U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-QSB
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QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES AND EXCHANGE ACT OF 1934
For the quarterly period ended
June 30, 1997
Commission File Number 1-12322
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SABA PETROLEUM COMPANY
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(Exact name of small business issuer as specified in its charter)
Delaware 47-0617589
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
3201 Airpark Drive, Suite 201
Santa Maria, CA 93455
(Address of principal executive offices)
Issuer's telephone number, including area code: (805) 347-8700
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the issuer was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
YES X NO_____
At August 8, 1997, 10,690,461 shares of common stock, $.001 par value, were
outstanding.
Transitional Small Business Disclosure Format. [ ] Yes [X] No
SABA PETROLEUM COMPANY
CONTENTS
Page(s)
PART I.-FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheet as of June 30, 1997 3
Condensed Consolidated Statements of Income for the six
and three month periods ended June 30, 1997 and 1996 4
Condensed Consolidated Statements of Cash Flows for
the six months ended June 30, 1997 and 1996 5
Notes to Condensed Consolidated Financial Statements 6-10
Item 2. Management's Discussion and Analysis 11-19
PART II.-OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 20
SIGNATURES 21
PART I - FINANCIAL INFORMATION
SABA PETROLEUM COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET
June 30, 1997
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 743,180
Accounts receivable, net of allowance for doubtful
accounts of $71,300 5,791,759
Other current assets 3,606,314
----------------
Total current assets 10,141,253
----------------
Property and equipment (Note 3):
Oil and gas properties (full cost method) 55,089,489
Land, plant and equipment 7,598,858
----------------
62,688,347
Less accumulated depletion and depreciation (18,435,163)
----------------
Total property and equipment 44,253,184
----------------
Other assets 2,061,348
================
$ 56,455,785
================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities $ 9,410,206
Current portion of long-term debt 3,658,113
----------------
Total current liabilities 13,068,319
Long-term debt, net of current portion (Note 3) 20,109,307
Other liabilities and deferred taxes 692,626
Minority interest in consolidated subsidiary 818,927
----------------
Total liabilities 34,689,179
----------------
Commitments and contingencies (Note 6)
Stockholders' equity:
Preferred stock - $.001 par value, authorized
50,000,000 shares; none issued -
Common stock - $.001 par value, authorized
150,000,000 shares; issued and outstanding
10,663,034 shares 10,663
Capital in excess of par value 15,011,401
Retained earnings 6,751,727
Cumulative translation adjustment (7,185)
----------------
----------------
Total stockholders' equity 21,766,606
----------------
$ 56,455,785
================
The accompanying notes are an integral part of these consolidated financial
statements.
SABA PETROLEUM COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
Six Months Three Months
Ended June 30 Ended June 30
1997 1996 1997 1996
Revenues:
Oil and gas sales $ 17,363,664 $ 14,603,688 $ 7,695,072 $ 7,640,802
Other 471,763 786,430 576,881 362,026
--------------- --------------- --------------- ---------------
Total revenues 17,835,427 15,390,118 8,271,953 8,002,828
--------------- --------------- --------------- ---------------
Expenses:
Production costs 8,433,089 7,180,776 4,187,879 3,778,786
General and administrative 2,098,533 1,667,961 1,172,111 964,204
Depletion, depreciation and 3,233,287 2,368,405 1,646,327 1,227,905
amortization
--------------- --------------- --------------- ---------------
Total expenses 13,764,909 11,217,142 7,006,317 5,970,895
--------------- --------------- --------------- ---------------
Operating income 4,070,518 4,172,976 1,265,636 2,031,933
--------------- --------------- --------------- ---------------
Other income (expense):
Other 273,540 (83,226) 70,101 (22,380)
Interest expense (830,785) (1,197,740) (439,985) (588,653)
--------------- --------------- --------------- ---------------
Total other income (expense) (557,245) (1,280,966) (369,884) (611,033)
--------------- --------------- --------------- ---------------
Income before income taxes 3,513,273 2,892,010 895,752 1,420,900
Provision for taxes on income (1,470,000) (1,301,500) (382,491) (607,500)
Minority interest in earnings
of consolidated subsidiary (94,391) (100,647) (5,961) (79,025)
--------------- --------------- --------------- ---------------
Net income $ 1,948,882 $ 1,489,863 $ 507,300 $ 734,375
=============== =============== =============== ===============
Net earnings per common share:
Primary $ 0.18 $ 0.16 $ 0.05 $ 0.08
=============== =============== =============== ===============
Fully-diluted $ 0.17 $ 0.16 $ 0.05 $ 0.08
=============== =============== =============== ===============
Weighted average common and
common equivalent shares
outstanding:
Primary 11,151,434 9,082,622 11,231,551 9,139,124
=============== =============== =============== ===============
Fully-diluted 12,232,057 11,895,021 12,222,305 12,025,834
=============== =============== =============== ===============
The accompanying notes are an integral part of these consolidated financial
statements.
