UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-Q
/ x / Quarterly Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the quarterly period ended June 30, 1997
or
/ / Transition Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the transition period from _______ to ________
Commission File No. 1-10695
PARKER & PARSLEY PETROLEUM COMPANY
(Exact name of Registrant as specified in its charter)
Delaware 74-2570602
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
303 West Wall, Suite 101, Midland, Texas 79701
(Address of principal executive offices) (Zip code)
Registrant's Telephone Number, including area code : (915) 683-4768
Not applicable
(Former name, former address and former fiscal year,
if changed since last report)
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 for 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 of Common Stock outstanding
as of August 1, 1997............................................... 41,773,238
Page 1 of 25 pages.
Exhibit index on page 25
PARKER & PARSLEY PETROLEUM COMPANY
TABLE OF CONTENTS
Page
----
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets as of June 30, 1997 and
December 31, 1996 ...................................... 3
Consolidated Statements of Operations for the three and six
months ended June 30, 1997 and 1996........................ 5
Consolidated Statement of Stockholders' Equity for the six
months ended June 30, 1997................................. 6
Consolidated Statements of Cash Flows for the three and six
months ended June 30, 1997 and 1996........................ 7
Notes to Consolidated Financial Statements................... 8
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations........................ 12
PART II. OTHER INFORMATION
Item 1. Legal Proceedings............................................ 22
Item 6. Exhibits and Reports on Form 8-K............................. 22
Signatures................................................... 24
Exhibit Index................................................ 25
2
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
PARKER & PARSLEY PETROLEUM COMPANY
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
June 30, December 31,
1997 1996
----------- -----------
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 9,843 $ 18,711
Restricted cash 1,723 1,749
Accounts receivable:
Trade, net 37,147 34,075
Affiliates 789 434
Oil and gas sales 33,074 48,459
Inventories 5,581 3,644
Deferred income taxes 9,300 7,400
Other current assets 1,955 2,567
---------- ----------
Total current assets 99,412 117,039
---------- ----------
Property, plant and equipment, at cost:
Oil and gas properties, using the successful
efforts method of accounting:
Proved properties 1,536,665 1,419,051
Unproved properties 41,071 7,331
Natural gas processing facilities 50,770 59,276
Accumulated depletion, depreciation and
amortization (489,143) (445,238)
---------- ----------
1,139,363 1,040,420
---------- ----------
Other property and equipment, net 28,552 27,779
Other assets, net 16,175 14,627
---------- ----------
$ 1,283,502 $ 1,199,865
========== ==========
The financial information included as of June 30, 1997 has been prepared by
management without audit by independent public accountants.
The accompanying notes are an integral part of these consolidated
financial statements.
3
PARKER & PARSLEY PETROLEUM COMPANY
CONSOLIDATED BALANCE SHEETS (continued)
(in thousands, except share data)
June 30, December 31,
1997 1996
----------- -----------
(Unaudited)
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt $ 6,064 $ 5,381
Undistributed unit purchases 1,723 1,749
Accounts payable:
Trade 63,779 56,713
Affiliates 837 7,528
Domestic and foreign income taxes 2,038 1,743
Other current liabilities 14,737 17,856
---------- ----------
Total current liabilities 89,178 90,970
---------- ----------
Long-term debt, less current maturities 349,457 320,908
Other noncurrent liabilities 27,336 8,071
Deferred income taxes 73,800 60,800
Preferred stock of subsidiary 188,820 188,820
Stockholders' equity:
Preferred stock, $.01 par value; 20,000,000
shares authorized; none issued and
outstanding - -
Common stock, $.01 par value; 180,000,000
shares authorized; 36,983,324 and 36,899,618
shares issued at June 30, 1997 and December
31, 1996, respectively 370 369
Additional paid-in capital 465,234 462,873
Treasury stock, at cost; 1,929,503 and
1,833,383 shares at June 30, 1997 and
December 31, 1996, respectively (34,460) (31,528)
Unearned compensation (712) (1,625)
Retained earnings 124,479 100,207
---------- ----------
Total stockholders' equity 554,911 530,296
---------- ----------
Commitments and contingencies (Note B)
$ 1,283,502 $ 1,199,865
========== ==========
The financial information included as of June 30, 1997 has been prepared by
management without audit by independent public accountants.
The accompanying notes are an integral part of these consolidated
financial statements.
4
PARKER & PARSLEY PETROLEUM COMPANY
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except share and per share data)
(Unaudited)
Three months ended Six months ended
June 30, June 30,
--------------------------- --------------------------
1997 1996 1997 1996
----------- ------------ ----------- ------------
Revenues:
Oil and gas $ 94,847 $ 93,989 $ 198,626 $ 192,014
Natural gas processing 4,954 5,685 11,819 11,104
Interest and other 680 1,256 2,833 2,423
Gain on disposition of assets, net 1,862 81,578 2,637 95,249
---------- ---------- ---------- ----------
102,343 182,508 215,915 300,790
---------- ---------- ---------- ----------
Costs and expenses:
Oil and gas production 27,311 26,910 55,392 57,404
Natural gas processing 2,601 2,837 6,098 6,035
Depletion, depreciation and
amortization 30,879 28,459 59,509 59,638
Exploration and abandonments 10,800 5,775 18,415 10,761
General and administrative 8,270 6,630 14,990 12,990
Interest 10,259 11,370 20,154 26,052
Other 410 971 831 1,344
---------- ---------- ---------- ----------
90,530 82,952 175,389 174,224
---------- ---------- ---------- ----------
Income before income taxes 11,813 99,556 40,526 126,566
Income tax provision (4,400) (19,400) (14,500) (31,700)
---------- ---------- ---------- ----------
Net income $ 7,413 $ 80,156 $ 26,026 $ 94,866
========== ========== ========== ==========
Net income per share:
Primary $ .21 $ 2.24 $ .74 $ 2.66
========== ========== ========== ==========
Fully Diluted $ .21 $ 1.93 $ .71 $ 2.32
========== ========== ========== ==========
Dividends declared per share $ - $ - $ .05 $ .05
========== ========== ========== ==========
Weighted average shares outstanding 35,362,525 35,803,093 35,364,261 35,699,560
=========== =========== =========== ===========
The financial information included herein has been prepared by
management without audit by independent public accountants.
The accompanying notes are an integral part of these consolidated
financial statements.
5
PARKER & PARSLEY PETROLEUM COMPANY
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(in thousands, except share data)
(Unaudited)
Common
Stock Additional Total
Shares Common Paid-in Treasury Unearned Retained Stockholders'
Outstanding Stock Capital Stock Compensation Earnings Equity
----------- ------ ---------- --------- ------------ -------- ------------
Balance at January 1, 1997 35,066,235 $ 369 $ 462,873 $(31,528) $ (1,625) $100,207 $ 530,296
Exercise of long-term
incentive plan stock options 53,834 1 1,162 - - - 1,163
Tax benefits related to stock
options - - 300 - - - 300
Purchase of treasury stock (96,120) - - (2,932) - - (2,932)
Shares awarded 29,872 - 899 - - - 899
Amortization of unearned
compensation - - - - 913 - 913
Net income - - - - - 26,026 26,026
Dividends ($.05 per share) - - - - - (1,754) (1,754)
------------ ----- --------- ------- -------- ------- ---------
Balance at June 30, 1997 35,053,821 $ 370 $ 465,234 $(34,460) $ (712) $124,479 $ 554,911
============ ===== ========= ======= ========= ======= =========
The financial information included herein has been prepared by
management without audit by independent public accountants.
The accompanying notes are an integral part of these
consolidated financial statements.
