PRODUCTION OPERATORS CORP
PART I
Production Operators Corp (the "Company") is engaged in compression and other
gas handling services in the oil field services industry. The Company, a
Delaware corporation organized in 1969, is the successor to a business
established in 1961. The term "Company" as used herein refers to Production
Operators Corp and its operating subsidiary, Production Operators, Inc.,
together with its subsidiaries, unless the context otherwise indicates.
Item 1. Business
The Company specializes in the handling of gases for maximizing
the recovery of hydrocarbon resources. These production services
include (1) contract compression and contract processing or
treating of gases, principally natural gas and (2) operating
compression and related facilities for the handling of carbon
dioxide used in enhanced oil recovery. In its contract gas
compression operations, the Company designs, engineers,
fabricates, transports, installs, operates and maintains
compression units specifically designed to meet unique client
requirements. The Company also designs, engineers and constructs
the site where the gas handling equipment is installed and
operated. In its contract processing or treating of gases,
usually performed in conjunction with contract gas compression,
the Company designs, engineers, installs and operates specialized
processing or treating equipment which recovers liquid
hydrocarbons from associated gas streams or removes impurities
such as hydrogen sulfide and carbon dioxide. The Company operates
its own equipment and contract operates client owned equipment
used in the compression, gathering and processing of gases. In
its enhanced oil recovery operations, which are reported in
Contract Gas Handling Services, the Company gathers, compresses,
transports and injects carbon dioxide gas used by the petroleum
industry in enhanced oil recovery projects. The Company considers
itself to be a leader in the technology of handling and
compressing carbon dioxide.
As of September 30, 1995, all oil and gas production activities
were classified as discontinued operations and a provision of
$6.7 million, net of taxes, was recorded. No further adjustments
to the fiscal 1995 fourth quarter charge were recorded during the
most recent fiscal year ended September 30, 1996 and the plan for
discontinuance has been completed.
Contract Gas Compression - Gas compression is the use of a mecha-
nical process for compressing a volume of a gas until it reaches a
desired pressure. Reciprocating compressors driven by internal
combustion engines or electric motors are the most common
equipment for compression, particularly when higher pressures are
involved.
Contract gas compression has various applications in the
production of oil and gas. The majority of the Company's contract
gas compression units compress natural gas either for transmission
or for reservoir injection in connection with secondary oil
recovery operations. In the case of natural gas being compressed
for pipeline transmission, compression becomes necessary when the
natural pressure of the gas field is below the operating pressure
of the pipeline system receiving and transporting the gas. Gas
compression is also used to inject natural gas into an oil field
for maintaining reservoir pressure or for gas lifting of fluids in
producing well bores. It is expected that at some time during the
life of substantially all natural gas fields the gas produced will
require compression. The Company's average gas compression job
historically has lasted approximately four years. In recent years
average job life has exceeded five years as the Company has
increasingly contracted to operate larger, longer term
assignments, originating primarily from alliance and international
client relationships.
Field operating performance is vital to the Company's business and
the mechanical availability of its equipment for on-stream
operation has consistently averaged more than 98%. The Company
believes its operating efficiency significantly exceeds the field
compression efficiency achieved by most producing and pipeline
companies operating their own equipment. The Company's ability to
achieve high operating efficiency distinguishes its services and
has a significant positive impact on an oil and gas producer's
revenues and profits. The market for contract compression
services has been expanding as oil and gas producers and pipeline
companies continue their efforts to lower operating costs and
improve efficiency by outsourcing their gas handling requirements.
The Company's gas compression contracts usually provide for fixed
monthly payments for an initial term of six months to three years
and, thereafter, continue on a month-to-month basis. Typically,
the Company's units have remained on location significantly longer
than the initial term of the contract. Most compression contracts
include a provision for periodically adjusting the price based on
various escalation indices.
