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, 1998
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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
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SNYDER OIL CORPORATION
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Delaware 75-2306158
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
777 Main Street, Fort Worth, Texas 76102
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(Address of principal executive offices) (Zip Code)
(Registrant's telephone number, including area code) (817) 338-4043
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(Former name, former address and former fiscal year,
if changed since last report.)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No .
33,498,273 Common Shares were outstanding as of May 12, 1998
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,
1998 1997
----------- ------------
(Unaudited)
ASSETS
Current assets
Cash and equivalents $ 72,391 $ 89,443
Accounts receivable 19,895 21,521
Inventory and other 3,007 2,911
---------- -----------
95,293 113,875
---------- -----------
Investments 118,408 143,066
---------- -----------
Oil and gas properties, successful efforts method 434,615 410,973
Accumulated depletion, depreciation and amortization (147,847) (136,669)
---------- -----------
286,768 274,304
---------- -----------
Gas facilities and other 22,489 21,317
Accumulated depreciation and amortization (7,164) (6,474)
---------- -----------
15,325 14,843
---------- -----------
$ 515,794 $ 546,088
========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable $ 20,692 $ 23,278
Accrued liabilities 30,096 34,271
---------- -----------
50,788 57,549
---------- -----------
Senior debt 1 1
Subordinated notes 173,662 173,635
Deferred taxes payable 24,007 31,649
Other noncurrent liabilities 19,252 19,498
Commitments and contingencies
Stockholders' equity
Common stock, $.01 par, 75,000,000 shares authorized,
35,866,613 and 35,696,213 shares issued 359 357
Capital in excess of par value 236,225 234,118
Retained earnings 44,039 44,390
Common stock held in treasury, 2,440,710 and 2,366,891 shares at cost (41,863) (40,461)
Unrealized gain on investments 9,324 25,352
---------- -----------
248,084 263,756
---------- -----------
$ 515,794 $ 546,088
========== ===========
The accompanying notes are an integral part of these statements.
3
SNYDER OIL CORPORATION
CONSOLIDATED INCOME STATEMENTS
(In thousands except per share data)
Three Months Ended March 31,
1998 1997
---------- -----------
(Unaudited)
Revenues
Oil and gas sales $ 32,822 $ 67,848
Gas transportation, processing and marketing 854 4,570
Gains on sales of equity interests in investees - 13,000
Gains on sales of properties 1 2,607
---------- -----------
33,677 88,025
---------- -----------
Expenses
Direct operating 8,448 14,021
Cost of gas and transportation 402 4,191
Exploration 3,213 1,700
General and administrative 4,150 5,492
Financing costs, net 2,751 6,579
Other 123 1,234
Depletion, depreciation and amortization 11,762 23,208
---------- -----------
Income before income taxes and minority interest 2,828 31,600
---------- -----------
Provision for income taxes
Current - -
Deferred 990 8,871
---------- -----------
990 8,871
---------- -----------
Minority interest in subsidiaries - 2,803
---------- -----------
Net income 1,838 19,926
Preferred dividends - 1,550
---------- -----------
Net income applicable to common $ 1,838 $ 18,376
========== ===========
Net income per common share $ .06 $ .59
========== ===========
Net income per common share - assuming dilution $ .05 $ .52
========== ===========
Weighted average shares outstanding 33,372 31,030
========== ===========
The accompanying notes are an integral part of these statements.
