ITEM 1. BUSINESS
THE COMPANY
Maynard Oil Company is a Delaware corporation which was organized in 1971 to continue the oil and gas operations conducted on an individual basis by its founders, including Mr. James G. Maynard, its Chairman of the Board and Chief Executive Officer. The Company's principal executive office is located at 8080 N. Central Expressway, Suite 660, Dallas, Texas 75206, and its telephone number is (214) 891-8880. Unless the context requires otherwise, as used herein, the term "Company" refers to Maynard Oil Company and its subsidiary.
The Company's principal line of business is the production and sale of, and exploration and development of, crude oil and natural gas. The Company's oil and gas operations are conducted exclusively in the United States, primarily in the states of Texas, Oklahoma and New Mexico.
RECENT ACQUISITION ACTIVITIES
Since January 1, 1999, the Company has purchased two sizeable groups of producing oil and gas properties.
In July and August, 1999, the Company purchased interests in twenty-three producing wells located in four counties in Texas (Fayette, Hardeman, Webb and Duval Counties) for cash consideration of $10,900,000. Total proved reserves were estimated to be 400,000 barrels of oil and 4.9 billion cubic feet of gas (BCF).
On November 12, 1999, Maynard Oil bought an interest in 170 oil and gas properties in the Permian Basin of Southeastern New Mexico and West Texas from Questar Exploration and Production Company for $32,000,000. Total proved reserves were estimated to be 4 million barrels of oil and 11.6 BCF of gas. To fund this acquisition, the Company entered into a new term loan arrangement with Bank One, Texas, which provides for the repayment of the outstanding $38,250,000 over a five year period with a maturity date of January 1, 2005. (see Note 7 to the Consolidated Financial Statements).
2000 ACTIVITIES
On March 16, 2000, the Company purchased eight producing wells for $2,800,245 at auction. These wells are located in Garza, Dawson, and Ector Counties, Texas.
OIL AND GAS OPERATIONS
The Company is an independent oil and gas company, engaged primarily in the production and exploration phases of the oil and gas business. Company
operations include acquiring, exploring, developing, and operating crude oil and natural gas properties.
The Company seeks to accomplish its overall goal of increasing hydrocarbon reserves and cash flow by selectively acquiring and exploiting producing oil and gas properties. When possible, the Company acquires producing properties on which it can act as operator, and thus, supervise production and development activities.
Prices realized from the sale of oil and gas from the Company's wells depend on numerous factors beyond the control of the Company, including the amount of domestic production, the importation of oil, the proximity of the Company's property to natural gas pipelines and the capacity of such pipelines, the market for other competitive fuels, fluctuations in seasonal demand, and governmental regulations relative to hydrocarbon production and pricing. The production of oil and gas is also subject to the laws of supply and demand, and therefore, is subject to purchaser cutbacks and price reductions during periods of oversupply. At December 31, 1999, approximately 68% of the Company's estimated proved reserves and 72% of the 1999 production, were attributable to crude oil and condensate on a net equivalent barrel basis (net equivalent barrel "NEB" uses a conversion ratio of six thousand cubic feet of gas (MCF) to one net equivalent barrel of oil) and consequently, the Company is primarily impacted by oil markets.
During 1999, the oil industry, including the Company, experienced a significant upswing in the average price received from the sale of its crude oil, exactly the opposite pricing effect than that experienced a year ago. The weighted average price at December 31, 1998 was $10.02 per barrel of oil sold. During the first quarter of 1999, the Company received an average of $11.44 per barrel, which then increased to averages of $16.00, $19.81, and $22.30 per barrel for the final three quarters of the year, respectively. Although the price increases experienced in 1999 positively impacted the Company's operations, the wide separation in prices between 1998 and 1999 further emphasizes the challenges and volatility of the domestic oil and gas business and how it is affected by conditions beyond the control of the Company.
During the year ended December 31, 1999, three customers, accounted for approximately 17%, 12%, and 10% respectively, of consolidated revenues. The Company does not believe it would be adversely affected by the loss of any of its oil or gas purchasers.
The market price for natural gas has also fluctuated significantly from month to month and year to year for the past several years. Like the oil market, the Company cannot predict gas price movements with any certainty.
Except for curtailed exploration and production activity occasionally experienced in severe weather and normal curtailments of gas sales in summer months, the Company does not consider its business to be seasonal and does not carry significant amounts of inventory.
A total of seven wells were drilled during 1999, two exploratory and five development wells. Two of the five development wells were drilled as producers on Company-operated properties, with Maynard retaining 100% and 20% working interest. The other three development wells were successful oil wells drilled by another operator. The two exploratory wells were determined to be non-productive.
GENERAL
The oil and gas business involves intense competition in all of its phases and, because of its size, the Company is not a significant competitive factor in the industry. In its efforts to acquire property rights, the Company competes with many companies having access to substantially greater financial resources and larger technical staffs.
The Company's oil and gas exploration efforts often involve exploratory drilling on unproven acreage involving high risks. There is no assurance that any oil or gas production will be obtained, or that such production, if obtained, will be profitable. The cost of drilling, completing and operating wells is often uncertain. Drilling may be curtailed or delayed as a result of many factors, including title problems, weather conditions, delivery delays, and shortages of pipe and equipment.
The Company's operations are subject to potential hazards, inherent in the exploration for and production of hydrocarbons, including blowouts and fires. These and other events can cause a suspension of drilling operations, severe damage to equipment or surrounding property, personal injury, and perhaps even a loss of life. The Company may be subject to liability for pollution and other damages and is subject to statutes and regulations relating to environmental and other matters. While the Company maintains insurance against certain of these risks, there are certain risks against which it cannot insure, or which it may elect not to insure due to premium costs, or for other reasons. Substantial uninsured liabilities to third parties may be incurred.
The oil and gas operations of the Company are subject to local, state and federal environmental regulations. To date, compliance with these regulations by the Company has had no material effect on the Company's capital expenditures. The Company is unable to assess or predict at this time the impact that compliance with such environmental regulations may have on its future capital expenditures, earnings and competitive position. The Company presently estimates that it will not make any material capital expenditures for environmental control facilities for its fiscal year ending December 31, 2000.
Many facets of the Company's operations are subject to governmental regulations. All of the Company's oil and gas properties are located in states in which oil and gas production is regulated by state production and conservation laws and regulations. These laws and regulations in many
instances also require permits for the drilling of wells, the spacing of wells, prevention of waste, conservation of oil and natural gas and various other requirements.
The Company's activities are subject to taxation at all levels of government, including taxes on income, severance of minerals, and payroll. Laws governing taxation, protection of the environment, crude oil and natural gas operations and production, and other crucial areas are all subject to modification at any time.
