-----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, V9uUSFCwXKsPQ7pSi3u/uy1771WY0jG4ReogIYSSTmI402TICbkgrn35iXM8d0tD 5EX/Q1nUG9duz2dsN6QMCQ== 0000950129-04-005882.txt : 20040810 0000950129-04-005882.hdr.sgml : 20040810 20040810160803 ACCESSION NUMBER: 0000950129-04-005882 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 20040630 FILED AS OF DATE: 20040810 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: 04964594 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 h17555e10vq.txt MISSION RESOURCES CORPORATION - JUNE 30, 2004 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 June 30, 2004 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) (713) 495-3000 Registrant's telephone number, including area code Not Applicable (Former name, former address and former fiscal year, if changed since last report) 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 July 28, 2004, 40,736,304 shares of common stock of Mission Resources Corporation were outstanding. MISSION RESOURCES CORPORATION INDEX
PAGE # ------ PART I. FINANCIAL INFORMATION............................................................................ 1 ITEM 1. Financial Statements.......................................................................... 1 Consolidated Balance Sheets: June 30, 2004 (Unaudited) and December 31, 2003.......................................... 1 Consolidated Statements of Operations (Unaudited): Three months and six months ended June 30, 2004 and 2003................................. 3 Consolidated Statements of Cash Flows (Unaudited): Six months ended June 30, 2004 and 2003.................................................. 4 Notes to Consolidated Financial Statements (Unaudited)........................................ 6 ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.......................................................... 24 ITEM 3. Quantitative and Qualitative Disclosures About Market Risk.................................... 40 ITEM 4. Controls and Procedures....................................................................... 41 PART II. OTHER INFORMATION............................................................................... 43 ITEM 1. Legal Proceedings............................................................................. 43 ITEM 2. Change in Securities, Use of Proceeds and Issuer Purchases of Equity Securities............... 43 ITEM 3. Defaults Upon Senior Securities............................................................... 43 ITEM 4. Submission of Matters to a Vote of Security Holders........................................... 43 ITEM 5. Other Information............................................................................. 43 ITEM 6. Exhibits and Reports on Form 8-K.............................................................. 44
i PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS MISSION RESOURCES CORPORATION CONSOLIDATED BALANCE SHEETS (Amounts in thousands)
June 30, December 31, 2004 2003 ------------ ------------ (Unaudited) ASSETS CURRENT ASSETS: Cash and cash equivalents ................................................. $ 5,486 $ 2,234 Cash held for reinvestment ................................................ --- 24,877 Accounts receivable ....................................................... 3,915 6,327 Accrued revenues .......................................................... 13,642 8,417 Current deferred taxes .................................................... 4,460 3,076 Prepaid expenses and other ................................................ 4,060 2,523 ------------ ------------ Total current assets .................................................. 31,563 47,454 ------------ ------------ PROPERTY AND EQUIPMENT, AT COST: Oil and gas properties (full cost), including unproved properties of $7,220 and $6,123 excluded from amortization as of June 30, 2004 and December 31, 2003, respectively ............................... 857,296 805,900 Asset retirement cost ..................................................... 12,480 10,987 Accumulated depreciation, depletion and amortization ...................... (545,204) (514,759) ------------ ------------ Net property, plant and equipment ..................................... 324,572 302,128 ------------ ------------ Leasehold, furniture and equipment ........................................ 4,709 4,405 Accumulated depreciation .................................................. (2,441) (2,065) ------------ ------------ Net leasehold, furniture and equipment ................................ 2,268 2,340 ------------ ------------ OTHER ASSETS .............................................................. 8,994 5,404 ------------ ------------ $ 367,397 $ 357,326 ============ ============
See accompanying notes to condensed consolidated financial statements 1 MISSION RESOURCES CORPORATION CONSOLIDATED BALANCE SHEETS (Amounts in thousands, except share information)
June 30, December 31, 2004 2003 ------------ ------------ (Unaudited) LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable .......................................................... $ 10,127 $ 8,864 Accrued liabilities ....................................................... 17,291 9,131 Interest payable .......................................................... 3,382 3,425 Commodity derivative liabilities .......................................... 13,096 8,597 Asset retirement obligation ............................................... 1,585 1,160 ------------ ------------ Total current liabilities ............................................. 45,481 31,177 LONG-TERM DEBT: Term loan facility ........................................................ 25,000 80,000 Revolving credit facility ................................................. 14,500 --- Senior 9 7/8% notes due 2011 .............................................. 130,000 --- Senior subordinated 10 7/8% notes due 2007 ................................ --- 117,426 Unamortized premium on issuance of senior subordinated 10 7/8 notes due 2007 ........................................................ --- 1,070 ------------ ------------ Total long-term debt .................................................. 169,500 198,496 LONG-TERM LIABILITIES: Commodity derivative liabilities, excluding current portion ............... 3,308 80 Deferred income taxes ..................................................... 18,684 20,346 Other liabilities ......................................................... --- 130 Asset retirement obligation, excluding current portion .................... 31,381 32,157 ------------ ------------ Total long-term liabilities ........................................... 53,373 52,713 STOCKHOLDERS' EQUITY: Preferred stock, $0.01 par value, 5,000,000 shares authorized, none issued or outstanding at June 30, 2004 and December 31, 2003 ..................................................... --- --- Common stock, $0.01 par value, 60,000,000 shares authorized, 40,701,304 and 28,017,636 shares issued at June 30, 2004 and December 31, 2003, respectively ................................... 411 284 Additional paid-in capital ................................................ 201,929 172,532 Retained deficit .......................................................... (90,978) (90,232) Treasury stock, at cost, 389,000 shares at June 30, 2004 and December 31, 2003 ................................................. (1,937) (1,937) Other comprehensive income (loss), net of taxes ........................... (10,382) (5,707) ------------ ------------ Total stockholders' equity .......................................... 99,043 74,940 ------------ ------------ $ 367,397 $ 357,326 ============ ============
See accompanying notes to condensed consolidated financial statements 2 MISSION RESOURCES CORPORATION CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED) (Amounts in thousands, except per share information)
Three Months Ended Six Months Ended June 30 June 30 ------------------------ ------------------------ 2004 2003 2004 2003 ---------- ---------- ---------- ---------- REVENUES: Oil and gas revenues ......................................... $ 31,635 $ 24,438 $ 60,431 $ 50,175 Gain (loss) on extinguishments of debt ....................... (4,081) --- (2,656) 22,375 Interest and other income (expense) .......................... (379) 187 (1,189) 722 ---------- ---------- ---------- ---------- 27,175 24,625 56,586 73,272 ---------- ---------- ---------- ---------- COST AND EXPENSES: Lease operating expenses ..................................... 6,100 8,364 13,206 17,254 Transportation costs ......................................... 63 102 88 192 Taxes other than income ...................................... 2,483 2,152 4,177 4,845 Asset retirement obligation accretion expense ................ 271 343 542 688 Depreciation, depletion and amortization ..................... 11,600 8,904 22,264 17,926 General and administrative expenses .......................... 2,956 2,860 5,779 5,432 Interest expense ............................................. 5,445 6,432 11,707 12,459 ---------- ---------- ---------- ---------- 28,918 29,157 57,763 58,796 ---------- ---------- ---------- ---------- Income (loss) before income taxes and cumulative effect of a change in accounting method ............................. (1,743) (4,532) (1,177) 14,476 Provision (benefit) for income taxes ............................ (637) (1,586) (431) 5,067 ---------- ---------- ---------- ---------- Income (loss) before income taxes and cumulative effect of a change in accounting method ............................. (1,106) (2,946) (746) 9,409 Cumulative effect of a change in accounting method, net of deferred tax of $935 in 2003 .......................... --- --- --- (1,736) ---------- ---------- ---------- ---------- Net income (loss) ............................................... $ (1,106) $ (2,946) $ (746) $ 7,673 ========== ========== ========== ========== Income (loss) before cumulative effect of a change in accounting method per share .................................. $ (0.03) $ (0.13) $ (0.02) $ 0.40 ========== ========== ========== ========== Income (loss) before cumulative effect of a change in accounting method per share-diluted .......................... $ (0.03) $ (0.13) $ (0.02) $ 0.40 ========== ========== ========== ========== Net income (loss) per share ..................................... $ (0.03) $ (0.13) $ (0.02) $ 0.33 ========== ========== ========== ========== Net income (loss) per share-diluted ............................. $ (0.03) $ (0.13) $ (0.02) $ 0.33 ========== ========== ========== ========== Weighted average common shares outstanding ...................... 40,591 23,508 36,101 23,508 ========== ========== ========== ========== Weighted average common shares outstanding-diluted .............. 40,591 23,508 36,101 23,594 ========== ========== ========== ==========
See accompanying notes to condensed consolidated financial statements 3 MISSION RESOURCES CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (Amounts in thousands)
Six Months Ended June 30, ----------------------------- 2004 2003 ------------ ------------ CASH FLOWS FROM OPERATING ACTIVITIES: Net (loss) income ......................................................... $ (746) $ 7,673 Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depreciation, depletion and amortization .......................... 22,264 17,926 (Gain) loss on commodity hedges ................................... 565 (416) (Gain) loss on interest rate swap ................................. --- (520) (Gain) loss on extinguishment of debt ............................. 2,656 (22,375) Cumulative effect of a change in accounting method, net of deferred tax ............................................. --- 1,736 Asset retirement obligation accretion expense ..................... 542 688 Amortization of deferred financing costs and bond premium ......................................................... 936 916 Deferred income taxes ............................................. (575) 4,992 Other ............................................................. 368 --- Change in assets and liabilities: Accounts receivable and accrued revenue ............................... (3,212) 2,545 Accounts payable and accrued liabilities .............................. 9,413 2,685 Abandonment costs ..................................................... (1,250) (2,984) Other ................................................................. (1,509) (2,754) ------------ ------------ NET CASH FLOWS PROVIDED BY OPERATING ACTIVITIES ....................... 29,452 10,112 CASH FLOWS FROM INVESTING ACTIVITIES: Acquisition of oil and gas properties ................................. (30,344) (453) Additions to oil and gas properties ................................... (22,365) (14,858) Additions to leasehold, furniture and equipment ....................... (304) (783) Proceeds on sale of oil and gas properties, net ....................... 8,556 3,170 Distribution from equity partner ...................................... 178 --- ------------ ------------ NET CASH FLOWS USED IN INVESTING ACTIVITIES ........................... (44,279) (12,924) CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from borrowings .............................................. 181,500 80,000 Repayment of senior subordinate notes & credit facilities ............. (181,011) (71,700) Stock issuance costs, net of proceeds ................................. (51) --- Cash held for reinvestment ............................................ 24,877 --- Financing costs ....................................................... (7,236) (4,420) ------------ ------------ NET CASH FLOWS PROVIDED BY FINANCING ACTIVITIES ....................... 18,079 3,880 Net increase in cash and cash equivalents ................................. 3,252 1,068 Cash and cash equivalents at beginning of period .......................... 2,234 11,347 ------------ ------------ CASH AND CASH EQUIVALENTS AT END OF PERIOD ................................ $ 5,486 $ 12,415 ============ ============
See accompanying notes to condensed consolidated financial statements 4 MISSION RESOURCES CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED) (UNAUDITED) (Amounts in thousands)
Six Months Ended June 30, ----------------------------- 2004 2003 ------------ ------------ SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Cash paid during the period for: Interest .............................................................. $ 10,638 $ 14,024 Income taxes paid (received) .......................................... $ 247 $ (581)
