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 March 31, 1997
--------------------
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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Commission file number 1-10509
SNYDER OIL CORPORATION
Delaware 75-2306158
- ------------------------------- -----------------------
(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
-----------------
- --------------------------------------------------------------------------------
(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 .
30,563,725 Common Shares were outstanding as of May 6, 1997
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 results of
operations.
2
SNYDER OIL CORPORATION
CONSOLIDATED BALANCE SHEETS
(In thousands)
March 31, December 31,
1997 1996
----------- ------------
(Unaudited)
ASSETS
Current assets
Cash and equivalents $ 37,892 $ 27,922
Accounts receivable 44,085 58,944
Inventory and other 7,976 11,212
----------- -----------
89,953 98,078
----------- -----------
Investments 124,015 129,681
----------- -----------
Oil and gas properties, successful efforts method 910,182 887,721
Accumulated depletion, depreciation and amortization (274,549) (252,334)
----------- -----------
635,633 635,387
----------- -----------
Gas facilities and other 23,740 28,111
Accumulated depreciation and amortization (10,810) (11,798)
----------- -----------
12,930 16,313
----------- -----------
$ 862,531 $ 879,459
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable $ 51,163 $ 51,867
Accrued liabilities 38,702 37,043
----------- -----------
89,865 88,910
----------- -----------
Senior debt 140,751 188,231
Subordinated notes 99,913 103,094
Convertible subordinated notes 80,324 80,748
Deferred taxes payable 25,294 9,034
Other noncurrent liabilities 28,766 28,064
Minority interest 86,289 86,710
Commitments and contingencies
Stockholders' equity
Preferred stock, $.01 par, 10,000,000 shares authorized, 6% Convertible
preferred stock, 1,033,500 shares
issued and outstanding 10 10
Common stock, $.01 par, 75,000,000 shares authorized,
31,543,665 and 31,456,027 shares issued 315 315
Capital in excess of par value 260,411 260,221
Retained earnings 42,030 25,711
Common stock held in treasury, 989,800 and 250,000 shares at cost (15,712) (3,510)
Unrealized gain on investments 24,275 11,921
----------- -----------
311,329 294,668
----------- -----------
$ 862,531 $ 879,459
=========== ===========
The accompanying notes are an integral part of these statements.
3
SNYDER OIL CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands except per share data)
Three Months Ended March 31,
1997 1996
------------ ------------
(Unaudited)
Revenues
Oil and gas sales $ 67,848 $ 36,122
Gas transportation, processing and marketing 4,209 4,451
Gains on sales of equity interests in investees 13,000 407
Gains (losses) on sales of properties 2,607 (20)
Other 1,091 759
---------- ----------
88,755 41,719
---------- ----------
Direct operating 14,021 10,759
Cost of gas and transportation 4,191 3,696
Exploration 1,700 514
General and administrative 5,492 3,868
Interest 6,787 3,614
Other 1,756 679
Depletion, depreciation and amortization 23,208 16,771
---------- ----------
Income before taxes and minority interest 31,600 1,818
---------- ----------
Provision (benefit) for income taxes
Current - 25
Deferred 8,871 (335)
---------- ----------
8,871 (310)
---------- ----------
Minority interest in subsidiaries 2,803 351
---------- ----------
Net income 19,926 1,777
Preferred stock dividends 1,550 1,553
---------- ----------
Net income available to common $ 18,376 $ 224
========== ==========
Net income per common share $ .59 $ .01
========== ==========
Weighted average shares outstanding 31,030 31,302
========== ==========
The accompanying notes are an integral part of these statements.
4
SNYDER OIL CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN
STOCKHOLDERS' EQUITY
(In thousands)
Preferred Stock Common Stock Capital in Retained
------------------ ------------------ Excess of Earnings Treasury
Shares Amount Shares Amount Par Value (Deficit) Stock
------ ------ ------ ------ --------- ---------- ----------
Balance, December 31, 1995 1,035 $ 10 31,430 $ 314 $ 265,911 $ (29,001) $ (2,457)
Common stock grants and
exercise of options - - 267 3 3,179 - (258)
Issuance of common - - 399 4 3,689 - -
Repurchase of common - - (640) (6) (6,243) - (795)
Repurchase of preferred (1) - - - (142) - -
Dividends - - - - (6,173) (8,238) -
Net income - - - - - 62,950 -
------- ------ -------- ------- --------- -------- --------
Balance, December 31, 1996 1,034 10 31,456 315 260,221 25,711 (3,510)
Common stock grants and
exercise of options - - 88 - 190 - -
Repurchase of common - - - - - - (12,202)
Dividends - - - - - (3,607) -
Net income - - - - - 19,926 -
------- ------ -------- ------- --------- -------- --------
Balance, March 31, 1997
(Unaudited) 1,034 $ 10 31,544 $ 315 $ 260,411 $ 42,030 $(15,712)
======= ====== ======== ======= ========= ======== ========
The accompanying notes are an integral part of these statements.
5
SNYDER OIL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Three Months Ended March 31,
1997 1996
------------ ------------
(Unaudited)
Operating activities
Net income $ 19,926 $ 1,777
Adjustments to reconcile net income to net
cash provided by operations
Amortization of deferred credits - (534)
Gains on sales of equity interests in investees (13,000) (407)
(Gains) losses on sales of properties (2,607) 20
Equity in (earnings) losses of investees (222) 88
Exploration expense 1,700 514
Depletion, depreciation and amortization 23,208 16,771
Deferred taxes 8,871 (335)
Minority interest in subsidiaries 2,803 351
Changes in operating assets and liabilities
Decrease (increase) in
Accounts receivable 14,859 (3,611)
Inventory and other (74) 50
Increase (decrease) in
Accounts payable (704) 16,390
Accrued liabilities (3,109) 1,050
Other liabilities 124 (5,415)
----------- -----------
Net cash provided by operations 51,775 26,709
----------- -----------
Investing activities
Acquisition, exploration and development (55,913) (14,088)
Proceeds from investments 40,153 774
Outlays for investments - (165)
Proceeds from sales of properties 8,380 (63)
----------- -----------
Net cash used by investing (7,380) (13,542)
----------- -----------
Financing activities
Issuance of common 739 512
Increase (decrease) in indebtedness (15,639) 6,102
Dividends (3,607) (3,589)
Deferred credits - (120)
Repurchase of stock (12,202) -
Repurchase of subordinated notes (3,716) -
----------- -----------
Net cash (used) realized by financing (34,425) 2,905
----------- -----------
Increase in cash 9,970 16,072
Cash and equivalents, beginning of period 27,922 27,263
----------- -----------
Cash and equivalents, end of period $ 37,892 $ 43,335
=========== ===========
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, exploration and development of oil and gas properties principally
in the Rocky Mountain and Gulf Coast regions of the United States. The Company
also gathers, transports and markets natural gas. The Company is also engaged in
international acquisition, exploration and development, primarily through
affiliates. The Company, a Delaware corporation, is the successor to a company
formed in 1978.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The consolidated financial statements include the accounts of Snyder
Oil Corporation ("SOCO") and its subsidiaries (collectively, the "Company").