6
PARKER & PARSLEY PETROLEUM COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(Unaudited)
Three months ended Six months ended
June 30, June 30,
-------------------- ---------------------
1997 1996 1997 1996
-------- --------- --------- ---------
Cash flows from operating activities:
Net income $ 7,413 $ 80,156 $ 26,026 $ 94,866
Adjustments to reconcile net income to net
cash provided by operating activities:
Depletion, depreciation and amortization 30,879 28,459 59,509 59,638
Exploration expenses, including dry holes 8,168 4,339 14,191 8,247
Deferred income taxes 2,600 19,400 11,400 31,700
Gain on disposition of assets, net (1,862) (81,578) (2,637) (95,249)
Other noncash items 1,733 1,417 2,180 1,677
Change in operating assets and liabilities,
net of effects from acquisitions
and dispositions:
Accounts receivable (2,478) 10,730 12,024 19,378
Inventory (1,048) (500) (1,851) (554)
Other current assets (153) (360) 680 154
Accounts payable 6,006 1,881 3,099 (3,012)
Accrued income taxes and other current
liabilities (128) (10,097) (28) 3,726
------- -------- -------- --------
Net cash provided by operating activities 51,130 53,847 124,593 120,571
------- -------- -------- --------
Cash flows from investing activities:
Proceeds from disposition of wholly-owned
subsidiaries, net of cash disposed - 70,456 - 178,737
Proceeds from disposition of assets 6,572 42,075 12,278 45,877
Additions to oil and gas properties (92,902) (32,270) (169,500) (73,945)
Other, net (3,766) (1,341) (750) (2,970)
------- -------- -------- --------
Net cash provided by (used in)
investing activities (90,096) 78,920 (157,972) 147,699
------- -------- -------- --------
Cash flows from financing activities:
Borrowings under long-term debt 41,543 614 41,543 782
Principal payments on long-term debt (2,230) (101,005) (12,802) (229,283)
Payment of noncurrent liabilities (327) (279) (707) (389)
Dividends - - (1,754) (1,770)
Purchase of treasury stock (347) (109) (2,932) (182)
Exercise of long-term incentive plan stock
options 745 1,823 1,163 2,559
Other - (43) - (151)
------- -------- -------- --------
Net cash provided by (used in)
financing activities 39,384 (98,999) 24,511 (228,434)
------- -------- -------- --------
Effect of exchange rate changes on cash and
cash equivalents - - - 290
Net increase (decrease) in cash and cash
equivalents 418 33,768 (8,868) 39,836
Cash and cash equivalents, beginning of period 9,425 26,298 18,711 19,940
------- -------- -------- --------
Cash and cash equivalents, end of period $ 9,843 $ 60,066 $ 9,843 $ 60,066
======= ======== ======== ========
The financial information included herein has been prepared by
management without audit by independent public accountants.
The accompanying notes are an integral part of these
consolidated financial statements.
7
PARKER & PARSLEY PETROLEUM COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1997
(Unaudited)
NOTE A. Summary of Significant Accounting Policies
Basis of Presentation
In the opinion of management, the unaudited consolidated financial
statements of Parker & Parsley Petroleum Company (the "Company") as of June 30,
1997 and for the three and six months ended June 30, 1997 and 1996 include all
adjustments and accruals, consisting only of normal recurring accrual
adjustments, which are necessary for a fair presentation of the results for the
interim periods. These interim results are not necessarily indicative of results
for a full year. Certain amounts in the prior period financial statements have
been reclassified to conform to the current period presentation.
Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted in this Form 10-Q pursuant to the
rules and regulations of the Securities and Exchange Commission. These
consolidated financial statements should be read in connection with the
consolidated financial statements and notes thereto included in the Company's
1996 Annual Report on Form 10-K.
NOTE B. Commitments and Contingencies
Legal Actions. The Company is party to various legal actions incidental
to its business. These lawsuits primarily involve claims for damages arising
from oil and gas leases and ownership interest disputes. The Company believes
that the ultimate disposition of these legal actions will not have a material
adverse effect on the Company's consolidated financial position, liquidity,
capital resources or future results of operations. The Company will continue to
evaluate its litigation matters on a quarter-by-quarter basis and will adjust
the litigation reserve as appropriate to reflect the then current status of its
litigation.
NOTE C. Derivative Financial Instruments
Commodity hedges. The Company utilizes various swap and option contracts
to (i) reduce the effect of the volatility of price changes on the commodities
the Company produces and sells, (ii) support the Company's annual capital
budgeting and expenditure plans and (iii) lock in prices to protect the
economics related to certain capital projects.
Crude Oil. All material purchase contracts governing the Company's oil
production are tied directly or indirectly to NYMEX prices. The following table
sets forth the Company's outstanding oil swap contracts as of August 1, 1997.
First Second Third Fourth
Quarter Quarter Quarter Quarter Total
------- ------- ------- ------- -------
Oil production:
1997 - Swap Contracts
Volume (MMBbl) - - 1.2 .7 1.9
Price per Bbl $ - $ - $ 19.28 $ 18.56 $ 19.02
1998 - Swap Contracts
Volume (MMBbl) .2 .2 .3 .2 .9
Price per Bbl $ 18.53 $ 18.53 $ 18.53 $ 18.53 $ 18.53
8
The Company reports average oil prices per Bbl including the effects of
oil quality, gathering and transportation costs and the net effect of the oil
hedges. During the three and six months ended June 30, 1997, the Company
reported average oil prices of $18.41 per Bbl and $19.20 per Bbl, respectively,
while realizing an average price for physical oil sales (excluding hedge
results) for the same periods of $18.62 per Bbl and $20.24 per Bbl,
respectively. The comparable average NYMEX prompt month closing per Bbl for the
three and six months ended June 30, 1997 was $19.94 and $21.36, respectively.
The Company recorded net reductions to oil revenues of $606 thousand and $6
million for the three and six months ended June 30, 1997, respectively, as a
result of its commodity hedges.
During the three and six months ended June 30, 1996, the Company
reported average oil prices per Bbl of $20.41 and $19.30, respectively, while
realizing an average price for physical oil sales (excluding hedge results) for
the same periods of $21.16 per Bbl and $19.84 per Bbl, respectively. The
comparable average NYMEX prompt month closing per Bbl for the three and six
months ended June 30, 1996 was $21.62 and $20.60, respectively. The Company
recorded net reductions to oil revenues of $2 million and $3.1 million for the
three and six months ended June 30, 1996, respectively, as a result of its
commodity hedges.
Natural Gas. The Company employs a policy of hedging gas production
based on the index price upon which the gas is actually sold in order to
mitigate the basis risk between NYMEX prices and actual index prices. The
following table sets forth the Company's outstanding gas swap and collar option
contracts as of August 1, 1997. Prices included herein represent the Company's
weighted average index price per MMBtu for the swap contracts and the weighted
average index price range for the collar option contracts and, as an additional
point of reference, the weighted average NYMEX price.
First Second Third Fourth
Quarter Quarter Quarter Quarter Total
------- ------- ---------- ---------- ----------
Gas production:
1997 - Swap Contracts
Volume (Bcf) - - 2.9 2.6 5.5
Index price per MMBtu $ - $ - $ 1.89 $ 1.86 $ 1.87
NYMEX price per MMBtu $ - $ - $ 2.15 $ 2.03 $ 2.10
1997 - Collar Options
Volume (Bcf) - - 6.1 4.3 10.4
Index price per MMBtu $ - $ - $1.96-2.31 $1.95-2.31 $1.96-2.31
1998 - Swap Contracts
Volume (Bcf) 2.5 1.8 1.4 1.4 7.1
Index price per MMBtu $ 1.86 $ 1.86 $ 1.86 $ 1.86 $ 1.86
NYMEX price per MMBtu $ 2.03 $ 2.03 $ 2.03 $ 2.03 $ 2.03
1999 - Swap Contracts
Volume (Bcf) 1.4 .4 - - 1.8
Index price per MMBtu $ 1.86 $ 1.86 $ - $ - $ 1.86
NYMEX price per MMBtu $ 2.03 $ 2.03 $ - $ - $ 2.03
The Company reports average gas prices per Mcf including the effects of
Btu content, gathering and transportation costs, gas processing and shrinkage
and the net effect of the gas hedges. During the three and six months ended June
30, 1997, the Company reported average gas prices of $2.07 per Mcf and $2.26 per
Mcf, respectively, while realizing an average price for physical gas sales
(excluding hedge results) for the same periods of $2.05 per Mcf and $2.42 per
Mcf, respectively. The comparable average NYMEX prompt month closing per Mcf for
the three and six months ended June 30, 1997 was $2.14 and $2.25, respectively.
The Company recorded a net increase to gas revenues of $471 thousand and a net
reduction to gas revenues of $6.1 million for the three and six months ended
June 30, 1997, respectively, as a result of its commodity hedges.
9
During the three and six months ended June 30, 1996, the Company
reported average gas prices per Mcf of $2.21 and $2.14, respectively, while
realizing an average price for physical gas sales (excluding hedge results) for
the same periods of $2.29 per Mcf and $2.22 per Mcf, respectively. The
comparable average NYMEX prompt month closing per Mcf for the three and six
months ended June 30, 1996 was $2.38 and $2.40, respectively. The Company
recorded net reductions to gas revenues of $1.5 million and $3.1 million for the
three and six months ended June 30, 1996, respectively, as a result of its
commodity hedges.
Interest rate swaps. During the second quarter of 1996, the Company
entered into a series of interest rate swap agreements for an aggregate amount
of $150 million with four counterparties. These agreements, which have a term of
three years, effectively convert a portion of the Company's fixed-rate
borrowings into floating-rate obligations. The weighted average fixed rate being
received by the Company over the term of these agreements is 6.62% while the
weighted average variable rate paid by the Company for the three and six months
ended June 30, 1997 was 5.74% and 5.65%, respectively, and for the three and six
months ended June 30, 1996, the weighted average variable rate paid by the
Company was 5.64%. The variable rate will be redetermined approximately every
six months based upon the London interbank offered rate at that point in time.
