-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, RzrFdbzUke9zG1Cq9UKgFmIBf4iEpqeUPc90veTSm79w94MXwBfBp0bKyel5Ihi9 wafEYxj9AI2P3ghzyVrRXg== 0000950129-03-005622.txt : 20031113 0000950129-03-005622.hdr.sgml : 20031113 20031113140631 ACCESSION NUMBER: 0000950129-03-005622 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 8 CONFORMED PERIOD OF REPORT: 20030930 FILED AS OF DATE: 20031113 FILER: COMPANY DATA: COMPANY CONFORMED NAME: MISSION RESOURCES CORP CENTRAL INDEX KEY: 0000319459 STANDARD INDUSTRIAL CLASSIFICATION: CRUDE PETROLEUM & NATURAL GAS [1311] IRS NUMBER: 760437769 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-09498 FILM NUMBER: 03997244 BUSINESS ADDRESS: STREET 1: 1331 LAMAR STREET 2: SUITE 1455 CITY: HOUSTON STATE: TX ZIP: 77010 BUSINESS PHONE: 7134953000 MAIL ADDRESS: STREET 1: 1221 LAMAR STREET 2: STE 1600 CITY: HOUSTON STATE: TX ZIP: 77010-3039 FORMER COMPANY: FORMER CONFORMED NAME: BELLWETHER EXPLORATION CO DATE OF NAME CHANGE: 19920703 10-Q 1 h10423e10vq.txt MISSION RESOURCES CORPORATION - SEPTEMBER 30, 2003 UNITED STATES 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 QUARTERLY PERIOD ENDED SEPTEMBER 30, 2003 or Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the Transition Period From ___________to _________ Commission file number: 0-9498 MISSION RESOURCES CORPORATION (Exact name of registrant as specified in its charter) Delaware 76-0437769 (State or other jurisdiction of (IRS Employer Identification Number) incorporation or organization) 1331 Lamar, Suite 1455, Houston, Texas 77010-3039 (Address of principal executive offices) (ZIP Code) Registrant's telephone number, including area code: (713) 495-3000 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 --- --- Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes No X --- --- As of November 10, 2003, 23,517,636 shares of common stock of Mission Resources Corporation were outstanding. MISSION RESOURCES CORPORATION INDEX
Page # ------ PART I. FINANCIAL INFORMATION ITEM 1. Financial Statements Condensed Consolidated Balance Sheets: September 30, 2003 (Unaudited) and December 31, 2002.................................... 1 Condensed Consolidated Statements of Operations (Unaudited): Three months and nine months ended September 30, 2003 and 2002.......................... 3 Condensed Consolidated Statements of Cash Flows (Unaudited): Nine months ended September 30, 2003 and 2002........................................... 4 Notes to Condensed Consolidated Financial Statements (Unaudited)................................... 6 ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations............................................................ 20 ITEM 3. Quantitative and Qualitative Disclosures About Market Risk ........................................ 33 ITEM 4. Controls and Procedures .................................................................... 34 PART II. OTHER INFORMATION...................................................................................... 36 ITEM 1. Legal Proceedings.................................................................................. 36 ITEM 2. Change in Securities and Use of Proceeds .......................................................... 36 ITEM 3. Defaults Upon Senior Securities ................................................................... 36 ITEM 4. Submission of Matters to a Vote of Security Holders ............................................... 36 ITEM 5. Other Information ................................................................................. 36 ITEM 6. Exhibits and Reports on Form 8-K .................................................................. 37
PART I. FINANCIAL INFORMATION MISSION RESOURCES CORPORATION CONDENSED CONSOLIDATED BALANCE SHEETS (Amounts in thousands) ITEM I. FINANCIAL STATEMENTS ASSETS
September 30, December 31, 2003 2002 -------------- -------------- (Unaudited) CURRENT ASSETS: Cash and cash equivalents ............................................................ $ 14,346 $ 11,347 Accounts receivable and accrued revenues ............................................. 10,694 18,931 Prepaid expenses and other ........................................................... 4,392 2,148 -------------- -------------- Total current assets ............................................................. 29,432 32,426 -------------- -------------- PROPERTY AND EQUIPMENT, AT COST: Oil and gas properties (full cost): Unproved properties of $8,037 and $8,369 excluded from depletion as of September 30, 2003 and December 31, 2002, respectively 799,307 775,344 Asset retirement cost ................................................................ 14,632 -- Accumulated depreciation, depletion and amortization--oil and gas .................... (477,940) (474,625) -------------- -------------- Net property, plant and equipment .................................................... 335,999 300,719 Leasehold, furniture and equipment ................................................... 4,420 3,545 Accumulated depreciation ............................................................. (1,895) (1,449) -------------- -------------- Net leasehold, furniture and equipment ............................................... 2,525 2,096 -------------- -------------- OTHER ASSETS ......................................................................... 6,147 7,163 -------------- -------------- $ 374,103 $ 342,404 ============== ==============
See accompanying notes to condensed consolidated financial statements MISSION RESOURCES CORPORATION CONDENSED CONSOLIDATED BALANCE SHEETS LIABILITIES AND STOCKHOLDERS' EQUITY (Amounts in thousands, except share information)
September 30, December 31, 2003 2002 -------------- -------------- (Unaudited) CURRENT LIABILITIES: Accounts payable and accrued liabilities ....................................................... $ 28,621 $ 24,498 Commodity derivative liabilities ............................................................... 5,345 6,973 Asset retirement obligation .................................................................... 2,726 -- Interest rate swap ............................................................................. -- 3 -------------- -------------- Total current liabilities .................................................................. 36,692 31,474 -------------- -------------- LONG-TERM DEBT: Term loan facility ............................................................................. 80,000 -- Subordinated notes due 2007 .................................................................... 127,426 225,000 Unamortized premium on $125 million subordinated notes ......................................... 1,214 1,431 -------------- -------------- Total long-term debt ....................................................................... 208,640 226,431 -------------- -------------- LONG-TERM LIABILITIES: Interest rate swap, excluding current portion .................................................. -- 1,817 Commodity derivative liabilities, excluding current portion .................................... 771 359 Deferred income taxes .......................................................................... 18,973 16,946 Asset retirement obligation, excluding current portion ......................................... 39,257 -- Other .......................................................................................... 146 -- -------------- -------------- Total long-term liabilities ................................................................ 59,147 19,122 -------------- -------------- STOCKHOLDERS' EQUITY: Preferred stock, $0.01 par value, 5,000,000 shares authorized; none issued or outstanding at September 30, 2003 and December 31, 2002 ................................. -- -- Common stock, $0.01 par value, 60,000,000 shares authorized, 23,517,636 and 23,585,959 shares issued at September 30, 2003 and December 31, 2002, respectively ............................................................ 239 239 Additional paid-in capital ..................................................................... 163,847 163,837 Retained deficit ............................................................................... (88,729) (92,599) Treasury stock, at cost, 389,323 shares at September 30, 2003 and 311,000 shares at December 31, 2002 ........................................................ (1,937) (1,905) (3,796) (4,195) Other comprehensive income (loss), net of taxes -------------- -------------- Total stockholders' equity ................................................................ 69,624 65,377 -------------- -------------- $ 374,103 $ 342,404 ============== ==============
See accompanying notes to condensed consolidated financial statements -2- MISSION RESOURCES CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED) (Amounts in thousands, except per share information)
Three Months Ended Nine Months Ended September 30 September 30 ---------------------------- ---------------------------- 2003 2002 2003 2002 ------------ ------------ ------------ ------------ REVENUES: Oil and gas revenues ........................................... $ 24,071 $ 25,848 $ 74,246 $ 86,096 Gain on extinguishments of debt ................................ -- -- 22,375 -- Interest and other income (expense) ............................ 170 1,723 892 (7,959) ------------ ------------ ------------ ------------ 24,241 27,571 97,513 78,137 ------------ ------------ ------------ ------------ COST AND EXPENSES: Lease operating expenses ...................................... 8,309 8,769 25,563 33,118 Transportation costs .......................................... 130 73 322 211 Taxes other than income ....................................... 2,106 2,365 6,951 7,094 Asset retirement obligation accretion expense ................. 350 -- 1,038 -- Loss of sale of assets ........................................ -- -- -- 2,719 Depreciation, depletion and amortization ...................... 10,037 9,718 27,963 31,917 General and administrative expenses ........................... 2,581 5,016 8,013 10,018 Interest expense .............................................. 6,569 5,365 19,028 20,420 ------------ ------------ ------------ ------------ 30,082 31,306 88,878 105,497 ------------ ------------ ------------ ------------ Income (loss) before income taxes and cumulative effect of a ..... (5,841) (3,735) 8,635 (27,360) change in accounting method Provision (benefit) for income taxes ............................. (2,038) (1,307) 3,029 (9,576) ------------ ------------ ------------ ------------ Income (loss) before income taxes and cumulative effect of a change in accounting method ................................... (3,803) (2,428) 5,606 (17,784) Cumulative effect of a change in accounting method, net of deferred tax of $935 .......................................... -- -- (1,736) -- ------------ ------------ ------------ ------------ Net income (loss) ................................................ $ (3,803) $ (2,428) $ 3,870 $ (17,784) ============ ============ ============ ============ Income (loss) before cumulative effect of a change in accounting method per share .............................................. $ (0.16) $ (0.10) $ 0.24 $ (0.75) ============ ============ ============ ============ Income (loss) before cumulative effect of a change in accounting method per share-diluted ...................................... $ (0.16) $ (0.10) $ 0.23 $ (0.75) ============ ============ ============ ============ Net income (loss) per share ...................................... $ (0.16) $ (0.10) $ 0.16 $ (0.75) ============ ============ ============ ============ Net income (loss) per share - diluted ............................ $ (0.16) $ (0.10) $ 0.16 $ (0.75) ============ ============ ============ ============ Weighted average common shares outstanding ....................... 23,515 23,586 23,508 23,586 ============ ============ ============ ============ Weighted average common shares outstanding - diluted ............. 23,515 23,586 24,291 23,586 ============ ============ ============ ============
See accompanying notes to condensed consolidated financial statements -3- MISSION RESOURCES CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (Amounts in thousands)
Nine Months Ended September 30, -------------------------------- 2003 2002 -------------- -------------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss) ........................................................................ $ 3,870 $ (17,784) Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depreciation, depletion and amortization ......................................... 27,963 31,917 (Gain) loss on interest rate swap ................................................ (520) (1,567) (Gain) loss due to commodity hedge ineffectiveness ............................... (603) 9,308 Gain on extinguishment of debt ................................................... (22,375) -- Cumulative effect of a change in accounting method, net of deferred tax .......... 1,736 -- Asset retirement obligation accretion expense .................................... 1,038 -- Stock option expense ............................................................. -- 102 Amortization of deferred financing costs and bond premium ....................... 1,536 1,949 Bad debt expense ................................................................. -- 763 Deferred income taxes ............................................................ 2,754 (9,576) Changes in assets and liabilities: Accounts receivable and accrued revenue .............................................. 8,237 8,435 Accounts payable and other liabilities ............................................... 2,973 (10,186) Abandonment costs .................................................................... (3,542) (2,505) Other ................................................................................ (1,726) 1,631 -------------- -------------- NET CASH FLOWS PROVIDED BY OPERATING ACTIVITIES .......................................... 21,341 12,487 -------------- -------------- CASH FLOWS FROM INVESTING ACTIVITIES: Acquisition of oil and gas properties ................................................ (953) (419) Additions to properties and facilities ............................................... (23,010) (16,607) Additions to leasehold, furniture and equipment ...................................... (875) (147) Proceeds on sale of oil and gas properties, net of costs ............................. 2,983 49,095 -------------- -------------- NET CASH FLOWS (USED IN) PROVIDED BY INVESTING ACTIVITIES ................................ (21,855) 31,922 -------------- --------------
See accompanying notes to condensed consolidated financial statements -4- MISSION RESOURCES CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED) (UNAUDITED) (Amounts in thousands)
Nine Months Ended September 30, -------------------------------- 2003 2002 -------------- -------------- CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from borrowings ..................................... 80,000 21,000 Payments of long term debt ................................... -- (49,000) Repurchase of notes .......................................... (71,700) -- Credit facility costs ........................................ (4,787) (65) -------------- -------------- NET CASH FLOWS PROVIDED BY (USED IN) FINANCING ACTIVITIES ........ 3,513 (28,065) -------------- -------------- Net increase in cash and cash equivalents ....................... 2,999 16,344 Cash and cash equivalents at beginning of period ................. 11,347 603 -------------- -------------- CASH AND CASH EQUIVALENTS AT END OF PERIOD ....................... $ 14,346 $ 16,947 -------------- --------------
Nine Months Ended September 30, -------------------------------- 2003 2002 -------------- -------------- SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Cash paid (received) during the period: Interest ....................................................... $ 16,495 $ 14,003 Income tax (refunds) ........................................... $ (550) $ (4,972)
See accompanying notes to condensed consolidated financial statements -5- MISSION RESOURCES CORPORATION NOTES TO FINANCIAL STATEMENTS (UNAUDITED) 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with instructions to Form 10-Q and, therefore, do not include all disclosures required by accounting principles generally accepted in the United States of America. However, in the opinion of management, these statements include all adjustments, which are of a normal recurring nature, necessary to present fairly the Company's financial position at September 30, 2003, and the results of operations and changes in cash flows for the periods ended September 30, 2003 and 2002. Interim period results are not necessarily indicative of results of operations or cash flows for a full year. These financial statements should be read in conjunction with the consolidated financial statements and notes to the consolidated financial statements in the Mission Resources Corporation (the "Company" or "Mission") Annual Report on Form 10-K for the year ended December 31, 2002. Principles of Consolidation The consolidated financial statements include the accounts of Mission Resources Corporation and its wholly owned subsidiaries. Mission owns a 26.6% interest in the White Shoal Pipeline Corporation that is accounted for using the equity method. Mission's investment of approximately $341,000 at September 30, 2003 is included in the other assets line of the Balance Sheet. The Company has a 10.1% ownership in the East Texas Salt Water Disposal Company that is accounted for using the cost method. The sale of this interest was under negotiation at September 30, 2003, in connection with the sale of several oil and gas properties in the East Texas area; therefore, the Company's investment of $861,000 is reported as a current asset in the September 30, 2003 Balance Sheet in the prepaid expenses and other line. Oil and Gas Property Accounting The Company utilizes the full cost method of accounting for its investment in oil and gas properties. Under this method of accounting, all costs of acquisition, exploration and development of oil and gas reserves (including such costs as leasehold acquisition costs, geological expenditures, dry hole costs, tangible and intangible development costs, and direct internal costs) are capitalized as the cost of oil and gas properties when incurred. To the extent that capitalized costs of oil and gas properties, net of accumulated depreciation, depletion and amortization, exceed the discounted future net revenues of proved oil and gas reserves net of deferred taxes, such excess capitalized costs will be charged to operations. No such charges to operations were required during the three and nine-month periods ending September 30, 2003 or 2002. Over the past several months, a reporting issue has arisen regarding the application of certain provisions of SFAS No. 141 and 142 to companies in the extractive industries, including oil and gas companies. The issue is whether SFAS No. 141 requires registrants to classify the costs of mineral rights associated with extracting oil and gas as intangible assets in the balance sheet, apart from other capitalized oil and gas property costs, and provide specific footnote disclosures. Historically, the Company has included the costs of mineral rights associated with extracting oil and gas as a component of oil and gas properties. If it is ultimately determined that SFAS No. 141 requires oil and gas companies to classify costs of mineral rights associated with extracting oil and gas as a separate intangible assets line item on the balance sheet, the Company would be required to reclassify less than $1.0 million out of oil and gas properties and into a separate intangible assets line item. These costs include those to acquire contract based drilling and mineral use rights such as delay rentals, lease bonuses, commissions and brokerage fees, and other leasehold costs. The Company's cash flows and results of operations would not -6- MISSION RESOURCES CORPORATION NOTES TO FINANCIAL STATEMENTS (UNAUDITED) be affected since such intangible assets would continue to be depleted and assessed for impairment in accordance with full cost accounting rules, as allowed by SFAS No. 142. Further, the Company does not believe the classification of the costs of mineral rights associated with extracting oil and gas as intangible assets would have any impact on the Company's compliance with covenants under its debt agreements. The Company will continue to classify its oil and gas leasehold costs as tangible oil and gas properties until further guidance is provided. Receivables Joint interest billing receivables represent those amounts owed to the Company as operator of an oil and gas property by the other working interest partners. These trade accounts receivable are recorded at the invoiced amount and typically do not bear interest. The Company reviews collectibility of trade accounts receivable monthly. Balances over ninety days past due and exceeding $30,000 are reviewed individually for collectibility. Account balances are charged off against earnings when the Company determines potential for recovery is remote. The Company does not have any off-Balance Sheet credit exposure related to its customers. From time to time, certain other receivables are created and may be significant. At September 30, 2003, the Company has recorded a receivable of approximately $1.2 million from its insurance carrier, representing repair costs incurred as a direct result of hurricane Lili in 2002. Deferred Compensation Plan In June 2003, the Company terminated the Mission Deferred Compensation Plan that had been established in late 1997. The Fund Manager made final distributions of all funds held in the plan to the plan participants. Both the current asset and the current liability of approximately $111,000 related to the plan at the termination date were removed from the Balance Sheet. Comprehensive Income Comprehensive income includes all changes in a company's equity except those resulting from investments by owners and distributions to owners. The Company's total comprehensive income for the three months and nine months ended September 30, 2003 and 2002 was as follows (in thousands):
Three Months Ended Nine Months Ended September 30, September 30, ---------------------------- --------------------------- 2003 2002 2003 2002 ------------ ------------ ------------ ------------ Net income (loss) ................................ $ (3,803) $ (2,428) $ 3,870 $ (17,784) Hedge accounting for derivative instruments, net of tax ....................................... 3,245 (2,739) 399 (5,492) ------------ ------------ ------------ ------------ Comprehensive income (loss) ...................... $ (558) $ (5,167) $ 4,269 $ (23,276) ============ ============ ============ ============
-7- MISSION RESOURCES CORPORATION NOTES TO FINANCIAL STATEMENTS (UNAUDITED) The accumulated balance of other comprehensive income (loss) related to commodity hedges, net of taxes, is as follows (in thousands):
Balance at December 31, 2002 ............... $ (4,195) Net losses on hedges ....................... (13,185) Reclassification adjustments ............... 13,369 Tax effect on hedging activity ............. 215 ---------- Balance at September 30, 2003 .............. $ (3,796) ==========
Stock-Based Employee Compensation Plans In December 2002, the FASB issued SFAS No. 148, Accounting for Stock-Based Compensation - Transition and Disclosure, an amendment of SFAS No. 123, that provides alternative methods of transition for a voluntary change to the fair value method of accounting for stock-based employee compensation. In addition, this statement amends the disclosure requirements of SFAS No. 123 to require prominent disclosures in both annual and interim financial statements. At September 30, 2003, the Company has two stock-based employee compensation plans. The Company accounts for those plans under the recognition and measurement principles of APB Opinion No. 25, Accounting for Stock Issued to Employees, and related Interpretations. No stock-based employee compensation cost is reflected in net income for options granted under those plans when the exercise price of the option is equal to the market value of the underlying common stock on the date of the grant. The following table illustrates the effect on net income and earnings per share if the Company had applied the fair value recognition provisions of FASB Statement No. 123, Accounting for Stock-Based Compensation, to stock-based employee compensation.
