales method, revenue is recognized based on cash received rather than the
proportionate share of gas produced. Gas imbalances at December 31, 1996 and
June 30, 1997 were not material.
TRANSPORTATION, PROCESSING AND FIELD ASSETS
The Company owns and operates over 2,100 miles of gas gathering systems
and gas processing plants 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 fifteen year periods.
During 1996, the majority of the Company's brine disposal and well
servicing activities were based in Oklahoma. In December 1996, the Company sold
its Oklahoma brine disposal and well servicing activities.
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 and
operating 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 operating cash flow, borrowings or the issuance of additional equity.
MARKETABLE SECURITIES
The Company has 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 reflected as a separate component of stockholders' equity. 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. At June 30, 1997,
the Company had $7.8 million of marketable securities included in Investment
and other assets.
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DEBT ISSUANCE COSTS
Expenses associated with the issuance of the 6% Convertible
Subordinated Debentures due 2007 and the 8.75% Senior Subordinated Notes due
2007 are included in Investment and Other Assets on the accompanying balance
sheet and are being amortized on the interest method over the term of the
indebtedness.
EARNINGS 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.
In February 1997, the Financial Accounting Standards Board issued SFAS
No. 128 "Earnings per Share." This statement requires the Company to disclose
earnings per share information with respect to its issued common stock or
potential common stock to be issued with respect to the conversion of its
Convertible Subordinated Debentures and Preferred Stock. The Company will adopt
this standard at year end.
RECLASSIFICATIONS
Certain reclassifications have been made to prior period numbers to
conform with the current period presentation.
(3) ACQUISITIONS:
All of the Company's acquisitions have been accounted for as purchases.
The purchase prices were allocated to the assets acquired based on the fair
value of such assets and liabilities at the respective acquisition dates. The
acquisitions were funded by working capital, advances under a revolving credit
facility and the issuance of equity.
In the first quarter of 1997, the Company acquired oil and gas
properties located in West Texas, South Texas and the Gulf of Mexico (the
"Cometra Properties") from American Cometra, Inc. ("Cometra") for $385 million.
The Cometra Properties, located primarily in the Company's core operating areas,
include 515 producing wells and additional development and exploration potential
on approximately 150,000 gross acres (90,000 net acres). In addition, the
Cometra Properties include gas pipelines, a 25,000 Mcf/d gas processing plant
and an above-market gas contract with a gas utility covering approximately 30%
of the current production from the Cometra Properties. The gas utility filed an
action concerning the above-market gas contract which is discussed in Note 6
Commitments and Contingencies. In addition, the Company acquired other interests
totaling $4.4 million during the six month period ended June 30, 1997.
During 1996, the Company acquired oil and gas properties, equipment and
acreage from Bannon Energy, Incorporated for approximately $37.0 million and
acquired Eastern Petroleum Company for approximately $13.7 million. The Bannon
interests included 270 producing properties located in Texas, Oklahoma, New
Mexico and Wyoming. Eastern Petroleum Company owned interests in oil and gas
properties, equipment and acreage in Ohio. In addition, the Company acquired
other interests totaling $12.9 million of consideration during the year.
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UNAUDITED PRO FORMA FINANCIAL INFORMATION
The following table presents unaudited pro forma operating results as
if certain transactions had occurred at the beginning of each period presented.
The pro forma operating results include the following transactions: (i) the
purchase by the Company of certain oil and gas properties from American Cometra
Inc. and Bannon Energy Incorporated, (ii) the conversion of the 7 1/2%
Convertible Preferred Stock, (iii) the private placement of $55 million of 6%
Convertible Subordinated Debentures due 2007 and the application of the net
proceeds therefrom, (iv) the sale of 4 million shares of Common Stock and the
application of the net proceeds therefrom, and (v) the sale of $125 million of
8.75% Senior Subordinated Notes due 2007 and the application of the net proceeds
therefrom. All acquisitions were accounted for as purchase transactions.
Six Months Ended June 30,
-------------------------------------
1996 1997
----------------- ----------------
(in thousands except per share data)
Revenues....................... $ 77,895 $ 70,531
Net income..................... 7,809 8,976
Earnings per share............. .33 .35
Total assets................... 664,741 674,835
Stockholders' equity........... 204,862 219,769
The pro forma operating results have been prepared for comparative
purposes only. They do not purport to present actual operating results that
would have been achieved had the acquisitions and financings been made at the
beginning of each period presented or to necessarily be indicative of future
results.