Affiliates in which the Company owns more than 50% but less than 100% are fully
consolidated, with the related minority interest being deducted from subsidiary
earnings and stockholders' equity. Affiliates being accounted for in this manner
include Patina Oil & Gas Corporation ("Patina"), SOCO International Holdings,
Inc. ("Holdings") and SOCO International Operations, Inc. ("Operations"). SOCO
Offshore, Inc. ("SOCO Offshore") was accounted for in this manner until all
remaining minority interests were acquired in June 1996. Affiliates in which the
Company owns between 20% and 50% are accounted for under the equity method.
Affiliates being accounted for in this manner include SOCO Perm Russia, Inc.
("SOCO Perm"), a Russian affiliate, and SOCO Tamtsag Mongolia, Inc. ("SOCO
Tamtsag"), a Mongolian affiliate. Command Petroleum Limited ("Command"), an
Australian affiliate, was accounted for in this manner until the Company
disposed of this investment in November 1996. Affiliates in which the Company
owns less than 20% are accounted for under the cost method. Affiliates being
accounted for in this manner include Cairn Energy plc ("Cairn"). 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.
Producing Activities
The Company utilizes the successful efforts method of accounting for
its oil and gas properties. Consequently, leasehold costs are capitalized when
incurred. Unproved properties are assessed periodically within specific
geographic areas and impairments in value are charged to expense. During the
three months ended March 31, 1997, the Company provided unproved property
impairments of $296,000. Exploratory expenses, including geological and
geophysical expenses and delay rentals, are charged to expense as incurred.
Exploratory drilling costs are initially capitalized, but charged to expense if
and when the well is determined to be unsuccessful. Costs of productive wells,
unsuccessful developmental wells and productive leases are capitalized and
amortized on a unit-of-production basis over the life of the remaining proved or
proved developed reserves, as applicable. Gas is converted to equivalent barrels
at the rate of 6 Mcf to 1 barrel. Amortization of capitalized costs is generally
provided on a property-by-property basis. Estimated future abandonment costs
(net of salvage values) are accrued at unit-of-production rates and taken into
account in determining depletion, depreciation and amortization.
The Company follows Statement of Financial Accounting Standards No.
121 ("SFAS 121"), "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed Of". SFAS 121 requires the Company to assess
the need for an impairment of capitalized costs of oil and gas properties on a
property-by-property basis. If an impairment is indicated based on undiscounted
expected future cash flows, then it is recognized to the extent that net
capitalized costs exceed discounted expected future cash flows. During the three
months ended March 31, 1997 and 1996, the Company did not provide for any such
impairments.
7
Section 29 Tax Credits
The Company from time to time enters into arrangements to monetize its
Section 29 tax credits. These arrangements result in revenue increases of
approximately $.40 per Mcf on production volumes from qualified Section 29
properties. As a result of such arrangements, the Company recognized additional
gas revenues of $801,000 and $534,000 during the three months ended March 31,
1997 and 1996, respectively. These arrangements are expected to continue through
2002.
Gas Imbalances
The Company uses the sales method to account for gas imbalances. Under
this method, revenue is recognized based on the cash received rather than the
proportionate share of gas produced. Gas imbalances at year end 1996 and March
31, 1997 were insignificant.
Financial Instruments
The following table sets forth the book value and estimated fair
values of financial instruments (in thousands):
March 31, December 31,
1997 1996
------------------------ -----------------------
Book Fair Book Fair
Value Value Value Value
----------- ----------- ---------- ----------
Cash and equivalents $ 37,892 $ 37,892 $ 27,922 $ 27,922
Investments 124,015 145,366 129,681 163,477
Senior debt (140,751) (140,751) (188,231) (188,231)
Subordinated notes (99,913) (102,948) (103,094) (105,650)
Convertible subordinated notes (80,324) (82,739) (80,748) (82,866)
Long-term commodity contracts - 4,936 - 5,040
Interest rate swap - 40 - (19)
The book value of cash and equivalents approximates fair value because
of the short maturity of those instruments. See Note (3) for a discussion of the
Company's investments. The fair value of senior debt is presented at face value
given its floating rate structure. The fair value of the subordinated notes and
convertible subordinated notes are estimated based on their March 31, 1997 and
December 31, 1996 closing prices on the New York Stock Exchange.
From time to time, the Company enters into commodity contracts to
hedge the price risk of a portion of its production. Gains and losses on such
contracts are deferred and recognized in income as an adjustment to oil and gas
sales revenue in the period to which the contracts relate. In 1994, the Company
entered into a long-term gas swap arrangement in order to lock in the price
differential between the Rocky Mountain and Henry Hub prices on a portion of its
Rocky Mountain gas production. The contract covers 20,000 MMBtu per day through
2004. At March 31, 1997, that volume represented approximately 15% of the
Company's consolidated Rocky Mountain gas production. The fair value of the
contract was based on the market price quoted for a similar instrument.
In September 1995, the Company entered into an interest rate swap
covering $50 million of its bank debt. The agreement requires payment to a
counterparty based on a fixed rate of 5.585% and requires the counterparty to
pay the Company interest at the then current 30 day LIBOR rate. Accounts
receivable or payable under this agreement are recorded as adjustments to
interest expense and are settled on a monthly basis. The agreement matures in
September 1997, with the counterparty having the option to extend it for two
years. At March 31, 1997 and December 31, 1996, the fair value of the agreement
was estimated at the net present value discounted at 10%.
8
Risks and Uncertainties
Historically, the market for oil and gas has experienced significant
price fluctuations. Prices for gas in the Rocky Mountain region, where the
Company currently produces over 70% of its natural gas, have traditionally been
particularly volatile. Prices are significantly impacted by the local weather,
supply in the area, seasonal variations in local demand and limited
transportation capacity to other regions of the country. Increases or decreases
in prices received, particularly in the Rocky Mountains, could have a
significant impact on the Company's future results of operations.
