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, 1997 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, 1997:
Common stock, par value $0.83-1/3 per share, 46,951,151
shares.
2
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
- ----------------------------
PENNZOIL COMPANY
CONDENSED CONSOLIDATED STATEMENT OF INCOME
(UNAUDITED)
Three Months Ended
March 31
----------------------------
1997 1996
----------- -----------
(Expressed in thousands
except per share amounts)
REVENUES $ 649,000 $ 587,341
COSTS AND EXPENSES
Cost of sales 355,872 340,095
Selling, general and administrative expenses 80,102 86,637
Depreciation, depletion and amortization 62,568 65,990
Exploration expenses 10,040 9,845
Taxes, other than income 13,112 13,742
Interest charges, net 37,118 47,563
----------- -----------
INCOME BEFORE INCOME TAX 90,188 23,469
Income tax provision 32,637 7,700
----------- -----------
NET INCOME $ 57,551 $ 15,769
=========== ===========
EARNINGS PER SHARE $ 1.23 $ 0.34
=========== ===========
DIVIDENDS PER COMMON SHARE $ 0.25 $ 0.25
=========== ===========
AVERAGE SHARES OUTSTANDING 46,818 46,394
=========== ===========
END OF PERIOD SHARES OUTSTANDING 46,937 46,426
=========== ===========
<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,
1997 1996
------------- -------------
(Expressed in thousands)
ASSETS
Current assets
Cash and cash equivalents $ 33,972 $ 34,383
Receivables 203,151 250,328
Inventories
Crude oil and natural gas 23,068 24,365
Motor oil and refined products 163,055 147,554
Deferred income tax 18,658 20,834
Other current assets 53,748 60,128
------------- -------------
Total current assets 495,652 537,592
Property, plant and equipment, net 2,388,517 2,318,084
Marketable securities and other investments 952,634 955,182
Other assets 300,595 313,396
------------- -------------
TOTAL ASSETS $ 4,137,398 $ 4,124,254
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Current maturities of long-term debt $ 1,998 $ 1,181
Accounts payable and accrued liabilities 244,266 274,618
Interest accrued 48,300 30,827
Other current liabilities 82,460 86,321
------------- -------------
Total current liabilities 377,024 392,947
Long-term debt 2,194,851 2,217,806
Deferred income tax 258,417 241,791
Other liabilities 276,010 302,635
------------- -------------
TOTAL LIABILITIES 3,106,302 3,155,179
------------- -------------
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY 1,031,096 969,075
------------- -------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 4,137,398 $ 4,124,254
============= =============
<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
---------------------------------
1997 1996
----------- -----------
(Expressed in thousands)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 57,551 $ 15,769
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation, depletion and amortization 62,568 65,990
Dry holes and impairments 2,416 1,574
Deferred income tax 19,569 6,370
Non-cash and other nonoperating items 4,497 13,486
Change in operating assets and liabilities 27,653 (69,761)
----------- -----------
Net cash provided by operating activities 174,254 33,428
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures (114,378) (127,663)
Purchases of marketable securities and other investments (131,210) (146,904)
Proceeds from sales of marketable securities and other
investments 135,940 159,516
Proceeds from sales of assets 5,620 121,556
Other investing activities (49,823) (5,815)
----------- -----------
Net cash provided by (used in) investing activities (153,851) 690
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds (repayments) of notes payable, net (19,596) (79,046)
Debt and capital lease obligation repayments (304,296) (303,116)
Proceeds from issuance of debt 300,000 370,000
Dividends paid (11,724) (11,600)
Other Financing Activities 14,802 -
----------- -----------
Net cash used in financing activities (20,814) (23,762)
----------- -----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (411) 10,356
CASH AND CASH EQUIVALENTS, beginning of period 34,383 23,615
----------- -----------
CASH AND CASH EQUIVALENTS, end of period $ 33,972 $ 33,971
=========== ===========
<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) New Accounting Standard -
In February 1997, the Financial Accounting Standards Board
issued Statement of Financial Accounting Standards ("SFAS") No.
128, Earnings Per Share which establishes new standards for
computing and presenting earnings per share. The provisions
of the statement are effective for fiscal years ending after
December 15, 1997. If the provisions of SFAS No. 128 had been
adopted in the first quarter of 1997 and 1996, basic and diluted
earnings per share would not have been materially different from
primary and fully diluted earnings per share, respectively, as
calculated in accordance with Accounting Principles Board Opinion
No. 15.
(3) Accounts Receivable -
In September 1996, Pennzoil Receivables Company, a wholly
owned special purpose subsidiary of Pennzoil, entered into a
receivables sales facility, which provides for the ongoing sales
of up to $135.0 million of accounts receivable of certain
Pennzoil subsidiaries. The facility expires in September 1997.
Accounts receivable sold under this agreement totaled $135.0
million as of March 31, 1997. Pennzoil used the proceeds to
reduce outstanding debt. Fees associated with the sale of
accounts receivable totaled $1.9 million in the first quarter of
1997 and are netted against other income.