SABA PETROLEUM COMPANY AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF
CASH FLOWS For the Six Months Ended June 30, 1997 and 1996 (Unaudited)
1997 1996
Cash flows from operating activities:
Net income $ 1,948,882 $ 1,489,863
Adjustments to reconcile net income to net cash
provided by operations:
Depletion, depreciation and amortization 3,233,287 2,368,405
Amortization of unearned compensation - 8,500
Compensation expense attributable to non-employee option - 91,600
Minority interest in earnings of consolidated subsidiary 94,391 100,647
Gain on issuance of shares of subsidiary (5,533) -
Changes in:
Accounts receivable 1,563,136 (1,540,620)
Other assets 149,463 278,060
Accounts payable and accrued liabilities 2,042,242 (1,544,309)
----------------- ----------------
----------------- ----------------
Net cash provided by operating activities 9,025,868 1,252,146
----------------- ----------------
Cash flows from investing activities:
Expenditures for property and equipment (12,531,621) (2,648,227)
----------------- ----------------
----------------- ----------------
Net cash used in investing activities (12,531,621) (2,648,227)
----------------- ----------------
Cash flows from financing activities:
Proceeds from notes payable and long-term debt 12,423,705 6,700,712
Principal payments on notes payable and long-term debt (9,105,508) (5,575,275)
(Increase) decrease in notes receivable 200,586 (284,056)
Increase in deferred loan costs - (165,777)
Net change in accounts with affiliated companies (132,236) (12,901)
Net proceeds from issuance of common stock 130,000 329,992
----------------- ----------------
----------------- ----------------
Net cash provided by financing activities 3,516,547 992,695
----------------- ----------------
Effect of exchange rate changes on cash and cash equivalents (1,650) 44
----------------- ----------------
Net increase (decrease) in cash 9,144 (403,342)
Cash at beginning of period 734,036 640,287
----------------- ----------------
Cash at end of period $ 743,180 $ 236,945
================= ================
The accompanying notes are an integral part of these consolidated financial
statements.
SABA PETROLEUM COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. General
The accompanying unaudited condensed consolidated financial statements have
been prepared on a basis consistent with the accounting principles and
policies reflected in the financial statements for the year ended December
31, 1996 and should be read in conjunction with the consolidated financial
statements and notes thereto included in the Company's 1996 Form 10-KSB. In
the opinion of management, the accompanying unaudited condensed consolidated
financial statements contain all adjustments (consisting of normal recurring
accruals only) necessary to present fairly the Company's consolidated
financial position as of June 30, 1997, and the consolidated results of
operations for the six and three month periods ended June 30, 1997 and 1996
and the consolidated cash flows for the six month periods ended June 30,
1997 and 1996.
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 128, "Earnings Per Share." Statement
of Financial Accounting Standards No. 128 specifies the computation,
presentation, and disclosure requirements for earnings per share and is
effective for financial statements issued for periods ending after December
15, 1997. Management has not yet determined the impact that adoption of
Statement of Financial Accounting Standard No. 128 is expected to have on
the financial statements of the Company.
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130, "Reporting Comprehensive Income" and
Statement of Financial Accounting Standards No. 131, " Disclosure About
Segments of an Enterprise and Related Information." Both Statements are
effective for fiscal years beginning after December 15, 1997. Management has
not yet determined the impact that adoption of the Statements is expected to
have on the financial statements of the Company.
2. Statements of Cash Flows
Following is certain supplemental information regarding cash flows for the
six month periods ended June 30, 1997 and 1996:
1997 1996
Interest paid $ 889,000 $ 1,228,000
============ =============
Income taxes paid $ 1,640,000 $ 643,000
============ =============
Non-cash investing and financing transactions:
Debentures in the principal amount of $2,157,000 were converted into
493,006 shares of Common Stock during the six months ended June 30, 1997.
Cumulative foreign currency translation gains (losses) in the amount of
($18,729) and $1,003 were recorded during the six month periods ended June
30, 1997 and 1996, respectively.
In February 1996, the Company issued 14,000 shares of Common Stock to a
director of the Company in settlement of an obligation in the amount of
$42,000.
Debentures in the principal amount of $156,000 were converted into
35,656 shares of Common Stock during the six months ended June 30, 1996.
SABA PETROLEUM COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The Company incurred a charge to operations, and a credit to Stockholders'
Equity, in the amount of $91,600 resulting from the issuance of stock
options to a consultant during the six months ended June 30, 1996.
3. Long-Term Debt
Long-term debt consists of the following at June 30, 1997:
9% convertible senior subordinated debentures - due 2005 $ 4,281,000
Revolving loan agreement with a bank 15,650,000
Demand revolving loan agreement with a bank 2,444,766
Capital lease obligations 375,054
Promissory notes-CAPCO 1,016,600
---------------
23,767,420
Less current portion 3,658,113
===============
$ 20,109,307
===============
On December 26, 1995, the Company issued $11,000,000 of 9% convertible
senior subordinated debentures ("Debentures") due December 15, 2005. On
February 7, 1996, the Company issued an additional $1,650,000 of Debentures
pursuant to the exercise of an over-allotment option by the underwriting
group. The Debentures are convertible into Common Stock of the Company, at
the option of the holders of the Debentures, at any time prior to maturity
at a conversion price of $4.38 per share, subject to adjustment in certain
events. The Company has reserved 3,000,000 shares of its Common Stock for
the conversion of the Debentures. The principal use of proceeds from the
sale of the Debentures was to retire short-term indebtedness incurred by the
Company in connection with its acquisitions of producing oil and gas
properties in Colombia. A portion of the proceeds was used to reduce the
balance outstanding under the Company's revolving credit agreement.
Debentures in the amount of $6,212,000 were converted into 1,419,846 shares
of Common Stock during the year ended December 31, 1996. An additional
$2,157,000 of Debentures were converted into 493,006 shares of Common Stock
during the six-month period ended June 30, 1997.
