-----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, PXF5Dc36v0w7wSRHl2ZVarG73VlDZH1vB2CyfQcMWpVK1snRLNIDW773OnW+sqOw fw3saKAYuvpoCrX9EjuEiw== 0000899243-01-000777.txt : 20010409 0000899243-01-000777.hdr.sgml : 20010409 ACCESSION NUMBER: 0000899243-01-000777 CONFORMED SUBMISSION TYPE: 10KSB40 PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 20001231 FILED AS OF DATE: 20010402 FILER: COMPANY DATA: COMPANY CONFORMED NAME: 3TEC ENERGY CORP CENTRAL INDEX KEY: 0000903267 STANDARD INDUSTRIAL CLASSIFICATION: CRUDE PETROLEUM & NATURAL GAS [1311] IRS NUMBER: 631081013 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10KSB40 SEC ACT: SEC FILE NUMBER: 001-14745 FILM NUMBER: 1588893 BUSINESS ADDRESS: STREET 1: TWO SHELL PLZ STREET 2: 777 WALKER STE 2400 CITY: HOUSTON STATE: TX ZIP: 77002 BUSINESS PHONE: 7132226275 MAIL ADDRESS: STREET 1: TWO SHELL PLZ STREET 2: 777 WALKER STE 2400 CITY: HOUSTON STATE: TX ZIP: 77002 FORMER COMPANY: FORMER CONFORMED NAME: MIDDLE BAY OIL CO INC DATE OF NAME CHANGE: 19930504 10KSB40 1 0001.txt FORM 10-KSB - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ---------------- FORM 10-KSB ---------------- (Mark One) [X] Annual report under Section 13 or 15(d) of the Securities Exchange Act of 1934 For the fiscal year ended December 31, 2000 [_] Transition report under Section 13 or 15(d) of the Securities Exchange Act of 1934 For the transition period from to Commission file number: 001-14745 3TEC ENERGY CORPORATION (Name of Small Business Issuer in Its Charter) Delaware 63-1081013 (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) Two Shell Plaza, Suite 2400 777 Walker Street Houston, Texas 77002 (713) 821-7100 (Address, including zip code, and telephone number, including area code, of registrant's principal executive offices) ---------------- Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: Common Stock, $.02 Par Value Series C Convertible Redeemable Preferred Stock, $.02 Par Value Check whether the Registrant (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 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 [_] Check if disclosure of delinquent filers in response to Item 405 of Regulation S-B is not contained in this form, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-KSB or any amendment to this Form 10-KSB. [X] Revenues of Registrant for fiscal year ended December 31, 2000 are $104,823,153. The aggregate market value as of March 21, 2001 of voting and nonvoting stock held by nonaffiliates of the Registrant was $192,671,375. As of March 21, 2001 the Registrant had 14,623,801 shares of Common Stock, $.02 par value outstanding. The Registrant's definitive proxy statement, to be filed pursuant to Regulation 14A on or before May 1, 2001, is incorporated by reference for the information set forth in Part III of this Form 10-KSB. Transitional Small Business Disclosure Format: [_] Yes [X] No - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- TABLE OF CONTENTS
Page PART I ---- Item 1. Business Background........................................................... 4 Recent Developments.................................................. 4 Business Strategy.................................................... 6 Marketing............................................................ 6 Competition.......................................................... 7 Regulation........................................................... 7 Employees............................................................ 9 Our Executive Offices................................................ 9 Item 2. Properties Description of Our Properties........................................ 10 Natural Gas and Oil Reserves......................................... 11 Volumes, Prices and Operating Expenses............................... 12 Development, Exploration and Acquisition Capital Expenditures........ 12 Drilling Activity.................................................... 13 Productive Wells..................................................... 13 Acreage Data......................................................... 13 Current Activities................................................... 13 Item 3. Legal Proceedings................................................ 14 Item 4. Submission of Matters to Vote of Security Holders................ 14 PART II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.......................................................... 15 Item 6. Management's Discussion and Analysis of Financial Condition and Results of Operations............................................ 16 Overview............................................................. 16 Certain Accounting Practices......................................... 16 Liquidity and Capital Resources...................................... 16 Results of Operations................................................ 17 Year Ended December 31, 2000, Compared With Year Ended December 31, 1999................................................................ 18 Year Ended December 31, 1999, Compared With Year Ended December 31, 1998................................................................ 19 Item 7. Financial Statements............................................ 19 Item 8. Changes In and Disagreements with Accountants on Accounting and Financial Disclosure............................................ 19 PART III Item 9. Directors and Executive Officers of the Registrant............... 20 Item 10. Executive Compensation.......................................... 20 Item 11. Security Ownership of Certain Beneficial Owners and Management.. 20 Item 12. Certain Relationships and Related Transactions.................. 20 Item 13. Exhibits, Financial Statement Schedules and Reports on Form 8- K............................................................... 20 Glossary of Certain Oil and Gas Terms................................ 24 Signatures........................................................... 26 Power of Attorney.................................................... 26
Item 13(a) includes the Index of Exhibits to be filed with the Securities and Exchange Commission relative to this Report. 2 Cautionary Statement About Forward-Looking Statements Some of the information in this Annual Report on Form 10-KSB, including information incorporated by reference, contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities and Exchange Act of 1934. The forward-looking statements speak only as of the date made and the Company undertakes no obligation to update such forward-looking statements. These forward-looking statements may be identified by the use of the words "believe," "expect," "anticipate," "will," "contemplate," "would" and similar expressions that contemplate future events. These future events include the following matters: . financial position; . business strategy; . budgets; . amount, nature and timing of capital expenditures; . drilling of wells; . natural gas and oil reserves; . timing and amount of future production of natural gas and oil; . operating costs and other expenses; . cash flow and anticipated liquidity; . prospect development and property acquisitions; and . marketing of natural gas and oil. Numerous important factors, risks and uncertainties may affect the Company's operating results, including: . the risks associated with exploration; . the ability to find, acquire, market, develop and produce new properties; . natural gas and oil price volatility; . uncertainties in the estimation of proved reserves and in the projection; . future rates of production and timing of development expenditures; . operating hazards attendant to the natural gas and oil business; . downhole drilling and completion risks that are generally not recoverable from third parties or insurance; . potential mechanical failure or under-performance of significant wells; . climactic conditions; . availability and cost of material and equipment; . delays in anticipated start-up dates; . actions or inactions of third-party operators of the Company's properties; . the ability to find and retain skilled personnel; . availability of capital; . the strength and financial resources of competitors; . regulatory developments; . environmental risks; and . general economic conditions. Any of the factors listed above and other factors contained in this Form 10- KSB could cause the Company's actual results to differ materially from the results implied by these or any other forward-looking statements made by the Company or on its behalf. The Company cannot assure you that future results will meet its expectations. 3 PART I Item 1. Business Background 3TEC Energy Corporation ("3TEC", "the Company", "we", "our" and "us") is the successor to Middle Bay Oil Company, Inc. ("Middle Bay"), an Alabama corporation formed on November 30, 1992. 3TEC was incorporated in Delaware on November 24, 1999, as a wholly owned subsidiary of Middle Bay for the sole purpose of merging with Middle Bay to effect a change in domicile to Delaware and to change our name to 3TEC Energy Corporation. Effective December 7, 1999, Middle Bay was merged into us and each share of common stock of Middle Bay was converted into one share of our common stock. Our common stock is quoted on the Nasdaq National Market under the symbol "TTEN". We are engaged in the acquisition, development, production and exploration of oil and natural gas reserves. Our properties are concentrated in East Texas and the Gulf Coast region, both onshore and in the shallow waters of the Gulf of Mexico. We also own significant properties in the Permian and San Juan basins and in the Mid-Continent region. Our management and technical staff have substantial experience in each of these areas. As of December 31, 2000, we had estimated total net proved reserves of 302 Bcfe, of which approximately 79% were natural gas and approximately 78% were proved developed, with an estimated PV-10 value of $1.0 billion. During December 2000, our net daily production averaged approximately 63.9 Mmcf of natural gas and 2.9 MBbls of oil or 81.3 Mmcfe. We have increased our reserves and production principally through acquisitions. We focus on properties that have a substantial proved reserve component and which management believes to have additional exploitation opportunities. Recently, we have also acquired a number of drilling prospects covered by an extensive 3-D seismic database that we believe have exploration potential. We have assembled an experienced management team and technical staff with expertise in property acquisitions and development, reservoir engineering, exploration and financial management. Since our formation in 1992, we have grown principally through several acquisitions of proved properties in the Gulf Coast and Mid-Continent regions. Acquisitions made in 1997 and 1998 significantly increased our reserves and production but were primarily nonoperated properties with high per Mcfe lease operating costs. In August 1999, W/E Energy Company L.L.C. ("W/E LLC"), an entity which is owned by affiliates of EnCap Investments L.L.C. ("EnCap") and Floyd C. Wilson, purchased a controlling interest in us for approximately $20.5 million in cash and $875,000 in producing properties. Concurrently with the investment by W/E LLC, Mr. Wilson was named our Chairman and Chief Executive Officer. Following the change in control in August 1999 discussed below, during the fourth quarter of 1999 and the first half of 2000 we closed several transactions that changed our senior management team, capital structure and our property base. In addition, we added several experienced professionals to our technical staff. Because of these recent transactions, our historical results of operations and cash flows will differ materially from, and will not be representative of, our current and future results. Recent Developments . Acquisition of Classic. On January 30, 2001, we acquired 100% of the issued and outstanding stock of Classic Resources Inc. ("Classic") for cash consideration of approximately $53.5 million. The purchase price is subject to certain post-closing adjustments customary in these types of transactions. We financed the acquisition of Classic under our existing credit facility. Classic's major properties, consisting of interests in the Beckville, Carthage, Oak Hill and Rodessa fields, are located near 3TEC's existing properties in East Texas. The Classic properties produce primarily from the Cotton Valley formation and encompass approximately 22,000 gross acres (14,500 net acres). 3TEC estimates these properties have unaudited total net proved reserves of 47 Bcfe, an associated PV-10 value of $57.6 million and net daily 4 production of approximately 11 Mmcfe, as of January 31, 2001. Combined with 3TEC's existing East Texas production, this core area will now produce approximately 39 Mmcfe per day for the Company. The estimated reserves for Classic are 96% gas on an equivalent basis and 99% operated. Classic owns interests in 87 producing wells with an average working interest of 72%. Approximately 63% of the reserves are classified as proved developed. The properties have a 10 year reserve-to-production ratio and low lease operating costs. 3TEC has identified 24 proved undeveloped locations and plans an active drilling program on Classic's properties in 2001. . Acquisition of HGW Properties. In November 2000, 3TEC acquired additional interests in the White Oak and Glenwood fields located in Upshur and Gregg Counties, Texas from H.G. Westerman and other third parties (the "HGW Properties"). Total cash consideration paid was $8.9 milion, which we financed under our existing credit facility. As of September 1, 2000, 3TEC estimated that the net proved reserves of the HGW Properties were 11.2 Bcfe with estimated net daily production of 1.8 Mmcfe. . Completion of Public Offering. On June 30, 2000, the Company completed a public offering of 8.05 million shares of the Company's common stock priced at $9.00 per share. The net proceeds, approximately $66.6 million, were used primarily to repay a portion of the outstanding debt under the Company's credit facility. . Acquisition of CWR Properties. On May 31, 2000, we acquired properties in East Texas operated by C.W. Resources, Inc. (the "CWR Properties") for cash consideration of approximately $52 million, which we financed under our credit facility. The CWR Properties are located in Upshur and Gregg Counties, Texas, in strategic proximity to our core East Texas properties. The CWR Properties encompass approximately 38,000 gross acres (10,100 net acres). As of December 31, 1999, Ryder Scott Company estimated that the net proved reserves of the CWR Properties were 67.8 Bcfe with an associated PV-10 value at that date of $58.3 million. The CWR Properties produce from the Cotton Valley formation, and the reserves as of December 31, 1999 were approximately 92% natural gas and 51% were classified as proved developed. . Acquisition of Magellan. On February 3, 2000, we completed the acquisition of Magellan Exploration LLC ("Magellan") from certain affiliates of EnCap and other third parties for consideration of approximately $19 million, consisting of (a) 1,085,934 shares of common stock, (b) four year warrants to purchase up to 333,333 shares of common stock at $30.00 per share, (c) 617,009 shares of 5% Series D Convertible Preferred Stock with a redemption value of $24.00 per share and each convertible into one share of common stock and (d) the assignment of a performance based "back-in" working interest of 5% of Magellan's interest in 12 exploration prospects. The acquired properties are located both onshore and in the shallow waters of south Louisiana and consist of 20,243 gross (11,244 net) acres in three prospective areas. As of December 31, 1999, Ryder Scott Company estimated that the net proved reserves of these properties were 25.3 Bcfe with an associated PV-10 value of $39.8 million. These proved reserves as of December 31, 1999 were approximately 67% natural gas and 69% were classified as proved undeveloped. In addition to the proved reserves, the Magellan properties contain several exploratory drilling locations that have been identified using 3-D seismic data. In April 2000, we purchased additional interests in certain of these properties from an unrelated party, bringing our total net purchase price for the Magellan properties to approximately $21 million. . Acquisition of Floyd Oil Properties. In November 1999, we completed the acquisition of properties and interests managed by Floyd Oil Company (the "Floyd Oil Properties") for $90.2 million, consisting of $86.8 million in cash and 503,426 shares of our common stock. The majority of these properties are located in Texas and Louisiana and, as of December 31, 1999, had estimated proved reserves of 165.5 Bcfe with an associated PV- 10 value at that time of $146.1 million. Additionally, 76% of the acquired reserves are natural gas and 77% were classified as proved developed. We operate approximately 53% of these properties on a PV-10 value basis. Floyd Oil Company is not affiliated with Floyd C. Wilson. 5 . Acquisition of Control by W/E LLC. In August 1999, W/E Energy Company LLC (" W/E LLC"), which is owned by affiliates of EnCap Investments L.L.C. ("EnCap") and Floyd C. Wilson, purchased a controlling interest in us for approximately $20.5 million in cash and $875,000 in producing properties. As of December 31, 2000, W/E LLC owned approximately 11% of our outstanding common stock Concurrent with the investment by W/E LLC, Mr. Wilson was named our Chairman and Chief Executive Officer. Business Strategy Our business strategy is focused on the following: . Pursuit of Strategic Acquisitions. We continually review opportunities to acquire producing properties, leasehold acreage and drilling prospects. We seek to acquire operational control of properties that we believe have significant exploitation and exploration potential. We are especially focused on increasing our holdings in fields and basins in which we already own an interest. . Further Development of Existing Properties. We intend to further develop our properties that have proved reserves. We seek to add proved reserves and increase production through the use of advanced technologies, including detailed technical analysis of our properties, and by drilling in-fill locations and selectively recompleting existing wells. We also plan to drill step-out wells to expand known field limits. We intend to enhance the efficiency and quality control of these activities by operating the majority of our properties. . Growth Through Exploration. We conduct an active technology-driven exploration program that is designed to complement our property acquisition and development drilling efforts with moderate to high risk exploration projects that have greater reserve potential. We generate exploration prospects through the analysis of geological and geophysical data and the interpretation of 3-D seismic data. We intend to manage our exploration expenditures through the optimal scheduling of our drilling program and by selectively reducing our participation in certain exploratory prospects through sales of interests to industry partners. . Rationalization of Property Portfolio. We intend to actively pursue opportunities to reduce and control operating costs of our existing properties and properties we may acquire in the future through the consolidation of overlapping operations, the sale of marginal properties and by increasing the number of fields we operate as a percentage of our total properties. . Maintenance of Financial Flexibility. We intend to maintain a substantial unused borrowing capacity under our bank credit facility by periodically refinancing our bank debt in the capital markets when conditions are favorable. We believe our expanded base of internally generated cash flow and other financial resources, including our existing financial partners, provide us with the financial flexibility to pursue additional acquisitions of producing properties and leasehold acreage and to develop our project inventory in an optimal fashion. Marketing We have marketed the natural gas and oil produced from our properties through typical channels for these products. We generally sell our oil at local field prices paid by the principal purchasers of oil. The majority of our natural gas production is sold at current market rates. Both natural gas and oil are purchased by marketing companies, pipelines, major oil companies, public utilities, industrial customers and other users and processors of petroleum products. We are not confined to, or dependent upon, any one purchaser or small group of purchasers. Accordingly, the loss of a single purchaser, or a few purchasers, would not have a long-term material effect on our business because there are numerous purchasers in the areas in which we sell our production. 