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, 1997
---------------------------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
----------------- ----------------
---------------------------------------------------------
Commission file 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 .
29,587,562 Common Shares were outstanding as of August 5, 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, except share data)
June 30, December 31,
1997 1996
------------- -------------
(Unaudited)
ASSETS
Current assets
Cash and equivalents $ 44,102 $ 27,922
Accounts receivable 37,822 58,944
Inventory and other 7,913 11,212
------------ ------------
89,837 98,078
------------ ------------
Investments 128,824 129,681
------------ ------------
Oil and gas properties, successful efforts method 928,375 887,721
Accumulated depletion, depreciation and amortization (304,423) (252,334)
------------ ------------
623,952 635,387
------------ ------------
Gas facilities and other 28,947 28,111
Accumulated depreciation and amortization (11,652) (11,798)
------------ ------------
17,295 16,313
------------ ------------
$ 859,908 $ 879,459
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable $ 45,444 $ 51,867
Accrued liabilities 43,874 37,043
------------ ------------
89,318 88,910
------------ ------------
Senior debt 97,001 188,231
Subordinated notes 271,256 103,094
Convertible subordinated notes - 80,748
Deferred taxes payable 19,761 9,034
Other noncurrent liabilities 21,413 28,064
Minority interest 84,061 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,
31,586,932 and 31,456,027 shares issued 316 315
Capital in excess of par value 260,920 260,221
Retained earnings 41,589 25,711
Common stock held in treasury, 2,532,100 and 250,000 shares at cost (42,873) (3,510)
Unrealized gain on investments 17,136 11,921
------------ ------------
277,098 294,668
------------ ------------
$ 859,908 $ 879,459
============ ============
The accompanying notes are an integral part of these statements.
3
SNYDER OIL CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except share data)
Three Months Six Months
Ended June 30, Ended June 30,
------------------------- -----------------------
1997 1996 1997 1996
---------- ---------- ---------- ----------
(Unaudited)
Revenues
Oil and gas sales $ 48,988 $ 44,330 $ 116,836 $ 80,452
Gas transportation, processing and marketing 1,996 4,344 6,205 8,795
Gains on sales of equity interests in investees 19,968 2,788 32,968 3,195
Gains on sales of properties 2,235 3,142 4,842 3,122
Other 1,229 2,164 2,320 2,923
--------- --------- --------- ---------
74,416 56,768 163,171 98,487
--------- --------- --------- ---------
Expenses
Direct operating 12,503 12,620 26,524 23,379
Cost of gas and transportation 1,757 3,415 5,948 7,111
Exploration 3,690 290 5,390 804
General and administrative 5,320 2,709 10,812 6,577
Interest 6,977 6,126 13,764 9,740
Other 1,044 2,760 2,800 3,439
Loss on sale of subsidiary interest 10,000 15,481 10,000 15,481
Depletion, depreciation and amortization 23,389 22,745 46,597 39,516
--------- --------- --------- ---------
Income (loss) before taxes, minority interest
and extraordinary item 9,736 (9,378) 41,336 (7,560)
--------- --------- --------- ---------
Provision (benefit) for income taxes
Current 500 8 500 33
Deferred 2,618 - 11,489 (335)
--------- --------- --------- ---------
3,118 8 11,989 (302)
--------- --------- --------- ---------
Minority interest in subsidiaries 626 597 3,429 948
--------- --------- --------- ---------
Income (loss) before extraordinary item 5,992 (9,983) 25,918 (8,206)
Extraordinary item-early extinguishment of debt,
net of benefit for income taxes of $1,533 2,848 - 2,848 -
--------- --------- --------- ---------
Net income (loss) 3,144 (9,983) 23,070 (8,206)
Preferred dividends 1,550 1,552 3,100 3,105
--------- --------- --------- ---------
Net income (loss) applicable to common $ 1,594 $ (11,535) $ 19,970 $ (11,311)
========= ========= ========= =========
Net income (loss) per common share before
extraordinary item $ .15 $ (.37) $ .75 $ (.36)
========= ========= ========= =========
Net income (loss) per common share $ .05 $ (.37) $ .66 $ (.36)
========= ========= ========= =========
Weighted average shares outstanding 29,841 31,450 30,435 31,376
========= ========= ========= =========
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 - - 130 1 674 - -
Conversion of subordinated
notes into common - - 1 - 25 - -
Repurchase of common - - - - - - (39,363)
Dividends - - - - - (7,192) -
Net income - - - - - 23,070 -
------- ------- ------- ------- ---------- ------- --------
Balance, June 30, 1997
(Unaudited) 1,034 $ 10 31,587 $ 316 $ 260,920 $ 41,589 $(42,873)
======= ======= ======= ======= ========= ======== ========
The accompanying notes are an integral part of these statements.
