FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1994
--------------------------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
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_________________________________________________________
For Quarter Ended June 30, 1994 Commission file number 1-10509
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SNYDER OIL CORPORATION
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(Exact name of registrant as specified in its charter)
Delaware 75-2306158
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
777 Main Street, Fort Worth, Texas 76102
- ------------------------------------------ -----------------
(Address of principal executive offices) (Zip Code)
(Registrant's telephone number, including area code) (817)338-4043
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(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 [ ].
23,586,735 Common Shares were outstanding as of July 25, 1994
PART I. FINANCIAL INFORMATION
The financial statements included herein have been prepared in
conformity with generally accepted accounting principles. The
statements are unaudited, but reflect all adjustments which, in the
opinion of management, are necessary to fairly present the Company's
financial position and the results of operations.
2
SNYDER OIL CORPORATION
CONSOLIDATED BALANCE SHEETS (Notes 1 and 2)
(In thousands)
December 31, June 30,
1993 1994
-------------- -------------
(Unaudited)
ASSETS
Current assets
Cash and equivalents $ 10,913 $ 13,437
Accounts receivable 47,472 37,196
Other 3,407 7,872
---------- ----------
61,792 58,505
---------- ---------
Investments (Note 4) 29,383 37,739
---------- ---------
Oil and gas properties, full cost method (Note 5) 468,764 546,854
Accumulated depletion, depreciation and amortization (126,123) (152,805)
--------- ---------
342,641 394,049
--------- ---------
Gas processing and transportation facilities (Note 5) 60,015 78,567
Accumulated depreciation (14,295) (17,311)
--------- ---------
45,720 61,256
--------- ---------
$479,536 $551,549
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable $ 37,262 $ 34,947
Accrued liabilities 23,239 13,890
-------- ---------
60,501 48,837
-------- ---------
Senior debt, net (Notes 3 and 5) 114,952 98,534
Convertible subordinated notes, net (Note 3) - 83,501
Deferred taxes and other (Note 9) 6,842 13,881
Commitments and contingencies (Note 10)
Stockholders' equity (Note 6)
Preferred stock, $.01 par, 10,000,000 shares authorized,
8% convertible preferred, 1,186,005 and 1,150,005 shares
issued and outstanding 12 12
6% convertible preferred, 1,035,000 shares
issued and outstanding 10 10
Common stock, $.01 par, 75,000,000 shares authorized,
23,259,658 and 23,568,630 issued and outstanding 233 236
Capital in excess of par value 250,574 254,840
Retained earnings 46,954 50,110
Foreign currency translation (542) 762
Unrealized gains on investments (Note 4) - 826
--------- ---------
297,241 306,796
--------- ---------
$479,536 $551,549
========= =========
<FN>
The accompanying notes are an intergral part of these statements
3
SNYDER OIL CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS (Notes 1 and 2)
(In thousands except per share data)
Three Months Six Months
Ended June 30, Ended June 30,
----------------------- ----------------------
1993 1994 1993 1994
-------- -------- -------- --------
(Unaudited)
Revenues (Note 8)
Oil and gas sales $ 29,856 $ 33,860 $ 60,865 $ 66,507
Gas processing, transportation and marketing 23,949 28,075 37,161 54,998
Other 4,471 2,643 5,123 4,888
-------- -------- --------- ---------
58,276 64,578 103,149 126,393
-------- -------- --------- ---------
Expenses
Direct operating 11,538 12,073 22,910 24,016
Cost of gas and transportation 21,636 24,352 32,936 47,617
General and administrative 2,183 2,086 3,805 3,877
Interest and other 1,522 2,669 3,813 4,234
Depletion, depreciation and amortization 14,562 15,044 26,393 29,700
------- ------- -------- --------
Income before taxes and extraordinary item 6,835 8,354 13,292 16,949
------- ------- -------- --------
Provision for income taxes (Note 7)
Current 300 25 390 50
Deferred - 2,899 - 5,466
-------- -------- -------- -------
300 2,924 390 5,516
-------- ------- -------- -------
Income before extraordinary item 6,535 5,430 12,902 11,433
Extraordinary item - early extinguishment of debt,
net of taxes of $198 (Note 3) - - (384) -
-------- -------- --------- --------
Net income $ 6,535 $ 5,430 $ 12,518 $ 11,433
======== ======== ========== ========
Net income per common share (Note 2)
Before extraordinary item $ .18 $ .12 $ .41 $ .26
Extraordinary item - - (.02) -
-------- -------- --------- --------
Total $ .18 $ .12 $ .39 $ .26
======== ======== ========= ========
Average common shares outstanding (Note 6) 23,112 23,381 23,004 23,344
<FN>
The accompanying notes are an integral part of these statements
4
SNYDER OIL CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN
STOCKHOLDERS' EQUITY (Notes 1, 2 and 6)
(In thousands)
Preferred Stock Common Stock Capital in
----------------------- ------------------- Excess of Retained
Shares Amount Shares Amount Par Value Earnings
-------- -------- -------- -------- ----------- -----------
Balance, December 31, 1992 1,200 $ 12 22,874 $ 229 $ 148,670 $ 35,482
Issuance of preferred 1,035 10 - - 99,315 -
Common stock grants and
exercise of options - - 309 3 2,590 -
Conversion of preferred
to common (14) - 77 1 (1) -
Dividends - - - - - (14,192)
Net income - - - - - 25,664
-------- -------- -------- -------- ---------- ---------
Balance, December 31, 1993 2,221 22 23,260 233 250,574 46,954
Common Stock grants and
exercise of options - - 111 1 818 -
Conversion of preferred
to common (36) - 198 2 (2) -
Issuance of warrants - - - - 3,450 -
Dividends - - - - - (8,277)
Net income - - - - - 11,433
-------- -------- -------- -------- ---------- ---------
Balance, June 30, 1994
(Unaudited) 2,185 $ 22 23,569 $ 236 $ 254,840 $ 50,110
======== ======== ======== ======== ========== =========
<FN>
The accompanying notes are an integral part of these statements.