The revolving loan ("Agreement") is subject to semi-annual redeterminations
and will be converted to a three-year term loan on July 1, 1999. Funds
advanced under the facility are collateralized by substantially all of the
Company's U.S. oil and gas producing properties and the common stock of its
principal U.S. subsidiaries. Interest is payable at the prime rate plus
0.25%, or LIBOR rate pricing options plus 2.25%. At June 30, 1997, the
borrowing base for the revolving loan was $18.2 million. The weighted
average interest rate for borrowings outstanding under the revolving loan at
June 30, 1997 was 8.2%. Effective August 1, 1997, the borrowing base for the
revolving loan was increased to $19.1 million, subject to a monthly
reduction of $400,000, beginning September 1, 1997. In accordance with the
terms of the Agreement, and after giving effect to the Company's anticipated
capital requirements, $3.3 million of the loan balance is classified as
currently payable at June 30, 1997. The Agreement
SABA PETROLEUM COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
requires, among other things, that the Company maintain at least a 1 to 1
working capital ratio, stockholders' equity of $6,250,000, a ratio of cash
flow to debt service of not less than 1.25 to 1.0 and general and
administrative expenses at a level not greater than 20% of revenue, all as
defined in the Agreement. Additionally, the Company is restricted from
paying dividends and advancing funds in excess of specified limits to
affiliates. The Company was in compliance with the terms of the Agreement at
June 30, 1997.
The Company's Canadian subsidiary has available a demand revolving reducing
loan in the face amount of $2.8 million. Interest is payable at a variable
rate equal to the Canadian prime rate plus 0.75% per annum (5.5% at June 30,
1997). The loan is collateralized by the subsidiary's oil and gas producing
properties, and a first and fixed floating charge debenture in the principal
amount of $3.6 million over all assets of the company. Effective July 1,
1997, the borrowing base will reduce at the rate of $58,000 per month. In
accordance with the terms of the loan agreement, $315,000 of the loan
balance is classified as currently payable at June 30, 1997. Although the
bank can demand payment in full of the loan at any time, it has provided a
written commitment not to do so except in the event of default.
The Company leases certain equipment under agreements which are classified
as capital leases. Lease payment terms vary from three to four years. The
effective interest rate on the total amount of capitalized leases at June
30, 1997 was 8.82%.
4. Common Stock and Stock Options
As of June 30, 1997, the Company had outstanding options to certain
employees of the Company for the purchase of 653,000 shares of Common Stock.
These options become exercisable over a period of five years from the date
of issue. The exercise price of the options is the fair market value of the
Common Stock at the date of grant. Options to acquire 89,000 shares of
Common Stock were exercised during the six month period ended June 30, 1997.
Options to acquire 269,000 shares of Common Stock were exercisable at June
30, 1997.
On May 30, 1997, the Company issued options to acquire 595,000 shares of
Common Stock to certain officers and employees in accordance with the
provisions of the 1996 Incentive Equity Plan. The options have an exercise
price of 110% of the market value at date of grant and become exercisable
over various periods ranging from two to five years from the date of grant.
No options were exercised during the period ended June 30, 1997.
On May 30, 1997, the Company's Board of Directors authorized, on a deferred
basis, the issuance of 200,000 shares of Common Stock to the Company's
President, the issuance of such shares being contingent upon the officer
remaining in the employ of the Company for a period of two years succeeding
the expiration of his existing employment contract at December 31, 1999,
with such shares to be issued in two equal installments of 100,000 shares
each at the end of each of the two succeeding years.
SABA PETROLEUM COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Additionally, the Board of Directors authorized the issuance of 100,000
shares of performance shares to the Company's President, issuable at the end
of calendar year 1997 provided that certain operating results are reported
by the Company at the end of the year.
5. Contingencies
The Company is subject to extensive Federal, state, and local
environmental laws and regulations. These requirements, which change
frequently, regulate the discharge of materials into the environment.
The Company believes that it is in compliance with existing laws and
regulations.
Environmental Contingencies
Pursuant to the purchase and sale agreement of an asphalt refinery in Santa
Maria, California, the sellers agreed to perform certain remediation and
other environmental activities on portions of the refinery property through
June 1999. Because the purchase and sale agreement contemplates that the
Company might also incur remediation obligations with respect to the
refinery, the Company engaged an independent consultant to perform an
environmental compliance survey for the refinery. The survey did not
disclose required remediation in areas other than those where the seller is
responsible for remediation, but did disclose that it was possible that all
of the required remediation may not be completed in the five-year period.
The Company, however, believes that all required remediation will be
completed by the seller within the five-year period. Environmental
compliance surveys such as those the Company has had performed are limited
in their scope and should not be expected to disclose all environmental
contamination as may exist.Pursuant to the purchase and sale agreement of an
asphalt refinery in Santa Maria, California, the sellers agreed to perform
certain remediation and other environmental activities on portions of the
refinery property through June 1999. Because the purchase and sale agreement
contemplates that the Company might also incur remediation obligations with
respect to the refinery, the Company engaged an independent consultant to
perform an environmental compliance survey for the refinery. The survey did
not disclose required remediation in areas other than those where the seller
is responsible for remediation, but did disclose that it was possible that
all of the required remediation may not be completed in the five-year
period. The Company, however, believes that all required remediation will be
completed by the seller within the five year period. Environmental
compliance surveys such as those the Company has had performed are limited
in their scope and should not be expected to disclose all environmental
contamination as may exist.
The Colombian Ministry of the Environment ("Ministry") issued a resolution
dated June 7, 1995 that set forth a number of measures aimed at correcting
certain deficiencies that the Ministry has allegedly found in environmental
aspects of certain of the Company's Colombia properties. Among such
measures, the Ministry ordered the temporary closing of one of five
production modules and of any wells processed in that module until Texas
Petroleum Company, the former owner and operator of the properties, provided
a document detailing the timetable to implement some of the measures
described above. The temporary closing of the module did not have a
substantial effect on total production because substantially all of the
crude oil which would otherwise have been processed in the closed module was
directed to other production modules. The resolution also ordered the
opening of an environmental investigation of Texas Petroleum Company's
operation of the properties. The document containing the requested timetable
was presented to the Ministry on July 6, 1995. On June 18, 1996, the
Ministry issued a resolution which allowed the current operator of the
properties to reopen the module, while requiring its efforts to finalize
correction of the cited deficiencies.