Three Months Ended Nine Months Ended September 30, September 30, -------------------------------- ------------------------------- 2003 2002 2003 2002 -------------- -------------- -------------- -------------- Net income (loss) (in thousands) As reported .............. $ (3,803) $ (2,428) $ 3,870 $ (17,784) Pro forma ................ $ (3,943) $ (4,961) $ 2,587 $ (20,387) Earnings (loss) per share As reported .............. $ (0.16) $ (0.10) $ 0.16 $ (0.75) Pro forma ................ $ (0.17) $ (0.21) $ 0.11 $ (0.86) Diluted earnings (loss) per share As reported .............. $ (0.16) $ (0.10) $ 0.16 $ (0.75) Pro forma ................ $ (0.17) $ (0.21) $ 0.11 $ (0.86)
Goodwill The FASB issued SFAS No. 142, Goodwill and Other Intangible Assets in June 2001. This pronouncement requires that intangible assets with indefinite lives, including goodwill, cease being amortized and be evaluated on an annual basis for impairment. The Company adopted SFAS No. 142 on January 1, 2002 at which time the Company had unamortized goodwill in the amount of $15.1 million and unamortized identifiable intangible assets in the amount of $374,300, all subject to the transition -8- MISSION RESOURCES CORPORATION NOTES TO FINANCIAL STATEMENTS (UNAUDITED) provisions. Upon adoption of SFAS No. 142, $277,000 of workforce intangible assets recorded as unamortized identifiable assets was subsumed into goodwill and was not amortized as it no longer qualified as a recognizable intangible asset. The transition and impairment test for goodwill, effective January 1, 2002, was performed in the second quarter of 2002. As of January 1, 2002, the Company's fair value exceeded the carrying amount; therefore goodwill was not impaired. Mission designated December 31st as the date for its annual test. Based upon the results of such test at December 31, 2002, goodwill was fully impaired and a write-down of $16.7 million was recorded. Recently Adopted Pronouncements SFAS No. 150, Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity was issued in May 2003. SFAS No. 150 provides guidance on how to classify and measure certain financial instruments with characteristics of both liabilities and equity. Many of these instruments were previously classified as equity. This statement is effective for financial instruments entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003. The statement requires cumulative effect transition for financial instruments existing at adoption date. None of the Company's financial instruments were impacted by this statement. SFAS No. 149, Amendment of Statement 133 on Derivative Instruments and Hedging Activities Summary was issued in April 2003. This statement amends and clarifies the accounting and reporting for derivative instruments, including embedded derivatives, and for hedging activities under SFAS No. 133. Statement 149 amends Statement 133 to reflect the decisions made as part of the Derivatives Implementation Group (DIG) and in other FASB projects or deliberations. Statement 149 is effective for contracts entered into or modified after June 30, 2003, and for hedging relationships designated after June 30, 2003. The Company has applied the pertinent DIG interpretations as they were issued and does not expect SFAS No. 149 will have a material impact on the Company's financial statements. SFAS No. 146, Accounting for Exit or Disposal Activities, was issued in June 2002. SFAS No. 146 addresses significant issues regarding the recognition, measurement, and reporting of costs that are associated with exit and disposal activities, including restructuring activities that are currently accounted for pursuant to the guidance set forth in EITF Issue No. 94-3, Liability Recognition of Certain Employee Termination Benefits and Other Costs to Exit an Activity. SFAS No. 146 is effective for the exit and disposal activities initiated after December 31, 2002. The Company will apply SFAS No. 146 as appropriate to future activities. SFAS No. 145, Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statements No. 13 and Technical Corrections, was issued in April 2002. SFAS No. 145 amends existing guidance on reporting gains and losses on the extinguishments of debt to prohibit the classification of the gain or loss as extraordinary, as the use of such extinguishments have become part of the risk management strategy of many companies. SFAS No. 145 also amends SFAS No. 13 to require sale-leaseback accounting for certain lease modifications that have economic effects similar to sale-leaseback transactions. The provision of the statement related to the rescission of SFAS No. 4 is applied in fiscal years beginning after May 15, 2002. Earlier application of these provisions was encouraged. The provisions of the statement related to SFAS No. 13 were effective for transactions occurring after May 15, 2002, with early application encouraged. Mission applied the provisions of SFAS No. 145 as they relate to the extinguishment of debt in accounting for the March 28, 2003 senior subordinated note repurchase discussed in Note 3. -9- MISSION RESOURCES CORPORATION NOTES TO FINANCIAL STATEMENTS (UNAUDITED) In November 2002, the FASB issued Interpretation No. 45, Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness to Others, an interpretation of FASB Statements No. 5, 57 and 107 and a rescission of FASB Interpretation No. 34. This interpretation elaborates on the disclosures to be made by a guarantor in its interim and annual financial statements about its obligations under guarantees issued. The interpretation also clarifies that a guarantor is required to recognize, at inception of a guarantee, a liability for the fair value of the obligation undertaken. The initial recognition and measurement provisions of the interpretation were applicable to guarantees issued or modified after December 31, 2002 and had no effect on Mission's financial statements. The disclosure requirements are effective for financial statements of interim and annual periods ending after December 15, 2002. Mission's disclosures are contained in Note 7. The FASB issued Interpretation No. 46, Consolidation of Variable Interest Entities, an interpretation of APB No. 51, in January 2003. This interpretation addresses the consolidation by business enterprises of variable interest entities as defined in the interpretation. The interpretation applied immediately to variable interest entities created after January 31, 2003, and to variable interests in variable interest entities obtained after January 31, 2003. Significant changes to this interpretation were proposed by FASB in October 2003, including delaying the effective date to the beginning of the first reporting period ending after December 15, 2003. The Company does not currently own an interest in any variable interest entities; therefore, this interpretation is not expected to have a material effect on its financial statements. In July 2001, the FASB issued SFAS No. 143, Accounting for Asset Retirement Obligations, which provided accounting requirements for retirement obligations associated with tangible long-lived assets. SFAS No. 143 requires that the Company record a liability for the fair value of its asset retirement obligation, primarily comprised of its plugging and abandonment liabilities, in the period in which it is incurred if a reasonable estimate of fair value can be made. The liability is accreted at the end of each period through charges to operating expense. The amount of the asset retirement obligation is added to the carrying amount of the oil and gas properties and this additional carrying amount is depreciated over the life of the properties. The Company adopted the provisions of SFAS No. 143 with a calculation effective January 1, 2003. The Company's assets are primarily working interests in producing oil and gas properties and related support facilities. The life of these assets is generally determined by the estimation of the quantity of oil or gas reserves available for production and the amount of time such production should require. The cost of retiring such assets, the asset retirement obligation, is typically referred to as abandonment costs. The Company hired independent engineers to provide estimates of current abandonment costs on all its properties, applied valuation techniques appropriate under SFAS No. 143, and recorded a net initial asset retirement obligation of $44.3 million on its Balance Sheet. An asset retirement cost of $14.4 million was simultaneously capitalized in the oil and gas properties section of the Balance Sheet. The adoption of SFAS No. 143 was accounted for as a change in accounting principle. A $2.7 million charge, net of a $935,000 deferred tax, was recorded to income as a cumulative effect of the change in accounting principle. -10- MISSION RESOURCES CORPORATION NOTES TO FINANCIAL STATEMENTS (UNAUDITED) The following table shows changes in the asset retirement obligation that have occurred in 2003.
Nine Months Ended Asset Retirement Obligation September 30, 2003 ------------------ (in thousands) Initial implementation ....................................................... $ 44,266 Liabilities incurred ......................................................... 221 Liabilities settled .......................................................... (3,542) Accretion expense ............................................................ 1,038 ------------------ Ending balance ............................................................... 41,983 Less: current portion ....................................................... 2,726 ------------------ Long-term portion ............................................................ $ 39,257 ==================
Had the provisions of SFAS No. 143 been applied on January 1, 2002, the pro forma asset retirement obligation as of September 30, 2002 would have been $43.7 million. The following table summarizes pro forma net income (loss) and net income (loss) per common share as if the Company had applied the provisions of SFAS No. 143 on January 1, 2002.
Three Months Ended Nine Months Ended September 30, 2002 September 30,2002 ------------------ ------------------ Net income (loss) (in thousands) As reported .............. $ (2,428) $ (19,237) Pro forma ................ $ (2,621) $ (17,977) Earnings (loss) per share As reported .............. $ (0.10) $ (0.75) Pro forma ................ $ (0.11) $ (0.82) Diluted earnings (loss) per share As reported .............. $ (0.10) $ (0.75) Pro forma ................ $ (0.11) $ (0.82)
Reclassifications Certain reclassifications of prior period statements have been made to conform to current reporting practices. Use of Estimates In order to prepare these financial statements in conformity with accounting principles generally accepted in the United States of America, management of the Company has made estimates and assumptions relating to the reporting of assets and liabilities, the disclosure of contingent assets and liabilities, and reserve information. Actual results could differ from those estimates. 2. STOCKHOLDERS' EQUITY Potentially dilutive options and warrants that are not in the money are excluded from the computation of diluted earnings per share ("EPS") because to do so would be antidilutive. In the three and nine-month periods ended September 30, 2003, the potentially dilutive options and warrants -11- MISSION RESOURCES CORPORATION NOTES TO FINANCIAL STATEMENTS (UNAUDITED) excluded represented 969,500 shares and 1,051,500 shares, respectively. In the three and nine-month periods ended September 30, 2002 the potentially dilutive options and warrants excluded represented 2,910,168 shares. In periods of loss, the effect of potentially dilutive options and warrants that are in the money is excluded from the calculation of diluted EPS. For the three and nine month periods ended September 30, 2002, potential incremental shares of 275,197 and 479,052, respectively were excluded. For the three- month period ended September 30, 2003, potential incremental shares of 1,385,947 were excluded. The following represents a reconciliation of the numerator and denominator of the basic earnings per share computation to the numerator and denominator of the diluted earnings per share computation (amounts in thousands except per share amounts):
For the Three Months Ended For the Three Months Ended September 30, 2003 September 30, 2002 --------------------------------------- -------------------------------------- Income Shares Per Share Income Shares Per Share (Numerator) (Denominator) Amount (Numerator) (Denominator) Amount ------------ ------------- ---------- ----------- ------------- --------- INCOME (LOSS) PER COMMON SHARE: Income (loss) available to common stockholders........ $ (3,803) 23,515 $ (0.16) $ (2,428) 23,586 $ (0.10) ---------- --------- EFFECT OF DILUTIVE SECURITIES: Options and warrants........ -- -- -- -- ---------- ------ ------------- ------ INCOME (LOSS) PER COMMON SHARE-DILUTED: Income (loss) available to common stockholders and assumed conversions......... $ (3,803) 23,515 $ (0.16) $ (2,428) 23,586 $ (0.10) ========== ====== ========== ============= ====== =========
For the Nine Months Ended For the Nine Months Ended September 30, 2003 September 30, 2002 -------------------------------------------- ---------------------------------------------- Income Shares Per Share Income Shares Per Share (Numerator) (Denominator) Amount (Numerator) (Denominator) Amount ------------ -------------- ------------ -------------- -------------- ----------- INCOME (LOSS) PER COMMON SHARE: Income (loss) available to common stockholders ...... $ 3,870 23,508 $ 0.16 $ (17,784) 23,586 $ (0.75) ------------ ----------- EFFECT OF DILUTIVE SECURITIES: Options and warrants ..... -- 783 -- -- ------------ -------------- -------------- -------------- INCOME (LOSS) PER COMMON SHARE-DILUTED: Income (loss) available to common stockholders and assumed conversions ...... $ 3,870 24,291 $ 0.16 $ (17,784) 23,586 $ (0.75) ============ ============== ============ ============== ============== ============
In the second quarter of 2003, the number of treasury shares increased to 389,323 because 78,323 shares were taken into treasury in lieu of collecting a note receivable valued at approximately -12- MISSION RESOURCES CORPORATION NOTES TO FINANCIAL STATEMENTS (UNAUDITED) $32,000. Treasury shares are valued at the price at which they are acquired, resulting in approximately $1.9 million being reported as a reduction to Stockholders' Equity as of September 30, 2003. Concurrent with the Bargo merger in 2001, all Bellwether employees who held stock options were immediately vested in those options upon closing of the merger. An additional $95,000 compensation expense, on those employee options that would have expired unexercisable pursuant to their original terms, was recognized in the first quarter of 2002 as a result of staff reductions. The expense was calculated as the excess of the price on the merger date over the exercise price of the option. In September 1997, the Company adopted a shareholder rights plan to protect its shareholders from coercive or unfair takeover tactics. Under the plan, each outstanding share of the Company's common stock and each share of subsequently issued common stock has attached to it one right. The rights become exercisable if a person or group acquires or announces an intention to acquire beneficial ownership of 15% or more of the outstanding shares of common stock without the prior consent of the Company. When the rights become exercisable, each holder of a right (except those held by the acquiring party) will have the right to receive, upon exercise, a number of shares of the Company's common stock having a market price of two times the exercise price of the right. The Company may redeem the rights for $0.01 per right at any time before they become exercisable without shareholder approval. The rights will expire on September 26, 2007, subject to earlier redemption by the Board of Directors of the Company. 3. LONG TERM DEBT Senior Subordinated Notes In April 1997, the Company issued $100.0 million of 10 7/8% senior subordinated notes due 2007. On May 29, 2001, the Company issued an additional $125.0 million of senior subordinated notes due 2007 with identical terms to the notes issued in April 1997 (collectively the "Notes") at a premium of $1.9 million. The premium is amortized as a reduction of interest expense over the life of the Notes so that the effective interest rate on these additional Notes is 10.5%. The premium is shown separately on the Balance Sheet. Interest on the Notes is payable semi-annually on April 1 and October 1. The Notes are redeemable, in whole or in part, at the option of the Company beginning April 1, 2002 at 105.44%, and decreasing annually to 100.00% on April 1, 2005 and thereafter, plus accrued and unpaid interest. In the event of a change of control of the Company, as defined in the indenture, each holder of the Notes will have the right to require the Company to repurchase all or part of such holder's Notes at an offer price in cash equal to 101.0% of the aggregate principal amount thereof, plus accrued and unpaid interest to the date of purchase. The Notes contain certain covenants, including limitations on indebtedness, liens, compliance with requirements of existing indebtedness, dividends, repurchases of capital stock and other payment restrictions affecting restricted subsidiaries, issuance and sales of restricted subsidiary stock, dispositions of proceeds of asset sales and restrictions on mergers and consolidations or sales of assets. As of September 30, 2003, the Company was in compliance with its covenants under the Notes. On March 28, 2003, the Company acquired, in a private transaction with various funds affiliated with Farallon Capital Management, LLC, pursuant to the terms of a purchase and sale agreement, approximately $97.6 million in principal amount of the Notes for approximately $71.7 million, plus accrued interest. Immediately after the consummation of the purchase and sale agreement, Mission had $127.4 million in principal amount of Notes outstanding. Including costs of the transaction and the removal of $2.2 million of previously deferred financing costs related to the acquired Notes, the Company recognized a $22.4 million gain on the extinguishment of the Notes. -13- MISSION RESOURCES CORPORATION NOTES TO FINANCIAL STATEMENTS (UNAUDITED) Credit Facility The Company was party to a $150.0 million credit facility with a syndicate of lenders. The credit facility was a revolving facility, expiring May 16, 2004, which allowed Mission to borrow, repay and re-borrow under the facility from time to time. The total amount which might be borrowed under the facility was limited by the borrowing base periodically set by the lenders based on Mission's oil and gas reserves and other factors deemed relevant by the lenders. The facility was re-paid in full on March 28, 2003. On March 28, 2003, simultaneously with the acquisition of the Notes, the Company amended and restated its credit facility with new lenders, led by Farallon Energy Lending, LLC. The entire $947,000 of deferred financing costs relating to this facility was charged to earnings as a reduction in the gain on extinguishment of debt. Under the amended and restated secured credit agreement (the "Facility"), the Company borrowed $80.0 million pursuant to term loans (the "Term Loan Facility"), the proceeds of which were used to acquire approximately $97.6 million face amount of Notes, to pay accrued interest on the Notes purchased, and to pay closing costs associated therewith. On June 16, 2003, the Company amended the Facility to add a revolving credit facility of up to $12.5 million (the "Revolver Facility"), including a letter of credit sub-facility (the "Sub-Facility") of up to $3.0 million. The Facility, which includes the Term Loan Facility and the Revolver Facility, is secured by a lien on substantially all of the Company's property and the property of all of the Company's subsidiaries, including a lien on at least 90% of their respective oil and gas properties and a pledge of the capital stock of all the subsidiaries. The Term Loan Facility expires on January 6, 2005, and the Revolver Facility expires on June 6, 2006 (each, a "Maturity Date"). If, however, the Maturity Date of the Term Loan Facility is not extended to at least 30 days after the Maturity Date of the Revolver Facility, or if the Term Loan Facility is not otherwise refinanced on terms satisfactory to the lenders under the Revolver Credit Facility, the Maturity Date of the Revolver Facility will be the later of (i) December 6, 2004 and (ii) 30 days prior to the Maturity Date of the Term Loan Facility. In addition, if the Maturity Date of the Term Loan Facility is changed to a date earlier than January 6, 2005, the Maturity Date of the Revolver Facility will be 30 days prior to the Maturity Date of the Term Loan Facility. As of September 30, 2003, the Company had no amounts outstanding under the Revolver Facility, but has issued $100,000 of letters of credit under the Sub-Facility. The proceeds of the Revolver Facility are to be used to finance the Company's ongoing working capital and general corporate needs. Subject to the terms and conditions of the Revolver Facility, the lenders under the Revolver Facility have agreed to make advances to the Company, from time to time, prior to the Maturity Date of the Revolver Facility, in an amount equal to the least of the following (in whole multiples of $1,000,000): (i) $12.5 million minus outstanding letters of credit, and (ii) the Borrowing Base (as hereinafter defined) minus outstanding letters of credit, and (iii) during a Cleanup Period (as hereinafter defined), $3.0 million minus outstanding letters of credit in excess of $1.0 million. For the purposes hereof, "Borrowing Base" means an amount equal to 10% of the PV-10 Value (as defined in the Facility) of the Company's proved developed producing reserves minus the sum of the Bank Product Reserves and Agent Reserves (each as defined in the Facility). The Borrowing Base was $16.2 million at September 30, 2003. A "Cleanup Period" shall be either of the following periods if principal amounts under the Term Loan Facility are outstanding: -14- MISSION RESOURCES CORPORATION NOTES TO FINANCIAL STATEMENTS (UNAUDITED) x) the 30-day period immediately following any 90-day period in which the total of advances and letters of credit outstanding