6 In order to manage our exposure to price risks in the marketing of our natural gas and oil production, we have in the past and may in the future enter into natural gas and oil price hedging arrangements with respect to a portion of our expected production. None of our natural gas or oil production is currently hedged. Competition We face competition from other oil and gas companies in all aspects of our business, including acquisition of producing properties and oil and gas leases, marketing of oil and gas, and obtaining goods, services and labor. Many of our competitors have substantially larger financial and other resources. Factors that affect our ability to acquire producing properties include available funds, available information about the property and our standards established for minimum projected return on investment. Competition is also presented by alternative fuel sources, including heating oil and other fossil fuels. We believe that we are competing and will compete effectively as a result of our expertise in the acquisition, exploration, and development of oil and gas reserves and our financial ability to take advantage of such opportunities. Regulation Federal Regulation of Transportation of Natural Gas. Historically, the transportation and sale for resale of natural gas in interstate commerce have been regulated by the Natural Gas Act of 1938, the Natural Gas Policy Act of 1978, and the regulations promulgated by the Federal Energy Regulatory Commission. In the past, the federal government has regulated the prices at which natural gas could be sold. Deregulation of natural gas sales by producers began with the enactment of the Natural Gas Policy Act. In 1989, Congress enacted the Natural Gas Wellhead Decontrol Act, which removed all remaining Natural Gas Act and Natural Gas Policy Act price and non-price controls affecting producer sales of natural gas effective January 1, 1993. Congress could, however, reenact price controls in the future. Our sales of natural gas are affected by the availability, terms and cost of pipeline transportation. The price and terms for access to pipeline transportation remain subject to extensive federal regulation. Beginning in April 1992, the Federal Energy Regulatory Commission issued Order No. 636 and a series of related orders, which required interstate pipelines to provide open-access transportation on a basis that is equal for all natural gas suppliers. The Federal Energy Regulatory Commission has stated that it intends for Order No. 636 to foster increased competition within all phases of the natural gas industry. Although Order No. 636 does not directly regulate our production and marketing activities, it does affect how buyers and sellers gain access to the necessary transportation facilities and how we and our competitors sell natural gas in the marketplace. The courts have largely affirmed the significant features of Order No. 636 and the numerous related orders, although some appeals remain pending and the Federal Energy Regulatory Commission continues to review and modify its regulations regarding the transportation of natural gas. One broad and significant pending review involves examination of several questions, including whether the transportation regulations should be changed to better operate together with changes in state law that are introducing competition in retail natural gas markets, whether the historical method of setting transportation rates based on cost should be changed for certain transportation, whether short term transportation capacity should be allocated based only on auctions, and whether additional changes need to be made to long term transportation policies to prevent a market bias in favor of short term transportation. We cannot predict what action the Federal Energy Regulatory Commission will take on these matters, nor can we accurately predict whether the Federal Energy Regulatory Commission's actions will achieve the goal of increasing competition in markets in which our natural gas is sold. However, we do not believe that any action taken will affect us in a way that materially differs from the way it affects other oil and natural gas producers. Additional proposals and proceedings that might affect the natural gas industry are pending before Congress, the Federal Energy Regulatory Commission and the courts. The natural gas industry historically has been very heavily regulated; therefore, we cannot assure you that the less stringent regulatory approach recently pursued by the Federal Energy Regulatory Commission and Congress will continue. 7 Federal Regulation of Transportation of Oil. Oil and sales of oil, condensate and natural gas liquids by us are not currently regulated and are made at market prices. Effective as of January 1, 1995, the Federal Energy Regulatory Commission implemented regulations establishing an indexing system for transportation rates for interstate common carrier oil pipelines. These rates are generally indexed to inflation, subject to conditions and limitations. These regulations may, over time, tend to increase transportation costs or reduce wellhead prices for oil. However, we do not believe that these regulations affect us any differently than other oil and gas producers, gatherers and marketers. State Regulation. Our oil and gas operations are subject to various types of regulation at the state and local levels. These regulations require drilling permits, regulate the methods for developing new fields and the spacing and operating of wells and waste prevention, and sometimes impose production limitations. These regulations may limit our production from wells and the number of wells or locations we can drill. Some states have adopted regulations with respect to gathering systems. These regulations have not had a material effect on the operation of our gathering systems, but we cannot predict whether any future regulations in this area may have a material impact on our gathering systems. Federal, State and Indian Leases. Our operations on federal, state or Indian oil and gas leases are subject to numerous restrictions, including nondiscrimination statutes. We must conduct our operations on these leases pursuant to permits and authorization and other regulations issued by the Bureau of Land Management, Minerals Management Service and other agencies. The Minerals Management Service currently has under consideration a proposal to change the manner in which crude oil is valued for purposes of calculating royalty due the government. If adopted, these changes would decrease reliance on historical valuation methods and instead adopt an indexing method intended to better reflect market value, but which may not reflect the proceeds actually received in the sale of the oil. We cannot predict what action the Minerals Management Service may ultimately take or how it will affect royalty payable on our production from federal leases, however, if adopted, the changes may tend to increase costs of royalty payments. Environmental Regulations. Our operations are subject to numerous laws and regulations governing the discharge of materials into the environment or otherwise relating to environmental protection. Our exploration and production operations and facilities for gathering, treating, processing and handling hydrocarbons and related exploration and production wastes are subject to stringent environmental regulation. These laws and regulations sometimes require government approvals before activities occur, limit or prohibit activities because of protected areas or species, impose substantial liabilities for pollution and provide penalties for noncompliance. As with the industry generally, compliance with existing and anticipated regulations increases our overall cost of business. These regulations, however, generally affect us and our competitors similarly. Environmental laws and regulations are subject to frequent change, and we are not able to predict the costs or other impacts of environmental regulation on our future operations. The Comprehensive Environmental Response, Compensation, and Liability Act ("CERCLA"), also known as the "Superfund" law, imposes liability, without regard to fault or the legality of the original conduct, on some classes of persons that are considered to have contributed to the release or threat of release of a "hazardous substance" into the environment. These persons include the owner or operator of the disposal site or sites where the release occurred and companies that disposed or arranged for the disposal of the hazardous substances found at the site. Persons who are or were responsible for releases of hazardous substances under CERCLA may be subject to joint and several liability for the costs of cleaning up the hazardous substances that have been released into the environment and for damages to natural resources, and it is not uncommon for neighboring landowners and other third parties to file claims for personal injury and property damage allegedly caused by the hazardous substances released into the environment. Our operations are also subject to regulation of air emissions under the Clean Air Act and comparable state and local requirements. Implementation of these laws could lead to the gradual imposition of new air pollution control requirements on our operations. As a result, we may incur capital expenditures over the next several years 8 to upgrade our air pollution control equipment. We do not believe that our operations would be materially affected by any such requirements, nor do we expect such requirements to be any more burdensome to us than to other companies our size involved in natural gas and oil exploration and production activities. In addition, legislation has been proposed in Congress from time to time that would reclassify some natural gas and oil exploration and production wastes as "hazardous wastes," which would make the reclassified wastes subject to much more stringent handling, disposal and clean-up requirements. If Congress were to enact this legislation, it could increase our operating costs, as well as those of the natural gas and oil industry in general. Initiatives to further regulate the disposal of natural gas and oil wastes are also pending in some states, and these various initiatives could have a similar impact on us. The Clean Water Act imposes restrictions and controls on the discharge of oil and gas wastes and other forms of pollutants into waters of the United States. Federal law also imposes strict liability on owners of facilities for consequences of an oil spill where the spill is in navigable waters or along shorelines. These laws impose penalties for unauthorized discharges and substantial liability for costs of removal and damages resulting from an unauthorized discharge. State laws for the control of water pollution provide similar penalties and liabilities. The cost of compliance with water pollution laws has not historically been material to our operations. There can be no assurance that changes in federal, state or local water pollution laws and programs will not materially adversely affect our operations in the future. Our management believes that we are in substantial compliance with current environmental laws and regulations that affect us and that continued compliance with these requirements will not have a material adverse impact on us. Employees At December 31, 2000, we had 50 full-time employees. We believe that our relationships with our employees are satisfactory. None of our employees is covered by a collective bargaining agreement. From time to time, we use the services of independent consultants and contractors to perform various professional services, particularly in the areas of construction, design, well-site surveillance, permitting and environmental assessment. Our Executive Offices Our principal executive offices are located at Two Shell Plaza, 777 Walker Street, Suite 2400, Houston, Texas 77002, and our telephone number is (713) 821-7100. Our website is www.3tecenergy.com. 9 Item 2. Properties Description of Our Properties We present information regarding our natural gas and oil reserves, properties, and operating results below, which does not include the properties acquired in the acquisition of Classic as discussed above.
As of December 31, 2000 -------------------------------------------------- Estimated Net Proved Reserves Percent Proved Budgeted -------------------------------- PV-10 Total Undeveloped 2001 Capital Gas Gas Total Value PV-10 Drilling Expenditures (Mmcf) (MBbls) (Mmcfe) ($000) Value Locations ($000) ---------- ---------- ---------- --------- ------- ----------- ------------ East Texas.............. 130,295 1,460 139,054 498,043 47.6% 136 20.0 Gulf Coast Area......... 62,033 2,566 77,428 340,576 32.5% 16 31.1 Permian/San Juan Area... 16,682 4,461 43,448 102,192 9.8% -- -- Mid-Continent Area...... 28,505 2,142 41,357 106,078 10.1% 8 1.1 Other Areas............. 178 43 436 475 0.0% -- -- ---------- --------- ---------- --------- ------ --- ---- Total................... 237,693 10,672 301,723 1,047,364 100.00% 160 52.2 ========== ========= ========== ========= ====== === ====
East Texas. Four of our five largest fields are located in the East Texas area. The Rosewood, Glenwood, White Oak and Oak Hill fields all produce from the Cotton Valley formation and have numerous proved undeveloped drilling locations. Many of these development drilling locations are based on a change in regulatory field rules that now permit wells to be drilled on 80 acre spacing as opposed to 160 acre spacing. Other significant fields in this region include East Roanoke and East Gladewater. At December 31, 2000 we have identified 136 proved undeveloped locations in this area. For 2001, we have budgeted approximately $20 million for drilling of development wells and exploitation activities in this area. Gulf Coast. We have established a substantial base of proved reserves and undeveloped acreage with significant exploration potential along the Gulf Coast of Texas and Louisiana. Through the acquisition of Magellan, we acquired significant interests in Breton Sound Block 34 in Louisiana state waters and the Garden City and Bay de Chene fields in south Louisiana. During 2000, we participated in the drilling of four wells in these fields, all of which were successful. We plan to drill two exploration wells to test the Hollywood and Krumbar formations in Breton Sound Block 34 during 2001. Other significant fields in south Louisiana include Riceville and Raceland. Along the Texas Gulf Coast, we are active in two main areas, the Stuart City field in the Edwards Reef Trend and the Segundo field in Webb County, Texas. In 2001, we have budgeted approximately $31.1 million for development and exploration drilling in this area. Permian, San Juan and Mid-Continent Areas. We own interests in numerous fields in the Anadarko, Permian, San Juan and Arkoma basins of Kansas, Oklahoma, Texas and New Mexico. Our largest fields in these areas are Puerto Chiquito and Basin in the San Juan basin, Spivey-Grabs in south central Kansas and West Stigler in eastern Oklahoma. In 2001, we have budgeted approximately $1.1 million for development drilling and exploitation activities in these areas. Classic Properties. Classic's major properties, consisting of interests in the Beckville, Carthage, Oak Hill and Rodessa fields, are located near 3TEC's existing properties in East Texas. The Classic properties produce primarily from the Cotton Valley formation and encompass approximately 22,000 gross acres (14,500 net acres). 3TEC estimates these properties have unaudited total net proved reserves of 47 Bcfe, an associated PV-10 value of $57.6 million and net daily production of approximately 11 Mmcfe, as of January 31, 2001. Combined with 3TEC's existing East Texas production, this core area is now producing approximately 39 Mmcfe per day for the Company. The estimated reserves for Classic are 96% gas on an equivalent basis and 99% operated. Classic owns interests in 87 producing wells with an average working interest of 72%. Approximately 63% of the reserves are classified as proved producing. The properties have a 10 year reserve-to-production ratio and low lease operating costs. 3TEC has identified 24 proved undeveloped locations and has budgeted approximately $11 million for development drilling on Classic's properties in 2001. Ten wells are scheduled at Beckville and nine wells are planned at Oak Hill during 2001. 10 Natural Gas and Oil Reserves The following table presents our estimated net proved natural gas and oil reserves and the PV-10 value of our reserves as of December 31, 2000 and 1999, excluding the Classic Properties. The period end prices of oil and natural gas at December 31, 2000 and 1999, used in the PV-10 calculation were $25.31 and $23.64 per barrel of oil and $9.40 and $2.23 per thousand cubic feet of natural gas, respectively. Our estimated net proved natural gas and oil reserves and the PV-10 value of our reserves as of December 31, 2000 and 1999, are based on a reserve report prepared by Ryder Scott Company for our properties. The PV-10 values shown in the table are not intended to represent the current market value of the estimated natural gas and oil reserves we own. For further information concerning the PV-10 values of these proved reserves, please read note 14 of the notes to our December 31, 2000 consolidated financial statements.
December 31 --------------------------- 2000 1999 1998 ---------- -------- ------- Proved Reserves: Natural gas (Mmcf)........................ 237,693 159,699 43,483 Oil (MBbls)(1)............................ 10,672 9,835 3,342 Natural gas equivalents (Mmcfe)........... 301,725 218,709 63,535 Proved Developed Reserves: Natural gas (Mmcf)........................ 177,252 122,914 36,731 Oil (MBbls)............................... 9,895 9,358 3,118 Natural gas equivalents (Mmcfe)........... 236,622 179,062 55,439 Estimated future net cash flows before income taxes, (in thousands)............. $1,996,831 $370,258 $71,464 PV-10 value, (in thousands)............... $1,047,364 $198,615 $38,894
- -------- (1) Includes oil, condensate and plant product barrels There are numerous uncertainties in estimating quantities of proved reserves and in projecting future rates of production and the timing of development expenditures, including many factors beyond our control. The reserve data herein are only estimates. Although we believe these estimates to be reasonable, reserve estimates are imprecise and may be expected to change as additional information becomes available. Estimates of oil and natural gas reserves, of necessity, are projections based on engineering data, and there are uncertainties inherent in the interpretation of this data, as well as the projection of future rates of production and the timing of development expenditures. Reservoir engineering is a subjective process of estimating underground accumulations of oil and natural gas that cannot be exactly measured. Therefore, estimates of the economically recoverable quantities of oil and natural gas attributable to any particular group of properties, classifications of the reserves based on risk of recovery and the estimates are a function of the quality of available data and of engineering and geological interpretation and judgment and the future net cash flows expected therefrom, prepared by different engineers or by the same engineers at different times, may vary substantially. There also can be no assurance that the reserves set forth herein will ultimately be produced or that the proved undeveloped reserves will be developed within the periods anticipated. Actual production, revenues and expenditures with respect to our reserves will likely vary from estimates, and the variances may be material. In addition, the estimates of future net revenues from our proved reserves and the present value thereof are based upon certain assumptions about future production levels, prices and costs that may not be correct. We emphasize with respect to the estimates prepared by independent petroleum engineers that PV-10 value should not be construed as representative of the fair market value of our proved oil and natural gas properties since discounted future net cash flows are based upon projected cash flows which do not provide for changes in oil and natural gas prices or for escalation of expenses and capital costs. The meaningfulness of such estimates is highly dependent upon the accuracy of the assumptions upon which they are based. Actual future prices and costs may differ materially from those estimated. 11 Volumes, Prices and Operating Expenses The following table presents information regarding the production volumes of, average sales prices received for, and average production costs associated with, our sales of oil and natural gas for the periods indicated.
