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 September 30,1997 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, October 31, 1997:
Common stock, par value $0.83-1/3 per share, 47,486,431
shares.
2
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
- ----------------------------
PENNZOIL COMPANY
CONDENSED CONSOLIDATED STATEMENT OF INCOME
(UNAUDITED)
Three Months Ended Nine Months Ended
September 30 September 30
---------------------------- ----------------------------
1997 1996 1997 1996
----------- ----------- ----------- -----------
(Expressed in thousands except per share amounts)
REVENUES $ 658,939 $ 653,688 $1,956,295 $1,877,609
COSTS AND EXPENSES
Cost of sales 347,989 360,013 1,077,154 1,071,762
Selling, general and administrative expenses 100,641 88,432 278,854 257,979
Depreciation, depletion and amortization 77,406 68,727 214,757 207,726
Exploration expenses 18,791 8,306 41,110 30,014
Taxes, other than income 12,392 13,688 37,255 41,035
Interest charges, net 42,708 43,585 120,988 137,952
----------- ----------- ----------- -----------
INCOME BEFORE INCOME TAX 59,012 70,937 186,177 131,141
Income tax provision 21,188 5,812 66,926 25,704
----------- ----------- ----------- -----------
INCOME BEFORE EXTRAORDINARY ITEM 37,824 65,125 119,251 105,437
EXTRAORDINARY ITEM (2,575) - (2,575) -
----------- ----------- ----------- -----------
NET INCOME $ 35,249 $ 65,125 $ 116,676 $ 105,437
=========== =========== =========== ===========
EARNINGS PER SHARE
Before Extraordinary Item $ .80 $ 1.40 $ 2.53 $ 2.27
Extraordinary Item (.05) - (.05) -
----------- ----------- ------------ -----------
EARNINGS PER SHARE $ .75 $ 1.40 $ 2.48 $ 2.27
=========== =========== =========== ===========
DIVIDENDS PER COMMON SHARE $ .25 $ .25 $ .75 $ .75
=========== =========== =========== ===========
AVERAGE SHARES OUTSTANDING 47,208 46,494 47,002 46,445
=========== =========== =========== ===========
END OF PERIOD SHARES OUTSTANDING 47,382 46,518 47,382 46,518
=========== =========== =========== ===========
<FN>
<F1>
See Notes to Condensed Consolidated Financial Statements.
</FN>
3
PART I. FINANCIAL INFORMATION - continued
PENNZOIL COMPANY
CONDENSED CONSOLIDATED BALANCE SHEET
(UNAUDITED)
September 30, December 31,
1997 1996
------------- -------------
(Expressed in thousands)
ASSETS
Current assets
Cash and cash equivalents $ 29,724 $ 34,383
Receivables 215,500 250,328
Inventories
Crude oil and natural gas 25,989 24,365
Motor oil and refined products 181,963 147,554
Deferred income tax 14,309 20,834
Other current assets 60,123 60,128
------------- -------------
Total current assets 527,608 537,592
Property, plant and equipment, net 2,501,354 2,318,084
Marketable securities and other investments 953,489 955,182
Other assets 317,652 313,396
------------- -------------
TOTAL ASSETS $ 4,300,103 $ 4,124,254
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Current maturities of long-term debt $ 2,433 $ 1,181
Accounts payable and accrued liabilities 235,443 274,618
Interest accrued 47,596 30,827
Other current liabilities 90,053 86,321
------------- -------------
Total current liabilities 375,525 392,947
Long-term debt 2,271,809 2,217,806
Deferred income tax 273,801 241,791
Other liabilities 290,269 302,635
------------- -------------
TOTAL LIABILITIES 3,211,404 3,155,179
------------- -------------
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY 1,088,699 969,075
------------- -------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 4,300,103 $ 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)
Nine Months Ended
September 30
---------------------------------
1997 1996
----------- -----------
(Expressed in thousands)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 116,676 $ 105,437
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation, depletion and amortization 214,757 207,726
Dry holes and impairments 19,441 5,240
Deferred income tax 40,089 14,805
Non-cash and other nonoperating items 22,303 (9,474)
Change in operating assets and liabilities (36,447) 16,516
----------- -----------
Net cash provided by operating activities 376,819 340,250
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures (403,441) (400,815)
Purchases of marketable securities and other investments (431,394) (433,716)
Proceeds from sales of marketable securities and other