At September 30, 1996 the Company's contract gas compression fleet
totaled 446,000 horsepower with units ranging in size from 25 to
3,000 horsepower. During the fiscal year 1996, net horsepower
added to the contract compression fleet was 53,000. At yearend
84% of the available horsepower was installed and earning revenue
or committed for reapplication. These installed units are located
in more than 150 separate oil and gas fields in the states of
Texas, Oklahoma, Louisiana, New Mexico, Colorado, Wyoming,
Mississippi, Kansas, Utah, Arkansas, California and Alabama and in
the countries of Venezuela, Argentina and Canada.
At fiscal yearend 1996, 67,000 horsepower was operating in
Venezuela, Argentina and Canada as compared to 41,000 horsepower
at yearend 1995. The Company is marketing its services in
additional foreign countries. The contracts in Venezuela and
Argentina are substantially dollar denominated and that tends to
mitigate the risks from uncertain political and economic
conditions.
Contract Gas Processing - Production Operators supplies gas
processing services on a contract basis using skid-mounted
processing equipment.
Enhanced Oil Recovery - As detailed in the 1994 Form 10-K, given
the substantially reduced size of the enhanced oil recovery (EOR)
area and the same business focus of operating compression
equipment in both the EOR and contract gas handling areas, EOR
results are now included in the contract gas handling segment for
financial reporting. The Comanche Creek pipeline, located in the
southern end of the Permian Basin in west Texas, was included in
discontinued operations at September 30, 1995 and sold in fiscal
1996.
Business Segments - The Company conducts its operations in one
business segment, contract gas handling services. This segment
consists principally of compression and other gas handling
services in the oil field services industry. Prior to fiscal year
1995, the Company had operated in two business segments including
contract gas handling services and enhanced oil recovery in the
oil field services industry and oil and gas producing operations.
As of September 30, 1995 oil and gas production operations were
classified as discontinued operations. The supplemental
information concerning these segments included in Notes 1 and 9 of
the Consolidated Financial Statements on pages 29 and 33 of the
Company's 1996 Annual Report to Stockholders and the Consolidated
Balance Sheets on page 25 of the Company's 1996 Annual Report to
Stockholders is incorporated herein by reference.
During fiscal 1996 two clients accounted for a total of 42% of the
Company's consolidated revenues, each of which accounted for 10%
or more of the Company's consolidated revenues.
Competition - There are numerous companies that sell or lease
compression equipment, but only a few that provide full-service,
total responsibility contract compression. The Company believes
it is the largest independent provider of contract compression
services, yet it accounts for only a small percentage of all
compression work performed. The vast majority of compression
equipment is owned and operated by oil and gas producers and
pipelines.
Employees - The Company employed 466 people at September 30, 1996
of whom 37 were administrative, 30 were in engineering and
purchasing, 86 worked at the Houston plant facility, and 313 were
involved in field operations. The remote location and adverse
living conditions often associated with the Company's field
operations restrict the number of qualified workers available and
the Company trains most of its personnel.
Item 2. Properties
The principal offices of the Company and its subsidiary are located at
11302 Tanner Road, Houston, Texas 77041. At that location, the
Company owns 27 acres of land acquired at a cost of $436,000.
The office and fabrication plant are located in four buildings
aggregating 124,000 square feet, of which approximately 10,000
square feet are unfinished and held in reserve for
future expansion.
Additional information regarding the Company's oil and gas
operations, discontinued as of September 30, 1995, is found in
Note 9 of the Financial Statements on page 33 of the Company's 1996
Annual Report to Stockholders.
The Company is obligated under short-term leases for space used for
administrative functions at various locations where its field
operations are conducted. Additional information regarding the
Company's obligations under leases, is found in Note 7 of the
Financial Statements on page 32 of the Company's 1996 Annual Report
to Stockholders.
Item 3. Legal Proceedings
The Company is not a party to any litigation that, in the judgment of
management, would have a material adverse effect on its operations or
financial condition if adversely determined. No material legal
proceedings of the Company were terminated during the fourth quarter
of the fiscal year covered by this report.
Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of security holders, through the
solicitation of proxies or otherwise, during the fourth quarter of the
fiscal year covered by this report.
