Business Context and Reporting Period
This Form 10-Q covers the quarterly and six-month periods ended June 30, 1998, for Lomak Petroleum, Inc. (operating as Range Resources Corp pending merger). The Company is an independent oil and gas explorer and developer focused on the Permian, Midcontinent, Gulf Coast, and Appalachia regions. In May 1998, Lomak announced a definitive merger agreement with Domain Energy Corporation, with the combined entity to be named Range Resources Corporation. The transaction is subject to shareholder approval scheduled for August 25, 1998.
Key Financial Metrics
| Metric (in thousands) | Six Months Ended June 30, 1998 | Six Months Ended June 30, 1997 |
|---|---|---|
| Total Revenues | $70,371 | $70,531 |
| Net Income (Loss) | $1,815 | $8,932 |
| Net Cash Provided by Operations | $32,808 | $44,642 |
| Net Cash Used in Investing | $(91,972) | $(370,016) |
| Net Cash Provided by Financing | $62,965 | $330,066 |
| Total Debt (Senior + Subordinated) | $432,200 | $367,125 |
| Cash and Equivalents | $13,526 | $9,725 |
| Available Credit Facility | $86,000 | N/A |
| Earnings Per Share (Basic) | $0.03 | $0.42 |
Material Changes vs. Prior Period
- Profitability Decline: Net income for the six months ended June 30, 1998, dropped to $1.8 million from $8.9 million in the prior year. The second quarter of 1998 specifically reported a net loss of $0.9 million compared to a $2.4 million profit in Q2 1997.
- Revenue Composition: While total revenues remained flat, "Interest and other" income collapsed from $4.0 million to $1.6 million due to lower sales of marketable securities and non-strategic assets. Oil and gas sales increased 4% to $63.3 million, driven by an 18% increase in production volumes (146,400 Mcfe/d vs. 123,800 Mcfe/d), which offset a 2% decline in average realized prices.
- Expense Increases: Interest expense rose 30% to $18.1 million due to higher debt balances financing acquisitions. Exploration expenses surged to $2.4 million from $1.2 million due to 3-D seismic projects. General and administrative expenses increased to $3.9 million from $2.1 million.
- Capital Expenditures: Net cash used in investing activities decreased significantly to $92 million from $370 million, reflecting a shift from the massive Cometra acquisition in 1997 to smaller development and acquisition activities (e.g., Powell Ranch Properties) in 1998.
Guidance, Outlook, and Risks
- Merger Status: The merger with Domain Energy is the primary strategic focus. Lomak purchased 3.3 million Domain shares for $43.9 million as a condition of the deal. The final exchange ratio is subject to market price fluctuations.
- Capital Requirements: Management projects spending approximately $300 million on development, exploitation, and exploration over the next three years. These expenditures are expected to consume the majority of internally generated cash flows.
- Liquidity: The Company maintains a $400 million revolving credit facility with a borrowing base of $325 million. As of June 30, 1998, $86 million was available. Liquidity is highly dependent on oil and gas prices, which affect the borrowing base.
- Hedging: The Company has open hedging contracts covering an average of 13,100 Mmbtu per day at prices ranging from $2.15 to $2.72 per Mmbtu to mitigate price volatility.
- Legal Contingencies:
- Gas Utility Litigation: A gas utility sued for breach of contract regarding an above-market gas price. A partial summary judgment was granted in favor of the utility's interpretation of the contract in May 1998. Damages are estimated at approximately $2 million plus fees, though Lomak intends to appeal.
- Merger Litigation: A Domain stockholder filed an action in the Delaware Court of Chancery alleging the merger terms are unfair. Lomak intends to defend vigorously.
- Year 2000 Compliance: The Company is implementing a plan to ensure computer systems are Y2K compliant, with testing expected to conclude by the end of 1998. Costs are not expected to be material.
Investor Verification Checklist
- Merger Completion: Verify the outcome of the shareholder vote scheduled for August 25, 1998, and the final exchange ratio for the Domain Energy merger.
- Legal Exposure: Monitor the resolution of the gas utility lawsuit, specifically the determination of damages following the partial summary judgment.
- Debt Covenants: Confirm continued compliance with debt covenants regarding net worth and working capital, given the increased debt load and lower earnings.
- Commodity Prices: Assess the impact of current oil and gas prices on the $325 million borrowing base and future cash flow projections.
- Capital Allocation: Review the balance between the projected $300 million capital expenditure plan and available cash flow versus debt financing needs.