investments 437,031 443,469
Proceeds from sales of assets 15,850 463,360
Other investing activities (43,298) (3,214)
----------- -----------
Net cash provided by (used in) investing activities (425,252) 69,084
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds (repayments) of notes payable, net 60,328 (167,755)
Debt and capital lease obligation repayments (1,177,441) (1,419,731)
Proceeds from issuance of debt 1,165,000 1,222,206
Dividends paid (35,272) (34,839)
Other financing activities 31,159 252
----------- -----------
Net cash provided by (used in) financing activities 43,774 (399,867)
----------- -----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (4,659) 9,467
CASH AND CASH EQUIVALENTS, beginning of period 34,383 23,615
----------- -----------
CASH AND CASH EQUIVALENTS, end of period $ 29,724 $ 33,082
=========== ===========
<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. Certain prior period
items have been reclassified in the condensed consolidated
financial statements in order to conform with the current year
presentation.
(2) New Accounting Standards -
In February 1997, the Financial Accounting Standards Board
("FASB") 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 nine months 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.
In June 1997, the FASB issued SFAS No. 130, "Reporting
Comprehensive Income," which establishes standards for reporting
and display of comprehensive income and its components in a full
set of general-purpose financial statements. The statement
requires (a) classification of items of other comprehensive income
by their nature in a financial statement and (b) display of the
accumulated balance of other comprehensive income separate from
retained earnings and additional paid-in capital in the equity
section of a statement of financial position. SFAS No. 130 is
effective for fiscal years beginning after December 15, 1997.
In June 1997, the FASB also issued SFAS No. 131, "Disclosure
about Segments of an Enterprise and Related Information," which
establishes standards for reporting information about operating
segments in annual financial statements and requires that selected
information be reported about the operating segments in interim
financial reports issued to the shareholders. It also establishes
standards for related disclosure about products and services,
geographic areas, and major customers. SFAS No. 131 is effective
for fiscal years beginning after December 15, 1997.
(3) Sale of Canadian Oil and Gas Interest -
Pennzoil announced on October 30, 1997 that it had agreed to
sell its interest in a natural gas joint venture in the Zama/Virgo
region of northwest Alberta, Canada to Phillips Petroleum Company
("Phillips"). Phillips will pay $104 million ($145 million
Canadian) for Pennzoil's 50 percent interest in the natural gas
joint venture. Pennzoil expects to record a pretax gain on the
sale of approximately $71 million when the anticipated transaction
closes in December 1997. As of December 31, 1996, Pennzoil had
proved reserves of 88 billion cubic feet equivalent in Canada.
6
PART I. FINANCIAL INFORMATION - continued
(4) 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. In September 1997, the facility was amended to
extend the expiration date of the facility to September 1998.
Accounts receivable sold under this agreement totaled $135.0
million as of September 30, 1997. Pennzoil used the proceeds to
reduce outstanding debt. Fees associated with the sale of accounts
receivable totaled $1.8 million and $6.0 million for the quarter
and nine months ended September 30, 1997, respectively.
(5) 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 resulted
in an after-tax charge of $1.3 million, or $.03 per share, in the
second quarter of 1997. In the third quarter of 1997, the $1.3
million was reclassified as an extraordinary charge.
Through the nine months ended September 30, 1997, certain
owners of Pennzoil's exchangeable debentures requested to exchange
their debentures for Chevron Corporation ("Chevron") common stock,
in accordance with the respective supplemental indentures. Pennzoil
recorded an after-tax extraordinary charge of $1.3 million associated
with the exchanges based on the difference between the face value of
the debt and the market value of the Chevron common stock.