The accompanying Consolidated Statements of Operations for the three and six
months ended June 30, 1997 include a reduction in interest expense of $310
thousand and $700 thousand, respectively, and a reduction in interest expense of
$110 thousand for the three and six months ended June 30, 1996 to account for
the settlement of these interest rate swap agreements.
NOTE D. Pro Forma Earnings per Share
In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 128, "Earnings per Share" ("SFAS
128") which simplifies the existing standards for computing earnings per share
("EPS") and makes them comparable to international standards. The Company is
required to adopt SFAS 128 in its year ended December 31, 1997 financial
statements and all prior period EPS information (including interim EPS) is
required to be restated at that time. Early implementation is not permitted.
Under SFAS 128, primary EPS is replaced by "basic" EPS, which excludes dilution
and is computed by dividing income available to common stockholders by the
weighted average number of common shares outstanding for the period. "Diluted"
EPS, which is computed similarly to fully-diluted EPS, reflects the potential
dilution that could occur if securities or other contracts to issue common stock
were exercised or converted into common stock or resulted in the issuance of
common stock that then shared in the earnings of the entity.
If the Company had adopted SFAS 128 on January 1 of each period
presented, the following basic and diluted EPS amounts would have been reported:
Three months ended Six months ended
June 30, June 30,
------------------ ------------------
1997 1996 1997 1996
------- ------- ------- -------
Basic EPS $ .21 $ 2.26 $ .74 $ 2.68
Diluted EPS $ .21 $ 1.93 $ .71 $ 2.32
NOTE E. Subsequent Events
Merger with Mesa Inc. On April 6, 1997, the Company and Mesa Inc.
("Mesa") entered into an Agreement and Plan of Merger (the "Merger Agreement")
which was approved by the stockholders of both companies on August 7, 1997 by a
majority vote of 76% by Company stockholders and 71%, 58%, and 100% by holders
of Mesa common stock, Mesa Series A Preferred Stock and Mesa Series B Preferred
10
Stock, respectively. Mesa is a publicly traded independent oil and gas company
based in Irving, Texas with substantial producing properties and operations in
the MidContinent region of the United States. The Merger Agreement provided for
(i) the merger of Mesa with and into Pioneer Natural Resources Company
("Pioneer"), a wholly-owned subsidiary of Mesa, as a result of which Mesa, which
is a Texas corporation, reincorporated into Delaware and (ii) the merger of the
Company with and into Mesa Operating Co., a wholly-owned subsidiary of Mesa, as
a result of which the Company became a wholly-owned subsidiary of Pioneer (items
(i) and (ii) collectively the "Mergers"). In accordance with the Merger
Agreement, (i) holders of Company common stock received one share of Pioneer
common stock for each share held; (ii) holders of Mesa common stock received one
share of Pioneer common stock for every seven shares held; and (iii) holders of
Mesa Series A 8% Cumulative Convertible Preferred Stock and Mesa Series B 8%
Cumulative Convertible Preferred Stock received 1.25 shares of Pioneer common
stock for every seven shares held. No fractional shares were issued.
In accordance with the provisions of Accounting Principles Board No. 16,
"Business Combinations", the merger has been accounted for as a purchase of Mesa
by the Company. As a result, historical financial statements for Pioneer will be
those of the Company, and Pioneer's financial statements will present the
addition of Mesa's assets and liabilities as an acquisition by the Company. The
aggregate Pioneer purchase consideration related to the assets and liabilities
of Mesa, including estimated nonrecurring merger transaction costs, is $985.9
million. The following table represents the preliminary allocation of the total
purchase price of Mesa to the acquired assets and liabilities based upon the
fair values assigned to each of the significant assets acquired and liabilities
assumed. Any future adjustments to the allocation of the purchase price are not
anticipated to be material to Pioneer's financial statements.
Allocation
of Aggregate
Purchase
Consideration
-------------
(in thousands)
Net working capital $ 11,882
Property, plant and equipment 2,302,048
Other assets 58,664
Long-term debt (1,186,538)
Other non-current liabilities,
including deferred taxes (200,183)
-----------
$ 985,873
===========
Pioneer common stock consideration $ 965,873
Cash paid for nonrecurring transaction
costs 20,000
-----------
Aggregate purchase consideration $ 985,873
===========
The accompanying Consolidated Balance Sheet as of June 30, 1997 includes
certain unamortized amounts which the Company will recognize as noncash charges
during the third quarter of 1997 as a result of the Merger. These amounts
include $2.5 million (pre-tax) of capitalized issuance fees associated with the
Company's existing bank credit facility which will be replaced by a new $1.4
billion bank credit facility and $544 thousand (pre-tax) of unearned
compensation resulting from certain change of control provisions included in the
Company's existing Long-term Incentive Plan whereby the vesting requirements of
outstanding restricted stock awards are accelerated.
11
Conversion of Subsidiary Preferred Shares to Common Stock. On July 28,
1997, the Company exercised its right to require each holder of 6 1/4%
Cumulative Monthly Income Convertible Preferred Shares ("Preferred Shares") to
mandatorily exchange all Preferred Shares for shares of common stock of the
Company. The Preferred Shares were issued by Parker & Parsley Capital LLC, a
wholly-owned finance subsidiary of the Company, in 1994. In accordance with the
terms of the original issue, on or after April 1, 1997, the Company was provided
with the option to exchange the Preferred Shares for Company common stock at a
rate of 1.7778 shares of common stock for each Preferred Share, provided that,
among other conditions, the closing price of Company common stock equals or
exceeds 125% of the then applicable conversion price for the 20 day trading
period before the date of conversion. Subsequent to April 1, 1997, 125% of the
applicable conversion price equaled $35.16. The closing price of the Company's
common stock for the period from June 27, 1997 to July 25, 1997 ranged from
$35.38 to $39.50.
As a result of the exchange, the $188.8 million reflected in the caption
"Preferred stock of subsidiary" in the accompanying Consolidated Balance Sheet
as of June 30, 1997, will be reclassified into stockholders' equity with the
issuance of approximately 6.7 million shares of common stock in exchange for the
3,776,400 Preferred Shares outstanding. In addition, the Company will no longer
incur interest expense associated with the Preferred Shares of approximately $12
million per year.
12
PARKER & PARSLEY PETROLEUM COMPANY
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations(1)
Subsequent to June 30, 1997, the Company's stockholders approved a merger with
Mesa Inc. The results included herein do not give effect to the merger and
therefore are not indicative of future results of the Company (see "Merger with
Mesa Inc" below).
General
Financial Performance. The Company reported net income of $7.4 million
(.21 per share) and $26.0 million ($.74 per share) for the three and six months
ended June 30, 1997, respectively, as compared to net income of $80.2 million
(2.24 per share) and $94.9 million ($2.66 per share) for the same periods in
1996. The three and six months ended June 30, 1996 include $68.4 million ($1.91
per share) and $74.8 million ($2.10 per share), respectively, related to net
after-tax gains on asset dispositions, primarily due to the sale of the
Company's Australasian subsidiaries. Excluding production from the Company's
Australasian subsidiaries which were sold in 1996 and production from
nonstrategic domestic assets which were sold in 1996, average daily oil
production increased 13% to 31,787 Bbls per day for the six months ended June
30, 1997 from 28,049 Bbls per day for the same period in 1996, and average daily
gas production increased 16% to 215,230 Mcf per day from 184,759 Mcf per day
during the same period. As discussed more fully in "Results of Operations"
below, the Company's financial performance during 1997 has been positively
affected by increases in oil and gas production, decreases in production costs
per BOE due to ongoing cost reduction efforts, and a decrease in interest
expense due to a decrease in the Company's outstanding long-term indebtedness,
offset by increases in exploration and general and administrative expenses.
Net cash provided by operating activities was $51.1 million and $124.6
million during the three and six months ended June 30, 1997, respectively,
consistent with net cash provided by operating activities of $53.8 million and
$120.6 million for the same periods in 1996.
The Company strives to maintain its outstanding indebtedness at a
moderate level in order to provide sufficient financial flexibility to fund
future opportunities. The Company's total book capitalization at June 30, 1997
was $1.1 billion, consisting of total long-term debt of $355.5 million,
stockholders' equity of $554.9 million and preferred stock of subsidiary of
$188.8 million. Debt as a percentage of total capitalization was 32% at June 30,
1997, up slightly from 31% at December 31, 1996.