(4) Debt -
In April 1997, Pennzoil redeemed $38.5 million principal
amount of indebtedness consisting of all of Pennzoil's
outstanding 9% debentures due 2017. The purchase premium and
related unamortized discount and debt issue costs relating to the
redemption are expected to result in an after-tax charge of
approximately $1.3 million, or $.03 per share, in the second
quarter of 1997.
6
PART I. FINANCIAL INFORMATION - continued
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, 1997 was $57.6
million, or $1.23 per share, compared to $15.8 million, or $.34
per share, for the same period in 1996. The increase in earnings
for the first quarter of 1997, compared to the prior year, was
primarily attributable to higher crude oil and natural gas prices
in the oil and gas segment and lower interest expense. These
increases were partially offset by lower results in the motor oil
and refined products segment.
Oil and Gas
Operating income from this segment was $107.2 million for
the quarter ended March 31, 1997, compared with $49.3 million for
the same period in 1996. The increase in operating income was
primarily due to higher natural gas and liquids price
realizations and lower operating expenses. These increases were
partially offset by lower natural gas and liquids volumes.
Natural gas price realizations averaged $2.77 per thousand
cubic feet ("Mcf") for the three months ended March 31, 1997
compared to $1.79 per Mcf for the same period in 1996. Natural
gas volumes produced for sale for the three months ended March
31, 1997 were 523.3 million cubic feet ("MMcf") per day compared
to 559.8 MMcf per day for the same period in 1996. Liquids
prices averaged $19.47 per barrel during the first quarter of
1997, up $5.32 per barrel from the comparable period in 1996.
Liquids production volumes were 53.6 thousand barrels ("Mbbls")
per day for the three months ended March 31, 1997 compared to
60.4 Mbbls per day for the same period in 1996. The decrease in
natural gas and liquids volumes was primarily the result of the
disposition of noncore assets in 1996.
Production at Pennzoil's West Cameron 580 block,
located in the Gulf of Mexico, resumed toward the end of first
quarter 1997 after experiencing mechanical problems in December
1996. Gross natural gas production from the two producing wells
in the block is currently at approximately 155 MMcf per day, or
about 115 MMcf per day net to Pennzoil. In addition, the two
wells currently produce about 7,500 barrels per day of liquids,
or about 5,500 barrels per day net to Pennzoil.
Internationally, Pennzoil plans to drill five exploration
wells in 1997. In Azerbaijan, Pennzoil and its partners, LUKoil,
AGIP and LUKAGIP, expect to drill the first exploration well on
the Karabakh structure offshore Baku in June 1997. Pennzoil has
a 30% interest in the Karabakh prospect. In Qatar, Pennzoil plans
to drill two exploration wells on Block 8 (100 percent Pennzoil)
during the second half of 1997. In Egypt, Pennzoil and Repsol
plan to drill an exploration well on the Southeast Gulf of Suez
block (50 percent Pennzoil) during the second half of 1997. Also
during the second half of 1997, Pennzoil plans to drill an
exploration well in southwestern Australia on the Whicher Range
concession (44 percent Pennzoil).
7
PART I. FINANCIAL INFORMATION - continued
Motor Oil & Refined Products
Operating income from this segment was $13.0 million for the
quarter ended March 31, 1997, compared with $14.4 million for the
same period in 1996. The decrease in operating income was
primarily due to lower refinery margins.
Production at Excel Paralubes, a lube base oil plant
in which Pennzoil and Conoco Inc. are equal partners, commenced
in the first quarter of 1997. After experiencing some initial
mechanical difficulties, the lube base oil plant is now operating
near capacity. The upgrade of Pennzoil's Shreveport, Louisiana
refinery was completed in April 1997 with first product shipment
expected in May 1997. The Shreveport refinery upgrade will
substantially increase fuels production at the facility.
Franchise Operations
The franchise operations segment recorded operating income
of $4.5 million for the quarter ended March 31, 1997, the same
level as last year's first quarter. Higher sales in the first
quarter of 1997 were offset by start-up costs associated with the
growth in the number of centers since the first quarter of 1996.
Systemwide sales reported on a comparable store basis for
the three months ended March 31, 1997 increased $2.3 million to
$163.6 million, compared with the first quarter of 1996.
Systemwide average ticket prices increased to $35.49 for the
quarter ended March 31, 1997, compared with $34.76 for the first
quarter of 1996. There were 1,419 lube centers (including 555
Jiffy Lube company operated centers) open as of March 31, 1997.
In 1997, Jiffy Lube plans to open approximately 150 centers,
of which 90 will be in Sears Automotive Centers. As of March 31,
1997, there were 134 fast-oil change units open in Sears Centers
of which 100 are company operated.