In accordance with the Articles of Association for the Cocorna Concession,
the Concession expired during the first quarter and the property interest
reverted to Ecopetrol. The property is presently under operation by
Ecopetrol. Under the terms of the acquisition of the Concession, the Company
and the operator were required to perform various environmental remedial
operations, which the operator advises have been substantially, if not
wholly, completed. The Company and the operator are awaiting an inspection
of the Concession area by Colombian officials to determine whether the
government concurs with the operator's conclusions. Based upon the advice of
the operator, the Company does not anticipate any significant future
expenditures associated with the environmental requirements for the Cocorna
Concession.
SABA PETROLEUM COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
In 1993, the Company acquired a producing mineral interest in California
from a major oil company ("Seller"). At the time of acquisition, the
Company's investigation revealed that the Seller had suffered a discharge of
diluent (a light oil based fluid which is often mixed with heavier grade
crudes). The purchase agreement required the Seller to remediate the area of
the diluent spill. After the Company assumed operation of the property, the
Company became aware of the fact that diluent was seeping into a drainage
area, which traverses the property. The Company took action to eliminate the
fluvial contamination and requested that the Seller bear the cost of
remediation. The Seller has taken the position that its obligation is
limited to the specified contaminated area and that the source of the
contamination is not within the area that the Seller has agreed to
remediate. The Company has commenced an investigation into the source of the
contamination to ascertain whether it is physically part of the area which
the Seller agreed to remediate or is a separate spill area. Investigation
and discussions with the Seller are ongoing. Should the Company be required
to remediate the area itself, the cost to the Company could be significant.
The Company has spent approximately $165,000 to date in remediation
activities, and present estimates are that the cost of complete remediation
could approach $1 million. Since the investigation is not complete, an
accurate estimate of cost cannot be made.
In 1995, the Company agreed to acquire, for less than $50,000, an oil and
gas interest in California on which a number of oil wells had been drilled
by the seller. None of the wells were in production at the time of
acquisition. The acquisition agreement required that the Company assume the
obligation to abandon any wells that the Company did not return to
production, irrespective of whether certain consents of third parties
necessary to transfer the property to the Company would be obtained. The
Company has been unable to secure all of the requisite consents to transfer
the property but nevertheless may have the obligation to abandon the wells.
The Company is evaluating its drilling options and is considering whether to
continue to attempt to secure the transfer consents. A preliminary estimate
of the cost of abandoning the wells and restoring the well sites is
approximately $800,000. The Company is currently unable to assess its
exposure to third parties if the Company elects to plug such wells without
first obtaining necessary consent.
The Company, as is customary in the industry, is required to plug and
abandon wells and remediate facility sites on its properties after
production operations are completed. The cost of such operation will be
significant and will occur, from time to time, as properties are abandoned.
There can be no assurance that material costs for remediation or other
environmental compliance will not be incurred in the future. The incurrence
of such environmental compliance costs could be materially adverse to the
Company. No assurance can be given that the costs of closure of any of the
Company's other oil and gas properties would not have a material adverse
effect on the Company.
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS
The following discussion should be read in conjunction with the condensed
consolidated financial statements of the Company and notes thereto, included
elsewhere herein.
Overview
The Company is an independent energy company engaged in the acquisition,
exploration and development of oil and gas properties. To date, the Company has
grown primarily through the acquisition of producing properties with significant
exploration and development potential in the United States, Colombia and Canada.
This strategy has enabled the Company to assemble a significant inventory of
properties over the past five years. The Company's strategy has expanded to
emphasize growth through exploration and development drilling.
The Company's revenues are primarily comprised of oil and gas sales attributable
to properties in which the Company owns a majority or substantial interest. The
Company accounts for its oil and gas producing activities under the full cost
method of accounting. Accordingly, the Company capitalizes, in separate cost
centers, all costs incurred in connection with the acquisition of oil and gas
properties and the exploration for and development of oil and gas reserves. The
Company's financial statements have been consolidated to reflect the operations
of its subsidiaries, including the Company's approximate 74% ownership interest
in Beaver Lake Resources Corporation, a Canadian public company.
The Company's operating performance is influenced by several factors, the most
significant of which are the price received for its oil and gas and the
Company's production volumes. The price received by the Company for its oil
produced in North America is influenced by the world price for crude oil, as
adjusted for the particular grade of oil. The oil produced from the Company's
California properties is predominantly a heavy grade of oil, which is typically
sold at a discount to lighter oil. Heavy oil producers, however, have benefited
recently from a decline in the price differential between light and heavy oil
and the rise in oil prices generally. The oil produced from the Company's
Colombian properties is predominantly a heavy grade of oil. The prices received
by the Company for its Colombian produced oil are determined based on formulas
set by Ecopetrol. Additional factors influencing operating performance include
production expenses, overhead requirements, the Company's method of depleting
reserves, and cost of capital.
Acquisition, Exploration and Development
Drilling activity during the quarter ended June 30, 1997, consisted of one gross
(1.0 net) horizontal oil well that was abandoned due to downhole stability
problems and one gross (.87 net) gas well that was plugged and abandoned as a
dry hole in Canada; the drilling and completion of one gross (1.0 net)
horizontal oil well and the drilling and completion of one pair (2 gross and
net) of Steam Assisted Gravity Drainage ("SAGD") wells in Santa Barbara County,
California; and the drilling and completion of four gross (1.0 net) oil wells
and the drilling of one gross (.25 net) well which was in progress in Colombia.
Production from the SAGD wells is expected to commence in September 1997 when
construction of surface injection equipment is completed.
In July, 1997 drilling operations commenced on the fifth horizontal well in the
California 1997 drilling program, as well as on a re-entry location in Lea
County, New Mexico to test the Cisco formation at the Company's Southwest Tatum
Prospect. In August, 1997 a re-entry operation commenced in Alberta, Canada in a
second attempt to establish production in the Wabamum formation.