5
SNYDER OIL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS (Notes 1 and 2)
(In thousands)
Six Months Ended June 30,
--------------------------------
1993 1994
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(Unaudited)
Operating activities
Net income $ 12,518 $ 11,433
Adjustments to reconcile net income to net cash
provided by operations
Depletion, depreciation and amortization 26,393 29,700
Deferred taxes - 5,466
Extraordinary item - early extinguishment of debt 384 -
Gain on sale of securities (480) (2,017)
Amortization of deferred credits (1,986) (1,632)
Changes in operating assets and liabilities
Decrease (increase) in
Accounts receivable (12,422) 10,276
Other current assets (900) (4,465)
Increase (decrease) in
Accounts payable 6,524 (1,899)
Accrued liabilities 40 (402)
Other liabilities - (150)
Other (264) (548)
---------- ----------
Net cash provided by operations 29,807 45,762
---------- ----------
Investing activities
Acquisition, development and exploration (100,548) (104,395)
Proceeds from investments 1,209 4,456
Outlays for investments (18,250) (7,313)
Sale of properties 5,480 1,818
---------- ---------
Net cash used by investing (112,109) (105,434)
---------- ---------
Financing activities
Issuance of common 1,430 696
Issuance of preferred 99,394 -
Issuance of convertible subordinated notes - 83,501
Decrease in indebtedness (17,241) (16,418)
Premium on debt extinguishment (582) -
Dividends (5,910) (8,277)
Deferred credits 1,409 2,694
---------- ----------
Net cash realized by financing 78,500 62,196
---------- ----------
Increase (decrease) in cash (3,802) 2,524
Cash and equivalents, beginning of period 20,485 10,913
---------- ----------
Cash and equivalents, end of period $ 16,683 $ 13,437
========== ==========
<FN>
The accompanying notes are an integral part of these statements.
6
SNYDER OIL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) ORGANIZATION AND NATURE OF BUSINESS
Snyder Oil Corporation (the "Company") is primarily engaged in the
acquisition, production, development and exploration of domestic oil
and gas properties. The Company is also involved in gas processing,
transportation, gathering and marketing. Additionally, the Company
is engaged to a modest but growing extent in international
acquisition, development and exploration and maintains a number of
special purpose subsidiaries which are engaged in ancillary
activities including gas transmission, water disposal and management
of oil and gas assets on behalf of institutional investors. The
Company, a Delaware corporation, is the successor to a company formed
in 1978.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The consolidated financial statements include the accounts of Snyder
Oil Corporation and its subsidiaries (collectively, the "Company").
The Company accounts for its interest in joint ventures and
partnerships using the proportionate consolidation method, whereby
its share of assets, liabilities, revenues and expenses are
consolidated with other operations.
The Company follows the "full cost" accounting method. All costs of
development and exploration are capitalized as incurred. Depletion,
depreciation and amortization ("depletion") is provided on the unit-
of-production method based on proved reserves. Gas is converted to
equivalent barrels at the rate of six Mcf per barrel. The depletion
rates per equivalent barrel produced were $4.91 and $4.84,
respectively, for the six months ended June 30, 1993 and 1994. No
gains or losses are recognized upon the disposition of oil and gas
properties except in extraordinary transactions. Proceeds are
credited to the carrying value of the properties. Maintenance and
repairs are expensed. Expenditures which enhance the value of the
properties are capitalized. Depreciation on gas processing and
transportation facilities is generally provided on a straight-line
basis over 15 years.
The Company's investment in its Australian affiliate is accounted
for using the equity method, whereby the cash basis investment is
increased for equity in earnings and decreased for dividends
received. The affiliate's functional currency is the Australian
dollar. The reported foreign currency translation adjustments are
the result of the translation of the Australian balance sheet into
United States dollars at the balance sheet dates and the related
impact of exchange rates subsequent to purchase.
All highly liquid investments with a maturity of three months or
less are considered to be cash equivalents. Earnings per share are
computed by dividing net income less dividends on preferred stock by
average common shares outstanding. Differences between primary and
fully diluted earnings per share were insignificant for all periods
presented. General and administrative expenses are reduced by
reimbursements for well operations, drilling and management of
partnerships. Reimbursements amounted to $8.3 million and $12.1
million, respectively, for the six months ended June 30, 1993 and
1994.
In the opinion of management, those adjustments to the financial
statements (all of which are of a normal and recurring nature)
necessary to present fairly the financial position and results of
operations have been made. These interim financial statements should
be read in conjunction with the 1993 annual report on Form 10-K.