Executive Officers of Registrant
The executive officers of the Company and their principal occupations and
other affiliations during the last five years are:
Name Age Principal Occupations and Affiliations
Carl W. Knobloch, Jr. 66 Chairman and Director effective May 1, 1961
and President from October 1986 through
July 1994
D. John Ogren 53 President and Director effective July 5,
1994. Senior Vice President of E.I.duPont
de Nemours and Company from April 1992 to
May 1994, President and Chief Executive
Officer of DuPont Canada from June 1991 to
April 1992 and Senior Vice President of
Conoco, Inc. from February 1989 to May 1991
Thomas R. Reinhart 54 Vice President effective February 21, 1992
and Executive Vice President of Production
Operators, Inc. (subsidiary) effective
April 1, 1994 - Senior Vice President from
November 1991 to March 1994 - Vice
President from October 1990 to October 1991
- General Manager Administration, Secretary
and Treasurer from April 1988 to September
1990 and Manager MIS and Purchasing prior
thereto
John B. Simmons 44 Chief Financial Officer effective October
23, 1996, Treasurer effective March 18,
1996 and Controller effective May 1995.
Director of Planning and Control of The
Western Company of North America from
February 1994 to April 1995 and Vice
President, Finance of Western Petroleum
Services International Company and Western
Oceanic, Inc. from December 1991 to January
1994
Carla Knobloch 38 Secretary effective October 1, 1990 -
Investor Relations effective July 1990;
Vice President of Wachovia Bank - Equity
Research Analyst from June 1984 to May 1990
_______________
The only family relationship among the Executive Officers of the Company is
that Carla Knobloch is the daughter of Carl W. Knobloch, Jr. Officers are
generally elected each year at the Board of Directors' meeting following
the annual meeting of the stockholders.
PART II
Item 5. Market for Registrant's Common Stock and Related Stockholder
Matters
Company's common stock is traded over-the-counter and is reported
in the NASDAQ National Market System under the symbol PROP.
There were 765 stockholders of record at September 30, 1996.
The information set forth in the "Market Price of Stock and Cash
Dividends" section appearing on page 20 of the Company's 1996
Annual Report to Stockholders is incorporated in this Item by
reference in response to the information required by this Item.
Item 6. Selected Financial Data
The information set forth under "Selected Financial Data"
appearing on pages 34 - 35 of the Company's 1996 Annual Report to
Stockholders is incorporated in this Item by reference in response
to the information required by this Item.
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
The information set forth under "Management's Discussion and
Analysis of Results of Operations and Financial Condition"
appearing on pages 21 - 23 of the Company's 1996 Annual Report
to Stockholders is incorporated in this Item by reference in
response to the information required by this Item.
Item 8. Financial Statements and Supplementary Data
The consolidated balance sheets as of September 30, 1996 and 1995
and the consolidated statements of income, stockholders'
investment and cash flows for each of the three years in the
period ended September 30, 1996, together with the report of
independent public accountants, contained on pages 24 through 36
of the Company's 1996 Annual Report to Stockholders are
incorporated in this Item by reference in response to the
information required by this Item.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None
PART III
Item 10. Directors and Executive Officers of the Registrant
The information that will be set forth under "Management --
Election of Directors,""Management -- Executive Compensation" and
"Other Matters" in the Company's proxy statement for the 1997
Annual Meeting of Stockholders is incorporated in this Item by
reference in response to the information required by this Item.
Information regarding the executive officers of the Company is
furnished in a separate Item captioned "Executive Officers of
Registrant" in Part I above and is incorporated by reference in
this Item in response to the information required by this Item.
Item 11. Executive Compensation
The information that will be set forth under "Management -- The
Board of Directors and its Committees," "-- Executive
Compensation" and "-- Description of the Company's Compensation
Plans for Key Officers" in the Company's proxy statement for the
1997 Annual Meeting of Stockholders is incorporated in this Item
by reference in response to the information required by this
Item.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The information that will be set forth under "Management --
Election of Directors" and "Five Percent Stockholders" (regarding
ownership of Production Operators stock) in the Company's proxy
statement for the 1997 Annual Meeting of Stockholders is
incorporated in this Item by reference in response to the
information required by this Item.