The Company's strategy internationally is to develop a portfolio of
projects that have the potential to make a major contribution to its production
and reserves while limiting its financial exposure and mitigating political risk
by seeking industry partners and investors to fund the majority of the required
capital. Such projects are subject to a number of political and economic
uncertainties, in addition to the typical risks and volatility associated with
the oil and gas industry. There is no assurance that the Company's international
operations will reach a level reasonably required to fully exploit the projects,
nor is there any assurance of economic success should such a level be reached.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Other
All liquid investments with an original maturity of three months or
less are considered to be cash equivalents. Certain amounts in prior years
consolidated financial statements have been reclassified to conform with current
classification. 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 1996
annual report on Form 10-K.
(3) INVESTMENTS
The Company has investments in foreign and domestic energy companies
and long-term notes receivable. The following table sets forth the book values
and estimated fair values of these investments:
March 31, 1997 December 31, 1996
------------------------ ------------------------
(In thousands)
Book Fair Book Fair
Value Value Value Value
--------- --------- --------- ---------
Equity method investments $ 8,649 $ 30,000 $ 8,789 $ 42,585
Marketable securities 110,503 110,503 115,558 115,558
Long-term notes receivable 4,863 4,863 5,334 5,334
--------- --------- --------- ---------
$ 124,015 $ 145,366 $ 129,681 $ 163,477
========= ========= ========= =========
The Company follows SFAS 115, "Accounting for Certain Investments in
Debt and Equity Securities", which requires that investments in marketable
securities accounted for on the cost method and long-term notes receivable must
be adjusted to their market value with a corresponding increase or decrease to
stockholders' equity. The pronouncement does not apply to investments accounted
for by the equity method.
9
Command Petroleum Limited
From May 1993 to November 1996, the Company had an investment in
Command, an Australian oil company, which was accounted for by the equity
method. In November 1996, the Company accepted an offer for its interest in
Command. The Company received 16.2 million shares of freely marketable common
stock of Cairn, an international independent oil company based in Edinburgh,
Scotland whose shares are listed on the London Stock Exchange. The Company
recognized a gain of $65.5 million as a result of this exchange. The Company's
investment in Cairn is accounted for under the cost method and is reflected as
marketable securities in the table above. Immediately prior to the acceptance of
Cairn's offer, the Company accrued for a transaction in which a director of the
Company exchanged his option to purchase 10% of the outstanding common stock of
SOCO International, Inc. (through which the investment in Command was held) and
issued promissory notes to the Company totaling $591,000 for 10% of the
outstanding common stock of two SOCO International, Inc. subsidiaries, Holdings
and Operations. As a result of this transaction, the Company recorded a $260,000
loss. Additionally, minority interest expense of $4.3 million was recorded
related to the director's 10% ownership as a result of the Command gain. The
actual exchange occurred in December 1996 and the promissory notes remained
outstanding at March 31, 1997.
SOCO International Operations, Inc.
In 1993, SOCO Perm, an affiliate of Operations, was organized by the
Company and a U.S. industry participant. SOCO Perm and a Russian partner formed
the Permtex joint venture to develop proven oil fields in the Volga-Urals Basin
of Russia. To finance a portion of its planned development expenditures, SOCO
Perm closed a private placement of its equity securities with three industry
participants in 1994. As a result, the Company's investment was reduced from 75%
to 41.25% and a $3.5 million gain was recorded. In 1995, the three industry
participants paid the final installments of their contributions to SOCO Perm and
as a result, the Company recognized an additional gain of $1.1 million. In April
1996, SOCO Perm closed a private placement which reduced the Company's interest
to 34.91%. The Company recognized a gain of $2.6 million as a result of this
transaction. The private placement agreement requires SOCO Perm to list its
common shares on a securities exchange no later than 1998. If such listing does
not occur, the new shareholders have the right to require the Company to
purchase their share at a formula price. The Company's investment in SOCO Perm
had a carrying cost at March 31, 1997 of $7.0 million.
In 1994, the Company formed a consortium to explore the Tamtsag Basin
of eastern Mongolia, then sold a portion of its interest to three industry
participants. One participant committed to fund the drilling of two wells, the
second purchased its interest for cash and a third participant assigned its
exploration rights in the basin to the consortium. Accordingly, the Company's
investment in SOCO Tamtsag, an affiliate of Operations, was reduced from 100% to
49% and a $1.5 million gain was recognized. In 1996, the Company completed the
exchange of a portion of its interest to an industry participant for consulting
services valued at $1.5 million. As a result of this transaction, the Company's
ownership was reduced to 42% and an $832,000 gain was recognized. In August
1996, the Mongolian Parliament ratified the grant of two additional concessions
in the area to SOCO Tamtsag, bringing the total acreage position to
approximately 10 million acres. In January 1997, SOCO Tamtsag completed an
equity sale which reduced the Company's investment to 40.3%. The Company's
investment in SOCO Tamtsag had a carrying cost of $1.6 million at March 31, 1997
in addition to $4.3 million in stockholder loans, which are required on a pro
rata basis by all stockholders, to SOCO Tamtsag which are included in notes
receivable in the table above.
The Company is currently seeking a listing of a newly formed entity,
SOCO International plc ("SOCO plc"), on the London Stock Exchange and intends to
conduct an offering of its shares. The Company will contribute to SOCO plc all
the assets of Operations, which includes the Company's interests in Russia,
Mongolia and Thailand. Certain minority interest owners in these ventures are
also expected to contribute their interests. If such listing occurs, it is
expected to meet the requirement to list SOCO Perm. As part of the listing, SOCO
plc will also acquire Cairn's UK onshore company as well as certain assets in
Yemen and Tunisia that were formerly owned by Command. The offering is expected
to raise approximately $75 million of new equity capital for SOCO plc. Following
the offering, the Company, which will retain all its shares, expects to have an
approximate 15% to 17% interest in SOCO plc. The Company estimates the fair
value of its investment in Operations at March 31, 1997 to be between $30
10
million and $37 million based on preliminary indications related to the listing.
The listing and offering are subject to certain conditions and there can be no
assurance that the offering will be consummated.