4
SNYDER OIL CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN
STOCKHOLDERS' EQUITY
(In thousands)
Total Unrealized Common Capital in
Stockholders' Gains on Stock Held Retained Excess of Common Preferred
Equity Investments in Treasury Earnings Par Value Stock Stock
------------ ----------- ----------- --------- --------- ------- ---------
(1)
Balance, December 31, 1996 $294,668 $ 11,921 $ (3,510) $ 25,711 $260,221 $ 315 $ 10
Net income 32,617 - - 32,617 - - -
Other comprehensive income,
net of tax
Unrealized gain on investments 13,431 13,431 - - - - -
----------
Comprehensive income 46,048
----------
Issuance of 607,000 shares for
common stock grants and
exercise of stock options 2,957 - - - 2,951 6 -
Conversion of subordinated
notes into common 25 - - - 25 - -
Issuance of 530,000 shares held
in treasury 8,655 - 8,655 - - - -
Repurchase of 2,647,000 shares
of common (45,606) - (45,606) - - - -
Repurchase of 291,000 shares
of preferred (30,102) - - (1,049) (29,050) - (3)
Conversion of 743,000 shares of
preferred to 3,632,000 shares
of common - - - - (29) 36 (7)
Dividends (12,889) - - (12,889) - - -
--------- --------- --------- ---------- --------- ------ ------
Balance, December 31, 1997 263,756 25,352 (40,461) 44,390 234,118 357 -
Net income 1,838 - - 1,838 - - -
Other comprehensive loss,
net of tax
Unrealized loss on investments (16,028) (16,028) - - - - -
---------
Comprehensive loss (14,190)
---------
Issuance of 171,000 shares for
common stock grants and
exercise of stock options 2,109 - - - 2,107 2 -
Repurchase of 74,000 shares
of common (1,402) - (1,402) - - - -
Dividends (2,189) - - (2,189) - - -
--------- --------- ---------- ---------- --------- ------ ------
Balance, March 31, 1998 (Unaudited) $248,084 $ 9,324 $ (41,863) $ 44,039 $236,225 $ 359 $ -
========= ========= ========== ========== ========== ====== ======
<FN>
(1) Represents total accumulated other comprehensive income.
</FN>
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,
1998 1997
----------- -----------
(Unaudited)
Operating activities
Net income $ 1,838 $ 19,926
Adjustments to reconcile net income to net
cash provided by operations
Gains on sales of equity interests in investees - (13,000)
Gains on sales of properties (1) (2,607)
Equity in earnings of investees - (222)
Exploration expense 3,213 1,700
Depletion, depreciation and amortization 11,762 23,208
Amortization of discount on subordinated notes 36 -
Deferred taxes 990 8,871
Minority interest in subsidiaries - 2,803
Changes in current and other assets and liabilities
Decrease (increase) in
Accounts receivable 1,626 14,859
Inventory and other (743) (74)
Increase (decrease) in
Accounts payable (2,586) (704)
Accrued liabilities 5,478 (3,109)
Other liabilities (303) 124
----------- -----------
Net cash provided by operations 21,310 51,775
----------- -----------
Investing activities
Acquisition, exploration and development (37,527) (55,913)
Proceeds from sales of investments - 40,153
Proceeds from sales of properties - 8,380
----------- -----------
Net cash used by investing (37,527) (7,380)
----------- -----------
Financing activities
Issuance of common 2,109 739
Decrease in indebtedness - (15,639)
Dividends (2,189) (3,607)
Repurchase of stock (755) (12,202)
Repurchase of subordinated notes - (3,716)
----------- -----------
Net cash used by financing (835) (34,425)
----------- -----------
Increase (decrease) in cash (17,052) 9,970
Cash and equivalents, beginning of period 89,443 27,922
----------- -----------
Cash and equivalents, end of period $ 72,391 $ 37,892
=========== ===========
Noncash investing and financing activities
Exchange of Company stock to retire notes receivable $ 647 $ -
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 and its subsidiaries (collectively, the
"Company") are engaged in the production, development, acquisition and
exploration of domestic oil and gas properties, primarily in the Gulf of Mexico,
the Rocky Mountains 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.
In October 1997, the Company sold its 74% interest in Patina Oil and
Gas Corporation ("Patina"). Net proceeds from the sale were approximately $127
million resulting in a $2.8 million gain, net of tax. For informational and
comparative purposes, the following table represents the Company's condensed
income statements, excluding Patina for 1997. Future results may differ
substantially from these condensed statements due to changes in oil and gas
prices, production declines and other factors. Therefore, such statements cannot
be considered indicative of future operations.
(In thousands, except per share and production data) Three Months Ended March 31,
1998 1997
----------- -----------
Revenues
Oil and gas sales $ 32,822 $ 38,408
Other 855 19,816
----------- -----------
33,677 58,224
Expenses
Direct operating 8,448 9,046
Exploration 3,213 1,641
General and administrative 4,150 4,165
Financing costs, net 2,751 2,138
Other 525 5,110
Depletion, depreciation and amortization 11,762 10,780
----------- -----------
Income before taxes and minority interest 2,828 25,344
Provision for income taxes 990 8,871
Minority interest - 688
----------- -----------
Net income $ 1,838 $ 15,785
=========== ===========
Net income per common share $ .06 $ .46
=========== ===========
Weighted average shares outstanding 33,372 31,030
=========== ===========
Daily Production
Oil (Bbls) 5,095 5,816
Gas (Mcf) 136,041 108,910
The accompanying notes are an integral part of these statements.