Item 13. Certain Relationships and Related Transactions
The information that will be set forth under "Management --
Election of Directors" and "-- Interest in Certain Transactions"
in the Company's proxy statement for the 1997 Annual Meeting of
Stockholders is incorporated in this Item by reference in response
to the information required by this Item.
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a) Financial Statements, Schedules and Exhibits -
(1) The consolidated financial statements of
Production Operators Corp and Consolidated
Subsidiary set forth as indicated below in
the Company's 1996 Annual Report to
Stockholders are incorporated in this Item by
reference and made a part of this Item in
response to the information required by this
Item:
Annual
Report Page
Consolidated Statements of Income for the
three years ended September 30, 1996 24
Consolidated Balance Sheets at September 30,
1996 and 1995 25
Consolidated Statements of Stockholders'
Investment for the three years ended
September 30, 1996 26
Consolidated Statements of Cash Flows for the
three years ended September 30, 1996 27 - 28
Notes to Consolidated Financial Statements 29 - 33
Selected Quarterly Financial Data (Unaudited) 32
Report of Independent Public Accountants 36
(2) All schedules are omitted because they are
not applicable or not required or the
required information is shown in the
consolidated financial statements or notes
thereto.
(3) The exhibits filed as a part of this report
are listed in the Exhibits Index submitted as
a separate section to this report.
(b) No report on Form 8-K was filed during the quarter ended
September 30, 1996.
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 on its behalf by the undersigned, thereunto duly authorized.
PRODUCTION OPERATORS CORP
BY:/s/ D. John Ogren
D. John Ogren, President
December 11, 1996
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons, who constitute a
majority of the directors, on behalf of the Registrant and in the capacities
and on the dates indicated.
/s/ F. D. Ellis 12/10/96
F. E. Ellis, Director Date
Jorge E. Estrada M., Director Date
/s/ C. Rahl George 12/9/96
C. Rahl George, Director Date
/s/ John R. Huff 12/11/96
John R. Huff, Director Date
/s/ Carl W. Knobloch, Jr. 12/11/96
Carl W. Knobloch, Jr., Chairman Date
/s/ Henry E. Longley 12/6/96
Henry E. Longley, Director Date
/s/ D. John Ogren 12/11/96
D. John Ogren, Director and Date
President
/s/ Lester Varn, Jr. 12/9/96
Lester Varn, Jr., Director Date
/s/ John B. Simmons 12/5/96
John B. Simmons, Treasurer Date
(Principal Financial and
Accounting Officer)
EXHIBITS INDEX
The following Exhibits are filed herewith or incorporated by reference
as a part of this report on Form 10-K:
(3)(a) Restated Certificate of Incorporation, together with all
amendments thereto (filed as Exhibit (3)(a) to Report on
Form 10-K for the year ended September 30, 1991, as
amended by Form 8 filed February 24, 1992, and
incorporated herein by reference).
(3)(b) Copy of By-Laws, together with all amendments thereto
(filed as Exhibit 4.1 to Report on Form 8 filed February
24, 1992 and incorporated herein by reference).
(4)(a) For the definition of the rights of holders of equity
securities see the Articles Fourth, Seventh and Eighth of
the Company's Certificate of Incorporation and the
Certificate of Designation, Preferences and Rights of the
Company's Series A Junior Participating Preference Stock
(filed as Exhibit (3)(a) to Report on Form 10-K for the
year ended September 30, 1991, as amended by Form 8 filed
February 24, 1992 and incorporated herein by reference).
(4)(b) For the relative By-laws provisions concerning the rights
of holders of equity securities see Articles II and VI of
the Company's By-Laws (filed as Exhibit 4.1 to Report on
Form 8 filed February 24, 1992 and incorporated herein by
reference).