(4) INDEBTEDNESS:
The Company had the following debt outstanding as of the dates shown.
Interest rates at June 30, 1997 are shown parenthetically (in thousands):
December 31, June 30,
1996 1997
---------------- ---------------
Bank facility (6.7%)................................. $ 61,355 $ 206,300
--------------- ---------------
Other ( 6.9%)........................................ 451 438
--------------- ---------------
61,806 206,738
Less amounts due within one year..................... 26 27
--------------- ---------------
Senior debt, net..................................... $ 61,780 $ 206,711
=============== ===============
8.75% Senior Subordinated Notes due 2007............ $ - $ 125,000
6% Convertible Subordinated Debentures due 2007..... 55,000 55,000
--------------- ---------------
Subordinated debt, net............................... $ 55,000 $ 180,000
=============== ===============
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The Company maintains a $400 million revolving bank facility. The
facility provides for a borrowing base which is subject to semi-annual
redeterminations. At July 31, 1997, the borrowing base on the credit facility
was $300 million of which $95.8 million was available to be drawn. The facility
bears interest at prime rate or LIBOR plus 0.625% to 1.125% depending upon the
percentage of the borrowing base drawn. Interest is payable quarterly and the
loan matures in February 2002. A commitment fee is paid quarterly on the undrawn
balance at a rate of .25% to .375% depending upon the percentage of the
borrowing base not drawn. 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 6.8% and 6.6% for the three months ended June 30, 1996 and 1997,
respectively.
The 8.75% Senior Subordinated Notes due 2007 (the "8.75% Notes") and
are not redeemable prior to January 15, 2002. Thereafter, the 8.75% Notes will
be subject to redemption at the option of the Company, in whole or in part, at
redemption prices beginning at 104.375% of the principal amount and declining
to 100% in 2005. The 8.75% Notes are unsecured general obligations of the
Company and are subordinated to all senior debt (as defined) of the Company
which includes borrowings under the bank facility. The 8.75% Notes are
guaranteed on a senior subordinated basis by all of the subsidiaries of the
Company and each guarantor is a wholly owned subsidiary of the Company. The
guarantees are full, unconditional and joint and several. Separate financial
statements of each guarantor are not presented because they are included in the
consolidated financial statements of the Company and management has concluded
that their disclosure provides no additional benefits.
The 6% Convertible Subordinated Debentures Due 2007 (the "Debentures")
are convertible into shares of the Company's Common Stock at the option of the
holder at any time prior to maturity. The Debentures are convertible at a
conversion price of $19.25 per share, subject to adjustment in certain events.
Interest is payable semi-annually. The Debentures will mature in 2007 and are
not redeemable prior to February 1, 2000. The Debentures are unsecured general
obligations of the Company subordinated to all senior indebtedness (as defined)
of the Company, which includes the 8.75% Notes.
The debt agreements contain various covenants relating to net worth,
working capital maintenance and financial ratio requirements. The Company is in
compliance with these various covenants as of June 30, 1997. Interest paid
during the six months ended June 30, 1996 and 1997 totaled $2.4 million and $6.0
million, respectively.
(5) FINANCIAL INSTRUMENTS AND HEDGING ACTIVITIES:
The Company's financial instruments include cash and equivalents,
accounts receivable, accounts payable, debt obligations, commodity and interest
rate futures, options, and swaps. 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 to 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 future crude oil and natural gas sales are
periodically hedged against price 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
expense.
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The following table sets forth the book value and estimated fair
values of the Company's financial instruments:
December 31, June 30,
1996 1997
------------------------- --------------------------
(In thousands)
Book Fair Book Fair
Value Value Value Value
--------- --------- --------- ---------
Cash and equivalents $ 8,625 $ 8,625 $ 13,317 $ 13,317
Marketable securities 6,966 7,658 1,235 1,380
Long-term debt ...... (116,806) (116,806) (386,738) (386,738)
Commodity swaps ..... -- (1,051) -- --
Interest rate swaps . -- 81 -- 38
The gains or losses on the Company's hedging transactions are
determined as the difference between the contract price and the 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 in the period the hedged production or inventory is sold. At June
30, 1997, the Company had no open contracts for oil and gas hedging activities
Net losses relating to these derivatives for the six months ended June 30, 1996
and 1997 approximated $(114,000) and $(338,000) respectively.