under the Revolver Facility exceeded $3.0 million for each day, or y) the one-day period immediately following any required payment on any indebtedness subordinate to the Facility. The interest rate on amounts outstanding under the Term Loan Facility is 12% until February 16, 2004, when it increases to 13% until the Maturity Date. The interest rate on amounts outstanding under the Revolver Facility will be equal to the prime rate plus 0.5% per annum, provided that the minimum interest rate will be 4.75% per annum. Outstanding letters of credit under the Sub-Facility will be charged a letter of credit fee equal to 3.0% per annum. The terms of the Term Loan Facility were not materially changed in connection with the addition of the Revolver Facility and the Sub-Facility, except that the Company is required to have Excess Availability (as hereinafter defined) of $5.0 million before certain prepayments may be made on the Term Loan Facility and except for minor modifications to the Company's negative covenants relating to capital expenditures and consolidated fixed charge coverage ratio. For the purposes hereof, "Excess Availability" is the amount equal to (i) the lesser of (x) $3.0 million and (y) the Borrowing Base, plus the Company's cash and cash equivalents subject to a Cash Management Agreement or a Control Agreement (each as defined in the Facility) minus (ii) advances under the Revolver Facility plus outstanding letters of credit plus the Company's trade payable 45 days past due plus the amount of interest payable on the Term Loan Facility and any indebtedness subordinate to the Facility. The Facility contains covenants that prevent the Company from making or committing to make any capital expenditures, except for capital expenditures in the ordinary course of business which: o do not exceed the sum of $35.0 million plus excess free cash (one-half of the amount by which discretionary cash flow for fiscal year 2003 exceeds $35.0 million) for fiscal year 2003; provided that expenditures for exploration during such fiscal year shall not exceed $15.0 million; o do not exceed the amount approved by the majority lenders for fiscal year 2004; or o are financed out of the net cash proceeds of issuances of capital stock (effected during a 30 day period) in excess of $20.0 million or out of the net cash proceeds of asset sales, with an aggregate limit of $50.0 million during the term of the loans outstanding under the Facility (the "Loans"), (i) of up to $5.0 million during the term of the Loans, and (ii) that are paid for the acquisition of replacement assets either 90 days before or 90 days after the asset sale or recovery event. Capital expenditures that are not spent in fiscal 2003 may be carried forward to fiscal 2004. For fiscal years 2005 and thereafter, the Company cannot make or commit to make any capital expenditures in excess of the amounts approved by the administrative agent and the majority lenders. In addition, the Facility requires that the following financial covenants be maintained: o minimum consolidated EBITDA, as of the last day of any fiscal quarter, for the period of two fiscal quarters that end on such day, of $17.5 million; o maximum leverage ratio as at the last day of any fiscal quarter beginning with the fiscal quarter ending June 30, 2003, of 2.75 to 1; and -15- MISSION RESOURCES CORPORATION NOTES TO FINANCIAL STATEMENTS (UNAUDITED) o minimum consolidated fixed charge coverage ratio, must be 1.00 to 1.00 at each fiscal quarter's end on a cumulative basis for the first eight fiscal quarters. Thereafter the ratio must be 1.25 to 1.00 at quarter's end for the total of the four preceding fiscal quarters. Leverage ratio is defined on the last day of any fiscal quarter as the ratio of (a) the principal amount of the Loans plus the principal amount of all indebtedness that is equal to or senior in right of payment to the Loans to (b) consolidated EBITDA for the period of four quarters ending on such day. Consolidated fixed charge coverage ratio for any period, is the ratio of: (a) the consolidated EBITDA during such period plus, for each applicable test period ended on March 31, June 30, September 30, and December 31, of calendar years 2003 and 2004, $12,000,000 to (b) the sum of (i) the Company's capital expenditures during such period plus (ii) the Company's cash income tax expense for such period plus (iii) the Company's cash consolidated interest expense for such period to the extent paid or required to be paid during such period. The Facility contains additional covenants that limit Mission's ability, among other things, to incur additional indebtedness or to create or incur liens; to merge, consolidate, liquidate, wind-up or dissolve; to dispose of property; and to pay dividends on or redeem stock. As of September 30, 2003, the Company was in compliance with the covenants in the Facility. 4. DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES Effective January 1, 2001, the Company adopted SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities. This statement establishes accounting and reporting standards requiring that derivative instruments (including certain derivative instruments embedded in other contracts) be recorded at fair value and included in the Balance Sheet as assets or liabilities. The accounting for changes in the fair value of a derivative instrument depends on the intended use of the derivative and the resulting designation, which is established at the inception of a derivative. Accounting for qualified hedges allows a derivative's gains and losses to offset related results on the hedged item in the Statement of Operations. For derivative instruments designated as cash flow hedges, changes in fair value, to the extent the hedge is effective, are recorded in Other Comprehensive Income ("OCI") until the hedged item is recognized in earnings. Hedge effectiveness is measured at least quarterly based upon the relative changes in fair value between the derivative contract and the hedged item over time. Any change in the fair value resulting from ineffectiveness, as defined by SFAS No. 133, is recognized immediately in earnings. The Company produces and sells crude oil, natural gas and natural gas liquids. As a result, its operating results can be significantly affected by fluctuations in commodity prices caused by changing market forces. The Company periodically seeks to reduce its exposure to price volatility by hedging a portion of its production through swaps, options and other commodity derivative instruments. A combination of options, structured as a collar, is the Company's preferred hedge instrument because there are no up-front costs and protection is given against low prices. Such hedges assure that Mission receives NYMEX prices no lower than the price floor and no higher than the price ceiling. The Company has also entered into some commodity swaps that fix the price to be received. In October 2002, the Company elected to de-designate all existing hedges and to re-designate them by applying the interpretations from the FASB's Derivative Implementation Group issue G-20 ("DIG G-20"). The Company's previous approach to assessing ineffectiveness required that changes in time value be recorded to income quarterly. By using the DIG G-20 approach, because the Company's collars and swaps meet specific criteria, the time value component is included in OCI and earnings variability is reduced. The hedges are considered perfectly effective. In the quarter and nine-month period ended -16- MISSION RESOURCES CORPORATION NOTES TO FINANCIAL STATEMENTS (UNAUDITED) September 30, 2003, gains of $187,000 and $603,000, respectively, related to these hedges were reported in the interest and other income line of the Statement of Operations. The gains relate to the amortization, from October 15, 2002 for a 15-month period, of both the realized and unrealized gains or losses related to the de-designated hedges. The amount remaining in OCI, or the unrealized loss, related to the de-designated hedges will be completely amortized by December 2003. At September 30, 2003 the remaining amount in OCI was approximately $864,000. The following tables detail all hedges of future production outstanding at September 30, 2003: OIL HEDGES
NYMEX NYMEX PRICE PRICE BBLS FLOOR/SWAP CEILING PERIOD PER DAY TOTAL BBLS TYPE AVG. AVG. ----------------------- -------------- -------------- -------------- -------------- -------------- Fourth Qtr. 2003 ..... 3,500 322,000 Swap $ 23.59 n/a First Qtr. 2004 ...... 2,500 227,500 Swap $ 25.24 n/a Second Qtr. 2004 ..... 2,500 227,500 Swap $ 24.67 n/a Third Qtr. 2004 ...... 2,500 230,000 Swap $ 24.30 n/a Fourth Qtr. 2004 ..... 2,500 230,000 Swap $ 23.97 n/a
GAS HEDGES
NYMEX NYMEX PRICE MMBTU TOTAL PRICE FLOOR CEILING PERIOD PER DAY MMBTU TYPE AVG. AVG. - -------------------------- -------------- -------------- -------------- -------------- -------------- Fourth Qtr. 2003 ......... 15,000 1,380,000 Collar $ 3.24 $ 4.54 First Qtr. 2004 .......... 8,000 728,000 Collar $ 4.13 $ 5.39 Second Qtr. 2004 ......... 5,000 455,000 Collar $ 3.70 $ 4.08 Third Qtr. 2004 ......... 5,000 460,000 Collar $ 3.70 $ 4.04 Fourth Qtr. 2004 ......... 5,000 460,000 Collar $ 3.85 $ 4.23 First Qtr. 2005 .......... 1,000 90,000 Collar $ 4.25 $ 6.32 Second Qtr. 2005 ......... 1,000 91,000 Collar $ 4.25 $ 4.92 Third Qtr. 2005 .......... 1,000 92,000 Collar $ 4.25 $ 4.72 Fourth Qtr. 2005 ......... 1,000 92,000 Collar $ 4.25 $ 5.14
By removing the price volatility from these volumes of oil and natural gas production, the Company has mitigated, but not eliminated, the potential negative effect of declining prices on its operating cash flow. The potential for increased operating cash flow from increasing prices has also been reduced. Excluding the impact of hedges, the Company's realized price for natural gas per MCF has averaged $0.21 less than the NYMEX MMBTU price over the past twelve months. Excluding the impact of hedges, the Company's realized price for oil has averaged $0.68 per barrel less than the NYMEX per barrel price over the past twelve months. Realized prices differ from NYMEX due to factors such as the location of the property, the heating content of natural gas and the quality of oil. The gas differential excludes the impact of gas sold from the Mist field in Oregon under an annually adjusted fixed price contract. The oil differential excludes the impact of Point Pedernales field production for which the -17- MISSION RESOURCES CORPORATION NOTES TO FINANCIAL STATEMENTS (UNAUDITED) Company's selling price was capped at $9.00 per BBL. The Point Pedernales field was sold in March 2003. Effective September 22, 1998, the Company entered into an eight and one-half year interest rate swap agreement with a notional value of $80.0 million. Under the agreement, Mission received a fixed interest rate and paid a floating interest rate. In February 2003, the interest rate swap was cancelled. Mission paid the counterparty $1.3 million, the then current market value of the swap. The increase in the swap's fair value of $520,000 from January 1, 2003 to the date of the cancellation has been reported as a reduction of interest expense. 5. INCOME TAXES The provision for federal and state income taxes for the three months and nine months ended September 30, 2003 was based upon a 35% effective tax rate. The $5.3 million valuation allowance on deferred taxes applicable at December 31, 2002 has been decreased to $4.9 million at September 30, 2003, due to the decrease in the deferred tax asset relating to state taxes. In assessing the realizability of the deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Based upon the projection for future state taxable income, management believes it is more likely than not that the Company will not realize its deferred tax asset related to state income taxes. The Company issued 9.5 million shares of its common stock on May 16, 2001 in its acquisition of Bargo Energy Company. Management believes that the merger with Bargo was not an ownership change as defined in Section 382 of the Internal Revenue Code. Therefore, the Company last had an ownership change in 1994 with the issuance of 3.4 million shares of its common stock. A change of stock ownership in the future by a significant shareholder of the Company may cause an ownership change, which would affect the Company's ability to utilize its net operating loss ("NOL") carryforwards in the future. Section 382 of the Internal Revenue Code significantly limits the amount of the NOL and investment tax credit carryforwards that are available to offset future taxable income and related tax liability when a change in ownership occurs. 6. RELATED PARTY TRANSACTIONS Milam Energy, LP ("Milam") is a 51% working interest owner with the Company in several south Louisiana and Texas properties. Torch Energy Advisors Incorporated ("Torch") is a majority owner of Milam. J.P. Bryan, a managing director and stockholder of Torch, was a director of Mission until October 2002; therefore, Milam is no longer affiliated with Mission. As of September 30, 2003, Milam owed the Company approximately $108,308 in joint interest billings related to these properties. On October 8, 2003, $50,625 was received and applied against the outstanding balance. The receivable is reflected on the accounts receivable and accrued revenues line of the consolidated Balance Sheet. Currently, Milam is paying estimated operating expenses one month in advance. The $57,683 balance remaining after the October 8th payment represents cash calls for capital projects. 7. GUARANTEES The Company routinely obtains bonds to cover its obligations to plug and abandon oil and gas wells. In instances where the Company purchases or sells oil and gas properties, the parties to the transaction routinely include an agreement as to who will be responsible for plugging and abandoning any wells on the property and restoring the surface. In those cases, the Company will obtain new bonds -18- MISSION RESOURCES CORPORATION NOTES TO FINANCIAL STATEMENTS (UNAUDITED) or release old bonds regarding its plugging and abandonment exposure based on the terms of the purchase and sale agreement. However, if a party to the purchase and sale agreement defaults on its obligations to obtain a bond or otherwise plug and abandon a well or restore the surface or if that party becomes bankrupt, the landowner, and in some cases the state or federal regulatory authority, may assert that the Company is obligated to plug the well since it is in the "chain of title". The Company has been notified of such claims from landowners and the State of Louisiana and is vigorously asserting its rights under the applicable purchase and sale agreements to avoid this liability. At this time, the Company has accrued a liability for approximately $239,500 for the abandonment and cleanup of the Bayou fer Blanc field that is currently in process and a liability for approximately $379,000, its proposal to settle abandonment issues at the West Lake Ponchartrain field. In 1993 and 1996 the Company entered into agreements with surety companies and with Torch and Nuevo Energy Company ("Nuevo") whereby the surety companies agreed to issue such bonds to the Company, Torch and/or Nuevo. However, Torch, Nuevo and the Company agreed to be jointly and severally liable to the surety company for any liabilities arising under any bonds issued to the Company, Torch and/or Nuevo. The amount of bonds presently issued to Torch and Nuevo pursuant to these agreements is approximately $35.2 million. The Company has notified the sureties that it will not be responsible for any new bonds issued to Torch or Nuevo. However, the sureties are permitted under these agreements to seek reimbursement from the Company, as well as from Torch and Nuevo, if the surety makes any payments under the bonds issued to Torch and Nuevo. 8. SUBSEQUENT EVENTS Mission's interests in East Cameron Block 17 were sold for approximately $1.9 million in a transaction that closed on October 9, 2003. All of Mission's oil and gas property interests in East Texas, plus its 10.1% interest in the East Texas Salt Water Disposal Company were sold for approximately $19 million in a transaction that closed on October 30, 2003. In addition, a purchase and sale agreement covering all of Mission's interests in the Raccoon Bend field in Texas was signed on November 7, 2003. Although the sale is subject to certain conditions, the Raccoon Bend divestiture is anticipated to close in mid-December 2003 for proceeds of approximately $5 million. Management of the Company intends to use the proceeds of these sales for the future acquisition of gas properties in the Gulf Coast or South Texas areas. Proved reserves of approximately 35 Bcfe were divested in these three sales. -19- MISSION RESOURCES CORPORATION ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS GENERAL CRITICAL ACCOUNTING POLICIES In response to SEC Release No. 33-8040, Cautionary Advice Regarding Disclosure About Critical Accounting Policies, we identified those policies of particular importance to the portrayal of our financial position and results of operations and those policies that require our management to apply significant judgment. We believe these critical accounting policies affect the more significant judgments and estimates used in the preparation of our consolidated financial statements. FULL COST METHOD OF ACCOUNTING FOR OIL AND GAS ASSETS We use the full cost method of accounting for investments in oil and gas properties. Under the full cost method of accounting, all costs of acquisition, exploration and development of oil and gas reserves are capitalized as incurred into a "full cost pool". Under the full cost method, a portion of employee-related costs may be capitalized in the full cost pool if they are directly identified with acquisition, exploration and development activities. Generally, salaries and benefits are allocated based upon time spent on projects. Amounts capitalized can be significant when exploration and major development activities increase. We deplete the capitalized costs in the full cost pool, plus estimated future expenditures to develop reserves, using the units of production method based upon the ratio of current production to total proved reserves. Depletion is a significant component of our net income. Proportionally, it represented 37% of our total oil and gas revenues in both the nine-month periods ended September 30, 2003 and 2002. Any reduction in proved reserves without a corresponding reduction in capitalized costs will increase the depletion rate. Should our reserves increase by 10%, our depletion per barrel equivalent would decrease approximately $0.93, or 9%; however a 10% decrease in reserves will have an 11% impact, increasing depletion per barrel equivalent by approximately $1.14. Both the volume of proved reserves and the estimated future expenditures used for the depletion calculation are obtained from the reserve estimates prepared by independent reservoir engineers. These reserve estimates are inherently imprecise as they rely upon both the engineers' quantitative and subjective analysis of various data, such as engineering data, production trends and forecasts, estimated future spending and the timing of spending. Different reserve engineers may make different estimates of reserves based on the same data. Finally, estimated production costs and commodity prices are added to the assessment in order to determine whether the estimated reserves have any value. Reserves that cannot be produced and sold at a profit are not included in the estimated total proved reserves; therefore the quantity of reserves can increase or decrease as oil and gas prices change. See "Risk Factors: Risks Related to Our Business, Industry and Strategy" in our Annual Report on Form 10-K for the fiscal year ended December 31, 2002 for general cautions concerning the reliability of reserve and future net revenue estimates by reservoir engineers. -20- MISSION RESOURCES CORPORATION The full cost method requires a quarterly calculation of a limitation on capitalized costs, often referred to as a full cost ceiling calculation. The ceiling is the discounted present value of our estimated total proved reserves adjusted for taxes, using a 10% discount rate. To the extent that our capitalized costs (net of depreciation, depletion, amortization, and deferred taxes) exceed the ceiling, the excess must be written off to expense. Once incurred, this impairment of oil and gas properties is not reversible at a later date even if oil and gas prices increase. No such impairment was required in the quarter or year-to-date periods ended September 30, 2003 and 2002, respectively. While the difficulty in estimating proved reserves could cause the likelihood of a ceiling impairment to be difficult to predict, the impact of changes in oil and gas prices is most significant. In general, the ceiling is lower when prices are lower. Oil and gas prices at the end of the period are applied to the estimated reserves, then costs are deducted to arrive at future net revenues, which are then discounted at 10% to arrive at the discounted present value of proved reserves. Additionally, we adjust the estimated future revenues for the impact of our existing cash flow commodity hedges. The ceiling calculation dictates that prices and costs in effect as of the last day of the period are generally held constant indefinitely. Therefore, the future net revenues associated with the estimated proved reserves are not based on Mission's assessment of future prices or costs, but rather are based on prices and costs in effect as of the end the period. Because the ceiling calculation dictates that prices in effect as of the last day of the period be held constant, the resulting value is rarely indicative of the true fair value of our reserves. Oil and natural gas prices have historically been variable and, on any particular day at the end of a period, can be either substantially higher or lower than our long-term price forecast, which we feel is more indicative of our reserve value. You should not view full cost ceiling impairments caused by fluctuating prices, as opposed to reductions in reserve volumes, as an absolute indicator of a reduction in the ultimate value of our reserves. Oil and gas prices used in the ceiling calculation at September 30, 2003 were $29.11 per barrel and $4.58 per MMBTU. A significant reduction in these prices at a future measurement