7
(3) INDEBTEDNESS
The following indebtedness was outstanding on the respective dates:
December 31, June 30,
1993 1994
------------ -------------
(In thousands)
Revolving credit facility $ 114,901 $ 98,501
Other 66 50
------------ ------------
114,967 98,551
Less current portion (15) (17)
------------ ------------
Senior debt, net $ 114,952 $ 98,534
============ ============
Convertible subordinated notes, net $ - $ 83,501
=========== ============
The Company maintains a $500 million revolving credit facility.
The facility is divided into a $400 million long-term portion and a
$100 million short-term portion. The elected borrowing base
available under the facility at June 30, 1994 was $200 million. The
majority of the borrowings under the facility currently bear interest
at LIBOR plus .75% with the remainder at prime, with an option to
select CD plus .75%. The margin on LIBOR or CD will increase to 1%
if the Company's consolidated senior debt becomes greater than 80% of
its tangible net worth. For the six months ended June 30, 1993 and
1994, the average borrowing cost under the facility was 4.9% and
5.0%, respectively. The Company pays certain fees based on the
unused portion of the borrowing base. Covenants require maintenance
of minimum working capital, limit the incurrence of debt and restrict
dividends, stock repurchases, certain investments, other indebtedness
and unrelated business activities.
In May 1994, the Company issued $86.3 million of 7% convertible
subordinated notes due May 15, 2001. The net proceeds were $83.5
million. The notes are convertible into common stock at $23.16 per
share, and are redeemable at the option of the Company on or after
May 15, 1997, initially at 103.51% of principal, and at prices
declining to 100% at May 15, 2000, plus accrued interest.
In March 1993, the Company retired 40% of the cumulative
participating rights associated with its $25 million of subordinated
notes. The portion of the payment in excess of principal and accrued
interest was expensed as an extraordinary item, net of income taxes,
for $384,000. In August 1993, the Company retired $10 million (40%)
of the subordinated notes and recorded an extraordinary expense of
$462,000, net of taxes. In November 1993, the remaining $15 million
of the subordinated notes and all remaining cumulative rights were
retired and an extraordinary expense of $1.1 million was reported.
Scheduled maturities of indebtedness are zero for the remainder
of 1994, $17,000 in 1995 and 1996, $16,000 in 1997, $98.5 million in
1998, zero in 1999 and 2000, and $83.5 million in 2001. The long-
term portion of the revolving credit facility is scheduled to expire
in 1998; however, management's policy is to renew the facility and
extend the maturity annually.
Cash payments for interest expense were $3.6 million and $2.8
million, respectively, for the six months ended June 30, 1993 and
1994.
(4) INVESTMENTS
The Company has investments in foreign and domestic energy
companies and notes receivable, which at December 31, 1993 and June
30, 1994, had a total cost of $29.4 million and $36.5 million,
respectively, with corresponding fair market values of $54.2 million
and $51.3 million. In the first quarter of 1994, the Company adopted
8
SFAS No. 115, "Accounting for Certain Investments in Debt and Equity
Securities." Per the pronouncement, investments carried on the cost
basis must be adjusted to their market value with a corresponding
increase or decrease to stockholder's equity. The pronouncement does
not apply to equity basis investments.
In May 1993, the Company acquired 92 million of the outstanding
shares of Command Petroleum Holdings N.L. ("Command"), an Australian
exploration and production company, for $18.2 million. The
investment is accounted for by the equity method. The Sydney based
company is listed on the Australian Stock Exchange, and holds
interests in various international exploration and production permits
and licenses as well as a 47.5% interest in a publicly traded
Netherlands exploration and production company whose assets are
located primarily in the North Sea. The market value of the
investment in Command based on its closing price on June 30, 1994 was
$33.5 million. Command has outstanding stock options covering the
issuance of up to 53.3 million common shares that expire November 30,
1994. Given that the exercise price of the options is substantially
below its current stock price, the Company assumes they will be
exercised. In January 1994, Command completed an offering of 43
million of its common shares, and in February 1994 paid $1.6 million
in cash and issued 2.5 million of its common shares in return for an
additional 18.8% interest in the publicly traded Netherlands
exploration and production company bringing its ownership from 28.7%
to 47.5% at June 30, 1994. Additionally, in May 1994, 1.7 million of
the November 1994 options were exercised. As a result of these
transactions, the Company's ownership in Command was reduced to
35.1%. If as expected, all of the November 1994 options are
exercised, the Company's ownership would be reduced to 29.3%.
The Company has investments in securities of publicly traded
domestic energy companies, not accounted for by the equity method,
having a book value and total cost at December 31, 1993 and June 30,
1994 of $9.7 million and $13.7 million, respectively. The market
value of these securities at December 31, 1993 and June 30, 1994
approximated $13.3 million and $14.6 million, respectively.
Accordingly, at June 30, 1994, investments were increased by $1.3
million, stockholders' equity was increased by $826 thousand and
deferred taxes payable were increased by $445 thousand as required by
SFAS No. 115.
The Company holds $2.9 million in notes receivable due from
privately held corporations. All notes are secured by certain
assets, including stock and oil and gas properties. At December 31,
1993 and June 30, 1994, the fair value of the notes receivable, based
on existing market conditions and the anticipated future net cash
flow related to the notes, approximated their book value.