At March 17, 2000 the Company employed 41 persons, including one geologist and five petroleum engineers.
ITEM 2.
ITEM 2. PROPERTIES
The Company's executive offices are presently located at 8080 N. Central Expressway, Suite 660, Dallas, Texas occupying approximately 13,101 square feet of space under a lease agreement which expires in April, 2005.
The Company's principal property holdings consist of leasehold interests in oil and gas properties located in the United States, primarily in Oklahoma, Texas and New Mexico. The leaseholds are continued in force so long as production from lands under lease is maintained. The Company believes that it has satisfactory title to its oil and gas properties. Such properties are subject to customary royalty interests, liens incident to operating agreements, liens for current taxes, and other burdens and minor encumbrances, easements, and restrictions. The Company believes such burdens do not materially detract from the value of the properties or materially interfere with their use in the operation of the Company's business. The Company has pledged certain of its oil and gas properties to secure its term loan.
ESTIMATED PROVED RESERVES, FUTURE NET REVENUES AND PRESENT VALUE
Reflected below are the estimated quantities of proved developed and undeveloped reserves of crude oil and natural gas owned by the Company as of December 31, 1999, 1998, and 1997. Such reserve information has been prepared by the Company's staff of petroleum engineers and audited by the independent petroleum consulting firm of Netherland, Sewell, and Associates, Inc. No reserve reports with respect to the Company's proved net oil or gas reserves were filed with any federal authority or agency during the fiscal year ended December 31, 1999.
The following table summarizes the future net revenues, using current prices and costs as of the dates indicated, as well as the present value, discounted at 10%, of such future net revenues from estimated production of proved reserves of crude oil and natural gas as of December 31, 1999, 1998, and 1997. Oil and gas prices used in the tabulation of the amounts below are based on the price received for each lease at December 31 of the appropriate year. The weighted average prices at December 31, 1999, 1998, and 1997 respectively, used in the estimates were $23.69, $10.02, and $15.72 per barrel of oil and $2.04, $1.86, and $2.05 per mcf of natural gas. Lease and well operating costs are based upon actual operating expense records.
Amounts presented in the tables above are before the effects of income taxes.
PRODUCTION, SALES PRICES AND COSTS
The following table sets forth the Company's net oil and gas production, average sales prices and production costs for the three years ended December 31, 1999.
PRODUCTIVE WELLS AND ACREAGE
As of December 31, 1999, the Company owned an interest in approximately 1,419 gross (457.5 net) wells, of which 1,311 gross (415.9 net) are oil wells and 108 gross (41.6 net) are gas wells, located on approximately 53,888 gross (21,637 net) producing acres.
UNDEVELOPED ACREAGE
The following table sets forth the Company's gross and net undeveloped acreage as of December 31, 1999. Undeveloped Acreage ------------------- Gross Net ----- ---
Arkansas................................................848 369 Colorado.................................................80 10 Louisiana.............................................1,185 461 North Dakota............................................ 62 4 Oklahoma................................................135 70 Texas.................................................9,143 2,912 Wyoming.............................................. 2,376 809 ------ ------
Total 13,829 4,635 ====== ======
DRILLING ACTIVITY
The following table sets forth the results of the Company's drilling activity during the three years ended December 31, 1999.
At March 17, 2000, and December 31, 1999, the Company had no wells in the process of being drilled.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
The Company is a defendant in minor lawsuits that have arisen in the ordinary course of business. The Company does not expect any of these lawsuits or other items to have a material adverse effect on the Company's consolidated financial position or results of operations.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
EXECUTIVE OFFICERS OF THE REGISTRANT
Information with respect to the Company's executive officers as of March 17, 2000, is set forth in the table below.
Name Position Age Since ---- -------- --- -----
James G. Maynard Chairman of the Board, 73 1971 Chief Executive Officer and Treasurer
Glenn R. Moore President and Chief 62 1982 Operating Officer
L. Brent Carruth Vice President of 66 1984 Operations
Kenneth W. Hatcher Vice President of 56 1983 Finance
Linda K. Burgess Corporate Secretary 51 1984 and Controller
Mr. Maynard has been a director since 1971 and engaged in oil and gas exploration as an independent operator and private investor for the past 40 years.
Mr. Moore has over 30 years experience in domestic and foreign oil and gas exploration and production. Prior to joining the Company in November, 1982, Mr. Moore served as President of Shannon Oil and Gas, Inc. and Hanover Petroleum Corporation.
Mr. Carruth has over 30 years of petroleum engineering experience. Prior to joining the Company in January, 1984, he served for one year as Vice President of Operations of Cordova Resources. Preceding that, Mr. Carruth was
a petroleum consultant for three years and served as Manager of Engineering of Texas Pacific Oil Company for eight years.
Mr. Hatcher has over 25 years of finance and accounting experience in the oil and gas industry and is a Certified Public Accountant. Prior to joining the Company in February, 1983, Mr. Hatcher served as Controller and Vice President of Finance of Shannon Oil and Gas, Inc. for three years and as Controller and Vice President of Hanover Petroleum Corporation for four years.
Ms. Burgess has in excess of 20 years of oil and gas accounting experience. Prior to joining the Company in May, 1984, Ms. Burgess served as Controller for Trans-Western Exploration Inc. for four years and as Controller for Energy Resources Oil and Gas for three years.
Each officer's term of office expires on the date of the next annual meeting of the Board of Directors, or until his earlier resignation or removal. There are no family relationships among the executive officers listed, and there are no arrangements or understandings pursuant to which any of them were elected or appointed as officers.
PART II
ITEM 5.
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED SECURITY HOLDER MATTERS.
The Company's Common Stock is traded in the over-the-counter market, NASDAQ trading symbol "MOIL". The high and low sales prices for each quarterly period during the two years ended December 31, 1999, were as follows:
As of March 17, 2000, the Company had approximately 818 shareholders of record.
The Company has not paid any dividends on its Common Stock in the past, nor does it plan to pay dividends in the foreseeable future. The Company's ability to pay dividends is currently restricted under its Loan Agreement with Bank One, Texas.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA.
The following table summarizes certain selected financial data to highlight significant trends in the Company's financial condition and operating results for the periods indicated. The selected financial information presented should be read in conjunction with the consolidated financial statements and related notes appearing elsewhere in this Report and the Management's Discussion and Analysis of Financial Condition and Results of Operations set forth under Item 7
Item 7 below. All amounts are expressed in thousands, except per share information.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
YEAR ENDED DECEMBER 31, 1999 COMPARED TO DECEMBER 31, 1998 - ---------------------------------------------------------- OVERVIEW - --------
Maynard Oil considers 1999 a successful year from the standpoint of adding significant oil and gas volumes to its hydrocarbon reserve base and from the standpoint that pricing for these volumes recovered from record low levels at year-end 1998.