date could trigger a full cost ceiling impairment. Our hedging program would serve to mitigate some of the impact of any price decline. Each $0.10 decline in gas prices would bring us 14% closer to a ceiling impairment, whereas, each $0.50 decline in oil prices would bring us 16% closer to a ceiling impairment. DERIVATIVE INSTRUMENTS ACCOUNTING All of our commodity derivative instruments represent hedges of the price of future oil and natural gas production. We estimate the fair values of our hedges at the end of each reporting period. The estimated fair values of our commodity derivative instruments are recorded in the consolidated Balance Sheet as assets or liabilities as appropriate. At September 30, 2003, they represented a $5.3 million current liability and a $771,000 long-term liability. For effective hedges, we record the change in the fair value of the hedge instruments to other comprehensive income, a component of stockholders' equity, until the hedged oil or natural gas quantities are produced. Any ineffectiveness of our hedges, which could represent either gains or losses, would be reported when calculated as an adjustment of interest and other income. Estimating the fair values of commodity hedge derivatives requires complex calculations, including the use of a discounted cash flow technique and our subjective judgment in selecting an appropriate discount rate. In addition, the calculation uses future NYMEX prices, which although posted for trading purposes, are the market consensus of forecast price trends and may differ from the prices in -21- MISSION RESOURCES CORPORATION place when the hedges actually settle. The results of our fair value calculation cannot be expected to represent exactly the fair value of our commodity hedges. In the past we have chosen to obtain the fair value of commodity derivatives from the counter parties to those contracts. Since the counter parties were market makers, they were able to provide us with a literal market value, or what they would be willing to settle such contracts for as of the given date. We currently use a software product from an outside vendor to calculate the fair value of our hedges. This vendor provides the necessary NYMEX futures prices and the calculated volatility in those prices to us daily. The software is programmed to apply a consistent discounted cash flow technique, using these variables and a discount rate derived from prevailing interest rates. This software is successfully used by several of our peers. Its methods are in compliance with the requirements of SFAS No. 133 and have been reviewed by a national accounting firm. Our existing commodity hedges are perfectly effective. Should circumstances change, all or part of the hedges could become ineffective. We would be required to record an income impact at that time. For example, should we fail to produce oil and gas in amounts adequate to cover the hedges, the derivative would immediately be considered speculative and its entire change in value would be recorded as either a gain or loss in interest and other income. Thereafter, the derivative would be marked to market each quarter, substantially increasing the volatility of our earnings. REVENUE RECOGNITION Mission records revenues from sales of crude oil and natural gas when delivery to the customer has occurred and title has transferred. This occurs when production has been delivered to a pipeline or a tanker lifting has occurred. We may share ownership with other producers in certain properties. In this case, we use the sales method to account for sales of production. It is customary in the industry for various working interest partners to sell more or less than their entitled share of natural gas production, creating gas imbalances. Under the sales method, gas sales are recorded when revenue checks are received or are receivable on the accrual basis. Typically no provision is made on the Balance Sheet to account for potential amounts due to or from Mission related to gas imbalances. If the gas reserves attributable to a property have depleted to the point that there are insufficient reserves to satisfy existing imbalance positions, a liability or a receivable, as appropriate, should be recorded equal to the net value of the imbalance. As of September 30, 2003, we have recorded a net liability of approximately $1.1 million, which is included in the accounts payable and accrued liabilities line of the Balance Sheet, representing approximately 411,527 Mcf at an average price of $2.69 per Mcf, related to imbalances on properties at or nearing depletion. We value gas imbalances using the price at which the imbalance originated, if required by the gas balancing agreement, or we use the current price where there is no gas balancing agreement available. Reserve changes on any fields that have imbalances could change this liability. We do not anticipate the settlement of gas imbalances to adversely impact our financial condition in the future. Settlements are typically negotiated, so the per Mcf price for which imbalances are settled could differ among wells and even among owners in one well. ASSET RETIREMENT We adopted SFAS No. 143, "Accounting for Asset Retirement Obligations" effective January 1, 2003. Previously our estimate of future plugging and abandonment and dismantlement costs was charged to income by being included in the capitalized costs that we depleted using the unit of production method. SFAS No. 143 requires us to record a liability for the fair value of our estimated asset retirement obligation, primarily comprised of our plugging and abandonment liabilities, in the period in which it is incurred. Upon initial implementation, we estimate asset retirement costs for all of our assets as of today, inflation adjust today's costs to the forecast abandonment date, discount that amount back to the date we acquired the asset and record an asset retirement liability in that amount with a corresponding addition to our asset value. Then we must compute all depletion previously taken on future plugging and -22- MISSION RESOURCES CORPORATION abandonment costs, and reverse that depletion. Finally, we must accrete the liability to present day. Any income effect of this initial implementation is reflected as a change in accounting method on our Statement of Operations. After initial implementation, we will reduce the liability as abandonment costs are incurred. Should actual costs differ from the estimate, the difference will be reflected as an abandonment gain or loss in the Statement of Operations when the abandonment occurs. We have developed a process through which to track and monitor the obligations for each asset following implementation of SFAS No. 143. As with previously discussed estimates, the estimation of our asset retirement obligation is dependent upon many variables. We attempt to limit the impact of management's judgment on these variables by using the input of qualified third parties when possible. We engaged an independent engineering firm to evaluate our properties and to provide us with estimates of abandonment costs. We used the remaining estimated useful life from the 2002 year-end Netherland, Sewell & Associates, Inc. reserve report in estimating when abandonment could be expected. The resulting estimate, after application of a discount factor and some significant calculations, could differ from actual results, despite all our efforts to make the most accurate estimation possible. LIQUIDITY AND CAPITAL RESOURCES We require substantial capital in order to fund our exploration and development programs. Our current primary sources of liquidity are internally generated cash flow, borrowings under our credit facility and the sale of non-core oil and gas properties. We have also used utilized public debt and equity offerings in the past to fund capital requirements. CASH FLOWS Net cash flow provided by operations was $21.3 million for the nine-month period ending September 30, 2003 whereas in the nine-month period ending September 30, 2002 cash flow used in operations was $12.5 million. Higher oil and gas prices in 2003 have contributed to the period-to-period improvement. Net cash flow used in investing activities for the nine-month period ending September 30, 2003 was $21.9 million while $31.9 million was provided by investing activities in the nine-month period ending September 30, 2002. We invested $23.0 million in oil and gas properties for the nine-month period ended September 30, 2003 compared to $16.6 million for the same period of 2002. Proceeds from property sales, primarily related to 2002 sales, were $3.0 million for the nine-month period ended September 30, 2003 compared to $49.1 million for the same period of 2002. Net cash flow provided by financing activities was $3.5 million in the nine-month period ended September 30, 2003, whereas $28.1 million was used in the same period of 2002. In 2002, our focus was on paying down our credit facility, while in 2003 we repurchased and retired almost $97.6 million of our Notes. See Long Term Debt below for more details. CAPITAL BUDGET AND DRILLING ACTIVITIES A capital budget of $32.0 million was adopted for the year 2003, with $20.8 million for development, $5.8 million for exploration and $5.4 million for seismic data, land and other related items. We design and continually adjust our capital spending plan to make optimal use of, but not to exceed, operating cash flow after debt service and administrative expenses plus proceeds from asset sales. Natural gas and oil prices, the timing of our drilling program and drilling results have a significant impact on the cash flows available for capital expenditures and our ability to borrow and raise additional capital. -23- MISSION RESOURCES CORPORATION Lower prices may also reduce the amount of natural gas and oil that we can economically produce. Lower prices and/or lower production may decrease revenues and cash flows, thus reducing the amount of financial resources available to meet our capital requirements. Capital expenditures, excluding $875,000 spent on office re-configuration, furniture and software, totaled approximately $24 million for the nine months ended September 30, 2003. Development costs comprised about 67% of the total, exploratory costs about 15% and the remaining costs were for seismic data, prospect data or prospect acquisition costs. Developmental costs have been focused in the Gulf Coast and the Permian Basin, specifically in the Brahaney Unit, Waddell Ranch and TXL fields in the Permian Basin and the West Lake Verret, Backridge and North Leroy fields in South Louisiana. Exploratory costs have been incurred in the Unit Petroleum Bluntzer #1 and the Black Stone No. 1 in Goliad and Hidalgo Counties, Texas, and in the J.P. Coleman in St. Mary Parish, Louisiana. Exploratory costs have also been incurred at the Eugene Island Block 284 D-1 field in the federal waters of the Gulf of Mexico. LONG TERM DEBT SENIOR SUBORDINATED NOTES In April 1997, Mission issued $100.0 million of 10 7/8% senior subordinated notes due 2007. On May 29, 2001, we issued an additional $125.0 million of senior subordinated notes due 2007 with identical terms to the notes issued in April 1997 (collectively the "Notes") at a premium of $1.9 million. The premium is amortized as a reduction of interest expense over the life of the Notes so that the effective interest rate on these additional Notes is 10.5%. The premium is shown separately on the balance sheet. Interest on the Notes is payable semi-annually on April 1 and October 1. The Notes may be redeemed, in whole or in part, at our option any time after April 1, 2002 at 105.44%, and decreasing annually to 100.00% on April 1, 2005 and thereafter, plus accrued and unpaid interest. In the event of a change of control, as defined in the indenture, each holder of the Notes will have the right to require us to repurchase all or part of such holder's Notes at an offer price in cash equal to 101.0% of the aggregate principal amount thereof, plus accrued and unpaid interest to the date of purchase. The Notes contain certain covenants, including limitations on indebtedness, liens, compliance with requirements of existing indebtedness, dividends, repurchases of capital stock and other payment restrictions affecting restricted subsidiaries, issuance and sales of restricted subsidiary stock, dispositions of proceeds of asset sales and restrictions on mergers and consolidations or sales of assets. As of September 30, 2003, we were in compliance with our covenants under the Notes. On March 28, 2003, we acquired, in a private transaction with various funds affiliated with Farallon Capital Management, LLC, approximately $97.6 million in principal amount of the Notes for approximately $71.7 million, plus accrued interest. Immediately after the consummation of the purchase and sale agreement, Mission had $127.4 million in principal amount of Notes outstanding. In the past, we received debt ratings from two major rating agencies in the United States. Beginning in April 2003, Mission terminated the ratings service with Standard & Poor's because two major rating agencies are not required for our debt instruments. In June 2003, Moody's downgraded Mission's subordinated note rating to "Ca". In determining Mission's debt rating, Moody's considers a number of items including, but not limited to, debt levels, planned asset sales, near-term and long-term production growth opportunities, capital allocation challenges and commodity price levels. A decline in our ratings would not create a default under our current credit facility or other unfavorable change. -24- MISSION RESOURCES CORPORATION CREDIT FACILITY On March 28, 2003, simultaneously with the acquisition of the Notes, the Company amended and restated its credit facility with new lenders, led by Farallon Energy Lending, LLC. The entire $947,000 of deferred financing costs relating to the facility with its previous lenders was charged to earnings as a reduction in the gain on extinguishment of debt. Under the amended and restated secured credit agreement ("the Facility"), the Company borrowed $80.0 million pursuant to term loans (the "Term Loan Facility"), the proceeds of which were used to acquire approximately $97.6 million face amount of Notes, to pay accrued interest on the Notes purchased, and to pay closing costs associated therewith. The Facility provides that an additional $10.0 million could be made available solely for the purpose of acquiring additional Notes. The additional $10.0 million will be advanced at the discretion of the lenders, and we cannot assure you that the lenders will consent to this additional advance. The interest rate on the Term Loan Facility is 12% until February 16, 2004, when it increases to 13% until the maturity date. Subject to certain conditions, we have the option to prepay and also may be required to prepay the loans outstanding under the Term Loan Facility (the "Loans"), upon the occurrence of certain payments, including, but not limited to, the issuance of capital stock or indebtedness, asset sales or recovery events, subject to certain limitations. Mission is also required, by not later than February 4, 2004, to prepay the Loans in an amount equal to one-half of the amount by which Mission's discretionary cash flow for fiscal 2003 exceeds $35.0 million, provided that no prepayment need be made in an amount less than $1.0 million. The facility requires Mission to use any divestiture proceeds to acquire oil and gas properties or to make a prepayment on the Loans. Upon the closing of the Facility, the lenders were entitled to a fee of 3% of the initial amounts drawn or $2.4 million. The fee is due, in full or in part, if certain events occur. Those events include certain material events of default, acceleration of the Loans or the prepayment or repayment of the Loans in full. Any additional loans made under the Facility would also be subject to the 3% fee, which will also be deferred as described above. Optional and mandatory prepayments of the initial loans outstanding and of any additional loans that become outstanding under the Facility can reduce the deferred fee in varying amounts based upon when the prepayment is made. On June 16, 2003, we again amended and restated the Facility to add a revolving credit facility (the "Revolver Facility") of up to $12.5 million, including a letter of credit sub-facility (the "Sub-Facility") of up to $3.0 million. As of September 30, 2003, we had no amounts outstanding under the Revolver Facility, but have issued $100,000 of letters of credit under the Sub-Facility. The proceeds of the Revolver Facility are to be used to finance our ongoing working capital and general corporate needs. The interest rate on amounts outstanding under the Revolver Facility will be equal to the prime rate plus 0.5% per annum, provided that the minimum interest rate will be 4.75% per annum. Outstanding letters of credit under the Sub-Facility will be charged a 3.0% per annum letter of credit fee. The Facility, which includes the Term Loan Facility, the Revolver Facility, and the Sub-Facility, is governed by various covenants including, but not limited to, covenants preventing us from making or committing to make certain capital expenditures and requiring that certain financial covenants be maintained. For a more complete discussion of the terms of the Facility, see Note 3 to the condensed consolidated financial statements. At September 30, 2003, we were in compliance with all of the Facility's covenants. The minimum consolidated fixed charge coverage ratio is calculated quarterly. Our ability to meet this requirement in future quarters will primarily be dependent upon the timing and the success of our drilling program. If we fail to meet this requirement, we would attempt to negotiate a more lenient calculation or would request a waiver of the requirement from the lenders. -25- MISSION RESOURCES CORPORATION CAPITAL STRUCTURE We have a highly leveraged capital structure, limiting our financial flexibility. In particular, we must pay approximately $23.6 million of interest annually on the remaining Notes and the Facility combined, which limits the amount of cash provided by operations that is available for exploration and development of oil and gas properties. The Notes also contain various covenants that limit our ability to, among other things, incur additional indebtedness, pay dividends, purchase capital stock and sell assets. Although, our common stock price has rebounded in recent months, we have a limited ability to complete offerings of equity securities. At September 30, 2003, we had a working capital deficit of approximately $7.3 million, compared to positive working capital of $0.9 million at December 31, 2002. The addition of a current obligation for asset retirement as a result of the implementation of SFAS No. 143 and the unfavorable impact of increased commodity prices on our hedges' fair value contributed most significantly to this deficit. The hedge liability represents the extent to which actual commodity prices exceed the price caps set by our hedges. Should commodity prices decrease, the liability will decline and the premium over the hedge prices that we will realize on unhedged production will also reduce. Since hedges are settled out of the receipts from the sale of production, we anticipate having adequate cash inflows to settle any hedge payments when they come due while maintaining revenue near the hedge price. We believe the cash flows from operating activities combined with our ability to control the timing of substantially all of our future development and acquisition requirements will provide us with the flexibility and liquidity to meet our future planned capital requirements for the remainder of 2003 and into next year. Our 2003 planned development and acquisition programs are projected to be funded substantially by available cash flow from our 2003 operations and our Revolver Facility is available for short-term borrowings. Because of these issues, our management team has reviewed various restructuring alternatives and has retained the investment-banking firm of Petrie Parkman & Co. to assist in this evaluation. The repurchase of approximately $97.6 million of the Notes was the first step in this effort to restructure the Balance Sheet. The addition of the $12.5 million Revolver Facility was a second step. Among the additional alternatives being considered are o a refinancing of the remaining Notes; o a new credit facility; o a merger with or an acquisition by another company; o the sale of certain oil and gas properties; o the acquisition by the Company of another company or assets; o other secured and unsecured debt financings; and o the issuance of equity securities or other debt securities for cash or properties or in exchange for the Notes. Some of these alternatives would require approval of our stockholders, and all of them will require the approval of other parties to the transaction. We cannot assure you that we will be successful in completing any of these possible transactions. CONTRACTUAL OBLIGATIONS AND COMMERCIAL COMMITMENTS Mission is required to make future payments under contractual obligations. Mission has also made various commitments in the future should certain events occur or conditions exist. As a result of the repurchase of the Notes and the amendment of our credit facility, our contractual obligations changed significantly on March 28, 2003, but have not changed significantly after June 30, 2003. -26- MISSION RESOURCES CORPORATION RELATED PARTIES Milam Energy, LP ("Milam") is a 51% working interest owner with the Company in several south Louisiana and Texas properties. Torch Energy Advisors Incorporated ("Torch") is a majority owner of Milam. J.P. Bryan, a managing director and stockholder of Torch, was a director of Mission until October 2002; therefore, Milam is no longer affiliated with Mission. As of September 30, 2003, Milam owed the Company approximately $108,308 in joint interest billings related to these properties. On October 8, 2003, $50,625 was received and applied against the outstanding balance. The receivable is reflected on the accounts receivable and accrued revenues line of the consolidated balance sheet. Currently, Milam is paying estimated operating expenses one month in advance. The $57,683 balance remaining after the October 8th payment represents cash calls for capital projects. RESULTS OF OPERATIONS The following table sets forth certain operating information for Mission for the periods presented:
Three Months Ended Nine Months Ended September 30, September 30, --------------------------- --------------------------- 2003 2002 2003 2002 ------------ ------------ ------------ ------------ Production: Oil and condensate (MBbls) .......................... 571 729 1,710 2,623 Natural gas (MMcf) .................................. 2,350 3,061 6,845 10,225 Equivalent barrels (MBOE) ........................... 963 1,239 2,851 4,327 Average sales price including the effect of hedges: Oil and condensate ($ per Bbl) ...................... 25.01 22.78 25.29 21.20 Natural gas ($ per Mcf) ............................ 4.17 3.02 4.53 2.98 Average sales price excluding the effect of hedges: Oil and condensate ($ per Bbl) ...................... 28.54 23.86 29.34 21.35 Natural gas ($ per Mcf) ............................. 4.79 3.01 5.44 2.86 Average costs: Lease operating expenses ($ per Boe) ................ 8.63 7.08 8.97 7.65 Taxes other than income ($ per Boe) ................. 2.19 1.91 2.44 1.64 General & administrative expense ($ per Boe) ........ 2.68 4.05 2.81 2.32 Depreciation, depletion and amortization ($ per Boe)(1) ................................. 10.25 7.75 9.65 7.26
(1) Excludes depreciation, depletion and amortization on gas plants, furniture and fixtures and other assets. -27- MISSION RESOURCES CORPORATION THREE MONTHS ENDED SEPTEMBER 30, 2003 AND 2002 NET INCOME (LOSS) Net loss for the three months ended September 30, 2003 was $3.8 million or $0.16 per share. Net loss for the three months ended September 30, 2002 was $2.4 million or $0.10 per share. Although production has declined substantially between the periods as a result of the sale of oil and gas properties in 2002, higher oil and gas prices have mitigated the impact of the production decline. OIL AND GAS REVENUES Oil revenues decreased 14% from $16.6 million for the three months ended September 30, 2002 to $14.3 million for the three months ended September 30, 2003. Oil production decreased 22% from 729 thousand barrels ("MBbls") in the three months ended September 30, 2002 to 571 MBbls in the same period of 2003. The sales of oil and gas properties in the latter half of 2002, and the sale of Pt. Pedernales in March 2003 account for most of the production decrease. Oil prices averaged $25.01 per barrel in the three months ended September 30, 2003, as compared to $22.78 per barrel in the three months ended September 30, 2002. Gas revenues increased 7% from $9.2 million reported for the quarter ended September 30, 2002 to $9.8 million for the quarter ended September 30, 2003. Gas production decreased 23% from 3,061 MMcf in the three months ended September 30, 2002 to 2,350 MMcf for the three months ended September 30, 2003. The sales of oil and gas properties in the latter half of 2002 account for most of the production decrease. Gas prices averaged $4.17 per Mcf, or 38% higher, in the three months ended September 30, 2003 as compared to $3.02 per Mcf in the comparable period of 2002. The volumes and revenues discussed above include a 23 MMcf reduction in gas balancing liability that may require settlement in cash upon depletion of the properties. This decrease in the liability during the third quarter of 2003 was valued at approximately $128,000 using prices in effect at the origination of the imbalances. The realized prices discussed above include the impact of oil and gas hedges. A decrease of $3.5 million related to hedging activity was reflected in oil and gas revenues for the three months ended September 30, 2003, while a decrease in oil and gas revenues of $767,000 was reflected for the same period of 2002. INTEREST AND OTHER INCOME (LOSS) Interest and other income (loss) was a net gain of $170,000 and $1.7 million for the three-month periods ended September 30, 2003 and 2002, respectively. The gain in 2002 was primarily a $1.7 million gain resulting from the settlement of a royalty calculation dispute with the MMS. In the three months ended September 30, 2003, there was a $187,000 gain from the amortization of OCI related to cancelled hedges. The hedges were cancelled in 2002 and re-designated in order to eliminate the volatility due to hedge ineffectiveness. LEASE OPERATING EXPENSES Lease operating expenses decreased from $8.8 million in the three months ended September 30, 2002 to $8.3 million for the same period of 2002. This decline of approximately 6% is primarily related to sales of oil and gas properties in 2002, partially offset by increases in operating costs in East Texas and the offshore Gulf of Mexico properties. Third quarter savings of approximately $1.7 million are attributable to the 2002 property sales. Increased costs for offshore MMS compliance work and expense workovers caused a periodic increase in lease operating expenses. -28- MISSION RESOURCES CORPORATION TAXES OTHER THAN INCOME Taxes other than income decreased from $2.4 million in the three months ended September 30, 2002 to $2.1 million for the same period of 2003. Production tax is included in this total. Production taxes are generally based upon volumes or revenues. They increase or decrease with changes in volumes and revenue. Decreased volumes as a result of the property sales and increased revenues a result of higher gas prices had offsetting impacts on production taxes. Ad valorem taxes are lower in 2003 than in 2002. TRANSPORTATION COSTS Transportation costs were not significant in either presented period. ASSET RETIREMENT OBLIGATION ACCRETION EXPENSE Asset retirement obligation accretion expense is a new category of expense for 2003 that resulted from the implementation of SFAS No. 143. The liability which we have recorded for our asset retirement obligation represents the estimate of such costs as of today. Each quarter, we must increase that liability to account for the passage of time, resulting in this accretion expense. DEPRECIATION, DEPLETION AND AMORTIZATION Depreciation, depletion and amortization ("DD&A") was $10.0 million for the three months ended September 30, 2003 and $9.7 million for the three months ended September 30, 2002. The DD&A rate has increased from $7.75 per BOE in the third quarter of 2002 to $10.25 per BOE in the third quarter of 2003. A reduction in reserves, primarily due to revisions calculated by reservoir engineers and to a lesser degree due to property sales, caused the increased DD&A rate. GENERAL AND ADMINISTRATIVE EXPENSES General and administrative expenses ("G&A") decreased 48% from $5.0 million in the three months ended September 30, 2002 to $2.6 million for the same period in 2003. The third quarter of 2002 included approximately $2.5 million of severance costs. At September 30, 2002, most of Mission's accounting, operating and marketing functions were performed by employees of Torch. Mission paid Torch a management fee for these outsourced services. By the end of April 2003 all outsourcing contracts with Torch had been terminated and Mission's staff had increased. Comparing the three months ended September 30, 2002 and 2003, Mission's management fees decreased by approximately $672,000 but there was a partially offsetting increase in employee costs. INTEREST EXPENSE Interest expense increased 22% to $6.6 million for the three months ended September 30, 2003 from $5.4 million in the same period of 2002. A $1.8 million gain on the mark-to-market of the interest rate swap caused 2002 interest expense to be significantly lower than usual. If the gain is ignored, the interest expense savings resulting from our recent activities is evident. Interest expense in 2002 included approximately $309,000 of interest paid on borrowings under Mission's previous revolving credit facility. In 2003, there were no borrowings under Mission's current revolving credit facility. Additionally, the March 2003 repurchase of $97.6 million of our 10-7/8% subordinated notes and their replacement with an $80.0 million term loan facility currently bearing interest at 12% has generated interest savings of approximately $95,000 per month. -29- MISSION RESOURCES CORPORATION INCOME TAXES The provision for federal and state income taxes for the three months ended September 30, 2003 was based upon a 35% effective tax rate. The $5.3 million valuation allowance on deferred taxes applicable at December 31, 2002 has been decreased to $4.9 million at September 30, 2003, due to the decrease in the deferred tax asset relating to state taxes. In assessing the realizability of the deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Based upon the projection for future state taxable income, management believes it is more likely than not that the Company will not realize its deferred tax asset related to state income taxes. NINE MONTHS ENDED SEPTEMBER 30, 2003 AND 2002 NET INCOME (LOSS) Net income for the nine months ended September 30, 2003 was $3.9 million or $0.16 per share. Net loss for the nine months ended September 30, 2002 was $17.8 million or $0.75 per share. The $22.4 million gain ($14.5 million net of tax) from the repurchase and retirement of the Notes in March 2003, combined with higher oil and gas prices in 2003, contributed to the increase in net income. OIL AND GAS REVENUES Oil revenues decreased 22% from $55.6 million for the nine months ended September 30, 2002 to $43.2 million for the nine months ended September 30, 2003. Oil production decreased 35% from 2,623 MBbls in the nine months ended September 30, 2002 to 1,710 MBbls in the same period of 2003. The sale of oil and gas properties during the year 2002 accounts for most of the production decrease. Oil prices averaged $25.29 per barrel in the nine months ended September 30, 2003, as compared to $21.20 per barrel in the nine months ended September 30, 2002. Gas revenues remained almost flat at $30.5 million for the nine months ended September 30, 2002 compared to $31.0 million for the nine months ended September 30, 2003. Gas production decreased 33% from 10,225 MMcf for the nine months ended September 30, 2002 to 6,845 MMcf for nine months ended September 30, 2003. The sale of oil and gas properties during the year 2002, accounts for most of the production decrease. Gas prices averaged $4.53 per Mcf, or 52% higher, in the nine months ended September 30, 2003 as compared to $2.98 per Mcf in the comparable period of 2002. The volumes and revenues discussed above include the provision for a 146 MMcf gas balancing liability that may require settlement in cash upon depletion of the properties. This reserve was valued at approximately $655,000 using prices in effect at the origination of the imbalances. The realized prices discussed above include the impact of oil and gas hedges. A decrease of $13.2 million related to hedging activity was reflected in oil and gas revenues for the nine months ended September 30, 2003, while an increase in oil and gas revenues of $868,000 was reflected for the same period of 2002. EXTINGUISHMENT OF DEBT On March 28, 2003, Mission acquired approximately $97.6 million in principal amount of its Notes for approximately $71.7 million, plus accrued interest. The Notes were retired. The difference between the principal amount retired and the amount paid to purchase the Notes is recorded as a gain on the extinguishment of debt. The costs of the purchase transaction and the removal of the amount of -30- MISSION RESOURCES CORPORATION previously deferred subordinated debt financing costs related to the retired Notes were netted against the gain to arrive at the $22.4 million gain ($14.5 million net of tax) on extinguishment of debt. INTEREST AND OTHER INCOME (LOSS) Interest and other income (loss) was a net gain of $892,000 for the nine months ended September 30, 2003 and a loss of $8.0 million for the nine months ended September 30, 2002. A $9.3 million loss on hedge ineffectiveness of derivatives is included as a component of other income in the first nine months of 2002 whereas a gain of $603,000 from the amortization of OCI related to cancelled hedges is recorded for the same period of 2003. The hedges were cancelled in 2002 and re-designated in order to eliminate the volatility due to hedge ineffectiveness. Approximately $404,000 in bad debt expense and note receivable write-offs burdened 2002, with no comparably large write-offs in 2003. Activity for 2003 includes approximately $341,000 of equity in the earnings of White Shoal Pipeline Corporation. Mission owns a 26.6% interest in this corporation, which operates in the Gulf of Mexico. LEASE OPERATING EXPENSES Lease operating expenses decreased from $33.1 million in the nine months ended September 30, 2002 to $25.6 million for the same period of 2003. This decline of approximately 23% is primarily related to 2002 property sales. TAXES OTHER THAN INCOME Taxes other than income decreased from $7.1 million in the nine months ended September 30, 2002 to $7.0 million for the same period of 2003. Ad valorem taxes are included in this total and these property taxes have been increasing as local jurisdictions search for ways to balance their budgets, however, Mission's property taxes have decreased overall due to the sales of properties. Production taxes are included in this total. In many states, production tax is a function of revenue rather than production, so production taxes tend to be higher in times of higher revenues. TRANSPORTATION COSTS Transportation costs were not significant in either period presented. ASSET RETIREMENT OBLIGATION ACCRETION EXPENSE Asset retirement obligation accretion expense is a new category of expense for 2003 that resulted from the implementation of SFAS No. 143. The liability which we have recorded for our asset retirement obligation represents the estimate of such costs as of today. Each quarter, we must increase that liability to account for the passage of time, resulting in this accretion expense. DEPRECIATION, DEPLETION AND AMORTIZATION DD&A was $28.0 million for nine months ended September 30, 2003 and $31.9 million for nine months ended September 30, 2002. Although this represents an overall cost decrease, DD&A per BOE has increased from $7.26 per BOE in the nine-month period of 2002 to $9.65 per BOE in the nine-month period of 2003. A reduction in year end reserves, primarily due to revisions calculated by reservoir engineers and to a lesser degree to property sales, caused the increased DD&A rate in 2003. -31- MISSION RESOURCES CORPORATION GENERAL AND ADMINISTRATIVE EXPENSES G&A totaled approximately $8.0 million in the nine months ended September 30, 2003 and $10.0 million in the nine months ended September 30, 2002. At September 30, 2002, most of Mission's accounting, operating and marketing functions were performed by employees of Torch. Mission paid Torch a management fee for these outsourced services. By the end of April 2003 all outsourcing contracts with Torch had been terminated and Mission's staff had increased; therefore, Mission's management fee costs decreased but a corresponding employee costs increase combined with severance costs related to the reorganization partially offset the management fee savings. The first half of 2003 included increased expenses that will not be required in future quarters as evidenced by the $280,000 decrease in G&A from the second quarter of 2003 to the third quarter of 2003. We incurred additional audit fees related to the first time audit of functions that were previously outsourced. Legal costs were higher as a result of several settled lawsuits and the implementation of the new corporate governance requirements. We also performed an extensive review of our land records in preparation of implementing a new land system. INTEREST EXPENSE Interest expense decreased 22% to $19.0 million for the nine months ended September 30, 2003 from $20.4 million in the same period of 2002. The change in fair value of the interest rate swap was recorded as a reduction to interest expense of $520,000 in the nine months ended September 30, 2003 and as additional interest expense of $1.6 million in the nine months ended September 30, 2002. Also, there were no borrowings outstanding under the revolving credit facility in the first half of 2003, but approximately $993,000 of interest on borrowings under the revolving credit facility was reported for the first half of 2002. Additionally, the March 2003 repurchase of $97.6 million of our 10-7/8% subordinated notes and their replacement with an $80.0 million term loan facility currently bearing interest at 12% has generated interest savings of approximately $95,000 per month beginning in the second quarter of 2003. INCOME TAXES The provision for federal and state income taxes for the nine months ended September 30, 2003 was based upon a 35% effective tax rate. The $5.3 million valuation allowance on deferred taxes applicable at December 31, 2002 has been decreased to $4.9 million at September 30, 2003, due to the decrease in the deferred tax asset relating to state taxes. In assessing the realizability of the deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Based upon the projection for future state taxable income, management believes it is more likely than not that the Mission will not realize its deferred tax asset related to state income taxes. FORWARD LOOKING STATEMENTS This Form 10-Q contains "forward looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended and Section 21E of the Securities Exchange Act of 1934, as amended. All statements other than statements of historical facts included herein, including without limitation, statements under "Management's Discussion and Analysis of Financial Condition and Results of Operations" and in the notes to the financial statements regarding the Company's financial position, capital budget, intent to acquire oil and gas properties, estimated quantities and net present values of reserves, business strategy, plans and objectives of management of the Company for future operations, -32- MISSION RESOURCES CORPORATION and the effect of gas balancing, are forward-looking statements. There can be no assurances that such forward-looking statements will prove to have been correct. Important factors that could cause actual results to differ materially from the Company's expectations ("Cautionary Statements") include the volatility of oil and gas prices, operating hazards, government regulations, exploration risks and other factors described in the Company's Annual Report on Form 10-K for the year ended December 31, 2002 filed with the Securities and Exchange Commission. All subsequent written and oral forward-looking statements attributable to the Company or persons acting on its behalf are expressly qualified by the Cautionary Statements. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Mission is exposed to market risk, including adverse changes in commodity prices and interest rate. COMMODITY PRICE RISK Mission produces and sells crude oil, natural gas and natural gas liquids. As a result, its operating results can be significantly affected by fluctuations in commodity prices caused by changing market forces. Mission periodically seeks to reduce its exposure to price volatility by hedging a portion of its production through swaps, options and other commodity derivative instruments. A combination of options, structured as a collar, is our preferred hedge instrument because there are no up-front costs and protection is given against low prices. Such hedges assure that Mission receives NYMEX prices no lower than the price floor and no higher than the price ceiling. As shown on the following tables, we have also entered into some commodity swaps that fix the NYMEX price to be received. During the three months ended September 30, 2003 and 2002, we recognized losses of $3.5 million and $66,073, respectively, related to hedges that were settled. Hedge settlements were a loss of $13.2 million in the nine months ended September 30, 2003, and a gain of $1.6 million in the nine months ended September 30, 2002. As of November 10, 2003, Mission had the following hedges in place: OIL HEDGES
NYMEX NYMEX BBLS PRICE PRICE PERIOD PER DAY TOTAL BBLS TYPE FLOOR/SWAP AVG. CEILING AVG. - -------------------------- -------------- -------------- -------------- --------------- -------------- Fourth Qtr. 2003 ......... 3,500 322,000 Swap $ 23.59 n/a First Qtr. 2004 .......... 2,500 227,500 Swap $ 25.24 n/a Second Qtr. 2004 ......... 2,500 227,500 Swap $ 24.67 n/a Third Qtr. 2004 .......... 2,500 230,000 Swap $ 24.30 n/a Fourth Qtr. 2004 ......... 2,500 230,000 Swap $ 23.97 n/a
-33- MISSION RESOURCES CORPORATION GAS HEDGES
NYMEX NYMEX MMBTU TOTAL PRICE FLOOR PRICE CEILING PERIOD PER DAY MMBTU TYPE AVG. AVG. - -------------------------- -------------- -------------- -------------- -------------- -------------- Fourth Qtr. 2003 ......... 15,000 1,380,000 Collar $ 3.24 $ 4.54 First Qtr. 2004 ......... 8,000 728,000 Collar $ 4.13 $ 5.39 Second Qtr. 2004 ......... 5,000 455,000 Collar $ 3.70 $ 4.08 Third Qtr. 2004 ......... 5,000 460,000 Collar $ 3.70 $ 4.04 Fourth Qtr. 2004 ......... 5,000 460,000 Collar $ 3.85 $ 4.23 First Qtr. 2005 ......... 1,000 90,000 Collar $ 4.25 $ 6.32 Second Qtr. 2005 ......... 1,000 91,000 Collar $ 4.25 $ 4.92 Third Qtr. 2005 ......... 1,000 92,000 Collar $ 4.25 $ 4.72 Fourth Qtr. 2005 ......... 1,000 92,000 Collar $ 4.25 $ 5.14