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS (continued)
The Company plans to continue drilling activities on its present properties
throughout the remainder of 1997, including as many as 26 additional horizontal
oil wells in California. Permits have been secured for a total of 21 drilling
locations in Colombia.
Results of Oil and Gas Producing OperationsResults of Oil and Gas Producing
Operations
Results of the Company's oil and gas producing activities for the six and three
month periods ended June 30, 1997 and 1996 are as follows:
Six Months Ended June 30, 1997 United
Total Canada Colombia
States
Oil and gas sales $ 17,363,664 $ 10,554,957 $ 1,249,110 $ 5,559,597
Production costs $ 8,433,089 $ 5,081,512 $ 503,617 $ 2,847,960
Depletion $ 2,938,140 $ 1,792,000 $ 155,805 $ 990,335
General and administrative $ 2,098,533 $ 1,782,786 $ 216,788 $ 98,959
expenses
Oil volume (Bbls) 1,066,407 555,784 54,822 455,801
Gas volume (Mcf) 1,096,629 732,222 364,407 -
Barrels of oil equivalent 1,249,179 677,821 115,557 455,801
(BOE)
Average per BOE:
Sales price $ 13.90 $ 15.57 $ 10.81 $ 12.20
Production costs $ 6.75 $ 7.50 $ 4.36 $ 6.25
Depletion $ 2.35 $ 2.64 $ 1.35 $ 2.17
General and administrative $ 1.68 $ 2.63 $ 1.88 $ 0.22
expenses
Six Months Ended June 30, 1996 United
Total Canada Colombia
States
Oil and gas sales $ 14,603,688 $ 6,859,207 $ 1,333,645 $ 6,410,836
Production costs $ 7,180,776 $ 3,927,488 $ 476,761 $ 2,776,527
Depletion $ 2,099,225 $ 991,305 $ 132,840 $ 975,080
General and administrative $ 1,563,530 $ 1,184,881 $ 289,211 $ 89,438
expenses
Oil volume (Bbls) 971,367 377,074 62,597 531,696
Gas volume (Mcf) 806,035 495,304 310,731 -
Barrels of oil equivalent 1,105,707 459,625 114,386 531,696
(BOE)
Average per BOE:
Sales price $ 13.21 $ 14.92 $ 11.66 $ 12.06
Production costs $ 6.49 $ 8.54 $ 4.16 $ 5.22
Depletion $ 1.89 $ 2.15 $ 1.16 $ 1.83
General and administrative $ 1.41 $ 2.58 $ 2.53 $ 0.17
expenses
Three Months Ended June 30, United
1997
Total States Canada Colombia
Oil and gas sales $ 7,695,072 $ 4,931,516 $ 511,880 $ 2,251,676
Production costs $ 4,187,879 $ 763,131 $ 280,355 $ 1,144,393
Depletion $ 1,488,091 $ 936,086 $ 86,703 $ 465,302
General and administrative $ 1,172,111 $ 994,218 $ 115,116 $ 62,777
expenses
Oil volume (Bbls) 531,984 297,175 27,148 207,625
Gas volume (Mcf) 532,999 335,796 197,203 -
Barrels of oil equivalent (BOE) 620,781 353,141 60,015 207,625
Average per BOE:
Sales price $ 12.40 $ 13.96 $ 8.53 $ 10.84
Production costs $ 6.75 $ 7.82 $ 4.67 $ 5.51
Depletion $ 2.40 $ 2.65 $ 1.44 $ 2.24
General and administrative $ 1.89 $ 2.82 $ 1.92 $ 0.30
expenses
Three Months Ended June 30, United
1996
Total States Canada Colombia
Oil and gas sales $ 7,640,802 $ 3,583,696 $ 757,401 $ 3,299,705
Production costs $ 3,778,786 $ 1,962,936 $ 274,632 $ 1,541,218
Depletion $ 1,094,106 $ 532,690 $ 74,041 $ 487,375
General and administrative $ 864,559 $ 659,332 $ 157,702 $ 47,525
expenses
Oil volume (Bbls) 492,262 194,628 33,978 263,656
Gas volume (Mcf) 390,705 228,292 162,413 -
Barrels of oil equivalent (BOE) 557,380 232,677 61,047 263,656
Average per BOE:
Sales price $ 13.71 $ 15.40 $ 12.41 $ 12.52
Production costs $ 6.78 $ 8.43 $ 4.49 $ 5.84
Depletion $ 1.96 $ 2.28 $ 1.21 $ 1.85
General and administrative $ 1.55 $ 2.83 $ 2.58 $ 0.18
expenses
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS (continued)
Results of Refining Operations
In June 1995, the Company entered into a processing agreement with an
unaffiliated company pursuant to which the latter company purchases crude
(including that produced by the Company), delivers the crude to the refinery,
reimburses the Company's out of pocket costs for refining, then markets the
asphalt and other refinery products. Profits from the refinery operations
(computed after recovery of crude costs and other costs of operations) are
generally shared equally by the Company and the unaffiliated company. The
processing agreement has a term which ends December 31, 1998.
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS (continued)
Processing operations for the six and three month periods ended June 30, 1997
and 1996 are as follows:
Six Months Three Months
Ended June 30 Ended June 30
1997 1996 1997 1996
Crude oil throughput (Bbls) 659,889 543,345 375,320 301,051
Production:
Asphalt (tons) 72,855 63,954 40,937 35,646
Other products (Bbls) 249,480 186,306 144,552 102,590
Sales:
Asphalt (tons) 70,846 30,296 45,638 25,248
Other products (Bbls) 226,933 173,164 135,588 89,911
Processing fee income $212,232 $44,000 $212,232 $44,000
The asphalt refining business is seasonal in nature, and is influenced by
several factors, including weatherconditions in the marketing area. A majority
of the Company's processing fee income is attributable to asphalt sales which
are recorded during the period April to October.