Interest rate swap agreements, which are used by the Company in the
management of interest rate exposure, is accounted for on the 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, 1997, the Company had
$60 million of borrowings subject to three interest rate swap agreements at
rates of 5.25%, 5.49% and 5.64% through July 1997, October 1997 and October
1998, respectively. The interest rate swaps may be extended at the
counterparties' option for two years. The interest rate swap agreement, covering
$20 million of borrowings at a rate of 5.25%, was extinguished in July 1997 at
the option of the counterparty. 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 June 30 1997 was 5.72%. The fair value of the interest rate
swap agreements at June 30, 1997 is based upon current quotes for equivalent
agreements.
These hedging activities are conducted with major financial or
commodities trading institutions which management believes entail acceptable
levels of market and credit risks. At times such risks may 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.
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In April 1997, an action was filed by an individual in United States
District Court in the Western District of Oklahoma seeking $550,000 in cash plus
100,000 shares of Red Eagle Resources Corporation Common Stock (approximately
87,000 shares of the Company's Common Stock). The individual claims he is
entitled to fees from the Company based upon a Yemen oil concession that he
claims Red Eagle Resources Corporation received in 1992, which was prior to the
acquisition of Red Eagle by the Company. Based upon the Company's examination of
the available documentation to such claim, the Company believes that the claim
is without merit because the oil concession was never obtained. The Company is
vigorously defending this action, and as stated above, believes the action is
without merit. A separate claim for approximately $2.0 million with respect to
the alleged Yemen oil concession was received in January 1997. Since that date,
no further action has been taken and the Company believes the claim is without
merit.
In July 1997, a gas utility filed a petition for declaratory judgement
in United States District Court in Tarrant County, Texas. The petition for
declaratory judgement asked the court to declare its purchase obligation under
a gas contract be limited to a quantity of gas equal to 80% of the Company's
delivery capacity, as defined, or 20,000 Mcf of gas per day, whichever is the
lesser amount. The Company is vigorously defending this action.
(7) EQUITY SECURITIES:
In November 1995, the Company issued 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 March 1997, the Company sold 4 million shares of common stock in a
public offering for $68 million. Warrants to acquire 20,000 shares of common
stock at a price of $12.88 per share were exercised in May 1997. At June 30,
1997 the Company has no outstanding warrants.
(8) STOCK OPTION AND PURCHASE PLAN:
The Company maintains a Stock Option Plan which authorizes the grant of
options of up to 3.0 million shares of Common Stock. However, no new options may
be granted which would result in there 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, 1997, options covering 97,100 shares were
exercised at prices ranging from $5.12 to $10.50 per share. At June 30, 1997,
options covering a total of 1.5 million shares were outstanding under the plan,
of which 699,000 options were exercisable. The exercise prices of the
outstanding options range from $3.38 to $18.00 per share.
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, 1997, 108,000 options were outstanding
under the Directors Plan of which 40,800 were exercisable as of that date. The
exercise price of the options ranges from $7.75 to $16.875 per share.
In June 1997, the stockholders approved the 1997 Stock Purchase Plan
(the "1997 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 previously had stock purchase plans which covered
833,333 shares. The previous stock purchase plans have been terminated. The
plans are administered by the Compensation Committee of the Board. During the
six months ended June 30, 1997, the Company sold 37,900 unregistered common
shares to officers, key employees and outside directors for total consideration
of $516,200. From inception through June 30, 1997, a total of 377,000
unregistered shares had been sold through stock purchase plans, for a total
consideration of approximately $2.8 million.
(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 1996 totaled $548,000.
12
13
(10) INCOME TAXES:
The Company has entered into several business combinations accounted
for as purchases. In connection with these transactions, deferred tax assets and
liabilities of $7.7 million and $23.8 million respectively, were recorded. In
1996 the Company acquired Eastern Petroleum Company in a taxable business
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, 1996 and 1997, the Company made a
provision for federal and state income taxes of $2.9 million and $5.6 million,
respectively. The effective tax rate has increased during 1997 due to
limitations on the utilization of net operating loss carryovers. At June 30,
1997, the Company had available for federal income tax reporting purposes net
operating loss carryovers of approximately $7.5 million which are subject to
annual limitations as to their utilization and expire between 1997 and 2010. The
Company has alternative minimum tax net operating loss carryovers of $6.6
million which are subject to annual limitations as to their utilization and
expire 1997 to 2009. The Company has statutory depletion carryover of
approximately $3.2 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 limitations 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 (4%); (b) long-term (1 to
5 years) (65%); 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
(31%). Approximately 59% 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, 1997, no one customer accounted for more than 10% of
the Company's total oil and gas revenues. Oil is sold on a basis such that the
purchaser can be changed on 30 days notice. The price received is generally
equal to a posted price set by the major purchasers in the area. Oil is sold on
a basis of price and service.