(5) OIL AND GAS PROPERTIES
The cost of oil and gas properties at December 31, 1993 and June
30, 1994 includes $9.8 million and $13.4 million, respectively, of
unevaluated leasehold. Such properties are held for exploration,
development or resale and are excluded from amortization. The
following table sets forth costs incurred related to oil and gas
properties and gas processing and transportation facilities:
Six
Year Ended Months Ended
December 31, June 30,
1993 1994
------------ -------------
Acquisition $ 50,997 $ 10,715
Development 90,182 65,488
Gas processing, transportation and marketing 22,595 18,552
Exploration 2,952 580
--------- ---------
$ 166,726 $ 95,335
========= =========
Development expenditures for the six months ended June 30, 1994,
were concentrated primarily in the DJ Basin of Colorado where
expenditures totalled $51.3 million. A total of 249 wells were
placed on production there in the first six months of 1994 with 32
9
in progress at June 30. In the Piceance Basin of western Colorado in
the Hunter Mesa Unit, eight wells have been drilled in 1994 with four
placed on sales and the other four in various stages of completion or
evaluation. In the East Washakie Basin of southern Wyoming, the 1994
Mesaverde drilling program was initiated in late March with plans to
drill throughout the year. Nine wells have been drilled with two
more in process at quarter end. In central Wyoming, five Company
operated and three third party operated Tensleep formation wells were
drilled and placed on production during the period. In the Giddings
Field in south Texas, the Company continued its horizontal drilling
program with the addition of six producing wells during the first six
months of 1994 with four in progress at quarter end.
The Company's gas facilities expansion continued with $16.4
million expended during 1994, primarily on facilities in the DJ
Basin. Construction of a new gas processing plant on the west end of
the Wattenberg Field has begun with $5.6 million in costs incurred.
A total of $6.9 million was expended to increase the Company's
gathering systems in the DJ Basin to add pipelines, feeder lines, an
additional compressor and new well connections for the continuing
drilling activity in the area. Additionally, $1.9 million of pipe
inventory was acquired for upcoming expansion. At the Roggen plant,
$1.0 million was expended to add a new de-ethanizer station, improve
metering and boost compression, among other projects. Another $1.0
million in expenditures were for system expansions in the Piceance
Basin, Nebraska and the Washakie Basin. Additionally, $2.2 million
was expended for miscellaneous equipment and field vehicles.
The Company expended $10.7 million for domestic acquisitions, of
which $4.3 million was for proved properties and $6.4 million for
unproved acreage.
(6) STOCKHOLDERS' EQUITY
A total of 75 million common shares, $.01 par value, are
authorized of which 23.6 million were issued and outstanding at June
30, 1994. In 1993, the Company issued 386,000 shares, with 309,000
shares issued primarily for the exercise of stock options by
employees and 77,000 shares issued on conversion of 14,000 preferred
shares. During the six months ended June 30, 1994, the Company
issued 309,000 shares, with 111,000 shares issued primarily for the
exercise of stock options by employees and 198,000 shares issued on
conversion of 36,000 preferred shares. In 1993, the Company paid
first and second quarter dividends of $.05 per share and increased
dividends to $.06 per share in the third and fourth quarters.
Dividends of $.06 per share were paid for the first and second
quarters of 1994.
A total of 10 million preferred shares, $.01 par value, are
authorized. In December 1991, 1.2 million shares of convertible
exchangeable preferred stock were sold through an underwriting. The
net proceeds were $57.4 million. The preferred stock carries an 8%
dividend and is convertible into common stock at $9.07 per share.
The stock is exchangeable at the option of the Company for 8%
convertible subordinated debentures on any dividend payment date.
The stock is redeemable at the option of the Company after December
31, 1994. The liquidation preference is $50.00 per share, plus
accrued and unpaid dividends. Beginning on December 31, 1994, the
stock is redeemable at $52.50 per share if the closing price exceeds
150% of the prevailing conversion price (currently $13.61 per share)
for 20 of the preceding 30 trading days. After 1995, no minimum
stock price is required. The redemption price declines $.50 per year
to $50.00 per share in 2000. In 1993, 14,000 preferred shares were
converted into 77,000 common shares. During the six months ended
June 30, 1994, 36,000 preferred shares were converted into 198,000
common shares.
In April 1993, 4.1 million depositary shares (each representing
a one quarter interest in one share of $100 liquidation value stock)
of convertible preferred stock were sold through an underwriting.
The net proceeds were $99.3 million. The preferred stock carries a
6% dividend and is convertible into common stock at $21.00 per share.
The stock is exchangeable at the option of the Company for 6%
convertible subordinated debentures on any dividend payment date on
or after March 31, 1994. The stock is redeemable at the option of
the Company on or after March 31, 1996. The liquidation preference
is $25.00 per depositary share, plus accrued and unpaid dividends.
The Company paid $2.4 million and $2.7 million, respectively, in
dividends for all preferred shares for the three months ended June
30, 1993 and 1994, $3.6 million and $5.5 million, respectively, for
the six months ended June 30, 1993 and 1994, and $9.1 million for all
of 1993.
10
In February 1994, the Company granted warrants to purchase two
million shares of its common stock to Union Pacific Resources
Corporation ("UPRC") in exchange for rights to develop UPRC's
previously uncommitted acreage in the Wattenberg area of Colorado.