1997 compared to 1996
Oil and Gas Sales
Oil and gas sales increased $2.8 million (19.2%) and $100,000 (1.3%) for the six
and three month periods ended June 30, 1997, respectively, from $14.6 million
and $7.6 million for the same periods of 1996. Average sales price per BOE
increases (decreases) of $0.69 and ($1.31) for the six and three month periods
ended June 30, 1997, respectively, from $13.21 and $13.71 for the same periods
of 1996, resulted in increased (decreased) oil and gas sales of $865,000 and
($815,000), respectively.
Production increases of 143,000 BOE (12.9%) and 63,000 BOE (11.3% ), for the six
and three month periods ended June 30, 1997, respectively, from 1,106,000 BOE
and 557,000 BOE for the same periods of 1996 resulted in increased oil and gas
sales of $1.9 million and $869,000, respectively. The increase in oil and gas
production was primarily attributable to the Company's property acquisition in
Louisiana in November 1996 and the horizontal drilling program that began in
California in June 1996. The production increases include declines in Colombia
of 76,000 BOE and 56,000 BOE for the six and three month periods ended June 30,
1997, respectively, from the same periods of 1996 which resulted from the
reversion of the Cocorna Concession property interest in February 1997 and
normal production declines.
Other Revenues
Other revenues increased (decreased) ($315,000) (40.1%) and $215,000 (59.4%) for
the six and three month periods ended June 30, 1997, respectively, from $786,000
and $362,000 for the same periods in 1996. The decrease for the six month period
was due primarily to additional Velasquez-Galan Pipeline operating expenses in
the amount of $414,000 which were invoiced to the Company by the facility's
operator in the first quarter of the year. An increase of $170,000 in processing
fee income from the Company's asphalt refinery was the principal source of the
change for the three month period.
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS (continued)
Production Costs
Production costs increased $1.2 million (16.7%) and $400,000 (10.5%) for the six
and three month periods ended June 30, 1997, respectively, from $7.2 million and
$3.8 million for the same periods in 1996. Average production cost per BOE
increases (decreases) of $0.26 and ($0.03) for the six and three month periods
ended June 30, 1997, respectively, from $6.49 and $6.78 for the same periods in
1996, resulted in increased (decreased) production costs of $321,000 and
($21,000).
Production increases of 143,000 BOE and 63,000 BOE for the six and three month
periods ended June 30, 1997, respectively, from 1,106,000 BOE and 557,000 BOE
for the same periods of 1996 resulted in increased production costs of $932,000
and $430,000, respectively. In comparison with the six and three month periods
of the prior year, production volume changes for the same periods in 1997 were
increases of 218,000 BOE and 120,000 BOE, respectively, in the United States and
decreases of 76,000 BOE and 56,000 BOE, respectively, in Colombia. The increases
in the United States are primarily attributable to the Company's property
acquisition in Louisiana in November 1996 and the horizontal drilling program
that began in California in June 1996. Approximately one-half of the production
declines in Colombia resulted from the reversion of the Cocorna Concession
property interest in February 1997; the balance of the decrease was due to
normal production declines.
General and Administrative Expenses
General and administrative expenses increased $400,000 (23.5%) and $200,000
(20%) for the six and three month periods ended June 30, 1997, respectively,
from $1.7 million and $1.0 million for the same periods of 1996. The overall
increase in general and administrative expenses was due principally to the
increase in employment in the Company's domestic offices to support its planned
oil and gas property development programs.
Depletion, Depreciation and Amortization
Depletion, depreciation and amortization expenses increased $800,000 (33.3%) and
$400,000 (33.3%) for the six and three month periods ended June 30, 1997,
respectively, from $2.4 million and $1.2 million for the same periods of 1996.
Depletion expense increased $800,000 (38.1%) and $400,000 (36.4%) for the six
and three month periods ended June 30, 1997, respectively, from $2.1 million and
$1.1 million for the same periods of 1996. The increases were primarily
attributable to domestic production volume increases for the six and three month
periods ended June 30, 1997 of 218,000 BOE and 120,000 BOE, respectively, in
comparison with the same periods of 1996, and capital costs recorded by the
Company in its full cost pools beginning in the second quarter of 1996 and the
anticipated future development and abandonment costs to be incurred in
connection with the management of its oil and gas properties. Depreciation and
amortization expenses increased $11,000 and $16,000 for the six and three month
periods ended June 30, 1997, respectively, from $269,000 and $134,000 for the
same periods of 1996.
Other Income (Expense)
Other income (expense) increased to income of $274,000 and $70,000 for the six
and three month periods ended June 30, 1997, respectively, from expense of
$83,000 and $22,000 for the same periods of 1996. The changes were primarily due
to non-operational gains realized by the Company's Colombia operations.
Interest Expense
Interest expense decreased $400,000 (33.3%) and $200,000 (33.3%) for the six and
three month periods ended June 30, 1997, respectively, from $1.2 million and
$600,000 for the same periods of 1996. The decreases were due primarily to the
conversion of $8.4 million of Debentures to Common Stock occurring since April
1, 1996.
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS (continued)
Interest expense attributable to the Company's revolving line of credit
increased $77,000 and $66,000 for the six and three month periods ended June 30,
1997, respectively, from the same periods of 1996. The average debt balance
outstanding under this credit facility increased $2.7 million (30.0%) and $3.4
million (38.6%) for the six and three month periods ended June 30, 1997,
respectively, from $9.0 million and $8.8 million for the same periods of 1996,
due principally to the use of loan proceeds to fund a property acquisition and
development drilling activities. The weighted average interest rate for the
revolving line of credit decreased 21 basis points (2.3%) and 56 basis points
(6.1%) for the six and three month periods ended June 30, 1997, respectively,
from 9.29% and 9.25% for the same periods of 1996.