Other
Other operating income for the quarter ended March 31, 1997
was $15.7 million, compared with $15.5 million for the same
period in 1996. Pennzoil's other income includes dividend income
of $9.8 million during the three months ended March 31, 1997
from its investment in common stock of Chevron Corporation.
Net interest expense for the quarter ended March 31,
1997 decreased $10.4 million from the same period in 1996
primarily due to higher capitalized interest and lower
borrowings.
8
PART I. FINANCIAL INFORMATION - continued
Capital Resources and Liquidity
Cash Flow. As of March 31, 1997, Pennzoil had cash and cash
equivalents of $34.0 million. During the three months ended
March 31, 1997, Pennzoil's cash and cash equivalents decreased
$.4 million. Cash flows from operating activities totaled $174.3
million during the first quarter of 1997.
Accounts Receivable. In September 1996, Pennzoil
Receivables Company, a wholly owned special purpose subsidiary of
Pennzoil, entered into a receivables sales facility, which
provides for the ongoing sales of up to $135.0 million of
accounts receivable of certain Pennzoil subsidiaries. The
facility expires in September 1997. Accounts receivable sold
under this agreement totaled $135.0 million as of March 31, 1997.
Pennzoil used the proceeds to reduce outstanding debt. Fees
associated with the sale of accounts receivable totaled $1.9
million in the first quarter of 1997 and are netted against other
income.
Debt. In April 1997, Pennzoil redeemed $38.5 million
principal amount of indebtedness consisting of all of Pennzoil's
outstanding 9% debentures due 2017. The purchase premium and
related unamortized discount and debt issue costs relating to the
redemption are expected to result in an after-tax charge of
approximately $1.3 million, or $.03 per share, in the second
quarter of 1997. Pennzoil used borrowings under its commercial
paper facilities to redeem these debentures.
9
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
----------------------------
1997 1996
----------- -----------
(Dollar amounts expressed
in thousands)
REVENUES
Oil and Gas $ 226,741 $ 175,082
Motor Oil & Refined Products 432,952 393,149
Franchise Operations 75,150 71,415
Other 11,470 21,958
Intersegment sales (97,313) (74,263)
----------- -----------
Total revenues $ 649,000 $ 587,341
----------- -----------
OPERATING INCOME
Oil and Gas $ 107,179 $ 49,323
Motor Oil & Refined Products 13,048 14,428
Franchise Operations 4,496 4,525
Other 15,665 15,487
----------- -----------
Total operating income 140,388 83,763
Corporate administrative expenses 13,082 12,731
Interest charges, net 37,118 47,563
----------- -----------
Income before income tax 90,188 23,469
Income tax provision 32,637 7,700
----------- -----------
NET INCOME $ 57,551 $ 15,769
=========== ===========
RATIO OF EARNINGS TO FIXED CHARGES 2.69 1.40
=========== ===========
10
PART I. FINANCIAL INFORMATION - continued
(UNAUDITED)
Three Months Ended
March 31
------------------------------
1997 1996
------------ ------------
OPERATING DATA
- --------------
OIL AND GAS
Net production
Crude oil, condensate and natural
gas liquids (barrels per day) 53,632 60,402
Natural gas produced for sale (Mcf per day) 523,348 559,776
Weighted average prices
Crude oil, condensate and natural
gas liquids (per barrel) $ 19.47 $ 14.15
Natural gas (per Mcf) $ 2.77 $ 1.79
MOTOR OIL & REFINED PRODUCTS
Sales (barrels per day)
Gasoline and naphtha 20,020 20,618
Distillates and gas oils 26,377 27,630
Lubricating oil and other specialty products 25,916 21,969
Residual fuel oils 3,513 4,042
----------- -----------
Total sales (barrels per day) 75,826 74,259
=========== ===========
Raw materials processed (barrels per day) <F1> 54,090 51,416
Refining capacity (barrels per day) <F2> 62,700 62,700
FRANCHISE OPERATIONS
Domestic systemwide sales (in thousands) $ 178,705 $ 164,819
Same center sales (in thousands) $ 163,625 $ 161,363
Centers open (U.S.) 1,419 1,229
<FN>
<F1> Excludes Excel Paralubes for comparability.
<F2> Excludes capacity at Excel Paralubes and the
Shreveport Refinery upgrade. Final production capacities
are currently being determined.
<FN>
11
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
The Pennsylvania Department of Environmental Protection is
seeking civil penalties in excess of $100,000 in connection with
the release of petroleum products from Pennzoil Products
Company's storage facility in Pittsburgh, Pennsylvania. The
company is in active negotiations with the agency with the
objective of arriving at a mutually agreeable resolution.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits -
3 Restated Certificate of Incorporation of Pennzoil Company,
as amended through May 10, 1996.
12 Computation of Ratio of Earnings to Fixed Charges for the three
months ended March 31, 1997 and 1996.
27 Financial Data Schedule
(b) Reports -
No reports on Form 8-K were filed during the quarter for which this report
was filed.
12
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 12, 1997