Marketable Securities
The Company had an investment in equity securities of one publicly
traded foreign energy company, Cairn, accounted for on the cost method at March
31, 1997 and December 31, 1996. In the first quarter of 1997, the Company sold
4.5 million Cairn shares at an average of $8.81 per share realizing $39.2
million in proceeds. These transactions resulted in a gain of $13.0 million. The
Company's total cost basis in the Cairn shares was $69.0 million at March 31,
1997. The market value of the Cairn shares approximated $110.5 million at March
31, 1997. In accordance with SFAS 115, at March 31, 1997 and December 31, 1996,
respectively, investments were increased by $41.5 million and $20.4 million in
gross unrealized holding gains, stockholders' equity was increased by $24.3
million and $11.9 million, minority interest liability was increased by $2.7
million and $1.3 million and deferred taxes payable were increased by $14.5
million and $7.2 million.
Notes Receivable
The Company holds long-term notes receivable due from SOCO Tamtsag,
other privately held corporations and a director, with a book value of $4.9
million and $5.3 million at March 31, 1997 and December 31, 1996. SOCO Tamtsag
shareholder loans, which bear interest at the three month LIBOR rate plus two
percent, are to be repaid from the gross receipts of SOCO Tamtsag under certain
circumstances (i.e., excess cash reserves). Any remaining balances mature
December 31, 2009. If the listing of SOCO plc on the London Stock Exchange is
consummated, these notes are expected to be contributed to the new public
company. The notes from other privately held corporations are secured by certain
assets, including stock and oil and gas properties. The notes from a director,
which originated in connection with an option to purchase 10% of the Company's
international affiliates, are unsecured and are due April 10, 1998. The Company
believes that, based on existing market conditions, the March 31, 1997 balances
will be recovered in the long term. At March 31, 1997 and December 31, 1996, 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
carrying cost.
(4) OIL AND GAS PROPERTIES AND GAS FACILITIES
The cost of oil and gas properties at March 31, 1997 and December 31,
1996 both include $32.7 million of unevaluated leasehold. Such properties are
held for exploration, development or resale. The following table sets forth
costs incurred related to oil and gas properties and gas processing and
transportation facilities:
Three
Months Ended Year Ended
March 31, December 31,
1997 1996
-------------- --------------
(In thousands)
Proved acquisitions $ 595 $ 273,088
Acreage acquisitions 431 24,589
Development 20,259 43,075
Gas processing, transportation and other 753 3,612
Exploration 1,768 4,588
--------- ----------
$ 23,806 $ 348,952
========= ==========
Of the $20.3 million development expenditures, the majority was
concentrated in the Gulf of Mexico, the DJ Basin of Colorado, the Washakie Basin
of southern Wyoming, the Green River Basin of southern Wyoming and the Piceance
Basin of western Colorado. During the three months ended March 31, 1997, the
Company placed 30 wells on sales, drilled one developmental dry hole and had 22
wells in progress at quarter end.
11
The exploration costs incurred in the first quarter of 1997 were
primarily the result of seismic programs in the Gulf of Mexico and north
Louisiana.
(5) INDEBTEDNESS
The following indebtedness was outstanding on the respective dates:
March 31, December 31,
1997 1996
-------------- -------------
(In thousands)
SOCO bank facility $ 53,301 $ 93,731
Patina bank facility 87,450 94,500
Less current portion - -
----------- -----------
Senior debt $ 140,751 $ 188,231
=========== ===========
Patina subordinated notes $ 99,913 $ 103,094
=========== ===========
SOCO convertible subordinated notes $ 80,324 $ 80,748
=========== ===========
SOCO maintains a $500 million revolving credit facility ("SOCO
Facility"). The facility is divided into a $400 million long-term portion and a
$100 million short-term portion. The borrowing base available under the facility
was $140 million at March 31, 1997. 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 increases to 1%
when the Company's consolidated senior debt becomes greater than 80% of its
consolidated tangible net worth as defined. During the first quarter of 1997,
the average interest rate under the revolver was 6.3%. The Company pays certain
fees based on the unused portion of the borrowing base. Among other
requirements, covenants require maintenance of a current working capital ratio
of 1 to 1 as defined, limit the incurrence of debt and restrict dividends, stock
repurchases, certain investments, other indebtedness and unrelated business
activities. Such restricted payments are limited by a formula that includes
proceeds from certain securities, cash flow and other items. Based on such
limitations, more than $70 million was available for the payment of dividends
and other restricted payments at March 31, 1997.
Patina maintains a $140 million revolving credit facility ("Patina
Facility"). The borrowing base available under the facility was $120 million at
March 31, 1997. Effective May 1, 1997, the borrowing base was reduced to $110
million. Patina may elect that all or a portion of the facility bear interest at
a rate per annum equal to: (i) the higher of (a) prime rate plus a margin equal
to .25% (the "Applicable Margin") and (b) the Federal Funds Effective Rate plus
.5% plus the Applicable Margin, or (ii) the rate at which Eurodollar deposits
for one, two, three or six months (as selected by Patina) are offered in the
interbank Eurodollar market plus a margin which fluctuates from .625% to 1.125%
determined by a debt to EBITDA ratio. During the first quarter of 1997, the
average interest rate under the facility was 6.9%.
The Patina Facility agreement contains certain financial covenants,
including but not limited to a maximum total debt to capitalization ratio, a
maximum total debt to EBITDA ratio and a minimum current ratio. The bank credit
agreement also contains certain negative covenants, including but not limited to
restrictions on indebtedness; certain liens; guaranties, speculative derivatives
and other similar obligations; asset dispositions; dividends, loans and
advances; creation of subsidiaries; investments; leases; acquisitions; mergers;
changes in fiscal year; transactions with affiliates; changes in business
conducted; sale and leaseback and operating lease transactions; sale of
receivables; prepayment of other indebtedness; amendments to principal
documents; pledges of assets; issuance of securities; and non speculative
commodity hedging.
12
In 1996, as part of an acquisition, Patina recorded $98.8 million of
11.75% Subordinated Notes ("Notes") due July 15, 2004 issued on July 1, 1994.
The Notes were recorded at a market value of $104.6 million or 105.875% of their
principal amount. Patina assumed the Notes in March 1997 when a wholly owned
subsidiary was merged into Patina. During 1996, $1.5 million of the Notes were
repurchased by the Company and retired. During the first quarter of 1997, $3.2
million of the Notes were repurchased by the Company and retired. Interest is
payable each January 15 and July 15. The Notes are redeemable at the option of
Patina, in whole or in part, at any time on or after July 15, 1999, initially at
105.875% of their principal amount, declining to 100% on or after July 15, 2001.
