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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
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[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
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or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number 1-10874
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MESA Inc.
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(Exact name of registrant as specified in its charter)
Texas 75-2394500
----- ----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
1400 Williams Square West
5205 North O'Connor Boulevard
Irving, Texas 75039
- ---------------------------- -----
(Address of Principal (Zip Code)
Executive Offices) (972) 444-9001
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(Registrant's telephone number)
(No changes)
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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
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Number of shares outstanding as of the close of business on August 5,
1997: 64,279,568
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PART I - FINANCIAL INFORMATION
==============================
Item 1. Financial Statements
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MESA Inc.
=========
Consolidated Statement of Operations
-------------------------------------
(in thousands, except per share data)
(unaudited)
Three Months Ended Six Months Ended
June 30 June 30
------------------- -------------------
1997 1996 1997 1996
-------- -------- -------- --------
REVENUES:
Natural gas...............................$ 34,246 $ 44,243 $ 88,810 $ 94,810
Natural gas liquids....................... 20,395 19,979 50,439 43,115
Oil and condensate........................ 19,709 4,484 26,087 8,847
Other..................................... 3,644 2,616 6,801 5,193
-------- -------- -------- --------
77,994 71,322 172,137 151,965
-------- -------- -------- --------
COSTS AND EXPENSES:
Lease operating........................... 17,227 12,077 35,281 25,039
Production and other taxes................ 6,124 4,893 12,048 10,299
Exploration charges....................... 2,134 2,270 8,067 2,814
General and administrative................ 5,476 8,954 9,277 14,538
Depreciation, depletion and amortization.. 30,787 22,068 56,510 46,064
Impairment of long-lived assets............ 2,907 -- 2,907 6,828
-------- -------- -------- --------
64,655 50,262 124,090 105,582
-------- -------- -------- --------
OPERATING INCOME............................... 13,339 21,060 48,047 46,383
-------- -------- -------- --------
OTHER INCOME (EXPENSE):
Interest income.......................... 297 3,747 764 6,964
Interest expense......................... (25,611) (36,164) (48,335) (73,913)
Gains on investments..................... -- 586 -- 9,349
Gain from adjustment of contingency
reserve................................ -- 15,000 -- 15,000
Other.................................... (2,263) 318 (2,493) 1,821
-------- -------- -------- --------
(27,577) (16,513) (50,064) (40,779)
-------- -------- -------- --------
NET INCOME (LOSS)............................. $(14,238) $ 4,547 $ (2,017) $ 5,604
DIVIDENDS ON PREFERRED STOCK ................. (5,609) -- (11,105) --
-------- -------- -------- --------
NET INCOME (LOSS) APPLICABLE TO COMMON STOCK $(19,847) $ 4,547 $(13,122) $ 5,604
======== ======== ======== ========
NET INCOME (LOSS) PER COMMON SHARE AND
COMMON SHARE EQUIVALENT ...................... $ (0.31) $ 0.07 $ (0.20) $ 0.09
======== ======== ======== ========
WEIGHTED AVERAGE COMMON SHARES AND COMMON
SHARE EQUIVALENTS OUTSTANDING................. 64,280 64,057 64,280 64,053
======== ======== ======== ========
(See accompanying notes to consolidated financial statements.)
MESA Inc.
=========
Consolidated Balance Sheets
---------------------------
(in thousands, except share data)
June 30, December 31,
ASSETS 1997 1996
------------ ------------
(unaudited)
CURRENT ASSETS:
Cash and cash investments.................... $ 20,751 $ 16,681
Accounts and notes receivable................ 45,077 63,410
Other........................................ 5,004 4,186
------------ ------------
Total current assets.................... 70,832 84,277
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PROPERTY, PLANT AND EQUIPMENT:
Oil and gas properties, wells and
equipment using the successful
efforts method of accounting............... 2,337,133 1,975,684
Office and other............................. 39,954 36,740
Accumulated depreciation, depletion
and amortization........................... (1,025,355) (966,040)
------------ ------------
1,351,732 1,046,384
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OTHER ASSETS:
Gas balancing receivable..................... 42,978 61,204
Other........................................ 39,916 22,014
------------ ------------
82,894 83,218
------------ ------------
$ 1,505,458 $ 1,213,879
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current maturities on long-term debt......... $ 5,305 $ 5,305
Accounts payable............................. 2,423 10,085
Interest payable............................. 23,436 21,150
Other accrued liabilities.................... 27,786 32,960
------------ ------------
Total current liabilities............... 58,950 69,500
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LONG-TERM DEBT.................................... 1,102,999 802,772
------------ ------------
DEFERRED REVENUE.................................. 14,793 14,977
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OTHER LIABILITIES................................. 65,239 61,136
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CONTINGENCIES
STOCKHOLDERS' EQUITY:
8% Cumulative convertible preferred
stock, $.01 par value, authorized
500,000,000 shares; outstanding
126,557,019 shares and 121,643,686 shares,
respectively............................... 1,266 1,216
Common stock, $.01 par value, authorized
600,000,000 shares; outstanding 64,279,568
shares and 64,279,568 shares, respectively. 643 643
Additional paid-in capital................... 667,860 656,805
Accumulated deficit.......................... (406,292) (393,170)
------------ ------------
263,477 265,494
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$ 1,505,458 $ 1,213,879
============ ============
(See accompanying notes to consolidated financial statements.)
MESA Inc.
=========
Consolidated Statements of Cash Flows
-------------------------------------
(in thousands)
(unaudited)
Six Months Ended
June 30
-------------------
1997 1996
-------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)................................. $ (2,017) $ 5,604
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation, depletion and amortization..... 56,510 46,064
Impairment of long-term assets............... 2,907 6,828
Accreted interest on discount notes.......... 9,227 (215)
Gains from investments....................... -- (9,349)
Changes in operating receivables and payables 11,554 (20,053)
Sales (purchases) of investments............. (405) 47,625
Other........................................ 9,986 2,069
-------- --------
Cash provided by operating activities........ 87,762 78,573
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures.............................. (371,960) (19,664)
Other............................................. 280 (90)
-------- --------
Cash used in investing activities............ (371,680) (19,754)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Long-term borrowings ............................. 349,000 --
Repayments of long-term debt...................... (58,000) (34,865)
Other............................................. (3,012) 1,294
-------- --------
Cash provided by (used in) financing
activities................................. 287,988 (33,571)
-------- --------
NET INCREASE IN CASH AND CASH INVESTMENTS.............. 4,070 25,248
CASH AND CASH INVESTMENTS AT BEGINNING OF PERIOD....... 16,681 149,143
-------- --------
CASH AND CASH INVESTMENTS AT END OF PERIOD............. $ 20,751 $174,391
======== ========
(See accompanying notes to consolidated financial statements.)
MESA Inc.
=========
Consolidated Statement of Changes in Stockholders' Equity
---------------------------------------------------------
(in thousands)
(unaudited)
December 31, Net June 30,
1996 Loss Dividends 1997
----------- -------- --------- ---------
Common Stock..................... $ 643 $ -- $ -- $ 643
8% Cumulative Convertible
Preferred Stock
Series A...................... 604 -- 25 629
Series B...................... 612 -- 25 637
Additional Paid in Capital....... 656,805 -- 11,055 667,860
Accumulated Deficit.............. (393,170) (2,017) (11,105) (406,292)
----------- -------- -------- ---------
Total Stockholders' Equity....... $ 265,494 $ (2,017) $ -- $ 263,477
=========== ======== ======== =========
Shares Outstanding
Common Stock.................. 64,280 -- -- 64,280
Series A...................... 60,443 -- 2,441 62,884
Series B...................... 61,201 -- 2,472 63,673
(See accompanying notes to consolidated financial statements.)
MESA Inc.
=========
Notes to Consolidated Financial Statements
------------------------------------------
June 30, 1997
(unaudited)
(1) ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
===========================================================
MESA Inc., a Texas corporation, was formed in 1991 to reorganize the
business of Mesa Limited Partnership. Unless the context otherwise requires,
as used herein the term "MESA" refers to MESA Inc. and its subsidiaries taken
as a whole and includes its predecessors.
MESA is primarily in the business of acquiring, exploring for,
developing, producing, processing and selling natural gas and oil in the
United States. For the six months ended June 30, 1997, 57 percent of MESA's
equivalent production was natural gas, 30 percent was natural gas liquids, and
13 percent was oil and condensate. MESA's primary producing areas are the
Hugoton field of southwest Kansas, the West Panhandle field of Texas and the
Gulf of Mexico, offshore Texas and Louisiana. Production from MESA's
properties has access to a substantial portion of the major metropolitan
markets in the United States, primarily in the midwest and northeast, through
numerous pipelines and other purchasers. In the first quarter of 1997, MESA
acquired additional condensate and natural gas liquids ("NGL") interests (the
"Liquids Acquisition") in the West Panhandle field of Texas from MAPCO, Inc.
and its affiliates ("MAPCO"). In the second quarter of 1997, MESA closed its
acquisition of Greenhill Petroleum Corporation ("Greenhill") from Western
Mining Corporation (USA) (the "Greenhill Acquisition"). The Greenhill
Acquisition provides MESA with reserve and production growth opportunities, a
new core area onshore Gulf Coast and increased oil reserves.