See accompanying notes to condensed consolidated financial statements 5 MISSION RESOURCES CORPORATION NOTES TO FINANCIAL STATEMENTS 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The accompanying unaudited 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 June 30, 2004, and the results of operations and changes in cash flows for the periods ended June 30, 2004 and 2003. 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, 2003. 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 $214,000 at June 30, 2004 is included in the other assets line of the Consolidated Balance Sheet. Mission received a $178,000 distribution from White Shoal Pipeline Corporation in the second quarter of 2004. Oil and Gas Property Accounting The Company uses 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 expenditure, 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 would be charged to operations. No such charges to operations were required during the three and six month periods ending June 30, 2004 or 2003. From time to time, certain other receivables are created and may be significant. Since Hurricane Lili damaged some of the Company's properties in late 2002, we accrued a receivable representing repair costs incurred and expected to be reimbursed by insurance. In May 2004, the Company received $2.45 million from its insurance carrier as final settlement for this hurricane damage claim. The Company has recorded a receivable of approximately $1.5 million from a private oil and gas company representing six months of override revenue. We expect to collect the entire amount of this receivable. Royalties Payable The accrued liabilities line of the Consolidated Balance Sheet includes approximately $4.6 million of royalties that are awaiting completion of title opinions. Upon receipt of the title opinions and executed division orders, Mission will be required to make payment. This liability will increase in size as the well produces until the title opinion is completed. Typically, royalties are paid within one to two months after the production is sold. 6 MISSION RESOURCES CORPORATION NOTES TO FINANCIAL STATEMENTS Joint Interest Billings Joint interest receivables are recorded at the invoiced amount and typically do not bear interest. The Company reviews collectibility of such receivables monthly. Balances over ninety days past due and exceeding $30,000 are reviewed individually for collectibility. Account balances are charged against earnings when the Company determines potential for recovery is remote. During the three and six months ended June 30, 2004 approximately $4,000 and $399,000, respectively, of such receivables were charged against earnings. The income charge is included in the interest and other income line of the Consolidated Statement of Operations. The Company does not have any off-balance sheet credit exposure related to its customers. 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 six months ended June 30, 2004 and 2003 was as follows (in thousands):
Three Months Ended Six Months Ended June 30, June 30, ------------------------ ------------------------ 2004 2003 2004 2003 ---------- ---------- ---------- ---------- Net income (loss) ............................................... $ (1,106) $ (2,946) $ (746) $ 7,673 Hedge accounting for derivative instruments, net of tax.......... (3,308) (957) (4,675) (2,846) ---------- ---------- ---------- ---------- Comprehensive income (loss) ..................................... $ (4,414) $ (3,903) $ (5,421) $ 4,827 ========== ========== ========== ==========
The accumulated balance of other comprehensive loss related to hedge accounting is as follows (in thousands):
Six Months Ended June 30, ----------------------------- 2004 2003 ------------ ------------ December 31 balance .............................. $ (5,707) $ (4,195) Net loss on cash flow hedges ..................... (7,140) (3,675) Reclassification adjustments ..................... (22) 2,361 Tax effect on hedging activity ................... 2,487 (1,532) ------------ ------------ June 30 balance .................................. $ (10,382) $ (7,041) ============ ============
Stock-Based Employee Compensation Plans 7 MISSION RESOURCES CORPORATION NOTES TO FINANCIAL STATEMENTS At June 30, 2004, the Company has two stock-based employee compensation plans: the 1996 Stock Incentive Plan and the 2004 Stock Incentive Plan. The 2004 Plan was approved by the Board of Directors on March 4, 2004 and by the Company's stockholders at the May 19, 2004 annual stockholders' meeting. The 1994 Stock Incentive Plan still has options outstanding that have not expired or been exercised; however, no new options can be granted under the plan. The Company accounts for the plans under the recognition and measurement principles of APB Opinion No. 25, Accounting or 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. SFAS No. 148, Accounting for Stock-Based Compensation - Transition and Disclosure, amends SFAS No. 123 to provide alternative methods of transition for an entity that voluntarily changes to the fair value based method of accounting for stock-based employee compensation and to require prominent disclosure about the effects on reported net income of an entity's accounting policy decisions with respect to stock-based employee compensation. SFAS No. 148 amends APB Opinion No. 28, Interim Financial Reporting, to require disclosure about those effects in interim financial information. Had compensation cost for the Company's stock option compensation plans been determined based on the fair value at the grant dates for awards under these plans consistent with the method of SFAS No. 123, the Company's pro forma net income and pro forma net income per share of Common Stock would have been as follows:
Three Months Ended Six Months Ended June 30, June 30, ------------------------ ------------------------ 2004 2003 2004 2003 ---------- ---------- ---------- ---------- Net income (loss) (in thousands) As reported .................................................... $ (1,106) $ (2,946) $ (746) $ 7,673 Pro forma ...................................................... $ (4,553) $ (4,705) $ (4,193) $ 5,877 Earnings (loss) per share As reported .................................................... $ (0.03) $ (0.13) $ (0.02) $ 0.40 Pro forma ...................................................... $ (0.11) $ (0.20) $ (0.12) $ 0.25 Diluted earnings (loss) per share As reported .................................................... $ (0.03) $ (0.13) $ (0.02) $ 0.33 Pro forma ...................................................... $ (0.11) $ (0.20) $ (0.12) $ 0.25
Recently Adopted Pronouncements The FASB issued Interpretation No. 46 (R ), 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 applies immediately to variable interest entities created after January 31, 2003, and to variable interests in variable interest entities obtained after January 31, 2003. The Company does not own an interest in any variable interest entities; therefore, this interpretation does not have a any effect on its financial statements. The provisions of this interpretation will be applied in the future should Mission acquire or establish a variable interest entity. Asset Retirement Obligations 8 MISSION RESOURCES CORPORATION NOTES TO 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 asset and this additional carrying amount is depreciated over the life of the asset. If the obligation is settled for other than the carrying amount of the liability, the Company will recognize a gain or loss on settlement. 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 in 2003 recorded a net initial asset retirement obligation of $44.3 million on its Consolidated Balance Sheet. An asset retirement cost of $14.4 million was simultaneously capitalized in the oil and gas properties section of the Consolidated Balance Sheet. The adoption of SFAS No. 143 was accounted for as a change in accounting principle in 2003, requiring that a $2.7 million charge, net of $935,000 in deferred tax be recorded to income as a cumulative effect of the change in accounting principle. The following table shows changes in the asset retirement obligation that have occurred in 2004 (amounts in thousands):
Six Months Ended Asset Retirement Obligation June 30, 2004 - -------------------------------------------------- ---------------- December 31, 2003 balance ........................ $ 33,317 Liabilities incurred ............................. 1,979 Liabilities settled .............................. (1,074) Liabilities sold ................................. (1,798) Accretion expense ................................ 542 -------- Ending balance ................................... 32,966 -------- Less: current portion ............................ 1,585 -------- Long-term portion ................................ $ 31,381 ========
Reclassifications Certain reclassifications of prior period statements have been made to conform with current reporting practices. Use of Estimates 9 MISSION RESOURCES CORPORATION NOTES TO FINANCIAL STATEMENTS In order to prepare these financial statements in conformity with accounting principles generally accepted in the United States, management of the Company has made a number of 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 On February 25, 2004, the Company acquired $15 million of its 10 7/8% senior subordinated notes due 2007 from Stellar Funding, Ltd. in exchange for 6.25 million shares of the Company's common stock. On March 15, 2004, the Company acquired an additional $15 million of its 10 7/8% senior subordinated notes due 2007 from Harbert Distressed Investment Master Fund, Ltd. in exchange for 6.0 million shares of the Company's common stock. On April 8, 2004, Mission issued 312,000 shares of its common stock in lieu of cash to its financial advisors as a fee for services rendered during the debt refinancing discussed below in Note 3. The $1.2 million fair value of this consideration was recorded as deferred financing costs in the other assets line of the Consolidated Balance Sheet. 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 for the three and six month periods ended June 30, 2004 and 2003, respectively. Additionally, potentially dilutive options and warrants that are not in the money are excluded from the computation of diluted earnings per share. For the three month periods ended June 30, 2004 and 2003, the potentially dilutive options and warrants excluded represented 0.5 million and 1.0 million shares, respectively. For the six month periods ended June 30, 2004 and 2003, the potentially dilutive options and warrants excluded represent 2.2 million and 2.5 million shares respectively. 10 MISSION RESOURCES CORPORATION NOTES TO FINANCIAL STATEMENTS SFAS No. 128 reconciliation (amounts in thousands except per share amounts):
For the Three Months Ended For the Three Months Ended June 30, 2004 June 30, 2003 -------------------------------------- -------------------------------------- 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................ $ (1,106) 40,591 $ (0.03) $ (2,946) 23,508 $ (0.13) ========= ========= EFFECT OF DILUTIVE SECURITIES: Options and warrants................ --- --- --- --- ----------- ------------- ----------- ------------- INCOME (LOSS) PER COMMON SHARE-DILUTED: Income (loss) available to common stockholders and assumed conversions......... $ (1,106) 40,591 $ (0.03) $ (2,946) 23,508 $ (0.13) =========== ============= ========= =========== ============= =========
For the Six Months Ended For the Six Months Ended June 30, 2004 June 30, 2003 -------------------------------------- -------------------------------------- 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................ $ (746) 36,101 $ (0.02) $ 7,673 23,508 $ 0.33 ========= ========= EFFECT OF DILUTIVE SECURITIES: Options and warrants................ --- --- 86 ----------- ------------- ----------- ------------- INCOME (LOSS) PER COMMON SHARE-DILUTED: Income (loss) available to common stockholders and assumed conversions......... $ (746) 36,101 $ (0.02) $ 7,673 23,594 $ 0.33 =========== ============= ========= =========== ============= =========
As of June 30, 2004 and 2003, Mission held in treasury 389,323 shares of its common stock that had been acquired at an aggregate price of $1.9 million. These treasury shares are reported at cost as a reduction to Stockholders' Equity. 11 MISSION RESOURCES CORPORATION NOTES TO FINANCIAL STATEMENTS 3. LONG TERM DEBT Refinancing On April 8, 2004, Mission issued new senior notes, announced the redemption of its 10 7/8% senior subordinated notes due 2007 (the "10 7/8% Notes"), and replaced both its revolving credit facility and its term loan. Those transactions and the details of the resulting debt are discussed below. 9 7/8% Notes On April 8, 2004, Mission issued $130 million of its 9 7/8% senior notes due 2011 (the "9 7/8% Notes") which are guaranteed on an unsubordinated, unsecured basis by all of its current subsidiaries. Interest on the notes is payable semi-annually, on each April 1 and October 1, commencing on October 1, 2004. A portion of the net proceeds from the offering of the 9 7/8% Notes was used to redeem, on May 10, 2004, the $87.4 million aggregate principal amount of the 10 7/8% Notes that remained outstanding. On April 8, 2004, the remainder of the net proceeds from the offering of the 9 7/8% Notes, together with $21.5 million that was advanced under the new senior secured revolving credit facility (as described below) and $25.0 million that was borrowed under the new second lien term loan (as described below), was used to completely discharge all of the Company's outstanding indebtedness under its prior revolving credit facility and term loan. At any time on or after April 9, 2005 and prior to April 9, 2008, the Company may redeem up to 35% of the aggregate original principal amount of the 9 7/8% Notes, using the net proceeds of equity offerings, at a redemption price equal to 109.875% of the principal amount of the 9 7/8% Notes, plus accrued and unpaid interest. On or after April 9, 2008, the Company may redeem all or a portion of the 9 7/8% Notes at the redemption prices (expressed as percentages of principal amount) set forth below plus accrued and unpaid interest, if redeemed during the twelve-month period beginning on April 9 of the years indicated below:
YEAR PERCENTAGE ---- ---------- 2008.......................... 104.93750% 2009.......................... 102.46875% 2010.......................... 100.00000%.