Upon the occurrence of a change of control, as defined in the Notes, Patina
would be obligated to make an offer to purchase all outstanding Notes at a price
of 101% of the principal amount thereof. In addition, Patina would be obligated,
subject to certain conditions, to make offers to purchase the Notes with the net
cash proceeds of certain asset sales or other dispositions of assets at a price
of 101% of the principal amount thereof. The Notes are unsecured general
obligations of Patina and are subordinated to all senior indebtedness of Patina
and to any existing and future indebtedness of Patina's subsidiaries. The Notes
contain covenants that, among other things, limit the ability of Patina to incur
additional indebtedness, pay dividends, engage in transactions with shareholders
and affiliates, create liens, sell assets, engage in mergers and consolidations
and make investments in unrestricted subsidiaries.
In 1994, SOCO issued $86.3 million of 7% convertible subordinated
notes due May 15, 2001. The net proceeds were $83.4 million. The notes are
convertible into common stock at $22.57 per share. Under the terms of the notes,
common stock dividends not paid out of retained earnings reduce the conversion
price when paid. The notes 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. During 1996 and the first quarter of 1997, the Company
repurchased $3.8 million and $534,000, respectively, of these notes in
accordance with a repurchase program.
Scheduled maturities of indebtedness for the next five years are zero
in 1997 and 1998, $87.5 million in 1999, $53.3 million in 2000 and $81.9 million
in 2001. The long-term portions of the Patina Facility and SOCO Facility are
scheduled to expire in 1999 and 2000. However, it is management's policy to
renew both the short-term and long-term facilities and extend their maturities
on a regular basis.
Consolidated cash payments for interest were $7.8 million and $2.2
million, respectively, for the quarters ended March 31, 1997 and 1996.
(6) FEDERAL INCOME TAXES
At March 31, 1997, 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 as they apply to the benefit for the three months
ended March 31, 1997 and 1996 follows:
Three Months Ended March 31,
1997 1996
------------ ------------
Federal statutory rate 35% 35%
Net change in valuation allowance (4%) (56%)
----------- ----------
Effective income tax rate 31% (21%)
=========== ==========
For tax purposes, Patina is not included in the Company's consolidated
United States federal income tax return. The Company, excluding Patina, had
regular net operating loss carryforwards of $112 million and alternative minimum
tax loss carryforwards of $28.9 million at December 31, 1996. These
carryforwards expire between 1997 and 2010. At December 31, 1996, the Company,
excluding Patina, had long-term capital loss carryforwards of $3.9 million which
will expire in 2000. At December 31, 1996, the Company, excluding Patina, also
had alternative minimum tax credit carryforwards of $644,000 which are available
indefinitely. Patina had regular net operating loss carryforwards of $70.2
million and alternative minimum tax loss carryforwards of $35.1 million at
December 31, 1996. Utilization of $31.9 million regular net operating loss
carryforwards and $31.6 million alternative minimum tax loss carryforwards
13
will be limited to $5.2 million per year. These carryforwards expire from 2006
through 2011. At December 31, 1996, Patina had alternative minimum tax credit
carryforwards of $478,000 which are available indefinitely. Current income taxes
shown in the financial statements reflect estimates of alternative minimum
taxes.
(7) STOCKHOLDERS' EQUITY
A total of 75 million common shares, $.01 par value, are authorized of
which 31.5 million were issued at March 31, 1997. The Company also has 2.1
million warrants outstanding. The warrants are exercisable at a price of $21.04
per share. Under the terms of the warrants, common stock dividends not paid out
of retained earnings reduce the exercise price when paid and increase the number
of warrants outstanding. Half of the warrants expire in each of February 1998
and February 1999. In 1996, the Company issued 666,000 shares of common stock,
with 399,000 shares issued in exchange for the remaining outstanding stock of
SOCO Offshore and 267,000 shares issued primarily for the exercise of stock
options. In 1996, the Company repurchased 725,000 shares of common stock for
$7.0 million. During the three months ended March 31, 1997, the Company issued
88,000 shares of common stock primarily for the exercise of stock options.
During the first quarter of 1997, the Company repurchased 740,000 shares of
common stock for $12.2 million. Quarterly dividends of $.065 per share were paid
in 1996 and the first quarter of 1997. For book purposes, for the period between
June 1995 and September 1996, the common stock dividends were in excess of
retained earnings and as such were treated as distributions of capital.
A total of 10 million preferred shares, $.01 par value, are authorized.
In 1993, 4.1 million depositary shares (each representing a quarter interest in
a share of $100 liquidation value stock) of 6% preferred stock were sold through
an underwriting. The net proceeds were $99.3 million. The stock is convertible
into common stock at $20.46 per share. Under the terms of the stock, common
stock dividends not paid out of retained earnings reduce the conversion price
when paid. The stock is exchangeable at the option of the Company for 6%
convertible subordinated debentures on any dividend payment date. The 6%
convertible preferred stock is currently redeemable at the option of the
Company. The liquidation preference is $25.00 per depositary share, plus accrued
and unpaid dividends. At March 31, 1997, the redemption price was $25.90 per
depositary share. The redemption price declines $.15 per year to $25.00 per
depositary share in 2003. During 1996, the Company repurchased 6,000 depositary
shares for $142,000. The Company paid $1.6 million ($1.50 per 6% convertible
depositary share per annum) in preferred dividends during the three months ended
March 31, 1997 and 1996.
Earnings per share are computed by dividing net income, less dividends
on preferred stock, by weighted average shares outstanding. Differences between
primary and fully diluted earnings per share were insignificant for all periods
presented.
The Company maintains a stock option plan for certain employees
providing for the issuance of options at prices not less than fair market value.
Options to acquire up to three million shares of common stock may be outstanding
at any given time. The specific terms of grant and exercise are determined by a
committee of independent members of the Board. A stock grant and option plan is
also maintained by the Company whereby each nonemployee Director receives 500
common shares quarterly in payment of their annual retainer. It also provides
for 2,500 options to be granted annually to each nonemployee Director. The
majority of currently outstanding options vest over a three year period (30%,
60%, 100%) and expire five years from the date of grant.
(8) COMMITMENTS AND CONTINGENCIES
The Company rents offices at various locations under noncancelable
operating leases. Minimum future payments under such leases approximate $1.9
million for the remainder of 1997, $2.4 million for 1998, $2.6 million for 1999,
$2.6 million for 2000 and $1.6 million for 2001.
