10QSB 1 d10qsb.txt FORM 10-Q FOR QTR. ENDED MAR. 31, 2001 U.S. SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-QSB [X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended March 31, 2001 OR [ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT For the transition period from ______ to _______ Commission File No. 001-14745 3TEC ENERGY CORPORATION (Exact name of small business issuer as specified in its charter) DELAWARE 63-1081013 (State or other jurisdiction of (I.R.S. Employer Incorporation or Organization) Identification No.) 777 WALKER STREET TWO SHELL PLAZA, SUITE 2400 HOUSTON, TX 77002 (Address of principal executive offices) (713) 821-7100 (Issuer's telephone number) N/A (Former Name, Former Address and Former Fiscal Year, If Changed Since Last Report) Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of Exchange Act during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Number of shares outstanding of each of the Registrant's classes of common stock, as of the latest practicable date: Common stock, $0.02 par value 14,698,296 shares as of April 26, 2001 Transitional Small Business Disclosure Format (check one) Yes [ ] No [X] 3TEC ENERGY CORPORATION AND SUBSIDIARIES INDEX PAGE NO. ---- PART I. FINANCIAL INFORMATION Item 1. Financial Statements Consolidated Balance Sheets- March 31, 2001 (Unaudited) and December 31, 2000 (Audited)... 1 Consolidated Statements of Operations (Unaudited)- Three months ended March 31, 2001 and 2000................... 2 Consolidated Statements of Cash Flows (Unaudited)- Three months ended March 31, 2001 and 2000................... 3 Notes to Consolidated Financial Statements (Unaudited)........ 4 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations................. 8 PART II. OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K....................... 10 PART I. CONSOLIDATED FINANCIAL INFORMATION ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS 3TEC ENERGY CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
MARCH 31, DECEMBER 31, 2001 2000 ------------ ------------ ASSETS (UNAUDITED) (AUDITED) CURRENT ASSETS Cash and cash equivalents.......................... $ 6,002,629 $ 4,436,497 Accounts receivable................................ 29,729,502 26,137,738 Other current assets............................... 2,724,613 5,389,848 ------------ ------------ Total current assets........................... 38,456,744 35,964,083 PROPERTY (AT COST) Oil and gas-successful efforts method.............. 372,948,127 270,277,796 Other.............................................. 2,412,577 2,030,310 ------------ ------------ 375,360,704 272,308,106 Accumulated depreciation, depletion and amortization. (62,999,144) (56,170,333) ------------ ------------ Net Properties and Equipment......................... 312,361,560 216,137,773 OTHER ASSETS......................................... 2,867,202 2,662,201 ------------ ------------ TOTAL ASSETS......................................... $353,685,506 $254,764,057 ============ ============ LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES Accounts payable................................... $ 15,866,330 $ 10,746,140 Accrued liabilities................................ 6,242,636 2,191,826 Series C Preferred stock redemption payable........ 2,726,616 2,855,521 Income taxes payable............................... 5,211,522 4,461,928 Other current liabilities.......................... 1,493,046 467,152 ------------ ------------ Total current liabilities............................ 31,540,150 20,722,567 LONG-TERM DEBT....................................... 99,000,000 63,000,000 SENIOR SUBORDINATED CONVERTIBLE NOTES................ 13,223,844 13,223,844 DEFERRED INCOME TAXES................................ 40,440,767 6,770,981 OTHER LIABILITIES.................................... 5,445 58,424 MINORITY INTEREST.................................... 1,575,926 1,393,578 STOCKHOLDERS' EQUITY Preferred stock, $0.02 par, 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 D, $24.00 stated value, 621,372 and 621,930 shares issued and outstanding at March 31, 2001 and December 31, 2000, respectively. $14,912,928 aggregate liquidation preference............................... 7,564,812 7,571,553 Common stock, $.02 par value, 60,000,000 shares authorized, 14,696,796 and 14,687,906 shares issued at March 31, 2001 and December 31, 2000, respectively......................................... 293,936 293,758 Additional paid-in capital......................... 136,436,833 136,382,775 Retained earnings.................................. 21,025,633 2,768,417 Treasury stock; 69,807 and 69,807 shares at March 31, 2001 and December 31, 2000, respectively...... (1,048,840) (1,048,840) ------------ ------------ TOTAL STOCKHOLDERS' EQUITY........................... 167,899,374 149,594,663 ------------ ------------ COMMITMENTS AND CONTINGENCIES........................ - - ------------ ------------ TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY........... $353,685,506 $254,764,057 ============ ============