If the Company experiences specific kinds of change of control, it may be required to purchase all or part of the 9 7/8% Notes at a price equal to 101% of the principal amount together with accrued and unpaid interest. The 9 7/8 Notes contain covenants that, subject to certain exceptions and qualifications, limit the Company's ability and the ability of certain its subsidiaries to: - incur additional indebtedness or issue certain types of preferred stock or redeemable stock; - transfer or sell assets; 12 MISSION RESOURCES CORPORATION NOTES TO FINANCIAL STATEMENTS - enter into sale and leaseback transactions; - pay dividends or make other distributions on stock, redeem stock or redeem subordinated debt; - enter into transactions with affiliates; - create liens on its assets; - guarantee other indebtedness; - enter into agreements that restrict dividends from subsidiaries; - make investments; - sell capital stock of subsidiaries; and - merge or consolidate. Standard and Poor's and Moody's currently publish debt ratings for the 9 7/8% Notes. Their ratings consider a number of items including the Company's debt levels, planned asset sales, near-term and long-term production growth opportunities, capital allocation challenges and commodity price levels. Mission's Standard & Poor's rating on the 9 7/8% Notes is "CCC" and its Moody's rating is "Caa2." A decline in credit ratings will not create a default or other unfavorable change in the 9 7/8% Notes. Senior Secured Revolving Credit Facility On April 8, 2004, the Company entered into a new senior secured revolving credit facility with a syndicate of lenders led by Wells Fargo Bank, N.A. The facility, which matures on April 8, 2007, is secured by a first priority mortgage and security interest in at least 85% of the Company's oil and gas properties, all of the ownership interests of all of the Company's subsidiaries, and the Company's equipment, accounts receivable, inventory, contract rights, general intangibles and other assets. The facility is also guaranteed by all of the Company's subsidiaries. Availability under the facility, which includes a $3 million subfacility for standby letters of credit, is subject to a borrowing base that is determined at the sole discretion of the facility lenders. The initial borrowing base of the facility was $50 million, of which $30 million was available for general corporate purposes and $20 million was available for the acquisition of oil and gas properties approved by the lenders. The borrowing base will be redetermined on each April 1 and October 1, beginning October 1, 2004. Mission and the lenders each have the option to request one unscheduled interim redetermination between scheduled redetermination dates. On April 8, 2004, the Company was advanced $21.5 million under the facility, which amount, together with a portion of the net proceeds from the offering of the 9 7/8% Notes and $25.0 million that was borrowed under the new second lien term loan (as described below), was used to completely discharge all of the Company's outstanding indebtedness under its prior revolving credit facility and term loan. At June 30, 2004, $14.5 million in borrowings were outstanding and $35.4 million was available for borrowing ($20 million of which is only to be used for acquisition costs). Advances under the facility bear interest, at the Company's option, at either (i) a margin (which varies from 25.0 basis points to 125.0 basis points based upon utilization of the borrowing 13 MISSION RESOURCES CORPORATION NOTES TO FINANCIAL STATEMENTS base) over the base rate, which is the higher of (a) Wells Fargo's prime rate in effect on that day, and (b) the federal funds rate in effect on that day as announced by the Federal Reserve Bank of New York, plus 0.5%; or (ii) a margin (which varies from 175.0 basis points to 275.0 basis points based upon utilization of the borrowing base) over LIBOR. The Company is allowed to prepay any base rate or LIBOR loan without penalty, provided that each prepayment is at least $500,000 and multiples of $100,000 in excess thereof, plus accrued and unpaid interest. Standby letters of credit may be issued under the letter of credit subfacility. Mission is required to pay, with respect to each issued letter of credit, (i) a per annum letter of credit fee equal to the LIBOR margin then in effect multiplied by the face amount of such letter of credit plus (ii) a fronting fee, which the higher of $500 or 12.5 basis points to the issuer of the letters of credit. The facility requires the Company to hedge forward, on a rolling 12-month basis, 50% of proved producing volumes projected to be produced over the following 12 months. The Company is also required to hedge forward, on a rolling 12-month basis, 25% of proved producing production volumes projected to be produced over the succeeding 12-month period. Any time that Mission has borrowings under the facility in excess of 70% of the borrowing base available for general corporate purposes, the agent under the facility may require Mission to hedge a percentage of projected production volumes on terms acceptable to the agent. The facility also contains the following restrictions on hedging arrangements and interest rate agreements: (i) the hedge provider must be a lender under the facility or an unsecured counterparty acceptable to the agent under the facility; and (ii) total notional volume must be not more than 75% of scheduled proved producing net production quantities in any period or, with respect to interest rate agreements, notional principal amount must not exceed 75% of outstanding loans, including future reductions in the borrowing base. The facility contains the following covenants which are considered important to Mission's operations. At June 30, 2004, Mission was in compliance with each of the following covenants: - The Company is required to maintain a current ratio of consolidated current assets (as defined in the facility) to consolidated current liabilities (as defined in the facility) of not less than 1.0 to 1.0; - The Company is required to maintain (on an annualized basis until the passing of four fiscal quarters and thereafter on a rolling four quarter basis) an interest coverage ratio (as defined in the facility) of no less than (i) 2.50 for June 30, 2004 through December 31, 2004, (ii) 2.75 for March 31, 2005 through June 30, 2005, and (iii) 3.0 for September 30, 2005 and thereafter; - The Company is required to maintain (on an annualized basis until the passing of four fiscal quarters and thereafter on a rolling four quarter basis) a leverage ratio (as defined in the facility) of no more than (i) 3.75 for June 30, 2004 through September 30, 2004, and (ii) 3.5 for December 31, 2004 and thereafter; and - The Company is required to maintain a tangible net worth (as defined in the facility) of not less than 85% of tangible net worth at March 31, 2004, plus 50% of positive 14 MISSION RESOURCES CORPORATION NOTES TO FINANCIAL STATEMENTS net income after tax distributions, plus 100% of equity offerings after March 31, 2004, excluding any asset impairment charges. The facility also includes restrictions with respect to changes in the nature of the Company's business; sale of all or a substantial or material part of its assets; mergers, acquisitions, reorganizations and recapitalizations; liens; guarantees; debt; leases; dividends and other distributions; investments; debt prepayments; sale-leasebacks; capital expenditures; lease expenditures; and transactions with affiliates. Second Lien Term Loan On April 8, 2004, Mission entered into a new second lien term loan with a syndicate of lenders arranged by Guggenheim Corporate Funding, LLC. The loan, which matures on April 8, 2008, is secured by a second priority security interest in the assets securing the senior secured revolving credit facility. The facility is also guaranteed by all of Mission's subsidiaries. On April 8, 2004, the Company borrowed the $25.0 million under the loan, which amount, together with a portion of the net proceeds from the offering of the 9 7/8% Notes and $21.5 million that was borrowed under the senior secured revolving credit facility (as described above), was used to completely discharge all of the outstanding indebtedness under the prior revolving credit facility and term loan. The loan accrues interest in each monthly interest period at the rate of 30-day LIBOR plus 525 basis points per annum, payable monthly in cash. The Company may prepay the loan at any time after the date six months and one day after April 8, 2004 in whole or in part in multiples of $1 million at the prices (expressed as percentages of principal amount) set forth below, plus accrued and unpaid interest, if prepaid during each successive 12-month period beginning on April 9th of each year indicated below:
YEAR PREMIUM ---- ------- 2004 102% 2005 101% 2006 to maturity 100%
provided, however, that no prepayment shall be made prior to the date six months and one day after April 8, 2004. The loan contains covenants that are no more restrictive than those contained in the senior secured revolving credit facility. Redeemed 10 7/8% Notes In April 1997, the Company issued $100.0 million of 10 7/8% Notes due 2007. On May 29, 2001, the Company issued an additional $125.0 million of 10 7/8% Notes with identical terms to the notes issued in April 1997 at a premium of $1.9 million. The premium was amortized as a reduction of interest expense over the life of the 10 7/8% Notes so that the effective interest rate on the additional 10 7/8% Notes was 10.5%. The premium was shown 15 MISSION RESOURCES CORPORATION NOTES TO FINANCIAL STATEMENTS separately on the Consolidated Balance Sheet. Interest on the 10 7/8% Notes was payable semi-annually on April 1 and October 1. On March 28, 2003, the Company acquired, in a private transaction with various funds affiliated with Farallon Capital Management, LLC, approximately $97.6 million in principal amount of the 10 7/8% Notes for approximately $71.7 million, plus accrued interest. Immediately after the consummation of the transaction, Mission had $127.4 million in principal amount of 10 7/8% Notes outstanding. Including costs of the transaction and the removal of $2.2 million of previously deferred financing costs related to the acquired 10 7/8% Notes, the Company recognized a $22.4 million gain on the extinguishment of the 10 7/8% Notes. In December 2003, February 2004 and March 2004, the Company, in three private transactions, acquired $40.0 million aggregate principal amount of the 10 7/8% Notes in exchange for an aggregate of 16.75 million shares of its common stock as summarized below.
Net Gain on Extinguishment Principal Common of 10 7/8% Date Note Holder Value Shares Notes - ------------- ------------------------------- ----------- ------------ -------------- December 2003 FTVIPT - Franklin Income $10 million 4.50 million $1.1 million Securities Fund and Franklin Custodian Funds - Income Series February 2004 Stellar Funding, Ltd. $15 million 6.25 million $0.5 million March 2004 Harbert Distressed Investment $15 million 6.00 million $0.9 million Master Fund, Ltd.