Drilling and Acquisition Activities. The Company's 1997 capital
expenditure budget has been increased to $335 million up from the previous
budget of $270 million, reflecting planned expenditures of $215 million for
exploitation activities, $69 million for exploration activities and $51 million
for oil and gas property acquisitions in the Company's core areas of Texas,
Oklahoma, New Mexico and Louisiana. As of June 30, 1997, expenditures are on
target with the new budget totaling $187.3 million for the six-month period.
During the first half of 1997, the Company participated in the completion of 223
gross exploration and development wells, including 152 wells in the Spraberry
Division, 30 wells in the Permian Division, 19 wells in the Gulf Coast Division,
16 wells in the MidContinent Division and six wells in Argentina. Of these
wells, 76 were in progress at December 31, 1996. Of the total wells completed
during the six months ended June 30, 1997, 202 wells were completed successfully
which resulted in a 91% success rate. In addition to the wells completed in the
first half of 1997, the Company had 131 wells in progress at June 30, 1997. In
total during 1997, the Company plans to drill approximately 620 development
wells and 60 exploratory wells and to perform recompletions on over 150 wells.
13
PARKER & PARSLEY PETROLEUM COMPANY
In May of 1997, the Company acquired a 35% interest in approximately
375,000 acres within the Cotton Valley Pinnacle Reef Trend from Union Pacific
Resources Company ("UPRC") for $26.9 million. The Company and UPRC have signed
an exploration agreement to jointly explore and develop this area located in
eastern Texas and plan to begin drilling the first exploration well before the
end of the year.
Also, during May of 1997, the Company finalized negotiations with Triton
Energy for a 40% working interest in a joint exploration program of two blocks
in Guatemala's South Peten Basin. Drilling on the Piedras Blancas #1 is expected
to be completed by the end of the year at an estimated total cost to the Company
of $3.7 million.
In addition, the Gulf Coast Division completed the acquisition of a
majority interest in the Maude Traylor field in Calhoun County, Texas for
approximately $8.8 million in February 1997. The acquisition represented an
average working interest of 87% in approximately 1,840 acres and five wells
which produce from the upper and lower Frio formations. The Company is currently
realizing gross gas production of 1.7 MMcf per day in this field, and since the
Company assumed operations the gross oil production rate has tripled to 161 Bbls
per day. The Company plans to drill up to nine additional wells during 1997 and
1998 on this acreage utilizing existing 3-D seismic information.
Also during February 1997, the Texas Railroad Commission (which regulates
oil and gas production) entered a favorable order on the Company's application
to allow administrative approval of uncontested applications to increase the
density of the drilling in the Spraberry field from one well per 80 acres to one
well in 40. The Company believes such reduced spacing may provide in excess of
1,000 additional drilling locations which have the potential to add 70 million
equivalent barrels to the Company's reserve base.
Asset Dispositions. For the six months ended June 30, 1997, the Company's
asset disposition activity primarily consisted of the sale of certain domestic
assets for proceeds of $10.7 million and resulted in a net gain of $1.9 million
and the sale of the Company's subsidiary with an ownership interest in oil and
gas properties in Turkey for proceeds of $1.6 million which resulted in the
recognition of a gain of $725 thousand. During the first half of 1996, the
Company sold certain wholly-owned Australasian subsidiaries for proceeds of
$178.7 million and a pre-tax gain of $85.2 million and certain nonstrategic
domestic assets for proceeds of $45.9 million that resulted in the recognition
of a pre-tax net gain of $10 million.
Conversion of Subsidiary Preferred Shares to Common Stock. On July 28,
1997, the Company exercised its right to require each holder of 6 1/4%
Cumulative Monthly Income Convertible Preferred Shares ("Preferred Shares") to
mandatorily exchange all Preferred Shares for shares of common stock of the
Company (see Note E of Notes to Consolidated Financial Statements included in
"Item 1. Financial Statements"). As a result of the exchange, the $188.8 million
reflected in the caption "Preferred stock of subsidiary" in the Consolidated
Balance Sheet as of June 30, 1997 (included in "Item 1. Financial Statements"),
will be reclassified into stockholders' equity with the issuance of
approximately 6.7 million shares of common stock in exchange for the 3,776,400
Preferred Shares outstanding. In addition, the Company will no longer incur
interest expense associated with the Preferred Shares of approximately $12
million per year.
Pro Forma Earnings per Share. In February 1997, the Financial Accounting
Standards Board ("FASB") issued Statement of Financial Accounting Standards No.
128 "Earnings per Share" ("SFAS 128") which simplifies the existing standards
for computing earnings per share ("EPS") and makes them comparable to
international standards. The Company does not anticipate that its EPS as
calculated under SFAS 128 will differ significantly from its existing
disclosures. See Note D of Notes to Consolidated Financial Statements included
in "Item 1. Financial Statements" for pro forma EPS amounts for the three and
six months ended June 30, 1996 and 1997.
14
PARKER & PARSLEY PETROLEUM COMPANY
Reporting Comprehensive Income. In June 1997, the FASB issued Statement
of Accounting Standards No. 130 "Reporting Comprehensive Income" ("SFAS 130")
which establishes standards for reporting and display of comprehensive income
and its components in a full set of general-purpose financial statements.
Specifically, SFAS 130 requires that an enterprise (i) classify items of other
comprehensive income by their nature in a financial statement and (ii) display
the accumulated balance of other comprehensive income separately from retained
earnings and additional paid-in capital in the equity section of a statement of
financial position. Although this statement is effective for fiscal years
beginning after December 15, 1997, the Company anticipates that it will early
adopt the provisions of SFAS 130 in its year ended December 31, 1997
consolidated financial statements.
Comprehensive income consists of the change in equity of a business
enterprise during a period from transactions and other events and circumstances
from nonowner sources. Specifically, this includes net income and other
comprehensive income, which is made up of certain changes in assets and
liabilities that are not reported in a statement of operations but are included
in the balances within a separate component of equity in a statement of
financial position. Such changes include, but are not limited to, unrealized
gains for marketable securities and future contracts, foreign currency
translation adjustments and minimum pension liability adjustments.
Segment Reporting. In June 1997, the FASB issued Statement of Accounting
Standards No. 131 "Disclosures about Segments of an Enterprise and Related
Information" ("SFAS 131") which establishes standards for public business
enterprises for reporting information about operating segments in annual
financial statements and requires that such enterprises report selected
information about operating segments in interim financial reports issued to
shareholders. This statement also establishes standards for related disclosures
about products and services, geographic areas, and major customers. SFAS 131 is
effective for financial statements for periods beginning after December 15,
1997.
The Company operates in the one product line of oil and gas production in
limited geographic areas. This information and information about major customers
historically has been disclosed in the Company's annual financial statements.
The Company plans to implement SFAS 131 in its year ended December 31, 1998
financial statements.
Merger with Mesa Inc.
On April 6, 1997, the Company and Mesa Inc. ("Mesa") entered into an
Amended and Restated Agreement and Plan of Merger (the "Merger Agreement") which
was approved by the stockholders of both companies on August 7, 1997 by a
majority vote of 76% by Company stockholders and 71%, 58%, and 100% by holders
of Mesa common stock, Mesa Series A Preferred Stock and Mesa Series B Preferred
Stock, respectively. Mesa is a publicly traded independent oil and gas company
based in Irving, Texas with substantial producing properties and operations in
the MidContinent region of the United States. The Merger Agreement provided for
(i) the merger of Mesa with and into Pioneer Natural Resources Company
("Pioneer"), a wholly-owned subsidiary of Mesa, as a result of which Mesa, which
is a Texas corporation, reincorporated into Delaware and (ii) the merger of the
Company with and into Mesa Operating Co., a wholly-owned subsidiary of Mesa, as
a result of which the Company became a wholly-owned subsidiary of Pioneer (items
(i) and (ii) collectively the "Mergers").
In accordance with the Merger Agreement, (i) holders of Company common
stock received one share of Pioneer common stock for each share held; (ii)
holders of Mesa common stock received one share of Pioneer common stock for
every seven shares held; and (iii) holders of Mesa Series A 8% Cumulative
Convertible Preferred Stock and Mesa Series B 8% Cumulative Convertible
15
PARKER & PARSLEY PETROLEUM COMPANY
Preferred Stock received 1.25 shares of Pioneer common stock for every seven
shares held. No fractional shares were issued. The aggregate Pioneer common
stock purchase consideration related to the assets and liabilities of Mesa,
including estimated nonrecurring merger transaction costs, is $985.9 million.
(See Note E of Notes to Consolidated Financial Statements included in "Item 1.
Financial Statements" for more information concerning the allocation of the
total purchase consideration and certain noncash charges to be recognized in the
third quarter of 1997 as a result of such merger.)