SEE ACCOMPANYING NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS 1 3TEC ENERGY CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31 -------------------------- (Unaudited) (Unaudited) 2001 2000 ----------- ----------- REVENUES Oil, natural gas and plant income.............. $48,863,830 $17,292,024 Gain on sale of properties..................... 87,210 8,893 Other.......................................... 125,110 308,284 ----------- ----------- TOTAL REVENUES................................... 49,076,150 17,609,201 ----------- ----------- EXPENSES Production - Lease operations............................. 4,356,813 3,483,897 Severance, production and ad valorem taxes... 3,176,160 1,409,467 Gathering, transportation and other.......... 858,199 377,451 Geological and geophysical..................... 215,113 173,121 Dry hole....................................... - 12,243 General and administrative..................... 1,541,737 1,383,846 Interest....................................... 2,181,131 2,084,499 Depreciation, depletion and amortization....... 6,801,239 3,920,436 ----------- ----------- TOTAL EXPENSES................................... 19,130,392 12,844,960 INCOME BEFORE INCOME TAX EXPENSE, MINORITY INTEREST AND DIVIDENDS TO PREFERRED STOCKHOLDERS...................... 29,945,758 4,764,241 Minority Interest................................ 182,348 42,400 Income tax expense............................... 11,315,424 1,605,424 ----------- ----------- NET INCOME....................................... 18,447,986 3,116,417 Dividends to preferred stockholders.............. 190,769 260,090 ----------- ----------- NET INCOME ATTRIBUTABLE TO COMMON STOCKHOLDERS............................ $18,257,217 $ 2,856,327 =========== =========== NET INCOME PER COMMON SHARE BASIC.......................................... $1.25 $0.48 =========== =========== DILUTED........................................ $0.98 $0.35 =========== =========== WEIGHTED AVERAGE COMMON SHARES OUTSTANDING BASIC.......................................... 14,597,465 6,013,109 ========== =========== DILUTED........................................ 19,049,503 9,342,722 ========== ===========
SEE ACCOMPANYING NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS 2 3TEC ENERGY CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED MARCH 31 --------------------------- (Unaudited) (Unaudited) 2001 2000 ------------ ----------- OPERATING ACTIVITIES Net income.......................................................................... $ 18,447,986 $ 3,116,417 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation, depletion and amortization.......................................... 6,638,908 3,920,436 Amortization of debt issue costs.................................................. 162,331 - Dry hole costs.................................................................... - 12,243 Gain on sale of properties........................................................ (87,210) (8,893) Deferred income taxes............................................................. 6,103,902 1,605,424 Minority interest................................................................. 182,348 42,400 Changes in current assets and liabilities net of acquisition effects: Accounts receivable and other current assets..................................... 38,426 (278,269) Accounts payable, accrued liabilities and other current liabilities.............. 6,858,761 (1,384,253) ------------ ----------- NET CASH PROVIDED BY OPERATING ACTIVITIES........................................... 38,345,452 7,025,505 INVESTING ACTIVITIES Proceeds from sales of properties................................................. - 148,519 Acquisition of Magellan Exploration LLC, net of cash acquired..................... - (269,937) Acquisition of Classic Resources, Inc., net of cash acquired...................... (57,199,127) - Acquisition of oil and gas properties............................................. (383,189) (4,165,381) Development of oil and gas properties............................................. (14,657,229) - Additions to other assets......................................................... (587,268) (486,532) ------------ ----------- NET CASH USED IN INVESTING ACTIVITIES............................................... (72,826,813) (4,773,331) FINANCING ACTIVITIES Proceeds from long term debt...................................................... 62,000,000 - Principal payments on long term debt.............................................. (26,000,000) (4,000,000) Proceeds from issuance of common stock............................................ - 12,000 Proceeds from exercise of stock options and warrants.............................. 47,493 - Preferred stock dividends......................................................... - (219,313) Debt, common stock and preferred stock issue and registration costs............... - (269,134) ------------ ----------- NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES................................. 36,047,493 (4,476,447) DECREASE (INCREASE) IN CASH AND CASH EQUIVALENTS.................................... 