LIQUIDITY AND CAPITAL RESOURCES - -------------------------------
During 1999, the Company made two producing property acquisitions for a combined purchase price of $42,900,000, participated in the drilling of seven wells, continued maintenance activities on existing properties, and made its scheduled bank loan payments. In order to accomplish these activities, the Company incurred additional bank debt of $32,000,000 and reduced its cash balance by almost eight million dollars. However, 14% of the Company's assets are represented by cash, which will be utilized along with internally
generated cash flow and additional bank debt, if necessary, to fund future oil and gas activities.
RESULTS OF OPERATIONS - --------------------- YEAR ENDED DECEMBER 31, 1999 COMPARED TO DECEMBER 31, 1998 - ----------------------------------------------------------
For the year ended December 31, 1999, the Company earned eighty-nine cents per share compared to the prior year loss of one dollar and sixty cents per share. The loss in 1998 was primarily related to oil and gas price reductions which resulted in lower oil and gas revenues and a non-cash impairment charge to oil and gas properties of $1.18 per share.
Oil and gas revenues rose $7,226,189, or almost 45% between the two years, primarily due to price increases and higher gas volumes resulting from the current year property acquisitions. Oil and gas prices were $5.26 per barrel and forty-six cents per thousand cubic feet (mcf) higher than a year ago. Gas volumes increased approximately 40% while oil volumes declined slightly more than 3% during this one year period.
On a net equivalent barrel basis, lease operating expense declined twenty cents per NEB from $5.91 in 1998 to $5.71 in 1999 because expense workovers were less during the current period than the same period a year ago.
Exploration costs increased $141,890, or 36%, during 1999 primarily because the Company drilled two exploratory dry holes in the current year, which are expensed under the successful efforts method of accounting since no commercial hydrocarbon reserves were found. During 1998, two exploratory wells were productive and capitalized as oil and gas property.
General and administrative expense category reflects a $513,470 increase which is primarily the result of phantom stock adjustments. During the current year, phantom stock expense was charged $214,875, while in 1998, general and administrative expenses included a phantom stock credit of $262,625. Phantom stock charges and credits arise as a result of stock price fluctuations. Closing stock prices at December 31, 1999, 1998, and 1997 were $9.75, $7.50, and $10.25 respectively.
Depreciation and amortization expense was reduced almost 41% from prior year levels. Under the successful efforts method of accounting, costs of oil and gas properties are amortized on a unit-of-production method based on estimated proved reserves. During 1998, the effects of lower oil and gas prices reduced the estimated quantities of recoverable proved reserves which resulted in increased expense. Likewise, higher product prices in the current year increased the estimated quantities of recoverable proved reserves and decreased the average depletion rate. On a net equivalent barrel basis, the current rate was $4.26 per NEB compared with $7.58 per NEB last year. Last year's impairment charge amounted to $6.74 per NEB. If the 1998 write down of oil and gas properties had not occurred, thus leaving the impairment amount capitalized, the current year depreciation and amortization expense would have increased forty-six cents per NEB.
Average oil prices for December, 1999 were $23.47 per barrel compared with an average of $10.02 a year ago. Consequently, there was no indication the carrying amount of the Company's assets should be assessed for recoverability, and thus there was no impairment charge during the current year.
Interest expense decreased $117,644 due to scheduled bank note payments and the resulting lower average principal amounts outstanding. For future periods, the amount of interest expense should rise because of the $32,000,000 increase in bank debt which occurred in late 1999.
Income tax expense reflects a charge of $2,793,000 during the current period while the prior year included a tax benefit of $4,081,856 to reflect the losses related to pricing reductions.
YEAR ENDED DECEMBER 31, 1998 COMPARED TO DECEMBER 31, 1997 - ---------------------------------------------------------- OVERVIEW - --------
1998 was a challenging year for Maynard Oil Company, as well as all others involved in the energy sector, attempting to deal with a virtual price collapse for its hydrocarbon products. For 1998, the Company recorded a net loss of $7,815,509, primarily related to oil and gas price reductions, which resulted in lower oil and gas revenues, as well as a non cash impairment charge of $8,754,846. Without this non cash write off, the Company would have reported a loss of approximately $2,075,000 (net of tax).
LIQUIDITY AND CAPITAL RESOURCES - -------------------------------
During 1998, the Company purchased three fields in West Texas for cash consideration of approximately $2,684,000. The Company also made its scheduled bank loan payments and continued maintenance activities on existing properties, all of which reduced the cash balance by approximately $3,700,000 in 1998. However, almost 35% of the Company's total assets, as reflected on its 1998 balance sheet, is represented by cash, which would be utilized along with additional bank debt to finance future property acquisitions.
RESULTS OF OPERATIONS - --------------------- YEAR ENDED DECEMBER 31, 1998 COMPARED TO DECEMBER 31, 1997 - ----------------------------------------------------------
The net loss for 1998 was $7,815,509 compared to net income of $4,455,355 for 1997 an adverse change in financial results over the two year period of $12,270,864.
Oil and gas revenues declined $10,311,196, or almost 39% between the two years, primarily due to product price reductions. Oil prices plummeted seven dollars per barrel during the period and gas prices fell forty-six cents per MCF, accounting for approximately $8,600,000 of the revenue reduction. Oil and gas revenues were also negatively impacted by oil and gas volume reductions of 7% and 16%, respectively.
Lease operating expenses decreased 14%, from $10,124,212 in 1997 to $8,722,565 in 1998, primarily due to lower production taxes resulting from the significant decline in oil and gas prices. On a net equivalent barrel basis, this decrease was fifty-two cents per NEB, from $6.43 per NEB in 1997 to $5.91 per NEB during the current year.
Exploration costs decreased from $838,580 in 1997 to $391,718 currently, a 53% decline, essentially due to a reduction in seismic costs which were partially offset by higher impairments of undeveloped acreage. Because the Company follows the successful efforts method of accounting, the Company's results of operations may be adversely affected during any accounting period in which seismic costs, exploratory dry hole costs, and unproved property impairments are expensed.
General and administrative expenses increased approximately 20% in 1998, due primarily to decreased amounts accrued under an employee benefit plan, which is based upon stock price (see Note 8 to the Company's Consolidated Financial Statements). Last year, general and administrative expense was credited $518,563 as the Company's stock price fell from $18.75 per share at the end of 1996 to $10.25 per share at the end of 1997. During the current calendar year, the Company's general and administrative expense was credited $262,625 to reflect a further stock price reduction from $10.25 per share to $7.50 per share at the end of 1998. Thus, the Company ended 1998 with a liability of $234,750 representing future cash payments to which various employees covered by this plan are entitled whenever their employment by the Company is ended.