7
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The consolidated financial statements include the accounts of 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 using the equity method. Entities in
which the Company owns less than 20% are accounted for using the cost method. At
March 31, 1998, entities accounted for under this method included Cairn and SOCI
plc. The Company accounts for its interest in joint ventures and partnerships
using the proportionate consolidation method, whereby its proportionate 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 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 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
three months ended March 31, 1998 and 1997, the Company did not provide for any
such impairments. 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 and
other assets. Oil and gas properties are generally assessed on a
property-by-property basis. If an impairment is indicated based on undiscounted
expected future net cash flows, then it is recognized to the extent that net
capitalized costs exceed discounted expected future net cash flows. During the
three months ended March 31, 1998 and 1997, the Company did not provide for any
such impairments.
Section 29 Tax Credits
The Company has entered 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
8
$255,000 and $801,000 during the three months ended March 31, 1998 and 1997,
respectively. Of these amounts, $518,000 in 1997 was recognized by Patina. These
arrangements, excluding Patina, 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 March 31, 1998 and
December 31, 1997 were not significant.
Financial Instruments
The following table sets forth the book value and estimated fair values
of financial instruments:
March 31, December 31,
1998 1997
---------------------------- ---------------------------
Book Fair Book Fair
Value Value Value Value
----------- ------------ ------------ ------------
(In thousands)
Cash and equivalents $ 72,391 $ 72,391 $ 89,443 $ 89,443
Investments 118,408 118,408 143,066 143,066
Senior debt (1) (1) (1) (1)
Subordinated notes (173,662) (179,813) (173,635) (178,063)
Long-term commodity contracts - 7,566 - 7,318
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 are
estimated based on their March 31, 1998 and December 31, 1997 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 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's per day through 2004. At March 31, 1998, that volume represented
approximately 33% of the Company's Rocky Mountain gas production. The fair value
of the contract was based on the market price quoted for a similar instrument.
At March 31, 1998, the Company had entered into various swap sales
contracts with a weighted average price (NYMEX based) of $2.30 for contract
volumes of 17,275,000 MMBtu's (approximately 81,000 MMBtu's per day) of natural
gas for April through October 1998. Also, the Company had entered into various
swap sales contracts with a weighted average price (CIG-Inside FERC based) of
$1.71 for contract volumes of 3,638,000 MMBtu's (approximately 17,000 MMBtu's
per day) of natural gas for April through October 1998. The unrecognized loss on
these contracts totaled $4.7 million based on March 31, 1998 product prices.
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
9
statements (all of which are of a normal and recurring in 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 1997
Annual Report on Form 10-K.
(3) INVESTMENTS
The Company holds marketable securities of two foreign energy companies
accounted for using the cost method. The Company follows Statement of Financial
Accounting Standards No. 115 ("SFAS 115"), "Accounting for Certain Investments
in Debt and Equity Securities," which requires that such investments be adjusted
to their fair value with a corresponding increase or decrease to stockholders'
equity. The following table sets forth the book/fair values and carrying costs
of these investments (in thousands):
March 31, 1998 December 31, 1997
---------------------------- ----------------------------
Book/Fair Carrying Book/Fair Carrying
Value Cost Value Cost
----------- ----------- ----------- -----------
Cairn $ 81,143 $ 73,140 $ 96,062 $ 73,140
SOCI plc 37,265 30,923 47,004 30,923
----------- ----------- ----------- -----------
$ 118,408 $ 104,063 $ 143,066 $ 104,063
=========== =========== =========== ===========
Cairn
In November 1996, the Company exchanged its interest in Command
Petroleum Ltd for 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. In the first quarter of
1997, the Company sold 4.5 million shares at an average price of $8.81 per share
realizing $39.2 million in proceeds resulting in a gain of $13.0 million. In
accordance with SFAS 115, at March 31, 1998 and December 31, 1997, respectively,
investments were increased by $8.0 million and $22.9 million in gross unrealized
holding gains, stockholders' equity was increased by $5.2 million and $14.9
million and deferred taxes payable were increased by $2.8 million and $8.0
million. As of May 11,1998, the fair value of the Company's investment in Cairn
was $66.8 million.