The consolidated financial statements of MESA for the three and six month
periods ended June 30, 1997 and 1996, are unaudited but reflect, in the
opinion of management, all adjustments (which include only normal recurring
adjustments) necessary to fairly present the results for such periods. The
accompanying financial statements should be read in conjunction with the
audited consolidated financial statements and notes thereto contained in
MESA's Annual Report on Form 10-K/A ("Form 10-K") for the year ended December
31, 1996.
The preparation of the consolidated financial statements of MESA 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 consolidated financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results could
differ from the estimates.
Certain reclassifications have been made to amounts reported in the
previous year to conform to 1997 presentation.
Impairment of Long-Term Assets
- ------------------------------
In 1996, MESA adopted Statement of Financial Accounting Standards No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets
to Be Disposed Of," ("SFAS No. 121") which establishes accounting standards
for the impairment of long-lived assets, certain identifiable intangibles and
goodwill. SFAS No. 121 requires a review for impairment whenever circumstances
indicate that the carrying amount of an asset may not be recoverable. In
performing the review for recoverability, MESA estimates future cash flows
(undiscounted and without interest charges) expected to result from use of an
asset and its eventual disposition. Impairment is recognized only if the
carrying amount of an asset is greater than the expected future cash flows.
The amount of impairment is based on the fair value of the asset. Under SFAS
No. 121, each property is individually evaluated for impairment. The results
for the six months ended June 30, 1996, include $6.8 million resulting from
impairment of long-term assets in accordance with initial adoption of SFAS No.
121. Such impairment relates primarily to a Gulf of Mexico oil and gas
property. The results for the three- and six-months ended June 30, 1997,
includes $2.9 million resulting from impairment of long-term assets held for
sale.
Revenues
- --------
MESA recognizes its ownership interest in production as revenue. Actual
production quantities sold may be different from MESA's ownership share of
production in a given period. MESA records these differences as gas balancing
receivables or as deferred revenue. The receivable or deferred revenue
component of revenues in future periods is dependent on future rates of
production, field allowables and the amount of production taken by MESA or by
its joint interest partners.
MESA periodically utilizes financial and physical energy markets as a
hedge against commodity price fluctuations. Gains or losses on hedges are
deferred and recognized as natural gas revenue when the hedged production
occurs. MESA recognized net gains from hedging activities of $2.9 million and
$1.1 million for the three- and six-month periods ended June 30, 1997,
respectively. MESA did not hedge production during the first six months of
1996.
(2) INVESTMENTS
===========
Since April 10, 1996, MESA has made no speculative investments in
commodity futures contracts. Speculative investments are expected to be
limited in the future.
For the six months ended June 30, 1996, MESA recognized net gains of
approximately $9.3 million from its investments. The net investment gains and
losses recognized during a period include both realized and unrealized gains
and losses. MESA realized net gains from investments of $16.9 million for the
six months ended June 30, 1996. At June 30, 1996, MESA had no open futures
contracts and no unrealized gain or loss on investments.
In 1995 MESA entered into certain over-the-counter commodity price swap
agreements for trading purposes. MESA was required to make payments to (or
receive payments from) a counter party based on the differential between a
fixed and a variable price for specified natural gas volumes. MESA's
agreements were to expire on the last day of trading for April, May and June
1996 natural gas futures contracts as determined by the NYMEX. During the six
months ended June 30, 1996, MESA closed all of these positions, which related
to 10.1 million British thermal units ("BTUs") of natural gas, at a gain of
$3.4 million.
These gains do not include gains or losses from financial instruments
accounted for as a hedge of oil and gas production. Hedge gains and losses
are included in revenue in the period in which the hedged production occurs.
(3) LONG-TERM DEBT
==============
Long-term debt and current maturities are as follows (in thousands):
June 30, December 31,
1997 1996
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10-5/8% Senior Subordinated Notes........... $ 325,000 $ 325,000
11-5/8% Senior Discount Notes............... 167,999 158,772
Credit Facility............................. 610,000 319,000
Other....................................... 5,305 5,305
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1,108,304 808,077
Current maturities.......................... (5,305) (5,305)
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Long-term debt.............................. $1,102,999 $ 802,772
========== ==========
Recapitalization
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In August of 1996, MESA completed a recapitalization (the
"Recapitalization") led by Richard E. Rainwater who, along with existing
shareholders, injected $265 million of equity into MESA. This equity infusion
enabled MESA to substantially reduce its overall debt level and debt service
requirements.
Credit Facility
- ---------------
In conjunction with the Recapitalization, MESA entered into a seven-year
$525 million secured revolving credit facility ("the Credit Facility"). Mesa
Operating Co.("MOC"), a wholly owned subsidiary of MESA Inc., is the borrower
under the Credit Facility and all borrowings are fully and unconditionally
guaranteed by MESA Inc. The Credit Facility, which is secured by liens on
substantially all of MESA's assets, matures on June 30, 2003. The borrowing
base for the Credit Facility is determined from the value of MESA's proved oil
and gas reserves. In order to accommodate the additional debt incurred in the
Greenhill Acquisition, the Credit Facility was amended to increase the
borrowing base to $650 million. As of June 30, 1997, the Credit Facility
supported Letters of Credit totaling $29.7 million and MESA had $10.3 million
of unused borrowing capacity. Borrowings bear interest, at MESA's option, at
Interbank Eurodollar rates plus 1-1/2%, CD rates plus 1-1/2%, Fed Funds rates
plus 1% or the prime rate plus 1/2% at the current amount borrowed under the
Credit Facility. The rates drop in 1/4% increments at borrowings under 75%
and 50% of the borrowing base. The rates on Eurodollar loans drop another
1/4% at borrowings under 25% of the borrowing base. MESA has entered into an
interest rate swap for two years that fixes the interest rate on $250 million
of borrowings at 7.73%.
The Credit Facility restricts, among other things, MESA's ability to
incur additional indebtedness, create liens, pay dividends, acquire stock or
make investments, loans or advances.
Senior Notes
- ------------
In conjunction with the Recapitalization, MESA issued and sold $475
million of senior subordinated notes consisting of $325 million of 10-5/8%
senior subordinated notes due in 2006 (the "Senior Subordinated Notes") and
$150 million in initial accreted value of 11-5/8% senior subordinated discount
notes due in 2006 (the "Senior Discount Notes"). MOC is the issuer of such
notes and such notes are fully and unconditionally guaranteed by MESA Inc. but
are unsecured. Interest on the Senior Subordinated Notes is payable
semi-annually in cash. Through June 30, 2001, interest will not accrue on the
Senior Discount Notes; however, the accreted value, as defined, of such notes
will increase at a rate of 11-5/8% per year, compounded semi-annually.
Thereafter, through maturity, interest will be payable semi-annually in cash.
The indentures governing the Senior Subordinated Notes and the Senior
Discount Notes contain certain covenants that, among other things, limit the
ability of MESA and its restricted subsidiaries to incur additional
indebtedness and issue certain types of capital stock, pay dividends, make
investments, make certain other restricted payments, enter into certain
transactions with affiliates, dispose of assets, incur liens and engage in
mergers and consolidations. See Note 5, Subsequent Events, for a discussion of
a potential merger.
Interest and Maturities
- -----------------------
The aggregate interest payments, net of amounts capitalized, made during
the six months ended June 30, 1997 and 1996, were $35.9 million and $72.6
million, respectively. The interest payments in the six months ended June 30,
1996, included a $42 million interest payment made on January 2, 1996, paid
pursuant to the terms of a series of debt repaid in the Recapitalization, in
respect of the regular December 31, 1995, interest payment. In addition, on
July 1, 1996, MESA made a $41.9 million interest payment related to the
regular June 30, 1996, interest payment on the same series of debt. Payment
of approximately $9.2 million of interest expense incurred during the six
months ended June 30, 1997, was deferred under the terms of the Senior
Discount Notes until the repayment dates of the Senior Discount Notes. Such
interest is included in interest expense in the consolidated statements of
operations for the six months ended June 30, 1997.
There are no scheduled principal payments under the terms of the Credit
Facility, the Senior Subordinated Notes or the Senior Discount Notes in the
next five years. However, MESA may have to pay the $5.3 million of other
long-term debt within the next year and therefore classifies such debt in
current maturities.
(4) Contingencies
=============
Kansas Ad Valorem Tax
- ---------------------
The Natural Gas Policy Act of 1978 ("NGPA") allows a "severance,
production or similar" tax to be included as an add-on, over and above the
maximum lawful price for natural gas. Based on the Federal Energy Regulatory
Commission ("FERC") ruling that Kansas ad valorem tax was such a tax, MESA
collected the Kansas ad valorem tax in addition to the otherwise maximum
lawful price. The FERC's ruling was appealed to the United States Court of
Appeals for the District of Columbia ("D.C. Circuit"), which held in June 1988
that the FERC failed to provide a reasoned basis for its findings and remanded
the case to the FERC for further consideration.