(12) OIL AND GAS ACTIVITIES:
The following summarizes selected information with respect to oil and
gas activities (in thousands):
December 31, June 30,
1996 1997
--------------- ---------------
(unaudited)
Oil and gas properties:
Subject to depletion............................... $ 259,681 $ 516,992
Not subject to depletion........................... 20,294 116,062
--------------- ---------------
Total.......................................... 279,975 633,054
Accumulated depletion.............................. (53,102) (74,819)
--------------- ---------------
Net oil and gas properties..................... $ 226,873 $ 558,235
=============== ===============
13
14
Six Months
Year Ended Ended
December 31, June 30,
1996 1997
--------------- ---------------
Costs incurred:
Acquisition........................................ $ 63,579 $ 342,645
Development........................................ 12,536 15,062
Exploration........................................ 2,025 1,433
--------------- ---------------
Total costs incurred........................... $ 78,140 $ 359,140
=============== ===============
14
15
MANAGEMENT'S DISCUSSION AND ANALYSIS
------------------------------------
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
------------------------------------------------
FACTORS EFFECTING FINANCIAL CONDITION AND LIQUIDITY
LIQUIDITY AND CAPITAL RESOURCES
General
Total assets at June 30, 1997 were $675 million. At June 30, 1997,
capitalization totaled $607 million, of which approximately 36% was represented
by stockholders' equity, 34% by senior debt and 30% by subordinated debt.
Approximately $206 million of the long-term debt at that date was comprised of
borrowings under the Credit Agreement, $125 million of 8.75% Senior Subordinated
Notes, $55 million of 6% Convertible Subordinated Debentures and $0.4 million of
other indebtedness. The Credit Agreement currently provides for quarterly
payments of interest with principal due in February 2002.
Common Stock and Note Offerings
On March 14, 1997, the Company completed offerings of 4,060,000 shares
of Common Stock (the "Common Offering") and $125 million of 8.75% Senior
Subordinated Notes due 2007 (the "Notes Offering") (collectively the
"Offerings"). The Notes are unconditionally guaranteed on an unsecured, senior
subordinated basis, by each of the Company's Restricted Subsidiaries (as defined
in the Indenture for the Notes), provided that such guarantees will terminate
under certain circumstances. The Indenture for the Notes contains certain
covenants, including, but not limited to, covenants with respect to the
following matters: (i) limitation on restricted payments; (ii) limitation on the
incurrence of indebtedness and issuance of Disqualified Stock (as defined in the
Indenture for the Notes); (iii) limitation on liens; (iv) limitation on
disposition of proceeds of asset sales; (v) limitation on transactions with
affiliates; (vi) limitation on dividends and other payment restrictions
affecting restricted subsidiaries; (vii) restrictions on mergers, consolidations
and transfers of assets; and (viii) limitation on "layering" indebtedness.
Cash Flow
The Company's principal operating sources of cash include sales of oil
and gas and revenues from gas transportation, processing and marketing. The
Company's cash flow is highly dependent upon oil and gas prices. Decreases in
the market price of oil or gas could result in reductions of both cash flow and
the borrowing base under the Credit Agreement which would result in decreased
funds available, including funds intended for planned capital expenditures.
The Company has three principal operating sources of cash: (i) sales of
oil; (ii) sales of natural gas and (iii) revenues from transportation,
processing and marketing. The increases in the Company's cash flow from
operations can be attributed to its growth primarily through acquisitions and
development.
The Company's net cash used in investing for the six months ended June
30, 1996 and 1997 was $60.0 million and $370 million, respectively. Investing
activities for these periods are comprised primarily of additions to oil and gas
properties through acquisitions and development and, to a lesser extent,
exploitation and additions of field assets. These uses of cash have historically
been partially offset through the Company's policy of divesting those properties
that it deems to be marginal or outside of its core areas of operation. The
Company's acquisition and development activities have been financed through a
combination of operating cash flow, bank borrowings and capital raised through
equity and debt offerings.
The Company's net cash provided by financing for the six months ended
June 30, 1996 and 1997 was $42.4 million and $330.1 million, respectively.
Sources of financing used by the Company during the most recent six month period
were borrowings under its Credit Agreement and capital raised through the
Offerings.