SOCI plc
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 SOCO International Operations,
Inc., which included the Company's interests in projects in Russia, Mongolia and
Thailand, for 7.8 million shares (15.9% of the total) of SOCI plc. The offering
raised approximately $75 million of new equity capital for SOCI plc to fund its
ongoing projects. The Company recognized a gain of $19.8 million as a result of
this exchange and is restricted from selling its shares until May 1999. In
accordance with SFAS 115, at March 31, 1998 and December 31, 1997, respectively,
investments were increased by $6.3 million and $16.1 million in gross unrealized
holding gains, stockholders' equity was increased by $4.1 million and $10.5
million and deferred taxes payable were increased by $2.2 million and $5.6
million.
Notes Receivable
The Company held notes receivable due from a director at December 31,
1997, which originated in connection with an option to purchase 10% of the
Company's international affiliates due April 10, 1998. As such, the notes were
classified as current assets. In March 1998, the director tendered 31,000 shares
of Company common stock to retire the notes.
10
(4) OIL AND GAS PROPERTIES AND GAS FACILITIES
The cost of oil and gas properties at March 31, 1998 and December 31,
1997 includes $22.2 million and $21.3 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 Year Ended December 31, 1997
Months Ended ---------------------------------
March 31, Excluding
1998 Patina Patina
-------------- ------------- -------------
(In thousands)
Proved acquisitions $ 3,270 $ 3,338 $ 338
Acreage acquisitions 1,189 5,609 -
Development 19,184 74,676 11,322
Exploration 3,213 17,217 121
Gas processing, transportation and other 1,185 3,096 329
-------------- ------------- -------------
$ 28,041 $ 103,936 $ 12,110
============== ============= =============
Of the $19.2 million development expenditures, the majority was
concentrated in the Gulf of Mexico and Rocky Mountains. During the three months
ended March 31, 1998, the Company placed 17 wells on sales with 10 wells in
progress at quarter end. In October 1997, the Company sold its interest in
Patina with net proceeds of approximately $127 million.
(5) INDEBTEDNESS
The following indebtedness was outstanding on the respective dates:
March 31, December 31,
1998 1997
-------------- -------------
(In thousands)
Bank facility $ 1 $ 1
Subordinated notes 173,662 173,635
-------------- -------------
$ 173,663 $ 173,636
============== =============
The Company maintains a $500 million revolving credit facility. The
facility is divided into a $400 million long-term portion and a $100 million
short-term portion. Credit availability is adjusted semiannually to reflect
changes in reserves and asset values. The borrowing base available under the
facility was $120 million at March 31, 1998. Subsequent to quarter end, the
Company elected to reduce its borrowing base to $100 million. Borrowings under
the facility generally bear interest at prime, with an option to select LIBOR
plus .75% or 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 1998, the average
interest rate available under the facility was 6.4%. The Company pays certain
fees based on the unused portion of the borrowing base. Covenants, in addition
to other requirements, require maintenance of a current working capital ratio of
1 to 1 as defined, limit the incurrence of additional 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 $130 million was available for the payment of
dividends and other restricted payments at March 31, 1998.
11
In June 1997, the Company issued $175.0 million of 8.75% Senior
Subordinated Notes ("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 $168.3 million which were used to redeem convertible subordinated
notes and pay down the balance outstanding under the credit facility. 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, the Company would be obligated to make an offer to purchase all
outstanding Notes at a price of 101% of the principal amount thereof. In
addition, the Company 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 100% of the principal amount
thereof. The Notes are unsecured general obligations of the Company and are
subordinated to the credit facility and to any existing and future indebtedness
of the Company's subsidiaries. The Notes contain covenants that, among other
things, limit the ability of the Company 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. 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 $100 million was available for the payment of
dividends and other restricted payments at March 31, 1998. The Company's
international investments are held through unrestricted subsidiaries. As such,
their activities and the proceeds realized from any disposition of these
interests are not restricted by the Note convenants.
In 1994, the Company 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 or $2.8
million net of tax ($.09 per common share) which was recorded as an
extraordinary item.
Scheduled maturities of indebtedness for the next five years are zero
in 1998 and 1999, $1,000 in 2000 and zero in 2001 and 2002. The long-term
portion of the credit facility is scheduled to expire in 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 zero and $7.8 million, respectively, for the quarters ended March
31, 1998 and 1997.