On December 1, 1993, the FERC issued an order reversing its prior ruling,
but limiting the effect of its decision to Kansas ad valorem taxes for sales
made on or after June 28, 1988. The FERC clarified the effective date of its
decision by an order dated May 18, 1994. The order clarified that the
effective date applies to tax bills rendered after June 28, 1988, not sales
made on or after that date. Numerous parties filed appeals of the FERC's
action in the D.C. Circuit. Various natural gas producers challenged the
FERC's orders on two grounds: (1) that the Kansas ad valorem tax, properly
understood, does qualify for reimbursement under the NGPA; and (2) the FERC's
ruling should, in any event, have been applied prospectively. Other parties
challenged the FERC's orders on the grounds that the FERC's ruling should have
been applied retroactively to December 1, 1978, the date of the enactment of
the NGPA and producers should have been required to pay refunds accordingly.
The D.C. Circuit issued its decision on August 2, 1996, which holds that
producers must make refunds of all Kansas ad valorem taxes collected with
respect to production since October 4, 1983 as opposed to June 28, 1988.
Petitions for rehearing were denied November 6, 1996. Various natural gas
producers subsequently filed a petition for writ of certiori with the United
States Supreme Court seeking to limit the scope of the potential refunds to
tax bills rendered on or after June 28, 1988 (the effective date originally
selected by the FERC). Williams Natural Gas Company filed a cross-petition
for certiori seeking to impose refund liability back to December 1, 1978.
Both petitions were denied on May 12, 1997.
MESA filed a petition for adjustment with the FERC on June 24, 1997.
MESA is unable at this time to predict the final outcome of this matter or the
amount, if any, that will ultimately have to be refunded. No provision for
liability has been made to the accompanying financial statements. MESA is
seeking waiver or set-off with respect to that portion of the refund
associated with (i) non-recoupable royalties, (ii) non-recoupable Kansas
property taxes based, in part, upon the higher prices collected, and
(iii) interest for all periods.
Masterson
- ---------
In February 1992, the current lessors of an oil and gas lease (the "Gas
Lease") dated April 30, 1955, between R. B. Masterson, et al., as lessor, and
Colorado Interstate Gas Company ("CIG"), as lessee, sued CIG in Federal
District Court in Amarillo, Texas, claiming that CIG had underpaid royalties
due under the Gas Lease. Under the agreements with CIG, MESA has an
entitlement to gas produced from the Gas Lease. In August 1992, CIG filed a
third-party complaint against MESA for any such royalty underpayments which
may be allocable to MESA. Plaintiffs alleged that the underpayment was the
result of CIG's use of an improper gas sales price upon which to calculate
royalties and that the proper price should have been determined pursuant to a
"favored-nations" clause in a July 1, 1967, amendment to the Gas Lease (the
"Gas Lease Amendment"). The plaintiffs also sought a declaration by the court
as to the proper price to be used for calculating future royalties.
The plaintiffs alleged royalty underpayments of approximately $500
million (including interest at 10%) covering the period from July 1, 1967, to
the present. In March 1995 the court made certain pretrial rulings that
eliminated approximately $400 million of the plaintiffs' claims (which related
to periods prior to October 1, 1989), but which also reduced a number of
MESA's defenses. MESA and CIG filed stipulations with the court whereby MESA
would have been liable for between 50% and 60%, depending on the time period
covered, of an adverse judgment against CIG for post-February 1988
underpayments of royalties.
On March 22, 1995, a jury trial began and on May 4, 1995, the jury
returned its verdict. Among its findings, the jury determined that CIG had
underpaid royalties for the period after September 30, 1989, in the amount of
approximately $140,000. Although the plaintiffs argued that the
"favored-nations" clause entitled them to be paid for all of their gas at the
highest price voluntarily paid by CIG to any other lessor, the jury determined
that the plaintiffs were estopped from claiming that the "favored-nations"
clause provides for other than a pricing-scheme to pricing-scheme comparison.
In light of this determination, and the plaintiffs' stipulation that a
pricing-scheme to pricing-scheme comparison would not result in any "trigger
prices" or damages, defendants asked the court for a judgment that plaintiffs
take nothing. The court, on June 7, 1995, entered final judgment that
plaintiffs recover no monetary damages. The plaintiffs filed a motion for new
trial on June 22, 1995. The court, on July 18, 1997, denied plaintiff's
motion. The plaintiffs are expected to appeal to the Fifth Circuit, but MESA
cannot predict whether they will do so.
On June 7, 1996, the plaintiffs filed a separate suit against CIG and
MESA in state court in Amarillo, Texas, similarly claiming underpayment of
royalties under the "favored-nations" clause, but based upon the
above-described pricing-scheme to pricing-scheme comparison on a well-by-well
monthly basis. The plaintiffs also claim underpayment of royalties since
June 7, 1995, under the "favored-nations" clause based upon either the
pricing-scheme to pricing-scheme method or their previously alleged higher price
method. MESA believes it has several defenses to this action and intends to
contest it vigorously. MESA is not currently able to determine the range of
reasonably possible losses, if any, that would be payable if such action was
determined adversely to MESA.
The federal court in the above-referenced first suit issued an order on
July 29, 1996, which stayed the second suit pending a decision by the court on
plaintiffs' motion for new trial in the first suit.
However, based on the jury verdict and final judgment, MESA does not
expect the ultimate resolution of these lawsuits to have a material adverse
effect on its financial position or results of operations.
Lease Termination
- -----------------
In 1991 MESA sold certain producing oil and gas properties to Seagull
Energy Company ("Seagull"). In 1994, two lawsuits were filed against Seagull
in the 100th District Court in Carson County, Texas, by certain land and
royalty owners claiming that certain of the oil and gas leases owned by
Seagull had terminated due to cessation in production and/or lack of
production in paying quantities occurring at various times from first
production through 1994. In the third quarter of 1995, Seagull filed
third-party complaints against MESA claiming breach of warranty and false
representation in connection with the sale of such properties to Seagull.
Seagull filed a similar third-party complaint June 29, 1995, against MESA
covering a different lease in the 69th District Court in Moore County, Texas.
The plaintiffs in the cases against Seagull sought to terminate the leases.
Seagull, in its complaint against MESA, sought unspecified damages relating to
any leases which were terminated. In February 1997, MESA entered a settlement
whereby, for an immaterial contribution, Seagull released MESA from all its
claims associated with the litigation and agreed to provide similar releases
from the land and royalty owners. MESA received such releases in the second
quarter.
Shareholder Litigation
- ----------------------
On July 3, 1995, Robert Strougo filed a class action and derivative
action in the District Court of Dallas County, Texas, 160th Judicial District,
against T. Boone Pickens, Paul W. Cain, John L. Cox, John S. Herrington, Wales
H. Madden, Jr., Fayez S. Sarofim, Robert L. Stillwell, and J. R. Walsh, Jr.
(the "Director Defendants"), each of whom is a present or former director of
MESA. The class action is purportedly brought on behalf of a class of MESA
shareholders and alleges, inter alia, that the Board infringed upon the
suffrage rights of the class and impaired the ability of the class to receive
tender offers by adoption of a shareholder rights plan. The lawsuit is also
brought derivatively on behalf of MESA and alleges, inter alia, that the Board
breached fiduciary duties to MESA by adopting a shareholder rights plan and by
failing to consider the sale of MESA. The lawsuit seeks unspecified damages,
attorneys' fees, and injunctive and other relief. Two other lawsuits filed by
Herman Krangel, Lilian Krangel, Jacquelyn A. Cady, and William A. Montagne,
Jr., in the District Court of Dallas County have been consolidated into this
lawsuit. A third lawsuit filed by Deborah M. Eigen and Adele Brody as a
derivative lawsuit in the U.S. District Court for the Northern District of
Texas, Dallas Division, intervened in this lawsuit.
On February 5, 1996, the Court denied Defendants' Motion to Dismiss. A
trial date has been set for September 15, 1997. The case has been stayed
pending a Special Litigation Committee investigation by MESA to decide whether
the case should be dismissed.
Other
- -----
MESA is also a defendant in other lawsuits and has assumed liabilities
relating to its predecessors. MESA does not expect the resolution of any of
these matters to have a material adverse effect on its financial position or
results of operations.
(5) Other Income
============
In the mid-to-late 1980's, as a result of regulatory changes, MESA settled
a number of natural gas purchase contracts. At that time, MESA established a
reserve for amounts possibly payable to third parties as a result of the
settlements. In 1996, as a result of reaching tentative agreement in
negotiation with certain of the parties, MESA determined that $15 million of
the amount previously reserved was no longer required.
(6) Subsequent Events
=================
On April 6, 1997, MESA announced that it and Parker & Parsley Petroleum
Company ("Parker & Parsley") had entered into an agreement (the "Merger
Agreement") to merge and create Pioneer Natural Resources Company ("Pioneer").