Years Ended December 31 ----------------------- 2000 1999 1998 ------- ------- ------- Net Production Data: Natural gas (Mmcf)................................ 17,764 4,738 3,847 Oil (MBbls)....................................... 1,139 532 581 Natural gas equivalents (Mmcfe)................... 24,598 7,930 7,333 Average Sale Prices: Natural gas ($ per Mcf)........................... $ 4.12 $ 2.18 $ 2.00 Oil ($ per Bbl)(1)................................ 25.11 16.88 11.52 Natural gas equivalents ($ per Mcfe)(1)........... 4.20 2.53 1.96 Expenses: ($ per Mcfe) Lease operations.................................. $ 0.62 $ 0.80 $ 0.95 Production, severance and ad valorem taxes........ $ 0.27 $ 0.17 $ 0.11 Gathering, transportation and other............... $ 0.09 $ 0.02 $ -- General and administrative........................ $ 0.25 $ 0.52 $ 0.58 Depreciation, depletion and amortization.......... $ 0.80 $ 0.84 $ 0.97
- -------- (1) Includes the effect of our hedging activities. Development, Exploration and Acquisition Capital Expenditures The following table presents information regarding our net costs incurred in the purchase of properties and in exploration and development activities.
Years Ended December 31, ------------------------- 2000 1999 1998 -------- ------- -------- (in thousands) Acquisition(1)..................................... $ 79,865 $91,424 $ 29,215 Exploration........................................ 695 824 1,802 Development........................................ 25,346 2,154 3,041 -------- ------- -------- Total costs incurred........................... $105,906 $94,402 $ 34,058 ======== ======= ========
- -------- (1) Includes $18.5 million of costs allocated to the Magellan Acquisition properties, reflected within "Acquisition of Magellan Exploration LLC, net of cash acquired" in the Company's Consolidated Statement of Cash Flows. 12 Drilling Activity The following table shows our drilling activity for the years ended December 31, 2000, 1999 and 1998. In the table, "gross" refers to the total wells in which we have a working interest and "net" refers to gross wells multiplied by our working interest in these wells.
Year Ended December 31, --------------------------------- 2000 1999 1998 ----------- ---------- ---------- Gross Net Gross Net Gross Net ----- ----- ----- ---- ----- ---- Exploration Wells: Productive................................. -- -- -- -- 1 0.13 Non-Productive............................. -- -- 5 0.90 8 0.79 --- ----- --- ---- --- ---- Total.................................. -- -- 5 0.90 9 0.92 === ===== === ==== === ==== Development Wells: Productive................................. 66 18.30 21 5.67 12 1.51 Non-Productive............................. -- -- -- -- 2 1.10 --- ----- --- ---- --- ---- Total.................................. 66 18.30 21 5.67 14 2.61 === ===== === ==== === ====
Productive Wells The following table sets forth the number of productive natural gas and oil wells in which we owned an interest as of December 31, 2000.
Total Productive Wells ----------------- Gross Net --------- ------- Natural Gas............................................. 883 316 Oil..................................................... 1,465 383 --------- ------- Total............................................... 2,348 699 ========= =======
Productive wells consist of producing wells and wells capable of production, including natural gas wells awaiting pipeline connections to commence deliveries and oil wells awaiting connection to production facilities. At December 31, 2000, we operated approximately 455 wells. Acreage Data The following table presents information regarding our developed and undeveloped leasehold acreage as of December 31, 2000. Developed acreage refers to acreage within producing units and undeveloped acreage refers to acreage that has not been placed in producing units.
Developed Undeveloped Acreage Acreage Total --------------- ------------- --------------- Gross Net Gross Net Gross Net ------- ------- ------ ------ ------- ------- Texas.......................... 227,924 76,352 8,180 2,159 236,104 78,511 Louisiana...................... 79,256 22,846 205 205 79,461 23,051 Kansas......................... 40,080 11,533 6,401 3,479 46,481 15,012 Oklahoma....................... 20,579 13,171 6,507 6,507 27,086 19,678 Other.......................... 164,857 60,258 560 490 165,417 60,748 ------- ------- ------ ------ ------- ------- Total...................... 532,696 184,160 21,853 12,840 554,549 197,000 ======= ======= ====== ====== ======= =======
13 Excluded from the acreage data are approximately 34,295 net mineral acres owned by us, primarily in La Fourche, St. Mary and Terrebonne parishes of Louisiana, all of which we believe have potential for oil and natural gas exploration. Current Activities As of March 21, 2001, 15 wells (4.0 net wells) were being drilled. Three wells are in Louisiana, nine in Texas and three in Oklahoma. Item 3. Legal Proceedings From time to time, we are party to various routine litigation proceedings incidental to our business. We currently are not a party to any material litigation. Item 4. Submission of Matters to a Vote of Security Holders None. 14 PART II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters Market Information Our common stock is currently quoted on the Nasdaq National Market under the market symbol "TTEN." We held a Special Meeting of Shareholders on January 14, 2000, at which meeting our shareholders approved an Amendment to the Company's Certificate of Incorporation which effected a 1-for-3 reverse stock split of our common stock. The reverse stock split became effective on January 18, 2000. All share and share related numbers in this report have been prepared, unless otherwise indicated, based on the number of shares outstanding after the reverse split. The following table sets forth the high and low sales prices per share of our common stock for the periods indicated on the Nasdaq National Market. The high and low sales price amounts for periods prior to January 18, 2000, have been adjusted to reflect the 1-for-3 reverse split of our common stock effective on that date.
Period High Low ------ ------ ------ 2000 First Quarter............................................... $11.44 $ 6.38 Second Quarter.............................................. 13.50 7.00 Third Quarter............................................... 17.25 9.63 Fourth Quarter.............................................. 19.13 13.38 1999 First Quarter............................................... 8.63 4.13 Second Quarter.............................................. 8.06 5.25 Third Quarter............................................... 14.44 7.50 Fourth Quarter.............................................. 13.59 7.13
On March 21, 2001 the last reported sales price of our common stock on the Nasdaq National Market was $17.375 per share. On March 21, 2001 there were 1,368 holders of record of our common stock. Our transfer agent is American Stock Transfer and Trust Company located at 40 Wall Street, New York, New York 10005. You may call them toll free at (800) 937-5449 to answer any questions about transferring your stock. We have never declared or paid any cash dividends on our common stock. We currently intend to retain future earnings, if any, for the operation and development of our business and do not anticipate paying any cash dividends on our common stock in the foreseeable future. In addition, our credit facility prohibits us from paying cash dividends on our common stock. Any future dividends are also restricted by the terms of our outstanding preferred stock and may be restricted by any debt agreements which we may enter into from time to time. We are obligated to pay net cash dividends in the amount of approximately $750,000 per year on our Series D Preferred Stock which may be paid, at our option, in cash or in additional shares of Series D Preferred Stock during the three years ending February 1, 2003. Our credit facility permits the payment of dividends on our Series D Preferred Stock. 15 Item 6. Management's Discussion and Analysis of Financial Condition and Results of Operations You should read the following discussion and analysis in conjunction with our audited consolidated financial statements. The following information contains forward-looking statements. See "Cautionary Statement About Forward Looking Statements". Overview We are engaged in the acquisition, development, production and exploration of oil and natural gas reserves. Our properties are concentrated in East Texas and the Gulf Coast region, both onshore and in the shallow waters of the Gulf of Mexico. We also own significant properties in the Permian and San Juan basins and in the Mid-Continent region. Our management and technical staff have substantial experience in each of these areas. As of December 31, 2000, we had estimated total net proved reserves of 302 Bcfe, of which approximately 79% were natural gas and approximately 78% were proved developed, with an estimated PV-10 value of $1.0 billion. During December 2000, our net daily production averaged approximately 63.9 Mmcf of natural gas and 2.9 MBbls of oil or 81.3 Mmcfe. We have increased our reserves and production principally through acquisitions. We focus on properties that have a substantial proved reserve component and which management believes to have additional exploitation opportunities. Recently, we have also acquired a number of drilling prospects covered by an extensive 3-D seismic database that we believe have exploration potential. We have assembled an experienced management team and technical staff with expertise in property acquisitions and development, reservoir engineering, exploration and financial management. Certain Accounting Practices We use the successful efforts method of accounting for our investments in oil and natural gas properties. Under this method, we capitalize all direct costs incurred in connection with the acquisition, drilling and development of productive oil and natural gas properties. Costs associated with unsuccessful exploration are expensed as incurred. Geological and geophysical costs and costs of carrying and retaining unevaluated properties are expensed as incurred. Depreciation, depletion and amortization of capitalized costs are computed separately for each field based on the unit of production method using only proved oil and gas reserves. We review our oil and gas properties on a field level for impairment when circumstances indicate that the capitalized costs less accumulated depreciation, depletion and amortization (the "Carrying Value") of the property may not be recoverable. If the Carrying Value of the property exceeds the expected future undiscounted cash flows, an amount equal to the excess of the Carrying Value over the fair value of the property is charged to operations. An impairment results in a non-cash charge to earnings but does not affect cash flows. Liquidity and Capital Resources Cash Flow. We believe that our cash flows from operations are adequate to meet the requirements of operating our business. However, future cash flows are subject to a number of variables, including our level of production and prices, and we cannot assure you that operations and other capital resources will provide cash in sufficient amounts to maintain planned levels of capital expenditures. Our principal operating sources of cash include sales of natural gas and oil. Our earnings before interest, taxes, minority interest, depletion and exploration ("EBITDAX") for the years ended December 31, 2000 and 1999, were $73.7 million and $7.6 million, respectively. For the year 2001, we have budgeted approximately $63 million for capital expenditures including $11 million budgeted for the Classic Properties. We are obligated to pay dividends of approximately $750,000 per year on the Series D Preferred Stock which we may pay in either cash or in additional shares of Series D Preferred Stock during the three years ending February 1, 2003. We are obligated to pay interest on the convertible subordinated notes of approximately $1.2 million per year. 16 Our activities in 2000 have been financed through operating cash flow, together with bank borrowings and equity sales. Our primary source of financing for acquisitions has been borrowing under our credit facility, discussed below. On June 30, 2000, the Company completed a public offering of 8.05 million shares of the Company's common stock priced at $9.00 per share. The net proceeds, approximately $66.6 million, were used primarily to repay a portion of the outstanding debt under the Company's credit facility. We believe we will have sufficient cash flow from operations and borrowings under our credit facility to meet our obligations and operating needs for the coming year. However, future cash flows are subject to a number of variables, including our level of production and prices, and we cannot assure you that operations and other capital resources will provide cash in sufficient amounts to maintain planned levels of capital expenditures. Credit Facility. Concurrent with the acquisition of the Floyd Oil Properties, the Company entered into a $250 million credit facility (the "Facility") with Bank One, NA as agent and four other banks. On May 31, 2000 and in connection with the acquisition of the CWR Properties, the Facility was amended and restated to: (1) extend the maturity date of the Facility to May 31, 2003, (2) add an additional bank, and (3) increase the borrowing base to $125 million. On March 12, 2001, the Company's borrowing base under its Credit Facility was redetermined and set at $175 million. Additionally, two new banks were added to the bank group. The borrowing base is to be redetermined semi- annually on May 1 and November 1 and provides for interest as revised under the Facility to accrue at a rate calculated at the Company's option as either the bank's prime rate plus a low of zero to a high of 50 basis points or LIBOR plus basis points increasing from a low of 150 to a high of 212.5 as loans outstanding increase as a percentage of the borrowing base. As of December 31, 2000, the borrowing base was set at $140 million. As of December 31, 2000, the Company was paying an average of 8.15% per annum interest on the principal balance of the Facility. The loan matures on May 31, 2003. Prior to maturity, no payments of principal are required so long as the borrowing base exceeds the loan balance. The borrowings under the Facility are secured by substantially all of the Company's oil and natural gas properties. At December 31, 2000, the amount available to be borrowed under the credit facility was approximately $77 million. In connection with the Facility we are required to adhere to certain affirmative and negative covenants. The loan agreement contains a number of dividend restrictions and restrictive covenants which, among other things, require the maintenance of minimum current and interest coverage ratios. Market Risk. We generally sell our oil at local field prices paid by the principal purchasers of oil. The majority of our natural gas production is sold at spot prices. Accordingly, we are generally subject to the commodity prices for these resources as they vary from time to time. Prices since mid- 1999 have generally followed an increasing trend, but the market continues to have considerable volatility. Inflation and Changes in Prices. Our revenues and the value of our oil and gas properties have been and will be affected by changes in natural gas and crude oil prices. Our ability to maintain current borrowing capacity and to obtain additional capital on attractive terms is also substantially dependent on natural gas and crude oil prices. These prices are subject to significant seasonal and other fluctuations that are beyond our ability to control or predict. During 2000, we received an average of $25.11 per barrel of crude oil and $4.12 per Mcf of gas. Costs and expenses are affected by the level of inflation, which has had a significant effect in 2000. Should current conditions in the industry be sustained, increased competition resulting in a relative shortage of oilfield supplies and/or services, inflationary cost pressures may continue. Results of Operations Our revenue, profitability, and future rate of growth are dependent upon prevailing prices for oil and gas, which, in turn, depend upon numerous factors such as economic, political, and regulatory developments as well as competition from other sources of energy. The energy markets historically have been highly volatile, and 17 future decreases in prices could have an adverse effect on our financial position, results of operations, quantities of reserves that may be economically produced, and access to capital. Due to our significant property and corporate acquisitions in 2000, our late 1999 change of control and our current capitalization structure, comparisons of our historical financial position and results of operations from 2000 to 1999 can be difficult. You should read the following discussion and analysis together with our audited consolidated financial statements and the related notes for the fiscal years ended December 31, 2000 and 1999. 