15
16
Capital Requirements
During the six months ended June 30, 1997, $15.1 million and $1.4
million of costs were incurred for development and exploration activities,
respectively. The Company is currently projecting that it will spend
approximately $160 million on development, exploitation and exploration
activities during the next three years. The Company anticipates that
approximately $45 million will be spent for exploitation and exploration during
that three year period. Although these expenditures are principally
discretionary, development and exploration expenditures are currently expected
to consume roughly 50% of internally generated cash flows. The remaining
internally generated cash flows will be available for debt repayment,
acquisitions or other capital expenditures.
Credit Agreement
In connection with the Cometra Acquisition, the Company and its
subsidiaries expanded the existing bank credit facility. The Credit Agreement
permits the Company to obtain revolving credit loans and to issue letters of
credit for the account of the Company from time to time in an aggregate amount
not to exceed $400 million. The Borrowing Base was set at $300 million upon the
consummation of the Offerings. The Borrowing Base is subject to semi-annual
determination and certain other redeterminations based upon a variety of
factors, including the discounted present value of estimated future net cash
flow from oil and gas production. At the Company's option, loans may be prepaid,
and revolving credit commitments may be reduced, in whole or in part at any time
in certain minimum amounts.
At the Company's option, the applicable interest rate per annum is the
LIBOR plus a margin ranging from 0.625% to 1.125%. The facility contains other
alternative rate options which have never been utilized by the Company. Based on
levels of debt outstanding as of June 30, 1997 the margin was 0.8750%.
Hedging Activities
Periodically, the Company enters into futures, option and swap
contracts to reduce the effects of fluctuations in crude oil and natural gas
prices. At June 30, 1997, the Company had no open contract for oil and gas
hedging activities. The gains or losses on the Company's hedging transactions
are determined as the difference between the contract price and a reference
price, generally closing prices on the NYMEX. The resulting transaction gains
and losses are determined monthly and are included in the period the hedged
production or inventory is sold. Net losses relating to these derivatives for
the six months ended June 30, 1996 and 1997, approximated $(114,000) and
$(338,000) respectively.
INFLATION AND CHANGES IN PRICES
The Company's revenues and the value of its oil and gas properties have
been and will be affected by changes in oil and gas prices. The Company's
ability to maintain current borrowing capacity and to obtain additional capital
on attractive terms is also substantially dependent on oil and gas prices. Oil
and gas prices are subject to significant seasonal and other fluctuations that
are beyond the Company's ability to control or predict. During the first six
months of 1997, the Company received an average of $19.29 per barrel of oil and
$2.60 per Mcf of gas. Although certain of the Company's costs and expenses are
affected by the level of inflation, inflation did not have a significant effect
during the first six months of 1997.
16
17
RESULTS OF OPERATIONS
Comparison of 1997 to 1996
The Company reported net income for the three months ended June 30,
1997 of $2.4 million, a 15% decrease from the second quarter of 1996. The
decrease was primarily the result of (i) higher interest costs on expanded
borrowings used to finance acquisitions, (ii) increased depletion rates on
higher production and (iii) a change in first quarter production estimates on
the Cometra properties prior to the Company's assumption of operations. Oil
and gas revenues increased 55% in the second quarter of 1997 due to production
volume and price increases. Production volumes increased 52% from 80,400 Mcfe/d
in 1996 to 122,100 Mcfe/d in 1997. The average price received increased 2% from
$2.35 per Mcfe in 1996 to $2.40 per Mcfe in 1997. The average oil price
decreased 13% to $16.00 per barrel while average gas prices increased 9% to
$2.32 per Mcf. As a result of the Company's larger base of producing properties
and production, oil and gas production expenses increased 37% to $7.5 million
in 1997 versus $5.5 million in 1996. The average operating cost per Mcfe
produced decreased 15% from $0.75 in the first six months of 1996 to $0.64 in
1997 primarily due to lower operating costs on the Cometra properties.
Transportation, processing and marketing revenues increased 92% to $2.8
million versus $1.4 million in 1996 principally due to the pipelines and gas
processing acquired in the Cometra Acquisition. Transportation, processing and
marketing expenses increased 68% to $0.7 million versus $0.4 million in 1996.
The increase in expenses was due to production growth, as well as the increase
in transportation, processing and marketing expense and higher personnel
administrative costs associated with the growth in gas marketing resulting from
the Cometra Acquisition.
Exploration expense decreased 43% to $0.2 million due to the timing of
exploration expenditures.