The consummation of the transaction contemplated in the Merger Agreement is
subject to the approval of the shareholders of each of MESA and Parker &
Parsley. If the Merger Agreement is approved and the business combination is
completed, (i) each seven outstanding shares of MESA Common Stock will be
converted into the right to receive one share of Pioneer Common Stock, (ii)
each seven outstanding shares of MESA's Series A 8% Cumulative Convertible
Preferred Stock and MESA's Series B 8% Cumulative Convertible Preferred Stock
will be converted into the right to receive either (a) 1.25 shares of Pioneer
Common Stock or (b) one share of Pioneer's Series A 8% Cumulative Convertible
Preferred Stock, in each case as the holder thereof shall elect or be deemed
to elect (provided that if the holders of a majority of the outstanding MESA
Series A Preferred Stock or MESA Series B Preferred Stock, each voting as a
separate class, vote in favor of the Merger Agreement, then all holders of the
series for which the vote has been obtained will receive Pioneer Common Stock)
and (iii) each outstanding share of Parker & Parsley Common Stock will be
converted into the right to receive one share of Pioneer Common Stock.
On June 27, 1997, the Securities and Exchange Commission declared
effective the Joint Proxy Statement/Prospectus for the proposed merger of MESA
Inc. and Parker & Parsley Petroleum Company to form Pioneer Natural Resources
Company. Both companies will conduct special meetings of stockholders on
August 7, 1997. Since the merger requires approval by MESA's common and
preferred shareholders and Parker & Parsley's shareholders, there can be no
assurance that such merger will occur.
(7) Pro Forma Condensed Consolidated Financial Statements
=====================================================
The unaudited pro forma combined statements of operations of MESA for six
months ended June 30, 1997, and for the year ended December 31, 1996, have
been prepared to give effect to the Greenhill Acquisition and additional
borrowings to finance such acquisition, as if these events had occurred on
January 1, 1996. The unaudited pro forma combined statement of operations of
MESA for the year ended December 31, 1996, has also been prepared to give
effect to the Recapitalization, which entailed issuing $265 million in new
preferred equity and repaying and refinancing substantially all of MESA's $1.2
billion of then existing long-term debt. MESA's balance sheet as of June 30,
1997, includes the assets and liabilities acquired in the Greenhill
Acquisition. The Greenhill Acquisition has been accounted for using the
purchase method of accounting.
The unaudited pro forma combined financial statements included herein are
not necessarily indicative of the results that might have occurred had the
transactions taken place at the beginning of the period specified and are not
intended to be a projection of future results. In addition, future results
may vary significantly from the results reflected in the accompanying
unaudited pro forma combined financial statements because of normal production
declines, changes in product prices, future acquisitions and divestitures,
future development and exploration activities, and other factors.
The following condensed consolidated financial statements should be read
in conjunction with (i) "Management's Discussion and Analysis of Financial
Condition and Results of Operations," (ii) the Consolidated Financial
Statements of MESA and the related notes thereto, which are set forth in
MESA's Annual Report on Form 10-K/A and in this Form 10-Q and incorporated
herein by reference, and (iii) the Historical Financial Statements of
Greenhill for the fiscal year ended June 30, 1996, and for the six months
ended December 31, 1996, (unaudited) and the related notes thereto, which are
set forth in MESA's Current Report on Form 8-K/A dated February 7, 1997, and
incorporated herein by reference.
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 1997
(in thousands, except per share data)
Pro Forma
Combined Pro Forma
MESA Greenhill Adjustments Combined
-------- --------- ----------- ---------
Revenues:
Oil and gas................. $165,336 17,369 182,705
Interest and other.......... 7,565 147 7,712
Gain on disposition of
assets, net............... (23) 41 18
-------- --------- ---------
172,878 17,557 190,435
-------- --------- ---------
Costs and expenses:
Oil and gas production...... 47,329 6,641 53,970
Depreciation, depletion and
amortization:
Oil and gas properties... 52,503 7,725 (483) (a) 59,745
Other.................... 4,007 -- 4,007
Impairment of long lived
assets................... 2,907 -- 2,907
Exploration and abandonments 8,067 4,059 12,126
General & administrative (b) 9,277 13,318 (11,027) (c) 11,568
Interest.................... 48,335 -- 5,429 (d) 53,764
Other....................... 2,470 -- 2,470
-------- --------- ---------
174,895 31,743 200,557
-------- --------- ---------
Income from continuing
operations.................. (2,017) (14,186) (10,122)
Dividends on preferred stock.. (11,105) -- (11,105)
-------- --------- ---------
Income (loss) from continuing
operations applicable to
common stock................ $(13,122) $ (14,186) $ (21,227)
======== ========= =========
Income (loss) from continuing
operations per common share
and common share equivalent. $ (0.20) $ (0.33)
======== =========
Weighted average common shares
and common share equivalents 64,280 64,280
======== =========
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1996
(in thousands, except per share data)
Pro Forma
Combined Pro Forma
MESA Recap. Greenhill Adjustments Combined
-------- ------- --------- ----------- ---------
Revenues:
Oil and gas................. $300,336 $ 70,944 $ 371,280
Interest and other.......... 33,824 -- 33,824
Gain on disposition of
assets, net............... 11,966 -- 11,966
-------- --------- ---------
346,126 70,944 417,070
-------- --------- ---------
Costs and expenses:
Oil and gas production...... 74,518 23,099 97,617
Depreciation, depletion and
amortization:
Oil and gas properties... 91,554 29,355 2,633 (a) 123,542
Other.................... 4,919 -- 4,919
Impairment of long lived
assets................... 6,828 -- 6,828
Exploration and abandonments 5,431 7,341 12,772
General & administrative (b) 31,473 9,543 41,016
Interest.................... 121,135 (34,530) (e) (729) 19,390 (d) 105,266
Other....................... 1,929 411 2,340
-------- --------- ---------
337,787 69,020 394,300
-------- --------- ---------
Income from continuing
operations.................. 8,339 1,924 22,770
Dividends on preferred stock.. (9,522) (12,358) (f) -- (21,880)
-------- --------- ---------
Income (loss) from continuing
operations applicable to
common stock................ $ (1,183) $ 1,924 $ 890
======== ========= =========
Income (loss) from continuing
operations per common share
and common share equivalent. $ (0.02) $ 0.01
======== =========
Weighted average common shares
and common share equivalents 64,164 64,164
======== =========
Notes to Pro Forma Combined Financial Statements
(unaudited)
Note 1. Basis of Presentation
- ------------------------------
The following is a description of the individual columns included in these
unaudited pro forma combined financial statements:
MESA - Represents the consolidated statements of operations of
MESA for the six months ended June 30, 1997, and for the year ended
December 31, 1996.
Recap. - Represents the effects on MESA's unaudited pro forma
combined statement of operations from the Recapitalization as if it
had occurred on January 1, 1996. In August of 1996, MESA completed a
recapitalization of its balance sheet by issuing new equity and
repaying and refinancing substantially all of its then existing long-term
debt. The Recapitalization was undertaken by MESA in an effort
to deleverage and recapitalize MESA through the issuance of additional
equity and through the refinancing of substantially all of MESA's $1.2
billion debt existing prior to the Recapitalization. The
Recapitalization provided MESA with an improved financial condition
due to (i) a significant reduction in total debt outstanding, (ii) a
reduction in annual cash interest expense of approximately $75
million, (iii) cost savings programs which reduced general and
administrative and other overhead expenses by approximately $10
million annually, and (iv) the extension of maturities on MESA's long-
term debt, which eliminated MESA's then existing liquidity concerns.
The Recapitalization included (i) the sale by private placement of
shares of a new class of MESA Series B Preferred Stock for $133
million to DNR, whose sole general partner is Rainwater, Inc., a Texas
corporation owned by Richard E. Rainwater, (ii) the sale of $132
million of a new class of MESA Series A Preferred Stock to MESA's then
existing stockholders through a rights offering, (iii) the
establishment of a new bank credit facility and (iv) the issuance of
two new series of senior subordinated notes.
Greenhill - Represents the unaudited statements of operations of
Greenhill for the period from January 1, 1997, to April 15, 1997 (the
date of acquisition), and for the year ended December 31, 1996.
Note 2. Pro Forma Entries
- --------------------------
The unaudited pro forma combined statement of operations for the year ended
December 31, 1996, presented herein does not reflect the results of operations
from MESA's acquisition from MAPCO Inc. of approximately 11 MMBOE in February
1997 for approximately $66 million. The acquisition is not presented since it
is not considered significant under Rule 3-05 of Regulation S-X. The purchase
was funded by additional borrowings under MESA's credit facility.
(a) To adjust depreciation, depletion and amortization expense for the
additional basis allocated to oil and gas properties acquired using the
purchase method of accounting.