Provision for Taxes on Income
Provision for taxes on income increased $169,000 (13.0%) and decreased $225,000
(37.0%) for the six and three month periods ended June 30, 1997, respectively,
from the same periods of 1996. The Company's estimated effective tax rates were
43.0% in 1997 and 46.0% in 1996.
Net Income
Net income increased $459,000 (30.8%) and decreased $227,000 (30.9%) for the six
and three month periods ended June 30, 1997, respectively, from the same periods
of 1996. The changes in net income reflect the changes in oil and gas sales,
other revenues, production costs, general and administrative expenses,
depletion, depreciation and amortization expenses, interest expense, other
income (expense) and provision for taxes on income discussed above.
The Company's oil and gas producing business is not seasonal in nature.
Liquidity and Capital Resources
Since 1991, the Company's strategy has emphasized growth through the acquisition
of producing properties with significant exploration and development potential.
The Company recently expanded its focus to emphasize drilling, enhanced recovery
methods and increased production efficiencies. During the past five years, the
Company financed its acquisitions and other capital expenditures primarily
through secured bank financing, the creation of joint interest operations and
production payment obligations, and sales of Common Stock and the Debentures.
Supplemental cash and working capital are provided through internally generated
cash flows, secured bank financing and debt and equity financing.
During 1997 and 1996, the Company used a combination of secured bank financing,
the proceeds from the sale of the Debentures and internally generated cash flow
to fund its acquisitions and other capital expenditures.
Working Capital
The Company's working capital decreased in 1997 from $2.4 million at December
31, 1996 to a deficit of $2.9 million at June 30, 1997. This decrease was
primarily due to an increase of $2.2 million in accounts payable, due to the
Company's development expenditures at the end of the second quarter, and the
classification as a current liability of $3.2 million of revolving bank loan
indebtedness which may become payable during the next twelve months, depending
on the Company's future capital requirements and available funding sources.
Operating Activities
The Company's operating activities during 1997 provided net cash flow of $9.0
million. Changes in the non-cash components of working capital were responsible
for $3.8 million of this amount. Cash flows from operating activities provided
net cash flow of $1.3 million in 1996.
Investing Activities
Investing activities during 1997, consisting of oil and gas property
acquisition, development and exploration expenditures, resulted in a net cash
outflow of $12.5 million.
Investing activities during 1996, consisting principally of oil and gas property
acquisition, development and exploration expenditures, resulted in a net cash
outflow of $2.6 million.
Financing Activities
Financing activities during 1997 resulted in net cash flow of $3.5 million.
Borrowings under the Company's credit facilities provided $3.3 million of this
inflow. Proceeds from the exercise of options provided cash inflows in the
amount of $130,000 during 1997.
Financing activities during 1996, which provided net cash flow of $993,000,
consisted principally of activity on the Company's revolving line of credit and
proceeds from the issuance of Debentures, net of related financing costs, in the
amount of $1.4 million.
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS (continued)
Credit Facilities
In September 1993, the Company established a reducing, revolving line of credit
with Bank One, Texas, N.A. to provide funds for the retirement of a production
note payable, the retirement of other short-term fixed rate indebtedness and for
working capital. At June 30, 1997, the borrowing base under the credit agreement
was $18.2 million, subject to a monthly reduction of $435,000, of which $15.7
million was outstanding. Effective August 1, 1997, the borrowing base was
increased to $19.1 million, subject to a monthly reduction of $400,000.
In addition, the Company has received from Bank One, Texas, N.A. a commitment
for a term credit facility of $3.4 million to fund development projects in the
United States. The borrowing base for this facility will reduce at the rate of
$142,000 per month.
The Company's Canadian subsidiary has available a demand revolving reducing loan
in the face amount of $2.8 million. Effective July 1, 1997, the maximum
principal amount available under the loan will reduce at the rate of $58,000 per
month. At June 30, 1997, $2.4 million was outstanding.
The Company's budget for capital expenditures for the second half of 1997 is
$32.6 million. The expenditures will be made primarily for the development of
existing properties. Additional capital expenditures may be made for
acquisitions of producing properties, both domestically and internationally. The
Company has recently concluded negotiations with Pertamina, the Indonesia
state-owned oil company regarding an exploration block on the island of Java and
is awaiting final approvals by Indonesian officials. The initial commitment
including cash bonus, seismic and drilling costs for a period of up to three
years, is $19 million. Subsequent to June 30, 1997, the Company entered into a
letter of intent with another oil company pursuant to which the Company is to
acquire a 75% working interest in two licenses located onshore England south of
London. The licenses cover approximately 123,550 acres of land. Saba will pay
$300,000 and will acquire seismic and other data and will act as operator of the
project, assuming receipt of government approvals. The Company intends to
commence drilling a well by year-end at an estimated gross cost of $1,100,000
($825,000 to the Company's interest) as a dry hole and $1,550,000 gross
($1,165,000 net) as a completed well.The amount of capital expenditures will
change during future periods depending on market conditions, results of the
Company's development drilling program and other related economic factors,
including the price of oil and natural gas. The funds available (including those
from credit lines) for anticipated capital expenditures will be affected by
prices for oil and natural gas, results of the Company's development drilling
program and other factors beyond the control of the Company.
Should the Company be unable to obtain equity and/or debt financing in amounts
sufficient to fund projected activities, it may be constrained in its ability to
acquire and/or develop additional oil and gas properties.
New Accounting Standards
In February 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No.128, "Earnings Per Share." Statement of
Financial Accounting Standards No. 128 specifies
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS (continued)
the computation, presentation, and disclosure requirements for earnings per
share and is effective for financial statements issued for periods ending after
December 15, 1997. Management has not yet determined the impact that adoption of
Statement of Financial Accounting Standard No. 128 is expected to have on the
financial statements of the Company.