The Company's Board of Directors (the "Board") expects that the Mergers
will have numerous benefits, the most significant of which are discussed below.
Benefits of a Larger Enterprise. The Board considered various benefits to
the Company's stockholders of holding an ownership interest in Pioneer, which
will be a substantially larger enterprise than the Company. The Board considered
that Pioneer will have a larger market capitalization than the Company and that
Company stockholders should enjoy enhanced liquidity as a result of Pioneer's
larger stockholder base and the increased visibility resulting from heightened
market research and institutional investor focus on a larger entity. The Board
also considered that the combined entity should produce significantly greater
cash flows than the Company, which should allow Company stockholders to
participate in opportunities for growth in oil and gas reserves and production,
either through acquisitions, exploration, exploitation or entries into new core
areas, that might not otherwise be available to the Company. In addition, the
Board considered that the stocks of larger enterprises often experience higher
trading multiples in relation to various standard measures (e.g., net cash flow
or net present value of oil and gas reserves) and that Pioneer's stock trading
multiples may be higher than those of the Company. If Pioneer common stock
trades at higher multiples than the Company common stock, Pioneer will have a
greater ability than the Company to use its common stock as currency in future
acquisitions.
Quality and Nature of Assets. In developing its recommendation, the Board
considered the quality and nature of Mesa's assets, the nature and scope of its
operations and its financial condition, as well as those of Pioneer following
the Mergers. In its review of the quality and nature of Mesa's assets, the Board
considered the favorable financial performance and stable cash flows generated
by Mesa's assets in the Hugoton and West Panhandle Fields. The Board also
considered that Pioneer's reserve base would be well balanced, with 52% of its
reserves comprised of natural gas and 48% of its reserves comprised of crude oil
and liquids. In addition, Pioneer would be one of the few large independent oil
and gas exploration and production companies in the United States whose primary
assets consist of both long-lived gas and long-lived oil reserves. The Board
also considered the immediate significant impact that the Mergers would have on
the achievement of certain of the Company's strategic goals, including growth in
total reserves, growth in market capitalization, and exposure to the exploration
potential of the Gulf of Mexico through Mesa's interest in 60 offshore
exploration blocks and in Mesa's recent acquisition of Greenhill Petroleum.
Management and Significant Stockholders. The Board considers Jon Brumley,
who will serve as Pioneer's Chairman of the Board, to be among the most
experienced and successful builders of independent oil and gas companies in the
United States. The Board also considered the benefits to the Company's
stockholders of the continued ownership by Richard Rainwater of Pioneer common
stock and Mr. Rainwater's continued participation as a Pioneer director in
Pioneer's strategic planning. Mr. Rainwater, who is the largest individual
stockholder of Pioneer, has a record of quickly and aggressively building
shareholder value in companies operating in a wide variety of industries.
16
PARKER & PARSLEY PETROLEUM COMPANY
Financial. The Board reviewed a broad range of financial information and
analysis regarding Mesa, the Company and the two companies on a pro forma
combined basis, including a financial comparison of Mesa and the Company and a
review of the potential impact of the Mergers on the balance sheet of the
combined company prepared by Goldman Sachs. Goldman Sachs' analysis included,
among other matters, a comparison of the relative contribution made by Mesa and
the Company to the combined levels of certain measures of Pioneer's financial
and operating condition, including total assets, proved reserves and production.
This analysis showed that the relative contribution made by the Company on the
majority of the measures did not exceed the majority ownership interest in
Pioneer to be held by the Company stockholders after the Mergers. The Board also
considered that accounting for the Merger as a purchase of Mesa by the Company
would decrease Pioneer's earnings below the levels it would achieve if Pioneer
could account for the Mergers as a pooling, and Goldman Sachs' advice that,
based on current market conditions, if Pioneer has positive earnings, the
reduction in earnings due to the impact of purchase accounting should not by
itself have a material adverse effect on the stock price of Pioneer common
stock. Goldman Sachs also advised that more relevant variables currently used to
measure the market valuations of the Company and Mesa and similar companies
include, among other things, discretionary cash flows, discounted present values
of future expected cash flows, the estimated value of reserves and the estimated
productive lives of reserves. The Board reviewed an analysis which showed that
if oil and gas commodity prices on the date of the Merger Agreement remained
constant, Pioneer would have positive earnings in 1997 on a pro forma combined
basis. The Board also considered that the established floor value of $35.00 for
Company stockholders at the end of the Measurement Period as provided by the
Merger Agreement might cause the price of the Company's common stock to rise to
levels which would allow the Company to effect an exchange of the Company's
Cumulative Guaranteed Monthly Income Convertible Preferred Shares for Company
common stock, increasing the Company's equity and decreasing its leverage, even
if the Merger Agreement were subsequently terminated. If this exchange occurred,
Pioneer's leverage would be within a range that is considered acceptable in the
oil and gas industry and would be at a level which is not materially greater
than the Company's. The Board also considered that Pioneer would succeed to
Mesa's approximately $600 million of net operating loss carryforwards. Subject
to certain limitations set forth in the Internal Revenue Code, these net
operating loss carryforwards could be used to reduce the federal income taxes
that would otherwise be assessed on Pioneer's earnings. In considering the
financial rationale for the Mergers, the Board also reviewed the terms of
several recent transactions in which long-lived natural gas reserves were
acquired by public exploration and production companies.
17
PARKER & PARSLEY PETROLEUM COMPANY
Results of Operations
Oil and Gas Production.
Three months ended Six months ended
June 30, June 30,
------------------- ---------------------
1997 1996 1997 1996
-------- -------- --------- ---------
(in thousands, except per unit amounts)
Revenues:
Oil and gas $ 94,847 $ 93,989 $ 198,626 $ 192,014
Gain on disposition of oil and gas
properties, net (a) 127 7,290 76 7,753
------- ------- -------- --------
94,974 101,279 198,702 199,767
------- ------- -------- --------
Costs and expenses:
Oil and gas production (27,311) (26,910) (55,392) (57,404)
Depletion (28,491) (26,177) (54,860) (54,773)
Exploration and abandonments (5,847) (3,062) (11,249) (4,586)
Geological and geophysical (4,953) (2,024) (7,166) (4,851)
------- ------- -------- --------
(66,602) (58,173) (128,667) (121,614)
------- ------- -------- --------
Operating profit (loss) (excluding
general and administrative
expenses and income taxes) $ 28,372 $ 43,106 $ 70,035 $ 78,153
======= ======= ======== ========
- - ---------------
(a) The 1997 amounts do not include the gain related to the disposition of the
Company's subsidiary which owned an interest in oil and gas properties in
Turkey. The 1996 amounts do not include the gain related to the disposition
of certain of the Company's wholly-owned Australasian subsidiaries.
Worldwide:
Production:
Oil (MBbls) 2,881 2,604 5,753 5,721
Gas (MMcf) 20,221 18,460 38,957 38,196
Total (MBOE) 6,251 5,681 12,246 12,087
Average daily production:
Oil (Bbls) 31,663 28,621 31,787 31,432
Gas (Mcf) 222,210 202,862 215,230 209,866
Average oil price (per Bbl) $ 18.41 $ 20.41 $ 19.20 $ 19.30
Average gas price (per Mcf) 2.07 2.21 2.26 2.14
Costs (per BOE):
Lease operating expense $ 3.27 $ 3.50 $ 3.26 $ 3.60
Production taxes $ .79 $ .86 $ .91 $ .79
Workover costs $ .31 $ .38 $ .35 $ .36
------- ------- -------- --------
Total production costs $ 4.37 $ 4.74 $ 4.52 $ 4.75
======= ======= ======== ========
Depletion $ 4.56 $ 4.61 $ 4.48 $ 4.53
Domestic:
Production:
Oil (MBbls) 2,841 2,580 5,679 5,347
Gas (MMcf) 20,221 18,460 38,957 36,269
Total (MBOE) 6,211 5,657 12,172 11,392
Average daily production:
Oil (Bbls) 31,219 28,353 31,376 29,378
Gas (Mcf) 222,210 202,862 215,230 199,278
Average oil price (per Bbl) $ 18.41 $ 20.44 $ 19.18 $ 19.29
Average gas price (per Mcf) 2.07 2.21 2.26 2.15
Costs (per BOE):
Lease operating expense $ 3.27 $ 3.50 $ 3.24 $ 3.52
Production taxes $ .79 $ .86 $ .92 $ .84
Workover costs $ .31 $ .38 $ .35 $ .38
------- ------- -------- --------
Total production costs $ 4.37 $ 4.74 $ 4.51 $ 4.74
======= ======= ======== ========
Depletion $ 4.54 $ 4.62 $ 4.45 $ 4.46
18
PARKER & PARSLEY PETROLEUM COMPANY
Oil and Gas Revenues. Revenues from oil and gas operations increased 3%
during the six months ended June 30, 1997 to $198.6 million and 1% to $94.8
million during the three months ended June 30, 1997, as compared to $192 million
and $94 million during the same periods in 1996. The increase during the six
months ended June 30, 1997 is primarily due to an increase in the average gas
price received and increases in oil and gas production, offset by a slight
decrease in the average price received per barrel of oil. The slight increase in
oil and gas revenues for the three months ended June 30, 1997 as compared to
June 30, 1996 is due to increased oil and gas production, offset by decreases in
the prices received for both oil and gas production.