Depreciation and amortization expense increased 22% due to an increase in the Company's average depletion rate. Under the successful efforts method of accounting, costs of oil and gas properties are amortized on a unit-of-production method based on estimated proved reserves. The increase in the Company's average depletion rate was attributable to the effects of lower oil and gas prices on estimated quantities of proved reserves. These estimates relate to end-of-year product prices, which were $15.72 per barrel of oil and $2.05 per MCF of natural gas at the end of 1997 compared to $10.02 per barrel of oil and $1.86 per MCF of natural gas at the end of 1998. On a net equivalent barrel basis, the current depreciation and amortization expense rate was $7.58 per NEB compared with $5.63 per NEB for the prior twelve months, a 35% increase.
During 1998, the Company also recognized a non-cash impairment charge to oil and gas properties in the amount of $8,754,846 compared to $227,879 in the prior year. Under generally accepted accounting principles, the Company must compare the carrying value of its oil and gas properties with the undiscounted value of its future net revenues from the properties. Should this comparison indicate non-recoverability of the carrying costs, an impairment is recognized based upon estimates of discounted value. The significant reduction in product pricing impacted this comparison and caused the current year writedown.
Interest expense decreased approximately $438,000, or 30% due to scheduled bank note payments for 1998 and the resulting lower principal amounts outstanding.
The Company recognized a tax benefit of $4,081,856 during 1998 compared with tax expense of $2,157,500 during the prior year. This current year tax benefit relates to the tax effects of the revenue reductions, expenses and impairments discussed above.
RECENT ACCOUNTING PRONOUNCEMENTS - --------------------------------
In June 1998, the Financial Accounting Standards Board issued Statement No. 133 ("SFAS 133"), "Accounting for Derivative Instruments and Hedging Activities." SFAS 133 establishes accounting and reporting standards for derivative instruments and for hedging activities. It requires enterprises to recognize all derivatives as either assets or liabilities in the balance sheet and measure those instruments at fair value. The requisite accounting for changes in the fair value of a derivative will depend on the intended use of the derivative and the resulting designation. The Company must adopt SFAS 133 effective January 1, 2001. Based on the Company's outstanding derivative contracts, the Company believes that the impact of adopting this standard would not have a material adverse affect on the Company's operations or consolidated financial condition. However, no assurances can be given with regard to the level of the Company's derivative activities at the time SFAS 133 is adopted or the resulting effect on the Company's operations or consolidated financial condition.
YEAR 2000 DISCLOSURE - --------------------
The Company has not experienced any problems related to the year 2000 date change, nor have its suppliers experienced any difficulties with respect to the products and services provided to the Company.
CERTAIN FACTORS THAT COULD AFFECT FUTURE OPERATIONS - ---------------------------------------------------
Certain information contained in this report, as well as written and oral statements made or incorporated by reference from time to time by the Company and its representatives in other reports, filings with the Securities and Exchange Commission, press releases, conferences, teleconferences or otherwise, may be deemed to be 'forward-looking statements' within the meaning of Section 21E of the Securities Exchange Act of 1934 and are subject to the 'Safe Harbor' provisions of that section. Forward-looking statements include statements concerning the Company's and management's plans, objectives, goals, strategies and future operations and performance and the assumptions underlying such forward-looking statements. When used in this document, the words "anticipates," "estimates," "expects," "believes," "intends," "plans" and similar expressions are intended to identify such forward-looking statements. Actual results and developments could differ materially from those expressed in or implied by such statements due to these and other factors.
ITEM 7.A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
COMMODITY RISK - --------------
The Company's primary commodity market risk exposure is to changes in the pricing applicable to its oil production, which is normally priced with reference to a defined benchmark, such as light, sweet crude oil traded on the New York Mercantile Exchange (WTI). Actual prices received vary from the benchmark depending on quality and location differentials. The markets for crude oil historically have been volatile and are likely to continue to be volatile in the future.
From time to time, the Company enters into financial market transactions, including collars, with creditworthy counterparties, primarily to reduce the risk associated with the pricing of a portion of the oil and natural gas that it sells. The policy is structured to underpin the Company's planned revenues and results of operations.
During 1999, the Company entered into a derivative financial instrument whereby the Company has hedged 2,500 barrels of daily production from November 1, 1999 through June 30, 2000 with a ceiling price of $23.90/bbl and a floor price of $14.00/bbl. The contracts call for a monthly settlement such that if the average WTI for the month is greater than $23.90/bbl, The Company remits to the counterparty the excess times the number of barrels hedged during the month. Conversely, if the average WTI for the month is less than $14.00/bbl, the counterparty pays the Company for the difference times the number of barrels hedged during the month. If the average WTI for the month falls between $14.00/bbl and $23.90/bbl, no settlement is made. As a result of this arrangement, the Company's oil and gas revenues were reduced by $234,673 during 1999.
INTEREST RATE RISK - ------------------
While the Company does have interest rate risk associated with the $38.25 million in outstanding borrowing as of December 31, 1999, they do not consider the risk to have a material impact on the Company's operations. As such, the Company does not hedge against interest rate risk exposure.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The information required by Item 8 is included on pages 19 through 38 of this Report.
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.
None
PART III
The information required by Part III (Items 10 through 13) is set forth in the Company's Proxy Statement for the annual meeting of stockholders to be held on May 17, 2000, and is incorporated herein by reference. Information with respect to the Company's executive officers as of March 17, 2000, is set forth commencing on pages 8 and 9 hereof under the caption "Executive Officers of the Registrant".
PART IV
ITEM 14.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8K
FINANCIAL STATEMENTS AND SCHEDULES
See Index to Consolidated Financial Statements and Schedule on page 19 of this Report.
REPORTS ON FORM 8-K
On October 21, 1999, the Company filed a Form 8-K with the Securities and Exchange Commission, to report the acquisition of oil and gas properties.
On November 23, 1999, the Company filed a Form 8-K with the Securities and Exchange Commission, as amended by Amendment No. 1 on Form 8-KA dated January 25, 2000 to report the acquisition of producing oil and gas properties. Pro forma financial information was included in the report, as amended.
EXHIBITS
3.1 (a) Certificate of Incorporation, as amended, filed as Exhibit 3.1 to the Company's Annual Report on Form 10-K for its fiscal year ended December 31, 1980 (the "1980 Form 10-K"), and incorporated herein by reference.