5
SNYDER OIL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Six Months Ended June 30,
-------------------------------
1997 1996
------------ ------------
(Unaudited)
Operating activities
Net income (loss) $ 23,070 $ (8,206)
Adjustments to reconcile net income (loss)
to net cash provided by operations
Amortization of deferred credits - (1,052)
Gains on sales of equity interests in investees (32,968) (3,195)
Gains on sales of properties (4,842) (3,122)
Equity in (earnings) losses of investees (367) 770
Exploration expense 5,390 804
Loss on sale of subsidiary interest 10,000 15,481
Depletion, depreciation and amortization 46,597 39,516
Deferred taxes 11,489 (335)
Minority interest in subsidiaries 3,429 948
Loss on early extinguishment of debt, net 2,848 -
Changes in operating assets and liabilities
Decrease (increase) in
Accounts receivable 21,122 (4,343)
Inventory and other 1,253 1,662
Increase (decrease) in
Accounts payable (6,423) 6,305
Accrued liabilities (957) 3,314
Other liabilities (7,609) (4,939)
---------- ----------
Net cash provided by operations 72,032 43,608
---------- ----------
Investing activities
Acquisition, exploration and development (80,889) (52,998)
Proceeds from investments 38,631 1,057
Outlays for investments - (4,705)
Proceeds from sales of properties 11,597 25,227
---------- ----------
Net cash used by investing (30,661) (31,419)
---------- ----------
Financing activities
Issuance of common 1,249 619
Repurchase of stock (39,363) (1,460)
Increase in indebtedness 22,963 5,312
Loss on early extinguishment of debt, net (2,848) -
Dividends (7,192) (7,209)
Deferred credits - 1,030
---------- ----------
Net cash used by financing (25,191) (1,708)
---------- ----------
Increase in cash 16,180 10,481
Cash and equivalents, beginning of period 27,922 27,263
---------- ----------
Cash and equivalents, end of period $ 44,102 $ 37,744
========== ==========
Noncash investing and financing activities
Acquisition of properties and stock via stock issuances - $ 3,693
Exchange of subsidiary stock for stock of investee $ 30,923 -
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 engaged in the acquisition,
exploration and development of domestic oil and gas properties, primarily in the
Gulf of Mexico, the Rockies and northern Louisiana. The Company also has
investments in two international exploration and production companies, SOCO
International plc ("SOCI plc") and Cairn Energy plc ("Cairn"). 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 in which the Company owns between
20% and 50% are accounted for under the equity method. Affiliates in which the
Company owns less than 20% are accounted for under the cost method. 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.
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 approximately 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 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.
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 six
months ended June 30, 1997, the Company provided unproved property impairments
of $467,000. 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
7
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 six
months ended June 30, 1997, the Company did not provide for any such
impairments.
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 $1.5 million and $1.1 million during the six month periods ended
June 30, 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 June
30, 1997 were insignificant.
Financial Instruments
The following table sets forth the book values and estimated fair
values of financial instruments (in thousands):
June 30, December 31,
1997 1996
---------------------- ----------------------
Book Fair Book Fair
Value Value Value Value
--------- --------- --------- ---------
Cash and equivalents $ 44,102 $ 44,102 $ 27,922 $ 27,922
Investments 128,824 128,824 129,681 163,477
Senior debt (97,001) (97,001) (188,231) (188,231)
Subordinated notes (271,256) (277,434) (103,094) (105,650)
Convertible subordinated notes - - (80,748) (82,866)
Long-term commodity contracts - 5,840 - 5,040
Interest rate swap - 16 - (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 certain of the subordinated
notes and all of the convertible subordinated notes are estimated based on their
June 30, 1997 and December 31, 1996 closing prices on the New York Stock
Exchange. The fair value of the remaining subordinated notes are estimated based
on their bid price as of June 30, 1997.