1,566,132 (2,224,273) CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD.................................... 4,436,497 6,141,153 ------------ ----------- CASH AND CASH EQUIVALENTS AT ENDING OF PERIOD....................................... $ 6,002,629 $ 3,916,880 ============ =========== SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Cash paid during the year for: Interest.......................................................................... $ 1,189,849 $ 2,054,620 ============ =========== Income taxes...................................................................... $ 4,408,200 $ - ============ =========== Non-cash investing and financing activities: Preferred dividends incurred but not paid......................................... $ 190,769 $ 150,434 ============ =========== Common stock and warrants issued in acquisition of Magellan Exploration LLC....... $ - $10,572,935 ============ =========== Preferred stock issued in acquisition of Magellan Exploration LLC................. $ - $ 7,453,457 ============ =========== Deferred taxes recorded in acquisition of Classic................................. $ 27,565,844 $ - ============ ===========
SEE ACCOMPANYING NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS 3 3TEC ENERGY CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (1) INTERIM FINANCIAL STATEMENTS In management's opinion, the accompanying consolidated financial statements contain all adjustments (consisting primarily of normal recurring adjustments) necessary to present fairly the consolidated financial position of the Company as of March 31, 2001 and the consolidated results of operations and consolidated cash flows for the periods ended March 31, 2001 and 2000. These consolidated financial statements should be read in conjunction with the Company's financial statements and notes thereto included in the Company's Annual Report on Form 10-KSB for the year ended December 31, 2000. The results of operations for the three months ended March 31, 2001, are not necessarily indicative of the results which may be expected for any other interim period or for the entire fiscal year ending December 31, 2001. (2) RECLASSIFICATIONS Certain reclassifications of prior period amounts have been made to conform to the current presentation. (3) 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 anti-dilutive. Basic and diluted earnings per share for the three month period ended March 31, 2001 and 2000 determined as follows (in thousands):
THREE MONTHS THREE MONTHS ENDED ENDED MARCH 31, 2001 MARCH 31, 2000 --------------- -------------- Basic net income attributable to common stockholders................... $18,257 $2,856 Plus preferred stock dividends......................................... 191 260 Plus interest expense (net of tax) on subordinated convertible notes... 182 196 ------- ------ Fully diluted net income attributable to common stockholders........... $18,630 $3,312 ======= ====== OUTSTANDING OUTSTANDING SHARES SHARES --------------- -------------- Basic shares outstanding (weighted average shares)..................... 14,597 6,013 Plus potentially dilutive securities: Dilutive options and warrants applying treasury stock method........... 2,230 1,004 Shares from conversion of subordinated convertible notes............... 1,469 1,469 Shares from conversion of Series B preferred stock..................... 132 91 Shares from conversion of Series C preferred stock..................... - 379 Shares from conversion of Series D preferred stock..................... 622 387 ------- ------ Fully diluted shares outstanding (weighted average shares)............. 19,050 9,343 ======= ======
4 3TEC ENERGY CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (UNAUDITED) (4) ACQUISITIONS 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 "Classic Acquisition") plus other acquisition costs. 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 approximately 11 Mmcfe, as of January 31, 2001. The Classic Acquisition was financed under the Company's existing Credit Facility. On May 31, 2000, we completed the acquisition of the CWR Properties (the "CWR Acquisition") located in East Texas for cash consideration of approximately $51.9 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 CWR Acquisition. The purchase price was allocated principally to oil and natural gas properties. 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 Energy Company, 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 purchase price of approximately $19 million was allocated principally to proved undeveloped oil and natural gas properties. The following pro forma data presents the results of the Company for the three months ended March 31, 2000, as if the Classic Acquisition and the CWR Acquisition had occurred on January 1, 2000, and the results of the Company for the three months ended March 31, 2001 as if the Classic Acquisition had occurred on January 1, 2001. The pro forma data assumes the acquisition of the respective properties and the debt 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 the Magellan Acquisition, 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 THREE MONTHS ENDED THREE MONTHS ENDED MARCH 31, 2001 MARCH 31, 2000 (UNAUDITED) (UNAUDITED) ------------------- ------------------- Total revenues................................................... $51,146 $22,846 Net income attributable to common stockholders................... 16,068 2,564 Net income per basic share attributable to common stockholders... 1.10 0.43
