1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington D. C. 20549
FORM 10-Q
Quarterly Report Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
For the Quarter Ended March 31, 1996 Commission File No. 1-5591
PENNZOIL COMPANY
(Exact name of registrant as specified in its charter)
Delaware 74-1597290
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
Pennzoil Place, P.O. Box 2967
Houston, Texas 77252-2967
(Address of principal executive offices)
Registrant's telephone number, including area code: (713) 546-4000
Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or
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 class of common stock, as
of latest practicable date, April 30, 1996:
Common stock, par value $0.83-1/3 per share, 46,443,204
shares.
2
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
- ----------------------------
PENNZOIL COMPANY
CONDENSED CONSOLIDATED STATEMENT OF INCOME
(UNAUDITED)
Three Months Ended
March 31
----------------------------
1996 1995
----------- -----------
(Expressed in thousands
except per share amounts)
REVENUES $ 587,341 $ 635,340
COSTS AND EXPENSES
Cost of sales 340,095 368,832
Selling, general and administrative expenses 86,637 99,457
Depreciation, depletion and amortization 65,990 92,611
Exploration expenses 9,845 9,072
Taxes, other than income 13,742 14,731
Interest charges, net 47,563 48,479
----------- -----------
INCOME BEFORE INCOME TAX 23,469 2,158
Income tax provision (benefit) 7,700 (585)
----------- -----------
NET INCOME $ 15,769 $ 2,743
=========== ===========
EARNINGS PER SHARE $ 0.34 $ 0.06
=========== ===========
DIVIDENDS PER COMMON SHARE $ 0.25 $ 0.75
=========== ===========
AVERAGE SHARES OUTSTANDING 46,394 46,158
=========== ===========
NUMBER OF SHARES OUTSTANDING 46,426 46,193
=========== ===========
<FN>
<F1>
See Notes to Condensed Consolidated Financial Statements.
</FN>
3
PART I. FINANCIAL INFORMATION - continued
PENNZOIL COMPANY
CONDENSED CONSOLIDATED BALANCE SHEET
(UNAUDITED)
March 31, December 31,
1996 1995
------------- -------------
(Expressed in thousands)
ASSETS
Current assets
Cash and cash equivalents $ 33,971 $ 23,615
Receivables 331,826 335,876
Inventories
Crude oil, natural gas and sulphur 29,902 41,363
Motor oil and refined products 126,985 119,830
Deferred income tax 24,418 26,452
Other current assets 57,058 57,689
------------- -------------
Total current assets 604,160 604,825
Property, plant and equipment, net 2,396,621 2,418,025
Marketable securities and other investments 929,414 910,334
Other assets 320,340 374,592
------------- -------------
TOTAL ASSETS $ 4,250,535 $ 4,307,776
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Current maturities of long-term debt $ 1,808 $ 2,263
Notes payable 389,888 468,934
Accounts payable and accrued liabilities 244,299 330,263
Interest accrued 39,974 35,358
Other current liabilities 63,366 81,450
------------- -------------
Total current liabilities 739,335 918,268
Long-term debt 2,101,132 2,038,921
Deferred income tax 243,419 227,941
Other liabilities 304,417 286,414
------------- -------------
TOTAL LIABILITIES 3,388,303 3,471,544
------------- -------------
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY 862,232 836,232
------------- -------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 4,250,535 $ 4,307,776
============= =============
<FN>
<F1>
See Notes to Condensed Consolidated Financial Statements.
</FN>
4
PART I. FINANCIAL INFORMATION - continued
PENNZOIL COMPANY
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
Three Months Ended
March 31
---------------------------------
1996 1995
----------- -----------
(Expressed in thousands)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 15,769 $ 2,743
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation, depletion and amortization 65,990 92,611
Dry holes and impairments 1,574 2,484
Deferred income tax 6,370 (910)
Non-cash and other nonoperating items 13,486 (377)
Change in operating assets and liabilities (69,761) 10,961
----------- ---------
Net cash provided by operating activities 33,428 107,512
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures (127,663) (93,700)
Purchases of marketable securities and other investments (146,904) (147,844)
Proceeds from sales of marketable securities and other
investments 159,516 145,312
Proceeds from sales of assets 121,556 37,448
Other investing activities (5,815) (22,413)
----------- -----------
Net cash provided by (used in) investing activities 690 (81,197)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds (repayments) of notes payable, net (79,046) 209,091
Debt and capital lease obligation repayments (303,116) (207,151)
Proceeds from issuance of debt 370,000 5,000
Dividends paid (11,600) (34,626)
----------- -----------
Net cash used in financing activities (23,762) (27,686)
----------- -----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 10,356 (1,371)
CASH AND CASH EQUIVALENTS, beginning of period 23,615 24,884
----------- -----------
CASH AND CASH EQUIVALENTS, end of period $ 33,971 $ 23,513
=========== ===========
<FN>
<F1>
See Notes to Condensed Consolidated Financial Statements.