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 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 June 30, 1997, that volume represented approximately 16% 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
8
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 June 30, 1997 and December 31, 1996, the fair value of the agreement
was estimated at the net present value discounted at 10%.
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, unless otherwise
disclosed) 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.
The following table sets forth the book values and estimated fair values of
these investments:
June 30, 1997 December 31, 1996
------------------------ ------------------------
(In thousands)
Book Fair Book Fair
Value Value Value Value
--------- ---------- --------- ----------
Equity method investments $ - $ - $ 8,789 $ 42,585
Marketable securities 128,824 128,824 115,558 115,558
Long-term notes receivable - - 5,334 5,334
--------- --------- --------- ----------
$ 128,824 $ 128,824 $ 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.
Command Petroleum Limited
From May 1993 to November 1996, the Company had an investment in
Command Petroleum Limited ("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, SOCO International Holdings ("Holdings") and
SOCO International Operations ("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 June 30, 1997. Subsequent to quarter
end, the Company exchanged 530,000 shares of the Company's treasury stock for
the director's 10% interest in Holdings. As a result, Holdings is now a wholly
owned subsidiary.
9
SOCO International Operations, Inc. and SOCO International plc
In 1993, SOCO Perm Russia, Inc. ("SOCO Perm"), 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. 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.
In 1994, the Company formed a consortium to explore the Tamtsag Basin
of eastern Mongolia, SOCO Tamtsag Mongolia, Inc. ("SOCO Tamtsag"). 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 May 1997, a newly formed entity, SOCI plc, completed an initial
public offering of its shares on the London Stock Exchange. Simultaneously with
the offering, the Company exchanged its shares of Operations, which included the
Company's interests in Russia, Mongolia and Thailand, for shares of SOCI plc.
Certain minority interest owners in these ventures also contributed their
interests. As part of the listing, SOCI plc acquired Cairn's UK onshore company
as well as certain assets in Yemen and Tunisia that were formerly owned by
Command. The offering raised approximately $75 million of new equity capital for
SOCI plc. The Company received 7.8 million shares (15.9% of the total) of SOCI
plc, which it has agreed not to sell for the two year period following the
listing. The Company recognized a gain of $20.0 million as a result of this
exchange. The Company's investment in SOCI plc is accounted for under the cost
method.
Marketable Securities
The Company has investments in equity securities of two publicly
traded foreign energy companies, Cairn and SOCI plc. Both investments are
accounted for on the cost method. In the first quarter of 1997, the Company sold
4.5 million Cairn shares at an average price 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 and SOCI plc shares was $69.0 million
and $30.9 million, respectively, at June 30, 1997. The market value of the Cairn
and SOCI plc shares approximated $94.3 million and $34.5 million, respectively,
at June 30, 1997. In accordance with SFAS 115, at June 30, 1997 and December 31,
1996, respectively, investments were increased by $28.9 million and $20.4
million in gross unrealized holding gains, stockholders' equity was increased by
$17.1 million and $11.9 million, minority interest liability was increased by
$1.7 million and $1.3 million and deferred taxes payable were increased by $10.1
million and $7.2 million.
Notes Receivable
The Company held long-term notes receivable due from privately held
corporations and a director, with a book value of zero and $591,000 at June 30,
1997 and December 31, 1996. At December 31, 1996, the Company also held a
long-term note receivable due from SOCO Tamtsag which was contributed to SOCI
plc along with the Company's interest in SOCO Tamtsag in May 1997. 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 secured by shares of the Company owned by the director and are
due April 10, 1998. The notes, which had a book value of $627,000 at June 30,
1997, have been reclassified as inventory and other in the second quarter of
1997. At June 30, 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 June 30, 1997 and December 31,
1996 includes $32.4 million and $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:
10
Six
Months Ended Year Ended
June 30, December 31,
1997 1996
-------------- --------------
(In thousands)
Proved acquisitions $ 984 $ 273,088
Acreage acquisitions 895 24,589
Development 41,464 43,075
Gas processing, transportation and other 993 3,612
Exploration 5,682 4,588
----------- ----------
$ 50,018 $ 348,952
=========== ==========
Of the $41.5 million development expenditures, the majority was
concentrated in the Gulf of Mexico and the Rockies. During the six months ended
June 30, 1997, the Company placed 51 wells on sales, drilled three development
and four exploratory dry holes and had 21 wells in progress at quarter end.