The exchangeable debentures are exchangeable at the option of
the holders at any time prior to maturity, unless previously
redeemed, for shares of Chevron common stock. In lieu of
delivering Chevron common stock, Pennzoil may, at its option, pay
to any holder an amount equal to the market value of the Chevron
common stock at the time the exchange request is received. If
Pennzoil delivers Chevron common stock to satisfy an exchange,
Pennzoil records an extraordinary charge for the extinguishment of
debt and an ordinary gain on the sale of Chevron common stock.
Alternatively, should Pennzoil choose to pay cash to the holders
and retain the Chevron common stock, Pennzoil would record an
extraordinary charge for the extinguishment of debt. In addition,
Pennzoil would record an increase in the net unrealized holding
gain on the Chevron common stock to reflect current market value
which was previously capped under the exchange rights. This would
be reported as a separate component of shareholders' equity as
required under SFAS No. 115, "Accounting for Certain Investments in
Debt and Equity Securities." Under SFAS No. 130, Pennzoil would
reflect the increase in the unrealized gain as a component of other
comprehensive income.
(6) Union Pacific Resources' Unsolicited Tender Offer -
As of the date hereof, Union Pacific Resources Group Inc.
("UPR") has a pending tender offer (the "Offer") to purchase all
outstanding shares of Pennzoil common stock at a price of $84.00
per share in cash.
The Offer, which is subject to numerous conditions and
uncertainties, including eliminating the effects of Pennzoil's
shareholder rights plan as applied to the Offer, will expire on
November 24, 1997, unless extended.
On November 11, 1997, UPR announced that it would terminate the
Offer on November 17, 1997 unless, among other things, Pennzoil
entered into good faith negotiations with UPR. On November 11,
1997, Pennzoil announced that it had no plans to negotiate with
UPR.
7
PART I. FINANCIAL INFORMATION - continued
(7) Use of Derivatives -
Pennzoil has a price risk management program that utilizes
derivative financial instruments, principally crude oil and natural
gas swaps, to reduce the price risks associated with fluctuations
in crude oil and natural gas prices. These financial instruments
are designated as hedges and accounted for on the accrual basis
with gains and losses being recognized based on the type of
contract and exposure being hedged. Realized gains or losses on
crude oil and natural gas swaps designated as hedges of anticipated
transactions related to anticipated production are treated as
deferred credits or charges and are included in other current
liabilities or other current assets on the balance sheet. Net
gains and losses on crude oil and natural gas swaps designated as
hedges of anticipated transactions, including accrued gains or
losses upon maturity or termination of the contract, are deferred
and recognized in income when the associated hedged commodities are
produced.
In order for crude oil and natural gas swaps to qualify as a
hedge of an anticipated transaction, the derivative contract must
identify the expected date of the transaction, the commodity
involved, and the expected quantity to be purchased or sold. In
the event that a hedged transaction does not occur, future gains
and losses, including termination gains or losses, are included in
the income statement when incurred.
In the statement of cash flows, cash receipts or payments
related to financial instruments are classified consistent with the
cash flows from the transaction being hedged.
Pennzoil has not materially hedged crude oil or natural gas
prices in 1997. Pennzoil will constantly review and may alter its
hedged positions as conditions change.
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
Results of Operations
Net income for the quarter and nine months ended September 30,
1997 was $35.2 million, or $.75 per share, and $116.7 million, or
$2.48 per share, respectively. This compares with net income of
$65.1 million, or $1.40 per share, for the third quarter of 1996
and $105.4 million, or $2.27 per share, for the nine months ended
September 30, 1996. Net income for the quarter ended September 30,
1997 included extraordinary charges of $2.6 million, net of tax, or
$.05 per share associated with the early retirement of debt.
Results for the third quarter of 1996 included a $41.3 million
pretax gain on the sale of certain real estate and a $19.1 million
tax benefit resulting from the sale of Canadian oil and gas assets.
Excluding these items, the increase in earnings for the quarter
ended September 30, 1997, compared to the same period in 1996, was
primarily due to higher results in the motor oil and refined
products segment, higher realized natural gas prices, and higher
natural gas and liquids production volumes. The increase in
earnings for the nine months ended September 30, 1997, compared to
the prior year, was primarily attributable to higher results in the
oil and gas and motor oil and refined products segments and lower
interest expense.