(b) MESA's general and administrative expenses for the year ended December 31,
1996, include $9.4 million associated with the elimination of 86 positions
from the total of 385 at December 31, 1995, and a significant downsizing
of MESA's natural gas vehicle equipment business in conjunction with the
Recapitalization. Given the first quarter 1997 general and
administrative expenses of $3.8 million, MESA's continuing costs are
estimated at approximately $15 million per year ($3.8 million multiplied
by four quarters). In addition, significant reductions in Greenhill's
general and administrative expenses are expected because few of
Greenhill's administrative personnel were retained. MESA considers a
continuing annual expense associated with the Greenhill properties of
approximately $5 million to be reasonable. Given the above, MESA expects
total general and administrative expenses to approximate $20 million per
year.
(c) To adjust general and administrative expenses to remove the $11.0 million
in severance costs paid to Greenhill employees at the time of the
acquisition.
(d) To adjust interest expense resulting from the borrowing of the funds
necessary for the acquisition of Greenhill. MESA 1997 and 1996 pro forma
incremental borrowing rate of 7% was utilized to determine the additional
pro forma interest expense.
(e) To reduce interest expense as a result of the Recapitalization. Interest
expense adjustments include the following for the year ended December 31,
1996 (in thousands):
Pro Forma
Historical Pro Forma Adjustment
---------- ---------- ----------
Interest expense on former debt
repaid in the Recapitalization:
Secured Notes................. $ 26,231 -- $ (26,231)
Former Credit Agreement....... 2,472 -- (2,472)
12-3/4% secured discount notes. 43,979 -- (43,979)
13-1/2% subordinated notes.... 654 -- (654)
Interest expense on former debt
repaid prior to the
Recapitalization:
12-3/4% unsecured discount
notes........................ 2,595 $ 2,595 --
Interest expense on new debt
issued in the Recapitalization:
10-5/8% Senior Subordinated
notes......................... 17,613 $ 35,418 17,805
11-5/8% Senior Discount Notes. 8,893 18,661 9,768
New Credit Facility........... 15,094 26,327 11,233
Other interest expense.......... 3,604 3,604 --
---------- ---------- ----------
$ 121,135 $ 86,605 $ (34,530)
========== ========== ==========
Other interest expense is primarily the interest portion of the
administrative fee charged by CIG in connection with MESA's West Panhandle
field operations. The interest rate on the New Credit Facility is
approximately 7.73% on the first $250 million due to an interest rate swap
with the balance at a floating rate that during the period outstanding in
1996 was approximately 7%.
(f) To record the pro forma adjustment for an 8% annual dividend on the MESA
Series A and Series B Preferred Stock payable quarterly in additional
shares of MESA Series A and Series B Preferred Stock for at least the
first four years after issuance as if the MESA Series A and Series B
Preferred Stock had been issued January 1, 1996.
NOTE 3. Pro Forma Production
- -----------------------------
The table below summarizes production and average prices for (i) MESA,
(ii) Greenhill, and (iii) MESA and Greenhill on a pro forma combined basis, for
the six months ended June 30, 1997.
Pro Forma
MESA Greenhill Combined
-------- --------- ---------
Production:
Natural gas equivalents (MMcfe)............ 64,875 5,225 70,100
Natural gas (MMcf)......................... 36,969 1,307 38,276
Natural gas liquids (MBbls)................ 3,236 -- 3,236
Oil and condensate (MBbls)................. 1,415 653 2,068
Helium (MMcf).............................. 106 -- 106
*Equivalent natural gas production is based on a factor of six Mcf per barrel of
liquids.
(8) NEW ACCOUNTING STANDARDS
========================
In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 128 which simplifies the
existing standards for computing earnings per share. In June 1997, the
Financial Accounting Standards Board issued Statement of Financial
Accounting Standards No. 130 which adds a requirement for reporting
comprehensive income as therein defined. In June 1997, the Financial
Accounting Standards Board issued Statement of Financial Accounting
Standards No. 131 which revises the existing standards for disclosures
about segments of an enterprise. None of the above standards is effective
in the second quarter and they are not anticipated to significantly impact
the financial results of MESA.
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations
- -------------------------------------------------------
DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS
===============================================
This Form 10-Q includes "forward-looking statements" within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended. All statements other than
statements of historical facts included in this Form 10-Q, including without
limitation, the statements under "Capital Resources and Liquidity" and Notes 4
and 5 to the consolidated financial statements of MESA regarding MESA's
financial position and liquidity, oil and gas production levels, expected
prices, acquisition, exploitation and exploration plans, and other matters are
forward-looking statements. Although MESA believes that the expectations
reflected in such forward-looking statements are reasonable, it can give no
assurance that such expectations will prove to have been correct. Important
factors that could cause actual results to differ materially from MESA's
expectations ("Cautionary Statements") are disclosed in this Form 10-Q,
including without limitation in conjunction with the forward-looking statements
included in this Form 10-Q. All subsequent written and oral forward-looking
statements attributable to MESA or persons acting on its behalf are expressly
qualified in their entirety by the Cautionary Statements.
RESULTS OF OPERATIONS
=====================
MESA reported a net loss applicable to common stock of $19.8 million in the
second quarter of 1997 compared with net income of $4.5 million in the second
quarter of 1996. MESA reported a net loss applicable to common stock of $13.1
million for the six months ended June 30, 1997, compared with net income of $5.6
million for the same period in 1996.
The following table presents a summary of the results of operations of MESA
for the periods indicated (in thousands):
Three Months Ended Six Months Ended
June 30 June 30
1997 1996 1997 1996
-------- -------- -------- --------
Revenues................. $ 77,994 $ 71,322 $172,137 $151,965
Operating and
administrative costs... (30,961) (28,194) (64,673) (52,690)
Depreciation, depletion
and amortization (1)... (33,694) (22,068) (59,417) (52,892)
-------- -------- -------- --------
Operating income......... 13,339 21,060 48,047 46,383
Interest expense,
net of interest income. (25,314) (32,417) (47,571) (66,949)
Other.................... (2,263) 15,904 (2,493) 26,170
-------- -------- -------- --------
Net income .............. $(14,238) $ 4,547 $ (2,017) $ 5,604
Dividends on preferred
stock.................. (5,609) -- (11,105) --
-------- -------- -------- --------
Net income applicable
to common stock ....... $(19,847) $ 4,547 $(13,122) $ 5,604
======== ======== ======== ========
(1) Depreciation, depletion and amortization includes impairment of long-lived
assets.
Revenues
- --------
The table below presents, for the periods indicated, the revenues,
production and average prices received from sales of natural gas, natural gas
liquids and oil and condensate.
Three Months Ended Six Months Ended
1997 1996 1997 1996
-------- -------- -------- --------
Revenues (in thousands):
Natural gas................. $ 34,246 $ 44,243 $ 88,810 $ 94,810
Natural gas liquids......... 20,395 19,979 50,439 43,115
Oil and condensate.......... 19,709 4,484 26,087 8,847
Other ...................... 3,644 2,616 6,801 5,193
-------- -------- -------- --------
Total.................. $ 77,994 $ 71,322 $172,137 $151,965
======== ======== ======== ========
Natural Gas Production (million cubic feet):
Hugoton..................... 10,780 12,111 21,608 25,054
West Panhandle.............. 3,436 4,097 8,712 9,568
Greenhill................... 964 -- 964 --
Gulf Coast and other........ 2,671 4,757 5,685 8,454
-------- -------- -------- --------
Total.................. 17,851 20,965 36,969 43,076
======== ======== ======== ========
Natural Gas Liquids Production (thousand barrels):
Hugoton..................... 761 842 1,503 1,712
West Panhandle.............. 776 617 1,688 1,457
Gulf Coast and other........ 11 58 45 71
-------- -------- -------- --------
Total.................. 1,548 1,517 3,236 3,240
======== ======== ======== ========
Oil and Condensate Production (thousand barrels):
West Panhandle.............. 252 42 469 76
Greenhill................... 600 -- 600 --
Gulf Coast and other........ 233 192 346 402
-------- -------- -------- --------
Total.................. 1,085 234 1,415 478
======== ======== ======== ========
Weighted average sales price (1):
Natural gas
(per thousand cubic feet).. $ 1.92 $ 2.06 $ 2.40 $ 2.17
Natural gas liquids
(per barrel)............. $ 13.13 $ 13.17 $ 15.57 $ 13.52
Oil and condensate
(per barrel).............. $ 18.15 $ 19.54 $ 18.43 $ 18.55
(1) Includes $0.01, $0.22 and $0.50 from hedging natural gas, natural gas
liquids and oil and condensate, respectively, in the second quarter of 1997 and
$0.08, $0.13 and $0.37 from hedging natural gas, natural gas liquids and oil and
condensate, respectively, in the six months ended June 30, 1997.
MESA's natural gas production declined in 1997 as a result of natural
production declines in the Hugoton field and the Gulf Coast and a post-payout
reduction in MESA's working interest in certain Gulf Coast wells in early 1997.