Exploration costs include the costs of four exploratory dry holes and
continuing seismic programs in the Gulf of Mexico and north Louisiana.
Proved acquisitions during 1996 included $218.4 million related to the
formation of Patina Oil & Gas Corporation ("Patina") and the subsequent May 1996
acquisition of Gerrity Oil & Gas Corporation ("GOG"). The Company currently owns
74% of Patina, and it is consolidated into the Company's financial statements.
(5) INDEBTEDNESS
The following indebtedness was outstanding on the respective dates:
June 30, December 31,
1997 1996
------------ ------------
(In thousands)
SOCO bank facility $ 12,001 $ 93,731
Patina bank facility 85,000 94,500
------------ ------------
Senior debt $ 97,001 $ 188,231
============ ============
SOCO subordinated notes $ 173,571 $ -
Patina subordinated notes 97,685 103,094
------------ ------------
Subordinated notes $ 271,256 $ 103,094
============ ============
SOCO convertible subordinated notes $ - $ 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 $120 million at June 30, 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 six months ended June 30,
1997, the average interest rate under the facility was 6.5%. 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 $132 million was available for the payment of dividends
and other restricted payments at June 30, 1997.
11
Patina maintains a $140 million revolving credit facility ("Patina
Facility"). The borrowing base available under the facility was $110 million at
June 30, 1997. 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 six months
ended June 30, 1997, the average interest rate under the facility was 6.8%.
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 nonspeculative
commodity hedging.
In June 1997, SOCO issued $175.0 million of 8.75% Senior Subordinated
Notes ("Subordinated Notes") due June 15, 2007. The notes were sold at a
discount resulting in an 8.875% effective interest rate. The net proceeds of the
offering were $168.8 million. The notes are redeemable at the option of the
Company on or after June 15, 2002, initially at 104.375% of principal, and at
prices declining to 100% of principal on or after June 15, 2005. Upon the
occurrence of a change of control, as defined in the Notes, SOCO would be
obligated to make an offer to purchase all outstanding Subordinated Notes at a
price of 101% of the principal amount thereof. In addition, SOCO would be
obligated, subject to certain conditions, to make offers to purchase the
Subordinated Notes with the net cash proceeds of certain asset sales or other
dispositions of assets at a price of 100% of the principal amount thereof. The
Notes are unsecured general obligations of SOCO and are subordinated to all
senior indebtedness of SOCO and to any existing and future indebtedness of
SOCO's subsidiaries. The Notes contain covenants that, among other things, limit
the ability of SOCO 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 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 six months ended June 30,
1997, $6.2 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 were
convertible into common stock at $22.57 per share. During 1996 and the first six
months of 1997, the Company repurchased $3.8 million and $824,000, respectively,
of these notes in accordance with a repurchase program. The notes were redeemed
by the Company in June 1997 at 103.51% of principal. As a result of the note
redemption, the Company incurred a loss of $4.4 million, $2.8 million net of
tax, which has been recorded as an extraordinary item in the accompanying
financial statements.
12
Scheduled maturities of indebtedness for the next five years are zero
in 1997 and 1998, $85.0 million in 1999, $12.0 million in 2000 and zero 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 $14.4 million and $7.6
million, respectively, for the six month periods ended June 30, 1997 and 1996.
(6) FEDERAL INCOME TAXES
At June 30, 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 for the six month periods ended June 30, 1997 and 1996
follows:
Six Months Ended June 30,
--------------------------------
1997 1996
---------- ----------
Federal statutory rate 35% (35%)
Loss in excess of net deferred tax liability - 31%
Utilization of net deferred tax asset (3%) -
-------- --------
Effective income tax rate 32% (4%)
======== ========
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 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 cash taxes paid based on estimates of
alternative minimum taxes.
(7) STOCKHOLDERS' EQUITY
A total of 75 million common shares, $.01 par value, are authorized of
which 31.6 million were issued and 29.1 million were outstanding at June 30,
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, Inc. 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 six
months ended June 30, 1997, the Company issued 131,000 shares of common stock
primarily for the exercise of stock options. During the six months ended June
30, 1997, the Company repurchased 2.3 million shares of common stock for $39.4
million. Quarterly dividends of $.065 per share were paid in 1996 and the first
six months 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%
13
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 June 30, 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 $3.1 million ($1.50 per 6% convertible
depositary share per annum) in preferred dividends during the six months ended
June 30, 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 $1.2
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 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 uncertainty. However, the Company believes its
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.