</FN>
5
PART I. FINANCIAL INFORMATION - continued
PENNZOIL COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(1) General -
The condensed consolidated financial statements included
herein have been prepared by Pennzoil Company ("Pennzoil") without
audit and should be read in conjunction with the financial
statements and the notes thereto included in Pennzoil's latest
annual report. The foregoing financial statements include only
normal recurring accruals and all adjustments which Pennzoil
considers necessary for a fair presentation.
(2) Adoption of New Accounting Standard -
In October 1995, the Financial Accounting Standards Board
issued Statement of Financial Accounting Standards ("SFAS") No.
123, "Accounting for Stock-Based Compensation," which established
an elective new standard on accounting for stock-based
compensation. SFAS No. 123 establishes a fair value-based method
of accounting for stock-based compensation plans awarded after
December 31, 1995 and encourages companies to adopt the accounting
method set forth in SFAS 123 in place of the existing accounting
method, which requires expense recognition only in situations where
stock compensation plans award intrinsic value to employees at the
date of grant. Companies that elect not to follow SFAS No. 123 for
accounting purposes must make annual pro forma disclosure of its
effects.
As of January 1, 1996, Pennzoil adopted SFAS No. 123 using the
pro forma disclosure method described in the pronouncement.
Accordingly, adoption of the statement did not impact Pennzoil's
results of operations or financial position. Information relating
to stock-based compensation will be included in footnotes to
Pennzoil's audited financial statements in future periods.
(3) Transactions Involving Oil and Gas Assets
In April 1996, Pennzoil signed a letter of intent with Gulf
Canada Resources Limited ("Gulf Canada") providing for (i) the
establishment of a joint venture for the development of natural gas
reserves in the Zama area of northern Alberta and (ii) the sale by
Pennzoil of its remaining, non-strategic Canadian oil and gas
assets to Gulf Canada for approximately C$250 million (US$184
million). These transactions are subject to the execution of a
definitive agreement and the receipt of certain regulatory
approvals and are expected to close by mid-1996. The sale is
expected to result in a gain for Pennzoil. The sale includes
840,000 net acres of land, 75 percent of which is
undeveloped. The properties to be sold, which are located in
Alberta and northwestern British Columbia, include net proved
reserves of approximately 35 million barrels ("MMbbls") of oil
equivalent and are currently producing approximately 5 thousand
barrels ("Mbbls") per day of liquids and 33 million cubic feet
("MMcf") per day of natural gas, net of royalties.
In April 1996, Pennzoil entered into a definitive agreement to
sell approximately half of its interest in the Azeri-Chirag-
Gunashli ("ACG") joint development unit offshore Azerbaijan in the
6
PART I. FINANCIAL INFORMATION - continued
Caspian Sea to ITOCHU Oil Exploration Co., Ltd. ("ITOCHU"), a
subsidiary of the Japanese general trading company ITOCHU Corp. As
part of the transaction, ITOCHU will fund all of Pennzoil's future
obligations in the ACG project until all such expenditures and
accrued interest are recovered from Pennzoil's share of production
from the ACG unit. ITOCHU will pay Pennzoil approximately $132
million for a 5 percent working interest in the ACG unit and the
right to receive 51 percent of the payments due Pennzoil for
reimbursement of costs incurred in developing a gas utilization
project for the Gunashli Field. Pennzoil will retain a 4.8175
percent working interest in the ACG unit after ITOCHU has recovered
its expenditures and accrued interest for payments made on
Pennzoil's behalf. Cash payments to Pennzoil will be made in three
installments. The first payment of about $90 million is due at
closing, which is expected to occur around mid-1996. Subsequent
installments of $22 million and $20 million are due at first
production (projected in late 1997) and when the project reaches
production of 200 Mbbls of oil equivalents per day (projected in
approximately four years), respectively. No gain or loss is
expected from this transaction as proceeds from the sale will be
applied to reduce Pennzoil's net investment in the ACG project.