(6) FEDERAL INCOME TAXES
At March 31, 1998, 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 three months ended March 31, 1998 and 1997
follows:
Three Months Ended March 31,
1998 1997
------------- -------------
Federal statutory rate 35% 35%
Net change in subsidiary valuation allowance - (4%)
------------- -------------
Effective income tax rate 35% 31%
============= =============
The Company had regular net operating loss carryforwards of $78.0
million at December 31, 1997. The majority of these carryforwards expire between
2006 and 2010 with a minimal amount expiring between 1998 and 2005. At December
31, 1997, the Company also had alternative minimum tax credit carryforwards of
$1.4 million which are available indefinitely. Cash payments for income taxes
were $500,000 during the three months ended March 31, 1998 and during 1997.
12
(7) STOCKHOLDERS' EQUITY
A total of 75 million common shares, $.01 par value, are authorized of
which 35.9 million were issued and 33.4 million were outstanding at March 31,
1998. During the three months ended March 31, 1998, the Company issued 171,000
shares primarily for the exercise of stock options, repurchased 43,000 shares
for $755,000 and received 31,000 shares, which are held in treasury, to retire
notes receivable from a director. In 1997, the Company issued a total of 4.2
million shares of common stock as follows: 3.6 million for the conversion of
preferred shares, 300,000 in exchange for 2.1 million of outstanding warrants
and 308,000 primarily for the exercise of stock options. The Company also issued
530,000 shares of treasury stock in exchange for a director's 10% interest in
SOCO International Holdings, Inc. During 1997, the Company repurchased 2.6
million shares of common stock for $45.6 million. Quarterly dividends of $.065
per share were paid in the first quarter of 1998 and during 1997. For book
purposes, for the period between June 1995 and September 1996, 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, have been
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. During 1996,
the Company repurchased 6,000 shares for $142,000. During 1997, the Company
called the preferred stock for redemption. The preferred stock was convertible
into common stock at $20.46 per share or the liquidation preference was $25.00
per depositary share, plus accrued and unpaid dividends. As a result of the
call, 72% of the preferred shares were converted into 3.6 million shares of
common stock. The remaining preferred shares were redeemed for $29.1 million
before accrued dividends and a redemption premium. 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.
13
Effective December 31, 1997, the Company adopted Statement of Financial
Accounting Standards No. 128 ("SFAS 128"), "Earnings per Share" which prescribes
standards for computing and presenting earnings per share and supersedes APB
Opinion No. 15, "Earnings per Share." In accordance with SFAS 128, income
applicable to common has been calculated based on the weighted average shares
outstanding during the year and income applicable to common-assuming dilution
has been calculated assuming the exercise or conversion of all dilutive
securities as of January 1, 1998 and 1997, or as of the date of issuance if
later. The following table illustrates the calculation of earnings per share for
income from continuing operations.
Income Shares Per-Share
----------- ----------- -----------
For the Three Months Ended March 31, 1998
-----------------------------------------
Income applicable to common
Income available to common shareholders $ 1,838 33,372 $ .06
Effect of dilutive securities
Stock options - 210
----------- -----------
Income applicable to common-assuming dilution
Income available to common shareholders +
assumed conversions $ 1,838 33,582 $ .05
=========== =========== ===========
For the Three Months Ended March 31, 1997
-----------------------------------------
Net income $ 19,926
Preferred dividends (1,550)
-----------
Income applicable to common
Income available to common shareholders 18,376 31,030 $ .59
Effect of dilutive securities
Stock options - 172
Convertible preferred stock 1,550 5,052
Convertible debt 919 3,578
----------- -----------
Income applicable to common-assuming dilution
Income available to common shareholders +
assumed conversions $ 20,845 39,832 $ .52
=========== =========== ===========
As of March 31, 1998, the only potentially dilutive securities
outstanding were stock options that have yet to be exercised.
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.
14
(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 1998, $2.8 million for 1999 and 2000, $1.8 million
for 2001 and $153,000 for 2002.
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, have unlawfully comingled production with
production from other leases and have breached their duties to reasonably
develop the lease. The plaintiffs also claim damages for fraud, co-mingling,
trespass and similar matters, and demand actual and punitive damages. Although
the complaint does not specify the amount of damages claimed, plaintiffs have
submitted calculations showing total damages against all owners in excess of
$100 million. The Company and the other interest owners have filed an answer
denying the claims and intend to contest the suit vigorously. The suit is
currently in discovery.