2000 Compared With 1999 Revenue. Total revenue for the year ended December 31, 2000 was $104.8 million, an increase of $82.6 million (372%) over total revenue for 1999 of $22.2 million. Oil, natural gas and plant income revenues for the 2000 period were $103.2 million compared to $20.0 million in 1999, an increase of $83.2 million (416%). Realized prices for the Company's production was $4.20/Mcfe in 2000 compared to $2.43/Mcfe in 1999, while production volumes increased to 24,598 Mmcfe in 2000 compared to 7,930 Mmcfe in 1999. Realized price increases for 2000 over 1999 were reflective of the strong commodity price environment in the industry, while being only minimally impacted by the company's hedging activities in both years ($2.1 million loss in 2000 on oil hedging, and $0.2 million loss on gas hedging in 1999). Comparability of the company's revenues and volumes were both driven by an aggressive developmental drilling program in 2000 and the acquisition of the Floyd Oil Properties in November 1999, the Magellan Properties in February 2000 and the CWR Properties in May 2000, which were all significant contributors to the year over year increases. Gain on Sale of Properties and Other Revenue. In 2000 vs. 1999, property divestments resulted in the recognition of gains of $0.8 million and $1.0 million, respectively. The Company continues to actively review and manage its property portfolio for divestiture of non-strategic properties. Other revenues in 2000 were $0.8 million compared to $1.0 million in 1999. Other revenue consists primarily of interest, delay rental and lease bonus income. Expenses. Total expenses for the year ended December 31, 2000 were $58.4 million, an increase of $31.4 million (116%) from total expenses in 1999 of $27.0 million. Comparability of total expenses was significantly impacted by the company's aggressive developmental drilling program and the acquisition of the Floyd Oil Properties in November 1999, the Magellan Properties in February 2000 and the CWR Properties in May 2000. On a per Mcfe basis, the Company's lease operating expenses decreased by 23% to $0.62 in 2000 from $0.80 in 1999. Production, severance and ad valorem tax increased by 59% to $0.27/Mcfe in 2000 from $0.17/Mcfe in 1999. Additionally, general and administrative, interest and depreciation, depletion and amortization ("DD&A") expenses all rose on a dollar basis in 2000 but decreased on a per Mcfe basis. General and administrative expense was $0.25/Mcfe in 2000 compared to $0.52/Mcfe in 1999, interest expense $0.31/Mcfe vs. $0.40/Mcfe in 1999, and DD&A $0.80/Mcfe in 2000 compared to $0.84/Mcfe in 1999. Income Taxes. The Company recorded a $14.4 million income tax provision during 2000 as compared to a $1.4 million income tax benefit for 1999. The results from the Company's operations generated pre-tax income of $46.1 million during 2000 vs. a pre-tax loss of $4.9 million in 1999. During 2000, the Company's effective tax rate was approximately 32%. Also, the Company became a cash taxpayer in 2000, with $8.0 million of the 2000 provision recorded as a current tax payable. Net Income. The Company's 2000 net income of $31.7 million is compared to the $3.4 million net loss in 1999. As discussed in the revenue and expenses paragraphs above, the Company's significant drilling and acquisition success during 2000, coupled with a very strong commodity price environment and cost containment and improved efficiencies on a per unit basis, all attributed to the current year net income result. Dividends to Preferred Shareholders. Dividends to preferred shareholders of $1.5 million in 2000 is a $0.9 million increase (150%) over 1999 dividends of $0.6 million. During 2000, the Company issued a new preferred 18 stock series, Series D, in connection with the Magellan Acquisition, which accounted for $0.6 million of the increase. Additionally, during the third quarter of 2000, the Company redeemed its Series C preferred stock and recognized a non-cash charge to dividend expense of $0.5 million. 1999 Compared With 1998 Revenue. Total revenue for the year ended December 31, 1999 was $22.2 million, an increase of $4.5 million (25%) over total revenue for 1998 of $17.7 million. Oil, natural gas and plant income revenues for the 1999 period were $20.1 million compared to $15.0 million in 1998, an increase of $5.1 million (34%). Realized prices for the Company's production was $2.43/Mcfe in 1999 compared to $1.96/Mcfe in 1998, an increase of $0.47/Mcfe (24%), while production volumes increased to 7,930 Mmcfe in 1999 compared to 7,333 Mmcfe in 1998, an 597 Mmcfe increase (8%). Realized price increases for 1999 over 1998 were representative of a stronger commodity price environment during the period, while being only minimally impacted by the company's hedging activities in 1999 (a $0.2 million loss in 1999 on gas hedging). The company's revenues and volumes were both impacted by the acquisition of the Floyd Oil Properties in November 1999, approximately $4.5 million in revenue from the date of acquisition (November 23, 1999) to year-end, and production of 75 Mbls of oil and 1,112 Mmcf of natural gas for the same period. Gain on Sale of Properties and Other Revenue. In 1999 vs. 1998, property divestments resulted in the recognition of gains of $1.0 million and $1.9 million, respectively. Other revenues in 1999 were $1.0 million compared to $0.5 million in 1998. Other revenue consists primarily of interest, delay rental and lease bonus income. Expenses. Total expenses for the year ended December 31, 1999 were $27.0 million, an decrease of $0.1 million (0.4%) from total expenses in 1998 of $27.1 million. On a per Mcfe basis, the Company's lease operating expenses decreased by 16% to $0.80 in 1999 from $0.95 in 1998. Production, severance and ad valorem tax increased by 55% to $0.17/Mcfe in 1999 from $0.11/Mcfe in 1998. Additionally, general and administrative expense was $0.52/Mcfe in 1999 compared to $0.58/Mcfe in 1998, interest expense $0.40/Mcfe vs. $0.27/Mcfe in 1998, and DD&A $0.84 in 1999 compared to $0.97 million in 1998. Impairment expense was approximately $2.5 million, relating to impairments on fee mineral acreage, non-producing leasehold and proved oil and gas properties, principally attributable to decreasing oil prices in 1999. Income Taxes. The Company recorded a $1.4 million income tax benefit during 1999 as compared to a $2.8 million income tax benefit for 1998. The results from the Company's operations generated pre-tax losses of $4.9 million during 1999 and $9.4 million in 1998. During 1999 and 1998, the Company's effective tax rate was approximately 30%. Net Loss. The Company's 1999 net loss of $3.4 million is compared to the $6.6 million net loss in 1998. As discussed in the revenue and expenses paragraphs above, the Company's acquisition efforts during 1999, coupled with a stronger overall commodity price environment and cost containment and improved efficiencies on a per unit basis, all attributed to the current year net income result. Dividends to Preferred Shareholders. Dividends to preferred shareholders of $0.6 million in 1999 is a $0.5 million increase (500%) over 1998 dividends of $0.1 million. During December 1998, the Company issued Series C Preferred Stock in connection with the acquisition of the Enex Partnership (the "Enex Partnership Acquisition"), obligating the Company to pay annual dividend of approximately $0.5 million. Item 7. Financial Statements The Consolidated Financial Statements that constitute this item follow the text of this report. An index to the Consolidated Financial Statements and Schedules appears in Item 13 of this report. Item 8. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure None. 19 PART III Item 9. Directors and Executive Officers of the Registrant The Company's Definitive Proxy Statement for its 2001 Annual Meeting of Stockholders, when filed pursuant to Regulation 14A under the Securities Exchange Act of 1934, will be incorporated by reference into this Annual Report on Form 10-KSB pursuant to General Instruction E(3) of Form 10-KSB and will provide the information required for Items 9, 10, 11 and 12 under Part III. Item 10. Executive Compensation The Company's Definitive Proxy Statement for its 2001 Annual Meeting of Stockholders, when filed pursuant to Regulation 14A under the Securities Exchange Act of 1934, will be incorporated by reference into this Annual Report on Form 10-KSB pursuant to General Instruction E(3) of Form 10-KSB and will provide the information required for Items 9, 10, 11 and 12 under Part III. Item 11. Security Ownership of Certain Beneficial Owners and Management The Company's Definitive Proxy Statement for its 2001 Annual Meeting of Stockholders, when filed pursuant to Regulation 14A under the Securities Exchange Act of 1934, will be incorporated by reference into this Annual Report on Form 10-KSB pursuant to General Instruction E(3) of Form 10-KSB and will provide the information required for Items 9, 10, 11 and 12 under Part III. Item 12. Certain Relationships and Related Transactions The Company's Definitive Proxy Statement for its 2001 Annual Meeting of Stockholders, when filed pursuant to Regulation 14A under the Securities Exchange Act of 1934, will be incorporated by reference into this Annual Report on Form 10-KSB pursuant to General Instruction E(3) of Form 10-KSB and will provide the information required for Items 9, 10, 11 and 12 under Part III. Item 13. Exhibits, Financial Statement Schedules and Reports on Form 8-K (a) 1. Consolidated Financial Statements: See Index to Consolidated Financial Statements on page F-1 2. Exhibits: The following documents are filed as exhibits to this report: 2.1 Agreement and Plan of Merger, dated December 21, 1999, by and between 3TEC Energy Corporation, 3TM Acquisition L.L.C., Magellan Exploration, LLC and ECIC Corporation, EnCap Energy Capital Fund III, L.P., EnCap Energy Acquisition III-B, Inc., BOCP Energy Partners, L.P., and Pel-Tex Partners, L.L.C. (Incorporated by reference to Exhibit C to Form DEF14A, filed January 11, 2000.) 2.2 Agreement and Plan of Merger, dated November 24, 1999, by and between 3TEC Energy Corporation, a Delaware corporation, and Middle Bay Oil Company, Inc., an Alabama corporation. (Incorporated by reference to Exhibit A to Form DEF14A, filed October 25, 1999.) 2.3 Form of Purchase Agreement between and among Middle Bay Oil Company, Inc. and private sellers of the properties managed by Floyd Oil Company. (Incorporated by reference to Exhibit 2.1 to Form 8-K filed December 7, 1999.) 2.4 Real Estate Exchange Agreement by and between Middle Bay Oil Company, Inc. and Floyd Oil Company. (Incorporated by reference to Exhibit 2.1 to Form 8-K/A filed December 17, 1999.) 2.5 First Amendment to Agreement and Plan of Merger, effective as of January 14, 2000, by and among 3TEC Energy Corporation, 3TM Acquisition L.L.C., Magellan Exploration, LLC, ECIC Corporation, EnCap Energy Capital Fund III, L.P., EnCap Energy Acquisition III-B, Inc., BOCP Energy Partners, L.P., and Pel-Tex Partners, L.L.C. (Incorporated by reference to Exhibit 2.1 to Form 8-K filed February 4, 2000.)
20 2.6 Second Amendment to Agreement and Plan of Merger, effective as of February 2, 2000, by and among 3TEC Energy Corporation, 3TM Acquisition L.L.C., Magellan Exploration, LLC, ECIC Corporation, EnCap Energy Capital Fund III, L.P., EnCap Energy Acquisition III-B, Inc., BOCP Energy Partners, L.P., and Pel-Tex Partners, L.L.C. (Incorporated by reference to Exhibit 2.2 to Form 8-K filed February 4, 2000.) 2.7 Form of Agreement of Sale and Purchase by and between C.W. Resources, Inc., Westerman Royalty, Inc., and Carl A. Westerman and 3TEC Energy Corporation. (Incorporated by Reference to Exhibit 10.32 to Form S-2 filed April 28, 2000.) 3.1 Certificate of Incorporation of 3TEC Energy Corporation. (Incorporated by reference to Exhibit 3.1 of Form 8-K/A filed December 6, 1999.) 3.2 Certificate of Amendment to the Certificate of Incorporation of 3TEC Energy Corporation. (Incorporated by reference to Exhibit 3.3 of Form 10-KSB filed March 30, 2000.) 3.3 Certificate of Merger of Middle Bay Oil Company, Inc. into 3TEC Energy Corporation. (Incorporated by reference to Exhibit 3.3 of Form 8-K/A filed December 16, 1999.) 3.4 Bylaws of the Company. (Incorporated by reference to Exhibit C of the Company's definitive proxy statement filed October 25, 1999.) 4.1 Certificate of Designation of Series B Preferred Stock of 3TEC Energy Corporation. (Incorporated by reference to Exhibit 3.1 to Form 8-K/A filed December 16, 1999.) 4.2 Certificate of Designation of Series C Preferred Stock of 3TEC Energy Corporation. (Incorporated by reference to Exhibit 3.2 Form 8-K/A filed December 16, 1999.) 4.3 Certificate of Designation of Series D Preferred Stock of 3TEC Energy Corporation. (Incorporated by reference to Exhibit 4.3 to Form 10-QSB filed May 15, 2000.) 10.1 Securities Purchase Agreement, dated July 1, 1999 by and between the Company and 3TEC Energy Corporation. (Incorporated by reference to Exhibit C to the definitive Proxy Statement filed July 19, 1999.) 10.2 Securities Purchase Agreement, dated August 27, 1999 by and between the Company and Shoemaker Family Partners, LP. (Incorporated by reference to Exhibit 10.2 to Form 10-QSB filed November 15, 1999.) 10.3 Securities Purchase Agreement, dated August 27, 1999 by and between the Company and Shoeinvest II, LP. (Incorporated by reference to Exhibits to Exhibit 10.3 to Form 10-QSB filed November 15, 1999.) 10.4 Securities Purchase Agreement, dated October 19, 1999 between The Prudential Insurance Company of America and the Company. (Incorporated by reference to Exhibit 10.1 to Form 8-K filed November 2, 1999.) 10.5 Shareholders Agreement, dated August 27, 1999 by and among the Company, 3TEC Energy Corporation and the Major Shareholders. (Incorporated by reference to Exhibit 10.5 to Form 10-QSB filed November 15, 1999.) 10.6 Registration Rights Agreement, dated August 27, 1999 by and among the Company, 3TEC Energy Corporation, the Major Shareholders, Shoemaker Family Partners, LP and Shoeinvest II, LP. (Incorporated by reference to Exhibit 10.6 to Form 10-QSB filed November 15, 1999.) 10.7 Amendment to Registration Rights Agreement, dated October 19, 1999 by and among the Company, W/E Energy Company, L.L.C. f/k/a 3TEC Energy Company L.L.C., f/k/a 3TEC Energy Corporation, Shoemaker Family Partners, LP, Shoeinvest II, LP, and The Prudential Insurance Company of America. (Incorporated by reference to Exhibit 10.2 to Form 8-K filed November 2, 1999.)
21 10.8 Participation Rights Agreement, dated October 19, 1999 by and among the Company, The Prudential Insurance Company of America and W/E Energy Company L.L.C. (Incorporated by reference to Exhibit 10.3 to Form 8-K filed November 2, 1999.) 10.9 Employment Agreement, dated April 15, 2000 by and between Floyd C. Wilson and the Company. (Incorporated by reference to Exhibit 10.9 to Form S-2 filed April 28, 2000.) 10.10 Employment Agreement, dated May 1, 2000, by and between R.A. Walker and the Company. (Incorporated by reference to Exhibit 10.9 to Form S-2 filed April 28, 2000.) 10.11 Letter Amendment No. 1 to Middle Bay Oil Company, Inc. Securities Purchase Agreement, dated November 23, 1999, by and between Middle Bay Oil Company, Inc. (n/k/a 3TEC Energy Corporation) and The Prudential Insurance Company of America (Incorporated by reference to Exhibit 10.21 to Form S-2 filed April 28, 2000 and replacing the unexecuted Exhibit 10.17 of Form 10-QSB filed November 15, 1999.) 10.12 Intercreditor Agreement, dated as of November 23, 1999, among Middle Bay Oil Company, Inc., Bank One Texas, N.A. and 3TEC Energy Company L.L.C. (Incorporated by reference to Exhibit 10.18 to Form S-2 filed April 28, 2000.) 10.13 Intercreditor Agreement, dated as of November 23, 1999, among Middle Bay Oil Company, Inc., Bank One Texas, N.A. and Shoemaker Family Partners, LP. (Incorporated by reference to Exhibit 10.18 to Form S-2 filed April 28, 2000.) 10.14 Intercreditor Agreement, dated as of November 23, 1999, among Middle Bay Oil Company, Inc., Bank One Texas, N.A. and Shoeinvest II, LP. (Incorporated by reference to Exhibit 10.20 to Form S-2 filed April 28, 2000.) 10.15 Amendment to Securities Purchase Agreement, dated as of November 23, 1999, among Middle Bay Oil Company, Inc. and 3TEC Energy Company L.L.C. (Incorporated by reference to Exhibit 10.22 to Form S-2 filed April 28, 2000.) 10.16 Amendment to Securities Purchase Agreement, dated as of November 23, 1999, among Middle Bay Oil Company, Inc. and Shoemaker Family Partners, LP. (Incorporated by reference to Exhibit 10.23 to Form S-2 filed April 28, 2000.) 10.17 Amendment to Securities Purchase Agreement, dated as of November 23, 1999, among Middle Bay Oil Company, Inc. and Shoeinvest II, LP. (Incorporated by reference to Exhibit 10.24 to Form S-2 filed April 28, 2000.) 10.18 Amended and Restated 1995 Stock Option and Stock Appreciation Rights Plan. (Incorporated by reference to Exhibit B to Form DEF 14A filed May 5, 1997.) 10.19 Amendment No. 1 to the Amended and Restated 1995 Stock Option and Stock Appreciation Rights Plan. (Incorporated by reference to Exhibit B to Form DEF 14A filed May 5, 1998.) 10.20 1999 Stock Option Plan. (Incorporated by reference to Exhibit E to Form DEF 14A filed October 25, 1999.) 10.21 2000 Stock Option Plan (Incorporated by reference to Exhibit A to Form DEF 14A filed on May 1, 2000.) 10.22 Second Restated Credit Agreement among 3TEC Energy Corporation, Enex Resources Corporation, Middle Bay Production Company, Inc., and Magellan Exploration, LLC, as Borrowers, and Bank One, Texas, N.A. and the Institutions named therein, as Lenders, Bank One, Texas, N.A., as Administrative Agent, Bank of Montreal as Syndication Agent and Banc One Capital Markets, Inc., as Arranger, dated May 31, 2000. (Incorporated by reference to Exhibit 10.28 to Form S-2/A filed June 6, 2000.) 10.23 First Amendment to Shareholders' Agreement by and among 3TEC Energy Corporation, the W/E Shareholders and the Major Shareholders, dated May 30, 2000. (Incorporated by reference to Exhibit 10.29 to Form S-2/A filed September 6, 2000.)