In addition to its interest in the ACG unit, Pennzoil retains a
30 percent interest in a definitive exploration, development and
production sharing contract covering the Karabakh prospect, also
located in the Caspian Sea. The Karabakh agreement was ratified by
the Azerbaijan Parliament in February 1996.
In the first quarter of 1996, Pennzoil substantially completed
its asset highgrading program and the related disposition of
noncore oil and gas assets commenced in 1992. Proceeds from the
first quarter 1996 sales of assets totaled $88.1 million. Gains or
losses on such sales during the first quarter of 1996 were
insignificant.
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
Results of Operations
Net income for the quarter ended March 31, 1996 was $15.8
million, or $.34 per share, compared to $2.7 million, or $.06 per
share, for the same period in 1995. The increase in earnings for
the first quarter of 1996, compared to the prior year, was
primarily attributable to higher results from the oil and gas
segment and lower overall general and administrative expenses.
These increases were partially offset by lower other income as a
result of a prior year Texas franchise tax refund.
Oil and Gas
Operating income from this segment was $49.3 million for the
quarter ended March 31, 1996, compared with $12.9 million for the
same period in 1995. The increase in operating income was
primarily due to higher natural gas prices, lower operating and
general and administrative expenses, and lower depreciation,
depletion and amortization ("DD&A") expense. The lower DD&A
expense experienced in the first quarter of 1996 was primarily
attributable to lower DD&A rates as a result of the July 1, 1995
write-down of assets associated with the adoption of SFAS No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-
Lived Assets to be Disposed of" (described below), and to a
decrease in natural gas and liquids volume. Operating costs per
barrel of oil equivalent produced, excluding DD&A and exploration
expense, decreased $.60 compared to the same period in 1995.
7
PART I. FINANCIAL INFORMATION - continued
Natural gas price realizations averaged $1.79 per thousand
cubic feet ("Mcf") for the three months ended March 31, 1996
compared to $1.40 per Mcf for the same period in 1995. Natural gas
volumes produced for sale for the three months ended March 31, 1996
were 559.8 MMcf per day compared to 682.3 MMcf per day for the same
period in 1995. Liquids production volumes were 60.4 Mbbls per day
for the three months ended March 31, 1996 compared to 73.3 Mbbls
per day for the same period in 1995.
Effective July 1, 1995, Pennzoil adopted the
requirements of SFAS No. 121 which, in certain instances, specifies
that the carrying values of assets be written down to fair values.
For Pennzoil, this resulted in write-downs of proved oil and gas
properties that were not required under its prior impairment
policy. The pretax charge for the asset impairment of Pennzoil's
proved oil and gas properties was $378.9 million.
In April 1996, Pennzoil signed a letter of intent with Gulf
Canada providing for (i) the establishment of a joint venture for
the development of natural gas reserves in the Zama area of
northern Alberta and (ii) the sale by Pennzoil of its remaining,
non-strategic Canadian oil and gas assets to Gulf Canada for
approximately C$250 million (US$184 million). These transactions
are subject to the execution of a definitive agreement and the
receipt of certain regulatory approvals and are expected to
close by mid-1996. The sale is expected to result in a
gain for Pennzoil. The sale includes 840,000 net acres of land,
75 percent of which is undeveloped. The properties to be
sold, which are located in Alberta and northwestern British
Columbia, include net proved reserves of approximately 35 MMbbls of
oil equivalent and are currently producing approximately 5 Mbbls
barrels per day of liquids and 33 MMcf per day of natural gas, net
of royalties.
In April 1996, Pennzoil entered into a definitive agreement to
sell approximately half of its interest in the ACG joint
development unit offshore Azerbaijan in the Caspian Sea to ITOCHU.