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130, "Reporting Comprehensive Income" and
Statement of Financial Accounting Standards No. 131, " Disclosure About Segments
of an Enterprise and Related Information." Both Statements are effective for
fiscal years beginning after December 15, 1997. Management has not yet
determined the impact that adoption of the Statements is expected to have on the
financial statements of the Company.
Safe Harbor for Forward-Looking Statements
Except for historical information contained herein, the statements in this
report are forward-looking statements that are made pursuant to the safe harbor
provisions of the Private Securities Litigation Reform Act of 1995.
Forward-looking statements involve known and unknown risks and uncertainties
which may cause the Company's actual results in future periods to differ
materially from forecasted results. These risks and uncertainties include, among
other things, volatility of oil prices, product demand, market competition,
risks inherent in the Company's international operations, including future
prices paid for oil produced at the Colombian oil properties, imprecision of
reserve estimates, and the Company's ability to replace and expand oil and gas
reserves. These and other risks are described elsewhere herein and in the
Company's other filings with the Securities and Exchange Commission.
Saba Petroleum Company
PART II - OTHER INFORMATION
PART II
Item 2. Changes in Securities.
During May 1997, pursuant to a general solicitation of shareholders,
the shareholders of the Registrant voted to change the state of incorporation of
Registrant from Colorado to Delaware. During June 1997, such reincorporation was
effected. The material differences in the rights of the holders of Registrant's
common stock, $0.001, are described in Registrant's definitive proxy statement
dated April 25, 1997, which was filed with the Securities and Exchange
Commission under file number 001-13880. The material set forth on pages 12
through 25, inclusive, under the Caption "Proposal No. II-Reincorporation In
Delaware" is incorporated herein in response to this item by this reference. See
also, Item 4 of this Report.
Item 4. Submission of Matters to a vote of Security Holders.
(a) On May 30, 1997, Registrant held its annual meeting of shareholders.
(b) The annual meeting involved the election of directors of the
Registrant's for a term expiring at the end of Registrants 1997 annual
meeting, or until the successors to the directors have been elected and
qualified. At such meeting the entire board of directors was elected
and the persons listed in (c) were elected directors of Registrant for
the term stated above.
(c) The following shows the matters voted upon at the annual meeting, and
the results of such voting:
1. Election of Directors:
- --------------------- ------------------ ------------------ ------------------ ------------------ ------------------
Nominee Votes For Votes Against Withheld Abstentions Broker Nonvotes
- --------------------- ------------------ ------------------ ------------------ ------------------ ------------------
- --------------------- ------------------ ------------------ ------------------ ------------------ ------------------
Ilyas Chaudhary 8,436,054 140 9,660 500,983
- --------------------- ------------------ ------------------ ------------------ ------------------ ------------------
- --------------------- ------------------ ------------------ ------------------ ------------------ ------------------
Alex Cathcart 8,435,793 700 10,920 500,983
- --------------------- ------------------ ------------------ ------------------ ------------------ ------------------
- --------------------- ------------------ ------------------ ------------------ ------------------ ------------------
Walton Vance 8,436,469 140 6,748 500,983
- --------------------- ------------------ ------------------ ------------------ ------------------ ------------------
- --------------------- ------------------ ------------------ ------------------ ------------------ ------------------
William Hagler 8,419,773 87,640 36,120 500,983
- --------------------- ------------------ ------------------ ------------------ ------------------ ------------------
- --------------------- ------------------ ------------------ ------------------ ------------------ ------------------
Rodney C. Hill 8,435,519 2,730 10,808 500,983
- --------------------- ------------------ ------------------ ------------------ ------------------ ------------------
- --------------------- ------------------ ------------------ ------------------ ------------------ ------------------
Ronald Ormand 8,435,479 770 10,948 503,083
- --------------------- ------------------ ------------------ ------------------ ------------------ ------------------
- --------------------- ------------------ ------------------ ------------------ ------------------ ------------------
Faysal Sohail 8,435,259 4,410 10,948 500,983
- --------------------- ------------------ ------------------ ------------------ ------------------ ------------------
2. Change of the State of Incorporation of the Registrant from Colorado to
Delaware:
Nominee Votes For Votes Against Withheld Abstentions Broker Nonvotes
5,611,022 155,631 12,262
3. Adoption of the Company's 1997 Stock Option Plan for Non-Employee Directors.
Nominee Votes For Votes Against Withheld Abstentions Broker Nonvotes
8,184,788 267,390 56,464
4. Ratification of the selection of Coopers & Lybrand, L.L.P. as Registrant=s auditors for the year 1997.
Nominee Votes For Votes Against Withheld Abstentions Broker Nonvotes
8,481,693 17,472 9,453
ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K
Exhibits filed for the quarter ended June 30, 1997 are as follows:
EXHIBIT NUMBER DESCRIPTION
10.38 Employment agreement with Alex Cathcart
10.39 Retainer Agreement with Rodney C. Hill, A
Professional Corporation
11.1 Computation of Earnings per Common Share
27.1 Financial Data Schedule
No reports were filed under Form 8-K during the quarter ended June 30, 1997.
Saba Petroleum Company
SIGNATURES
In accordance with the requirements of the Exchange Act, the issuer caused this
report to be signed on its behalf by the undersigned, thereunto duly authorized.
SABA PETROLEUM COMPANY
Date: August 19, 1997 By: /s/ Ilyas Chaudhary___________________
Ilyas Chaudhary
President
(Principal Executive
Officer)
Date: August 19, 1997 By: /s/ Walton C. Vance__________________
Walton C. Vance
Chief Financial Officer
(Principal Financial and
Accounting Officer)