On May 10, 2004, the remaining $87.4 million of 10 7/8% Notes were redeemed at a premium of approximately $1.6 million. This premium is included in the $4.1 million ($2.6 million. net of tax) net loss on extinguishment of debt reported in the three month period ended June 30, 2004. Former Credit Facilities 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 and cancelled on March 28, 2003. 16 MISSION RESOURCES CORPORATION NOTES TO FINANCIAL STATEMENTS On March 28, 2003, simultaneously with the acquisition of $97.6 million in principal amount of the 10 7/8% Notes, the Company amended and restated the credit facility with new lenders, led by Farallon Energy Lending, LLC. The entire $947,000 of deferred financing costs relating to the previously existing facility was charged to earnings as a reduction in the gain on extinguishment of debt. Under the amended and restated facility, the Company borrowed $80.0 million, the proceeds of which were used to acquire approximately $97.6 million face amount of 10 7/8% Notes, to pay accrued interest on the 10 7/8% Notes purchased, and to pay closing costs. The amended and restated facility was cancelled in April 2004 and was replaced by the "Senior Secured Revolving Credit Facility" discussed above. 4. DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES 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 NYMEX price to be received. Hedging activities decreased revenues by $4.3 million and $3.7 million for the three month periods ended June 30, 2004 and 2003, respectively, and by $7.1 million and $9.7 million for the six month periods ended June 30, 2004 and 2003, respectively. The Company's 12-month average realized price, excluding hedges, for natural gas was $0.11 per MCF less than the NYMEX MMBTU price. The Company's 12-month average realized price, excluding hedges, for oil was $1.05 per BBL less than the NYMEX price. Realized prices differ from NYMEX as a result of factors such as the location of the property, the heating content of natural gas and the quality of oil. The gas differential stated above excludes the impact the Mist field gas production that is sold at an annually fixed price. The Company has elected to designate all hedges by applying the interpretations from the FASB's Derivative Implementation Group issue G-20 ("DIG G-20"). By using the DIG G-20 approach, because the Company's collars and swaps meet specific criteria, the time value component is included in the hedge relationship and is recorded to other comprehensive income ("OCI") rather than to income, which reduces earnings variability. Should ineffectiveness occur for reasons other than time, that ineffectiveness is recognized currently and is reported in the interest and other income line of the Consolidated Statement of Operations. The Company has acquired software specifically designed to make the complex calculations required by SFAS No. 133, including calculating ineffectiveness. The Company recognized a loss related to the ineffectiveness of its cash flow hedges in the three and six month periods ended June 30, 2004 of approximately $142,000 and $565,000, respectively. As the existing hedges settle over the next two years, gains or losses in OCI will be reclassified to earnings. At June 30, 2004 strip prices, the amount expected to be reclassified over the next twelve months will be a $12.7 million loss. 17 MISSION RESOURCES CORPORATION NOTES TO FINANCIAL STATEMENTS The following tables detail the cash flow commodity hedges that were in place at June 30, 2004. OIL HEDGES
NYMEX NYMEX PRICE PRICE BBLS FLOOR/SWAP CEILING PERIOD PER DAY TOTAL BBLS TYPE AVG. AVG. - ---------------- ------- ---------- ------ ---------- ------- Third Qtr. 2004 2,500 230,000 Swap $24.30 N/A Fourth Qtr. 2004 2,500 230,000 Swap $23.97 N/A First Qtr. 2005 2,000 180,000 Collar $27.14 $ 30.19 Second Qtr. 2005 1,500 136,500 Collar $26.33 $ 28.79 Third Qtr. 2005 1,500 138,000 Collar $26.17 $ 27.90 Fourth Qtr. 2005 1,500 138,000 Collar $26.00 $ 27.33 First Qtr. 2006 250 22,500 Collar $26.46 $ 30.90 Second Qtr. 2006 250 22,750 Collar $26.29 $ 30.75 Third Qtr. 2006 250 23,000 Collar $26.24 $ 30.51 Fourth Qtr. 2006 250 23,000 Collar $26.03 $ 30.15
GAS HEDGES
NYMEX NYMEX PRICE MMBTU TOTAL PRICE FLOOR CEILING PERIOD PER DAY MMBTU TYPE AVG. AVG. - ---------------- ------- --------- ---- ----------- ------- Third Qtr. 2004 19,000 1,748,000 Collar $4.71 $5.65 Fourth Qtr. 2004 16,500 1,518,000 Collar $4.64 $5.73 First Qtr. 2005 12,000 1,080,000 Collar $4.85 $8.85 Second Qtr. 2005 8,000 728,000 Collar $4.66 $5.83 Third Qtr. 2005 8,000 736,000 Collar $4.66 $5.80 Fourth Qtr. 2005 8,000 736,000 Collar $4.66 $6.28 First Qtr. 2006 2,000 180,000 Collar $5.00 $8.00
The Company may also enter into financial instruments such as interest rate swaps to manage the impact of interest rates. 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. The Company paid $1.3 million to the counter party in February 2003 to cancel the swap. 18 MISSION RESOURCES CORPORATION NOTES TO FINANCIAL STATEMENTS 5. INCOME TAXES The provision for federal and state income taxes for the three months and six months ended June 30, 2004 was based upon a 36.5% effective tax rate. 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 recognition of future taxable income during the periods in which those temporary differences are available. Based upon projections for future state taxable income, management believes it is more likely than not that the Company will not realize its entire deferred tax asset related to state income taxes. In addition, management believes it is more likely than not that the Company will not realize its deferred tax asset related to the impairment of the interest in Carpatsky. A valuation allowance of approximately $5.1 million has been recorded at June 30, 2004. On December 17, 2003, the Company issued 4.5 million shares of common stock in exchange for the surrender of $10 million of the 10 7/8% Notes. As a result of this transaction, management believes that the Company has experienced an "ownership change" as defined in Section 382 of the Internal Revenue Code, which could result in the imposition of significant limitations on the future use of the Company's existing net operating loss and tax credit carryforwards in the future. As of June 30, 2004, management believes that the limitations imposed by Section 382 will not affect the Company's ability to fully utilize its net operating loss and tax credit carryforwards to offset future taxable income and related tax liabilities. 6. GUARANTEES In 1993 and 1996 the Company entered into agreements with surety companies and with Torch Energy Advisors Incorporated ("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. Torch currently has no bonds outstanding pursuant to these agreements and Nuevo has issued approximately $35 million of bonds. 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 and from Torch and Nuevo, if the surety makes any payments under the bonds issued to Torch and Nuevo. On May 17, 2004, Plains Exploration and Production Company announced it had completed the acquisition of Nuevo Energy Company effective May 14, 2004. The Company's subsidiaries, Mission E&P Limited Partnership, Mission Holdings LLC and Black Hawk Oil Company are guarantors under the Senior Secured Revolving Credit Facility, the Second Lien Term Loan and the indenture for the 9 7/8% Notes. 7. SUPPLEMENTAL GUARANTOR INFORMATION - UNAUDITED Mission E&P Limited Partnership, Mission Holdings LLC and Black Hawk Oil Company, all subsidiaries of Mission Resources Corporation (collectively, the "Guarantor Subsidiaries") are guarantors under the Senior Secured Revolving Credit Facility, the Second Lien Term Loan and the indenture for the 9 7/8% Notes. The Company does not believe that separate financial statements and other disclosures concerning the Guarantor Subsidiaries would 19 MISSION RESOURCES CORPORATION NOTES TO FINANCIAL STATEMENTS provide any additional information that would be material to investors in making an investment decision. CONDENSED CONSOLIDATING BALANCE SHEETS - UNAUDITED AS OF JUNE 30, 2004 (IN THOUSANDS)
MISSION GUARANTOR RESOURCES SUBSIDIARIES ELIMINATIONS CONSOLIDATED ------------ ------------ ------------ ------------ Total current assets ............................................ $ 25,731 $ 5,832 $ 31,563 Net property, plant and equipment ............................... 183,099 141,473 324,572 Net leasehold, furniture and equipment .......................... 2,235 33 2,268 Investment in subsidiaries ...................................... 146,725 143,970 (290,695) --- Total other assets .............................................. 8,994 --- 8,994 ------------ ------------ ------------ ------------ Total assets ................................................. $ 366,784 $ 291,308 $ (290,695) $ 367,397 ============ ============ ============ ============ Total current liabilities ....................................... $ 43,057 $ 2,424 $ 45,481 Long-term debt .................................................. 169,500 --- 169,500 Deferred taxes .................................................. (40,776) 59,460 18,684 Other long-term liabilities ..................................... 3,308 --- 3,308 Intercompany .................................................... 52,244 (52,244) --- Asset retirement obligation, excluding current portion ...................................... 20,883 10,498 31,381 Total stockholders' equity ...................................... 118,568 271,170 (290,695) 99,043 ------------ ------------ ------------ ------------ Total liabilities and stockholders' equity ................... $ 366,784 $ 291,308 $ (290,695) $ 367,397 ============ ============ ============ ============
20 MISSION RESOURCES CORPORATION NOTES TO FINANCIAL STATEMENTS CONDENSED CONSOLIDATING INCOME STATEMENTS - UNAUDITED FOR THE YEAR ENDED JUNE 30, 2004 (IN THOUSANDS)
MISSION GUARANTOR RESOURCES SUBSIDIARIES ELIMINATIONS CONSOLIDATED ------------ ------------ ------------ ------------ Revenues ........................................................ $ 40,299 $ 16,287 $ 56,586 Equity in earnings from subsidiaries ............................ 628 --- (628) --- Expenses ........................................................ (44,219) (13,544) (57,763) ------------ ------------ ------------ ------------ Net earnings (loss) before income taxes ......................... (3,920) 2,743 (628) (1,177) Income taxes .................................................... (2,546) 2,115 (431) ------------ ------------ ------------ ------------ Net earnings (loss) ............................................. $ (746) $ 628 $ (628) $ (746) ============ ============ ============ ============
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS - UNAUDITED FOR THE YEAR ENDED JUNE 30, 2004 (IN THOUSANDS)
MISSION GUARANTOR RESOURCES SUBSIDIARIES ELIMINATIONS CONSOLIDATED ------------ ------------ ------------ ------------ CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss) .............................................. $ (746) $ 628 $ (628) $ (746) Non-cash adjustments ........................................... 19,804 6,324 628 26,756 Changes in assets and liabilities .............................. (24,294) 27,736 3,441 ------------ ------------ ------------ ------------ Net cash provided by operating activities ...................... (5,236) 34,688 --- 29,452 ------------ ------------ ------------ ------------ CASH FLOWS FROM INVESTING ACTIVITIES: Net property, plant and equipment .............................. (9,520) (34,633) (44,153) Leasehold, furniture and equipment ............................. (250) (54) (304) Other .......................................................... 178 --- 178 ------------ ------------ ------------ ------------ Net cash used in investing activities .......................... (9,592) (34,687) --- (44,279) ------------ ------------ ------------ ------------ CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from borrowings ....................................... 181,500 --- 181,500 Repayment of senior subordinated notes & old credit facility ........................................... (181,011) --- (181,011) Stock issuance costs, net of proceeds .......................... (51) --- (51) Financing costs ................................................ (7,236) --- (7,236) Restricted cash held for investments ........................... 24,877 --- 24,877 ------------ ------------ ------------ ------------ Net cash provided by financing activities ...................... 18,079 --- --- 18,079 Net increase (decrease) in cash and cash equivalents ................................................... 3,879 1 3,252 Cash and cash equivalents at beginning of period ............... 2,224 10 2,234 ------------ ------------ ------------ ------------ Cash and cash equivalents at end of period ..................... $ 6,103 $ 11 $ --- $ 5,486 ============ ============ ============ ============
21 MISSION RESOURCES CORPORATION NOTES TO FINANCIAL STATEMENTS CONDENSED CONSOLIDATING BALANCE SHEETS - UNAUDITED AS OF DECEMBER 31, 2003 (IN THOUSANDS)
MISSION GUARANTOR RESOURCES SUBSIDIARIES ELIMINATIONS CONSOLIDATED ------------ ------------ ------------ ------------ Total current assets ............................................ $ 40,557 $ 6,897 $ 47,454 Net property, plant and equipment ............................... 188,964 113,164 302,128 Net leasehold, furniture and equipment .......................... 2,361 (21) 2,340 Investment in subsidiaries ...................................... 146,097 143,970 (290,067) --- Total other assets .............................................. 5,404 --- 5,404 ------------ ------------ ------------ ------------ Total assets ................................................. $ 383,383 $ 264,010 $ (290,067) $ 357,326 ============ ============ ============ ============ Total current liabilities ....................................... $ 30,185 $ 992 $ 31,177 Long-term debt .................................................. 198,496 --- 198,496 Deferred taxes .................................................. (37,034) 57,380 20,346 Other long-term liabilities ..................................... 210 --- 210 Intercompany .................................................... 73,969 (73,969) --- Asset retirement obligation, excluding current portion ...................................... 23,093 9,064 32,157 Total stockholders' equity ...................................... 94,464 270,543 (290,067) 74,940 ------------ ------------ ------------ ------------ Total liabilities and stockholders' equity ................... $ 383,383 $ 264,010 $ (290,067) $ 357,326 ============ ============ ============ ============
8. SUBSEQUENT EVENTS On July 20, 2004, the Company announced that it had retained Petrie Parkman & Co., Inc. to assist in evaluating strategic alternatives to enhance stockholder value. We cannot assure you that any transaction will be entered into or completed as a result of this process. On July 29, 2004, the Company released a mid-year reserve update based upon the review of Netherland, Sewell & Associates, Inc. The reserves were priced at June 30, 2004 period end prices of $36.90 per BBL of oil and $6.02 per MMBTU of natural gas. Estimated net proved oil and gas reserves at June 30, 2004 were approximately 217 BCFE and the 10% present value of future cash flows for such reserves is approximately $407 million. We more than replaced production through reserve additions and extensions. The majority of the extensions are proved undeveloped locations identified in the Jalmat field. The Jalmat field acquisition in January and April 2004 is the majority of the 32.1 BCFE purchased reserves. Set forth below is a reconciliation of our yearend 2003 reserves to those reported as of June 30, 2004.