At this time, the Company is unable to estimate the range of potential
loss, if any, from the foregoing uncertainty. However, the Company believes that
resolution should not have a material adverse effect on 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 and its subsidiaries and affiliates are named defendants in
lawsuits and involved from time to time in governmental proceedings, all arising
in the ordinary course of business. Although the outcome of these lawsuits and
proceedings cannot be predicted with certainty, management does not expect these
matters to have a material adverse effect on the financial position of the
Company.
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
Snyder Oil Corporation (the "Company") is engaged in the production,
development, acquisition and exploration of domestic oil and gas properties,
primarily in the Gulf of Mexico, the Rocky Mountains 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"),
both listed on the London Stock Exchange.
During 1997, the Company consummated several transactions to simplify
its operating and capital structure.
* The Company exchanged its international operational holdings for stock
in SOCI plc, which simultaneously completed an initial public offering
of its stock on the London Stock Exchange to raise capital to fund its
ongoing exploration and development efforts. This transaction
effectively replaced the Company's equity investments in all of its
international ventures (except its holding in Cairn) with one
marketable security.
* The Company issued $175 million in ten-year, 8.75% subordinated debt
and used the proceeds to redeem the outstanding 7% convertible
subordinated debt and to pay down its revolving credit facility. These
transactions provided the capacity for the Company to enter into a
large acquisition from existing credit sources, extended the maturity
of subordinated debt at an attractive rate for the next ten years and
eliminated the potential dilution of common shareholders from the
convertible subordinated debt.
* The Company sold its 74% interest in Patina Oil and Gas Corporation
("Patina") for approximately $127 million in cash and the elimination
of approximately $170 million in debt. This transaction provided cash
and additional acquisition capacity while simplifying the capital
structure of the Company. Patina was restricted by its debt covenants
from paying dividends to its shareholders; thus the Company did not
directly benefit from the cash flow of Patina.
* The Company issued 300,000 common shares in exchange for 2.1 million
outstanding warrants, which also reduced the potential dilution of the
common shareholders of the Company.
* The Company called its preferred stock for redemption with 72%
converting to common (3.6 million shares issued) and the remainder
being redeemed for $30.1 million of cash. This transaction eliminated
1.4 million shares of additional potential dilution to the common
shareholders of the Company and over $6 million per year in preferred
dividend payments.
The aforementioned transactions simplified the Company's capital
structure and, together with the sale of nonstrategic assets during 1995 and
1996, positioned the Company to focus on its core growth areas with all future
increases in value going to the common shareholders of the Company.
Unless indicated otherwise, amounts in the following 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
Net income for the first quarter was $1.8 million as compared to $19.9
million in the same period in 1997. During the first quarter 1997, the Company
recognized a $13.0 million gain on the sale of 4.5 million shares of Cairn stock
and Patina contributed $4.1 million to net income.
16
The following table sets forth certain operating information of the
Company for the periods presented.
Excluding Patina Consolidated
------------------------- -------------------------
Three Months Ended Three Months Ended
March 31, Increase March 31, Increase
1998 1997 (Decrease) 1998 1997 (Decrease)
----------- ----------- ---------- ----------- ----------- ----------
Oil and gas sales (in thousands) $ 32,822 $ 38,408 (15%) $ 32,822 $ 67,848 (52%)
Production margin (in thousands) $ 24,374 $ 29,362 (17%) $ 24,374 $ 53,827 (55%)
Daily production:
Oil (Bbls) 5,095 5,816 (12%) 5,095 11,137 (54%)
Gas (Mcf) 136,041 108,910 25% 136,041 183,027 (26%)
Equivalent barrels (BOE) 27,768 23,968 16% 27,768 41,641 (33%)
Average Prices:
Oil ($/Bbl) $ 13.07 $ 20.84 (37%) $ 13.07 $ 21.18 (38%)
Gas ($/Mcf) $ 2.19 $ 2.81 (22%) $ 2.19 $ 2.83 (23%)
Equivalent barrel ($/BOE) $ 13.13 $ 17.81 (26%) $ 13.13 $ 18.10 (27%)
DD&A per BOE $ 4.71 $ 5.00 (6%) $ 4.71 $ 6.19 (24%)
Oil and gas sales, excluding Patina, decreased 15% due to a 26%
decrease in oil and gas prices partially offset by a 16% increase in production.