In August 1995, the Company was sued in the United States District
Court of Colorado by seven plaintiffs purporting to represent all persons who,
at any time since January 1, 1960, have had agreements providing for royalties
from gas production in Colorado to be paid by the Company under a number of
14
various lease provisions. In January 1997, the judge ordered that the class not
be certified. All remaining liability under this suit was assumed by Patina upon
its formation. In January 1996, a subsidiary of Patina was also sued in a
similar but separate class action filed in stated court. In both suits, the
plaintiffs allege that unspecified "post-production" costs incurred prior to
calculating royalty payments were deducted in breach of the relevant lease
provisions and that this fact was fraudulently concealed. The plaintiffs seek
unspecified compensatory and punitive damages and a declaratory judgment
prohibiting deduction of post-production costs prior to calculating royalties
paid to the class. Patina has informed the Company that Patina believes the
calculations are and have been proper under the relevant lease provisions, and
that Patina intends to defend these and any similar suits vigorously.
In September 1996, the Company and other interest owners in a lease in
southern Texas were sued by the royalty owners in Texas state court in Brooks
County, Texas. The Company's working interest in the lease is approximately 20%.
The complaint alleges, among other things, that the defendants have failed to
pay proper royalties under the lease and have breached their duties to
reasonably develop the lease. The plaintiffs also claim damages for fraud and
trespass, and demand actual and punitive damages. Although the complaint does
not specify the amount of damages claimed, an earlier letter from plaintiffs
claimed damages in excess of $50 million. The Company and the other interest
owners have filed an answer denying the claims and intend to contest the suit
vigorously.
At this time, the Company is unable to estimate the range of potential
loss, if any, from the foregoing uncertainties. However, the Company believes
their resolution should not have a material adverse effect upon the Company's
financial position, although an unfavorable outcome in any reporting period
could have a material impact on the Company's results of operations for that
period.
The Company's operations are affected by political developments and
federal and state laws and regulations. Oil and gas industry legislation and
administrative regulations are periodically changed for a variety of political,
economic and other reasons. Numerous departments and agencies, federal, state,
local and Indian, issue rules and regulations binding on the oil and gas
industry, some of which carry substantial penalties for failure to comply. The
regulatory burden on the oil and gas industry increases the Company's cost of
doing business, decreases flexibility in the timing of operations and may
adversely affect the economics of capital projects.
The financial statements reflect favorable legal proceedings only upon
receipt of cash, final judicial determination or execution of a settlement
agreement. 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.
15
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Overview
The Company is an independent energy company primarily engaged in the
acquisition, exploration and development of oil and gas properties principally
in the Rocky Mountain and Gulf Coast regions of the United States. The Company
also gathers, transports and markets natural gas. The Company is also engaged in
international acquisition, exploration and development, primarily through
affiliates.
In May 1996, the Company consolidated its properties in the Wattenberg
Field of Colorado with those of Gerrity Oil and Gas Corporation ("GOG") to
create Patina Oil and Gas Corporation ("Patina"), thereby converting its working
interest in the field into a 74% interest in the field's largest producer.
Patina is reflected in the Company's financial statements as a consolidated
subsidiary, with the related minority interest being deducted from subsidiary
earnings and stockholder's equity. Unless indicated otherwise, amounts in this
discussion reflect the consolidated results of the Company, including Patina.
References to the Company "excluding Patina" refer to the Company on a
consolidated basis but after excluding amounts attributable to Patina.
Results of Operations
Total revenues for the three month period ended March 31, 1997 were
$88.8 million, a $47.0 million increase from the same period in 1996. The
increase was primarily due to a $31.7 million increase in oil and gas sales and
a $12.6 million increase in gains on sales of equity interests in investees. The
increase in oil and gas sales is a combination of a 41% rise in the price
received per equivalent barrel ("BOE") and a 33% increase in BOE production.
Natural gas prices rebounded toward the end of 1996 resulting in an average
price for the first quarter of 1997 of $2.83 per Mcf compared to $1.78 per Mcf
during the same period in 1996. Oil prices improved 18% to average $21.18 per
barrel during the first quarter of 1997. The increase in gains on sales of
equity interests in investees was due to sales of Cairn Energy plc ("Cairn")
stock. Excluding Patina, total revenues were $59.3 million for the period ended
March 31, 1997.
Net income for the three month period ended March 31, 1997 was $19.9
million, an increase from the $1.8 million experienced in the same period in
1996. Patina contributed $4.1 million to the 1997 amount. Net income was
positively impacted as the aforementioned price increases resulted in
approximately an additional $10 million in net income. The quarter also
benefitted from the Cairn sales which contributed approximately $8 million to
net income. Production increases also helped but to a lesser extent as the
increases were offset somewhat by higher operating and depletion, depreciation
and amortization expenses.
Production margin (oil and gas sales less direct operating expenses)
for the quarter ended March 31, 1997 was $53.8 million, an increase of 112% from
the same period in 1996. Average daily production during the first quarter of
1997 was 41,641 BOE, an increase of 34% over the same period in 1996 (an 8%
increase over fourth quarter 1996 production). In addition, the average product
price received increased by 41% to $18.10 per BOE. The increase in oil and gas
production can be attributed primarily to the acquisition of GOG by Patina.
Excluding Patina, production margin was $29.4 million and average daily
production was 23,963 BOE. The increased production resulting from three
acquisitions in the Gulf of Mexico during 1996 was offset by decreased
production due to the sale of nonstrategic properties throughout 1996. The
Company focused the last two years on divesting of noncore assets and acquiring
strategic assets that allow for future growth of the Company. The Company
expects to increase development during 1997 which, along with two acquisitions
in the Gulf of Mexico in the fourth quarter of 1996, should result in an
increase in production through 1997. Total operating expenses for the first
quarter of 1997 increased by $3.3 million ($3.0 million excluding Patina) from
the same period in 1996 which is in line with the increased production.
Operating costs per BOE were $3.74 compared to $3.81 in the same period in 1996.
16
Gains on sales of equity interests in investees were $13.0 million
during the three month period ended March 31, 1997. The 1997 gains resulted from
sales of Cairn stock totaling 4.5 million shares at an average of $8.81 per
share realizing $39.2 million in proceeds.
Gains on sales of properties were $2.6 million during the three months
ended March 31, 1997, compared to losses on sales of properties of $20,000
during the same period in 1996. The most significant gain during the first
quarter of 1997 was a $2.1 million gain on the sale of an offshore block in the
Gulf of Mexico which was not included in the Company's strategic plans.