(9) SUBSEQUENT EVENT
On July 31, 1997, the Company agreed to a series of transactions
intended to result in the sale of all of the 14 million shares of common stock
of Patina held by the Company. As part of these transactions, Patina filed a
registration statement with the Securities and Exchange Commission covering the
14
underwritten public offering by the Company of 7.5 million shares of Patina
common stock. Patina has agreed to purchase all shares owned by the Company that
are not sold in the public offering. To fund the purchase of these shares,
Patina has received commitments covering the sale of up to $63 million of a new
class of convertible preferred stock and $3 million of shares of common stock to
members of Patina's management.
The Company may withdraw from the transaction at any time until the
prospectus for the public offering is broadly distributed to prospective
offerees, or in the event the offering does not cover at least 5 million shares
or the public offering price is less than $7.50 per share (before deducting
assumed underwriters' commissions of 5.5%). Closing of the transactions is
subject to a number of conditions, including effectiveness of the registration
facility, of sufficient funds to purchase all shares not sold in the public
offering.
Based on the expected terms of the transactions, the Company would
incur a loss as a result of the sale. Therefore, the Company recorded an
estimated pretax loss of $10 million, primarily attributable to underwriting and
similar expenses to be borne by the Company, in the second quarter of 1997.
The following table summarizes the unaudited pro forma effects on the
Company's financial statements assuming the Patina divestiture had been
consummated June 30, 1997 (for balance sheet data) and on January 1, 1997 and
1996 (for statement of operations data). Future results may differ substantially
from pro forma results due to changes in oil and gas prices, production declines
and other factors. Therefore, pro forma statements cannot be considered
indicative of future operations.
As of and for the Six
Months Ended June 30,
----------------------------
1997 1996
----------- ----------
(In thousands)
Total assets $566,040 N/A
Total debt $185,572 N/A
Oil and gas sales $ 64,723 $ 50,636
Total revenues $110,831 $ 68,377
Production direct operating margin $ 47,521 $ 32,658
Income (loss) before extraordinary item $ 21,648 $ (6,034)
Net income (loss) $ 18,800 $ (6,034)
Net income (loss) per common share $ .52 $ (.29)
Weighted average shares outstanding 30,435 31,376
Production volume (MBOE) 4,223 3,848
15
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Overview
Snyder Oil Corporation (the "Company") is engaged in the acquisition,
exploration and development of domestic oil and gas properties, primarily in the
Gulf of Mexico, the Rockies and northern Louisiana. The Company also has
investments in two international exploration and production companies, SOCO
International plc and Cairn Energy plc.
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 initially into a 70% interest (currently 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 stockholders' 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.
On July 31, 1997, the Company agreed to a series of transactions
intended to result in the sale of all of the 14 million shares of common stock
of Patina held by the Company. As part of these transactions, Patina filed a
registration statement with the Securities and Exchange Commission covering the
underwritten public offering by the Company of 7.5 million shares of Patina
common stock. Patina has agreed to purchase all shares owned by the Company that
are not sold in the public offering. To fund the purchase of these shares,
Patina has received commitments covering the sale of up to $63 million of a new
class of convertible preferred stock and $3 million of shares of common stock to
members of Patina's management.
The Company may withdraw from the transaction at any time until the
prospectus for the public offering is broadly distributed to prospective
offerees, or in the event the offering does not cover at least 5 million shares
or the public offering price is less than $7.50 per share (before deducting
assumed underwriters' commissions of 5.5%). Closing of the transactions is
subject to a number of conditions, including effectiveness of the registration
facility, of sufficient funds to purchase all shares not sold in the public
offering. If the Company withdraws from the transaction (other than as the
result of the failure of certain conditions, including the minimum size and
price conditions described above) and a majority of Patina's voting securities
are sold to a third party within certain periods thereafter, and in certain
other circumstances, the prospective purchasers of Patina's preferred stock and
Thomas J. Edelman, Patina's Chief Executive Officer, may exercise options to
purchase up to 4 million shares of Patina common stock from the Company, subject
to an aggregate minimum spread guaranteed by the Company of $3 million.
Based on the expected terms of the transactions, the Company would
incur a loss as a result of the sale. Therefore, the Company recorded an
estimated pretax loss of $10 million, primarily attributable to underwriting and
similar expenses to be borne by the Company, in the second quarter of 1997.