22 21.1 Subsidiaries of 3TEC Energy Corporation.* 23.1 Consent of KPMG LLP, independent certified public accountants. * 23.2 Consent of Ryder Scott Company, independent petroleum engineers. *
- -------- * Filed herewith (b) The following reports were filed on Form 8-K during the fourth quarter of 2000: None. 23 GLOSSARY OF CERTAIN OIL AND GAS TERMS The following are abbreviations and definitions of certain terms commonly used in the oil and gas industry and herein: Bbl. One stock tank barrel, or 42 U.S. gallons liquid volume, used herein in reference to oil or other liquid hydrocarbons. Bcf. One billion cubic feet of natural gas. Bcfe. One billion cubic feet of natural gas equivalent, determined using the ratio of six Mcf of natural gas to one Bbl of oil, condensate or natural gas liquids. Btu or British Thermal Unit. The quantity of heat required to raise the temperature of one pound of water by one degree Fahrenheit. Completion. The installation of permanent equipment for the production of natural gas or oil, or in the case of a dry hole, the reporting of abandonment to the appropriate agency. Condensate. Liquid hydrocarbons associated with the production of a primarily natural gas reserve. Developed acreage. The number of acres that are allocated or assignable to productive wells or wells capable of production. Development well. A well drilled into a proved natural gas or oil reservoir to the depth of a stratigraphic horizon known to be productive. Exploratory well. A well drilled to find and produce natural gas or oil reserves that are not proved, to find a new reservoir in a field previously found to be productive of natural gas or oil in another reservoir or to extend a known reservoir. Field. An area consisting of a single reservoir or multiple reservoirs all grouped on or related to the same individual geological structural feature and/or stratigraphic level. MBbls. One thousand barrels of oil or other liquid hydrocarbons. Mcf. One thousand cubic feet of natural gas. Mcfe. One thousand cubic feet equivalent, determined using the ratio of six Mcf of natural gas to one Bbl of oil, condensate or natural gas liquids. Mmbtu. One million British Thermal Units. Mmcf. One million cubic feet of natural gas. Mmcfe. One million cubic feet equivalent, determined using the ratio of six Mcf of natural gas to one Bbl of oil, condensate or natural gas liquids. Productive well. A well that is found to be capable of producing sufficient quantities of oil and gas so that proceeds from the sale of the production are greater than production expenses and taxes. Prospect. A specific geographic area which, based on supporting geological, geophysical or other data and also preliminary economic analysis using reasonably anticipated prices and costs, is deemed to have potential for the discovery of oil and natural gas. 24 Proved developed reserves. Reserves that can be expected to be recovered through existing wells with existing equipment and operating methods. Proved reserves. The estimated quantities of oil, natural gas and natural gas liquids that geological and engineering data demonstrate with reasonable certainty to be recoverable in future years from known reservoirs under existing economic and operating conditions. Proved undeveloped reserves. Reserves that are expected to be recovered from new wells on developed acreage where the subject reserves cannot be recovered without drilling additional wells. PV-10 value. The estimated future net revenue to be generated from the production of proved reserves discounted to present value using an annual discount rate of 10%. These amounts are calculated net of estimated production costs and future development costs, using prices and costs in effect as of a certain date, without escalation and without giving effect to non-property related expenses, such as general and administrative expenses, debt service, future income tax expense, or depreciation, depletion, and amortization. Recompletion. The completion of an existing well for production from a formation that exists behind the casing of the well. Reservoir. A porous and permeable underground formation containing a natural accumulation of producible natural gas and/or oil that is confined by impermeable rock or water barriers and is individual and separate from other reservoirs. Royalty interest. An interest in a natural gas and oil property entitling the owner to a share of natural gas and oil production free of costs of production. Standardized measure. The estimated future net cash flows from proved natural gas and oil reserves computed using prices and costs, at a specific date, after income taxes and discounted at 10%. Tcfe. One trillion cubic feet of natural gas equivalent, determined using the ratio of six Mcf of natural gas to one Bbl of oil, condensate or natural gas liquids. Undeveloped acreage. Lease acreage on which wells have not been drilled or completed to a point that would permit the production of commercial quantities of natural gas and oil regardless of whether such acreage contains proved reserves. Working interest. The operating interest that gives the owner the right to drill, produce and conduct operating activities on the property and receive a share of production. 25 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed by the undersigned, thereunto duly authorized, as of March 30, 2001. 3Tec Energy Corporation (Registrant) /s/ Floyd C. Wilson By: _________________________________ Floyd C. Wilson Chairman and Chief Executive Officer POWER OF ATTORNEY KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Floyd C. Wilson, his true and lawful attorney- in-fact and agent, each with full power of substitution and resubstitution, to sign any and all amendments (including post-effective amendments) to this Annual Report on Form 10-KSB and to file the same, with exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorney-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done in connection therewith, as fully to all intents and purposes as he or she might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact, or their substitute or substitutes, or any of them, shall do or cause to be done by virtue hereof. Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated:
Signature Title Date --------- ----- ---- /s/ Floyd C. Wilson Chairman and Chief March 30, 2001 ______________________________________ Executive Officer Floyd C. Wilson /s/ R.A. Walker President, Chief Financial March 30, 2001 ______________________________________ Officer, Director R.A. Walker /s/ Steve W. Herod Executive Vice President-- March 30, 2001 ______________________________________ Corporate Development, Steve W. Herod Director /s/ Shane M. Bayless Vice President-- March 30, 2001 ______________________________________ Controller, Principal Shane M. Bayless Accounting Officer /s/ Gary R. Christopher Director March 30, 2001 ______________________________________ Gary R. Christopher /s/ Larry L. Helm Director March 30, 2001 ______________________________________ Larry L. Helm /s/ David B. Miller Director March 30, 2001 ______________________________________ David B. Miller /s/ D. Martin Phillips Director March 30, 2001 ______________________________________ D. Martin Phillips
26 INDEX TO FINANCIAL STATEMENTS
Page ---- Independent Auditors' Report............................................. F-2 Consolidated Balance Sheets as of December 31, 2000 and 1999............. F-3 Consolidated Statements of Operations for the years ended December 31, 2000 and 1999........................................................... F-4 Consolidated Statements of Cash Flows for the years ended December 31, 2000 and 1999........................................................... F-5 Consolidated Statements of Changes in Stockholders' Equity for the years ended December 31, 2000 and 1999........................................ F-6 Notes to Consolidated Financial Statements............................... F-7
F-1 INDEPENDENT AUDITORS' REPORT The Board of Directors and Stockholders 3TEC Energy Corporation We have audited the accompanying consolidated balance sheet of 3TEC Energy Corporation and subsidiaries as of December 31, 2000 and December 31, 1999 and the related consolidated statements of operations, changes in stockholders' equity, and cash flows for each of the years then ended. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of 3TEC Energy Corporation and subsidiaries as of December 31, 2000 and 1999, and the results of their operations and their cash flows for each of the years then ended in conformity with accounting principles generally accepted in the United States of America. KPMG LLP Houston Texas March 16, 2001 F-2 3TEC ENERGY CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
December 31, December 31, 2000 1999 ------------ ------------ ASSETS Current Assets: Cash and cash equivalents........................ $ 4,436,497 $ 6,141,153 Accounts receivable.............................. 26,137,738 9,453,551 Other............................................ 5,389,848 176,226 ------------ ------------ Total Current Assets........................... 35,964,083 15,770,930 Properties and Equipment, at cost: Oil and gas properties, successful efforts method.......................................... 270,277,796 168,840,499 Other property and equipment..................... 2,030,310 1,141,879 ------------ ------------ 272,308,106 169,982,378 Accumulated depletion, depreciation and amortization...................................... (56,170,333) (38,208,298) Net Properties and Equipment....................... 216,137,773 131,774,080 ------------ ------------ Other Assets....................................... 2,662,201 1,698,496 ------------ ------------ TOTAL ASSETS....................................... $254,764,057 $149,243,506 ============ ============ LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities: Accounts payable................................. $ 10,746,140 $ 5,726,569 Accrued liabilities.............................. 2,191,826 1,576,731 Series C Preferred stock redemption payable...... 2,855,521 -- Income taxes payable............................. 4,461,928 -- Accounts payable--Stockholder Dissenters......... -- 1,118,678 Other current liabilities........................ 467,152 347,733 ------------ ------------ Total Current Liabilities...................... 20,722,567 8,769,711 Long-Term Liabilities Bank Debt.................... 63,000,000 87,500,000 Senior Subordinated convertible notes.............. 13,223,844 13,223,844 Other long-term liabilities........................ 58,424 257,627 Minority Interest.................................. 1,393,578 1,089,044 ------------ ------------ Total Long-Term Liabilities........................ 77,675,846 102,070,515 ------------ ------------ Deferred income taxes.............................. 6,770,981 290,643 ------------ ------------ TOTAL LIABILITIES.................................. 105,169,394 111,130,869 ------------ ------------ Commitments and Contingencies...................... -- -- STOCKHOLDERS' EQUITY Preferred stock, $.02 par value, 20,000,000 shares authorized 266,667 designated Series B, 2,300,000 shares designated Series C and 725,167 shares designated Series D, none other designated...................................... -- -- Convertible preferred stock Series B, $7.50 stated value, 266,667 shares issued and outstanding. $2,000,000 aggregate liquidation preference...................................... 3,627,000 3,627,000 Convertible preferred stock Series C, $5.00 stated value, -0- and 1,139,506 shares issued and outstanding at December 31, 2000 and December 31, 1999, respectively................. -- 5,198,440 Convertible preferred stock Series D, 5% $24.00 stated value, 621,930 shares issued and outstanding at December 31, 2000, $14,926,320 aggregate liquidation preference................ 7,571,553 -- Common stock, $.02 par value, 60,000,000 shares authorized, 14,687,906 and 5,338,771 shares issued at December 31, 2000 and December 31, 1999, respectively.............................. 293,758 106,778 Additional paid-in capital....................... 136,382,775 57,775,199 Retained earnings (deficit)...................... 2,768,417 (27,408,062) Treasury stock; 69,807 and 7,258 shares at December 31, 2000 and December 31, 1999, respectively.................................... (1,048,840) (1,186,718) ------------ ------------ TOTAL STOCKHOLDERS' EQUITY..................... 149,594,663 38,112,637 ------------ ------------ TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY......... $254,764,057 $149,243,506 ============ ============
See accompanying notes to consolidated financial statements. F-3 3TEC ENERGY CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS
Year Ended ------------------------- December 31, December 2000 31, 1999 ------------ ----------- REVENUES: Oil, natural gas and plant income................ $103,210,199 $20,087,682 Gain on sale of properties....................... 800,338 1,047,860 Other............................................ 812,616 1,020,456 ------------ ----------- TOTAL REVENUES................................. $104,823,153 $22,155,998 ------------ ----------- EXPENSES: Production -- Lease operations............................... $ 15,326,014 $ 6,315,063 Production, severance and ad valorem tax....... 6,691,508 1,337,273 Gathering, transportation and other............ 2,223,396 135,932 Geological and geophysical....................... 666,089 472,697 Dry hole and impairments......................... 29,261 3,102,760 General and administrative....................... 6,141,297 4,122,135 Stock compensation............................... -- 729,938 Severance payments............................... -- 624,420 Compensation plan payments....................... -- 292,527 Interest......................................... 7,555,529 3,204,768 Depreciation, depletion and amortization......... 19,779,218 6,690,961 ------------ ----------- TOTAL EXPENSES................................. $ 58,412,312 $27,028,474 ------------ ----------- INCOME (LOSS) BEFORE INCOME TAXES, MINORITY INTEREST AND DIVIDENDS TO PREFERRED STOCKHOLDERS.. 46,410,841 (4,872,476) Minority Interest.................................. (304,534) (2,323) Income Tax (Provision) benefit..................... (14,442,267) 1,442,524 ------------ ----------- NET INCOME (LOSS).................................. 31,664,040 (3,432,275) Dividends to preferred stockholders................ 1,487,561 574,080 ------------ ----------- NET INCOME (LOSS) ATTRIBUTABLE TO COMMON STOCKHOLDERS...................................... $ 30,176,479 $(4,006,355) ============ =========== EARNINGS (LOSS PER COMMON SHARE: Basic............................................ $ 2.91 $ (1.14) ============ =========== Diluted.......................................... $ 2.28 $ (1.14) ============ =========== WEIGHTED AVERAGE COMMON SHARES OUTSTANDING: Basic............................................ 10,382,836 3,519,532 ============ =========== Diluted.......................................... 13,894,961 3,519,532 ============ ===========
See accompanying notes to consolidated financial statements. F-4 3TEC ENERGY CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended ------------------------ December December 2000 1999 ----------- ----------- OPERATING ACTIVITIES Net income (loss).................................... 31,664,040 (3,432,275) Adjustments to reconcile net income to net cash provided by operating activities: Depreciation, depletion and amortization............ 18,712,937 6,690,961 Amortization of debt issue costs and other.......... 1,066,281 377,885 Dry hole and impairments............................ 29,261 3,102,760 Stock compensation expense.......................... -- 729,938 Gain on sale of properties.......................... (800,338) (1,047,860) Deferred income taxes............................... 6,480,338 (1,442,524) Minority interest................................... 304,534 2,323 Changes in operating assets and liabilities: Accounts receivable and other current assets........ (21,706,674) (5,852,041) Account payable and accrued liabilities............. (8,717,435) 2,272,159 ----------- ----------- CASH PROVIDED BY OPERATING ACTIVITIES................ 44,467,804 1,401,326 INVESTING ACTIVITIES Payment for acquisition of assets managed by Floyd Oil Company........................................ -- (82,829,903) Proceeds from sales of oil and gas properties....... 5,840,574 6,230,420 Proceeds from sales of other assets................. -- 13,363 Acquisition of Magellan Exploration LLC, net of cash acquired........................................... (417,789) -- Acquisition of oil and gas properties............... (64,611,740) -- Development of oil and gas properties............... (24,091,364) (3,449,083) Additions of other assets........................... (1,326,216) (509,773) Payments from (advances to) stockholder............. -- 173,115 ----------- ----------- CASH USED BY INVESTING ACTIVITIES.................... (83,770,957) (80,371,861) FINANCING ACTIVITIES Proceeds from long-term debt........................ 66,100,000 91,036,000 Proceeds from issuance of senior subordinated convertible notes.................................. -- 13,223,844 Proceeds from issuance of common stock.............. 68,103,000 12,465,891 Proceeds from exercise of stock options and warrants........................................... 704,893 -- Payments on long-term debt.......................... (90,600,000) 30,990,568 Preferred stock dividends........................... (1,369,465) (245,029) Treasury stock purchase--Alabama dissenters......... (980,800) -- Redemption of Preferred Series C.................... (1,432,540) -- Debt, common stock and preferred stock issue and registration costs................................. (2,926,591) (1,418,246) ----------- ----------- CASH PROVIDED BY FINANCING ACTIVITIES................ 37,598,497 84,071,592 (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS..... (1,704,656) 5,101,057 CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD....... 6,141,153 1,040,096 ----------- ----------- CASH AND CASH EQUIVALENTS, END OF PERIOD............. $ 4,436,497 $ 6,141,153 =========== =========== SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Cash paid during the year for: Interest............................................ $ 7,539,124 $ 3,269,354 Income Taxes........................................ 3,500,000 -- Non-cash investing and financing activities: Common stock and warrants issued in acquisition of Magellan Exploration LLC........................... 10,572,935 -- Preferred stock Series D issued in acquisition of Magellan Exploration LLC........................... 7,453,457 -- Preferred Stock Series C conversions to common stock.............................................. 362,480 -- Preferred dividends incurred but not paid........... -- 329,051 Common stock issued for acquisition of oil and gas properties from W/E LLC............................ -- 875,000 Common stock repurchase contingency accrual--Alabama dissenters......................................... 137,878 1,118,678 Common stock issued in asset acquisition from Floyd Oil Company........................................ -- 6,992,587 Conversion of Preferred Series C into Common Stock.. 910,379 -- Preferred dividends paid in-kind.................... 118,096 -- Liability for redemption of Preferred Stock Series C.................................................. 2,855,521 --