These commodity swap agreements expose Mission to counterparty credit risk to the extent the counterparty is unable to meet its monthly settlement commitment to Mission. Mission believes it selects creditworthy counterparties to its hedge transactions. Each of Mission's counterparties have long term senior unsecured debt ratings of at least A/A2 by Standard & Poor's or Moody's. INTEREST RATE RISK Effective September 22, 1998, Mission entered into an eight and one-half year interest rate swap agreement with a notional value of $80.0 million. Under the agreement, Mission receives a fixed interest rate and pays a floating interest rate, subject to a cap, based on the simple average of three foreign LIBOR rates. Mission paid $1.3 million to the counterparty in February 2003 to cancel the swap. A $520,000 gain related to the change in the fair market value of the swap from January 1, 2002 to the date of cancellation was recognized as a reduction in interest expense. ITEM 4. CONTROLS AND PROCEDURES EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES As of the end of the period covered by this report, Mission's principal executive officer ("CEO") and principal financial officer ("CFO") carried out an evaluation of the effectiveness of Mission's disclosure controls and procedures pursuant to Rule 13a-15 of the Securities and Exchange Act of 1934. Based on those evaluations, the CEO and CFO believe: i. that Mission's disclosure controls and procedures are designed to ensure that information required to be disclosed by Mission in the reports it files under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms, and that such information is accumulated and communicated to Mission's management, including the CEO and CFO, as appropriate to allow timely decisions regarding required disclosure; and ii. that Mission's disclosure controls and procedures are effective. -34- MISSION RESOURCES CORPORATION CHANGES IN INTERNAL CONTROLS OVER FINANCIAL REPORTING There have been no significant changes in Mission's internal controls over financial reporting during the period covered by this report that has materially affected, or are reasonably likely to materially affect, Mission's control over financial reporting. -35- MISSION RESOURCES CORPORATION PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS The Company is involved in litigation relating to claims arising out of its operations in the normal course of business, including workmen's compensation claims, tort claims and contractual disputes. Some of the existing known claims against the Company are covered by insurance subject to the limits of such policies and the payment of deductible amounts by the Company. Management believes that the ultimate disposition of all uninsured or unindemnified matters resulting from existing litigation will not have a material adverse effect on the Company's business or financial position. ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS None. ITEM 3. DEFAULTS UPON SENIOR SECURITIES None. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. ITEM 5. OTHER INFORMATION On November 4, 2003, the Company entered into an employment agreement with Marshall L. Munsell, its Senior Vice President - Land and Land Administration, providing for an initial annual salary of $200,000 and an option to purchase 125,000 shares of Mission common stock. The option has an exercise price of $2.61 per share, a term of 10 years and vests as to one-third of the shares on the grant date and as to one-third of the shares on the first and second anniversary of the grant date. The agreement provides for an initial term of three years with automatic extensions that continually set the term at three years. The agreement also provides for two years of salary continuation in the event of termination without "cause" or for "good reason," and contains confidential information and non-solicitation provisions. In addition, the agreement provides for two years of salary continuance and, if applicable, an additional cash payment to make the executive whole for certain tax liabilities, upon the occurrence of a "change in control" and the termination of Mr. Munsell's employment without cause or for good reason within one year of the "change in control." In addition, on November 5, 2003, the Compensation Committee of the Board of Directors awarded Robert L. Cavnar, our Chairman of the Board, President and Chief Executive Officer, 800,000 share appreciation rights. The rights have an initial value of $0.55 for each right granted, have a term of ten years and fully vest only upon the occurrence of a "change of control" or the termination of Mr. Cavnar's employment by the Company without "cause" or by Mr. Cavnar for "good reason." Upon the occurrence of any of the foregoing vesting events, the Company will pay to Mr. Cavnar, for each right, cash in the amount of the difference between the initial value of the right and the then current price of the Company's common stock as determined by the share appreciation rights agreement. -36- MISSION RESOURCES CORPORATION ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K a. Exhibits. The following exhibits are filed with this Form 10-Q and are identified by the number indicated. 10.1 Second Amended and Restated Credit Agreement among Mission Resources Corporation, as Borrower, the Several Lenders from Time to Time Parties Hereto, Farallon Energy Lending, L.L.C., as Arranger Jefferies & Company, Inc., as Syndication Agent and Wells Fargo Foothill, Inc., as Administrative Agent dated as of June 5, 2003 (incorporated by reference to Exhibit 99.2 to the Current Report on Form 8-K filed on June 17, 2003). 10.2 Third Amended, Restated And Consolidated Guaranty And Collateral Agreement, dated as of June 5, 2003, made by Mission Resources Corporation and certain of its Subsidiaries, in favor of Wells Fargo Foothill, Inc., as Administrative Agent (incorporated by reference to Exhibit 99.3 to the Current Report on Form 8-K filed on June 17, 2003). 10.3 First Amendment to and Waiver of Second Amended and Restated Credit Agreement, dated as of June 25, 2003, among Mission Resources Corporation, the several banks and other financial institutions or entities from time to time parties to the Amendment, Farallon Energy Lending, L.L.C., as sole advisor, sole lead arranger and sole bookrunner, and Wells Fargo Foothill, Inc, as administrative agent (filed herewith). 10.4 Second Amendment, dated October 22, 2003, to the Second Amended and Restated Credit Agreement, dated as of June 5, 2003, by and among Mission Resources Corporation, the several banks and other financial institutions or entities from time to time parties thereto, Farallon Energy Lending, L.L.C., as sole advisor, sole lead arranger and sole bookrunner, Jefferies & Company, Inc., as the syndication agent, and Wells Fargo Foothill, Inc, formerly known as Foothill Capital Corporation, as administrative agent (filed herewith). 10.5 Employment Agreement effective November 4, 2003 between the Company and Marshall L. Munsell (filed herewith) 31.1 Certification of Chief Executive Officer pursuant to Rule 13a-14(a) / Rule 15d-14(a), promulgated under the Securities Exchange Act of 1934, as amended (filed herewith). 31.2 Certification of Chief Financial Officer pursuant to Rule 13a-14(a) / Rule 15d-14(a), promulgated under the Securities Exchange Act of 1934, as amended (filed herewith). 32.1 Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, of Chief Executive Officer of the Company (filed herewith). -37- MISSION RESOURCES CORPORATION 32.2 Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, of Chief Financial Officer of the Company (filed herewith). b. Reports on Form 8-K (i) The Company filed a Current Report on Form 8-K on July 1, 2003 regarding its press release announcing 2003 drilling successes. (ii) The Company filed a Current Report on Form 8-K on August 12, 2003 regarding the resignation of Mr. James L. Bowles from the Company's Board of Directors and also to furnish information included in its earnings press release for the quarter ended June 30, 2003. -38- MISSION RESOURCES CORPORATION 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, thereunto duly authorized. MISSION RESOURCES CORPORATION ----------------------------- (Registrant) Date: November 13, 2003 By: /s/ Robert L. Cavnar ----------------- ----------------------------------- Robert L. Cavnar Chairman, President and Chief Executive Officer Date: November 13, 2003 By: /s/ Richard W. Piacenti ----------------- ---------------------------------- Richard W. Piacenti Executive Vice President and Chief Financial Officer -39- EXHIBIT INDEX 10.1 Second Amended and Restated Credit Agreement among Mission Resources Corporation, as Borrower, the Several Lenders from Time to Time Parties Hereto, Farallon Energy Lending, L.L.C., as Arranger Jefferies & Company, Inc., as Syndication Agent and Wells Fargo Foothill, Inc., as Administrative Agent dated as of June 5, 2003 (incorporated by reference to Exhibit 99.2 to the Current Report on Form 8-K filed on June 17, 2003). 10.2 Third Amended, Restated And Consolidated Guaranty And Collateral Agreement, dated as of June 5, 2003, made by Mission Resources Corporation and certain of its Subsidiaries, in favor of Wells Fargo Foothill, Inc., as Administrative Agent (incorporated by reference to Exhibit 99.3 to the Current Report on Form 8-K filed on June 17, 2003). 10.3 First Amendment to and Waiver of Second Amended and Restated Credit Agreement, dated as of June 25, 2003, among Mission Resources Corporation, the several banks and other financial institutions or entities from time to time parties to the Amendment, Farallon Energy Lending, L.L.C., as sole advisor, sole lead arranger and sole bookrunner, and Wells Fargo Foothill, Inc, as administrative agent (filed herewith). 10.4 Second Amendment, dated October 22, 2003, to the Second Amended and Restated Credit Agreement, dated as of June 5, 2003, by and among Mission Resources Corporation, the several banks and other financial institutions or entities from time to time parties thereto, Farallon Energy Lending, L.L.C., as sole advisor, sole lead arranger and sole bookrunner, Jefferies & Company, Inc., as the syndication agent, and Wells Fargo Foothill, Inc, formerly known as Foothill Capital Corporation, as administrative agent (filed herewith). 10.5 Employment Agreement effective November 4, 2003 between the Company and Marshall L. Munsell (filed herewith) 31.1 Certification of Chief Executive Officer pursuant to Rule 13a-14(a) / Rule 15d-14(a), promulgated under the Securities Exchange Act of 1934, as amended (filed herewith). 31.2 Certification of Chief Financial Officer pursuant to Rule 13a-14(a) / Rule 15d-14(a), promulgated under the Securities Exchange Act of 1934, as amended (filed herewith). 32.1 Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, of Chief Executive Officer of the Company (filed herewith). 32.2 Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, of Chief Financial Officer of the Company (filed herewith). EX-10.3 3 h10423exv10w3.txt 1ST AMEND.TO WAIVER OF 2ND AMENDED CREDIT AGMT Exhibit 10.3 FIRST AMENDMENT TO AND WAIVER OF SECOND AMENDED AND RESTATED CREDIT AGREEMENT THIS FIRST AMENDMENT TO AND WAIVER OF SECOND AMENDED AND RESTATED CREDIT AGREEMENT (this "Amendment"), dated as of June 25, 2003, among MISSION RESOURCES CORPORATION, a corporation formed under the laws of the State of Delaware (the "Borrower"), the several banks and other financial institutions or entities from time to time parties to this Amendment (the "Lenders"), FARALLON ENERGY LENDING, L.L.C., as sole advisor, sole lead arranger and sole bookrunner (in such capacity, the "Arranger"), and WELLS FARGO FOOTHILL, INC., as the administrative agent (in such capacity, the "Administrative Agent"). All defined terms not defined herein shall have the same meaning as set forth in the Second Amended and Restated Credit Agreement, dated as of June 5, 2003 (the "Credit Agreement"). I. BACKGROUND WHEREAS, the Borrower, certain lenders party thereto, the Arranger, the Syndication Agent and the Administrative Agent entered into the Credit Agreement, which amended and restated the Amended and Restated Credit Agreement, dated as of March 28, 2003, as amended, by and among the Borrower, the financial institutions party thereto, Wells Fargo Foothill, Inc., as administrative agent, Jefferies & Company, Inc., as syndication agent; WHEREAS, pursuant to the Credit Agreement and the other Loan Documents, each Loan Party granted a lien on and security interest in certain of its assets, including, without limitation, a substantial portion of its Oil and Gas Properties, to secure its Obligations to the Lenders, the Administrative Agent and any affiliate of the Administrative Agent providing Bank Products to the Borrower or any of its subsidiaries; WHEREAS, the Borrower now believes that its interest in the Oil and Gas Properties in the Backridge Field, Cameron Parish, Louisiana (the "Backridge Field") referred to as Henry 28-2 and 28-3, more fully described on Exhibit A hereto, represents a much higher drilling risk than previously anticipated and has determined not to drill on either property (the "Henry Interests"); WHEREAS, the Borrower has determined to convey title to the Henry Interests to Milam Energy L.P. ("Milam") in exchange for Milam's interest in the Oil and Gas Properties in the Backridge Field referred to as the Davis 26-3 acreage, more fully described in Exhibit A hereto (the "Davis Interest") pursuant to the terms of that certain agreement, dated ______, 2003 (the "Swap Agreement" and the exchange of the properties contemplated by such agreement referred to herein as the "Swap"); WHEREAS, the Lenders party hereto have agreed to permit the consummation of the Swap, subject to the terms and provisions hereof; NOW THEREFORE, in consideration of the mutual covenants and agreements herein contained, the parties hereto agree to amend and restate the Credit Agreement as follows: II. WAIVERS (a) The Lenders party hereto, constituting the Majority Lenders, do hereby consent and agree, pursuant to Section 9.1 of the Credit Agreement, to permit the consummation of the Swap pursuant to the terms of the Swap Agreement, and do hereby waive the requirements of Sections 6.4(l) and 2.7(b) of the Credit Agreement with respect thereto; provided, however, that for purposes of determining the aggregate amount of Net Cash Proceeds of Asset Sales and Recovery Events which may be excluded from the requirement to make prepayments of Loans pursuant to clauses (i), (ii) and (iii) of Section 2.7(b), the Borrower shall be deemed to have received seven million five hundred thousand dollars ($7,500,000.00) in Net Cash Proceeds in connection with the Swap. III. AMENDMENT Section 5.7 of the Credit Agreement is hereby amended to read in its entirety as follows: Notices. Promptly, and in any event within five Business Days after knowledge thereof, give notice to the Administrative Agent and each Lender of: (a) the occurrence of any Default or Event of Default; (b) any (i) default or event of default under any Contractual Obligation of the Loan Parties or any of their respective Subsidiaries or (ii) litigation, investigation or proceeding which may exist at any time between any Loan Party or any of their respective Subsidiaries and any Governmental Authority, that in either case, if not cured or if adversely determined, as the case may be, could reasonably be expected to have a Material Adverse Effect; (c) any litigation or proceeding affecting any Loan Party or any of their respective Subsidiaries in which the amount involved is $500,000 or more and not covered by insurance or in which injunctive or similar relief is sought; (d) the occurrence of any Casualty Event to the Mortgaged Property or the commencement of any action or proceeding for the taking of any material portion of the Mortgaged Property or any part thereof or interest therein under power of eminent domain or by condemnation, nationalization or similar proceeding; (e) the following events, as soon as possible and in any event within 30 days after the Borrower knows or has reason to know thereof: (i) the occurrence of any Reportable Event with respect to any Plan, a failure to make any material required contribution to a Plan, the creation of any Lien in favor of the PBGC or a Plan or any withdrawal from, or the termination, Reorganization or Insolvency of, any Multiemployer Plan or (ii) the institution of proceedings or the taking of any other action by the PBGC 2 or any Loan Party or any Commonly Controlled Entity or any Multiemployer Plan with respect to the withdrawal from, or the termination, Reorganization or Insolvency of, any Plan; and (f) as soon as possible, and in any event within 5 days after the Borrower knows or has reason to know of the occurrence of any event, action, circumstance or proceeding which has adversely affected or could adversely affect the value of any of the Oil and Gas Properties constituting Collateral in a material amount; Each notice pursuant to this Section 5.7 shall be accompanied by a statement of a Responsible Officer setting forth details of the occurrence referred to therein and stating what action the Borrower or the relevant Subsidiary proposes to take with respect thereto. IV. AMENDMENT OF MORTGAGE Simultaneously with the consummation of the Swap and in accordance with the Credit Agreement and the other Loan Documents, the Company and the Administrative Agent shall cause an amendment to the Mortgage, in proper form for execution and filing in Cameron Parish, Louisiana, and otherwise on terms and conditions satisfactory to the Administrative Agent, to be duly executed and delivered to the Administrative Agent (i) releasing the Henry Interests from the Mortgage and (ii) adding the Davis Interest as Collateral securing the Obligations. V. EXERCISE OF REMEDIES. The Lenders hereby waive their rights to exercise their remedies under the agreement based solely upon the consummation of the Swap as contemplated and described herein and subject to the terms and provisions hereof. Except with respect to matters expressly waived hereby, nothing herein shall be construed to be a waiver of any Defaults or Events of Default as they exist now or at any time in the future. VI. MISCELLANEOUS. (a) The execution and delivery of this Amendment shall constitute a representation and warranty by the Borrower that the representations and warranties contained in the Credit Agreement are true and correct as of the date hereof and that no event which, but for the giving of notice or passage of time or both, would constitute an Event of Default, or Event of Default, exists as of the date hereof. (b) Except as herein expressly amended, the Credit Agreement, the Loan Documents, and any other documents or instruments executed in connection therewith are and shall be unchanged, and shall continue to be in full force and effect. All the terms, covenants, provisions and conditions of the Credit Agreement are incorporated herein by reference. 3 (c) This Amendment may be executed in any number of counterparts, all of which shall constitute one and the same instrument, but in making proof of this Amendment it shall not be necessary to produce or account for more than one such counterpart. IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be duly executed as of the day and year first above written. MISSION RESOURCES CORPORATION, as Borrower By: /s/ RICHARD W. PIACENTI ---------------------------- Name: Richard W. Piacenti ---------------------- Title: Executive Vice --------------------- President & CFO --------------------- FARALLON ENERGY LENDING, L.L.C., as Arranger and as a Lender By: /s/ WILLIAM MELLIN ---------------------------- Name: William Mellin ---------------------- Title: Managing Member --------------------- WELLS FARGO FOOTHILL, INC., as Administrative Agent and as a Lender By: /s/ THOMAS SHUGHRUE ---------------------------- Name: Thomas Shughrue ---------------------- Title: Vice President --------------------- ABLECO FINANCE LLC, as a Lender, for itself and on behalf of affiliate assignees By: /s/ KEVIN GENDA ---------------------------- Name: Kevin Genda ---------------------- Title: Sr. VP/Chief Credit --------------------- Officer --------------------- HIGHBRIDGE/ZWIRN SPECIAL OPPORTUNITIES FUND, L.P., as a Lender By: Highbridge/Zwirn Capital Management, LLC By: /s/ DANIEL B. ZWIRN ---------------------------- Name: Daniel B. Zwirn ---------------------- Title: Managing Principal --------------------- 4 ARES Leveraged Investment Fund II, L.P. By: ARES Management II, L.P. Its: General Partner By: /s/ SETH J. BRUFSKY ---------------------------- Name: Seth J. Brufsky ---------------------- Title: Vice President --------------------- TRS THEBE LLC, as Lender By: /s/ DEBORAH O'KEEFFE ---------------------------- Name: Deborah O'Keeffe ---------------------- Title: Vice President --------------------- 5 EXHIBIT A Henry Interests Oil, Gas and Mineral Lease dated March 25, 2002 between Sheryl Lebleu Swift, et al and Mission Resources Corporation, recorded in Book 953, Entry No. 276939 and Book 948, Entry No. 275634; Ratification thereof recorded March 11, 2003 in Book 962, File No. 279772, Cameron Parish, Louisiana, covering certain lands described as follows: That certain tract or parcel of land containing 240.0 acres, more or less, being described as the North Half of the Southwest Quarter (N/2 SW/4) of Section 28 and the Southeast Quarter (SE/4) of Section 29, Township 14 South, Range 9 West, Cameron Parish, Louisiana. LESS AND EXCEPT: That portion of the above described property situated within the confines of the P-2 Strg. RA SUA, established by Office of Conservation Order No. 248-G-2, effective December 1, 1962; the P-2-A RA SUA, established by Office of Conservation Order No. 248-K, effective July 1, 1964; and the CAM. P-3 RA SU, established by Office of Conservation Order No. 248-E-2, effective March 1, 1965. Leaving a balance of 115.0 acres, more or less. Oil, Gas and Mineral Lease dated March 25, 2002 between The Ardoin Limited Partnership and Mission Resources Corporation, recorded in Book 948, Entry No. 275633, Cameron Parish, Louisiana, covering certain lands described as follows: That certain tract or parcel of land containing 240.0 acres, more or less, being described as the North Half of the Southwest Quarter (N/2 SW/4) of Section 28 and the Southeast Quarter (SE/4) of Section 29, Township 14 South, Range 9 West, Cameron Parish, Louisiana. LESS AND EXCEPT: That portion of the above described property situated within the confines of the P-2 Strg. RA SUA, established by Office of Conservation Order No. 248-G-2, effective December 1, 1962; the P-2-A RA SUA, established by Office of Conservation Order No. 248-K, effective July 1, 1964; and the CAM. P-3 RA SU, established by Office of Conservation Order No. 248-E-2, effective March 1, 1965. Leaving a balance of 115.0 acres, more or less. Oil, Gas and Mineral Lease effective November 1, 1993 between John Henry Lebleu, et al, and Louisiana Oil and Gas, Inc. recorded in Book 790, Entry No. 235710, amended in Book 803, Entry No. 237864; Ratification thereof recorded March 11, 2003 in Book 962, File No. 279773, Cameron Parish, Louisiana, covering certain lands described as follows: 730.79 acres, more or less, situated in Cameron Parish, Louisiana, in Sections 20, 21, 28, 29 and 30, T14S-R9W, INSOFAR AND ONLY INSOFAR as said lease covers S/2 NW/4 and S/2 N/2 NW/4 of Section 28 and S/2 NE/4 of Section 29. Oil, Gas and Mineral Lease effective November 1, 1993 between Scott Henry Lebleu, a minor, represented by