The increases in oil and gas production during the three and six months
ended June 30, 1997 as compared to the same periods in 1996 are a direct result
of the successes of the Company's exploration and exploitation efforts. Such
production growth becomes particularly evident in light of the fact that a
portion of the average daily oil and gas production for the first half of 1996
related to properties included in the 1996 sale of the Company's Australasian
subsidiaries and the 1996 sale of certain nonstrategic domestic assets.
Excluding production associated with assets sold during 1996, average daily oil
production increased 13% from 28,049 Bbls for the first half of 1996 to 31,787
Bbls for the first half of 1997 and average daily gas production increased 16%
from 184,759 Mcf to 215,230 Mcf for the same period. During the second quarter
of 1997, the Company experienced similar increases in oil and gas production as
compared to the second quarter of 1996. Excluding production associated with the
assets sold during 1996, average daily oil production increased 15%, from 27,541
barrels during the three months ended June 30, 1996 to 31,663 barrels during the
three months ended June 30, 1997, and average daily gas production increased 16%
from 191,767 Mcf per day to 222,210 Mcf per day during the same periods.
The average oil price received for the six months ended June 30, 1997
decreased slightly (from $19.30 to $19.20 for the six months ended June 30, 1996
and 1997, respectively), while the average gas price received increased 6% (from
$2.14 to $2.26 for the six months ended June 30, 1996 and 1997, respectively).
During the three months ended June 30, 1997, the average price of oil and gas
received decreased 10% (from $20.41 during the second quarter of 1996 to $18.41
during the second quarter of 1997) and 6% (from $2.21 during the second quarter
of 1996 to $2.07 during the second quarter of 1997), respectively.
Hedging Activities
The oil and gas prices that the Company reports are based on the market
price received for the commodities adjusted by the results of the Company's
hedging activities. The Company periodically enters into commodity derivative
contracts (swaps, futures and options) in order to (i) reduce the effect of the
volatility of price changes on the commodities the Company produces and sells,
(ii) support the Company's annual capital budgeting and expenditure plans and
(iii) lock in prices to protect the economics related to certain capital
projects.
Crude Oil. All material purchase contracts governing the Company's oil
production are tied directly or indirectly to NYMEX prices. The average oil
price per Bbl that the Company reports includes the effects of oil quality,
gathering and transportation costs and the net effect of the oil hedges. The
Company's average realized price for physical oil sales (excluding hedge
results) for the three and six months ended June 30, 1997 was $18.62 per Bbl and
$20.24 per Bbl, respectively, while, as a point of reference, the comparable
average NYMEX prompt month closing per Bbl for the same periods was $19.94 and
$21.36, respectively. The Company recorded net reductions to oil revenues of
$606 thousand and $6 million for the three and six months ended June 30, 1997,
respectively, as a result of its commodity hedges.
19
PARKER & PARSLEY PETROLEUM COMPANY
During the three and six months ended June 30, 1996, the Company
realized an average price for physical oil sales (excluding hedge results) of
$21.16 per Bbl and $19.84 per Bbl, respectively, while, as a point of reference,
the comparable average NYMEX prompt month closing per Bbl for the same periods
was $21.62 and $20.60, respectively. The Company recorded net reductions to oil
revenues of $2 million and $3.1 million for the three and six months ended June
30, 1996, respectively, as a result of its commodity hedges.
Natural Gas. The Company employs a policy of hedging gas production
based on the index price upon which the gas is actually sold in order to
mitigate the basis risk between NYMEX prices and actual index prices. The
average gas price per Mcf that the Company reports includes the effects of Btu
content, gathering and transportation costs, gas processing and shrinkage and
the net effect of the gas hedges. The Company's average realized price for
physical gas sales (excluding hedge results) for the three and six months ended
June 30, 1997 was $2.05 per Mcf and $2.42 per Mcf, respectively, while as a
point of reference, the comparable average NYMEX prompt month closing per Mcf
for the same periods was $2.14 and $2.25, respectively. The Company recorded a
net increase to gas revenues of $471 thousand and a net reduction to gas
revenues of $6.1 million for the three and six months ended June 30, 1997,
respectively, as a result of its commodity hedges.
During the three and six months ended June 30, 1996, the Company
realized an average price for physical gas sales (excluding hedge results) of
$2.29 per Mcf and $2.22 per Mcf, respectively, while as a point of reference,
the comparable average NYMEX prompt month closing per Mcf for the same periods
was $2.38 and $2.40, respectively. The Company recorded net reductions to gas
revenues of $1.5 million and $3.1 million for the three and six months ended
June 30, 1996, respectively, as a result of its commodity hedges.
See Note C of Notes to Consolidated Financial Statements included in
"Item 1. Financial Statements" for information concerning the Company's open
hedge positions at August 1, 1997 and the related prices to be realized.
Production Costs. While total production costs per BOE decreased 5% to
$4.52 during the six months ended June 30, 1997 as compared to production costs
per BOE of $4.75 during the same period in 1996, the primary component of
production costs, lease operating expense, decreased 9% from $3.60 per BOE in
the first half of 1996 to $3.26 per BOE for the same period in 1997. These
reductions are primarily due to the Company's concentrated efforts to evaluate
and reduce all operating costs and the sale of certain high operating cost
properties during 1996. The success of these cost reduction efforts is partially
offset by a 15% or $.12 per BOE increase in average production taxes per BOE
resulting from higher gas prices during the six months ended June 30, 1997 as
compared to the six months ended June 30, 1996. During the three months ended
June 30, 1997 production costs per BOE decreased 8% to $4.37 from $4.74 during
the same periods in 1996. Although all production cost categories decreased
during the second quarter of 1997 as compared to the second quarter of 1996,
most of the decrease was due to a decline in lease operating expense of 7% or
$.23 per BOE due to the Company's costs reduction efforts.
Depletion Expense. Depletion expense per BOE declined slightly to $4.56
and $4.48 during the three and six months ended June 30, 1997, respectively, as
compared to $4.61 per BOE and $4.53 per BOE during the same periods in 1996,
primarily due to reserves added by the Company's successful drilling program
during 1996 and 1997.
Exploration and Abandonments/Geological and Geophysical Costs.
Exploration and abandonments/geological and geophysical costs increased to $10.8
million and $18.4 million during the three and six months ended June 30, 1997
from $5.1 million and $9.4 million during the same respective periods in 1996.
The increase is largely the result of increased domestic activity, both in
20
PARKER & PARSLEY PETROLEUM COMPANY
exploratory drilling and geological and geophysical activity, resulting from the
Company's increased focus on exploration activities. During the six months ended
June 30, 1997, the domestic exploratory dry hole costs were primarily related to
12 unsuccessful exploratory wells in the Gulf Coast Division, six unsuccessful
exploratory wells in the MidContinent Division and two unsuccessful wells in the
Permian Division, at a total cost of $6.8 million, $1.7 million and $500
thousand, respectively, and additional costs of approximately $700 thousand
associated with wells which were determined to be unsuccessful in 1996. These
increases are offset by a decrease in leasehold abandonment expenses. The
following table sets forth the components of the Company's 1997 and 1996 first
half expense:
Three months Six months
ended June 30, ended June 30,
------------------- -------------------
1997 1996 1997 1996
-------- -------- -------- --------
(in thousands)
Exploratory dry holes:
United States $ 5,184 $ 409 $ 9,701 $ 724
Foreign (175) - 219 580
Geological and geophysical costs:
United States 4,135 2,094 5,790 3,299
Foreign 818 (70) 1,376 1,552
Leasehold abandonments and other 838 2,653 1,329 3,282
------- ------- ------- -------
$ 10,800 $ 5,086 $ 18,415 $ 9,437
======= ======= ======= =======
Approximately 21% of the Company's 1997 capital budget will be spent on
exploratory projects (compared to 16.7% in 1996 and 13.3% in 1995). The Company
currently anticipates that its 1997 exploration efforts will be concentrated in
the Gulf Coast Division, the Permian Division, the MidContinent Division, the
Company's newly acquired interests in the Cotton Valley Pinnacle Reef Trend and
its interests in Guatemala. The Company continues to review opportunities
involving exploration joint ventures in domestic or international areas outside
the Company's existing core operating areas.