As part of the transaction, ITOCHU will fund all of Pennzoil's
future obligations in the ACG project until all such expenditures
and accrued interest are recovered from Pennzoil's share of
production from the ACG unit. ITOCHU will pay Pennzoil
approximately $132 million for a 5 percent working interest in the
ACG unit and the right to receive 51 percent of the payments due
Pennzoil for reimbursement of costs incurred in developing a gas
utilization project for the Gunashli Field. Pennzoil will retain a
4.8175 percent working interest in the ACG unit after ITOCHU has
recovered its expenditures and accrued interest for payments made
on Pennzoil's behalf. Cash payments to Pennzoil will be made in
three installments. The first payment of about $90 million is due
at closing, which is expected to occur around mid-1996. Subsequent
installments of $22 million and $20 million are due at first
production (projected in late 1997) and when the project reaches
production of 200 Mbbls of oil equivalents per day (projected in
approximately four years), respectively. No gain or loss is
expected from this transaction as proceeds from the sale will be
applied to reduce Pennzoil's net investment in the ACG project.
In addition to its interest in the ACG unit, Pennzoil retains a
30 percent interest in a definitive exploration, development and
production sharing contract covering the Karabakh prospect, also
located in the Caspian Sea. The Karabakh agreement was ratified by
the Azerbaijan Parliament in February 1996.
In the first quarter of 1996, Pennzoil substantially completed
its asset highgrading program and the related disposition of
noncore oil and gas assets commenced in 1992. Proceeds from the
first quarter 1996 sales of assets totaled $88.1 million. Gains or
losses on such sales during the first quarter of 1996 were
insignificant.
8
PART I. FINANCIAL INFORMATION - continued
Motor Oil & Refined Products
Operating income from this segment was $14.4 million for the
quarter ended March 31, 1996, compared with $14.3 million for the
same period in 1995. This slight increase in operating income from
the comparable period in 1995 was primarily attributable to higher
motor oil and other lubricating product margins. These increases
were partially offset by higher manufacturing expenses, and pre-
operating expenses related to Excel Paralubes. Excel Paralubes is
the joint venture partnership with Conoco, Inc. for construction
and operation of a new lube base oil plant near Lake Charles,
Louisiana. Completion of the plant and initial startup is expected
before year-end.
Franchise Operations
The franchise operations segment recorded operating income of
$4.5 million for the quarter ended March 31, 1996, compared with a
loss of $.1 million for the same period in 1995. Results for the
first quarter of 1995 included a $6.0 million litigation settlement
charge. After adjusting for nonrecurring charges, operating income
was slightly down primarily due to the impact of severe winter
weather in the northeastern part of the United States where Jiffy
Lube has a high concentration of company centers, and start-up
costs associated with the opening of new centers during the
quarter.
Domestic systemwide sales reported on Jiffy Lube centers for
the first quarter of 1996 increased $12.3 million to $164.8
million, compared with the first quarter of 1995. Average ticket
prices increased to $34.76 for the quarter ended March 31, 1996,
compared with $34.30 for the first quarter of 1995. There were
1,229 domestic lube centers (including 484 Jiffy Lube company
operated centers) open as of March 31, 1996.
The Sears Auto Center program continues to expand, with 42
fast-oil change units open in Sears centers throughout the system,
including 37 company operated and 5 franchised operated units.
Jiffy Lube expects to open approximately 160 fast-oil change units
in Sears centers by year-end and has committed to open a total of
254 units in the program.
Other
Other operating income for the quarter ended March 31, 1996
was $15.5 million, compared with $41.1 million for the same period
in 1995. The decrease was primarily due to a 1995 favorable
resolution of a Texas franchise tax issue, which resulted in
Pennzoil receiving a $24.7 million refund which included $1.5
million in interest.
Net interest expense for the quarter ended March 31, 1996
decreased $0.9 million from the same period in 1995 primarily due
to lower interest rates.
Capital Resources and Liquidity
Cash Flow. As of March 31, 1996, Pennzoil had cash and cash
equivalents of $34.0 million. During the three months ended March
31, 1996, Pennzoil's cash and cash equivalents increased $10.4
million. Cash flows from operating activities totaled $33.4
million during the first quarter of 1996.
9
PART I. FINANCIAL INFORMATION - continued
Pennzoil's other income includes dividend income of $9.0
million during the three months ended March 31, 1996 from its
investment in common stock of Chevron Corporation.