Results of Operations
Total revenues for the three month and six month periods ended June 30,
1997 increased to $74.4 million and $163.2 million, representing increases of
$17.6 million and $64.7 million from the same periods in 1996. The increases
were primarily due to $4.7 million and $36.4 million increases in oil and gas
sales and $17.2 million and $29.8 million increases in gains on sales of equity
interests in investees, respectively. The increases in oil and gas sales are a
combination of a 1% and 21% rise in the price received per equivalent barrel
("BOE") and a 9% and 20% increase in BOE production. Natural gas prices
rebounded toward the end of 1996 resulting in an average price for the three
month and six month periods ended June 30, 1997 of $1.85 and $2.34 per Mcf
compared to $1.62 and $1.69 per Mcf during the same period in 1996. Oil prices
improved as compared to the first six months of 1996 to average $19.74 per
16
barrel during the first six months of 1997, although the second quarter of 1997
average price of $18.33 represented a decrease from the second quarter of 1996
average price of $20.52. The increase in production as compared to the three and
six month periods ended June 30, 1996 is due primarily to the production from
the properties acquired in the Patina transaction in May 1996. The increase in
gains on sales of equity interests in investees was due to sales of Cairn Energy
plc ("Cairn") stock and a gain on the sale of the Company's interest in SOCO
International Operations, Inc. ("Operations") in exchange for 7.8 million shares
of SOCO International plc ("SOCI plc"), a newly formed, publicly traded entity
on the London Stock Exchange. Excluding Patina, total revenues were $51.6 and
$110.8 million for the three month and six month periods ended June 30, 1997.
Net income before extraordinary items for the second quarter of 1997
was $6.0 million as compared to a net loss of $10.0 million experienced in the
same period in 1996. Net income benefitted from the gain on the sale of the
Company's interest in Operations which totaled approximately $13.0 million, net
of tax, partially offset by an estimated loss of $6.5 million, net of tax,
related to the Patina transaction. During the second quarter of 1997, the
Company redeemed its 7% Convertible Subordinated Notes due May 15, 2001. The
Company recorded an extraordinary charge for a loss on early extinguishment of
debt of $2.8 million, net of tax. See "Financial Condition and Capital
Resources." After consideration of this item, net income for the quarter was
$3.1 million.
Production margin (oil and gas sales less direct operating expenses)
for the quarter ended June 30, 1997 was $36.5 million, an increase of 15% from
the same period in 1996. Average daily production during the second quarter of
1997 was 41,118 BOE, an increase of 9% over the same period in 1996. Excluding
Patina, production margin was $18.1 million and average daily production was
22,706 BOE. The increased production resulted from the GOG acquisition (three
months in the current quarter versus two months in the prior year quarter) and
three acquisitions in the Gulf of Mexico during 1996 offset somewhat 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. The Company expects to
continue to increase development during 1997 which, along with two acquisitions
in the Gulf of Mexico in the fourth quarter of 1996, should result in continued
increases in production over prior periods through 1997 excluding, in each case,
the effects of Patina. Even with higher production levels, total operating
expenses for the second quarter of 1997 decreased by $117,000 ($1.0 million
excluding Patina) from the same period in 1996. This is primarily due to the
sale of noncore properties which tended to have higher operating costs and an
increased emphasis on operating efficiencies. Operating costs per BOE were $3.34
compared to $3.67 in the same period in 1996.
Gains on sales of equity interests in investees were $20.0 million for
the quarter ended June 30, 1997. In May 1997, a newly formed entity, SOCI plc,
completed an initial public offering of its shares on the London Stock Exchange.
Simultaneously with the offering, the Company exchanged its shares of
Operations, which included the Company's interests in Russia, Mongolia and
Thailand, for shares of SOCI plc. Certain minority interest owners in these
ventures also contributed their interests. As part of the listing, SOCI plc
acquired Cairn's UK onshore company as well as certain assets in Yemen and
Tunisia that were formerly owned by Command. The offering raised approximately
$75 million of new equity capital for SOCI plc. The Company received 7.8 million
shares (15.9% of the total) of SOCI plc, and has agreed not to sell any shares
for the two year period following the listing. The Company recognized a gain of
$20.0 million as a result of this exchange.