The results of Classic's operations have been included in the Company's consolidated financial statements beginning on January 30, 2001 using the purchase method of accounting. The total purchase price was allocated principally to oil and natural gas assets as adjusted for deferred tax liabilities of $27 million. 5 3TEC ENERGY CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (UNAUDITED) (5) STOCKHOLDERS' EQUITY Common Stock On June 30, 2000, the Company completed its 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 amended credit facility. Series C Preferred Stock Redemption 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 August 31, 2000, with 1,293,521 shares (62%) held by the Company's 80% owned subsidiary, Enex Resources Corporation. Approximately 109,580 Series C shares were converted into 36,527 shares of common stock and approximately 1,992,247 Series C shares were redeemed. At March 31, 2001, the Company's liability for the Series C redemption is approximately $2.7 million. Series D Preferred Stock In connection with the Magellan Acquisition, the Company issued 617,009 shares of Series D Preferred Stock, par value $0.02 per share (the "Series D"), with a redemption value of $24.00 per share. While the per share redemption and dividend amounts of all of our different series of preferred stock vary, the rights as to dividends and liquidation payments are equal. Shares of Series D earn cumulative dividends at 5% per annum, payable semi-annually on March 31 and September 30 of each year, when, as and if authorized and declared by the board of directors. For a period of three years from the closing date of the Magellan Acquisition, the Company may pay the dividends at its option in cash or in additional shares of Series D. Dividends were paid on the outstanding shares of Series D as of March 31, 2000 in the form of additional shares of Series D Preferred Stock, and as of September 30, 2000 and March 31, 2001 in a cash payment. Holders of Series D have the right to convert one share of Series D into one share of common stock. Upon thirty days written notice, the Company has the right to redeem any or all shares of Series D for $24.00 per share plus any accrued but unpaid dividends. Holders of the Series D have no right to require the Company to redeem the Series D. During the three month period ended March 31, 2001, 558 shares of the Series D Preferred Stock were converted to common stock. In the event of liquidation, dissolution, winding-up or merger of the Company, the holders of Series D Preferred Stock are entitled to receive distributions of $24.00 per share of Series D plus any accrued but unpaid dividends before any holders of common stock or junior preferred stock receive any distributions. A majority of the holders of Series D must consent to certain actions by the Company, that might adversely affect any holder's rights and preferences. (6) 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, 1999 shareholders 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 6 3TEC ENERGY CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (UNAUDITED) "dissenters"). The Company made an offer to the dissenters on March 14, 2000 and the dissenters made a counteroffer in late March. On May 26, 2000, the Company agreed to a settlement with the dissenters to purchase 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. (7) HEDGING ACTIVITIES In February 2000, the Company entered into fixed price 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 three month period ending March 31, 2000, the Company's oil revenues were reduced by the effect of our hedging activities by $101,000. The fair market value of the open position at March 31, 2000 was approximately ($47,480). As of December 31, 2000 and the period ended March 31, 2001, the Company did not have any open derivative instruments or hedging activities. However, the Company cannot assure that such instruments or activities will not be put into place in the future. (8) ACCOUNTING PRONOUNCEMENTS In September 1998, the FASB issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities." SFAS No. 133, as amended, standardizes the accounting for and disclosures of derivative instruments, including certain derivative instruments embedded in other contracts. The statement is effective for the Company's financial statements on January 1, 2001. As of December 31, 2000 and the period ended March 31, 2001, the Company did not have any open derivative instruments or hedging activities. However, the Company cannot assure that such instruments or activities will not be put into place in the future. 