Of the warrants, one million expire three years from the date of
grant, and are exercisable at $25 per share, while the other one
million expire in four years and are exercisable at $27 per share.
One year from the date of grant, the exercise prices may be reduced
to 120% of the average closing price of the Company stock for the
preceding 20 consecutive trading days, but not to lower than an
exercise price of $21.60 per share. The expiration date of the
warrants may also be extended one year if the average closing price
over that 20 day trading period is less than $16.50 per share. For
financial purposes, the warrants were valued at $3.5 million, which
was included as an increase to capital in excess of par value.
The Company maintains a stock option plan for employees providing
for the issuance of options at prices not less than fair market
value. Options to acquire up to 3 million shares of common stock may
be outstanding at any given time. The specific terms of grant and
exercise are determinable by a committee of independent members of
the Board of Directors. Virtually all outstanding options vest over
a three-year period (30%, 60%, 100%) and expire five to seven years
from date of grant.
In 1990, the shareholders adopted a stock grant and option plan
(the "Directors' Plan") for non-employee Directors of the Company.
The Directors' Plan provides for each non-employee director to
receive 500 common shares quarterly in payment of their annual
retainer. It also provides for 2,500 options to be granted annually
to each non-employee Director. The options vest over a three-year
period (30%, 60%, 100%) and expire five years from date of grant.
At June 30, 1994, 1.8 million options were outstanding under both
plans at exercise prices of $4.53 to $20.38 per share. At June 30,
1994, a total of 802,000 of such options were vested having exercise
prices of $4.53 to $18.38 per share. During 1993, 309,000 options
were exercised at prices of $4.53 to $9.13 per share, and 23,000 were
forfeited. During the six months ended June 30, 1994, 111,000
options were exercised at prices of $4.53 to $13.00 per share, and
2,000 were forfeited.
(7) FEDERAL INCOME TAXES
The Company adopted FASB Statement No. 109, "Accounting for Income
Taxes," effective January 1, 1992. At June 30, 1994, the Company had
no liability for foreign taxes. A reconciliation of the United
States federal statutory rate to the Company's effective income tax
rate follows:
Six Months Ended June 30,
-------------------------
1993 1994
--------- ---------
Federal statutory rate 35% 35%
Utilization of net deferred tax asset (34%) -
Prior year tax reimbursement - (2%)
------- -------
Effective tax rate 1% 33%
======= =======
For tax purposes, the Company had net operating loss
carryforwards of $69.1 million at December 31, 1993. These
carryforwards expire between 1997 and 2008. At December 31, 1993,
the Company had alternative minimum tax credit carryforwards of $1.4
million and depletion carryforwards of $1.1 million, both of which
are available indefinitely. Current income taxes shown in the
financial statements reflect estimates of alternative minimum taxes
due. Cash payments during the six months ended June 30, 1993 and
1994 were $75,000 and $10,000, respectively.
(8) SALES TO MAJOR CUSTOMERS
For the six months ended June 30, 1993 and 1994, Amoco Production
Company accounted for 16% and 12%, respectively, of revenues.
Management believes that the loss of any individual purchaser would
not have a material adverse impact on the financial position or
results of operations of the Company.
11
(9) DEFERRED CREDITS
In 1992, an institutional investor agreed to contribute $7 million
to a partnership formed to monetize Section 29 tax credits to be
realized from the Company's properties, mainly in the DJ Basin. The
initial $3 million was contributed in 1992, an additional $3 million
contributed during 1993 and $1 million received in March 1994. In
June 1994, the arrangement was extended and an additional $1.5
million was received. A revenue increase of more than $.40 per Mcf
is realized on production generated from qualified Section 29
properties in this partnership. The Company recognized $2.0 million
and $1.6 million, respectively, during the six months ended June 30,
1993 and 1994.
(10) COMMITMENTS AND CONTINGENCIES
The Company rents office space and gas compressors at various
locations under non-cancelable operating leases. Minimum future
payments under such leases approximate $1.1 million for the remainder
of 1994, $2.2 million for 1995, $2.3 million for 1996 and 1997, and
$2.1 million for 1998.
In 1993, the Company received a $5.3 million settlement on a gas
contract dispute. Of the proceeds, $3.5 million was reflected as
other income in second quarter 1993, with the remaining $1.8 million
reflected as a reserve for possible contingencies. In second quarter
1994, the reserve was reduced by $610,000 based on further
developments in the settlement proceedings. In April 1993, the
Company was granted a $2.7 million judgment in litigation involving
the allocation of proceeds from a pipeline dispute. The judgment has
been appealed. The Company is a party to various other lawsuits
incidental to its business, none of which are anticipated to have a
material adverse impact on its financial position or results of
operations. The financial statements reflect favorable legal
judgments only upon receipt of cash, final judicial determination or
execution of a settlement agreement.
12
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Results of Operations
Total revenues for the three month and six month periods ended
June 30, 1994 rose to $64.6 million and $126.4 million, respectively.