Susan Kuntz, and Louisiana Oil and Gas, Inc., recorded in Book 790, Entry No. 235711, amended in Book 803, Entry No. 237865; Ratification thereof recorded March 11, 2003 in Book 962, File No. 279773, Cameron Parish, Louisiana, covering certain lands described as follows: 730.79 acres, more or less, situated in Cameron Parish, Louisiana, in Sections 20, 21, 28, 29 and 30, T14S-R9W, INSOFAR AND ONLY INSOFAR as said lease covers S/2 NW/4 and S/2 N/2 NW/4 of Section 28 and S/2 NE/4 of Section 29. Oil, Gas and Mineral Lease effective November 1, 1993 between Cameron Wayne Lebleu, a minor, represented by Paige Roberson Lebleu , and Louisiana Oil and Gas, Inc., recorded in Book 790, Entry No. 235712, amended in Book 803, Entry No. 237866; Ratification thereof recorded March 11, 2003 in Book 962, File No. 279773, Cameron Parish, Louisiana, covering certain lands described as follows: 730.79 acres, more or less, situated in Cameron Parish, Louisiana, in Sections 20, 21, 28, 29 and 30, T14S-R9W, INSOFAR AND ONLY INSOFAR as said lease covers S/2 NW/4 and S/2 N/2 NW/4 of Section 28 and S/2 NE/4 of Section 29. Oil, Gas and Mineral Lease effective November 1, 1993 between Hilda Peloquin Henry, et al and Louisiana Oil and Gas, Inc., recorded in Book 790, Entry No. 235713, amended in Book 803, Entry No. 237867; Ratification thereof recorded March 11, 2003 in Book 962, File No. 279773, of the records of Cameron Parish, Louisiana, covering certain lands described as follows: 730.79 acres, more or less, situated in Cameron Parish, Louisiana, in Sections 20, 21, 28, 29 and 30, T14S-R9W, INSOFAR AND ONLY INSOFAR as said lease covers S/2 NW/4 and S/2 N/2 NW/4 of Section 28 and S/2 NE/4 of Section 29. Davis Interests Oil, Gas and Mineral Lease dated March 25, 2002 between The James Austin and Martha Davis Trust for Lonnie A. Davis, et al and Mission Resources Corporation, recorded in Book 948, Entry No. 275632, Cameron Parish, Louisiana, covering certain lands described as follows: Township 14 South, Range 9 West Section 22: SE/4 SE/4 Section 26: SW/4 NE/4; NW/4 and S/2 Section 27: E/2 NE/4 7 LESS AND EXCEPT: That portion of the above described property included within the confines of the ABB 2 RB SUA, created by State of Louisiana, Office of Conservation Order No. 1249-B-1, effective September 23, 1997 and; LESS AND EXCEPT: That portion of the SW/4 NE/4 lying north of the confines of the ABB 2 RB SUA, created by State of Louisiana, Office of Conservation Order No. 1249-B-1, effective September 23, 1997 as situated in Section 26, described above. Leaving a balance of 500.00 acres, more or less 8 EX-10.4 4 h10423exv10w4.txt 2ND AMEND.TO 2ND AMENDED CREDIT AGREEMENT EXHIBIT 10.4 SECOND AMENDMENT TO SECOND AMENDED AND RESTATED CREDIT AGREEMENT Second Amendment, dated as of October 22, 2003 (this "Amendment"), to the Second Amended and Restated Credit Agreement, dated as of June 5, 2003 (the "Credit Agreement"), by and among MISSION RESOURCES CORPORATION, a corporation formed under the laws of the State of Delaware (the "Borrower"), the several banks and other financial institutions or entities from time to time parties to thereto (the "Lenders"), FARALLON ENERGY LENDING, L.L.C., as sole advisor, sole lead arranger and sole bookrunner (in such capacity, the "Arranger"), JEFFERIES & COMPANY, INC., as the syndication agent (in such capacity, the "Syndication Agent") and WELLS FARGO FOOTHILL, INC., formerly known as Foothill Capital Corporation, as the administrative agent (in such capacity, the "Administrative Agent"). All terms used herein which are defined in the Credit Agreement and not otherwise defined herein are used herein as defined therein. The Borrower and the Required Lenders desire to amend Section 2.7(b) of the Credit Agreement as hereinafter set forth. Accordingly, the Borrower and the Majority Lenders hereby agree as follows: 1. Conditions Subsequent. (a) Clause (b) of Section 2.7 of the Credit Agreement is hereby amended and restated in its entirety to read as follows: "(b) Unless the Required Lenders shall otherwise agree, if on any date any Loan Party shall receive Net Cash Proceeds from any Asset Sale or Recovery Event then, except as provided below, the Loans shall be prepaid by an amount equal to the amount of such Net Cash Proceeds as set forth in Section 2.7(e). No prepayment shall be required under this Section 2.7(b) with respect to the following: (i) at the written request of the Borrower prior to the applicable Reinvestment Prepayment Date to the extent such Net Cash Proceeds have not been used to purchase or otherwise acquire Replacement Assets, up to $5,000,000 in aggregate Net Cash Proceeds received from one or more Asset Sales or Recovery Events during the term of the Loans, (ii) the Net Cash Proceeds of any Asset Sale or Recovery Event used to pay for the acquisition of Replacement Assets acquired after the date of such Asset Sale or Recovery Event and prior to the applicable Reinvestment Prepayment Date, provided, that the Borrower shall have delivered a Reinvestment Notice to the Administrative Agent within twenty Business Days after such acquisition or expenditure, and (iii) that portion of the Net Cash Proceeds of any Asset Sale equal to the aggregate cash consideration paid by a Loan Party for the acquisition of Replacement Assets during the 90-day period immediately prior to the consummation of such Asset Sale, provided, that the Borrower shall have delivered a Reinvestment Notice to the Administrative Agent not less than three Business Days prior to the Reinvestment Prepayment Date; provided, that the sum (without duplication) of the aggregate Net Cash Proceeds of Asset Sales and Recovery Events that may be excluded from the foregoing prepayment requirement pursuant to clauses (i), (ii) and (iii) shall not exceed $50,000,000 during the term of the Loans. Except as provided in clauses (i), (ii) and (iii) of this Section 2.7(b), or as otherwise may be agreed by the Required Lenders, the Reinvestment Deferred Amounts received by the Borrower or any of its Subsidiaries shall be applied as a prepayment on the Obligations as set forth in Section 2.7(e). The provisions of this Section 2.7(b) do not constitute a consent to the consummation of any Disposition not permitted by Section 6.4. Notwithstanding any provision hereof to the contrary, with respect to the Term Loans to be prepaid pursuant to this Section 2.7(b), such Term Loans will be prepaid in the minimum amount of $1,000,000 and in integral multiples thereof, and proceeds of Asset Sales otherwise payable pursuant to this Section 2.7(b) with respect to such Term Loans will cumulate until such minimum amount (or an integral multiple thereof) is reached, and the parties agree that these provisions shall not be applicable to the payment of the Revolving Loan Obligations. Any amounts not applied to the Term Loans as a result of the operation of the immediately preceding sentence will be carried forward and taken into account in connection with any subsequent prepayment pursuant to this Section 2.7(b)." (b) Clause (d) of Section 2.7 of the Credit Agreement is hereby amended and restated in its entirety to read as follows "(d) Pending a prepayment of the Loans and/or the acquisition of Replacement Assets with the Net Cash Proceeds received from an Asset Sale and/or Recovery Event pursuant to Section 2.7(b), such proceeds shall be deposited with the Administrative Agent who shall hold such proceeds in an interest bearing cash collateral account reasonably satisfactory to it; provided, however, that the Loan Parties shall not be required to deposit the proceeds from any Asset Sale resulting in less than $250,000 in Net Cash Proceeds until the aggregate Net Cash Proceeds of such Asset Sales exceeds $1,000,000. From time to time, upon the written request of the Borrower, and provided no Default has occurred and is continuing, the Administrative Agent will release such proceeds to the Borrower as necessary (i) for the acquisition of Replacement Assets in accordance with Section 2.7(b)(ii) or (ii) pursuant to the written request of the Borrower made in accordance with Section 2.7(b)(i)." 2. Continued Effectiveness of Credit Agreement. The Borrower hereby (i) confirms and agrees that each Loan Document to which it is a party is, and shall continue to be, in full force and effect and is hereby ratified and confirmed in all respects except that on and after the date hereof all references in any such Loan Document to "the Credit Agreement", "thereto", "thereof", "thereunder" or words of like import referring to the Credit Agreement shall mean the Credit Agreement as amended by this Amendment, and (ii) confirms and agrees that to the extent that any such Loan Document purports to assign or pledge to the Collateral Agent, or to grant to the Collateral Agent a security interest in or lien on, any collateral as security for the Obligations of the Borrower from time to time existing in respect of -2- the Credit Agreement and the Loan Documents, such pledge, assignment and/or grant of the security interest or lien is hereby ratified and confirmed in all respects. 3. Miscellaneous. (a) This Amendment may be executed in any number of counterparts and by different parties hereto in separate counterparts, each of which shall be deemed to be an original, but all of which taken together shall constitute one and the same agreement. Delivery of an executed counterpart of this Amendment by telefacsimile shall be equally as effective as delivery of an original executed counterpart of this Amendment. (b) Section and paragraph headings herein are included for convenience of reference only and shall not constitute a part of this Amendment for any other purpose. (c) This Amendment shall be governed by, and construed in accordance with, the laws of the State of New York. [REMAINDER OF THIS PAGE INTENTIONALLY LEFT BLANK] -3- IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be executed by their respective officers thereunto duly authorized as of the day and year first above written. MISSION RESOURCES CORPORATION, as Borrower By: /s/ Richard W. Piacenti ---------------------------------- Name: Richard W. Piacenti Title: Executive VP & CFO FARALLON ENERGY LENDING, L.L.C., as Arranger and as a Lender By: /s/ William Mellin ---------------------------------- Name: William Mellin Title: Managing Member WELLS FARGO FOOTHILL, INC., as Administrative Agent and as a Lender By: /s/ Thomas Shughrue ---------------------------------- Name: Thomas Shughrue Title: Vice President ABLECO FINANCE LLC, as a Lender, for itself and on behalf of its affiliate assignees By: /s/ Kevin Genda ---------------------------------- Name: Kevin Genda Title: Sr. VP/Chief Credit Officer HIGHBRIDGE/ZWIRN SPECIAL OPPORTUNITIES FUND, L.P., as a Lender By: Highbridge/Zwirn Capital Management, LLC By: /s/ Daniel B. Zwirn ---------------------------------- Name: Daniel B. Zwirn Title: Managing Principal ARES LEVERAGED INVESTMENT FUND II, L.P., as a Lender By: ARES Management II, L.P., its general partner By: /s/ Seth J. Brufsky ---------------------------------- Name: Seth J. Brufsky Title: Vice President TRS THEBE LLC, as Lender By: /s/ Deborah O'Keeffe ---------------------------------- Name: Deborah O'Keeffe Title: Vice President BERNARD LEVERAGED LOAN INVESTORS, LTD., as Lender By: /s/ Mora Parchment ---------------------------------- Name: Mora Parchment Title: Director EX-10.5 5 h10423exv10w5.txt EMPLOYMENT AGREEMENT - MARSHALL L. MUNSELL Exhibit 10.5 EMPLOYMENT AGREEMENT This Employment Agreement (this "Agreement") entered into effective as of November 4, 2003, by and between Marshall L. Munsell (the "Executive"), and Mission Resources Corporation, a Delaware corporation having its principal place of business at 1331 Lamar, Suite 1455, Houston, Texas 77010-3039 (the "Company"); WITNESSETH: WHEREAS, The Company wishes to employ the Executive as Senior Vice President - Land and Land Administration and to perform services incident to such position for the Company, and the Executive wishes to be so employed by the Company, all upon the terms and conditions hereinafter set forth: NOW THEREFORE, in consideration of the premises and mutual covenants and obligations herein set forth and for other good and valuable consideration, the receipt, sufficiency and adequacy of which is hereby acknowledged, accepted and agreed to, the parties hereto, intending to be legally bound, hereby agree as follows: 1. EMPLOYMENT AND TERM. The Company hereby employs the Executive to serve as Senior Vice President - Land and Land Administration of the Company. The term of this Agreement (the "Term of this Agreement") shall be effective as of the date first above written and shall terminate thirty-six (36) months from the date hereof (the "Termination Date"), unless earlier terminated by either party hereto in accordance with the provisions of Section 5 hereof; provided, however, that beginning on the first anniversary date of the date hereof and on each anniversary date of the date hereof thereafter, the Term of this Agreement shall be automatically extended one additional year unless either party give written notice to the other at least six months prior to such anniversary of the date hereof that the Term of this Agreement shall cease to be so extended. During the Term of this Agreement, the terms of employment shall be as set forth herein unless modified by the Executive and the Company in accordance with the provisions of Section 12 hereof. The Executive hereby agrees to accept such employment and to perform the services specified herein, all upon the terms and conditions hereinafter set forth. 2. POSITION AND RESPONSIBILITIES. The Executive shall serve as Senior Vice President - Land and Land Administration of the Company and shall report to, and be subject to the general direction of the Chairman and Chief Executive Officer of the Company. The Executive shall have other obligations, duties, authority and power to do all acts and things as are customarily done by a person holding the same or equivalent position or performing duties similar to those to be performed by executives in corporations of similar size to the Company and shall perform such managerial duties and responsibilities for the Company which are not inconsistent with his position as may reasonably be assigned to him by the Chairman and Chief Executive Officer and/or the Board of Directors of the Company (or a committee thereof). Unless otherwise agreed to by the Executive, the Executive shall be based at the Company's principal executive offices located in the greater Houston, Texas metropolitan area. 3. EXTENT OF SERVICE. The Executive shall devote his full business time and attention to the business of the Company. During the Term of this Agreement, Executive shall devote his best efforts and skills to the business and interests of Company, do his utmost to 1 further enhance and develop Company's best interests and welfare, and endeavor to improve his ability and knowledge of Company's business, in an effort to increase the value of his services for the mutual benefit of the parties hereto. During the Term of this Agreement, it shall not be a violation of this Agreement for Executive to (i) serve on any corporate board or committee thereof with the approval of the Board, (ii) serve on any civic or charitable boards or committees (except for boards or committees of a competing business unless approved by the Board), (iii) deliver lectures, fulfill teaching or speaking engagements, (iv) testify as a witness in litigation involving a former employer or (v) manage personal investments; provided, however, any such activities must not materially interfere with performance of Executive's responsibilities under this Agreement. 4. COMPENSATION. (a) In consideration of the services to be rendered by the Executive to the Company, the Company will pay the Executive a salary ("Salary") of $200,000 per year during the Term of this Agreement. Such Salary will be payable in conformity with the Company's prevailing practice for executives' compensation as such practice shall be established or modified from time to time. Salary payments shall be subject to all applicable federal and state withholding, payroll and other taxes. From time to time during the Term of this Agreement, the amount of the Executive's Salary may be increased by, and at the sole discretion of, the Compensation Committee of the Company's Board of Directors (the "Compensation Committee"), which shall review the Executive's Salary no less regularly than annually. (b) The Company has granted the Executive on November 4, 2003 an option to purchase 125,000 shares of common stock of the Company at an exercise price per share of $2.61 ("Option"). Such Option shall vest 33.4% on the date of grant and 33.3% on each of the first and second anniversary date of grant. The term of the Option shall be ten years from the date of grant subject to the provisions of paragraphs 5(f)(i) and 5(g) hereof. Additional grants of options will be considered by the Compensation Committee on an annual basis based on a review of the Executive's performance. (c) The Executive will be considered for an annual cash and/or stock bonus based on an evaluation of his performance by the Compensation Committee. Any such bonus will be at the sole discretion of the Compensation Committee. (d) During the term of this Agreement, the Company shall pay or reimburse the Executive for all reasonable out-of-pocket expenses for travel, meals, hotel accommodations, entertainment and the like incurred by him in connection with the business of the Company upon submission by him and approval of an appropriate statement documenting such expenses as required by the Company's policy and the Internal Revenue Code of 1986, as amended (the "Code"). In addition, the Audit Committee of the Board of Directors shall review all such expense reports on a quarterly basis. (e) The Executive shall be entitled to four (4) weeks of paid vacation during each calendar year during the term of this Agreement. Vacation shall accrue on the first day of each calendar year. The use of such vacation shall be governed by and administered in accordance with the Company's vacation policy as in effect from time to time. 2 (f) During the term of this Agreement, the Executive shall be entitled to participate in and to receive all rights and benefits under any life, disability, medical and dental, health and accident and profit sharing or deferred compensation plans and such other plan or plans as may be implemented by the Company during the term of this Agreement. The Executive shall also be entitled to participate in and to receive all rights and benefits under any plan or program adopted by the Company for any other or group of other executive employees of the Company, including without limitation, the rights and benefits under the directors' and officers' liability insurance in place from time to time under the Company's insurance program for the directors and officers of the Company. (g) During the term of this agreement, the Executive shall be entitled to receive a car allowance of $500.00 per month, and one parking space shall be provided to the Executive by the Company. (h) The Company shall pay one club initiation fee of up to $25,000.00 and the base monthly dues applicable thereto, not to exceed $400.00 per month. 