BCFE ----- Proved reserves at beginning of year.................... 177.9 Revisions of previous estimates......................... (9.7) Extensions and discoveries.............................. 31.9 Production.............................................. (11.8) Sales of reserves in-place.............................. (3.4) Purchase of reserves in-place........................... 32.1 ----- Proved reserves at June 30, 2004........................ 217.0 =====
22 MISSION RESOURCES CORPORATION NOTES TO FINANCIAL STATEMENTS On August 4, 2004, the Compensation Committee of the Board of Directors of the Company granted to Robert L. Cavnar, Chairman, President and CEO of the Company, a nonqualified option to acquire 800,000 shares of the Company's common stock. This option has been granted to replace the grant of 800,000 share appreciation rights made to Mr. Cavnar in November 2003. The option was granted under the 2004 Incentive Plan, has a term of 10 years, is fully vested and has a strike price of $.55 per share, which is the same exercise price as the surrendered share appreciation rights. As a result of this option having an exercise price below the current market value for the Company's common stock, the Company will recognize a non-cash compensation expense of approximately $4.1 million ($2.6 million, net of tax) in the third quarter of 2004. 23 MISSION RESOURCES CORPORATION ITEM 2. MANAGEMENTS' DISCUSSION & ANALYSIS AND RESULTS OF OPERATIONS Mission is an independent oil and gas exploration and production company. We drill for, acquire, develop and produce natural gas and crude oil. Our property portfolio is comprised of long-lived, low-risk assets, like those in the Permian Basin, and multi-reservoir, high-productivity assets found along the Gulf Coast and in the Gulf of Mexico. Our operational focus remains on efficient, well managed upstream natural gas and crude oil exploration and production. We will continue to pursue complementary acquisitions when the appropriate opportunities present themselves. RESULTS OF OPERATIONS The following table sets forth certain operating information for the Company for the periods presented:
Three Months Ended Six Months Ended June 30, June 30, ------------------------ ------------------------ 2004 2003 2004 2003 ---------- ---------- ---------- ---------- Production: Oil and condensate (MBBLs) .................................. 404 534 804 1,096 Natural gas (MMCF) .......................................... 3,731 2,416 6,947 4,753 MMCFE ....................................................... 6,155 5,620 11,771 11,329 Average sales price including the effect of hedges: Oil and condensate (per BBL) ................................ 29.36 25.85 28.49 25.27 Natural gas (per MCF) ....................................... 5.30 4.40 5.40 4.73 Average sales price excluding the effect of hedges: Oil and condensate (per BBL) ................................ 37.05 28.81 35.70 29.74 Natural gas (per MCF) ....................................... 5.63 5.23 5.60 5.74 Average costs per unit of production (per MCFE): Lease operating expenses .................................... 0.99 1.49 1.12 1.52 General & administrative expense ............................ 0.48 0.51 0.49 0.48 Depreciation, depletion and amortization .................... 1.85 1.56 1.86 1.56
THREE MONTHS ENDED JUNE 30, 2004 AND 2003 NET LOSS Net loss for the three months ended June 30, 2004 was $1.1 million or $0.03 per share. Net loss for the three months ended June 30, 2003 was $2.9 million or $0.13 per share. Higher gas volumes, partially offset by lower oil volumes resulting from property sales in 2003, lower operating costs and higher commodity prices were the primary reasons for the improvement in the current quarter of 2004. A $4.1 million loss ($2.6 million, net of taxes) from the extinguishment of debt in the three-month period ended June 30, 2004 was the most significant contributor to the overall loss for the period. 24 MISSION RESOURCES CORPORATION OIL AND GAS REVENUES Oil revenues for the three months ended June 30, 2004 were $11.9 million, as compared to $13.8 million for the respective period in 2003. Oil production decreased 24% from 534,000 barrels in the three month period ended June 30, 2003 to 404,000 barrels for the same period of 2004. The sale of the Raccoon Bend and East Texas fields in the last half of 2003 accounted for the production decrease. Realized oil prices averaged $29.36 per barrel in the three month period ended June 30, 2004, as compared to $25.85 per barrel in the three month period ended June 30, 2003. Gas revenues increased 86% from $10.6 million reported for the quarter ended June 30, 2003 to $19.8 million for the quarter ended June 30, 2004. Gas production was up 54% compared to the same quarter of 2003 with 3,731 MMCF and 2,416 MMCF produced for the three month periods ended June 30, 2004 and 2003, respectively. The January and April 2004 acquisitions of the Jalmat field in Lea County, New Mexico, the LeBlanc #1 well in Vermilion Parish, Louisiana, the South Marsh Island wells and recompletions, Offshore Louisiana, and the High Island 553 well, Offshore Texas, account for most of the production increase. Realized gas prices averaged $5.30 per MCF, or 20% higher, in the three month period ended June 30, 2004 as compared to $4.40 per MCF in the comparable period of 2003. The realized prices discussed above include the impact of oil and gas hedges. Decreases of $4.3 million and $3.7 million related to hedging activity were reflected in oil and gas revenues for the three months ended June 30, 2003 and June 30, 2004, respectively.. EXTINGUISHMENT OF DEBT During the three months ended June 30, 2004, a loss of $4.1 million ($2.6 million, net of tax) related to our refinancing was recorded. This loss included the $1.6 million premium paid to redeem the remaining 10 7/8% Notes plus additional transaction costs. The write-off of deferred financing costs related to the cancelled debt, netted against the approximately $710,000 unamortized issuance premium on the 10 7/8% Notes, accounts for the remaining loss. INTEREST AND OTHER INCOME (LOSS) Interest and other income was a loss of $379,000 for the three months ended June 30, 2004 and was a gain of $187,000 for the three months ended June 30, 2003. Activity for 2003 included a gain of $208,000 from the amortization of OCI related to cancelled hedges and $36,000 was collected on previously written off receivables. In the second quarter of 2004, plugging and abandonment costs of $255,000 for properties that we no longer own and a loss on hedge ineffectiveness of $142,000 were our most significant items. These losses were partially offset by small items of miscellaneous income such as interest on invested cash. LEASE OPERATING EXPENSES Lease operating expenses decreased from $8.4 million in the three months ended June 30, 2003 to $6.1 million for the same period of 2004. This decline of approximately 27% is primarily related to our 2003 sales of high cost properties and the subsequent redeployment of proceeds into lower cost gas properties. Lease operating expenses decreased approximately 34% on a per MCFE basis between the periods to $0.99 per MCFE. In the second quarter of 2004, we recovered approximately $575,000 of previously paid Waddell Ranch field lease operating expenses. Exclusive of this recovery, recurring lease operating expense on an MCFE basis was $1.08 for the quarter ending June 30, 2004. TAXES OTHER THAN INCOME 25 MISSION RESOURCES CORPORATION The table below details the components of taxes other than income and their respective changes between the periods (dollars in thousands).
Three Months Ended June 30, Change ---------- ---------- ------------------------ 2004 2003 Amount Percent ---------- ---------- ---------- ---------- Production taxes .................................. $ 1,808 $ 1,209 $ 599 50% Property taxes .................................... 558 842 (284) (34%) Other taxes ....................................... 117 101 16 16% ---------- ---------- ---------- Taxes other than income ........................... $ 2,483 $ 2,152 $ 331 ========== ========== ==========
Taxes other than income increased from $2.2 million in the three months ended June 30, 2003 to $2.5 million for the same period of 2004. In general, production taxes increase as revenue and production increases. In 2004, the increase in production taxes was disproportionately larger than our revenue increases because Louisiana's tax rate on natural gas increased by 40% and a significant portion of our gas production increase is from Louisiana properties. Offsetting this increase is a 34% reduction in our property taxes. This is due to the sale of many Texas properties late in 2003, and their replacement with properties in New Mexico, which has lower property tax rates than Texas. DEPRECIATION, DEPLETION AND AMORTIZATION Depreciation, depletion and amortization ("DD&A") was $11.6 million for the three months ended June 30, 2004 and $8.9 million for the three months ended June 30, 2003. DD&A per MCFE has increased from $1.56 per MCFE in the second quarter of 2003 to $1.85 per MCFE in the second quarter of 2004. The increase in DD&A on a per MCFE basis reflects the impact of decreases in reserves due to property sales in 2003. The additions to reserves announced on July 29, 2004 will impact future DD&A rates. GENERAL AND ADMINISTRATIVE EXPENSES General and administrative expenses ("G&A") were $3.0 million in the three month period ended June 30, 2004, and were $2.9 million in the three month period ended June 30, 2003. This increase is primarily a result of lower overhead reimbursements on operated properties as a result of 2003 property sales. 26 MISSION RESOURCES CORPORATION INTEREST EXPENSE Interest expense decreased 16% to $5.4 million for the three months ended June 30, 2004 from $6.4 million in the same period in 2003. The following table details the components of interest and their respective changes between the periods (dollars in thousands).
Three Months Ended June 30, Change --------------------------- ------------------------ 2004 2003 Amount Percent ------------ ------------ ---------- ---------- Interest on senior notes, net of amortized premium ........... $ 4,243 $ 3,314 $ 929 28% Interest on term loan ........................................ 778 2,499 (1,721) (69%) Interest on credit facility .................................. 232 --- 232 100% Amortization of financing costs .............................. 347 579 (232) (40%) Other ........................................................ (155) 40 (195) (485%) ------------ ------------ ---------- Reported interest expense .............................. $ 5,445 $ 6,432 $ (987) ============ ============ ==========
Throughout 2003 and early 2004, interest expense on the term loan was based on an $80 million principal balance at 12.0% interest. On April 8, 2004, as part of the debt refinancing, the principal balance on the term loan was repaid and replaced with a senior secured revolving credit facility and a second lien term loan with rates between 3.1% and 6.4%. This resulted in a 69% reduction in interest paid in the three month period ending June 30, 2004, as compared to the same period in 2003. Partially offsetting this interest reduction was a one month overlap in interest payments resulting from the issuance of the 9 7/8% Notes approximately one month before the redemption of the 10 7/8% Notes. INCOME TAXES The provision for federal and state income taxes for the three months ended June 30, 2004 was based upon a 36.5% effective tax rate. There is a $5.1 million valuation allowance on deferred taxes applicable at June 30, 2004. 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 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. SIX MONTHS ENDED JUNE 30, 2004 AND 2003 NET INCOME (LOSS) Net loss for the six months ended June 30, 2004 was $746,000 or $0.02 per share. Net income for the six months ended June 30, 2003 was $7.7 million or $0.33 per share. The six months ended June 30, 2003 included a $22.4 million gain ($14.5 million, net of taxes) from the repurchase and retirement of 10 7/8% Notes in March 2003. Absent the large gain in 2003, the results for the six month period ended June 30, 2003 would have been a $6.9 million net loss. The improvement in the six month period ended June 30, 2004 resulted from increased gas production, higher oil and gas prices and lower lease operating expenses. OIL AND GAS REVENUES 27 MISSION RESOURCES CORPORATION Oil revenues for the six months ended June 30, 2004 were $22.9 million, as compared to $27.7 million for the respective period in 2003. Oil production decreased 27 % from 1,096 MBBLs in the six month period ended June 30, 2003 to 804 MBBLs for the same period of 2004. The sale of the Raccoon Bend and East Texas fields in the last half of 2003, accounts for the production decrease. Higher realized oil prices that averaged $28.49 per barrel in the six month period ended June 30, 2004, as compared to $25.27 per barrel in the six month period ended June 30, 2003 partially offset the oil production decline. Gas revenues increased 67% from $22.5 million reported for the six months ended June 30, 2003 to $37.5 million for the same period 2004. Gas production was up 46% compared to the same period of 2003 with 6,947 MMCF and 4,753 MMCF for the six month periods ended June 30, 2004 and 2003, respectively. The January and April 2004 acquisitions of the Jalmat field in Lea County, New Mexico, the LeBlanc #1 well in Vermilion Parish, Louisiana, the South Marsh Island wells and recompletions, Offshore Louisiana, and the High Island 553 well, Offshore Texas, account for most of the production increase. Higher realized gas prices that averaged $5.40 per MCF, or 14% higher, in the six month period ended June 30, 2004 as compared to $4.73 per MCF in the comparable period of 2003. The realized prices discussed above include the impact of oil and gas hedges. Decreases of $7.1 million and $9.7 million related to hedging activity were reflected in oil and gas revenues for the six months ended June 30, 2004 and 2003, respectively. EXTINGUISHMENT OF DEBT On March 28, 2003, Mission acquired approximately $97.6 million in principal amount of its 10 7/8% Notes for approximately $71.7 million, plus accrued interest. The difference between the principal amount of the 10 7/8% Notes retired and the amount paid to purchase the 10 7/8% Notes is recorded as a gain on the extinguishment of debt. The costs of the transaction and the removal of the amount of previously deferred subordinated debt financing costs related to the retired 10 7/8% Notes were subtracted from the gain resulting in the $22.4 million gain ($14.5 million, net of tax) on extinguishment of debt. In February and March 2004, an additional $30.0 million in principal amount of the 10 7/8% Notes were retired at a gain of $1.4 million on extinguishment of debt. During the three months ended June 30, 2004, a loss of $4.1 million ($2.6 million, net of tax) related to our refinancing was recorded. This loss included the $1.6 million premium paid to redeem the remaining 10 7/8% Notes plus additional transaction costs. The write-off of deferred financing costs related to the cancelled debt, netted against the approximately $710,000 unamortized issuance premium on the 10 7/8% Notes, account for the remaining loss. INTEREST AND OTHER INCOME (LOSS) Interest and other income was a loss of $1.2 million for the six months ended June 30, 2004 and was a gain of $0.7 million for the six months ended June 30, 2003. Activity for 2003 includes a gain of $416,000 from the amortization of OCI related to cancelled hedges and $315,000 of equity in the earnings of White Shoal Pipeline Corporation. In the first six months of 2004, bad debt expense of approximately $399,000 related to joint interest receivables, hedge ineffectiveness loss of $565,000 and plugging and abandonment costs of $293,000 on properties that we no longer own accounted for most of the loss. LEASE OPERATING EXPENSES 28 MISSION RESOURCES CORPORATION Lease operating expense decreased from $17.3 million in the six months ended June 30, 2003 to $13.2 million for the same period of 2004. This decline of approximately 24% is primarily related to our 2003 sales of high cost properties and the subsequent redeployment of proceeds into lower cost gas properties. Lease operating expenses decreased approximately 26% on a per MCFE basis between the periods to $1.12 per MCFE. In the second quarter of 2004, we recovered approximately $575,000 of previously paid Waddell Ranch field lease operating expenses. Exclusive of this recovery, recurring lease operating expense on an MCFE basis was $1.17 for the six months ending June 30, 2004. TAXES OTHER THAN INCOME The table below details the components of taxes other than income and their respective changes between the periods (dollars in thousands).