These represented increases of 11% and 23% over the respective prior
year periods. Equivalent oil and gas production for the three months
ended June 30, 1994, grew 27% from the prior year quarter, however,
the benefit did not fully impact revenues as the average price
received per equivalent barrel dropped 11% to $12.20. The second
quarter revenue comparison was also impacted by a $2.9 million
reduction in gas contract settlements between periods. Net income
before taxes and extraordinary items for the second quarter of 1994
grew 22% as the 11% revenue increase was enhanced by more moderate
increases in direct operating expenses and depletion. Second quarter
1994 net income was $5.4 million, a 17% decrease from the 1993
quarter, as deferred income taxes were $2.9 million in 1994 compared
to a total tax provision of $300,000 in second quarter 1993. After
the effect of $1.9 million in additional preferred stock dividends in
1994 from the issuance of the 6% preferred stock in April 1993, net
income per common share for the six months ended June 30, 1994, was
$.26 compared to $.39 in the 1993 period.
Average daily production in the second quarter of 1994 climbed to
12,338 barrels and 109.0 MMcf (30,505 barrels of oil equivalent),
increases of 38% and 20%, respectively. The production increases
resulted from continuing development drilling in the DJ Basin of
Colorado and, to a lesser extent, newly initiated acquisition and
development projects in the Piceance Basin of western Colorado, the
Washakie Basin of western Wyoming and the Giddings Field of south
Texas. During the first six months of 1994, 249 wells were placed on
production in the DJ Basin, with 32 wells in various stages of
drilling and completion at June 30. Wattenberg second quarter
results were hampered by several difficulties, including compression
problems, delays in connecting new wells, down time at third-party
plants and permitting difficulties. Based on discussions with the
permitting agency and assuming completion of a new Company-owned gas
processing plant in the fourth quarter, the Company is hopeful that
many of the difficulties currently being encountered in Wattenberg
will be substantially reduced by the end of the year. The gross
margin from production operations for the second quarter of 1994 was
$21.8 million, a 19% increase over the prior year quarter. Oil
prices improved from the first quarter 1994 eight year low to average
$15.55 in the second quarter of 1994. This was, however, a 7%
decline from the 1993 period. Gas prices decreased 12% to $1.65 per
Mcf, from $1.87 in 1993. Second quarter operating expenses per
equivalent barrel (including production taxes) decreased to $4.35
from $5.28 in 1993.
The gross margin from gas processing, transportation and marketing
activities jumped 61% to $3.7 million in second quarter 1994. The
increase was primarily attributable to a $1.3 million rise in
processing and transportation margins as a result of the DJ Basin
facilities expansion during late 1993 in combination with the DJ
Basin production growth. A new gas processing plant began
construction in April on the west end of the Wattenberg field and gas
should begin being processed there in the fourth quarter of 1994. DJ
Basin gathering facilities daily throughput averaged 95.4 MMcf in
second quarter 1994 compared to 60.5 MMcf in the 1993 quarter, a 55%
increase. Gas marketing margins grew 26% to $398,000 due primarily
to increased margins on the Oklahoma cogeneration supply contract as
a result of a decrease in gas purchase costs in 1994.
Other income was $2.6 million during the three month period ended
June 30, 1994, compared to $4.5 million in 1993. The decrease
resulted from the receipt of a $3.5 million gas contract settlement
in 1993, versus $610,000 in similar income in 1994, partially offset
by increases in other income sources. General and administrative
expenses, net of reimbursements, for second quarter 1994 represented
3.2% of revenues, compared to 3.7% in 1993. While revenues grew 11%,
expenses were decreased moderately due to reimbursements received
from joint venture partners for costs incurred in the Russian
development project, which more than offset increases arising from
expanding activities and new hiring activity. Interest and other
expense increased by $1.1 million to $2.7 million in second quarter
1994 as a result of an increase in outstanding debt levels due to the
13
continuing capital expenditure projects. The average effective
interest rate was reduced by the retirement of the Company's
previously outstanding $25 million in 13.5% subordinated debt in 1993
and the issuance of $86.3 million in new 7% subordinated convertible
notes in May 1994.
Depletion, depreciation and amortization for second quarter 1994
increased $482,000, or 3% from the 1993 quarter. The increase was
lower than the 27% production rise as second quarter 1993 included a
$2.8 million charge to reduce the Company's basis in the Thomasville
processing plant. The depletion rate per equivalent barrel was $4.84
in second quarter 1994, compared to $4.91 in 1993.
Development, Acquisition and Exploration
During the six months ended June 30, 1994, the Company incurred
$95.3 million in property and equipment capital expenditures;
including $65.4 million for oil and gas property development, $16.4
million for gas facility expansion and $10.7 million for property
purchases.
Of the total development expenditures, $51.3 million was
concentrated in the DJ Basin of Colorado. A total of 249 wells were
placed on production there in 1994 with 32 in progress at June 30.
Five wells spudded during the period were plugged and abandoned.
Difficulty in obtaining drilling and recompletion permits in a timely
fashion and the onset of the agricultural season contributed to a
considerable slowdown during the second quarter. The drilling
slowdown is expected to prevail throughout the third quarter.
Drilling should accelerate sharply in the fourth quarter, permitting
the completion of the 500 wells originally planned for the year. The
Company continues to add to its inventory of available drillsites
with lease acquisitions, farm-ins and the addition of proven
locations as they become economic through continued drilling cost
reductions. In February 1994, the Company executed an agreement with
Union Pacific Resources Corporation ("UPRC") whereby the Company
gained the right to drill wells on UPRC's previously uncommitted
acreage in the Wattenberg area. The transaction significantly
increased the Company's inventory of undeveloped Wattenberg acreage.