8
PART I. FINANCIAL INFORMATION - continued
Oil and Gas
Operating income from this segment for the quarter and nine
months ended September 30, 1997 was $67.7 million and $244.0
million, respectively. This compares with operating income of
$60.7 million and $175.5 million, respectively, for the same
periods in 1996. The increase in operating income for the quarter
ended September 30, 1997, compared to the same period in 1996, was
primarily due to increased natural gas and liquids production
volumes and higher realized prices for natural gas and liquids
partially offset by higher exploration expense which resulted from
increased drilling activity in the Gulf of Mexico. The increase in
operating income for the nine months ended September 30, 1997,
compared to the same period in 1996, was primarily due to higher
realized prices for natural gas and liquids, lower other taxes and
lower general and administrative expenses partially offset by
higher exploration expense.
Natural gas price realizations averaged $2.09 per thousand
cubic feet ("Mcf") and $2.25 per Mcf, respectively, for the quarter
and nine months ended September 30, 1997, compared to $1.80 per Mcf
and $1.81 per Mcf, respectively, for the same periods in 1996.
Liquids price realizations averaged $15.55 per barrel and $16.77
per barrel for the quarter and nine months ended September 30,
1997, compared to $14.85 per barrel, for the same periods in 1996.
Natural gas volumes produced for sale were 619.4 million cubic feet
("MMcf") per day and 586.7 MMcf per day, respectively, for the
quarter and nine months ended September 30, 1997, compared to 599.6
MMcf per day and 596.0 MMcf per day, respectively, for the same
periods in 1996. Liquids production volumes were 59.9 thousand
barrels ("Mbbls") per day and 58.8 Mbbls per day, respectively, for
the quarter and nine months ended September 30, 1997, compared to
58.4 Mbbls per day and 61.3 Mbbls per day, respectively, for the
same periods in 1996.
In August 1997, Pennzoil filed a petition with the West
Virginia Public Service Commission to sell its utility division,
along with certain other noncore oil and gas properties in West
Virginia, to Gasco Distribution System, Inc. for $8.5 million.
Until the West Virginia Public Service Commission application is
approved, Pennzoil will continue to operate the properties and
natural gas utility.
Also during August 1997, Pennzoil was the high bidder on 9 out
of 17 blocks in the western Gulf of Mexico federal offshore oil and
gas lease sale. The blocks are located in water depths ranging
from 50 to 3,000 feet. Pennzoil has a 100 percent working interest
in eight of the blocks and 50 percent in one block bid jointly with
Enterprise Oil Gulf of Mexico, Inc., subject to approval by the
Minerals Management Service. Pennzoil's share of the high bids was
$4.0 million.
Internationally, Pennzoil is currently drilling several wells
in the Caspian Sea, Australia and Qatar. In the Caspian Sea, the
KPS-1 well on the Karabakh block continues drilling at 3,691
meters. Pennzoil has a 30 percent working interest in Karabakh. On
October 10, 1997, Pennzoil confirmed that natural gas had been
encountered after drilling had reached 3,470 meters. Additional
natural gas shows have been encountered after drilling deeper, and
drilling continues toward additional prospective horizons. KPS-1
is expected to reach target depth of approximately 3,850 meters in
1997.
9
PART I. FINANCIAL INFORMATION - continued
At the nearby Azeri-Chirag-Gunashli ("ACG") joint development
area, where Pennzoil has a 4.8 percent carried interest, the first
development well to be drilled off of the Chirag-1 platform has
been completed after reaching total depth of 2,938 meters. The ACG
joint development area is estimated to contain over 4.7 billion
barrels of crude oil. First crude oil production began on November
7, 1997, with sales of crude expected to begin in the first quarter
of 1998. The international consortium developing this area, known
as AIOC, plans to drill one more development well in 1997 and six
wells in 1998.