The 25% increase in gas production is the result of development drilling
offshore at Main Pass 255 and 259 and High Island 208 coupled with initial
production from Main Pass 261 commencing in March 1998. Also, production from
the Deep Green River and Washakie Basins in Wyoming has seen steady growth from
an active development program. The 12% decrease in oil production is attributed
to the Company delaying workovers and drilling related to oil projects where
feasible in light of low oil prices. The Company expects increasing production
from exploratory and development drilling to largely replace Patina's 1997
production contribution by the end of 1998.
Production margin (oil and gas sales less direct operating expenses)
for the quarter ended March 31, 1998, excluding Patina, decreased 17% compared
to the same period in 1997 largely due to lower oil and gas prices offset
partially by increased production and lower operating costs. Operating costs per
BOE, excluding Patina, were $3.38 for the first quarter 1998 compared to $4.19
for the same period in 1997 due to ongoing cost cutting efforts and the absence
of production taxes on the growing production in the Gulf of Mexico.
Exploration expense for the first quarter of 1998 increased by $1.5
million from the same period in 1997 to $3.2 million. The expenditures are
primarily for 3-D seismic data centered around exploration plays in the Gulf of
Mexico and in northern Louisiana.
General and administrative expenses, net of reimbursements, for the
first quarter of 1998 were $4.2 million, or $1.3 million less than the same
period in 1997. The decrease is attributable to the disposition of Patina.
Interest expense, net of interest income, was $2.8 million for the
first quarter of 1998 compared to $6.6 million for the same period in 1997.
Patina contributed $4.4 million to the 1997 amount. Excluding Patina, there was
a net $613,000 increase as a result of the higher principal amount and effective
interest rate from the subordinated notes issued in June 1997, offset partially
by higher interest income. Interest income for the first quarter of 1998 was
$1.1 million compared to $208,000 for the same period in 1997, as the Company
had a higher average cash balance due to the proceeds from the disposition of
Patina which have yet to be redeployed.
Depletion, depreciation and amortization expense, excluding Patina, for
the quarter ended March 31, 1998, increased $1.0 million to $11.8 million. The
increase can be primarily attributed to the 16% increase in production. However,
depletion, depreciation and amortization per BOE, excluding Patina, was $4.71
during the first quarter of 1998 compared to $5.00 for the same period in 1997
as a result of the Company's successful drilling programs.
17
Acquisition,Exploration and Development
During the three months ended March 31, 1998, the Company incurred
$28.0 million in capital expenditures, including $19.2 million for development,
$4.4 million for property acquisitions, $3.2 million for exploration, $1.2
million for field and office equipment and $23,000 for gas facility expansion.
Of the total development expenditures, $11.0 million was concentrated
in the Gulf of Mexico where three wells were in progress at quarter end. The
Company expended $2.6 million in the East Washakie Basin of southern Wyoming to
place six wells on sales with three in progress at quarter end. In the Green
River Basin of southern Wyoming, $2.2 million was incurred to place four wells
on sales with one in progress at quarter end. The Company expended $1.9 million
in the Piceance Basin of western Colorado to place six wells on sales with one
in progress at quarter end.
The Company expended $4.4 million relating to property acquisitions
during the first quarter 1998. Of this amount, $3.2 million was for producing
properties and $1.2 million was for unevaluated properties.
The $3.2 million of exploration expense was primarily for the purchase
of seismic in the Gulf of Mexico, north Louisiana and Rocky Mountains.
Financial Condition and Capital Resources
During the first quarter 1998, net cash provided by operations was
$21.3 million, an increase of 20% compared to the fourth quarter 1997. As of
March 31, 1998, commitments for capital expenditures totaled $6.9 million. The
Company anticipates that 1998 expenditures for exploration and development will
approximate $130 to $140 million. The level of these and other future
expenditures is largely discretionary, and the amount of funds devoted to any
particular activity may increase or decrease significantly, depending on
available opportunities and market conditions. The Company plans to finance its
ongoing development, acquisition and exploration expenditures using internally
generated cash flow, available cash, marketable securities and existing credit
facilities.
At March 31, 1998, the Company had total assets of $515.8 million.
Total capitalization was $421.7 million, of which 59% was represented by
stockholders' equity and 41% by subordinated debt. At March 31, 1998, the
Company had $72.4 million in cash and equivalents, and marketable securities
with a market value of $118.4 million for its investment in Cairn and SOCI plc.