Gains on sales of properties were $2.2 million for the quarter compared
to $3.1 million in the prior year quarter. The gain during the second quarter of
1997 was due to the sale of the Santa Fe Springs Unit as part of the Company's
ongoing divestiture plan.
General and administrative expenses, net of reimbursements, for the
second quarter 1997 were $5.3 million, a $2.6 million increase from the same
period in 1996. The increase is primarily a result of two items. Several of the
properties sold during 1996, although having high operating costs and depletion,
depreciation and amortization rates, provided significant general and
administrative expense reimbursements. Also, as part of the formation of Patina
and the GOG acquisition, the Company received a nonrecurring reimbursement from
Patina for general and administrative expenses incurred during the organization
and acquisition process. The reimbursement was recorded in the second quarter of
1996. The Company's general and administrative expenses continue to decrease
compared to the last two quarters (decreases of $514,000 and $172,000 compared
to the fourth quarter of 1996 and the first quarter of 1997, respectively).
Excluding Patina, these expenses totaled $4.0 million during the quarter ended
June 30, 1997.
17
Interest expense was $7.0 million during the second quarter of 1997,
$4.0 million of which was incurred by Patina, compared to $6.1 million during
the same period in 1996. The majority of the increase is the result of higher
interest rates.
Depletion, depreciation and amortization expense for the second quarter
increased to $23.4 million from $22.7 million in the same period in 1996. The
minimal increase, in spite of increased production, is due to a decrease in the
total depletion, depreciation and amortization rate per BOE from $6.62 in the
second quarter of 1996 to $6.25 during the same period in 1997. Excluding
Patina, total depletion, depreciation and amortization expense was $11.0 million
reflecting an overall rate of $5.34 per BOE.
Acquisition, Exploration and Development
During the six months ended June 30, 1997, the Company incurred $50.0
million in capital expenditures, including $41.5 million for development, $5.7
million for exploration, $1.9 million for property acquisitions and $1.0 million
for fixed assets.
Of the $41.5 million of development expenditures, $19.6 million was
concentrated in the Gulf of Mexico, $5.1 million in the Washakie Basin of
southern Wyoming, $3.4 million in the Green River Basin of southern Wyoming and
$2.5 million in the Piceance Basin of western Colorado. In addition, Patina
incurred $8.0 million of the total expenditures of the Company. During the six
months ended June 30, 1997, the Company placed 51 wells on sales, drilled three
developmental and four exploratory dry holes and had 21 wells in progress at
quarter end.
Exploration costs include the costs of four exploratory dry holes and
continuing seismic programs in the Gulf of Mexico and north Louisiana. Patina
incurred $62,000 of exploration costs during the six month period ended June 30,
1997.
Financial Condition and Capital Resources
At June 30, 1997, the Company had total assets of $859.9 million. Total
capitalization was $729.4 million, of which 38% was represented by stockholders'
equity, 37% by subordinated debt, 13% by senior debt and 12% by minority
interest. During the six months ended June 30, 1997, net cash provided by
operations was $72.0 million, an increase of 65% compared to the same period in
1996. Excluding Patina, net cash provided by operations was $38.5 million. As of
June 30, 1997, commitments for capital expenditures, primarily for new
production facilities in the Gulf of Mexico, totaled $16.0 million, $180,000 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 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, existing credit facilities, proceeds from sales of
investments and proceeds from sales of nonstrategic properties. In addition,
joint ventures or future public offerings of debt or equity securities may be
utilized.
During the six months ended June 30, 1997, Patina accounted for $33.5
million of the Company's net cash provided by operations. 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 second quarter of
1997, Patina reduced its total debt by $4.7 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.
18
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 June 30, 1997 was
$120 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 six months ended June 30, 1997, the
average interest rate under the revolver was 6.5%. 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 $132
million was available for the payment of dividends and other restricted payments
as of June 30, 1997.
In June 1997, SOCO issued $175.0 million of 8.75% Senior Subordinated
Notes due June 15, 2007. The notes were sold at a discount resulting in an
8.875% effective interest rate. The net proceeds of the offering were $168.8
million. The notes are redeemable at the option of the Company on or after June
15, 2002, initially at 104.375% of the principal, and at prices declining to
100% of principal on or after June 15, 2005. The notes include a number of
restrictive covenants, none of which is currently expected to significantly
impact the Company's activities. The proceeds from the notes were used to redeem
the Company's convertible subordinated notes due May 15, 2001, and reduce the
balance outstanding under the SOCO Facility. The notes were redeemed at 103.51%
of principal. As a result of the note redemption, the Company incurred a loss of
$4.4 million, $2.8 million net of tax. Through the issuance of the new notes and
the redemption of the old notes, the Company has effectively extended its debt
maturity by over six years.