In Australia, the WR-4 exploration well on Whicher Range,
where Pennzoil has 44 percent working interest, reached target
depth of 4,575 meters on October 24, 1997. Pennzoil is waiting on
equipment in order to complete the WR-4 well and is preparing to re-
enter the WR-1 well. In Qatar, the PQ-3 exploration well on Block
8 (75% Pennzoil working interest) began drilling on October 17,
1997 with a target depth of 2,800 meters.
In Canada, Pennzoil announced on October 30, 1997 that it had
agreed to sell its interest in a natural gas joint venture in the
Zama/Virgo region of northwest Alberta, Canada to Phillips.
Phillips will pay $104 million ($145 million Canadian) for
Pennzoil's 50 percent interest in the natural gas joint venture.
Pennzoil expects to record a pretax gain on the sale of
approximately $71 million when the anticipated transaction closes
in December 1997. As of December 31, 1996, Pennzoil had proved
reserves of 88 billion cubic feet equivalent in Canada.
Motor Oil & Refined Products
Operating income from this segment for the quarter and nine
months ended September 30, 1997 was $32.3 million and $71.2
million, respectively. This compares to operating income of $9.5
million and $39.7 million, respectively, for the same periods in
1996.
Earnings for the quarter and nine months ended September 30,
1997 were up significantly from the same periods last year due
primarily to the completion of two major refining projects, as well
as higher margins for industrial specialties products. Total
domestic lubricating product sales volume were up over 3% in the
third quarter of 1997 over the same period in 1996. Pennzoil motor
oil continues to be the nation's top selling motor oil with a U.S.
market share in excess of 21%. These positive impacts were
partially offset by lower base oil margins and higher selling and
advertising expenses.
Excel Paralubes, Pennzoil's lubrication base oil plant
partnership with Conoco Inc. ("Conoco"), completed startup and
operated at near capacity during the second quarter of 1997. Third
quarter production was less than capacity due to an interruption in
feedstock supply caused by mechanical problems in a supplier's
process units. The problems have been corrected and production is
expected to return to normal levels for the fourth quarter of 1997.
On July 22, 1997, the partners in Excel Paralubes achieved
"financial completion" of the lube base oil facilities under the
intercreditor agreement. With financial completion obtained,
Pennzoil Company's guarantee to Excel's lenders is no longer
required and has been terminated.
10
PART I. FINANCIAL INFORMATION - continued
The fuels upgrade project at the Shreveport refinery came on-
line in April 1997 and is building production toward design levels.
This project increases the utilization of the crude oil capacity as
well as upgrades the by-products from the existing processes to
higher value fuels products. As a result, total crude oil
processed at Pennzoil's refineries increased over 1,200 barrels per
day for the nine months ended September 30, 1997 over the same
period in 1996.
The additional revenues from these projects were partially
offset by lower base oil margins. Base oil prices declined with
the extra supply brought to the market from Excel Paralubes and
PetroCanada's new base oil facility. Base oil margins with respect
to West Texas Intermediate crude oil prices averaged $.46 per
gallon for the third quarter of 1997, compared to an average of
$.64 per gallon for the same period in 1996.
On October 1, 1997, Pennzoil signed the final agreement with
Conoco to form Penreco, a specialties joint venture. Penreco will
combine Pennzoil's white oil, petrolatum and specialty solvents
businesses with Conoco's solvents businesses. Pennzoil's PENRECO (R)
and MAGIE BROS (R) products are used in cosmetics, pharmaceuticals,
plastics, textiles, agricultural products, food processing, inks,
and aluminum rolling oils. Conoco's Conosol (R) and LVT (R)
products are sold primarily into the drilling fluids, mining, and
cleaning products markets, and as carrier oils for many consumer
products.
During the fourth quarter of 1997, Pennzoil Products Company
acquired the assets of two automotive aftermarket chemical
companies. On October 15, 1997, Pennzoil purchased the assets of
Total Action Automotive Products ("TAAP"). TAAP manufactures and
markets premium quality automotive appearance products, including
Classic (R) car waxes and washes. On November 4, 1997, Pennzoil
purchased the marketing assets of Snap Automotive Products, Inc.