General and administrative expenses, net of reimbursements, for the
three month period ended March 31, 1997 increased $1.6 million from the same
period in 1996 but decreased $342,000 from the fourth quarter of 1996. The
increase is primarily due to essentially doubling the number of properties in
the DJ Basin of Colorado related to the acquisition of GOG. Excluding Patina,
these expenses totaled $4.2 million during the period ended March 31, 1997.
Interest expense was $6.8 million during the first quarter of 1997,
$4.4 million of which was incurred by Patina, compared to $3.6 million during
the same period in 1996. The majority of the increase is the result of a higher
average interest rate primarily due to Patina's subordinated notes which have an
effective interest rate of 11.1%.
Depletion, depreciation and amortization expense during the first
quarter of 1997 increased to $23.2 million from $16.8 million in the same period
in 1996. The increase can be primarily attributed to the 33% increase in
production volumes and, to a lesser extent, a higher total depletion,
depreciation and amortization rate per BOE of $6.19 compared to $5.94 during the
same period in 1996. The increase in rates is primarily due to the amortization
of a noncompete agreement by Patina. Excluding Patina, total depletion,
depreciation and amortization expense was $10.8 million reflecting an overall
rate of $5.00 per BOE.
Acquisition, Exploration and Development
During the three months ended March 31, 1997, the Company incurred
$23.8 million in capital expenditures, including $20.3 million for development,
$1.8 million for exploration, $1.0 million for property acquisitions and
$753,000 for fixed assets.
Of the $20.3 million of development expenditures, $8.7 million was
concentrated in the Gulf of Mexico, $2.1 million in the Washakie Basin of
southern Wyoming, $1.7 million in the Green River Basin of southern Wyoming and
$1.1 million in the Piceance Basin of western Colorado. In addition, Patina
incurred $5.6 million of the total expenditures of the Company. During the three
months ended March 31, 1997, the Company placed 30 wells on sales, drilled one
developmental dry hole and had 22 wells in progress at quarter end.
Exploration costs in the first quarter of 1997 were $1.8 million
primarily for seismic work performed in and around the Company's major drilling
projects. Patina incurred $58,000 of exploration costs in the first quarter of
1997.
In Russia, drilling activity has been slower than anticipated due to
difficulties in securing drilling contracts on commercially reasonable terms.
During 1997, SOCO Perm Russia, Inc. expects to drill 11 wells. In Mongolia, the
Mongolian Parliament ratified the grant of two additional concessions in the
area to SOCO Tamtsag Mongolia, Inc. bringing the total acreage position to
approximately 10 million acres. SOCO Tamtsag Mongolia, Inc. intends to drill
four wells during 1997. In Thailand, the Company was awarded Block B8/38 in the
Gulf of Thailand. The Company has entered into an agreement with an
international oil company which will fund the drilling of an exploration well in
this block. Drilling is expected to begin in the second quarter, with a second
well possibly being drilled by year end.
17
Financial Condition and Capital Resources
At March 31, 1997, the Company had total assets of $862.5 million.
Total capitalization was $632.3 million, of which 49% was represented by
stockholder's equity, 29% by subordinated debt and 22% by senior debt. During
the three months ended March 31, 1997, net cash provided by operations was $51.8
million, an increase of 94% compared to the same period in 1996. Excluding
Patina, net cash provided by operations was $27.8 million. As of March 31, 1997,
commitments for capital expenditures, primarily for new production facilities in
the Gulf of Mexico, totaled $26.8 million, $579,000 of which was attributable to
Patina. The Company anticipates that 1997 expenditures for development drilling
will approximate $112 million. Approximately $85 million is expected to be spent
for development drilling programs, $19 million for expanded exploratory activity
and $8 million for gas facilities and other activities. Approximately $48
million is targeted for continued development in the Gulf of Mexico, $38 million
for expanded development of its major Rocky Mountain projects (including $15
million for Patina) and $2 million for additional leasing and seismic costs in
North Louisiana. 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 acquisition,
exploration and development expenditures using internally generated cash flow
and existing credit facilities. In addition, joint ventures or future public
offerings of debt or equity securities may be utilized.
The Company is currently seeking a listing of a newly formed entity,
SOCO International plc ("SOCO plc"), on the London Stock Exchange and intends to
conduct an offering of its shares. The Company will contribute to SOCO plc all
the assets of SOCO International Operations, Inc. which includes the Company's
interests in Russia, Mongolia and Thailand. Certain minority interest owners in
these ventures are also expected to contribute their interests. SOCO plc will
also acquire Cairn's UK onshore company as well as certain assets in Yemen and
Tunisia that were formerly owned by Command Petroleum Limited. The offering is
expected to raise approximately $75 million of new equity capital for SOCO plc.
Following the offering, the Company, which will retain all its shares, expects
to have an approximate 15% to 17% interest in SOCO plc. The listing and offering
are subject to certain conditions and there can be no assurance that the
offering will be consummated.
During the first quarter of 1997, Patina accounted for $24.0 million of
the Company's net cash provided by operations. For the foreseeable future, cash
generated by Patina will, however, be retained by Patina to fund its development
program, reduce debt and pursue acquisitions in the DJ Basin or elsewhere.
Moreover, Patina's credit facility currently prohibits the payment of dividends
on its common stock. Accordingly, Patina's cash flow is intended to be used to
reduce debt levels, fund a limited development program and any future
acquisitions which may be consummated and may not be available to fund the
Company's other operations or to pay dividends to its stockholders. During the
first quarter of 1997, Patina reduced its total debt by $10.2 million.
SOCO maintains a $500 million revolving credit facility (the "SOCO
Facility"). The SOCO Facility is divided into a $100 million short-term portion
and a $400 million long-term portion that expires on December 31, 2000.
Management's policy is to renew the facility on a regular basis. Credit
availability is adjusted semiannually to reflect changes in reserves and asset
values. The borrowing base available under the facility at March 31, 1997 was
$140 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 increases to 1% when the
Company's consolidated senior debt becomes greater than 80% of its consolidated
tangible net worth as defined. During the first quarter of 1997, the average
interest rate under the revolver was 6.3%. Financial covenants limit debt,
require maintenance of $1.0 million in minimum working capital as defined and
restrict certain payments, including stock repurchases, dividends and
contributions or advances to unrestricted subsidiaries. Such restricted payments
are limited by a formula that includes proceeds from certain securities, cash
flow and other items. Based on such limitations, more than $70 million was
available for the payment of dividends and other restricted payments as of March
31, 1997.