7 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS This quarterly report on Form 10-QSB contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Such forward-looking statements involve risks and uncertainties and other factors beyond the control of the Company. Readers are cautioned that any such forward-looking statements are not guarantees of future performance and that actual results or developments may differ materially from those projected in the 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, on a pro forma basis including the subsequent acquisition of Classic, we had at that date estimated total net proved reserves of 354 Bcfe, of which approximately 81% were natural gas and approximately 74% were proved developed, with an estimated PV-10 value of $1.23 billion (using SEC pricing parameters at December 31, 2000.) LIQUIDITY AND CAPITAL RESOURCES 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 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 production. For the year 2001, we have budgeted approximately $63 million for development and exploration capital expenditures. Through March 31, 2001, the Company has expended approximately $15 million of its capital budget. We are obligated to pay dividends of approximately $740,000 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. Our primary source of financing for acquisitions has been borrowings under our credit facility (the "Facility"), discussed below. 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 current year. We also believe that we have the ability to raise additional equity or debt financing and otherwise access the capital markets should those sources of capital prove insufficient to execute our strategic objectives. 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 of sufficient amounts to maintain planned levels of capital expenditures. The Facility provides for a borrowing base which is redetermined on a semi- annual basis, and as of March 31, 2001, was set at $175 million. Interest under the Facility is based upon 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 amounts outstanding increase as a percentage of the borrowing base. At March 31, 2001, we were paying an average of approximately 7.44% per annum interest on the entire principal balance of the Facility of $99 million. The Facility matures on May 31, 2003. The borrowings under the Facility are secured by substantially all of our properties. In connection with this 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 a minimum current ratio and interest coverage ratio. At March 31, 2001, the Company was in compliance with the terms of the Facility. 8 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. As of March 31, 2001, the Company does not have any derivative instruments or hedging activities that will impact 2001 operations and therefore does not expect any income statement or balance sheet impact for 2001. However, the Company cannot assure that such instruments or activities will not be put into place in the future. Due to our significant property and corporate acquisitions in 2000 and 2001, and our current capital structure, comparisons of our results of operations for interim periods in 2001 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 year ended December 31, 2000, filed in our 2000 Form 10-KSB. The following table reflects certain summary operating data for the periods presented:
THREE MONTHS ENDED MARCH 31 ------------------ 2001 2000 ------ ------ Net Production Data: -------------------- Oil and Liquids (MBbls)................ 300 308 Natural Gas (MMcf)..................... 5,623 3,578 Equivalent Production (MMcfe).......... 7,423 5,426 Average Sales Price: (1) ------------------------ Oil and Liquids (per Bbl).............. $27.21 $24.94 Natural Gas (per Mcf).................. 7.14 2.56 Equivalent price (per Mcfe)............ 6.51 3.11 Expenses ($ per Mcfe): ---------------------- Lease operations....................... $ 0.59 $ 0.64 Production, severance and ad valorem... 0.43 0.26 Gathering, transportation and other.... 0.12 0.07 General and administrative............. 0.21 0.26 Depreciation and depletion (2)......... 0.92 0.72
(1) Includes effect of our hedging activities. (2) Represents depreciation, depletion and amortization, excluding impairments. THREE MONTHS ENDED MARCH 31, 2001 COMPARED TO THREE MONTHS ENDED MARCH 31, 2000 Oil and Gas Revenues. Revenues from oil and gas operations increased by 183% to $48.9 million for the three months ended March 31, 2001, compared to $17.3 million for the same period during 2000. The increase is attributable to the Company's significant revenue growth via acquisitions and drilling as well as higher commodity prices received by the Company during the period. Production Expense. Production expense for the three months ended March 31, 2001, increased by 58% to $8.4 million compared to $5.3 million during the same period of 2000. Lease operating expenses on an $/MCFE basis decreased to $0.59/MCFE from $0.64/MCFE, while production, severance and ad valorem taxes increased to $0.43/MCFE from $0.26/MCFE. Lower per unit operating costs associated with the Company's acquired properties and higher per unit operating costs of properties sold by the Company in July of 2000 are attributed to the current period decrease. Higher realized commodity prices during the three months ended March 31, 2001 of $6.51/MCFE vs. $3.11/MCFE in 2000 is the principal reason for the increase in taxes. General and Administrative Expense. General and administrative expense for the three months ended March 31, 2001 increased by $0.2 million compared to the same period in 2000. The increase is attributable to increased staffing levels as a result of the Company's significant growth from acquisitions. 