UPRC retained a royalty and the right to participate as a 50% working
interest owner in each well, and received warrants to purchase two
million shares of Company stock. One million of the warrants expire
three years from the date of grant and are exercisable at $25 per
share. The other million expire in four years and are exercisable at
$27 per share. On February 8, 1995, the exercise prices may be
reduced to 120% of the average closing price of the Company stock for
the preceding 20 consecutive trading days, but not below $21.60 per
share. The expiration date of the warrants will be extended one year
if the average closing price over the 20 day trading period is less
than $16.50 per share. For financial reporting purposes, the
warrants were valued at $3.5 million, which was recorded as an
increase to oil and gas properties and capital in excess of par
value.
The Company expended $14.2 million for other development and
recompletion projects during the first half of 1994. In the Piceance
Basin of western Colorado, where the Company formed the 53,000 acre
Hunter Mesa Unit in late 1993, eight wells have been drilled in 1994
with four placed on sales and the other four in various stages of
completion or evaluation. The Company plans to drill up to 30 wells
there in 1994 and may institute a more significant drilling program
thereafter. In the East Washakie Basin of southern Wyoming, the
Company initiated its 1994 Mesaverde drilling program in late March
and plans to drill up to 40 wells there by year end. Nine wells have
been drilled with two more in process at June 30. Acreage
acquisition and farm out opportunities continue to be pursued there.
In the central Wyoming fields acquired in late 1992, five Company
operated and three third party operated Tensleep formation wells were
drilled and placed on production during the period. On Company
operated properties there, three wells each are planned in Hamilton
Dome and Riverton for later in 1994. In the Giddings Field of south
Texas, the Company continued its horizontal drilling program with the
addition of six producing wells during the first six months of 1994
with four in progress at quarter end.
14
The Company's gas gathering and processing facility operations
continue to grow with $16.4 million of capital expenditures in the
first six months of 1994. The work was heavily concentrated in the
Wattenberg area of the DJ Basin. Construction of a new gas
processing plant on the west end of the Wattenberg Field has begun
with $5.6 million in costs incurred through June 30. Included is a
new cryogenic skid being fabricated to handle up to 80 MMcf per day.
Initial start up for the approximate $20 million plant is scheduled
for fourth quarter 1994. A total of $6.9 million was expended to
increase the Company's gathering systems in the DJ Basin to add
pipelines, feeder lines, an additional compressor and new well
connections for the continuing drilling activity in the area.
Additionally, $1.9 million of pipe inventory was acquired at discount
prices for upcoming expansion use. At the Roggen plant, $1.0 million was
expended to add a new de-ethanizer station, improve metering and
boost compression, among other projects. Another $1.0 million in
expenditures were for system expansions in the Piceance Basin,
Nebraska and the Washakie Basin. Additionally, $2.2 million was
expended for miscellaneous equipment and field vehicles.
In the six months ended June 30, 1994, the Company expended $10.7
million for domestic acquisitions, of which $4.3 million was for
proved properties and $6.4 million for unproved acreage. Although a
number of potential producing property acquisitions are under review,
no significant purchases were consummated in the period.
Exploration costs for 1994 were limited to $580,000, most of which
was expended on international projects. In Russia, preparations for
the initiation of commercial operations continue. Production testing
and facility construction are in progress in the southernmost field
in the contract area. Three industry partners have committed $11.25
million to the joint venture to fully fund the western participants'
anticipated equity requirements, of which 20% ($2.25 million) has
been received. On June 30, 1994, a commitment letter was executed
with the Overseas Private Investment Corporation ("OPIC") whereby
OPIC will commit $40 million to the Russian Permtex project. It is
expected that the final OPIC agreement and associated debt financing
will be in place by year end. In Mongolia and Tunisia, seismic
acquisition and processing continues.
Financial Condition and Capital Resources
At June 30, 1994, the Company had total assets of $552 million.
Total capitalization was $503 million, of which 61% was represented
by stockholder's equity, 20% by senior debt, 17% by convertible
subordinated notes and the remainder by deferred taxes. During the
six months ended June 30, 1994, cash provided by operations was $45.8
million, an increase of 54% over 1993. As of June 30, 1994,
commitments for capital expenditures totalled $20.3 million. The
Company anticipates that 1994 expenditures for development drilling
and gas facilities will total from $175 to $200 million. The level
of these and other future expenditures is largely discretionary, and
the amount of funds devoted to any particular activity may increase
or decrease significantly, depending on available opportunities and
market conditions. The Company plans to finance its ongoing
development, acquisition and exploration expenditures using
internally generated cash flow and existing credit facilities. In
addition, joint ventures or future public and private offerings of
debt or equity securities may be utilized.
In 1994, the Company renegotiated its bank credit facility and
increased it to $500 million. The new facility is divided into a
$100 million short-term portion and a $400 million long-term portion
that expires on December 31, 1998. Management's policy is to renew
the facility annually. Credit availability is adjusted semiannually
to reflect changes in reserves and asset values. In 1994, the
elected borrowing base was increased to $200 million. The majority
of the borrowings currently bear interest at LIBOR plus .75% with the
remainder at prime. The Company also has the option to select CD
plus .75%. The margin on LIBOR or CD loans will increase to 1% if
the Company's consolidated senior debt becomes greater than 80% of
its tangible net worth. Financial covenants limit debt, require
maintenance of minimum working capital and restrict certain payments,
including stock repurchases, dividends and contributions or advances
to unrestricted subsidiaries. Based on such limitations, $100.0
million would have been available for the payment of dividends and
other restricted payments as of June 30, 1994.