Six Months Ended June 30, Change --------------------------- ------------------------ 2004 2003 Amount Percent ------------ ------------ ---------- ---------- Production taxes ................................................ $ 2,953 $ 2,577 $ 376 15% Property taxes .................................................. 1,000 2,047 (1,047) (51%) Other taxes ..................................................... 224 221 3 1% ------------ ------------ ---------- Taxes other than income ......................................... $ 4,177 $ 4,845 $ (668) ============ ============ ==========
Taxes other than income decreased from $4.8 million in the six months ended June 30, 2003 to $4.2 million for the same period of 2004. As a result of the sale of Texas properties late in 2003, and their replacement with properties in New Mexico, that has lower property tax rates than Texas, our property taxes have been reduced by 51%. In general, production taxes increase as revenue and production increases. In 2004, the increase in production taxes was disporportionately larger than our revenue increases because Louisiana's tax rate on natural gas increased by 40%. DEPRECIATION, DEPLETION AND AMORTIZATION DD&A was $22.3 million for the six months ended June 30, 2004 and $17.9 million for the six months ended June 30, 2003. DD&A per MCFE has increased from $1.56 per MCFE in the six months ended June 30, 2003 to $1.86 per MCFE for the same period in 2004. The increase in DD&A on a per MCFE basis reflects the impact of decreases in reserves due to property sales in 2003. The additions to reserves announced on July 29, 2004 will impact future DD&A rates. GENERAL AND ADMINISTRATIVE EXPENSES G&A expenses were $5.8 million in the six month period ended June 30, 2004 and were $5.4 million in the six-month period ended June 30, 2003. Salary and benefits, travel for road show presentations and lower overhead reimbursement on operated properties as a result of 2003 property sales, contributed to the overall increase in G&A as compared to the six month period of 2003. Partially offsetting such increases was the completion of the extensive review of the land records incurred in 2003 and lower reserve engineering consulting fees in 2004. INTEREST EXPENSE 29 MISSION RESOURCES CORPORATION Interest expense decreased 6% to $11.7 million for the six months ended June 30, 2004 from $12.5 million for the same period in 2003. The following table details the components of interest and their respective changes between the periods (dollars in thousands).
Six Months Ended June 30, Change --------------------------- ------------------------ 2004 2003 Amount Percent ------------ ------------ ---------- ---------- Interest rate swap (gain) loss .................................. $ --- $ (520) $ 520 100% Interest on senior notes, net of amortized premium .............. 7,132 9,440 (2,308) (24%) Interest on term loan ........................................... 3,261 2,499 762 30% Interest on credit facility ..................................... 232 50 182 364% Amortization of financing costs ................................. 1,032 1,058 (26) (2%) Other ........................................................... 50 (68) 118 174% ------------ ------------ ---------- Reported interest expense ................................. $ 11,707 $ 12,459 $ (752) ============ ============ ==========
The interest rate swap was cancelled in February 2003 and was not replaced. Throughout 2003 and early 2004, we repurchased approximately $137.6 million in 10 7/8% Notes. On May 10, 2004 the remaining $87.4 million of 10 7/8% Notes were redeemed. This resulted in a 24% reduction in interest paid in the first six months of 2004 as compared to the same period in 2003. INCOME TAXES The provision for federal and state income taxes for the six months ended June 30, 2004 was based upon a 36.5% effective tax rate. There was a $5.1 million valuation allowance on deferred taxes applicable at June 30, 2004. 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 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. FINANCIAL CONDITION In 2002, management began evaluating various alternatives to improve Mission's financial position. In 2003 and the first half of 2004, the following steps were taken to enhance our financial condition: - The March 2003 repurchase of approximately $97.6 million of 10 7/8% Notes financed with an $80.0 million term loan facility. - The establishment of a new revolving credit facility in June 2003, making $12.5 million available for short-term borrowings. - The issuance of 16.75 million shares of common stock in exchange for $40 million of the 10 7/8% Notes in three transactions in December 2003, February 2004 and March 2004. - The issuance of $130 million of the 9 7/8% Notes, and the simultaneous establishment of a new senior secured revolving credit facility and a new second lien term loan. - The redemption of the remaining $87.4 million aggregate principal amount of the 10 7/8% Notes at a premium using a portion of the proceeds from the issuance of the 9 7/8% Notes. 30 MISSION RESOURCES CORPORATION - The repayment in full of the prior term loan facility using the remaining portion of the proceeds from the issuance of the 9 7/8% Notes, together with $21.5 million that was advanced under the new senior secured revolving credit facility and $25 million that was borrowed under the new second lien term loan. After completion of these actions, our outstanding indebtedness totaled $169.5 million at June 30, 2004. The nature of our indebtedness as of June 30, 2004 and December 31, 2003 is summarized on the table below (amounts in thousands).
June 30, December 31, 2003 2004 ------------ ------------ Term loan facility ........................................................ $ --- $ 80,000 10 7/8% Notes ............................................................. --- 117,426 Unamortized premium on 107/8% Notes ....................................... --- 1,070 9 7/8% Notes .............................................................. 130,000 Second lien term loan facility ............................................ 25,000 Senior secured revolving credit facility(1) ............................... 14,500 ------------ ------------ Total debt ................................................................ $ 169,500 $ 198,496 ============ ============
- ---------------- (1) $35.4 million was available at June 30, 2004 for additional borrowings under this facility. On July 20, 2004, Mission announced that it had retained Petrie Parkman & Co., Inc. to assist in evaluating strategic alternatives to enhance stockholder value. We cannot assure you that any transaction will be entered into or completed as a result of this process. LIQUIDITY AND CAPITAL RESOURCES Mission's principal sources of capital for the last three years have been cash flow from operations, debt sources such as the issuance of bonds or credit facility borrowings, issuances of common stock, and the sale of oil and gas properties. Our primary uses of capital have been the funding of exploration and development projects, property acquisitions and the refinancing of long term debt. At June 30, 2004, we had negative working capital of $13.9 million compared to a negative working capital, excluding $24.9 million in restricted cash, of $8.6 million at December 31, 2003. The decrease in working capital can primarily be attributed to increases in our commodity derivative liabilities and accrued liabilities partially offset by increases in our cash, receivables and prepaid expenses. The size of our current liability related to commodity derivatives has increased $4.5 million, as commodity prices increased, contributing to the working capital reduction. The hedge liability represents the amount by which actual commodity prices exceed the price caps on 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. Our cash balance increased by approximately $3.3 million from December 31, 2003 to June 30, 2004. We received $3.0 million on June 30, 2004 for the sale of our rights to the Tranquillon Ridge Prospect, Offshore California. 31 MISSION RESOURCES CORPORATION Two components of accrued liabilities account for most of the increase in accrued liabilities, royalties payable and accrued capital expenditures. The increase in royalties payable included approximately $4.6 million of royalties that are awaiting completion of title opinions. Upon receipt of the title opinions and executed division orders, Mission will be required to make payment. This payable will increase in size as the well produces each month until paid. The $1.1 million increase in accrued capital expenditures results from increased exploratory and development activities in the first half of 2004. After considering the impact of these working capital changes and our forecasts of future results of operations, we believe that cash flows from operating activities combined with our ability to control the timing of substantially all of our future exploration and development requirements will provide us with the flexibility and liquidity to meet our planned capital requirements for 2004. In addition, our revolving credit facility has $15.4 million available for general corporate purposes, including exploratory and developmental drilling, and $20.0 million available for acquisitions of oil and gas properties as of June 30, 2004. CASH FLOWS Net cash flow provided by operations was $29.5 million and $10.1 million for the six month periods ending June 30, 2004 and 2003, respectively. The period-to-period increase in cash flow was primarily caused by significantly higher gas revenues, reduced operating costs and reductions in cash interest expense. Net cash used in investing activities for the six month period ending June 30, 2004 and 2003 was $44.3 million and $12.9 million, respectively. We spent $30.3 million to acquire oil and gas properties in the six month period ended June 30, 2004, compared to approximately $453,000 for the same period of 2003. We invested $22.4 million in exploration and development of oil and gas properties for the six-month period ended June 30, 2004 compared to $14.9 million for the same period of 2003. Proceeds from property sales were $8.6 million and $3.2 million for the six month periods ending June 30, 2004 and 2003, respectively. Net cash provided by financing activities was $18.1 million and $3.9 million in the six month periods ending June 30, 2004 and 2003, respectively. The largest variance is $24.9 million of cash held for reinvestment to acquire the Jalmat field in January 2004. A capital budget of $34.0 million was originally adopted for the year 2004, with approximately 60% for development, 20% for exploration and 20% for seismic, land or corporate assets. The budget did not include an estimate for costs of major acquisitions. As cash flows from operations in 2004 exceed budgeted levels, we have allocated 50% of such excess cash flows, plus the $3.0 million proceeds from the sale of our rights to Tranquillon Ridge, to capital projects with the remaining portion to be used to reduce long-term debt. Using estimated prices of $35.00 per BBL and $5.50 per MMBTU, we believe that we will spend approximately $48.0 million of cash flow on capital expenditures in 2004 without incurring additional indebtedness. We believe that cash flows from operating activities combined with our ability to control the timing of substantially all of our future exploration and development requirements will provide us with the flexibility and liquidity to meet our planned capital requirements for 2004. 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. Lower prices may also reduce the amount of natural gas and oil that we can economically produce. Lower prices and/or 32 MISSION RESOURCES CORPORATION lower production may decrease revenues and cash flows, thus reducing the amount of financial resources available to meet our capital requirements. 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 Jalmat field acquisition in January 2004 and the debt for equity swaps in February and March 2004, our contractual obligations and commercial commitments changed. Additionally, in April and May of 2004, we substantially refinanced all Mission's existing debt; therefore, the following tables reflect future estimated payments related to Mission's obligations and commitments after such changes (amounts in thousands):
Contractual Cash Obligations: ** Total 2004 2005 2006 2007 2008 Thereafter - ----------------------------------- -------- -------- -------- -------- -------- -------- ---------- Long Term Debt* ................... $216,655 $ 6,419 $ 12,838 $ 12,838 $ 12,838 $ 12,838 $ 158,884 Term Loan ......................... 31,095 819 1,625 1,625 1,625 25,401 --- Operating Leases .................. 2,253 866 709 677 1 --- --- -------- -------- -------- -------- -------- -------- ---------- Total Contractual Obligations...... $250,003 $ 8,104 $ 15,172 $ 15,140 $ 14,464 $ 38,239 $ 158,884 ======== ======== ======== ======== ======== ======== ==========
- ----------------- * Includes principal of $130 million on the 9 7/8% Notes due 2011 and Note interest accrued monthly and payable April 1st and October 1st of each year. ** Due to the completion of the debt refinancing in the second quarter of 2004, the Long Term Debt and Term Loan activity was recalculated to reflect current obligations and commitments.