Patina maintains a $140 million revolving credit facility ("Patina
Facility"). The borrowing base available under the facility at June 30, 1997 was
$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 six months
ended June 30, 1997, the average interest rate under the facility was 6.8%.
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 nonspeculative
commodity hedging.
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 six months ended June 30,
1997, $6.2 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
19
assets, engage in mergers and consolidations and make investments in
unrestricted subsidiaries.
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 six months
ended June 30,1997, the Company recognized additional gas sales of $1.5 million.
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 six months of 1997, the Company received $11.6 million
in proceeds from sales of properties which were used primarily to fund
development expenditures. None of the sales were individually significant.
In November 1996, the Company accepted an offer from Cairn for its
interest in Command Petroleum Limited ("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 June 30, 1997. During the six months ended June
30, 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.
In May 1997, a newly formed entity, SOCI plc, completed an initial
public offering of its shares on the London Stock Exchange. The Company
contributed to SOCI plc all the assets of Operations, which included the
Company's interests in Russia, Mongolia and Thailand. Certain minority interest
owners in these ventures also contributed their interests. As part of the
listing, SOCI plc acquired Cairn's UK onshore company as well as certain assets
in Yemen and Tunisia that were formerly owned by Command. The offering raised
approximately $75 million of new equity capital for SOCI plc. The Company
received 7.8 million shares (15.9% of the total) of SOCI plc, which it has
agreed not to sell for the two year period following the listing. The Company
recognized a gain of $20.0 million as a result of this exchange. This
transaction accomplished the Company's goal of achieving a more appropriate
valuation of its international assets while also providing SOCI plc access to
the optimum equity market to secure funding for its range of international
projects.
The Board has authorized the repurchase of up to $70 million of the
Company's securities. During 1996 and the first six months of 1997, the Company
repurchased 3.0 million common shares for $46.3 million, 6,000 preferred
depositary shares for $142,000 and $4.6 million principal amount convertible
subordinated notes for $4.3 million.
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.
20
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 six months ended June 30, 1997 and the
year ended December 31, 1996 were increased by $.03 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
Second 18.33 1.85 13.09
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 June 1997, the Company received an average of $17.50 per barrel and
$1.96 per Mcf for its production.
21
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.
As reported in the Company's Annual Report on Form 10-K for the year ended
December 31, 1996, Patina has assumed the Company's liabilities relating to a
purported class action that had been brought against the Company in the United
States District Court of Colorado alleging underpayment of royalties and other
matters. In January 1997, the judge ordered that the class not be certified. The
case, and a similar action brought against GOG (and assumed by Patina), were
subsequently settled by Patina for amounts that are not material to the Company.
Item 4. Submission of Matters to a Vote of Security Holders.
Two matters were submitted to a vote of the Company's stockholders at the
Company's Annual Meeting, held on May 21, 1997. All management's nominees for
director, as listed in the Company's Proxy Statement, were elected with over 92%
of votes cast in favor of each nominee. Separately, amendments to the Company's
1989 Stock Option Plan, as described in the Company's Proxy Statement, were
approved, with 24.6 million votes cast in favor of approval, 600,000 votes cast
against adoption and 345,000 votes abstaining.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits -
10.11.6 Sixth Amendment dated as of May 19, 1997 to Fifth Restated
Credit Agreement.
10.14 Stock Repurchase Agreement, dated as of July 31, 1997, between
the Company and Patina Oil & Gas Corporation.
10.15 Form of Stock Option Agreement dated July 31, 1997 between the
Company and certain persons covering an aggregate of 4,000,000
shares of common stock of Patina Oil & Gas Corporation.
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) The Following reports on Form 8-K were filed during the quarter ended March
31, 1997:
April 24, 1997 -- Item 5. Other Events.
June 2, 1997 -- Item 5. Other Events.
June 10, 1997 -- Item 5. Other Events.
22
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 (Mark A. Jackson)
-----------------------
Mark A. Jackson
Senior Vice President and Chief Financial Officer
August 6, 1997
23