General and administrative expenses increased 7% from $1.0 million in
1996 to $1.1 million in 1997. As a percentage of revenues, general and
administrative expenses were 3% in 1997 as compared to 5% in 1996. This
decreasing trend reflects the spreading of administrative costs over a growing
asset base.
Interest and other income increased from $0.6 million in 1996 to $3.4
million in 1997 primarily due to gains from the sale of marketable securities
and certain non-strategic assets. In 1997 interest expense increased 269% to
$7.2 million as compared to $2.0 million in 1996. This was primarily a result of
the higher average outstanding debt balance during the year due to the financing
of acquisitions and capital expenditures. The average outstanding balances on
the Credit Agreement were $107 million and $169 million for 1996 and the six
months ended June 30, 1997, respectively. The weighted average interest rate
on these borrowings was 6.7% for both six month periods ended June 30, 1996 and
1997.
Depletion, depreciation and amortization increased 107% compared to
1996 as a result of increased production volumes and a higher average depletion
rate. The Company-wide depletion rate was $0.72 per Mcfe in the second quarter
of 1996 and $0.99 per Mcfe in the second quarter of 1997.
17
18
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.
In April 1997, an action was filed by an individual in United States
District Court in the Western District of Oklahoma seeking $550,000 in cash plus
100,000 shares of Red Eagle Resources Corporation Common Stock (approximately
87,000 shares of the Company's Common Stock). The individual claims he is
entitled to fees from the Company based upon a Yemen oil concession that he
claims Red Eagle Resources Corporation received in 1992, which was prior to the
acquisition of Red Eagle by the Company. Based upon the Company's examination of
the available documentation to such claim, the Company believes that the claim
is without merit because the oil concession was never obtained. The Company is
vigorously defending this action, and as stated above, believes the action is
without merit. A separate claim for approximately $2.0 million with respect to
the alleged Yemen oil concession was received in January 1997. Since that date,
no further action has been taken and the Company believes the claim is without
merit.
In July 1997, a gas utility filed a petition for declaratory judgement
in United States District Court in Tarrant County, Texas. The petition for
declaratory judgement asked the court to declare its purchase obligation under
a gas contract be limited to a quantity of gas equal to 80% of the Company's
delivery capacity, as defined, or 20,000 Mcf of gas per day, whichever is the
lesser amount. The Company is vigorously defending this action.
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, 1996 and 1997, filed herewith.
11.2 Statement re: computation of per share earnings for the six
months ended June 30, 1996 and 1997, filed herewith.
27 Financial data schedule
(b) Reports on Form 8-K
Current report on Form 8-K, dated February 27, 1997 and form 8K/A
dated March 14, 1997 regarding the acquisition of oil and gas
properties.
18
19
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
Senior Vice President - Finance
and Administration
Chief Financial Officer
August 14, 1997
19
20
EXHIBIT INDEX
Sequentially
Exhibit Number Description of Exhibit Numbered Page
- --------------------- ---------------------------------- ------------------
11.1 Statement re: computation of per 21
share earnings for the three
months ended June 30, 1996 and
1997, filed herewith.
11.2 Statement re: computation of per 22
share earnings for the six
months ended June 30, 1996 and
1997, filed herewith.
27 Financial data schedule 23
20
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,
---------------------------
1996 1997
------------- -----------
Average shares outstanding 14,486 20,290
Net effect of conversion of warrants and stock options 476 631
------------- --------
Total primary and fully diluted shares 14,962 20,921
============= ========
Net income $ 2,780 $ 2,368
Less preferred stock dividends (609) (584)
------------- --------
Net income applicable to common shares $ 2,171 $ 1,784
============= ========
Earnings per common share $ .15 $ .09
============= ========
21
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,
-------------------------
1996 1997
---------- ----------
Average shares outstanding 13,940 18,640
Net effect of conversion of warrants and stock options 383 687
-------- --------
Total primary and fully diluted shares 14,323 19,327
======== ========
Net income $ 5,384 $ 8,932
Less preferred stock dividends (1,287) (1,167)
-------- --------
Net income applicable to common shares $ 4,097 $ 7,765
======== ========
Earnings per common share $ .29 $ .40
======== ========
22
5
6-MOS
DEC-31-1997
JAN-01-1997
JUN-01-1997
13,317
1,380
20,926
0
2,210
37,833
704,383
82,007
674,835
38,327
0
0
1,150
203
218,416
674,835
60,967
70,531
15,284
20,176
35,850
0
11,184
14,505
5,573
8,932
0
0
0
8,932
.40
.40