Price Risk Management. Pennzoil has a price risk management
program that permits utilization of agreements and financial
instruments (such as futures, forward and option contracts and
swaps and collars) to reduce the price risks associated with
fluctuations in crude oil and natural gas prices. The primary
purpose of the program, as it relates to 1996 crude oil and natural
gas production, is to help provide Pennzoil with sufficient cash
from operations in 1996 to fund its capital spending program
without increasing debt. As of March 31, 1996, Pennzoil had
entered into transactions that committed an average of
approximately 273 MMcf per day of natural gas for the remainder of
1996 to be sold at fixed prices (New York Mercantile Exchange
("NYMEX")-based) ranging from $1.73 to $2.93 per Mcf, with a
weighted average price of $1.80 per Mcf, and Pennzoil had entered
into transactions that committed an average of approximately 37
Mbbls per day of crude oil for the remainder of 1996 to be sold at
fixed prices (NYMEX-based) ranging from $16.75 per barrel to $17.72
per barrel, with a weighted average price of $17.02 per barrel.
Pennzoil will constantly review and may alter its hedged positions
as conditions change.
10
PART I. FINANCIAL INFORMATION - continued
(UNAUDITED)
The following tables show revenues and operating income by segment,
other components of income and operating data.
Three Months Ended
March 31
----------------------------
1996 1995
----------- -----------
(Dollar amounts expressed
in thousands)
REVENUES
Oil and Gas $ 175,082 $ 189,176
Motor Oil & Refined Products 393,149 378,283
Franchise Operations 71,415 67,120
Other 21,958 42,032
Intersegment sales (74,263) (41,271)
----------- -----------
Total revenues $ 587,341 $ 635,340
----------- -----------
OPERATING INCOME (LOSS)
Oil and Gas $ 49,323 $ 12,908
Motor Oil & Refined Products 14,428 14,265
Franchise Operations 4,525 (148)
Other 15,487 41,058
----------- -----------
Total operating income 83,763 68,083
Corporate administrative expenses 12,731 17,446
Interest charges, net 47,563 48,479
----------- -----------
Income before income tax 23,469 2,158
Income tax provision (benefit) 7,700 (585)
----------- -----------
NET INCOME $ 15,769 $ 2,743
=========== ===========
RATIO OF EARNINGS TO FIXED CHARGES 1.40 1.02
=========== ===========
11
PART I. FINANCIAL INFORMATION - continued
(UNAUDITED)
Three Months Ended
March 31
------------------------------
1996 1995
------------ ------------
OPERATING DATA
- --------------
OIL AND GAS
Net production
Crude oil, condensate and natural
gas liquids (barrels per day) 60,402 73,326
Natural gas produced for sale (Mcf per day) 559,776 682,273
Weighted average prices
Crude oil, condensate and natural
gas liquids (per barrel) $ 14.15 $ 14.34
Natural gas (per Mcf) $ 1.79 $ 1.40
MOTOR OIL & REFINED PRODUCTS
Sales (barrels per day)
Gasoline and naphtha 20,618 21,492
Distillates and gas oils 27,630 28,487
Lubricating oil and other specialty products 21,969 23,756
Residual fuel oils 4,042 4,098
----------- -----------
Total sales (barrels per day) 74,259 77,833
=========== ===========
Raw materials processed (barrels per day) 51,416 55,548
Refining capacity (barrels per day) 62,700 62,700
FRANCHISE OPERATIONS
Domestic systemwide sales (in thousands) $ 164,819 $ 152,534
Same center sales (in thousands) $ 154,794 $ 150,917
Centers open (U.S.) 1,229 1,137
12
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
(a) In March 1996, the United States Department of Justice
filed a lawsuit against Pennzoil Products Company ("PPC") and The
Eureka Pipe Line Company ("Eureka"), a subsidiary of PPC, in the
Unites States District Court for the Southern District of West
Virginia. The lawsuit alleges that PPC and Eureka are legally
responsible for numerous oil spills in navigable waters of the
United States in violation of the Clean Water Act, and seeks
payment of civil penalties in excess of $100,000 and injuctive
relief. The Company is currently engaged in active settlement
negotiations with respect to these matters.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits -
12 Computation of Ratio of Earnings to Fixed Charges for the
three months ended March 31, 1996 and 1995.
27 Financial Data Schedule
(b) Reports -
No reports on Form 8-K were filed during the quarter for which
this report was filed.
13
SIGNATURE
Pursuant to the requirements of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be
signed on its behalf by the undersigned thereunto duly authorized.
PENNZOIL COMPANY
Registrant
S/N Michael J. Maratea
Michael J. Maratea
Vice President and Controller
May 10, 1996