See accompanying notes to consolidated financial statements. F-5 3TEC ENERGY CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY YEARS ENDED DECEMBER 31, 2000 AND 1999
Preferred Stock -------------------------------------------------------------- Series B Series C Series D Common Stock ------------------ ----------------------- ------------------ -------------------- Paid-in Accumulated Shares Par Shares Par Shares Par Shares Par Capital Deficit ------- ---------- ---------- ----------- ------- ---------- ---------- -------- ------------ ------------ Balance January 1, 1999......... 266,667 3,627,000 1,142,663 5,281,937 -- -- 2,850,655 57,016 37,061,627 (23,401,707) Preferred Series C registration costs........... (67,711) Common stock and warrants issued to W/E Energy Company LLC..... 1,585,185 31,703 10,668,297 Common stock and warrants issued to related party........... 22,222 444 149,556 Common stock and warrants issued to the Prudential Insurance Co. of America......... 351,680 7,034 2,366,810 Common stock issued in asset acquisition from Floyd Oil Company......... 503,426 10,069 6,982,518 Stockholder dissenters repurchase contingency..... Common stock regisgtration costs........... (365,571) Preferred Series C conversions... (13,157) (65,786) 4,103 82 65,704 Preferred Series C issued as consulting fee.. 10,000 50,000 Employee stock option plan expense......... 729,938 Employee stock option exercises....... 21,500 430 116,320 Net Loss........ (3,432,275) Preferred stock dividends....... (574,080) ------- ---------- ---------- ----------- ------- ---------- ---------- -------- ------------ ------------ Balance December 31, 1999........ 266,667 $3,627,000 1,139,506 $ 5,198,440 -- -- 5,338,771 $106,778 $ 57,775,199 $(27,408,062) ======= ========== ========== =========== ======= ========== ========== ======== ============ ============ Common stock ussued in merger with Magellan Exploration LLC............. 1,085,934 21,718 10,251,217 Warrants issued in merger with Magellan Exploration LLC............. 300,000 Preferred Series D issued in merger with Magellan Exploration LLC............. 617,009 7,453,457 Stockholder dissenters repurchase contingency adjustment...... -- Preferred Series C conversions... (72,496) (362,480) 63,465 1,268 361,212 Common stock issued.......... 8,050,000 161,000 67,942,000 Common stock offering and registration costs........... (1,496,651) Preferred Series C redemption.... (1,067,010) (4,835,960) 36,527 729 547,170 Reverse split fractional shares.......... (314) (6) Employee stock option exercises....... 95,190 1,904 647,990 Warrant exercises....... 18,333 367 54,632 Net Income...... 31,664,040 Preferred stock dividends....... 4,921 118,096 (1,487,561) ------- ---------- ---------- ----------- ------- ---------- ---------- -------- ------------ ------------ Balance December 31, 2000........ 266,667 $3,627,000 -- $ -- 621,930 $7,571,553 14,687,906 $293,758 $136,382,775 2,768,417 ======= ========== ========== =========== ======= ========== ========== ======== ============ ============ Treasury Stock ------------ Stockholders' Par Equity ------------ -------------- Balance January 1, 1999......... (68,040) 22,557,833 Preferred Series C registration costs........... (67,711) Common stock and warrants issued to W/E Energy Company LLC..... 10,700,000 Common stock and warrants issued to related party........... 150,000 Common stock and warrants issued to the Prudential Insurance Co. of America......... 2,373,844 Common stock issued in asset acquisition from Floyd Oil Company......... 6,992,587 Stockholder dissenters repurchase contingency..... (1,118,678) (1,118,678) Common stock regisgtration costs........... (365,571) Preferred Series C conversions... -- Preferred Series C issued as consulting fee.. 50,000 Employee stock option plan expense......... 729,938 Employee stock option exercises....... 116,750 Net Loss........ (3,432,275) Preferred stock dividends....... (574,080) ------------ -------------- Balance December 31, 1999........ $(1,186,718) $ 38,112,637 ============ ============== Common stock ussued in merger with Magellan Exploration LLC............. 10,272,935 Warrants issued in merger with Magellan Exploration LLC............. 300,000 Preferred Series D issued in merger with Magellan Exploration LLC............. 7,453,457 Stockholder dissenters repurchase contingency adjustment...... 137,878 137,878 Preferred Series C conversions... -- Common stock issued.......... 68,103,000 Common stock offering and registration costs........... (1,496,651) Preferred Series C redemption.... (4,288,061) Reverse split fractional shares.......... -- Employee stock option exercises....... 649,894 Warrant exercises....... 54,999 Net Income...... 31,664,040 Preferred stock dividends....... (1,369,465) ------------ -------------- Balance December 31, 2000........ (1,048,840) 149,594,663 ============ ==============
See accompanying notes to consolidated financial statements F-6 3TEC ENERGY CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2000 and 1999 (1) ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Organization 3TEC Energy Corporation, (formerly Middle Bay Oil Company, Inc.), was incorporated under the laws of the state of Alabama on November 20, 1992. The Company was reincorporated in Delaware on December 7, 1999 and changed its name to 3TEC Energy Corporation. The reincorporation and name change were part of a series of transactions related to a securities purchase agreement that closed on August 27, 1999 between the Company and W/E Energy Company, LLC ("W/E LLC"), formerly known as 3TEC Energy Company, LLC, whereby the Company received $21.4 million in cash and oil and natural gas properties for the sale of common stock, warrants and debt securities (See Note 3). 3TEC Energy Corporation and its subsidiaries (the "Company") are engaged in the acquisition, development, production and exploration of oil and natural gas in the contiguous United States. The Company considers its business to be a single operating segment. Effective November 23, 1999, the Company acquired oil and natural gas properties and interests managed by Floyd Oil Company ("Floyd Oil Company") from a group of private sellers. Effective February 3, 2000, the company acquired oil and natural gas properties through a merger with Magellan Exploration, LLC. Effective May 31, 2000, the Company acquired oil and natural gas properties from C.W. Resources, Inc. (the "CWR Properties"). Effective November 15, 2000, the Company acquired oil and natural gas properties from H.G. Westerman (the "HGW Properties") and a group of private sellers. Significant Accounting Policies The Company's accounting policies reflect industry standards and conform to generally accepted accounting principles. The more significant of such policies are described below. Principles of Consolidation The consolidated financial statements include the accounts of the Company and Enex Resources Corporation ("Enex") an 80% owned subsidiary. The equity of the minority interests in Enex is shown in the consolidated financial statements as "minority interest". All significant intercompany balances and transactions have been eliminated in consolidation. Reclassifications Certain prior-year amounts have been reclassified to conform with current year presentation. Consolidated Statements of Cash Flows For the purpose of cash flows, the Company considers all highly liquid investments with a maturity date of three months or less to be cash equivalents. Significant transactions may occur which do not directly affect cash balances and as such will not be disclosed in the Consolidated Statements of Cash Flows. Certain of such non-cash transactions are disclosed in the Consolidated Statements of Shareholders' Equity relating to shares issued as compensation, and shares issued for stock and debt of an acquired company. F-7 3TEC ENERGY CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) December 31, 2000 and 1999 Oil and Gas Properties The Company follows the successful efforts method of accounting for oil and natural gas properties, and accordingly, capitalizes all direct costs incurred in connection with the acquisition, drilling and development of productive oil and natural gas properties. Costs associated with unsuccessful exploration are charged to expense currently. Geological and geophysical costs and costs of carrying and retaining unevaluated properties are charged to expense. Depreciation, depletion and amortization of capitalized costs are computed separately for each field based on the unit-of-production method using only proved oil and natural gas reserves. In arriving at such rates, commercially recoverable reserves have been estimated by independent petroleum engineering firms. The Company reviews its undeveloped properties continually and charges them to expense on a property-by-property basis when it is determined that they have been condemned by dry holes, or have otherwise diminished in value. The Company recorded no impairments on its undeveloped properties, principally fee minerals and non-producing leasehold costs, for the year ended December 31, 2000 and $1.5 million during 1999. Gains and losses are recorded on sales of interests in proved properties and on sales of entire interests in unproved properties. For the years ended December 31, 2000 and 1999, the Company realized gains on sales of properties of $0.8 million and $1.0 million, respectively. Proved oil and natural gas reserves are the estimated quantities of oil, natural gas and natural gas liquids which are expected to be recoverable in future years from known reservoirs under existing economic and operating conditions. Reservoirs are considered proved if economic productability is supported by either actual production or conclusive formation tests. The Company reviews long-lived assets for impairment when events or changes in circumstances indicate that the carrying value of such an asset may not be recoverable. This review consists of a comparison of the carrying value of the asset to the asset's expected future undiscounted cash flows. Estimates of expected future cash flows represent management's best estimate based on reasonable and supportable assumptions and projections. If the expected future cash flows, assuming escalated prices, are less than the carrying value of the asset, an impairment exists and is measured as the excess of the carrying value over the estimated fair value of the asset. The Company estimates discounted future net cash flows to determine fair value. Any impairment provisions recognized are permanent and may not be restored in the future. For the years ended December 31, 2000 and 1999, the Company's proved properties were assessed for impairment on an individual field basis and the Company recorded impairment provisions on certain producing properties of $-0- and $1.0 million, respectively. Revenue Recognition of Production Imbalances Oil and natural gas revenues are recorded using the sales method, whereby the Company recognizes revenues based on the amount of oil and natural gas sold to purchasers on its behalf not withstanding its ownership percentage. At December 31, 2000 and 1999, the Company's net imbalance position was immaterial. Hedging In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 133, Accounting for Derivative Instruments and Hedging Activities ("SFAS 133"). In June 1999, the FASB issued SFAS 137, Accounting for Derivative Instruments and Hedging Activities--Deferral of the F-8 3TEC ENERGY CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) December 31, 2000 and 1999 Effective Date of FASB Statement No. 133. In June 2000, the FASB issued SFAS 138, Accounting for Derivative Instruments and Hedging Activities, an amendment of FASB Statement No. 133. SFAS 133, as amended, establishes accounting and reporting standards requiring that every derivative instrument (including certain derivative instruments embedded in other contracts) be recorded in the balance sheet as either an asset or liability measured at its fair market value. The statement requires that changes in the derivative's fair value be recognized currently in earnings unless specific hedge criteria are met. Special accounting for qualifying hedges allows a derivative's gains and losses to offset related results on the hedged item in the income statement, and requires that a company must formally document, designate and assess the effectiveness of transactions that receive hedge accounting. The Company adopted SFAS 133 effective January 1, 2001. Based upon the historical volatility of oil and gas commodity prices, the Company expects that SFAS 133 could increase volatility in the Company's earnings and other comprehensive income for periods where hedging activities are present. SFAS 133, in part, allows hedge accounting. SFAS 133 provides that the effective portion of the gain or loss on a loss on a derivative instrument designated and qualifying as a cash flow hedging instrument be reported as a component of other comprehensive income and be reclassified into earnings in the same period during which the hedged forecasted transaction affects earnings. The remaining gain or loss on the derivative instrument, if any, must be recognized currently in earnings. As of December 31, 2000, the Company has not entered into any derivative financial instruments or derivative commodity instruments. Earnings Per Share Basic earnings and loss per common share are based on the weighted average shares outstanding without any dilutive effects considered. Diluted earnings and loss per share reflect dilution from all potential common shares, including options, warrants and convertible preferred stock and convertible notes. Diluted loss per share does not include the effect of any potential common shares if the effect would be to decrease the loss per share. For the year ended December 31, 1999, the Company had a weighted average of 1,149,476 combined stock options, warrants and convertible preferred stock and notes outstanding, respectively, which were not included in the computation of diluted loss per share, because the effect of the assumed exercise of these stock options, warrants and convertible securities would have an antidilutive effect on the computation of diluted loss per share. At December 31, 2000, the Company had a weighted average of 3,789,456, combined stock options, warrants and convertible preferred stock and notes outstanding, respectively. The weighted average shares for 2000, excluding 277,331 of Preferred C shares, were included in the computation of diluted earnings per share for the year ending December 31, 2000. F-9 3TEC ENERGY CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) December 31, 2000 and 1999 All share and per share amounts have been retroactively adjusted for a one- for-three reverse split that was approved by the Company's shareholders on January 14, 2000. Concentrations of Market Risk The future results of the Company will be affected by the market prices of oil and natural gas. The availability of a ready market for oil and natural gas in the future will depend on numerous factors beyond the control of the Company, including weather, production of other oil and natural gas, imports, marketing of competitive fuels, proximity and capacity of oil and natural gas pipelines and other transportation facilities, any oversupply or undersupply of oil and natural gas, the regulatory environment, and other regional and political events, none of which can be predicted with certainty. Concentrations of Credit Risk Financial instruments which subject the Company to concentrations of credit risk consist primarily of cash and accounts receivable. The Company places its cash investments with high credit qualified financial institutions. Risk with respect to receivables is concentrated primarily in the current production revenue receivable from multiple oil and natural gas purchasers, and is typical in the industry. No single customer accounted for greater than 10% of the Company's total oil and natural gas sales for the years ended December 31, 2000 and 1999. Use of Estimates Management of the Company has made a number of estimates and assumptions relating to the reporting of assets and liabilities to prepare the financial statements in conformity with generally accepted accounting principles. Actual results could differ from those estimates. F-10 3TEC ENERGY CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) December 31, 2000 and 1999 (2) ACQUISITIONS On May 31, 2000, we completed the acquisition of the CWR Properties located in East Texas for cash consideration of approximately $51.7 million. The effective date of the acquisition was January 1, 2000, and the operations are included in the Company's consolidated financial statements beginning June 1, 2000. The CWR Properties acquisition was financed under our existing credit facility, which we amended prior to closing the acquisition. The total purchase price was allocated principally to oil and natural gas properties using the purchase method of accounting. On February 3, 2000, we completed the acquisition of Magellan Exploration LLC (the "Magellan Acquisition"), from certain affiliates of EnCap Investments L.L.C., a Delaware limited liability company and an investor in W/E LLC ("EnCap Investments"), and other third parties for consideration consisting of (a) 1,085,934 shares of common stock, (b) four year warrants to purchase up to 333,333 shares of common stock at $30.00 per share, (c) 617,009 shares of 5% Series D Convertible Preferred Stock with a redemption value of $24.00 per share and (d) the assignment of a performance based "back-in" working interest of 5% of Magellan's interest in 12 exploration prospects. The total purchase price of approximately $19 million was allocated principally to proved undeveloped oil and natural gas properties using the purchase method of accounting. On November 23, 1999, the Company completed the acquisition of oil and natural gas properties and interests, managed by Floyd Oil Company, owned by a group of private sellers (the "Floyd Oil Acquisition") for $86.8 million in cash and 503,426 shares of Company common stock. Prior to the acquisition, there was no relationship between Floyd C. Wilson, President of the Company and Floyd Oil Company. The effective date of the acquisition was January 1, 1999 and the cost was allocated using the purchase method of accounting. The total purchase price of $90.2 million, considering post-closing adjustments and transaction costs, was allocated principally to oil and natural gas properties. The following pro forma data presents the results of the Company for the year ended December 31, 1999, as if the Floyd Oil Acquisition and the CWR Acquisition had occurred on January 1, 1999, and the results of the Company for the year ended December 31, 2000 as if the CWR Acquisition had occurred on January 1, 2000. The pro forma data assumes the acquisition of the respective properties and the debt and equity financing transactions related to these acquisitions. The pro forma results are presented for comparative purposes only and are not necessarily indicative of the results which would have been obtained had the acquisitions been consummated as presented. The pro forma financial data does not include the financial information for Magellan, which is not significant with respect to the operations of the Company for the period presented (in thousands, except per share amounts):