(b) Certificate of Amendment of Certificate of Incorporation dated May 19, 1981, filed as Exhibit 3.1(b) to the Company's Annual Report on Form 10-K for its fiscal year ended December 31, 1981 (the "1981 form 10-K"), and incorporated herein by reference.
(c) Certificate of Amendment of Certificate of Incorporation dated May 22, 1987, filed as Exhibit 3.1 to the Company's Quarterly Report on Form 10-Q for the period ended June 30, 1987, and incorporated herein by reference.
(d) Certificate of Amendment of Certificate of Incorporation dated June 3, 1993, filed as Exhibit 3.1 to the Company's Quarterly Report on Form 10-Q for the period ended June 30, 1993, and incorporated herein by reference.
3.2 (a) By-Laws, as amended, filed as Exhibit 3.2(b) to the 1981 Form 10-K and incorporated herein by reference.
(b) Amendment to the By-Laws, filed as Exhibit 3.2(b) to the 1981 Form 10-K and incorporated herein by reference.
(c) Amendment to the By-Laws, filed as Exhibit 3.2(c) to the Company's Annual Report on Form 10-K for its fiscal year ended December 31, 1984, and incorporated herein by reference.
(d) Amendment to the By-Laws, filed as Exhibit 3.2 to the Company's Quarterly Report on Form 10-Q for the period ended June 30, 1987, and incorporated herein by reference.
(e) Amendment to the By-Laws, filed as Exhibit 3.2 to the Company's Annual Report on Form 10-K for its fiscal year ended December 31, 1993 and incorporated herein by reference.
(f) By-Laws, as amended, filed as Exhibit 3.2 to the Company's Quarterly Report on Form 10-Q for the period ended September 30, 1999, and incorporated herein by reference.
4.1 Second Restated Loan Agreement, dated November 12, 1999 between Maynard Oil Company and Bank One, Texas, N.A., filed herewith.
10.1 1989 Stock Participation Plan, filed as Exhibit 10.1 to the Company's Annual Report on Form 10-K for its fiscal year ended December 31, 1995 and incorporated herein by reference.
21.1 List of subsidiaries of the Company as of December 31, 1999, filed herewith.
27 Financial Data Schedule, filed herewith.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
MAYNARD OIL COMPANY
By \s\ James G. Maynard ---------------------- James G. Maynard Chairman of the Board
Date: March 30, 2000
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons in the capacities and on the date indicated in multiple counterparts with the same force and effect as if each person executing a separate counterpart has joined in execution of the same counterpart.
/s/ James G. Maynard Chairman of the Board, March 30, 2000 - ------------------------ James G. Maynard Chief Executive Officer & Treasurer
/s/ Glenn R. Moore President and Chief March 30, 2000 - ------------------------ Glenn R. Moore Operating Officer
/s/ Kenneth W. Hatcher Vice President of Finance March 30, 2000 - ------------------------ Kenneth W. Hatcher (Principal Financial and Accounting Officer)
/s/ Robert B. McDermott Director March 30, 2000 - ------------------------ Robert B. McDermott
/s/ Ralph E. Graham Director March 30, 2000 - ------------------------ Ralph E. Graham
MAYNARD OIL COMPANY AND SUBSIDIARY
Index to Consolidated Financial Statements and Schedule
Page
Financial Statements:
Report of Independent Accountants 20
Consolidated Balance Sheets - December 31, 1999 and 1998 21
Consolidated Statements of Operations - Three years ended December 31, 1999 22
Consolidated Statements of Shareholders' Equity - Three years ended December 31, 1999 23
Consolidated Statements of Cash Flows - Three years ended December 31, 1999 24
Notes to Consolidated Financial Statements 25
Financial Statement Schedule for the Three years ended December 31, 1999
II - Valuation and Qualifying Accounts 38
All other schedules are omitted as the required information is inapplicable or the information is presented in the Consolidated Financial Statements or Notes thereto.
REPORT OF INDEPENDENT ACCOUNTANTS ---------------------------------
To the Board of Directors and Shareholders of Maynard Oil Company
In our opinion, the consolidated financial statements listed in the accompanying index present fairly, in all material respects, the financial position of Maynard Oil Company and its subsidiary at December 31, 1999 and 1998, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1999 in conformity with accounting principles generally accepted in the United States. In addition, in our opinion, the financial statement schedule listed in the accompanying index presents fairly, in all material respects, the information set forth therein when read in conjunction with the related Consolidated Financial Statements. These financial statements and the financial statement schedule are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements and the financial statement schedule based on our audits. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above.
PricewaterhouseCoopers LLP Dallas, Texas March 28, 2000
MAYNARD OIL COMPANY AND SUBSIDIARY Consolidated Balance Sheets
December 31, -------------------------------- 1999 1998 ---- ---- ASSETS Current assets: Cash and cash equivalents $ 12,910,321 $ 20,889,742 Accounts receivable, trade 6,029,188 2,568,807 Income taxes receivable 750,000 977,587 Other current assets 836,554 478,680 ------------- ------------- Total current assets 20,526,063 24,914,816 ------------- -------------
Property and equipment, at cost: Oil and gas properties, successful efforts method 151,655,045 107,292,314 Other property and equipment 337,546 460,475 ------------- ------------- 151,992,591 107,752,789 Less accumulated depreciation and amortization (78,158,395) (72,985,138) ------------- ------------- Net property and equipment 73,834,196 34,767,651 ------------- -------------
Deferred income taxes 348,000 681,000 ------------- -------------
$ 94,708,259 $ 60,363,467 ============= ============= LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Current installments of long-term debt $ 5,737,500 $ 5,000,000 Accounts payable 4,249,724 2,583,357 Accrued expenses 1,257,618 842,368 Income taxes payable 960,212 40,799 ------------- ------------- Total current liabilities 12,205,054 8,466,524 ------------- -------------
Long-term debt 32,512,500 6,250,000
Shareholders' equity: Preferred stock of $.50 par value Authorized 1,000,000 shares; none issued -- -- Common stock of $.10 par value Authorized 20,000,000 shares; 4,880,887 and 4,884,597 shares issued and outstanding 488,089 488,460 Additional paid-in capital 18,831,138 18,831,138 Retained earnings 30,671,478 26,327,345 ------------- ------------- Total shareholders' equity 49,990,705 45,646,943 ------------- -------------
Contingencies and commitments (note 11) $ 94,708,259 $ 60,363,467 ============= =============
See accompanying Notes to Consolidated Financial Statements.
MAYNARD OIL COMPANY AND SUBSIDIARY Notes to Consolidated Financial Statements
(1) Summary of Significant Accounting Policies ------------------------------------------
Business Activity -----------------
Maynard Oil Company (the Company) is engaged in the acquisition, exploration, development, production and sale of crude oil and natural gas in the Continental United States, primarily in the states of Texas, Oklahoma and New Mexico.