Commercial Commitments: Total 2004 2005 2006 2007 2008 Thereafter - ----------------------------------- -------- -------- -------- -------- -------- -------- ---------- Credit Facility ................... $ 16,285 $ 327 $ 649 $ 649 $ 14,660 $ --- $ --- Other Commercial Commitments ...... 4,980 4,071 336 262 173 138 --- -------- -------- -------- -------- -------- -------- ---------- Total Commercial Commitments ...... $ 21,265 $ 4,398 $ 985 $ 911 $ 14,833 $ 138 $ --- ======== ======== ======== ======== ======== ======== ==========
33 MISSION RESOURCES CORPORATION SUBSEQUENT EVENTS On July 20, 2004, the Company announced that it had retained Petrie Parkman & Co., Inc. to assist in evaluating strategic alternatives to enhance stockholder value. We cannot assure you that any transaction will be entered into or completed as a result of this process. On July 29, 2004, the Company released a mid-year reserve update based upon the review of Netherland, Sewell & Associates, Inc. The reserves were priced at June 30, 2004 period end prices of $36.90 per BBL of oil and $6.02 per MMBTU of natural gas. Estimated net proved oil and gas reserves at June 30, 2004 were approximately 217 BCFE and the 10% present value of future cash flows for such reserves is approximately $407 million. We more than replaced production through reserve additions and extensions. The majority of the extensions are proved undeveloped locations identified in the Jalmat field. The Jalmat field acquisition in January and April 2004 is the majority of the 32.1 BCFE purchased reserves. Set forth below is a reconciliation of our yearend 2003 reserves to those reported as of June 30, 2004.
BCFE ----- Proved reserves at beginning of year.................... 177.9 Revisions of previous estimates......................... (9.7) Extensions and discoveries.............................. 31.9 Production.............................................. (11.8) Sales of reserves in-place.............................. (3.4) Purchase of reserves in-place........................... 32.1 ----- Proved reserves at June 30, 2004........................ 217.0 =====
In general, estimates of economically recoverable oil and natural gas reserves and of the future net cash flows therefrom are based upon a number of factors, such as historical production from the properties, assumptions concerning future oil and natural gas prices, future operating costs and the assumed effects of regulation by governmental agencies, all of which may vary considerably from actual results. All such estimates are to some degree speculative, and classifications of reserves are only attempts to define the degree of speculation involved. Estimates of the economically recoverable oil and natural gas reserves attributable to any particular group of properties, classifications of such reserves based on risk of recovery and estimates of future net cash flows expected there from, prepared by different engineers or by the same engineers at different times, may vary. Mission's actual production, revenues, severance and excise taxes and development and operating expenditures with respect to its reserves will vary from such estimates, and such variances could be material. 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. 34 MISSION RESOURCES CORPORATION 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, on a prospective basis using the units of production method based upon the ratio of current production to total proved reserves. Depreciation, depletion and amortization is a significant component of our net income. Proportionally, it represented 36% and 35% of our total oil and gas revenues for the six month periods ended June 30, 2004 and 2003, respectively. Any reduction in proved reserves without a corresponding reduction in capitalized costs will increase the depletion rate. If, during 2004, our reserves increase by 10%, our depletion per MCFE would decrease approximately $0.17, or 9%; however, a 10% decrease in reserves would have an 11% impact, increasing depletion per MCFE by approximately $0.21. 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 reserve engineers. These reserve estimates 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. 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 filed for the fiscal year ended December 31, 2003 for general cautions concerning the reliability of reserve and future net revenue estimates by reserve engineers. 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 six months ended June 30, 2004 and 2003. 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 35 MISSION RESOURCES CORPORATION 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 June 30, 2004 were $36.90 per barrel and $6.02 per MMBTU. A significant reduction in these prices at a future measurement date could trigger a full cost ceiling impairment. As an illustration, had oil and gas prices at June 30, 2004 been 10% lower, we would have been 68% closer to a ceiling impairment. Our hedging program would serve to mitigate some of the impact of any price decline. If our hedges were excluded from the ceiling calculation, we would have been 60% 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. 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 in our hedges, which could represent either gains or losses, is reported when calculated at the end of each accounting period as part of the interest and other income line of the Statement of Operations. 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 merely the market consensus of forecast price trends. The results of our fair value calculation cannot be expected to represent exactly the fair value of our commodity hedges. 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. In order to minimize the impact on managements' estimates on our ineffectiveness calculation, we began using this same software to calculate any ineffectiveness in our hedge relationships. The software facilitates the complex calculations and uses current prices downloaded to the database, but the results are nevertheless estimates. The most significant estimate used in the ineffectiveness calculation is our estimate of future prices. We use the forward price curves posted for each of our contract prices. REVENUE RECOGNITION 36 MISSION RESOURCES CORPORATION 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 June 30, 2004, the Company had recorded a net liability of approximately $899,000, representing approximately 378,000 MCF at an average price of $2.37 per MCF, related to imbalances on properties at or nearing depletion. The net liability accrued as of June 30, 2003, was $1,236,000 representing 434,525 MCF at an average price of $2.84 per MCF. 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. Exclusive of the liability recorded for properties at or nearing depletion (see discussion above), the Company's unrecorded imbalance, valued at current prices would be a $2.1 million liability. ASSET RETIREMENT, IMPAIRMENT OR DISPOSAL 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 such date, inflation adjust those 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 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 reduce the liability as abandonment costs are incurred. We will accrete the liability quarterly using the period and effective interest rates determined at implementation. As new wells are drilled or purchased their initial asset retirement cost and liability will be calculated and recorded. Should either the estimated life or the estimated abandonment costs of a property change upon our quarterly review, a new calculation is performed using the same methodology of taking the abandonment cost and inflating it forward to its abandonment date and then discounting it back to the present using our risk-adjusted rate. The carrying value of the asset retirement obligation is adjusted to the newly calculated value, with a corresponding offsetting adjustment to the asset retirement cost; therefore, abandonment costs will almost always approximate the estimate. We have developed a process through which to track and monitor the obligations for each asset following implementation of SFAS No. 143. 37 MISSION RESOURCES CORPORATION When wells are sold the related liability and asset costs are removed from the Balance Sheet. Any difference between the two remains in the full cost pool. SFAS No. 143 does not specifically address the proper accounting to be applied by a full cost method company when properties are sold. A May 23, 2003 letter to the FASB and the SEC from a group of concerned companies makes inquiries and outlines possible alternatives, including our current treatment. Should a clarification be issued, there is a chance that Mission's treatment will be required to change and income would be impacted. As with previously discussed estimates, the estimation of our initial liability and its subsequent remeasurements 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 annually and to provide us with estimates of abandonment costs. We used the remaining estimated useful life from the yearend reserve reports by Netherland, Sewell & Associates, Inc. in estimating when abandonment could be expected for each property. 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. INCOME TAXES Mission has accumulated substantial income tax deductions that have not yet been used to reduce cash income taxes actually paid with the filing of our income tax returns. These accumulated deductions are commonly referred to as "net operating loss carryforwards" or "NOLs". Our NOLs are, subject to a number of restrictions, available to reduce cash taxes that may become owed in future years. In accordance with the accounting for income taxes under SFAS No. 109, we record a deferred tax asset and a reduction of our tax expense for our NOLs. If we estimate that some or all of our NOLs are more likely than not going to expire or otherwise not be utilized to reduce future tax, we record a valuation allowance to remove the benefit of those NOLs from our financial statements One of the restrictions on the future use of NOLs is contained in Section 382 of the Internal Revenue Code. In general, Section 382 provides that the amount of existing NOLs that may be used to offset future taxable income after the occurrence of an "ownership change" (as defined solely for Section 382 purposes) is limited to an amount that is determined, in part, by the fair market value of the enterprise at the time the ownership change occurred. The fair market value of the enterprise's individual assets and the timing in which the value of those assets are realized are also factors that impact the amount of NOLs available under Section 382 ("382 Limitation"). As a result of our issuance of common stock in exchange for the retirement of a portion of our 10 7/8% senior subordinated notes in December 2003, we experienced an "ownership change" as defined under Section 382. Consequently, we have included the estimated impact that a 382 Limitation may have upon the future availability of our NOLs as part of our evaluation under SFAS 109. Consistent with previously described estimates, the initial estimation of the future benefit of our NOLs is dependent upon many variables and is subject to change. Management's judgment on these variables is based upon the input of qualified third parties when possible. We have used information derived from the public equity markets as well as data provided by an independent engineering firm to assist us with determining fair market values. We have engaged an international independent public accounting firm to assist us in applying the numerous and complicated tax law requirements. However, despite our attempt to make the most accurate estimates possible, the ultimate utilization of our NOLs is highly dependent upon our actual production and the realization of taxable income in future periods. 38 MISSION RESOURCES CORPORATION FORWARD-LOOKING STATEMENTS This quarterly report on Form 10-Q includes "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended (the "Securities Act"), and Section 21E of the Securities Exchange Act of 1934, as amended ("Exchange Act"). All statements other than statements of historical fact are forward-looking statements. Forward-looking statements are subject to certain risks, trends and uncertainties that could cause actual results to differ materially from those projected. Among those risks, trends and uncertainties are our estimate of the sufficiency of existing capital sources, our highly leveraged capital structure, our ability to raise additional capital to fund cash requirements for future operations, the uncertainties involved in estimating quantities of proved oil and natural gas reserves, in prospect development and property acquisitions and in projecting future rates of production, the timing of development expenditures and drilling of wells, and the operating hazards attendant to the oil and gas business. Although we believe that in making such forward-looking statements our expectations are based upon reasonable assumptions, such statements may be influenced by factors that could cause actual outcomes and results to be materially different from those projected. We cannot assure you that the assumptions upon which these statements are based will prove to have been correct. 39 MISSION RESOURCES CORPORATION 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, our operating results can be significantly affected by fluctuations in commodity prices caused by changing market forces. We periodically seek to reduce our exposure to price volatility by hedging a portion of 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. These collars assure that the NYMEX prices we receive on the hedged production will be no lower than the price floor and no higher than the price ceiling. The oil hedges that are swaps fix the price to be received. Our 12-month average realized price, excluding hedges, for natural gas per MCF was $0.11 less than the NYMEX MMBTU price. Our 12-month average realized price, excluding hedges, for oil was $1.05 per BBL less than NYMEX. Realized prices differ from NYMEX as a result of factors such as the location of the property, the heating content of natural gas and the quality of oil. The gas differential stated above excludes the impact the Mist field gas production that is sold at an annually fixed price. By removing the price volatility from hedged volumes of oil and natural gas production, we have mitigated, but not eliminated, the potential negative effect of declining prices on our operating cash flow. The potential for increased operating cash flow due to increasing prices has also been reduced. If all our commodity hedges were to settle at June 30, 2004 prices, our cash flows would decrease by $16.4 million; however the actual settlement of our hedges will increase or decrease cash flows over the period of the hedges at varying prices. As of August 3, 2004, Mission had the following hedges in place: OIL HEDGES