Patina maintains a $140 million revolving credit facility ("Patina
Facility"). The borrowing base available under the facility was $120 million at
March 31, 1997. Effective May 1, 1997, the borrowing base was reduced to $110
million. Patina may elect that all or a portion of the facility bear interest at
18
a rate per annum equal to: (i) the higher of (a) prime rate plus a margin equal
to .25% (the "Applicable Margin") and (b) the Federal Funds Effective Rate plus
.5% plus the Applicable Margin, or (ii) the rate at which Eurodollar deposits
for one, two, three or six months (as selected by Patina) are offered in the
interbank Eurodollar market plus a margin which fluctuates from .625% to 1.125%
determined by a debt to EBITDA ratio. During the first quarter of 1997, the
average interest rate under the facility was 6.9%.
The Patina Facility agreement contains certain financial covenants,
including but not limited to a maximum total debt to capitalization ratio, a
maximum total debt to EBITDA ratio and a minimum current ratio. The bank credit
agreement also contains certain negative covenants, including but not limited to
restrictions on indebtedness; certain liens; guaranties, speculative derivatives
and other similar obligations; asset dispositions; dividends, loans and
advances; creation of subsidiaries; investments; leases; acquisitions; mergers;
changes in fiscal year; transactions with affiliates; changes in business
conducted; sale and leaseback and operating lease transactions; sale of
receivables; prepayment of other indebtedness; amendments to principal
documents; pledges of assets; issuance of securities; and non speculative
commodity hedging.
The Company from time to time enters into arrangements, primarily by
Patina, to monetize its Section 29 tax credits. These arrangements result in
revenue increases of approximately $.40 per Mcf on production volumes from
qualified Section 29 properties. As a result of such arrangements, the Company
recognized additional gas sales of $2.5 million in 1996. During the three months
ended March 31, 1997, the Company recognized additional gas sales of $801,000.
These arrangements are expected to increase revenues through 2002.
The Company seeks to diversify its exploration and development risks by
seeking partners for its significant development projects and maintains a
program to divest marginal properties and assets which do not fit its long range
plans. During the first quarter of 1997, the Company sold 50% of its working
interest in the Wind River Basin and the Big Horn Basin area for a total of $1.7
million in proceeds. The first well was spudded in January 1997 in the Big Horn
Basin and another well is expected to be drilled in the Wind River Basin during
1997.
In November 1996, the Company accepted an offer from Cairn for its
interest in Command. The Company received 16.2 million shares of freely
marketable common stock of Cairn, and recorded a gain of $65.5 million, with no
associated current tax liability. However, a deferred tax provision of $4.0
million was recorded related to this transaction. Immediately prior to the
acceptance of Cairn's offer, the Company accrued for a transaction in which a
director of the Company exchanged his option to purchase 10% of the outstanding
common stock of SOCO International, Inc. (through which the investment in
Command was held) and issued promissory notes to the Company totaling $591,000
for 10% of the outstanding common stock of two SOCO International, Inc.
subsidiaries, SOCO International Holdings, Inc. and SOCO International
Operations, Inc. As a result of this transaction, the Company recorded a
$260,000 loss. Additionally, minority interest expense of $4.3 million was
recorded related to the director's 10% ownership as a result of the Command
gain. The actual exchange occurred in December 1996 and the promissory notes
remained outstanding at March 31, 1997. During the three months ended March 31,
1997, the Company sold 4.5 million Cairn shares at an average of $8.81 per share
realizing $39.2 million in proceeds. These transactions resulted in a pretax
gain of $13.0 million.
The Board has authorized the repurchase of up to $50 million of the
Company's securities. During 1996 and the first quarter of 1997, the Company has
repurchased 1.5 million common shares for $19.2 million, 6,000 preferred
depositary shares for $142,000 and $4.3 million principal amount convertible
subordinated notes for $4.0 million. Subsequent to quarter end, the Company has
repurchased an additional 411,000 common shares for $6.8 million and $290,000
principal amount convertible subordinated notes for $294,000.
The Company believes that its capital resources are 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.
19
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 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
1997 and 1996. Average gas prices for the three months ended March 31, 1997 and
the year ended December 31, 1996 were increased by $.06 and $.08 per Mcf,
respectively, by the benefit of the Company's hedging activities. 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.
Average Prices
-------------------------------------------
Crude Oil
and Natural Equivalent
Liquids Gas Barrels
--------- --------- ----------
(Per Bbl) (Per Mcf) (Per BOE)
Annual
------
1996 $ 20.39 $ 1.97 $ 14.35
1995 16.96 1.35 11.00
1994 14.80 1.67 11.82
1993 15.41 1.94 13.41
1992 18.87 1.74 13.76
Quarterly
---------
1997
----
First $ 21.18 $ 2.83 $ 18.10
1996
----
First $ 17.95 $ 1.78 $ 12.80
Second 20.52 1.62 12.90
Third 20.25 1.78 13.60
Fourth 22.26 2.64 17.69
In March 1997, the Company received an average of $19.87 per barrel and
$1.92 per Mcf for its production.
20
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits -
10.14 Amended and Restated Credit Agreement dated as of April 1,
1997 among Patina Oil and Gas Corporation, the Financial
Institutions Listed on Schedule I, thereto, Texas Commerce
Bank National Association, as Administrative Agent, Nations
Bank of Texas, N.A., as Documentary Agent, and Wells Fargo
Bank, N.A., CIBC, Inc. and Credit Lyonnais New York Branch,
as Co- Agents.
10.14.1 First Amendment dated as of May 1, 1997 among Patina Oil and
Gas Corporation, the Financial Institutions Listed on
Schedule I, thereto, Texas Commerce Bank National
Association, as Administrative Agent, Nations Bank of Texas,
N.A., as Documentary Agent, and Wells Fargo Bank, N.A., CIBC,
Inc. and Credit Lyonnais New York Branch, as Co-Agents.
10.15 Supplemental Indenture dated as of March 31, 1997 among
Gerrity Oil and Gas Corporation, Patina Oil and Gas
Corporation and The Chase Manhattan Bank.
11.1 Computation of Per Share Earnings.
12 Computation of Ratio of Earnings to Fixed Charges and Ratio
of Earnings to Combined Fixed Charges and Preferred Stock
Dividends.
27 Financial Data Schedule.
(b) No reports on Form 8-K were filed during the quarter ended March 31,
1997.
21
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
May 7, 1997
22