Natural Gas Processing
Natural gas processing revenues increased 6% to $11.8 million for the
six months ended June 30, 1997 as compared to $11.1 million for the same period
in 1996, and natural gas processing costs for the six months ended June 30, 1997
of $6.1 million were consistent with 1996 costs of $6 million. The increases in
natural gas processing revenues are primarily due to increases in the prices of
NGL's and residue gas. The average price per Bbl of NGL's increased slightly
during the first half of 1997 compared to the first half of 1996 (from $13.25 in
1996 to $13.40 in 1997), and the average price per Mcf of residue gas increased
25% during the same period (from $2.01 in 1996 to $2.51 in 1997). For the three
months ended June 30, 1997, natural gas processing revenues and costs decreased
13% to $5 million and 8% to $2.6 million, respectively, as compared to $5.7
million and $2.8 million, respectively, for the three months ended June 30,
1996. These decreases are primarily due to the sale of the Company's Hooker gas
processing facility and decreases in the average price received for NGL's (from
$13.13 to $12.15 for the three months ended June 30, 1996 and 1997,
respectively).
During the first half of 1996, the Company recognized noncash pre-tax
charges of $1.3 million related to abandonments of certain of the Company's gas
processing facilities and the cancellation of certain gas processing contracts.
General and Administrative Expense
General and administrative expense was $8.3 million and $15 million for
the three and six months ended June 30, 1997, respectively, as compared to $6.6
million and $13 million for the three and six months ended June 30, 1996,
respectively. The increase for both periods is primarily due to severance costs
of $1.4 million in the second quarter of 1997 associated with certain
reorganizations within the Company's management structure as a result of the
merger with Mesa.
21
PARKER & PARSLEY PETROLEUM COMPANY
Interest Expense
During the three months ended June 30, 1997, interest expense totaled
$10.3 million, down from $11.4 million for the second quarter of 1996. Interest
expense for the six months ended June 30, 1997 decreased to $20.2 million as
compared to $26.1 million for the same period in 1996. The decreases are
primarily due to decreases in the weighted average outstanding balance of the
Company's indebtedness of $58.3 million and $151.9 million for the three and six
months ended June 30, 1997, respectively, as compared to the same periods in
1996. The decreases in the Company's indebtedness were primarily the result of
the application of proceeds from the sale of the Company's Australasian
subsidiaries and the sales of certain domestic assets during 1996 to the
outstanding balance of the Company's bank credit facility. The weighted average
interest rate on the Company's indebtedness during the three months ended June
30, 1997 of 7.78% was comparable to the rate of 7.79% for the same period in
1996, and the rate of 7.83% for the six months ended June 30, 1997 was
comparable to the rate of 7.81% for the same period in 1996.
During the three and six months ended June 30, 1997, the Company
recorded a reduction in interest expense of $310 thousand and $700 thousand,
respectively, related to a series of interest rate swap agreements which
effectively convert $150 million of the Company's fixed rate borrowings into
floating rate obligations. During the same period in 1996, such agreements
resulted in a reduction in interest expense of $110 thousand. See Note C of
Notes to Consolidated Financial Statements included in "Item 1. Financial
Statements" for information concerning the fixed and variable interest rates in
effect during these periods.
Income Taxes
The Company's income tax provisions of $4.4 million and $14.5 million
for the three and six months ended June 30, 1997, respectively, and $19.4 and
$31.7 million for the three and six months ended June 30, 1996, respectively,
reflect the net provision resulting from the separate tax calculation prepared
for each tax jurisdiction in which the Company is subject to income taxes.
Capital Commitments, Capital Resources and Liquidity
Capital Commitments. The Company's primary needs for cash are for
exploration, development and acquisitions of oil and gas properties, repayment
of principal and interest on outstanding indebtedness and working capital
obligations.
The Company's cash expenditures during the first half of 1997 for
additions to oil and gas properties totaled $169.5 million. This amount includes
$30.8 million for the acquisition of properties and $138.7 million for
development and exploratory drilling. The Company's acquisition activities
during the first half of 1997 primarily consisted of (i) a 35% interest in
approximately 375,000 acres within the Cotton Valley Pinnacle Reef Trend from
UPRC for $26.9 million funded by $11.1 million in cash and a note payable to
UPRC of $15.8 million and (ii) an 87% average working interest in the Maude
Traylor field in Calhoun County, Texas for approximately $8.8 million.
Significant drilling expenditures in the first half of 1997 included $56.2
million in the unitized portion of the Spraberry field of the Permian Basin
(including $24.9 million in the Driver unit, $10 million in the Merchant unit,
$9.2 million in the North Pembrook unit, $3.8 million in the Preston unit, $3.3
million in the Midkiff unit and $3.2 million in the Shackelford unit) and $9.3
million in other portions of the Spraberry field, $31.2 million in the onshore
Gulf Coast region, $21.1 million in other areas of the Permian Basin, $14.8
million in the MidContinent region and $6.1 million internationally in Argentina
and Guatemala.
The Company's 1997 capital expenditure budget has been increased to $335
million, up from the previous budget of $270 million, reflecting planned
expenditures of $215 million for exploitation activities, $69 million for
exploration activities and $51 million for oil and gas property acquisitions in
the Company's core areas of Texas, Oklahoma, New Mexico and Louisiana. The
22
PARKER & PARSLEY PETROLEUM COMPANY
significant increase in the capital expenditure budget is indicative of the many
exciting exploration, exploitation and acquisition opportunities available to
the Company. Funding for the Company's capital expenditure budget will be
primarily provided by cash flows generated by operating activities and by
proceeds resulting from the Company's ongoing divestiture program for
nonstrategic assets . In addition, the Company may periodically be required to
borrow funds under its $350 million bank facility in order to fund these
commitments to the extent that they exceed such internally-generated cash flows.
Funding for the Company's working capital obligations is provided by
internally-generated cash flows. Funding for the repayment of principal and
interest on outstanding debt may be provided by any combination of
internally-generated cash flows, proceeds from the disposition of nonstrategic
assets or alternative financing sources as discussed in "Capital Resources"
below.
Capital Resources. The Company's primary capital resources are net cash
provided by operating activities, proceeds from financing activities and
proceeds from sales of nonstrategic assets. The Company expects that these
resources will be sufficient to fund its capital commitments in 1997.
Operating Activities. Net cash provided by operating activities was
$51.1 million and $124.6 million during the three and six months ended June 30,
1997, respectively, consistent with net cash provided by operating activities of
$53.8 million and $120.6 million for the same periods in 1996.
Financing Activities. The Company had an outstanding balance under its
bank facility at June 30, 1997 of $40.6 million (including outstanding letters
of credit of $617 thousand), leaving approximately $309.4 million of unused
borrowing base immediately available. The weighted average interest rate for the
six months ended June 30, 1997 on the Company's indebtedness was 7.83% as
compared to 7.81% for the six months ended June 30, 1996 (taking into account
the effect of interest rate swaps).
As the Company continues to pursue its strategy, it may utilize
alternative financing sources, including the issuance for cash of fixed rate
long-term public debt, convertible securities or preferred stock. The Company
may also issue securities in exchange for oil and gas properties, stock or other
interests in other oil and gas companies or related assets. Additional
securities may be of a class preferred to common stock with respect to such
matters as dividends and liquidation rights and may also have other rights and
preferences as determined by the Company's Board of Directors.
On February 12, 1997, the Company completed a shelf registration
statement with the Securities and Exchange Commission, which provides for the
issuance of up to $400 million of common stock, preferred stock, warrants to
acquire preferred stock, depository shares representing fractional interests in
preferred stock, debt securities and warrants to acquire debt securities, or any
combination thereof which the Company may offer from time to time. The $400
million includes $127.9 million which remained unused from a 1994 shelf
registration statement. The net proceeds from any such offering will be used for
general corporate purposes, which may include repayment of indebtedness,
redemption or repurchase of securities of the Company or any subsidiary,
additions to working capital and capital expenditures, including acquisitions
and drilling.
Sales of Nonstrategic Assets. During the six months ended June 30, 1997
and 1996, proceeds from the sale of domestic nonstrategic assets totaled $12.3
million and $45.9 million, respectively. In addition, during the first half of
1996, the Company sold certain Australasian subsidiaries resulting in cash
proceeds of $178.7 million. The proceeds from these sales were utilized to
reduce the Company's outstanding bank indebtedness and for general working
capital purposes. The Company anticipates that it will continue to sell
nonstrategic properties from time to time to increase capital resources
available for other activities and to achieve administrative efficiencies.