Pro Forma Pro Forma Year Ended Year Ended December 31, 2000 December 31, 1999 ----------------- ----------------- (unaudited) (unaudited) Total revenues...................... $109,714 $66,167 Net income attributable to common stockholders....................... 32,552 5,667 Net income per basic share attributable to common stockholders....................... 3.14 0.45
F-11 3TEC ENERGY CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) December 31, 2000 and 1999 (3) COMMON STOCK, WARRANT AND SENIOR SUBORDINATED CONVERTIBLE NOTE SALE TO W/E ENERGY COMPANY, L.L.C. ("W/E LLC") On August 27, 1999, the Company closed a Securities Purchase Agreement (the "Agreement") for a total of $21.4 million with W/E Energy Company, LLC ("W/E LLC"). The Securities Purchase Agreement and contemplated transactions were approved by the stockholders at the Company's annual meeting on August 10, 1999. The controlling person of W/E LLC is EnCap Investments L.L.C., a Delaware limited liability company ("EnCap Investments"). The sole member of EnCap Investments is El Paso Field Services Company, a Delaware corporation ("El Paso Field Services"). The controlling person of El Paso Field Services is El Paso Corporation, a Delaware corporation. The Company received $9.8 million in cash and properties valued at $875,000 for 1,585,185 shares of common stock and 1,200,000 warrants (the "Warrants") and $10.7 million for a 5-year senior subordinated convertible note with a face value of $10.7 million (See Note 6). W/E LLC's ownership at December 31, 2000 is approximately 11% of the current outstanding shares of common stock. (4) RELATED PARTY TRANSACTIONS David B. Miller and D. Martin Phillips, directors of the Company, are managing directors of EnCap Investments, which is the controlling person of W/E, LLC which owns approximately 11% of the common stock of the Company, excluding shares attributable to the warrants and convertible notes, as of December 31, 2000. Floyd C. Wilson, Chairman and Chief Executive Officer of the Company, is also a member of W/E LLC. Gary R. Christopher, a shareholder and director of the Company, is employed by Kaiser-Francis Oil Co., which owns approximately 8% of the common stock of the Company as of December 31, 2000. The Company paid EnCap Investments a fee of $500,000 in connection with a private equity shelf facility related to the CWR Properties acquisition. As required by the Company's Credit Facility, the private equity shelf facility would have allowed the Company to require EnCap Investments to purchase up to $20 million of a new class of exchangeable preferred stock from the Company. Upon completion of the Company's public offering of common stock on June 30, 2000, the shelf facility expired. (5) LONG-TERM DEBT Long-term debt at December 31, 2000 and 1999, consisted of the following (in thousands):
2000 1999 ------- ------- $250 million Credit Facility............................. $63,000 $87,500 Less current maturities.................................. -- -- ------- ------- Long-term debt excluding current maturities.............. $63,000 $87,500 ======= =======
Concurrent with the Floyd Oil Acquisition, the Company entered into a $250 million credit facility (the "Facility") with Bank One, NA as agent and four other banks. On May 31, 2000 and in connection with the CWR Acquisition, the Facility was amended and restated to: (1) extend the maturity date of the Facility to May 31, 2003, (2) add an additional bank, and (3) increase the borrowing base to $125 million. As of December 31, 2000, the borrowing base was set at $140 million. The borrowing base is to be redetermined semi- annually on May 1 and November 1 and provides for interest as revised under the Facility to accrue at a rate calculated at the Company's option as either the bank's prime rate plus a low of zero to a high of 50 basis points or LIBOR plus basis points increasing from a low of 150 to a high of 212.5 as loans outstanding increase as a percentage of the borrowing base. As of December 31, 2000, the Company was paying an average of 8.15% per annum interest on the principal balance of the Facility. The loan matures on May 31, 2003. Prior to maturity, no payments of principal are required so long as the borrowing base exceeds the loan balance. The borrowings under the Facility are secured by substantially all of the Company's oil and natural gas properties. F-12 3TEC ENERGY CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) December 31, 2000 and 1999 The Facility is governed by various financial and other covenants, including requirements to maintain a current ratio of one to (1:1), and an interest rate coverage ratio. Additionally, limitations on asset dispositions, declaration and payment of cash dividends and the entering into hedge transactions without the bank's consent are included. Aggregate amounts of expected required repayments of long term debt at December 31, 2000 are as follows (in thousands): 2001.............................................................. $ -- 2002.............................................................. -- 2003.............................................................. 63,000 Thereafter........................................................ -- ------- Total......................................................... $63,000 =======
On March 12, 2001, the Company's borrowing base under its Credit Facility was redetermined and set at $175 million. Additionally, two new banks were added to the bank group. (6) SENIOR SUBORDINATED CONVERTIBLE NOTES On August 27, 1999, senior subordinated convertible promissory notes (the "Senior Subordinated Notes") were sold to W/E LLC and affiliates of Alvin V. Shoemaker ("Shoemaker"), a former director and significant shareholder, for $10.7 million and $150,000, respectively. On October 19, 1999, $2.4 million of Senior Subordinated Notes were sold to The Prudential Insurance Company of America ("Prudential"). The Senior Subordinated Notes bear interest at an annual rate of 9%. Interest is payable beginning on December 31, 1999, every March 31, June 30, September 30 and December 31, until maturity on August 27, 2004. The Company may defer payment of fifty percent (50%) of the first eight quarterly interest payments. The Senior Subordinated Notes may be prepaid, without premium or penalty, in whole or in part, at any time after August 27, 2001. The holders of the Senior Subordinated Notes may convert all or any portion of outstanding principal and accrued interest at any time into shares of Company common stock at a conversion price of $9.00 per common share, a total of 1,469,316 common shares. The conversion price may be adjusted from time to time based on the occurrence of certain events. In the event of a change in control, the entire outstanding principal balance and all accrued but unpaid interest is immediately due and payable. The Senior Subordinated Notes rank senior in right of payment to all Company notes and indebtedness other than the Facility. (7) INCOME TAXES The components of income tax expense (benefit) for the years ended December 31, 2000 and 1999 consisted of the following (in thousands):
December 31, --------------- 2000 1999 ------- ------- Current.................................................. $ 7,962 $ -- Deferred................................................. 6,480 (1,443) ------- ------- Total.................................................... $14,442 $(1,443) ======= =======
F-13 3TEC ENERGY CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) December 31, 2000 and 1999 The reconciliation of income tax computed at the U.S. federal statutory tax rates to the provision for income taxes is as follows (in thousands):
December 31, ---------------- 2000 1999 ------- ------- Income tax provision (benefit) at statutory rate....... $16,137 $(1,656) State income taxes, net of federal benefit............. 1,364 -- Decrease in valuation allowance........................ (2,523) (151) Increase due to non-deductible stock compensation...... -- 248 Utilization of Sec. 29 tax credits..................... (400) -- Other.................................................. (136) 116 ------- ------- Total.................................................. $14,442 $(1,443) ======= =======
The Company's net deferred tax liability at December 31, 2000 and 1999 is as follows (in thousands):
2000 1999 ------- ------- Deferred tax liability Oil and natural gas properties........................ $ 9,547 $ 1,428 ------- ------- Deferred tax asset NOL carryforward...................................... (5,812) (6,643) AMT tax credit carryforward........................... (36) (36) Other................................................. (495) (547) ------- ------- (6,343) (7,226) Valuation allowance................................... 3,566 6,089 ------- ------- Net deferred tax liability.............................. $ 6,770 $ 291 ======= =======
In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax asset will not be realized. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income, and tax planning strategies in making this assessment. Based upon projections for future taxable income over the periods in which the deferred tax assets are deductible and the Section 382 limitation discussed below, management believes it is more likely than not that the Company will realize the benefits of these deductible differences, net of the existing valuation allowances at December 31, 2000 and 1999. The net change in the total valuation allowance for the year ended December 31, 2000 was approximately $2.5 million and the amount remaining at December 31, 2000 is $3.6 million. The Enex Acquisition caused an ownership change pursuant to Section 382 in March 1998. As a result of this ownership change, the Company's use of its net operating loss carryforwards subsequent to that date will be limited. The Floyd Oil Acquisition in November 1999 also caused an ownership change pursuant to Section 382. As a result of these changes, the Company's use of its net operating loss carryforwards subsequent to that date will be limited. In February 2000, Enex had an ownership change pursuant to Section 382 with respect to its net operating losses. As of December 31, 2000, the Company had net operating loss carryforwards of approximately $16.6 million, expiring beginning in 2009 through 2019. F-14 3TEC ENERGY CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) December 31, 2000 and 1999 (8) RETIREMENT PLAN AND EMPLOYEE INCENTIVE PLAN All of the employees of the Company are eligible to participate in a defined contribution plan that provides for maximum employee contributions of 15% of total wages paid to employees for the year and Company contributions. Company contributions made to the plan for the year ending December 31, 2000 was $135,225. There was no contribution made to the plan during 1999. In March 1995, the Board of Directors adopted an employee incentive compensation plan (the "Plan") for the benefit of Company employees. The Plan benefits were equal to one percent (1%) of the annual net profit from oil and natural gas properties acquired or discovered on or after January 1, 1994 and one percent (1%) of the annual sales proceeds from any oil and natural gas properties sold on or after January 1, 1994. The Compensation Committee of the Board of Directors had sole authority regarding the amount and timing of payment of any Plan benefits to eligible employees. On August 27, 1999, the Company paid $274,625 to the eligible participants in the Plan and terminated the Plan pursuant to the terms of the W/E LLC agreement. The payment was equal to 100% of the Plan benefits through August 27, 1999. The entire amount of the payment, including associated taxes of $17,902, was recognized during the year ended December 31, 1999. Prior to the Compensation Committee's authorization, the Plan benefits were not accrued as an expense in the financial statements because the likelihood that the Compensation Committee would determine that the benefits would be payable to eligible employees was less than probable. (9) STOCK OPTION PLANS The Company's stock option plans authorize the granting of options to key employees and non-employee directors at prices equivalent to the market value at the date of grant. Options generally become exercisable in the following manner: 50% upon the date of grant with the remaining 50% exercisable in three annual installments commencing one year after the date grant and, if not exercised, expire 10 years from the date of grant. The Company accounts for employee stock-based compensation using the intrinsic value method and since the exercise price of the options granted is equal to the quoted market price of the Company's stock at the grant date, no compensation costs have been recognized for its stock option plans. Had compensation cost for the Company's Plans been determined based on the fair value at the grant date for stock options granted for the year ending December 31, 1999, the Company's net income (loss) and income (loss) per share would have been adjusted to the pro forma amounts listed below (in thousands, except per share amounts):
December 31, December 31, 2000 1999 ------------ ------------ Net Income (Loss) As Reported.................................. $30,176 $(4,006) Pro Forma.................................... $21,889 $(4,110) Net Income (Loss) per common share, diluted As Reported.................................. $ 2.28 $ (1.14) Pro Forma.................................... $ 1.58 $ (1.17)
The fair value of grants was estimated on the date of grant using the Black Scholes option pricing model with the following weighted-average assumptions used in 2000 and 1999, respectively: risk free interest rates of 6.48% and 4.78%, expected volatility of 72% and 77%, no dividend yield, and an expected life of the option of 3 years in 2000 and 1999. The weighted average fair value of stock options granted in 2000 and 1999 was $5.72 and $2.40 per share, respectively. F-15 3TEC ENERGY CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) December 31, 2000 and 1999 A summary of the status of the Company's plans as of December 31, 2000 and 1999, and changes during the years ended on those dates is presented below:
Average Exercise Shares Price Per Share --------- ---------------- Options and warrants outstanding at January 1, 1999.......................................... 303,722 $16.71 Granted in 1999.............................. 66,667 $ 4.50 Exercised in 1999............................ (21,500) $ 5.43 Forfeited in 1999............................ (12,967) $17.40 --------- ------ Options and warrants outstanding at December 31, 1999...................................... 335,922 $15.00 Granted in 2000(1)........................... 2,898,500 $11.07 Exercised in 2000............................ (95,190) $ 6.83 Forfeited in 2000............................ (248,160) $16.39 --------- ------ Options and warrants outstanding at December 31, 2000...................................... 2,891,072 $11.15 Options and warrants outstanding at December 31, 1999...................................... 335,922 $15.00 Options and warrants exercisable at December 31, 2000...................................... 1,442,995 11.16 Options and warrants exercisable at December 31, 1999...................................... 335,922 15.00 Options available for grant at December 31, 2000.......................................... 275,298 Options available for grant at December 31, 1999.......................................... 657,300