5. TERMINATION. (a) Termination by Company; Discharge for Cause. The Company shall be entitled to terminate this Agreement and the Executive's employment with the Company at any time and for whatever reason; or at any time for "Cause" (as defined below) by written notice to the Executive. Termination of the Executive's employment by the Company shall constitute a termination for "Cause" if such termination is for one or more of the following reasons: (i) the willful failure or refusal of the Executive to render services to the Company in accordance with his obligations under this Agreement, including, without limitation, the willful failure or refusal of the Executive to comply with the work rules, policies, procedures, and directives as established by the Chairman and Chief Executive Officer and the Board of Directors and consistent with this Agreement; such failure or refusal to be uncured and continuing for a period of not less than fifteen (15) days after notice outlining the situation is given by the Company to the Executive; (ii) the commission by the Executive of an act of fraud or embezzlement; (iii) the commission by the Executive of any other action with the intent to injure the Company; (iv) the Executive having been convicted of a felony or a crime involving moral turpitude; (v) the Executive having misappropriated the property of the Company; (vi) the Executive having engaged in personal misconduct which materially injures the Company; or (vii) the Executive having willfully violated any law or regulation relating to the business of the Company which results in material injury to the Company. In the event of the Executive's termination by the Company for Cause hereunder, the Executive shall be entitled to no severance or other termination benefits except for any unpaid Salary accrued through the date of termination. A termination of this Agreement by the Company without Cause pursuant to this Section 5(a) (which shall include the decision by the Company to not renew the Term of this Agreement for any additional one year periods as provided in Section 1 above) shall entitle the Executive to the Severance Payment and other benefits specified in Section 5(f) or (g), hereof, as the case may be. (b) Death. If the Executive dies during the term of this Agreement and while in the employ of the Company, this Agreement shall automatically terminate and the Company shall have no further obligation to the Executive or his estate except that the Company shall pay to the 3 Executive's estate that portion of his Salary and benefits accrued through the date of death. All such payments to the Executive's estate shall be made in the same manner and at the same time as the Executive's Salary. (c) Disability. If during the term of this Agreement, the Executive shall be prevented from performing his duties hereunder for a period of 90 days by reason of disability, then the Company, on 30 days' prior notice to the Executive, may terminate this Agreement. For purposes of this Agreement, the Executive shall be deemed to have become disabled when the Board of Directors of the Company, upon verification by a physician designated by the Company, shall have determined that the Executive has become physically or mentally unable (excluding infrequent and temporary absences due to ordinary illness) to perform the essential functions of his duties under this Agreement with reasonable accommodation. In the event of a termination pursuant to this paragraph (c), the Company shall be relieved of all its obligations under this Agreement, except that the Company shall pay to the Executive or his estate in the event of his subsequent death, that portion of the Executive's Salary and benefits accrued through the date of such termination. All such payments to the Executive or his estate shall be made in the same manner and at the same time as his Salary would have been paid to him had he not become disabled. (d) Termination for Good Reason. The Executive shall be entitled to terminate this Agreement and his employment with the Company at any time upon thirty (30) days written notice to the Company for "Good Reason" (as defined below). The Executive's termination of employment shall be for "Good Reason" if such termination is a result of any of the following events: (i) The Executive is assigned any responsibilities or duties materially inconsistent with his position, duties, responsibilities and status with the Company as in effect at the date of this Agreement or as may be assigned to the Executive pursuant to Section 2 hereof; or his title or offices as in effect at the date of this Agreement or as the Executive may be appointed or elected to in accordance with Section 2 are changed; or the Executive is required to report to or be directed by any person other than the Chairman and Chief Executive Officer and the Board of Directors of the Company; (ii) there is a reduction in the Salary (as such Salary shall have been increased from time to time) payable to the Executive pursuant to Section 4(a) hereof unless such reduction is applicable to all senior executives of the Company; (iii) failure by the Company or any successor to the Company or its assets to continue to provide to the Executive any material benefit, bonus, profit sharing, incentive, remuneration or compensation plan, stock ownership or purchase plan, stock option plan, life insurance, disability plan, pension plan or retirement plan in which the Executive was entitled to participate in as at the date of this Agreement or subsequent thereto, or the taking by the Company of any action that materially and adversely affects the Executive's participation in or materially reduces his rights or benefits under or pursuant to any such plan or the failure by the Company to increase or improve such rights or benefits on a basis consistent with practices in effect prior to the date of this Agreement or with practices implemented and subsequent to the date of this Agreement with respect to the 4 executive employees of the Company generally, which ever is more favorable to the Executive, but excluding such action that is required by law; (iv) without Executive's consent, the Company requires the executive to relocate to any city or community other than one within a fifty (50) mile radius of the greater Houston, Texas metropolitan area, except for required travel on the Company's business to an extent substantially consistent with the Executive's business obligations under this Agreement; or (v) there is any material breach by the Company of any provision of this Agreement. (vi) Upon the Executive's termination of this Agreement for Good Reason, the Executive shall be entitled to the Severance Payment and other benefits specified in Section 5(f) hereof. (e) Voluntary Termination. Notwithstanding anything to the contrary herein, the Executive shall be entitled to voluntarily terminate this Agreement and his employment with the Company at his pleasure upon sixty (60) days written notice to such effect. In such event, the Executive shall not be entitled to any further compensation other than any unpaid Salary and benefits accrued through the date of termination. At the Company's option, the Company may pay to the Executive the salary and benefits that the Executive would have received during such sixty (60) day period in lieu of requiring the Executive to remain in the employment of the Company for such sixty (60) day period. (f) Termination Benefits Upon Involuntary Termination or Termination for Good Reason. In the event that (i) the Company terminates this Agreement and the Executive's employment with the Company for any reason other than for Cause (as defined in Section 5(a) hereof) or the death or disability (as defined in Section 5(c) hereof) of the Executive, or (ii) the Executive terminates this Agreement and his employment with the Company for Good Reason (as set forth in Section 5(d) hereof), then the Company shall pay the Executive, within thirty (30) days after the date of termination, an amount (the "Severance Payment") equal to (x) two (2) times the Executive's highest annual Salary in existence at any time during the last two (2) years of employment immediately preceding the date of termination, and (y) a prorata portion (based on the portion of the calendar year that the Executive served hereunder prior to such termination) of the annual bonus which would have been paid to the Executive for the full year during which such termination occurred, minus applicable withholding and authorized salary reductions (the "Severance Payment"). In addition, following other such termination, the Executive shall be entitled to the following benefits (collectively, the "Additional Benefits"); (i) immediate vesting of any of the Executive's outstanding options to purchase securities of the Company which were not vested by their own terms on the date of termination and the extension of the Executive's right to exercise all the Executive's options to purchase securities of the Company for a period equal to the lesser of (A) one (1) year following the date of termination or (B) the remaining term of the applicable option; 5 (ii) continued coverage, at the Company's cost, under the Company's group health plan for the applicable coverage period under the Consolidated Omnibus Budget Reconciliation Act of 1985, as amended ("COBRA") but only if Executive elects such COBRA continuation in accordance with the time limits and in the applicable COBRA regulations; and (iii) an amount, in cash, equal to the sum of (A) any unreimbursed expenses incurred by the Executive in the performance of his duties hereunder and in compliance with Company policy through the date of termination, plus (B) any accrued and unused vacation time or other unpaid benefits as of the date of termination; and (iv) Company shall cause Executive to be covered by any policy or contract of insurance obtained by it to insure its directors and officers against personal liability for acts or omissions in connection with service as an officer or director of Company or service in other capacities at the request of the company. The coverage provided to Executive pursuant to this paragraph shall be of a scope and on terms and conditions at least as favorable as the most favorable coverage provided to any other officer or director of Company (or any successor). In addition, the Company agrees that the Indemnification Agreement entered into by and between the Company and the Executive, as well as all other rights to which Executive is entitled with regard to indemnification and advancement of expenses, whether by virtue of the Company's certificate of incorporation, bylaws or otherwise, will remain in full force and effect, in accordance with its terms. The parties agree that, because there can be no exact measure of the damages which would occur to the Executive as a result of termination of employment, such payments contemplated in this Section 5(f) shall be deemed to constitute liquidated damages and not a penalty and the Company agrees that the Executive shall not be required to mitigate his damages. The termination compensation in this Section 5(f) shall be paid only if the Executive executes a termination agreement releasing all legally waivable claims arising from the Executive's employment. (g) Termination and Benefits upon a Change in Control. In the event of a Change in Control, as defined in this Section 5(g), then in lieu of the Severance Payment contained in Section 5(f) hereof, if the Executive is terminated without Cause or the Executive terminates his employment for Good Reason within the twelve (12) month period immediately following a Change in Control the Company shall pay to the Executive a lump sum amount equal to: (x) two (2) times the Executive's highest annual salary paid during the last two (2) years immediately preceding the date of termination, and (y) a prorata portion (based on the portion of the calendar year that the Executive served hereunder prior to such termination) of the annual bonus which would have been paid to the Executive for the full year during which such termination occurred, which in no event will be less than one-half of the Executive's then current Salary, minus applicable withholding and authorized salary reductions (the "Payment"). In the event that the excise tax relating to "parachute payments" under Section 280G of the Code applies to the Payment, then the Company shall pay the Executive an additional payment in an amount such that, after payment of federal income taxes (but not the excise tax) on such additional payment, the Executive receives an additional amount equal to the excise tax originally imposed on the 6 Payment. The Executive shall also be entitled to receive the Additional Benefits. "Change of Control" means or shall be deemed to have occurred if and when: (i) any "person" or "group" (as such terms are used in Section 13(d) and 14(d) of the Exchange Act) is or becomes the "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of more than 50% of the total voting power of the outstanding voting stock of the Company; (ii) the Company is merged with or into or consolidated with another Person and, immediately after giving effect to the merger or consolidation, (a) less than 50% of the total voting power of the outstanding voting stock of the surviving or resulting Person is then "beneficially owned" (within the meaning of Rule 13d-3 under the Exchange Act) in the aggregate by the stockholders of the Company immediately prior to such merger or consolidation, and (b) any "person" or "group" (as defined in Section 13(d)(3) or 14(d)(2) of the Exchange Act) has become the direct or indirect "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act) of more than 50% of the total voting power of the voting stock of the surviving or resulting Person; (iii) the Company sells, assigns, conveys, transfers, leases or otherwise disposes of all or substantially all of the Company assets (either in one transaction or a series of related transactions); (iv) the liquidation or dissolution of the Company; or (v) during any consecutive two-year period individuals who at the beginning of such period constituted the Board of Directors of the Company (together with any new directors whose election by such Board of Directors or whose nomination by the Board of Directors for election by the stockholders of the Company was approved by a vote of a majority of the directors then still in office who were either directors at the beginning of such period or whose election or nomination for election was previously so approved) cease for any reason to constitute a majority of the Board of Directors of the Company then in office. (h) Survival. Notwithstanding the termination of this Agreement under this Section 5, the provisions of Sections 7 and 8 of this Agreement, and all other provisions hereof which by their terms are to be performed following the termination hereof shall survive such termination and be continuing obligations. 6. CONSENT AND WAIVER BY THIRD PARTIES. The Executive hereby represents and warrants that he has obtained all necessary waivers and/or consents from third parties as to enable him to accept employment with the Company on the terms and conditions set forth herein and to execute and perform this Agreement without being in conflict with any other agreement, obligations or understanding with any such third party. 7. CONFIDENTIAL INFORMATION. The Executive acknowledges that in the course of his employment with the Company, he has received and will receive access to confidential information of a special and unique value concerning the Company and its business, including, without limitation, trade secrets, know-how, lists of customers, employee records, books and records relating to operations, costs or providing service and equipment, operating and maintenance costs, pricing criteria and other confidential information and knowledge concerning the business of the Company and its affiliates (hereinafter collectively referred to as "information") which the Company desires to protect. The Executive acknowledges that such information is confidential and the protection of such confidential information against unauthorized use or disclosure is of critical importance to the Company. The Executive agrees that he will not reveal such information to any one outside the Company. The Executive further agrees that during the term of this Agreement and thereafter he will not use or disclose such 7 information. Upon termination of his employment hereunder, the Executive shall surrender to the Company all papers, documents, writings and other property produced by him or coming into his possession by or through his employment hereunder and relating to the information referred to in this Section 7, and the Executive agrees that all such materials will at all times remain the property of the Company. The obligation of confidentiality, non-use and non-disclosure of know-how set forth in this Section 7 shall not extend to know-how (i) which was in the public domain prior to disclosure by the disclosing party, (ii) which comes into the public domain other than through a breach of this Agreement, (iii) which is disclosed to the Executive after the termination of this Agreement by a third party having legitimate possession thereof and the unrestricted right to make such disclosure, or (iv) which is necessarily disclosed in the course of the Executive's performance of his duties to the Company as contemplated in this Agreement. The agreements in this Section 7 shall survive the termination of this Agreement. 8. NO SOLICITATION. To support the agreements contained in Section 7 hereof, from the date hereof and for a period twelve (12) months after the Executive's employment with the Company is terminated for any reason, the Executive shall not, either directly or indirectly, through any person, firm, association or corporation with which the Executive is now or may hereafter become associated, (i) solicit any then current employee of the Company or its affiliates (except through ads or notices offering employment that are published or otherwise made publicly available), or (ii) use in any competition, solicitation or marketing effort any information as to which the Executive has a duty of confidential treatment under paragraph 7 above. 9. NOTICES. All notices, requests, consents and other communications under this Agreement shall be in writing and shall be deemed to have been delivered on the date personally delivered or on the date mailed, postage prepaid, by certified mail, return receipt requested, or telegraphed and confirmed if addressed to the respective parties as follows: If to the Executive: Marshall L. Munsell c/o Mission Resources Corporation 1331 Lamar, Suite 1455 Houston, Texas 77010-3039 If to the Company: Mission Resources Corporation 1331 Lamar, Suite 1455 Houston, Texas 77010-3039 Attn: Chairman, Compensation Committee Either party hereto may designate a different address by providing written notice of such new address to the other party hereto. 10. SPECIFIC PERFORMANCE. The Executive acknowledges that a remedy at law for any breach or attempted breach of Section 7 or 8 of this Agreement will be inadequate, agrees that the Company shall be entitled to specific performance and injunctive and other equitable relief in case of any such a breach or attempted breach, and further agrees to waive any requirement of the securing or posting of any bond in connection with the obtaining of any such injunctive or any other equitable relief. 8 11. WAIVERS AND MODIFICATIONS. This Agreement may be modified, and the rights and remedies of any provision hereof may be waived, only in accordance with this Section 11. No modifications or waiver by the Company shall be effective without the consent of at least a majority of the Compensation Committee of the Board of Directors then in office at the time of such modification or waiver. No waiver by either party of any breach by the other or any provision hereof shall be deemed to be a waiver of any later or other breach thereof or as a waiver of any other provision of this Agreement. This Agreement sets forth all the terms of the understandings between the parties with reference to the subject matter set forth herein and may not be waived, changed, discharged or terminated orally or by any course of dealing between the parties, but only by an instrument in writing signed by the party against whom any waiver, change, discharge or termination is sought. 12. GOVERNING LAW. This Agreement shall be construed in accordance with the laws of the State of Texas. 13. SEVERABILITY. In case of one or more of the provisions contained in this Agreement for any reason shall be held to be invalid, illegal or unenforceable in any respect, such invalidity, illegality or unenforceability shall not affect any other provision of this Agreement, but this Agreement shall be construed as if such invalid, illegal or unenforceable provisions had never contained herein. 14. ARBITRATION. In the event that a dispute or controversy should arise between the Executive and the Company as to the meaning or application of any provision, term or condition of this Agreement, such dispute or controversy shall be settled by binding arbitration in Houston, Texas and for said purpose each of the parties hereto hereby expressly consents to such arbitration in such place. Such arbitration shall be conducted in accordance with the existing rules and regulations of the American Arbitration Association governing commercial transactions. The expense of the arbitrator shall be borne by the Company. IN WITNESS WHEREOF, each of the parties hereto has executed this Agreement as of the date and year first above written. COMPANY: MISSION RESOURCES CORPORATION By: ----------------------------------------------- Name: --------------------------------------------- Title: -------------------------------------------- EXECUTIVE: -------------------------------------------------- Marshall L. Munsell 9 EX-31.1 6 h10423exv31w1.txt CERTIFICATION OF CEO PURSUANT TO SECTION 302 Exhibit 31.1 I, Robert L. Cavnar, certify that: 1. I have reviewed this Form 10-Q of Mission Resources Corporation; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (c) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. November 13, 2003 /s/ Robert L. Cavnar - -------------------- Robert L. Cavnar Chairman, President and Chief Executive Officer EX-31.2 7 h10423exv31w2.txt CERTIFICATION OF CFO PURSUANT TO SECTION 302 Exhibit 31.2 I, Richard W. Piacenti, certify that: 1. I have reviewed this Form 10-Q of Mission Resources Corporation; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (c) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. November 13, 2003 /s/ Richard W. Piacenti - ----------------------- Richard W. Piacenti Executive Vice President and Chief Financial Officer EX-32.1 8 h10423exv32w1.txt CERTIFICATION OF CEO PURSUANT TO SECTION 906 Exhibit 32.1 CERTIFICATION OF CHIEF EXECUTIVE OFFICER OF MISSION RESOURCES CORPORATION This certification is provided pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350, and accompanies the quarterly report on Form 10-Q (the "FORM 10-Q") for the quarter ended September 30, 2003 of Mission Resources Corporation (the "ISSUER"). I, Robert L. Cavnar, the Chief Executive Officer of the Issuer, certify that: (i) the Form 10-Q fully complies with the requirements of section 13(a) or section 15(d) of the Securities Exchange Act of 1934 (15 U.S.C. 78m(a) or 78o(d)); and (ii) the information contained in the Form 10-Q fairly presents, in all material respects, the financial condition and results of operations of the Issuer. Dated: November 13, 2003 /s/ Robert L. Cavnar ----------------- -------------------- Subscribed and sworn to before me this 13th day of November 2003 /s/ Carmen M. Garcia - -------------------- Notary Public in and for the State of Texas My commission expires: May 15, 2006 A signed original of this written statement required by Section 906 has been provided to Mission Resources Corporation and will be retained by Mission Resources Corporation and furnished to the Securities and Exchange Commission or its staff upon request. EX-32.2 9 h10423exv32w2.txt CERTIFICATION OF CFO PURSUANT TO SECTION 906 Exhibit 32.2 CERTIFICATION OF CHIEF FINANCIAL OFFICER OF MISSION RESOURCES CORPORATION This certification is provided pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350, and accompanies the quarterly report on Form 10-Q (the "FORM 10-Q") for the quarter ended September 30, 2003 of Mission Resources Corporation (the "ISSUER"). I, Richard W. Piacenti, the Chief Financial Officer of the Issuer, certify that: (i) the Form 10-Q fully complies with the requirements of section 13(a) or section 15(d) of the Securities Exchange Act of 1934 (15 U.S.C. 78m(a) or 78o(d)); and (ii) the information contained in the Form 10-Q fairly presents, in all material respects, the financial condition and results of operations of the Issuer. Dated: November 13, 2003 /s/ Richard W. Piacenti ----------------- ------------------------ Subscribed and sworn to before me this 13 day of November 2003 /s/ Carmen M. Garcia - --------------------- Notary Public in and for the State of Texas My commission expires: May 15, 2006 A signed original of this written statement required by Section 906 has been provided to Mission Resources Corporation and will be retained by Mission Resources Corporation and furnished to the Securities and Exchange Commission or its staff upon request. -----END PRIVACY-ENHANCED MESSAGE-----