MESA's combined natural gas liquids and oil and condensate production increased
in 1997 as a result of the acquisition of condensate and natural gas liquid
interests from MAPCO effective January 1, 1997, and the acquisition of Greenhill
Petroleum Corporation effective April 15, 1997.
MESA anticipates that total production for 1997 will increase over 1996
as a result of the previously mentioned acquisitions and ongoing development
activities. A field compression expansion program currently underway in the
Hugoton field is expected to increase production in the second half of 1997.
The recently completed East Cameron 322/323 drilling program is also expected to
increase Gulf Coast production in the second half of 1997.
Prices for all of MESA's production fell in the second quarter of 1997 in
comparison to the second quarter of 1996. The lower recognized prices reflect
the decline in energy commodity prices but were partially offset by MESA's
hedging activities.
The following table shows the effects of MESA's hedging activities on its
prices for the periods indicated:
Quarter Ended June 30, 1997 Six Months Ended June 30, 1997
------------------------------ ------------------------------
Natural Natural Oil and Natural Natural Oil and
Gas Gas Liquids Condensate Gas Gas Liquids Condensate
($/Mcf) ($/Bbl) ($/Bbl) ($/Mcf) ($/Bbl) ($/Bbl)
------- ----------- ---------- ------- ----------- ----------
Actual price
received $ 1.91 $ 12.91 $ 17.65 $ 2.35 $ 15.44 $ 18.06
Effect of
hedging 0.01 0.22 0.50 0.08 0.13 0.37
------- ----------- ---------- ------- ----------- ----------
Average price $ 1.92 $ 13.13 $ 18.15 $ 2.43 $ 15.57 $ 18.43
======= =========== ========== ======= =========== ==========
As a result of physical sales contracts and other hedging arrangements,
MESA's estimated fixed price profile is as follows:
Percent of Floor Ceiling
Production Price Price
---------- ------- -------
Last Six Months of 1997
- -----------------------
Natural Gas ($/MMBtu net to MESA) . . . 55% $ 2.22 $ 2.24
Natural Gas Liquids ($/Bbl net to MESA) 10% $ 17.13 $ 17.13
Crude Oil ($/Bbl NYMEX equivalent). . . 36% $ 20.56 $ 22.63
Calendar Year 1998
- ------------------
Natural Gas ($/MMBtu net to MESA) . . . 16% $ 2.67 $ 2.73
Crude Oil ($/Bbl NYMEX equivalent). . . 6% $ 19.90 $ 19.90
In addition to these hedges, MESA entered into an eight-year agreement
covering 13,000 MMBtus of natural gas per day beginning January 1, 1997. Under
this agreement, MESA will receive the NYMEX Henry Hub natural gas price plus
$0.52 per MMBtu for the first two years and ten percent of the NYMEX West Texas
Intermediate crude oil price for the remaining six years.
Costs and Expenses
- ------------------
MESA's aggregate costs and expenses increased by approximately 29% in the
second quarter of 1997 and increased approximately 18% in the six months ended
June 30, 1997, compared to the same periods in 1996. Lease operating expenses
increased as a result of increased field and plant gas usage and an increase in
the cost of gas used in operations, higher gathering fees in the West
Panhandle, and the addition of costs for the Greenhill properties acquired in
the second quarter. Exploration charges for the six months ended June 30,
1997, increased as compared to the same period in 1996 reflecting the dry
hole costs associated with Vermilion 348. General and administrative
expenses decreased primarily as a result of lower legal expenses and a
significant reduction in personnel in MESA's natural gas vehicle equipment
business and administrative functions. 1996 general and administrative
expenses include a $3.6 million charge associated with such reduction in
personnel. Depreciation, depletion and amortization, is calculated quarterly
on a unit-of-production basis. Depreciation expense increased as a result
of the downward revision of reserves at the end of 1996 and the higher per
unit basis in the Greenhill properties. The impairment of long-lived assets
for 1997 relates to the sales of MESA's remaining natural gas vehicles
businesses early in the third quarter of 1997. The impairment of long-lived
assets for the six months ended June 30, 1996,relates to the adoption of a
new accounting requirement (SFAS No. 121) in 1996.
Other Income (Expense)
- ----------------------
Interest income and interest expense in the three- and six-month periods
ended June 30, 1997, decreased from such income and expense during the same
periods in 1996 as average cash balances and aggregate debt outstanding
decreased.
Average long-term debt and interest rates for the periods indicated are as
follows:
Three Months Ended Six Months Ended
June 30 June 30
1997 1996 1997 1996
------- ------- ------- -------
Average long-term debt
outstanding (in millions). ..$ 1,052 $ 1,208 $ 954 $ 1,215
Effective interest rate...... 9.2% 11.7% 9.3% 11.8%
Results of operations for the three- and six-months periods ended June 30,
1997 and 1996, include certain items which are either non-recurring or are not
directly associated with MESA's oil and gas producing operations. The following
table sets forth the amounts of such items for the periods indicated (in
thousands):
Three Months Ended Six Months Ended
June 30 June 30
1997 1996 1997 1996
------- ------- ------- -------
Gains from investments.......$ -- $ 586 $ -- $ 9,349
Gain from adjustment of
Contingency reserve.......... -- 15,000 -- 15,000
Other ....................... (2,263) 318 (2,493) 1,821
------- ------- ------- -------
Total Other Income........$(2,263) $15,904 $(2,493) $26,170
======= ======= ======= =======
The gains from investments relate to MESA's investments in marketable
securities and energy futures contracts, which included NYMEX futures contracts,
commodity price swaps and options that are not accounted for as hedges of future
production. MESA's investments in marketable securities and futures contracts
are valued at market prices at each reporting date with gains and losses
included in the statement of operations for such reporting period whether or not
such gains or losses have been realized. Since April 10, 1996, MESA has not
engaged in speculative investments. Such investments are expected to be limited
in the future.
In the mid-to-late 1980's, as a result of regulatory changes, MESA settled
a number of natural gas purchase contracts. At that time, MESA established a
reserve for amounts possibly payable to third parties as a result of the
settlements. In 1996, as a result of reaching tentative agreement in
negotiation with certain of the parties, MESA determined that $15 million of the
amount previously reserved was no longer required.
Subsequent Events
- -----------------
See Note 6 to the consolidated financial statements included in this Form
10-Q for a discussion of the Merger Agreement.
CAPITAL RESOURCES AND LIQUIDITY
===============================
In August of 1996, MESA completed a recapitalization of its balance sheet
by issuing new equity and repaying and refinancing substantially all of its then
existing long-term debt. In the Recapitalization, Richard E. Rainwater, along
with then existing shareholders, injected $265 million of equity into MESA. The
Recapitalization enhanced MESA's ability to compete in the oil and gas industry
by substantially increasing its cash flow available for investment and improving
its ability to attract capital. The ability to redirect cash flow to
acquisition, exploitation and exploration activities and plant expansion rather
than debt service allows MESA to pursue its aggressive growth strategy.
See Note 3 to the consolidated financial statements of MESA included
elsewhere in this Form 10-Q for a detailed discussion of MESA's existing debt.
MESA has budgeted $130 million for development, exploration and gas
processing in 1997. Of the 1997 total, $86 million is planned for development,
$32 million for exploratory drilling, seismic and lease acquisition, and $12
million for gas plant and facility expansions. The 1997 budget includes work
planned for the Greenhill properties. As of June 30, 1997, MESA had expended a
little over $40 million of the amounts budgeted. The timing of most of MESA's
capital expenditures is discretionary. The only material long-term capital
expenditure commitment relates to a one year contract for a drilling rig to
accomodate MESA's planned drilling activity in the Gulf of Mexico.
Consequently, MESA has a significant degree of flexibility to adjust the level
of such expenditures as circumstances warrant.
In addition to developing its existing reserves, MESA will attempt to
increase its reserve base, production and operating cash flow by engaging in
strategic acquisitions of oil and natural gas properties. MESA does not have a
specific acquisition budget because of the unpredictability of the timing and
size of forthcoming acquisition activities. There is no assurance that MESA
will be able to identify suitable acquisition candidates in the future, or that
MESA will be successful in the acquisition of producing properties. Further,
there can be no assurances that any future acquisitions made by the Company will
be integrated successfully into the Company's operations or will achieve desired
profitability objectives.
On April 6, 1997, MESA announced that it and Parker & Parsley had entered
into the Merger Agreement to merge and create Pioneer. See Note 6 to the
consolidated financial statements of MESA included elsewhere in this Form 10-Q
for a detailed discussion of the Merger Agreement. Since the merger requires
approval by MESA's common and preferred shareholders and Parker & Parsley's
shareholders, there can be no assurance that such merger will occur.