9 Depreciation, Depletion and Amortization Expense. Depreciation, depletion and amortization expense ("DD&A") for the three months ended March 31, 2001 was $6.8 million compared to $3.9 million for the same period of 2000. The additional DD&A recorded is again attributed to the Company's significant production growth from acquisitions. Income Taxes. For the three months ended March 31, 2001, the Company recorded a tax provision of $11.3 million compared to a tax provision of $1.6 million during the same period in 2000. The provision recorded in 2001 represents the Company's net income for the three months ended at its expected effective tax rate for 2001 of approximately 38%. Dividends to Preferred Stockholders. Dividends to preferred stockholders of approximately $0.2 million in the three months ended March 31, 2001 decreased from $0.3 million for the three months ended March 31, 2000. The decrease in dividends was due to the redemption of the Series C Preferred Stock at September 30, 2000. PART II. OTHER INFORMATION ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) 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.) 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.) 2.8 Form of Stock Purchase Agreement by and between 3TEC Energy Corporation and Classic Resources, Inc., Natural Gas Partners IV, L.P., Natural Gas Partners V, L.P., and certain individual signatories. (Incorporated by reference to Exhibit 2.1 to Form 8-K filed February 13, 2001.) 3.1 Certificate of Incorporation of 3TEC Energy Corporation. (Incorporated by reference to Exhibit 3.1 Form 8-K/A filed December 6, 1999.) 10 3.2 Certificate of Amendment to the Certificate of Incorporation of 3TEC Energy Corporation. (Incorporated by reference to Form 3.3 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 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 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.) 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 Restated Credit Agreement by and among Middle Bay Oil Company, Inc., Enex Resources Corporation and Middle Bay Production Company, Inc. as borrowers, and Bank One, Texas, N.A. and other institutions as lenders. (Incorporated by reference to Exhibit 10.1 to Form 8-K/A filed December 17, 1999.) 10.12 Subordination Agreement, dated August 27, 1999 by and among Shoemaker Family Partners, LP, Compass Bank, and Bank of Oklahoma, National Association. (Incorporated by reference to Exhibit 10.15 to Form 10-QSB filed November 15, 1999.) 11 10.13 Subordination Agreement, dated August 27, 1999 by and among Shoeinvest II, LP, Compass Bank, and Bank of Oklahoma, National Association. (Incorporated by reference to Exhibit 10.16 to Form 10-QSB filed November 15, 1999.) 10.14 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.) 10.15 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.) 10.16 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.) 10.17 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.) 10.18 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.) 10.19 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.) 10.20 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.) 10.21 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.) 10.22 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.) 10.23 1999 Stock Option Plan. (Incorporated by reference to Exhibit E to Form DEF 14A filed October 25, 1999.) 10.24 2000 Stock Option Plan (Incorporated by reference to Exhibit A to Form DEF 14A filed on May 1, 2000.) 10.25 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 September 6, 2000.) 10.26 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.) 10.27 Third Restated Credit Agreement among 3TEC Energy Corporation, Enex Resources Corporation and 3TEC/CRI Corporation, as Borrowers, and Bank One, N.A. and the Institutions named therein, as Lenders, Bank One, N.A., as Administrative Agent, Bank of Montreal as Syndication Agent and Banc One Capital Markets, Inc., as Arranger, dated March 12, 2001.* 12 * Filed herewith (b) The following reports were filed on Form 8-K during the first quarter of 2001: On January 8, 2001, the Company filed a Form 8-K under Items 5 and 7 describing the agreement entered to acquire the stock of Classic Resources, Inc. On February 13, 2001, the Company filed a Form 8-K under Items 2 and 7 describing the acquisition of Classic Resources, Inc. 13 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 May 14, 2001. 3TEC ENERGY CORPORATION (Registrant) By: /s/ Floyd C. Wilson ------------------- Floyd C. Wilson Chairman and Chief Executive Officer By: /s/ R.A. Walker --------------- R.A. Walker President, Chief Financial Officer, Director By: /s/ Shane M. Bayless -------------------- Shane M. Bayless Vice President-Controller, Treasurer and Principal Accounting Officer 14