("Snap"). Snap products include Fix-A-Flat (R), the number one
selling tire inflator in the U.S.; Outlaw (R) fuel additives; and
Snap (R) fuel additives and chemicals.
Franchise Operations
The franchise operations segment, which operates through Jiffy
Lube International, Inc. ("Jiffy Lube"), recorded operating income
of $7.6 million and $18.4 million, respectively, for the quarter
and nine months ended September 30, 1997. This compares with
operating income of $6.2 million and $16.0 million, respectively,
for the same periods in 1996. The increase in operating income for
the quarter and nine months ended September 30, 1997 was primarily
due to improved company-operated store results and increased
royalty income.
Systemwide average ticket prices for the quarter ended
September 30, 1997 increased $0.53 to $35.58 and for the nine
months ended September 30, 1997 increased $0.59 to $35.74, from
comparable periods in 1996. There were 1,476 domestic lube centers
(including 561 Jiffy Lube company-operated centers) open as of
September 30, 1997.
In the first nine months of 1997, Jiffy Lube has opened 96 new
centers. As of September 30, 1997, there were 142 fast-oil change
units open in Sears Centers of which 110 are company-operated.
Jiffy Lube is the largest fast oil change provider in the U.S. with
over 25 percent of the market.
11
PART I. FINANCIAL INFORMATION - continued
Other
Other operating income for the quarter and nine months ended
September 30, 1997 was $14.4 million and $26.9 million,
respectively, compared with $51.6 million and $77.4 million for the
same periods in 1996. The decrease in other operating income for
the quarter and nine months ended September 30, 1997, compared to
the same periods in 1996, was primarily due to the $41.3 million
pretax gain on the sale of certain real estate which was included
in the third quarter 1996 results.
Pennzoil's other income includes dividend income of $10.4
million and $30.8 million for the quarter and nine months ended
September 30, 1997, respectively, from its investment in common
stock of Chevron. Pennzoil beneficially owns approximately 18
million shares of common stock of Chevron.
Net interest expense for the quarter and nine months ended
September 30, 1997 decreased $0.9 million and $17.0 million,
respectively, from the same periods in 1996 primarily due to lower
borrowings and higher capitalized interest.
Corporate Administrative Expense
Corporate administrative expense for the quarter and nine
months ended September 30, 1997 was $20.2 million and $53.2
million, respectively, compared with $13.4 million and $39.5
million for the same periods in 1996. The increase in corporate
administrative expense for the quarter and nine months ended
September 30, 1997, compared to the same periods in 1996, was
primarily due to charges incurred in connection with the UPR Offer.
Reference is made to Note 6 of Notes to Condensed Consolidated
Financial Statements.
Capital Resources and Liquidity
Cash Flow. As of September 30, 1997, Pennzoil had cash and
cash equivalents of $29.7 million. During the nine months ended
September 30, 1997, cash and cash equivalents decreased $4.7
million. Cash flows from operating activities for the nine months
ended September 30,1997 totaled $376.8 million compared to $340.3
million for the same period in 1996.
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. In September 1997, the facility was
amended to extend the expiration date of the facility to September
1998. Accounts receivable sold under this agreement totaled $135.0
million as of September 30, 1997. Pennzoil used the proceeds to
reduce outstanding debt. Fees associated with the sale of accounts
receivable totaled $1.8 million and $6.0 million for the quarter
and nine months ended September 30, 1997, respectively.
Debt Instruments and Repayments. 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 resulted in an after-tax charge of
$1.3 million, or $.03 per share, in the second quarter of 1997. In
the third quarter of 1997, the $1.3 million was reclassified as an
extraordinary charge.
12
PART I. FINANCIAL INFORMATION - continued
Through the nine months ended September 30, 1997, certain
owners of Pennzoil's exchangeable debentures requested to exchange
their debentures for Chevron common stock, in accordance with the
respective supplemental indentures. Pennzoil recorded an after-tax
extraordinary charge of $1.3 million associated with the exchanges
based on the difference between the face value of the debt and the
market value of the Chevron common stock.