(4)(c) Loan Agreement dated June 2, 1995 and the Second Amended
and Restated Credit Agreement with the Bank of New York
individually and as agent for the First National Bank of
Chicago (filed as Exhibit (4)(d) to Report on Form 10-Q
for the quarter ended June 30, 1995 and incorporated
herein by reference).
(4)(c)(i) Subordination Agreement among Production Operators Corp,
Production Operators, Inc. and the Bank of New York as
agent (filed as Exhibit (4)(b) to Report on Form 10-Q for
the quarter ended December 31, 1990 and incorporated
herein by reference).
(10)(a) Employment Agreement between the Company and D. John Ogren
dated June 7, 1994 (filed as Exhibit 10(b) to Report on
Form 10-Q for the quarter ended June 30, 1994 and
incorporated herein by reference).
(10)(b)(i) Consulting and Deferred Compensation Agreement between the
Company and C. Rahl George dated June 1, 1981 (filed as
Exhibit (10)(f)(i) to Report on Form 10-K for the fiscal
year ended September 30, 1981 and incorporated herein by
reference).
(10)(b)(ii) Amended Deferred Compensation Agreement between the
Company and C. Rahl George dated October 24, 1984 (filed
as Exhibit (10)(f)(ii) to Report on Form 10-K for the
fiscal year ended September 30, 1984 and incorporated
herein by reference).
(10)(c)(i) Employee Stock Ownership Plan and Trust dated June 9, 1989
(filed as Exhibit (10)(c)(i) to Report on Form 10-K for
the fiscal year ended September 30, 1989 and incorporated
herein by reference).
(10)(c)(ii) First Amendment to Employee Stock Ownership Plan and Trust
dated December 18, 1989 (filed as Exhibit (10)(c)(ii) to
Report on Form 10-K for the fiscal year ended September
30, 1989 and incorporated herein by reference).
(10)(c)(iii) Second Amendment to Employee Stock Ownership Plan and
Trust dated September 30, 1994 (filed as Exhibit
(10)(d)(iii) to Report on Form 10-K for the fiscal year
ended September 30, 1994 and incorporated herein by
reference).
(10)(d) 1980 Long-Term Incentive Plan approved by stockholders
January 30, 1981, as amended through February 27, 1991
(filed as Exhibit (10)(d) to Report on Form 10-K for the
fiscal year ended September 30, 1991 and incorporated
herein by reference).
(10)(d)(i) 1992 Long-Term Incentive Plan approved by stockholders
February 24, 1993, as amended through October 24, 1995
(filed as Exhibit (10)(d)(i) to Report on Form 10-K for
the fiscal year ended September 30, 1995 and incorporated
herein by reference).
(10)(e) Target Variable Compensation Plan dated May 5, 1995.
(filed as Exhibit (10)(e) to Report on Form 10-K for the
fiscal year ended September 30, 1995 and incorporated
herein by reference).
(10)(f) Production Operators, Inc. Supplemental Benefit Plan
(filed as Exhibit 28.2 to Report on Form 8-K, filed
February 24, 1992 and incorporated herein by reference).
(10)(f)(i) Form of Service Continuation Agreement.
(10)(g) Form of Purchase Agreement dated June 20, 1991 between
Production Operators Corp and each purchaser in connection
with the private placement of 590,000 shares of Common
Stock (filed as Exhibit 1.1 to Registration Statement on
Form S-3, File No. 33-41254, filed June 26, 1991 and
incorporated herein by reference).
(11) Statement regarding Computation of Net Income per Share of
Common Stock.
(13) 1996 Annual Report to Stockholders.
(22) List of subsidiaries.
(24)(a) Consent of Independent Public Accountants re inclusion of
their Report dated November 20, 1996 in this Form 10-K.
(24)(b) Consent of Independent Public Accountants re inclusion of
their report dated November 20, 1996 into the Company's
previously filed Registration Statements on Form S-3 and
Forms S-8.