Liquidity. At June 30, 1997, the Company had $9.8 million of cash and
cash equivalents on hand, compared to $18.7 million at December 31, 1996. The
Company's ratio of current assets to current liabilities was 1.11 at June 30,
1997 and 1.29 at December 31, 1996.
- - ---------------
(1) The information in this document includes forward-looking statements that
are based on assumptions that in the future may prove not to have been
accurate. Those statements, and Parker & Parsley Petroleum Company's
business and prospects, are subject to a number of risks including the
volatility of oil and gas prices, environmental risks, operating hazards
and risks, risks associated with natural gas processing plants, risks
related to exploration and development drilling, uncertainties about
estimates of reserves, competition, government regulation, and the ability
of the Company to implement its business strategy. These and other risks
are described in the Company's 1996 Annual Report on Form 10-K which is
available from the United States Securities and Exchange Commission.
23
PARKER & PARSLEY PETROLEUM COMPANY
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
As discussed in Note B of Notes to Consolidated Financial Statements included in
"Item 1. Financial Statements", the Company is a party to various legal actions
incidental to its business. The claims for damages from such legal actions are
not in excess of 10% of the Company's current assets and the Company believes
none of these actions to be material.
Item 4. Submission of Matters to a Vote of Security Holders
On August 7, 1997, the Company and Mesa Inc. ("Mesa") each held a Special
Meeting for the respective stockholders in Dallas, Texas. At both meetings, the
following three proposals were submitted for vote to the stockholders: (i) to
approve and adopt an Amended and Restated Agreement and Plan of Merger, dated as
of April 6, 1997 (the "Merger Agreement"), among the Company, Mesa and its
subsidiaries Pioneer Natural Resources Company ("Pioneer") and Mesa Operating
Co. ("MOC"), which provides for the business combination of Parker & Parsley and
Mesa (as a result of the business combination, Mesa, which is a Texas
corporation, will reincorporate to Delaware by merging into Pioneer and Parker &
Parsley will merge into MOC and thereby become a wholly-owned subsidiary of
Pioneer), (ii) to approve the adoption of the Pioneer Long-Term Incentive Plan
and (iii) to approve the adoption of the Pioneer Employee Stock Purchase Plan.
Each of the proposals was approved by Company stockholders as follows:
Proposal For Against Abstain Not Voted
-------- ---------- --------- --------- ----------
Merger Agreement 26,575,978 115,317 160,921 8,186,605
Long-Term Incentive Plan 17,364,692 9,205,241 282,283 8,186,605
Employee Stock Purchase Plan 25,993,027 581,111 278,078 8,816,605
In addition, each of the three proposals was approved by Mesa stockholders as
follows:
Proposal For Against Abstain Not Voted
-------- ---------- --------- --------- ----------
Merger Agreement
Common stockholders of Mesa 45,946,840 1,068,821 2,259,454 15,004,453
Preferred Series A stockholders of Mesa 36,054,385 8,953,770 4,125,626 12,517,382
Preferred Series B stockholders of Mesa 62,424,436 - - -
Long-Term Incentive Plan
Common stockholders of Mesa 39,505,930 6,668,536 3,100,649 15,004,453
Preferred Series A stockholders of Mesa 34,019,452 7,940,429 7,173,900 12,517,382
Preferred Series B stockholders of Mesa 62,424,436 - - -
Employee Stock Purchase Plan
Common stockholders of Mesa 43,605,373 2,614,233 3,055,509 15,004,453
Preferred Series A stockholders of Mesa 38,146,770 3,797,918 7,189,093 12,517,382
Preferred Series B stockholders of Mesa 62,424,436 - - -
Item 6. Exhibits and Reports on Form 8-K
Exhibits
2.1 Agreement and Plan of Merger dated as of April 6, 1997 among Mesa Inc.,
Mesa Operating Co., MXP Reincorporation Corp., and Parker & Parsley
Petroleum Company (incorporated by reference to Exhibit 2.1 to the
Company's Current Report on Form 8-K dated April 6, 1997).
24
PARKER & PARSLEY PETROLEUM COMPANY
2.2 Shareholders Agreement dated as of April 6, 1997 by and between Mesa
Inc. and DNR-Mesa Holdings, L.P. (incorporated by reference to Exhibit
2.2 to the Company's Current Report on Form 8-K dated April 6, 1997).
2.3 Letter Agreement dated April 6, 1997 between Parker & Parsley Petroleum
Company and DNR-Mesa Holdings, L.P. (incorporated by reference to
Exhibit 2.3 to the Company's Current Report on Form 8-K dated April 6,
1997).
2.4 Shareholders Agreement dated as of April 6, 1997 by and between Boone
Pickens and Parker & Parsley Petroleum Company (incorporated by
reference to Exhibit 2.4 to the Company's Current Report on Form 8-K
dated April 6, 1997).
27. Financial Data Schedule
Reports on Form 8-K
During the quarter ended June 30, 1997, the Company filed the following Current
Reports on Form 8-K:
(1) On April 3, 1997, the Company filed a Current Report on Form 8-K (a)
reporting under Item 5 (Other Events) the divestitures of (i) certain
wholly-owned Australasian subsidiaries, (ii) the wholly-owned
subsidiary Bridge Oil Timor Sea, Inc. and (iii) certain nonstrategic
domestic oil and gas properties, gas plants, and related assets and
contract rights and (b) reporting under Item 7 (Financial Statements
and Exhibits) the following pro forma financial information for the
Company, taking into account (i) the sale of certain wholly-owned
Australasian subsidiaries, (ii) the sale of Bridge Oil Timor Sea, Inc.
and (iii) the aggregate effect of completed sales of certain
nonstrategic domestic oil and gas properties, gas plants, and assets
and contract rights through December 31, 1996.
a. Preliminary Statement
b. Unaudited Pro Forma Combined Statement of Operations for the year
ended December 31, 1996
c. Notes to Unaudited Pro Forma Combined Financial Statements
(2) On April 6, 1997, the Company filed a Current Report on Form 8-K
reporting under Item 5 (Other Events) the signing of an Agreement and
Plan of Merger with Mesa Inc. ("Mesa") and under Item 7 (Financial
Statements and Exhibits) various documents related to such merger. Item
5 (Other Events) of such Current Report included summary pro forma
condensed consolidated financial, operating and reserve information of
the Company and Mesa as of and for the year ended December 31, 1996.
Such information does not give effect to the proposed merger. The
unaudited pro forma consolidated information of the Company gives
effect to the divestitures of (i) certain wholly-owned Australasian
subsidiaries, (ii) the wholly-owned subsidiary Bridge Oil Timor Sea,
Inc. and (iii) certain nonstrategic domestic oil and gas properties,
gas plants, and related assets and contract rights. The unaudited pro
forma consolidated information of Mesa gives effect to the 1996
recapitalization of Mesa's balance sheet, the acquisition of all of the
outstanding equity of Greenhill Petroleum Corporation and additional
borrowings to finance such acquisition.
25
PARKER & PARSLEY PETROLEUM COMPANY
S I G N A T U R E S
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 thereto duly authorized.
PARKER & PARSLEY PETROLEUM COMPANY
By: Pioneer Natural Resources USA, Inc.,
its successor by merger
Date: August 14, 1997 By: /s/ Scott D. Sheffield
--------------------------
Scott D. Sheffield
President
Date: August 14, 1997 By: /s/ Rich Dealy
--------------------------
Rich Dealy
Vice President - Controller
26
PARKER & PARSLEY PETROLEUM COMPANY
Exhibit Index Page
- - ------------- ----
2.1 Agreement and Plan of Merger dated as of April 6, 1997 among
Mesa Inc., Mesa Operating Co., MXP Reincorporation Corp.,
and Parker & Parsley Petroleum Company (incorporated by
reference to Exhibit 2.1 to the Company's Current Report on
Form 8-K dated April 6, 1997).
2.2 Shareholders Agreement dated as of April 6, 1997 by and
between Mesa Inc. and DNR-Mesa Holdings, L.P. (incorporated
by reference to Exhibit 2.2 to the Company's Current Report
on Form 8-K dated April 6, 1997).
2.3 Letter Agreement dated April 6, 1997 between Parker & Parsley
Petroleum Company and DNR-Mesa Holdings, L.P. (incorporated
by reference to Exhibit 2.3 to the Company's Current Report
on Form 8-K dated April 6, 1997).
2.4 Shareholders Agreement dated as of April 6, 1997 by and
between Boone Pickens and Parker & Parsley Petroleum Company
(incorporated by reference to Exhibit 2.4 to the Company's
Current Report on Form 8-K dated April 6, 1997).
27. Financial Data Schedule
27