Principles of Consolidation ---------------------------
The consolidated financial statements include the accounts of Maynard Oil Company and its wholly-owned subsidiary. All significant intercompany balances and transactions have been eliminated in consolidation.
Cash Equivalents ----------------
Cash equivalents are highly liquid investments purchased with an original maturity of three months or less.
Property and Equipment ----------------------
The Company follows the "successful efforts" method of accounting for its costs of acquisition, exploration and development of oil and gas properties. Intangible drilling and development costs related to development wells and successful exploratory wells are capitalized, whereas the costs of exploratory wells which do not find proved reserves are expensed. All geological and geophysical costs not reimbursed are expensed as incurred. Costs of acquiring unproved leases are evaluated for impairment until such time as the leases are proved or abandoned. In addition, unamortized costs at a field level are reduced to fair value if the sum of expected undiscounted future cash flows are less than net book value.
Depreciation and amortization of producing properties is computed using the unit-of-production method based upon estimated proved recoverable reserves. Depreciation of other property and equipment is calculated using the straight-line method based upon estimated useful lives ranging from two to ten years.
Maintenance and repairs are charged to expense as incurred. Renewals and betterments are capitalized. When assets are sold, retired or otherwise disposed of, the applicable costs and accumulated depreciation and amortization are removed from the accounts, and the resulting gain or loss is recognized.
Revenue Recognition -------------------
The Company recognizes oil and gas sales from its interests in producing wells under the sales method of accounting. Under the sales method, the Company recognizes revenues based on the amount of oil and natural gas sold to purchasers, which may be different from the amounts to which the Company is entitled based on its interest in the properties. Gas balance obligations as of December 31, 1999, 1998 and 1997 were not significant.
Overhead Reimbursement Fees ---------------------------
Prior to 1999, overhead charges billed to working interest owners, including the Company, have been classified as a reduction of general and administrative expenses in the Consolidated Statements of Operations with the Company's working interest share being included in operating expenses. For 1999, the Company reduced general and administrative expenses by only the amounts actually due from outside working interest owners and has reclassified the expenses for 1998 and 1997 to conform with the 1999 presentation. The effect of this reclassification for the prior two years is as follows:
Deferred Income Taxes ---------------------
The Company recognizes deferred tax liabilities and assets for the expected future tax consequences of temporary differences between the tax and financial reporting bases of the Company's assets and liabilities by applying enacted tax rates. A valuation allowance is established to reduce deferred tax assets if it is more likely than not that the related tax benefits will not be realized.
Derivative Financial Instruments --------------------------------
The Company periodically enters into commodity hedge contracts, including caps and floors which require payments to (or receipts from) counterparties based on the differential between a fixed price and a variable price for a fixed quantity of crude oil or natural gas without the exchange of underlying volumes. The notional amounts of these derivative financial instruments are based on expected production from existing wells. The Company uses these derivative financial instruments to manage market risks resulting from fluctuations in commodity prices.
The derivative financial instruments held by the Company are not leveraged and are held for purposes other than trading.
Correlation of the hedge contracts is determined by evaluating whether hedge contract gains and losses will substantially offset the effects of price changes on the underlying crude oil and natural gas sales volumes. To the extent that correlation exists between the hedge contracts and the underlying crude oil and natural gas sales volumes, realized gains or losses and related cash flows arising from the hedge contracts are recognized as a component of oil and natural gas sales in the same period as the sale of the underlying volumes. To the extent that correlation does not exist between the hedge contracts and the underlying crude oil and the natural gas sales volumes, realized gains or losses and related cash flows arising from the hedge contracts are recognized in the period as a component of other income. The fair market value of any hedge contract that does not meet the correlation test outlined above is recorded as a deferred gain or loss on the balance sheet and is adjusted to current market value at each balance sheet date with any deferred gains or losses recognized as a component of other income.
In the event that management decides to terminate a hedge contract, generally accepted accounting principles require that any gains or losses upon termination be carried forward and recognized as a component of oil and natural gas sales in the period in which the underlying volumes are sold.
Income per Common Share -----------------------
The Company does not have a complex capital structure, and consequently, net income per common share is computed using the weighted average number of common shares outstanding during each year. Basic and diluted earnings per share were the same for 1999, 1998 and 1997.
Segment Information -------------------
All of the Company's oil and gas properties and related operations are located in the United States and management has determined that the Company has one reportable segment.
The Use of Estimates in Preparing Financial Statements ------------------------------------------------------
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, liabilities, disclosures of gain and loss contingencies at the date of the financial statements and reported amounts of revenues and expenses during the reporting period. Since estimates are made based on all information available at the time, it is reasonably possible in the near term a change in an estimate may occur or actual amounts may differ from estimated amounts.
Reclassifications -----------------
Certain reclassifications of prior period statements have been made to conform with the 1999 presentation.
(2) Fair Value of Financial Instruments, Risk Management, and --------------------------------------------------------- Concentrations of Credit Risk -----------------------------
Fair Value of Financial Instruments -----------------------------------
The carrying amounts of cash and cash equivalents, accounts receivable, and accounts payable approximate fair value because of the short maturity of these instruments. The carrying amount of long-term debt, including the current portion, approximates fair value because the interest rate on this instrument changes with market interest rates.
Risk Management ---------------
During 1999, the Company entered into a derivative financial instrument whereby the Company has hedged 2,500 barrels of daily production from November 1, 1999 through June 30, 2000 with a ceiling price of $23.90/bbl and a floor price of $14.00/bbl. The contracts call for a monthly settlement such that if the average WTI for the month is greater than $23.90/bbl, Maynard remits to the counterparty the excess times the number of barrels hedged during the month. Conversely, if the average WTI for the month is less than $14.00/bbl, the counterparty pays Maynard for the difference times the number of barrels hedged during the month. If the average WTI for the month falls between $14.00/bbl and $23.90/bbl, no settlement is made. As a result of this arrangement, the Company's oil and gas revenues were reduced by $234,673 during 1999.
Concentration of Credit Risks -----------------------------
Financial instruments, which potentially subject the Company to concentrations of credit risk, consist principally of cash and cash equivalents and accounts receivable. The Company places its cash and cash equivalents with high credit quality institutions. With respect to accounts receivable, these financial instruments primarily pertain to oil and gas sales and joint interest billings. These accounts receivable are due from small to mid-size companies engaged principally in oil and gas activities. The Company performs ongoing credit evaluations of its customers' financial condition and, generally, requires no collateral from its customers. Payment terms are on a short-term basis and in accordance with industry standards.