- -------- (1) Includes 300,000 options granted under the Company's 2001 Stock Option Plan. The Company's Board of Directors has approved both the option grant and the 2001 Plan. The plan will be submitted for shareholder approval at the Company's annual meeting. At December 31, 2000, the range of exercise prices and weighted average remaining contractual life of options outstanding was $4.50 to $15.19 and 9.47 years, respectively. On August 24, 1999, the Company amended the 1995 Plan due to the change in control that resulted from the Agreement (See Note 3). The 1995 Plan was amended to extend the exercise date for all options issued prior to July 1, 1999 to one year from the following dates: (1) the termination date of employees if the termination date is without cause and occurred during the six-month period commencing with the closing of the Agreement; (2) the date of termination for employees terminated for "Good Reason" as defined in such employee's employment agreement; and (3) the date of resignation of a holder who is also a director who resigns at closing of the Agreement. The extension of the exercise period of the employee stock options resulted in a new measurement date and compensation expense, equal to the intrinsic value of all of the outstanding options, of approximately $730,000, was recognized as stock compensation during the year ended December 31, 1999. Options to acquire 75,000 shares of the Company common stock at an exercise price of $16.50 were granted outside of the 1995 Plan on February 13, 1997 to certain officers of the Company. Warrants to acquire 25,000 shares of the Company common stock at an exercise price of $15.00 were granted outside of the 1995 Plan on September 15, 1998 to a consultant and were forfeited in 2000. Both grants are included in the table above. New warrants to purchase 1,216,822 shares and 266,226 shares of common stock at $3.00 per share were issued on August 27, 1999 and October 19, 1999, respectively, and warrants to purchase 333,333 shares of common stock at $30.00 per share were issued on February 3, 2000, are excluded from the table above because the warrants were issued in conjunction with the sales of stock and are not stock-based compensation. F-16 3TEC ENERGY CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) December 31, 2000 and 1999 (10) STOCKHOLDERS' EQUITY Preferred Stock--Series B In connection with the merger of Shore Oil Company, effective June 30, 1997, the Company issued 266,667 shares of Series B Preferred Stock ("Series B"). The Series B is nonvoting and pays no dividends. The Series B has a liquidation value of $7.50 per share. Until December 31, 2002, any holder of the Series B may convert all or any portion of Series B shares into Company Common Stock ("Common") at the greater ratio of (i) three shares of Series B for one share of Common or (ii) at a ratio based upon the "Alternative Conversion Factor." The Alternative Conversion Factor is determined by dividing the net increase in value of approximately 40,000 net mineral acres owned by the Company in South Louisiana by $8,000,000 and multiplying the product by 355,333 to arrive at the potential number of total Common shares all holders would receive upon conversion. In no event shall the aggregate total number of shares of Common into which the Series B are converted be less than 88,889 shares or exceed 444,444 shares, unless further increased for any anti-dilution provisions. Upon expiration of the conversion period, unless the Company has given notice to redeem the Series B, all of the shares of the Series B shall be automatically converted. At December 31, 2000, the value of the fee minerals had increased to a level that resulted in the Series B shares being convertible into an additional 42,426 common shares applying the Alternative Conversion Factor. At December 31, 2000, none of the Series B had been converted. Preferred Stock--Series C On August 31, 2000, the Company sent notices to the holders of its Series C Preferred Stock (the "Series C") advising that the Series C would be redeemed on September 30, 2000. The Series C had a redemption price of $5.00 per share and the holders had the right to convert their Series C shares into Company common stock at a ratio of one share of common for three shares of Series C prior to September 30, 2000. A total of 2,101,827 shares of the Series C were outstanding on September 30, 2000 with 1,293,521 (62%) held by the Company's 80% owned subsidiary, Enex Resources Corporation. 109,580 Series C shares were converted to 36,527 shares of common stock and approximately 1,992,247 Series C shares were redeemed. On a consolidated basis, the Company's liability for the Series C redemption was approximately $4.8 million. At December 31, 2000, $2.9 million remained to be funded. As a result of the Series C redemption, the Company recognized a charge to dividend expense of $498,706. Preferred Stock--Series D On February 3, 2000, we completed the acquisition of Magellan Exploration LLC (the "Magellan Acquisition"), from certain affiliates of EnCap Investments L.L.C., a Delaware limited liability company and an investor in W/E LLC ("EnCap Investments"), and other third parties for consideration consisting of (a) 1,085,934 shares of common stock, (b) four year warrants to purchase up to 333,333 shares of common stock at $30.00 per share, (c) 617,009 shares of 5% Series D Convertible Preferred Stock with a redemption value of $24.00 per share and (d) the assignment of a performance based "back-in" working interest of 5% of Magellan's interest in 12 exploration prospects. The total purchase price of approximately $19 million was allocated principally to proved undeveloped oil and natural gas properties. Common Stock On June 30, 2000, the Company completed its public offering of 8.05 million shares of the Company's common stock (prices at $9.00 per share). The net proceeds, approximately $66.6 million, were used primarily to repay a portion of the outstanding debt under the amended Credit Facility. F-17 3TEC ENERGY CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) December 31, 2000 and 1999 On January 14, 2000, the Company's stockholders voted to affect a one-for- three reverse split of the Company's common stock for the stockholders of record on December 9, 1999. The reverse stock split resulted in a decrease of 10,677,542 in the number of shares issued at December 31, 1999, 14,515 of which are held in treasury. The par value of these shares was transferred to additional paid-in capital. All common share and earnings per common share amounts have been retroactively restated in the accompanying consolidated financial statements to reflect the reverse stock split. On August 27, 1999, the Company sold to W/E LLC 1,585,185 shares of common stock and five-year warrants to purchase 1,200,000 shares of common stock for $9.8 million in cash and oil and natural gas properties valued at $875,000. On the same date, the Company sold 22,222 shares of common stock and five-year warrants to purchase 16,822 shares of common stock to Shoemaker for $150,000 (See Notes 3 and 6). On October 19, 1999, the Company closed a private placement of securities to Prudential. The economic terms and conditions of the private placement are similar to those of the securities purchase agreement with W/E LLC and Shoemaker entered into on July 1, 1999. The private placement consisted of the sale of 351,681 shares of common stock and five-year warrants to purchase 266,226 shares at $3.00 per share of common stock for $2.4 million and a five- year senior subordinated convertible note for $2.4 million (See Note 6). The warrants issued to W/E LLC, Shoemaker and Prudential are exercisable for $3.00 per share and expire five years from the issue date. Sixty percent of the warrants were immediately exercisable, in whole or in part at any time until the expiration date. An additional 10% of the warrants may be exercised at each anniversary of the grant date until expiration. At December 31, 2000, 1,025,296 warrants were exercisable. On the occurrence of either a change of control, payment in full of the Senior Notes or conversion of the entire principal balance of the Senior Subordinated Notes, all of the warrants become immediately exercisable. If less than the entire principal balance of the Senior Subordinated Notes are converted, a pro-rata portion of the warrants will be convertible based on the portion of the Senior Subordinated Notes that are converted. (11) COMMITMENTS AND CONTINGENCIES On November 18, 1999, the Company's shareholders approved a reincorporation of the Company from Alabama to Delaware (See Note 1). The Alabama Code has a shareholder dissent provision that allows a shareholder to dissent from the reincorporation and demand cash payment equal to the fair value of the common stock owned at the date of the reincorporation. Before the November 18 meeting, the Company received shareholder dissents representing ownership of 99,438 shares of common stock. Over the period December 15, 1999 to January 25, 2000, the Company received formal demands for payment from the dissenting shareholders (the "dissenters"). At December 31, the Company had accrued the estimated cash payment to the dissenters of approximately $1.1 million. The Company made an offer to the dissenters on March 14, 2000 and the dissenters made a counteroffer in late March. One May 26, 2000, the Company agreed to a settlement with the dissenters for them to surrender 62,549 shares of common stock for a total of $980,800, including interest. The settlement closed on June 30, 2000 and the shares are held by the Company as treasury stock. A shareholder holding 36,889 shares of common stock agreed to withdraw his dissent. Commitments and Contingencies The Company has commitments for operating leases (primarily for office space) in Houston, Texas. Rental expense for office space was $390,452 in 2000 and $267,337 in 1999. Future minimum lease expenses at December 31, 2000 are $489,545 in 2001; $509,226 in 2002; $502,888 in 2003; $499,094 in 2004; $83,056 in 2005; and $-0- in years thereafter. F-18 3TEC ENERGY CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) December 31, 2000 and 1999 The Company is a defendant in various legal proceedings which are considered routine litigation incidental to the Company's business, the disposition of which management believes will not have a material effect on the financial position or results of operations of the Company. (12) FINANCIAL INSTRUMENTS In February 2000, the Company entered into fixed swap agreements covering 2,000 barrels of oil per day for the period March through October 2000 at a weighted average NYMEX West Texas Intermediate price of $25.96 per barrel. During the year ended December 31, 2000, the Company's oil revenues were reduced by the effect of the hedge by $2,131,253. In April 1999, the Company entered into costless collar hedges for approximately 3,650 Mcf per day with a weighted average floor and ceiling of $2.06 and $2.20, respectively, for the months of May through October of 1999. During the year ending December 31, 1999, the Company incurred hedging losses of approximately $164,000. At December 31, 2000, the Company had no open derivative instruments. Fair value of cash, receivables and payables approximates carrying value. Fair value of long-term debt also approximates carrying value due to the nature of the Facility, whereby the interest rates are floating rates which reflect market rates. The estimated fair value of the $13.2 million senior subordinated convertible notes was $13.1 million. (13) SUBSEQUENT EVENTS On January 30, 2001, the Company acquired 100% of the issued and outstanding stock of Classic Resources Inc. ("Classic") for cash consideration of approximately $53.5 million. The purchase price is subject to certain post- closing adjustments customary in transactions of this type. Classic is a privately-held exploration and production company with properties located in East Texas. The Company estimates these properties to have unaudited total net proved reserves of 47 Bcfe and net daily production of 11 Mmcfe, as of January 31, 2001. The acquisition of Classic was financed under the Company's existing Credit Facility. On March 12, 2001, the Company's borrowing base under its Credit Facility was redetermined and set at $175 million. Additionally, two new banks were added to the bank group. F-19 3TEC ENERGY CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) December 31, 2000 and 1999 (14) SUPPLEMENTAL OIL AND NATURAL GAS INFORMATION (UNAUDITED) Capitalized Costs and Costs Incurred The following tables present the capitalized costs related to oil and natural gas producing activities and the related depreciation, depletion, amortization and impairment as of December 31, 2000 and 1999 and costs incurred in oil and natural gas property acquisition, exploration and development activities (in thousands) for the years ended December 31, 2000 and 1999.
2000 1999 -------- -------- Capitalized Costs Proved properties.................................... $263,801 $162,455 Nonproducing leasehold............................... 6,477 6,385 Accumulated depreciation, depletion, amortization and impairment.......................................... (54,260) (37,861) -------- -------- Net capitalized costs.............................. $216,018 $130,979 ======== ======== Costs Incurred Proved properties.................................... $ 79,770 $ 91,081 Unproved properties.................................. 95 343 Exploration costs.................................... 695 824 Development costs.................................... 25,346 2,154 -------- -------- Total.............................................. $105,906 $ 94,402 ======== ======== Depletion, depreciation, amortization and impairment... $ 18,459 $ 9,067 ======== ========
Estimated Quantities of Reserves The Company has interests in oil and natural gas properties that are located principally in Texas, Louisiana, Kansas, Oklahoma and New Mexico. The Company does not own or lease any oil and natural gas properties outside the United States. There are no quantities of oil and natural gas subject to long-term supply or similar agreements with any governmental agencies. The Company retains independent engineering firms to provide year-end estimates of the Company's future net recoverable oil, natural gas and natural gas liquids reserves. In 2000 and 1999, such estimates were prepared by Ryder Scott Company. The reserve information was prepared in accordance with guidelines established by the Securities and Exchange Commission. Estimated proved net recoverable reserves as shown below include only those quantities that can be expected to be commercially recoverable at prices and costs in effect at the balance sheet dates under existing regulatory practices and with conventional equipment and operating methods. Proved developed reserves represent only those reserves expected to be recovered through existing wells. Proved undeveloped reserves include those reserves expected to be recovered from new wells or on undrilled acreage or from existing wells on which a relatively major expenditure is required for recompletion. F-20 3TEC ENERGY CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) December 31, 2000 and 1999 Net quantities of proved developed and undeveloped reserves of oil, including condensate and natural gas liquids, for the years ended December 31, 2000 and 1999 are summarized as follows:
2000 1999 ---------------- --------------- Oil Oil (MBbls) Gas (MBbls) Gas (1) (MMcf) (1) (MMcf) ------- ------- ------ ------- Proved Reserves Beginning of year....................... 9,835 159,699 3,342 43,483 Purchases of reserves in place.......... 1,981 85,437 6,866 126,557 Extensions and discoveries.............. 51 2,699 12 1,226 Revisions of previous estimates......... 659 8,698 502 (5,136) Sales of reserves in place.............. (715) (1,076) (355) (1,693) Production for the year................. (1,139) (17,764) (532) (4,738) ------ ------- ----- ------- End of year........................... 10,672 237,693 9,835 159,699 ====== ======= ===== ======= Proved Developed Reserves Beginning of year....................... 9,358 122,914 3,118 36,731 ====== ======= ===== ======= End of year............................. 9,895 177,252 9,358 122,914 ====== ======= ===== =======
- -------- (1) Includes oil, condensate and plant product barrels. Standardized Measure of Discounted Future Net Cash Flows From Proved Reserves The following is a summary of the standardized measure of discounted future net cash flows related to the Company's proved oil and natural gas reserves. For these calculations, estimated future cash flows from estimated future production of proved reserves are computed using oil and natural gas prices as of the end of each period presented. Future development and production costs attributable to the proved reserves were estimated assuming that existing conditions would continue over the economic lives of the individual leases and costs were not escalated for the future. Estimated future income taxes were calculated by applying statutory tax rates (based on current law adjusted for permanent differences and tax credits) to the estimated future pre-tax net cash flows related to proved oil and natural gas reserves, less the tax basis of the properties involved. The Company cautions against using this data to determine the value of its oil and natural gas properties. To obtain the best estimate of the fair value of the oil and natural gas properties, forecasts of future economic conditions, varying discount rates, and consideration of other than proved reserves would have to be incorporated into the calculation. In addition, there are significant uncertainties inherent in estimating quantities of proved reserves and in projecting rates of production that impair the usefulness of the data. The standardized measure of discounted future net cash flows relating to proved oil and natural gas reserves for the years ended December 31, 2000 and 1999 are summarized as follows (in thousands):
2000 1999 ---------- -------- Future cash inflows.................................. $2,349,534 $594,023 Future production costs and development costs........ (352,703) (223,765) Future income tax expenses........................... (676,227) (92,975) ---------- -------- Future net cash flows................................ 1,320,604 277,283 10% discount to reflect timing of cash flows......... (627,930) (128,542) ---------- -------- Standardized measure of discounted future net cash flows............................................... $ 692,674 $148,741 ========== ========
F-21 3TEC ENERGY CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) December 31, 2000 and 1999 The following are the principal sources of changes in the standardized measure of discounted future net cash flows for the years ended December 31, 2000 and 1999 (in thousands):
2000 1999 -------- -------- Sales of oil and natural gas, net of production cost... $(78,969) $(12,300) Net changes in prices and production cost.............. 479,690 18,646 Extensions and discoveries............................. 22,909 1,945 Purchases of reserves.................................. 749,702 150,295 Sales of reserves...................................... (8,789) (1,643) Revisions of previous quantity estimates............... 39,442 (1,994) Net change in income taxes............................. 304,816 (49,874) Accretion of discount.................................. 19,843 3,889 Changes in production rates (timing) and other......... (984,711) 883 -------- -------- Change for year........................................ $543,933 $109,847 ======== ========
The period end prices of oil and natural gas at December 31, 2000 and 1999, used in the above table were $25.31 and $23.64 per barrel of oil and $9.40 and $2.23 per thousand cubic feet of natural gas, respectively. F-22 EX-21.1 2 0002.txt SUBSIDIARIES EXHIBIT 21.1 SUBSIDIARIES OF 3TEC ENERGY CORPORATION
Name of Subsidiary Jurisdiction of Incorporation or Organization ------------------ --------------------------------------------- Enex Resources Corporation Delaware 3TEC/CRI Corporation Delaware (formerly Classic Resources Inc.)
EX-23.1 3 0003.txt CONSENT Exhibit 23.1 Accountants' Consent We consent to incorporation by reference in the registration statements Nos. 333-49354 and 333-53192 on Form S-8 and No. 333-51964 on Form S-3 of 3TEC Energy Corporation of our report dated March 16, 2001, relating to the consolidated balance sheets of 3TEC Energy Corporation and subsidiaries as of December 31, 2000, and 1999, and the related consolidated statements of operations, changes in stockholders' equity and cash flows for each of the years then ended, which report appears in the December 31, 2000 annual report on Form 10-KSB of 3TEC Energy Corporation. KPMG LLP Houston, Texas March 29, 2001 EX-23.2 4 0004.txt CONSENT OF RYDER SCOTT EXHIBIT 23.2 [RYDER SCOTT COMPANY, L.P. LETTERHEAD] CONSENT OF INDEPENDENT PETROLEUM ENGINEERS Board of Directors 3TEC Energy Corporation Houston, Texas As independent petroleum engineers, we hereby consent to all references in the Form 10-KSB for the year ended December 31,2000 to Ryder Scott Company, L.P. and/or our summary letters dated December 16, 1999, May 25, 2000 and May 31, 2000, regarding our estimates of the proved oil and natural gas reserves of 3TEC Energy Corporation as of December 31, 1999. We further consent to all references to our Firm in previous filings that are incorporated by reference in the Form 10-KSB, including our reserve estimates of the oil and natural gas properties acquired by 3TEC Energy Corporation from Floyd Oil Company, Magellan Exploration, LLC, and CWR Resources, Inc. RYDER SCOTT COMPANY, L.P. Houston, Texas March 27, 2001 -----END PRIVACY-ENHANCED MESSAGE-----