Management believes that cash from operating activities, together with the
availability under the Credit Facility will be sufficient for MESA to meet its
debt service obligations and scheduled capital expenditures and to fund its
working capital needs for the next several years. In order to finance any
possible future acquisitions, MESA will either use borrowings available under
the Credit Facility or MESA may seek to obtain additional debt or equity
financing in the public or private capital markets. In February 1997, MESA
filed a shelf registration statement for $500 million of debt securities and/or
common stock with the Securities and Exchange Commission. In April 1997, MESA
amended the Credit Facility, increasing the borrowing base to $650 million to
accommodate additional debt incurred to finance the Greenhill Acquisition. In
addition, MESA may seek to use its equity securities as an acquisition
currency. The availability and attractiveness of these sources of financing
will depend upon a number of factors, some of which will relate to the
financial condition and performance of MESA, and some of which will be beyond
MESA's control, such as prevailing interest rates, oil, natural gas and NGL
prices, the availability of properties for acquisition and other market
conditions. There can be no assurance that additional debt or equity
financing will be available or be available on terms attractive to MESA.
In addition, the ability of MESA to incur any additional indebtedness and
grant security interests with respect thereto will be subject to the terms of
the Credit Facility and the indentures governing its Senior Subordinated
Notes and Senior Discount Notes.
Price Risk Management
=====================
In order to mitigate the potential negative effects of volatile commodity
prices, MESA entered into over-the-counter commodity and natural gas basis swap
agreements with financial institutions and gas marketing companies. A commodity
swap has the effect of fixing the absolute price or setting a trading range for
a specific product. A natural gas basis swap "fixes" the differential between
MESA's physical gas delivery points and the NYMEX Henry Hub.
As a result of physical sales contracts and other hedging arrangements,
MESA's estimated fixed price profile is as follows:
Percent of Floor Ceiling
Production Price Price
---------- ------- -------
Last Six Months of 1997
- -----------------------
Natural Gas ($/MMBtu net to MESA) . . . 55% $ 2.22 $ 2.24
Natural Gas Liquids ($/Bbl net to MESA) 10% $ 17.13 $ 17.13
Crude Oil ($/Bbl NYMEX equivalent). . . 36% $ 20.56 $ 22.63
Calendar Year 1998
- ------------------
Natural Gas ($/MMBtu net to MESA) . . . 16% $ 2.67 $ 2.73
Crude Oil ($/Bbl NYMEX equivalent). . . 6% $ 19.90 $ 19.90
In connection with acquisitions, MESA has and expects to continue to enter
into hedging arrangements for all or a portion of the production on the acquired
properties. Regarding the Greenhill acquisition, MESA hedged approximately 100%
of its 1997 expected natural gas production at approximately $2.60 per MMBtu and
approximately 30% of Greenhill's projected crude oil production at approximately
$22.60 per barrel. Through the use of a collar, MESA created a $19.25 floor and
a $25.50 cap for approximately 20% of the 1997 expected Greenhill crude oil
production. For the year 1998, MESA fixed approximately 40% of the projected
Greenhill natural gas production around $2.35. With respect to the Liquids
Acquisition, MESA sold approximately 100% of the crude oil and natural gas
liquids at a net price of $21.00 per barrel and $18.66 per barrel, respectively,
for the first three quarters of 1997.
In addition to these hedges, MESA entered into an eight year agreement for
13,000 MMBtus of natural gas per day beginning in early 1997. Under this
agreement, MESA will receive NYMEX Henry Hub plus $0.52 per MMBtu for the first
two years and 10% of the NYMEX WTI crude oil price for the remaining six years.
Net Operating Loss Carryforwards
================================
At December 31, 1996, MESA had a regular tax net operating loss ("NOL")
carryforward of approximately $560 million. Additionally, MESA had an
alternative minimum tax loss carryforward available to offset future alternative
minimum taxable income of approximately $535 million. If not used, these
carryforwards will expire between 2007 and 2011. As a result of the
Recapitalization, MESA's ability to carry forward its NOLs is subject to the
limitations of Section 382 of the Internal Revenue Code of 1986, which, in
general, limits the utilization of NOL carryforwards subsequent to a substantial
change (generally more than 50%) in corporate stock ownership. Notwithstanding
the above limitations, MESA expects the NOL's available in 1997 to be sufficient
to offset any taxable income that may be generated in 1997.
Other
=====
MESA recognizes its ownership interest in natural gas production as
revenue. Actual production quantities sold may be different from MESA's
ownership share of production in a given period. MESA records these differences
as gas balancing receivables or as deferred revenue. Net gas balancing
overproduction represented less than 1% of total equivalent production for the
six months ended June 30, 1997, compared with net gas balancing underproduction
amounting to approximately 3.7% of total equivalent production during the same
period in 1996. The gas balancing receivable or deferred revenue component of
natural gas and natural gas liquids revenues in future periods is dependent on
future rates of production, field allowables and the amount of production taken
by MESA or by its joint interest partners.
Management does not anticipate that inflation will have a significant
effect on MESA's operations.
MESA believes that the costs for compliance with current environmental laws
and regulations have not had and will not have a material effect on MESA's
financial position or results of operation.
The Financial Accounting Standards Board has recently issued several new
accounting standards. The standards are not anticipated to significantly
impact the financial results of MESA. See Note 8 to the consolidated
financial statements included in this Form 10-Q for a discussion of the new
standards.
PART II - OTHER INFORMATION
===========================
Item 1. Legal Proceedings
- --------------------------
Reference is made to Part I, Item 1, Note 4 of this Form 10-Q for
information regarding legal proceedings, which information is incorporated
herein by reference.
Item 6. Exhibits and Reports on Form 8-K
- -----------------------------------------
(a)(3) Exhibits
- ----------------
(Asterisk indicates exhibits are incorporated by reference herein).
*2.1 - Stock Purchase Agreement dated February 7, 1997, by and between
Western Mining Corporation (USA) and MESA Operating Co
(Exhibit 10 to MESA's Form 8-K dated February 7, 1997).
*2.2 - Agreement and Plan of Merger dated as of April 6, 1997, among
MESA Inc, Mesa Operating Co., MXP Reincorporation Corp., and
Parker & Parsley Petroleum Company (Exhibit 2.1 to MESA's
Form 8-K dated April 6, 1997).
*2.3 - Shareholders Agreement dated as of April 6, 1997, by and between
MESA Inc. and DNR-MESA Holdings, L.P. (Exhibit 2.2 to MESA's
Form 8-K dated April 6, 1997).
*2.4 - Letter Agreement dated April 6, 1997, between Parker & Parsley
Petroleum Company and DNR-MESA Holdings, L.P. (Exhibit 2.3 to
MESA's Form 8-K dated April 6, 1997).
*2.5 - Shareholders Agreement dated as of April 6, 1997, by and between
MESA Inc., Boone Pickens and Parker & Parsley Petroleum Company
(Exhibit 2.4 to MESA's Form 8-K dated April 6, 1997).
*3.1 - Amended and Restated Articles of Incorporation of MESA Inc.
dated December 31, 1991, (Exhibit 3[a] to MESA's Form
10-K dated December 31, 1991).
*3.2 - Statement of Resolution establishing Series A 8% Cumulative
Convertible Preferred Stock and Series B 8% Cumulative
Convertible Preferred Stock. (Exhibit 4 to MESA's Form 8-K
dated April 29, 1996).
*3.3 - Amended and Restated Bylaws of MESA Inc. dated July 2,
1996 (Exhibit 3.3 to MESA's Form 10-Q dated August 13,
1996).
*4.1 - Credit Agreement dated as of July 2, 1996, among MESA
Operating Co., as Borrower, MESA Inc. and the Banks listed as
lenders in the Credit Agreement and The Chase Manhattan
Bank, N.A., as Administrative Agent, Bankers Trust Company,
as Syndication Agent, and Society Generale, Southwest Agency,
as Documentation Agent (Exhibit No. 4.16 to MESA's Form 10-Q
dated August 13, 1996).
*4.2 - Indenture dated July 2, 1996, among Mesa Operating Co., as
Issuer, MESA Inc., as a Guarantor, and Harris Trust and
Savings Bank as Trustee relating to 11-5/8% Senior
Subordinated Discount Notes Due 2006 (Exhibit No. 4.17 to
MESA's Form 10-Q dated August 13, 1996).
*4.3 - Indenture dated July 2, 1996, among Mesa Operating Co., as
Issuer, MESA Inc., as a Guarantor, and Harris Trust and
Savings Bank as Trustee relating to 10-5/8% Senior
Subordinated Notes Due 2006 (Exhibit No. 4.18 to MESA's Form
10-Q dated August 13, 1996).
The Registrant agrees to furnish to the Commission upon
request any instruments defining the right of holders of
long-term debt with respect to which the total amount
outstanding does not exceed 10% of the total assets of the
Registrant and its subsidiaries on a consolidated basis.
*10.1 - Stock Purchase Agreement, dated April 26, 1996, between MESA
and DNR-MESA Holdings, L.P. (Exhibit No. 10 to MESA's
Form 8-K filed on April 29, 1996).
*10.2 - Contract dated January 3, 1928, between Colorado Interstate
Gas Company and Amarillo Oil Company (the "B" Contract)
(Exhibit 10.1 to Pioneer Corporation's Form 10-K dated
December 31, 1985).