During the years ended December 31, 1999 and 1997, oil and gas sales to three customers, amounting to approximately $4,143,000, $2,868,000, and $2,457,000 and $5,698,000, $5,067,000 and $3,783,000, respectively, each accounted for more than 10% of total consolidated revenues. For the year ended December 31, 1998, oil and gas sales to four customers, amounting to approximately $2,449,000, $2,277,000, $2,183,000, and
$2,144,000, respectively, each accounted for more than 10% of total consolidated revenues.
(3) Subsequent Event ----------------
On March 16, 2000, the Company purchased eight producing wells for $2,800,245 at auction. These wells are located in Garza, Dawson, and Ector Counties, Texas.
(4) Acquisitions (Reserve information is unaudited) -----------------------------------------------
During 1999, the Company consummated two separate producing property acquisitions for a gross purchase price of $42,900,000. In July and August of 1999, the Company purchased interests in twenty-three producing oil and gas wells located in four counties in Texas (Fayette, Hardeman, Webb, and Duval) at auction. Estimated proved reserves associated with this transaction approximated 400,000 barrels of oil and 4.9 billion cubic feet of gas (BCF). Total consideration paid was $10,900,000.
On November 12, 1999, Maynard Oil bought an interest in 170 oil and gas properties in the Permian Basin of Southeastern New Mexico and West Texas from Questar Exploration and Production Company for $32,000,000. Total proved reserves were estimated to be 4 million barrels of oil and 11.6 bcf of gas. In conjunction with this transaction, the Company entered into a new term loan arrangement with Bank One, Texas.
The above acquisitions were accounted for as purchases, and their results of operations are included in the Consolidated Statements of Operations from the closing dates. In connection with the Questar purchase, results of operations from the effective date through the closing date were recorded as purchase price adjustments.
The following table presents unaudited pro forma operating results for the Questar transaction as if this $32,000,000 acquisition had occurred on January 1, 1998. Years ended December 31, ------------------------ 1999 1998 ---- ---- Amounts in thousands, except per share amounts Sales $30,653 $24,345 Net income (loss) 4,342 (9,092) Income (loss) per common share: Income (loss) .89 ($1.86)
(5) Impairment of Long-Lived Assets -------------------------------
Oil and gas prices fell from an average of $15.72 per barrel and $2.05 per mcf at the end of 1997 to averages of $10.02 per barrel and $1.86 per mcf, at the end of 1998. Consequently, the Company performed an impairment evaluation of its oil and gas properties and recognized a
non-cash impairment of $8,754,846 in December 1998 to account for those properties whose investment would not be recoverable under the Company's current pricing assumptions, as defined by Statement of Financial Accounting Standards No. 121, Accounting for the Impairment of LongLived Assets and for Long-Lived Assets to Be Disposed Of ("SFAS 121").
For 1997, when oil prices ranged from averages of $16.52 to $22.11 per barrel and gas prices averaged $2.05 to $3.59 per mcf, the Company recognized an impairment of oil and gas properties amounting to $227,879.
(6) Cash Flow Data --------------
Supplemental cash flow information for the three years ended December 31, 1999 is summarized as follows:
1999 1998 1997 ---- ---- ---- Cash paid: Interest expense $ 758,695 $982,258 $1,462,269 ========= ======= =========
Income taxes $1,279,111 $330,000 $5,047,847 ========= ======= =========
(7) Long-term Debt
Long-term debt at December 31, 1999 and 1998 is summarized as follows:
Effective November 12, 1999, the Company executed a new loan agreement with Bank One, Texas, increasing its outstanding loan from $6,250,000 to $38,250,000 in connection with the acquisition of producing properties discussed in Note 4.
The term note permits the Company to choose between three interest rate options and to specify what portion of the loan is covered by a specific interest rate option and the applicable funding period to which the
interest rate option is to apply. The interest rate options are as follows:
(1) Bank's prime lending rate (2) Bank's certificate of deposit rate (3) London interbank eurodollar rate (Eurodollar)
At December 31, 1999, interest on the bank term loan was at a rate of approximately 6.99%.
The credit agreement contains various financial covenants related to working capital, net worth, and cash flow. Additionally, the debt agreement places certain limitations on the incurrence of additional debt and prohibits the payment of dividends.
(8) Employee Incentive Plans ------------------------
In August 1989, an employee incentive plan was adopted, whereby stock participation units might be granted to officers and key employees. Such stock participation units entitle a participant to a cash payment following termination of employment in an amount equal to the excess, if any, of the fair market value of one share of the Company's common stock over a share price specified on the date of grant, multiplied by the number of vested units. The units vest over a five year period with 25% vesting after two years and the remainder in three equal annual installments. For the year ended December 31, 1989, 73,000 units were awarded to certain employees at a price of $4.50 per share of which 49,500 units remain outstanding at December 31, 1999, all of which are 100% vested. During August 1993, 52,000 additional units were awarded at $5.625 per share of which 46,000 units remain outstanding and are also 100% vested. Earnings are charged and credited over the life of the units for fluctuations in stock prices from $4.50 per share and $5.625 per share. During the current year, operations were charged $111,375 and $103,500 in regard to the stock participation units granted in 1989 and 1993, respectively. These charges reflect the increase in closing stock prices from $7.50 per share at December 31, 1998 to $9.75 per share at December 31, 1999. During 1998 and 1997, respectively operations were credited $262,625 and $518,563.
(9) Income Taxes ------------
Income tax expense (benefit) consists of the following:
Years ended December 31, ------------------------------------------------ 1999 1998 1997 ---- ---- ---- Federal Current $ 2,227,000 $ (734,967) $1,212,500 Deferred 333,000 (3,313,000) 413,000 State 233,000 (33,889) 532,000 ---------- --------- --------- $ 2,793,000 $(4,081,856) $2,157,500 ========== ========== =========
Income tax expense(benefit) for the three years ended December 31, 1999 differs from the amount computed by applying the applicable U.S. corporate income tax rate of 34% to income (loss) before income taxes. The reasons for this difference are as follows:
The components of the net deferred tax asset were as follows:
December 31, ------------------------------- 1999 1998
Oil and gas property assets $ 178,000 $ 621,000 Employee benefit obligations 170,000 60,000 --------- ---------
Net deferred tax asset $ 348,000 $ 681,000 ========= =========
For both 1999 and 1998, the net deferred tax calculation resulted in the recognition of a deferred tax asset. After review by management, it was determined no valuation allowance was deemed necessary.