Borrowings under Pennzoil's commercial paper and variable-
rate credit arrangements totaled $388.4 million as of September
30, 1997, all of which has been classified as long-term debt.
13
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 Nine Months Ended
September 30 September 30
---------------------------- ----------------------------
1997 1996 1997 1996
----------- ----------- ----------- -----------
(Dollar amounts expressed in thousands)
REVENUES
Oil and Gas $ 210,703 $ 186,797 $ 641,718 $ 566,097
Motor Oil & Refined Products 441,493 426,475 1,327,541 1,258,141
Franchise Operations 84,459 78,626 243,256 226,617
Other 14,543 55,352 23,551 90,640
Intersegment sales (92,259) (93,562) (279,771) (263,886)
----------- ----------- ----------- -----------
Total revenues $ 658,939 $ 653,688 $1,956,295 $1,877,609
----------- ----------- ----------- -----------
OPERATING INCOME
Oil and Gas $ 67,689 $ 60,715 $ 243,975 $ 175,522
Motor Oil & Refined Products 32,302 9,459 71,153 39,667
Franchise Operations 7,554 6,152 18,366 15,988
Other 14,420 51,609 26,903 77,411
----------- ----------- ----------- -----------
Total operating income 121,965 127,935 360,397 308,588
Corporate administrative expenses 20,245 13,413 53,232 39,495
Interest charges, net 42,708 43,585 120,988 137,952
----------- ----------- ----------- -----------
Income before income tax 59,012 70,937 186,177 131,141
Income tax provision 21,188 5,812 66,926 25,704
----------- ----------- ----------- -----------
INCOME BEFORE EXTRAORDINARY ITEM 37,824 65,125 119,251 105,437
EXTRAORDINARY ITEM (2,575) - (2,575) -
----------- ----------- ----------- -----------
NET INCOME $ 35,249 $ 65,125 $ 116,676 $ 105,437
=========== =========== =========== ===========
RATIO OF EARNINGS TO FIXED CHARGES 2.17 1.76
=========== ===========
14
PART I. FINANCIAL INFORMATION - continued
(UNAUDITED)
Three Months Ended Nine Months Ended
September 30 September 30
------------------------------ ------------------------------
1997 1996 1997 1996
------------ ------------ ------------ ------------
OPERATING DATA
- --------------
OIL AND GAS
Net production
Crude oil, condensate and natural
gas liquids (barrels per day) 59,938 58,442 58,807 61,274
Natural gas produced for sale (Mcf per day) 619,364 599,615 586,709 595,967
Weighted average prices
Crude oil, condensate and natural
gas liquids (per barrel) $ 15.55 $ 14.85 $ 16.77 $ 14.85
Natural gas (per Mcf) $ 2.09 $ 1.80 $ 2.25 $ 1.81
MOTOR OIL & REFINED PRODUCTS
Sales (barrels per day)
Gasoline and naphtha 18,807 21,332 19,015 21,043
Distillates and gas oils 24,073 25,984 26,479 26,711
Lubricating oil and other specialty products 30,257 24,638 29,200 23,768
Residual fuel oils 1,284 4,221 1,962 4,120
----------- ----------- ----------- -----------
Total sales (barrels per day) 74,421 76,175 76,656 75,642
=========== =========== =========== ===========
Crude oil processed
(barrels per day) 54,320 54,330 54,540 53,302
Crude oil refining capacity
(barrels per day) 62,700 62,700 62,700 62,700
FRANCHISE OPERATIONS
Domestic systemwide sales (in thousands) $ 199,002 $ 179,980 $ 572,566 $ 523,394
Same center sales (in thousands) $ 183,697 $ 178,672 $ 524,893 $ 519,844
Centers open (U.S.) 1,476 1,332 1,476 1,332
15
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits -
12 Computation of Ratio of Earnings to Fixed Charges for
the nine months ended September 30, 1997 and 1996.
27 Financial Data Schedule
(b) Reports -
No reports were filed on Form 8-K during the three months
ended September 30, 1997.
16
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
November 13, 1997