15
In May 1994, the Company issued $86.3 million of 7% Convertible
Subordinated Notes due 2001 in an underwritten public offering for
net proceeds of $83.5 million. The net proceeds of the offering were
used to repay a portion of the borrowings under the bank credit
facility. The resulting borrowing capacity under the credit facility
will be used to fund development drilling, gas facility expansion and
acquisitions.
In 1992, an institutional investor agreed to contribute $7 million
to a partnership formed to monetize Section 29 tax credits to be
realized from the Company's properties, mainly in the DJ Basin. The
initial $3 million was contributed in 1992, an additional $3 million
contributed during 1993 and $1 million received in March 1994. In
June 1994, the arrangement was extended and an additional $1.5
million was received. This transaction will increase cash flow and
net income for the foreseeable future. A revenue increase of more
than $.40 per Mcf is realized on production generated from qualified
Section 29 properties in this partnership. The Company recognized
$2.0 million and $1.6 million, respectively, of this revenue during
the six months ended June 30, 1993 and 1994.
The Company maintains a program to divest marginal properties and
assets which do not fit its long range plans. During the six months
ended June 30, 1993 and 1994, the Company received $5.5 million and
$1.8 million, respectively, in proceeds from sales of properties.
The 1993 proceeds included $4.0 million of cash receipts previously
accrued for late 1992 sales. The Company intends to continue to
evaluate and dispose of nonstrategic assets.
In 1993, the Company received a $5.3 million settlement on a gas
contract dispute. Of the proceeds, $3.5 million was reflected as
other income in second quarter 1993, with the remaining $1.8 million
reflected as a reserve for possible contingencies. In second quarter
1994, the reserve was reduced by $610,000 based on further
developments in the settlement proceedings. In April 1993, the
Company was granted a $2.7 million judgment in litigation involving
the allocation of proceeds from a pipeline dispute. The judgment has
been appealed. The financial statements reflect these judgments only
upon receipt of cash, final judicial determination or execution of a
settlement agreement.
The Company believes that its capital resources are more than
adequate to meet the requirements of its business. However, future
cash flows are subject to a number of variables including the level
of production and oil and gas prices, and there can be no assurance
that operations and other capital resources will provide cash in
sufficient amounts to maintain planned levels of capital expenditures
or that increased capital expenditures will not be undertaken.
Inflation and Changes in Prices
While certain of its costs are affected by the general level of
inflation, factors unique to the petroleum industry result in
independent price fluctuations. Over the past five years,
significant fluctuations have occurred in oil and gas prices.
Although it is particularly difficult to estimate future prices of
oil and gas, price fluctuations have had, and will continue to have,
a material effect on the Company.
The following table indicates the average oil and gas prices
received over the last five years and highlights the price
fluctuations by quarter for 1993 and 1994. Average gas prices prior
to 1994 exclude the Thomasville gas production. During 1993, the
Company renegotiated its Thomasville gas contract and received a
substantial payment. After January 1994, the Company still receives
a higher than market price for its Thomasville gas sales, however the
price is significantly below the previously received average price of
over $12.00 per Mcf. Average price computations exclude contract
settlements and other nonrecurring items to provide comparability.
Average prices per equivalent barrel indicate the composite impact of
changes in oil and gas prices. Natural gas production is converted
to oil equivalents at the rate of 6 Mcf per barrel.
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Average Prices
------------------------------------------
Crude Oil Per
and Natural Equivalent
Liquids Gas Barrel
--------- --------- ---------
(Per Bbl) (Per Mcf)
Annual
------
1989 $ 18.30 $ 1.65 $ 12.84
1990 23.65 1.69 15.61
1991 20.62 1.68 14.36
1992 18.87 1.74 13.76
1993 15.41 1.94 13.41
Quarterly
---------
1993
------
First $ 16.62 $ 2.05 $ 14.25
Second 16.76 1.87 13.65
Third 14.78 1.85 12.73
Fourth 13.80 2.02 13.12
1994
------
First $ 12.02 $ 1.98 $ 11.93
Second 15.55 1.65 12.20
In June 1994, the Company received an average of $16.75 per
barrel and $1.56 per Mcf for its production.
17
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits -
10.11 Fifth Restated Credit Agreement dated as of June 30,
1994 among the Registrant and the banks party
thereto - incorporated by reference from Exhibit
4.1.8 to Registrant's Registration Statement on Form
S-3 (Registration No. 33-54809).
10.12 Computation of Ratio of Earnings to Fixed Charges and
Ratio of Earnings to Combined Fixed Charges and
Preferred Stock Dividends.
(b) Reports on Form 8-K -
No reports on Form 8-K were filed by Registrant during the
quarter ended June 30, 1994.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned thereunto duly authorized.
SNYDER OIL CORPORATION
By /s/ James H. Shonsey
----------------------
James H. Shonsey, Vice President
August 8, 1994
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