NYMEX NYMEX PRICE PRICE BBLS FLOOR/SWAP CEILING PERIOD PER DAY TOTAL BBLS TYPE AVG. AVG. - ---------------- ------- ---------- ------ ---------- ------- Third Qtr. 2004 2,500 230,000 Swap $24.30 N/A Fourth Qtr. 2004 2,500 230,000 Swap $23.97 N/A Fourth Qtr. 2004 500 46,000 Collar $35.00 $ 46.15 First Qtr. 2005 2,500 225,000 Collar $28.71 $ 32.78 Second Qtr. 2005 2,000 182,000 Collar $28.50 $ 31.82 Third Qtr. 2005 2,000 184,000 Collar $28.13 $ 31.04 Fourth Qtr. 2005 2,000 184,000 Collar $27.75 $ 30.65 First Qtr. 2006 750 67,500 Collar $30.15 $ 37.07 Second Qtr. 2006 750 68,250 Collar $30.10 $ 36.35 Third Qtr. 2006 750 69,000 Collar $29.41 $ 36.40 Fourth Qtr. 2006 750 69,000 Collar $29.34 $ 35.92
40 MISSION RESOURCES CORPORATION GAS HEDGES
NYMEX NYMEX PRICE MMBTU TOTAL PRICE FLOOR CEILING PERIOD PER DAY MMBTU TYPE AVG. AVG. - ---------------- ------- --------- ------ ----------- ------- Third Qtr. 2004 19,000 1,748,000 Collar $4.71 $5.65 Fourth Qtr. 2004 16,500 1,518,000 Collar $4.64 $5.73 First Qtr. 2005 12,000 1,080,000 Collar $4.85 $8.85 Second Qtr. 2005 8,000 728,000 Collar $4.66 $5.83 Third Qtr. 2005 8,000 736,000 Collar $4.66 $5.80 Fourth Qtr. 2005 8,000 736,000 Collar $4.66 $6.28 First Qtr. 2006 2,000 180,000 Collar $5.00 $8.00
These commodity derivative agreements expose Mission to counter party credit risk to the extent the counter party is unable to met its monthly settlement commitment to Mission. Mission believes it selects creditworthy counter parties to its hedge transactions and has entered into all of its derivative positions with only two different counter parties in order to minimize this risk. Each of Mission's counter parties 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 received a fixed interest rate and paid 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 counter party 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 during the quarter ended March 31, 2003. Our new senior secured revolving credit facility and term loan have floating interest rates and as such exposes us to interest rate risk. If interest rates were to increase 10% over their current levels, and at our current level of borrowing, our annualized interest expense would increase $211,000 or 1.4%. We have considered, but have not yet entered into, derivative transactions designed to mitigate interest rate risk. ITEM 4. CONTROLS AND PROCEDURES 41 MISSION RESOURCES CORPORATION 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. CHANGES IN INTERNAL CONTROLS There have been no significant changes in Mission's internal controls over financial reporting during the period covered by this report that have materially affected, or are reasonably likely to materially affect, Mission's control over financial reporting. 42 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, USE OF PROCEEDS AND ISSUER PURCHASES OF EQUITY SECURITIES None. ITEM 3. DEFAULTS UPON SENIOR SECURITIES None. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS On May 19, 2004, the 2004 Annual Meeting of Stockholders was held in Houston, Texas. At the meeting, the stockholders elected the following people to serve as directors of the Company until the 2005 Annual Meeting of Stockholders, or until their successors are duly elected and qualified:
Director For Withheld -------- --- -------- Robert L. Cavnar 33,127,889 142,141 Joseph N. Jaggers 33,122,830 147,200 David A.B. Brown 33,079,989 190,041 Robert R. Rooney 33,069,986 200,044 Herbert C. Williamson, III 33,072,906 197,124
The stockholders also adopted the 2004 Incentive Plan as follows:
For Against Abstain --- ------- ------- Incentive Plan 16,274,921 2,046,189 71,182
ITEM 5. OTHER INFORMATION On August 4, 2004, the Compensation Committee of the Board of Directors of the Company granted to Robert L. Cavnar, Chairman, President and CEO of the Company, a nonqualified option to acquire 800,000 shares of the Company's common stock. This option has been granted to replace the grant of 800,000 share appreciation rights made to Mr. Cavnar in November, 2003. The option was granted under the 2004 Incentive Plan, has a term of 10 years, is fully vested and has a strike price of $.55 per share, which is the same exercise price as the surrendered share appreciation rights. As a result of this option having an exercise price below the current market value for the Company's common stock, the Company will recognize a noncash compensation expense of approximately $4.1 million ($2.6 million, net of tax) in the third quarter of 2004. -43- 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 they are identified by the number indicated. 4.1 Purchase Agreement dated April 1, 2004, among the Company, the Guarantors named therein and the Initial Purchasers named therein relating to the Company's 9 7/8% Senior Notes due 2011 (incorporated by reference to Exhibit 4.1 to the Company's Current Report on Form 8-K/A filed on April 15, 2004). 4.2 Indenture dated as of April 8, 2004, among the Company, the Guarantors named therein and The Bank of New York, as Trustee, relating to the Company's 9 7/8% Senior Notes due 2011 (incorporated by reference to Exhibit 4.2 to the Company's Current Report on Form 8-K/A filed on April 15, 2004). 4.3 Exchange and Registration Rights Agreement dated s of April 8, 2004, among the Company, the Guarantors named therein and the Initial Purchasers named therein relating to the Company's 9 7/8% Senior Notes due 2011 (incorporated by reference to Exhibit 4.3 to the Company's Current Report on Form 8-K/A filed on April 15, 2004). 10.1 Credit Agreement dated as of April 8, 2004, among the Company, as Borrower, Wells Fargo Bank, National Association, as Lead Arranger and Administrative Agent, and the Lenders signatory thereto (incorporated by reference to Exhibit 10.1 to the Company's Current Report on Form 8-K/A filed on April 15, 2004). 10.2 Term Loan Agreement dated as of April 8, 2004, among the Company, as Borrower, Guggenheim Corporate Funding, LLC, as Collateral Agent, and the Lenders signatory thereto (incorporated by reference to Exhibit 10.2 to the Company's Current Report on Form 8-K/A filed on April 15, 2004). 10.3 Intercreditor Agreement dated as of April 8, 2004, by and between the Company, the Company's Subsidiaries, Wells Fargo Bank, National Association and Guggenheim Corporate Funding LLC (incorporated by reference to Exhibit 10.2 to the Company's Current Report on Form 8-K/A filed on April 15, 2004). 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. 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. -44- MISSION RESOURCES CORPORATION 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. 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 April 1, 2004 regarding the agreement to sell $130.0 million aggregate principal amount of 9 7/8% Senior Notes due 2011 in a private offering. (ii) The Company filed a Current Report on Form 8-K on April 8, 2004 (as amended by a Current Report on Form 8-K/A filed on April 15, 2004) regarding the completion of its private offering of $130.0 million of 9 7/8% Senior Notes due 2011 and its entering into a new senior secured revolving credit facility with a syndicate of lenders. (iii) The Company filed a Current Report on Form 8-K on April 15, 2004, regarding its acquisition of approximately 14% additional working interest in the Jalmat Field in Lea County, N.M. (iv) The Company filed a Current Report on Form 8-K on May 4, 2004 regarding the completion and testing of the #1 Barry well in DeWitt County, Texas and the recompletion of the High Island Block A-553 #A-7 in offshore Texas federal waters. (v) The Company filed a Current Report on Form 8-K on May 6, 2004 in order to furnish the information included in its earnings press release for the quarter ended March 31, 2004. (vi) The Company filed a Current Report on Form 8-K on May 19, 2004 regarding its adding EBITDA and Discretionary Cash Flow guidance for the full year of 2004. (vii) The Company filed a Current Report on Form 8-K on June 7, 2004 in order to update the description of its capital stock. (viii) The Company filed a Current Report on Form 8-K on June 10, 2004 regarding its entering into new gas hedging agreements. (ix) The Company filed a Current Report on Form 8-K on June 30, 2004 announcing that it had been added to the Russell 3000 index effective June 25, 2004. -45- 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: August 10, 2004 By: /s/ Robert L. Cavnar ------------------------------ Robert L. Cavnar Chairman and Chief Executive Officer Date: August 10, 2004 By: /s/ Richard W. Piacenti ----------------------------- Richard W. Piacenti Executive Vice President and Chief Financial Officer -46- MISSION RESOURCES CORPORATION INDEX TO EXHIBITS 4.1 Purchase Agreement dated April 1, 2004, among the Company, the Guarantors named therein and the Initial Purchasers named therein relating to the Company's 9 7/8% Senior Notes due 2011 (incorporated by reference to Exhibit 4.1 to the Company's Current Report on Form 8-K/A filed on April 15, 2004). 4.2 Indenture dated as of April 8, 2004, among the Company, the Guarantors named therein and The Bank of New York, as Trustee, relating to the Company's 9 7/8% Senior Notes due 2011 (incorporated by reference to Exhibit 4.2 to the Company's Current Report on Form 8-K/A filed on April 15, 2004). 4.3 Exchange and Registration Rights Agreement dated s of April 8, 2004, among the Company, the Guarantors named therein and the Initial Purchasers named therein relating to the Company's 9 7/8% Senior Notes due 2011 (incorporated by reference to Exhibit 4.3 to the Company's Current Report on Form 8-K/A filed on April 15, 2004). 10.1 Credit Agreement dated as of April 8, 2004, among the Company, as Borrower, Wells Fargo Bank, National Association, as Lead Arranger and Administrative Agent, and the Lenders signatory thereto (incorporated by reference to Exhibit 10.1 to the Company's Current Report on Form 8-K/A filed on April 15, 2004). 10.2 Term Loan Agreement dated as of April 8, 2004, among the Company, as Borrower, Guggenheim Corporate Funding, LLC, as Collateral Agent, and the Lenders signatory thereto (incorporated by reference to Exhibit 10.2 to the Company's Current Report on Form 8-K/A filed on April 15, 2004). 10.3 Intercreditor Agreement dated as of April 8, 2004, by and between the Company, the Company's Subsidiaries, Wells Fargo Bank, National Association and Guggenheim Corporate Funding LLC (incorporated by reference to Exhibit 10.2 to the Company's Current Report on Form 8-K/A filed on April 15, 2004). 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. 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. 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. 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-31.1 2 h17555exv31w1.txt CERTIFICATION OF CEO PURSUANT TO RULE 13A-14A/15D-14A 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. August 10,, 2004 /s/ Robert L. Canvar - -------------------- Robert L. Cavnar Chairman, President and Chief Executive Officer EX-31.2 3 h17555exv31w2.txt CERTIFICATION OF CFO PURSUANT TO RULE 13A-14A/15D-14A 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. August 10,, 2004 /s/ Richard W. Piacenti - ----------------------- Richard W. Piacenti Executive Vice President and Chief Financial Officer EX-32.1 4 h17555exv32w1.txt CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350 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 annual report on Form 10-Q (the "FORM 10-Q") for the quarter ended June 30, 2004 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: August 10,, 2004 /s/ Robert L. Cavnar -------------------- Subscribed and sworn to before me this 10th day of August 2004 /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 5 h17555exv32w2.txt CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350 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 annual report on Form 10-Q (the "FORM 10-Q") for the quarter ended June 30, 2004 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: August 10, 2004 /s/ Richard W. Piacenti ----------------------- Subscribed and sworn to before me this 10th day of August 2004 /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-----