The Company maintains a $500 million revolving credit facility. The
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, 1998 was $120 million. Subsequent to
quarter end, the Company elected to reduce its borrowing base to $100 million.
During the first quarter 1998, the average interest rate available under the
facility was 6.4%. At March 31, 1998, the Company had $1,000 outstanding under
the facility. Covenants, in addition to other requirements, require maintenance
of a current working capital ratio of 1 to 1 as defined, limit the incidence of
additional 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 $130 million was
available for the payment of dividends and other restricted payments at March
31, 1998.
In June 1997, the Company issued $175.0 million of 8.75% Senior
Subordinated Notes ("Notes") due June 15, 2007. The net proceeds of the offering
were $168.3 million which were used to redeem the Company's convertible
subordinated notes due May 15, 2001, and reduce the balance outstanding under
the credit facility. 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. The Notes contain covenants that, among other things, limit the
ability of the Company to incur additional indebtedness, pay dividends, engage
18
in transactions with shareholders and affiliates, create liens, sell assets,
engage in mergers and consolidations and make investments in 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 $100 million was available for the payment of dividends
and other restricted payments at March 31, 1998.
The Board has authorized, at management's discretion, the repurchase of
up to $70 million of the Company's securities. From 1996 through first quarter
of 1998, the Company repurchased 3.5 million common shares for $54.0 million
under this plan. During 1997, the Company redeemed its preferred depositary
shares by issuing 3.6 million shares of common stock and paying $30.1 million in
cash.
The Company has developed a plan to ensure its systems are in
compliance with the requirements to process transactions in the year 2000 and
beyond. The majority of the Company's systems are already compliant, with a
detailed plan for the remaining systems scheduled to be modified or replaced
within one year. The costs associated with final compliance are not considered
material.
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 the Company's 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. In addition, changing prices often cause costs
of equipment and supplies to vary as industry activity levels increase and
decrease to reflect perceptions of future price levels. 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
1998 and 1997. Average gas prices for the three months ended March 31, 1998 and
the year ended December 31, 1997 increased by $.20 and $.05 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
------
1997 $ 18.88 $ 2.29 $ 15.06
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
Quarterly
---------
1998
----
First $ 13.07 $ 2.19 $ 13.13
1997
----
First $ 21.18 $ 2.83 $ 18.10
Second 18.33 1.85 13.09
Third 18.09 1.97 13.38
Fourth 16.86 2.65 16.09
In March 1998, the Company received an average of $12.43 per barrel and
$2.04 per Mcf for its production.
Forward-looking Information
All statements other than statements of historical fact contained in
this Quarterly Report on Form 10-Q and other materials filed or to be filed by
the Company with the Securities and Exchange Commission (as well as information
included in oral statements or other written statements made or to be made by
the Company) contain or will contain or include forward-looking statements
within the meaning of the Private Securities Litigation Reform Act of 1995. Such
forward-looking statements may be or may concern, among other things, capital
expenditures, drilling activity, acquisitions and dispositions, development or
exploratory activities, cost savings efforts, production activities and volumes,
hydrocarbon reserves, hydrocarbon prices, hedging activities and the results
thereof, financing plans, liquidity, regulatory matters, competition and the
Company's ability to realize efficiencies related to certain transactions or
organizational changes.
20
Forward-looking statements generally are accompanied by words such as
"anticipate," "believe," "estimate," "expect," "intend," "plan," "project,"
"potential" or similar statements. Although the Company believes that the
expectations reflected in such forward-looking statements are reasonable, no
assurance can be given that such expectations will prove correct. Factors that
could cause the Company's results to differ materially from the results
discussed in such forward-looking statements include the risks described under
"Risk Factors and Investment Considerations" in the Company's Annual Report on
Form 10-K, such as the fluctuations of the prices received or demand for the
Company's oil and gas, the ability to replace depleting reserves, potential
additional indebtedness, the requirements for capital, drilling risks, operating
hazards, the cost and availability of drilling rigs, acquisition risks, the
uncertainty of reserve estimates, competition and the effects of governmental
and environmental regulation. All forward-looking statements are expressly
qualified in their entirety by the cautionary statements in this section.
21
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits -
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 Dividends.
27 Financial Data Schedule.
(b) No reports on Form 8-K were filed during the quarter ended March 31, 1998.
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
May 12, 1998
23