(10) Employee Benefit Plans ----------------------
The Company adopted a noncontributory defined contribution retirement plan for all full-time employees age 21 or older who have completed one year of service. The plan provides for a minimum annual contribution by the Company equal to 3% of an employee's base salary plus overtime compensation. At its discretion, the Company may also make supplemental contributions to the plan. For calendar 1997, 1998 and 1999, the Company elected to contribute 5% for each employee covered by this plan. Under this plan, amounts equal to retirement plan expense are funded annually, which amounted to $106,462, $103,458 and $99,313, respectively, for the years ended December 31, 1999, 1998 and 1997 respectively.
The Company also has a profit sharing plan pursuant to Section 401 of the Internal Revenue Code, whereby participants may contribute a percentage of compensation. The Plan provides for a matching contribution by the Company equal to one-half of the employee's percentage contribution up to the first 10% of compensation for 1999, 1998, and 1997. During this same three year period, the Company's matching portion amounted to $93,823, $91,911, and $91,302, respectively.
(11) Contingencies and Commitments -----------------------------
The Company is a defendant in certain non-environmental litigation arising from operations in the normal course of business. While it is not feasible to determine the outcome of these actions, it is the Company's opinion that the ultimate outcome of the litigation will not have a material adverse effect on the financial position or results of operations of the Company.
All of the Company's operations are generally subject to Federal, state and local environmental regulations. To the best of management's knowledge, the Company is in substantial compliance with such laws and regulations.
The Company leases office space and certain equipment under various operating leases which expire over the next five years. All leases require the payment of taxes and insurance, and the office lease requires the Company to pay its pro rata share of increases in maintenance expense above that prevailing in base years. Management expects that in the normal course of business, leases will be renewed or replaced by other leases. The Company extended its office space lease, which was scheduled to terminate April 30, 2000, for an additional five years, such that the expiration date is now April 30, 2005. Rent expense for the three years ended December 31, 1999 was $362,443, $341,443, and $321,001, respectively.
Minimum payments for operating leases having initial or noncancellable terms in excess of one year are as follows:
2000 $ 276,750 2001 269,304 2002 255,672 2003 231,395 2004 202,722 ---------
Total minimum payments $1,235,843 ==========
(12) Supplemental Oil and Gas Disclosures (Unaudited) ------------------------------------------------
Capitalized Costs -----------------
A summary of the Company's aggregate capitalized property and equipment costs relating to oil and gas exploration and development activities follows:
Costs Incurred --------------
A summary of costs incurred in oil and gas acquisition, exploration and development activities follows:
(12) Supplemental Oil and Gas Disclosures (Unaudited) continued ----------------------------------------------------------
Results of Operations ---------------------
The results of operations from oil and gas producing activities are as follows:
(12) Supplemental Oil and Gas Disclosures (Unaudited) continued ----------------------------------------------------------
Oil and Gas Reserve Quantities ------------------------------
The following unaudited tables represent the Company's estimates of its proved oil and gas reserves. The Company emphasizes that reserve estimates are inherently imprecise and that estimates of new discoveries are more imprecise than those of producing oil and gas properties. Accordingly, the estimates are expected to change as future information becomes available. The estimates were evaluated by the Company's staff of petroleum engineers and audited by independent petroleum engineers. It is their opinions that the reserve quantity and present value information in the following tables complies with the applicable rules and regulations of the SEC. All of the Company's reserves are located within the United States.
Proved Developed and Oil Gas Undeveloped Reserves (Barrels) (MCF) - -------------------- --------- ----- Total as of December 31, 1996 8,974,386 14,585,180 Revisions of previous estimates (733,337) (763,172) Purchases of reserves 55,867 98,228 Extensions and discoveries 10,402 782,797 Production (1,106,042) (1,957,147) Sales of reserves in place (52,809) (10,966) ----------- -----------
Total as of December 31, 1997 7,148,467 12,734,920 Revisions of previous estimates (1,372,452) (252,807) Purchases of reserves 244,810 1,971,319 Extensions and discoveries 24,624 94,318 Production (1,025,524) (1,637,254) Sales of reserves in place (473) (6,396) ----------- -----------
Total as of December 31, 1998 5,019,452 12,904,100 Revisions of previous estimates 1,874,514 559,013 Purchases of reserves 4,706,560 18,008,548 Extensions and discoveries 930,732 2,928,373 Production (990,877) (2,289,564) Sales of reserves in place (20,351) (183,610) ----------- -----------
Total as of December 31, 1999 11,520,030 31,926,860 =========== ===========
Proved Developed Reserves - ------------------------- December 31, 1997 6,761,920 12,001,602 December 31, 1998 4,947,039 12,262,069 December 31, 1999 10,072,772 28,917,190
(12) Supplemental Oil and Gas Disclosures (Unaudited) continued ----------------------------------------------------------
Standardized Measure - --------------------
The standardized measure of discounted future cash flows from proved oil and gas reserves determined in accordance with rules prescribed by the Financial Accounting Standards Board is summarized as follows:
Years ended December 31, ------------------------------------ 1999 1998 1997 (000's) (000's) (000's) ------- ------- -------
Future cash inflows $ 338,098 $ 74,282 $ 138,471 Future production costs (134,474) (38,158) (73,641) Future development costs (11,605) (773) (2,193) --------- --------- --------- 192,019 35,351 62,637 Future income tax (expenses) benefits (39,884) 487 (6,891) --------- --------- --------- Future net cash flows 152,135 35,838 55,746 10% annual discount for estimated timing of cash flows (54,926) (11,348) (17,867) --------- --------- --------- Standardized measure of discounted future net cash flows $ 97,209 $ 24,490 $ 37,879 ========= ========= =========
The average prices for oil and gas used to calculate future cash inflows at December 31, 1999 were $23.69 per barrel and $2.04 per mcf, respectively.
The following are the principal sources of changes in the standardized measure of discounted future net cash flows. Years ended December 31, -------------------------------- 1999 1998 1997 (000's) (000's) (000's) ------- ------- -------
Standardized measure - beginning of year $ 24,490 $ 37,879 $ 77,638 Sales of oil and gas produced, net of production costs (15,553) (7,443) (16,353) Net changes in prices and production costs 35,657 (10,714) (46,696) Extensions, discoveries, and improved recovery, less related costs 9,151 277 1,593 Changes in future development costs (228) 1,094 128 Development costs incurred 60 193 994 Revisions of previous quantity estimates 15,202 (7,361) (3,741) Accretion of discount 2,416 3,788 4,256 Purchase of proved reserves 52,739 1,800 348 Sale of proved reserves (394) (2) (255) Net change in income taxes (25,817) 5,015 19,889 Other (514) (36) 78 -------- -------- --------
Standardized measure - end of year $ 97,209 $ 24,490 $ 37,879 ======== ======== ========
Schedule II -----------