*10.3 - Amendments to the "B" Contract (Exhibit 10.2 to Pioneer
Corporation's Form 10-K dated December 31, 1985).
*10.4 - Gathering Charge Agreement dated January 20, 1984, as
amended, with respect to the "B" Contract (Exhibit 10.3 to
Pioneer Corporation's Form 10-K dated December 31, 1985).
*10.5 - Agreement of Compromise and Settlement dated May 29, 1987,
between the Partnership and Colorado Interstate Gas Company
(Confidential Treatment Requested) (Exhibit 10[s] to the
Partnership's Form 10-K dated December 31, 1987).
*10.6 - Agreement of Sale between Pioneer Corporation and Cabot
Corporation dated August 29, 1984 (Exhibit 10.5 to Pioneer
Corporation's Form 10-K dated December 31, 1985).
*10.7 - Settlement Agreement dated March 15, 1989, by and among MESA
Operating Limited Partnership and MESA Limited Partnership,
et al, Energas Company and the City of Amarillo (Exhibit
10[k] to the Partnership's Form 10-K dated December 31,
1990).
*10.8 - Gas Purchase Agreement dated December 1, 1989, between
Williams Natural Gas Company and MESA Operating Limited
Partnership acting on behalf of itself and as agent for MESA
Midcontinent Limited Partnership (Exhibit 10.1 to
Registration Statement of the Partnership on Form S-3,
Registration No. 33-32978).
*10.9 - "B" Contract Production Allocation Agreement dated July 29,
1991, and effective as of January 1, 1991, between Colorado
Interstate Gas Company and Mesa Operating Limited
Partnership (Exhibit 10[r] to MESA's Form 10-K dated
December 31, 1991).
*10.10 - Amendment to "B" Contract Production Allocation Agreement
effective as of January 1, 1993, between Colorado Interstate
Gas Company and Mesa Operating Limited Partnership (Exhibit
10.24 to MESA's Registration Statement on Form S-1,
Registration No. 033-51909).
*10.11 - Amended Supplemental Stipulation and Agreement between
Colorado Interstate Gas Company and Mesa Operating Limited
Partnership dated June 19, 1991 (Exhibit 10[w] to the
Partnership's Registration Statement on Form S-4,
Registration No. 33-42102).
*10.12 - Amended Peak Day Gas Purchase Agreement dated effective June
19, 1991, between Colorado Interstate Gas Company and Mesa
Operating Limited Partnership (Exhibit 10[t] to MESA's
Form 10-K dated December 31, 1991).
*10.13 - Omnibus Amendment to Collateral Instruments to Supplemental
Stipulation and Agreement dated June 19, 1991, between
Colorado Interstate Gas Company and Mesa Operating Limited
Partnership (Exhibit 10[u] to MESA's Form 10-K dated
December 31, 1991).
*10.14 - Amarillo Supply Agreement between Mesa Operating Limited
Partnership, Seller, and Energas Company, a division of Atmos
Energy Corporation, Buyer, dated effective January 2, 1993
(Exhibit 10.14 to MESA's Form 10-K dated December 31,
1995).
*10.15 - Gas Gathering Agreement-Interruptible between Colorado
Interstate Gas Company, Transporter, and Mesa Operating
Limited Partnership, Shipper, dated effective October 1,
1993, as amended by agreements dated January 1, 1994,
January 5, 1994, and June 1, 1994 (Exhibit 10.15 to MESA's
Form 10-K dated December 31, 1995).
*10.16 - Gas Supply Agreement dated May 11, 1994, between Mesa
Operating Co., as successor to Mesa Operating Limited
Partnership, acting on behalf of itself and as agent for
Hugoton Capital Limited Partnership, and Williams Gas
Marketing Company, and Gas Supply Guarantee dated May 11,
1994 (Exhibit 10.16 to MESA's Form 10-K dated December 31,
1995).
*10.17 - Gas Transportation Agreement dated June 14, 1994, between
Western Resources, Inc. and Mesa Operating Co., acting on
behalf of itself and as agent for Hugoton Capital Limited
Partnership (Exhibit 10.24 to MESA's Form 10-K dated
December 31, 1994).
*10.18 - Incentive Bonus Plan of Mesa Operating Limited Partnership,
as amended, dated effective January 1, 1986 (Exhibit 10[s]
to the Partnership's Form 10-K dated December 31, 1990).
*10.19 - Performance Bonus Plan of Mesa Operating Limited Partnership
dated effective January 1, 1990 (Exhibit 10[t] to the
Partnership's Form 10-K dated December 31, 1990).
*10.20 - 1991 Stock Option Plan of MESA (Exhibit 10[v] to MESA's
Form 10-K dated December 31, 1991).
*10.21 - Interruptible Gas Transportation and Sales Agreement dated
January 1, 1991, between Mesa Operating Limited Partnership
and Energas Company and Amendment dated January 1, 1995
(Exhibit 10.22 to MESA's Form 10-K dated December 31,
1995).
*10.22 - "B" Contract Operating Agreement dated January 1, 1988,
between Mesa Operating Limited Partnership and Colorado
Interstate Gas Company (Exhibit 10.23 to MESA's Form 10-K
dated December 31, 1995).
*10.23 - "B" Contract Agreement of Compromise and Settlement dated
May 29, 1987, between Mesa Operating Limited Partnership and
Colorado Interstate Gas Company, and Amendment to Gathering
Agreement dated July 15, 1990 (Exhibit 10.24 to MESA's
Form 10-K dated December 31, 1995).
*10.24 - Gas Purchase Agreement dated January 1, 1996, between Mesa
Operating Co., as Seller, and KN Marketing L.P., as Buyer,
and Amendment dated August 1, 1995 (Exhibit 10.25 to MESA's
Form 10-K dated December 31, 1995).
*10.25 - Change in Control Retention/Severance Plan adopted August
22, 1995, and Amendment dated October 20, 1995 (Exhibit 10.26
to MESA's Form 10-K dated December 31, 1995).
*10.26 - Employment Agreement dated as of August 21, 1996, between
MESA Inc., a Texas corporation, and Ira Jon Brumley,
a Texas resident.
*10.27 - 1996 Incentive Plan of MESA Inc. (Exhibit 10.27 to MESA's Form
10-K/A dated December 31, 1996).
*10.28 - Mesa Management Severance Plan including Schedule of
Participants (Exhibit 10.28 to MESA's Form 10-K/A dated
December 31, 1996).
27 - Article 5 of Regulation S-X Financial Data Schedule
for the Second Quarter 1997 Form 10-Q.
(b) Reports on Form 8-K
1. Current Report on Form 8-K dated April 7, 1997, regarding the
proposed merger of MESA Inc. and Parker & Parsley Petroleum
Company.
2. Current Report on Form 8-K dated July 29, 1997, regarding MESA's
second quarter results.
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.
MESA Inc.
(Registrant)
/s/ Wayne A. Stoerner
---------------------
Wayne A. Stoerner
Controller
(Principal accounting officer
duly authorized to sign on
behalf of the Registrant)
Date: August 7, 1997
--------------
INDEX TO EXHIBITS
-----------------
Exhibit No. Description
- ----------- -----------
27 Article 5 of Regulation S-X Financial Data Schedule
for the Second Quarter 1997 Form 10-Q.
[ARTICLE] 5
[LEGEND] THIS SCHEDULE CONTAINS SUMMARY FINANCIAL
INFORMATION EXTRACTED FROM THE MESA INC. AND
SUBSIDIARIES JUNE 30, 1997, FINANCIAL
STATEMENTS AND IS QUALIFIED IN ITS ENTIRETY
BY REFERENCE TO SUCH FINANCIAL STATEMENTS
[MULTIPLIER] 1,000
[PERIOD-TYPE] 6-MOS
[FISCAL-YEAR-END] DEC-31-1996
[PERIOD-END] JUN-30-1997
[CASH] 20,751
[SECURITIES] 473
[RECEIVABLES] 45,077
[ALLOWANCES] 2,534
[INVENTORY] 3,130
[CURRENT-ASSETS] 70,832
[PP&E] 2,377,087
[DEPRECIATION] 1,025,355
[TOTAL-ASSETS] 1,505,458
[CURRENT-LIABILITIES] 58,950
[BONDS] 1,102,999
[PREFERRED-MANDATORY] 1,266
[PREFERRED] 0
[COMMON] 643
[OTHER-SE] 261,568
[TOTAL-LIABILITY-AND-EQUITY] 1,505,458
[SALES] 77,994
[TOTAL-REVENUES] 77,994
[CGS] 0
[TOTAL-COSTS] 64,655
[OTHER-EXPENSES] 27,577
[LOSS-PROVISION] 0
[INTEREST-EXPENSE] 25,611
[INCOME-PRETAX] (19,847)
[INCOME-TAX] 0
[INCOME-CONTINUING] (19,847)
[DISCONTINUED] 0
[EXTRAORDINARY] 0
[CHANGES] 0
[NET-INCOME] (19,847)
[EPS-PRIMARY] (0.31)
[EPS-DILUTED] (0.31)