SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(MARK ONE)
/x/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTER ENDED MARCH 31, 1994
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER 1-7667
SANTA FE ENERGY RESOURCES, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 36-2722169
(STATE OF INCORPORATION) (I.R.S. EMPLOYER IDENTIFICATION NO.)
1616 SOUTH VOSS, SUITE 1000
HOUSTON, TEXAS 77057
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES, INCLUDING ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (713) 783-2401
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 \ No
Shares of Common Stock outstanding at May 6, 1994 -- 89,957,219.
PART I _ FINANCIAL STATEMENTS
PAGE
Consolidated Statement of Operations
Three Months Ended March 31, 1994
and 1993--------------------------- 2
Consolidated Balance Sheet
March 31, 1994 and December 31,
1993------------------------------- 3
Consolidated Statement of Cash Flows
Three Months Ended March 31, 1994
and 1993--------------------------- 4
Consolidated Statement of
Shareholders' Equity
Three Months Ended March 31, 1994
and 1993--------------------------- 5
Notes to Consolidated Financial
Statements------------------------- 6
Management's Discussion and Analysis
of Financial Condition
and Results of Operations---------- 10
1
SANTA FE ENERGY RESOURCES, INC.
CONSOLIDATED STATEMENT OF OPERATIONS (UNAUDITED)
(IN MILLIONS OF DOLLARS, EXCEPT PER SHARE DATA)
THREE MONTHS ENDED
MARCH 31,
1994 1993
Revenues
Crude oil and liquids------------ $ 58.6 $ 80.5
Natural gas---------------------- 28.1 28.6
Natural gas systems-------------- -- 3.0
Crude oil marketing and
trading------------------------ 2.7 2.3
Other---------------------------- 0.9 0.9
90.3 115.3
Costs and Expenses
Production and operating--------- 40.6 42.7
Oil and gas systems and
pipelines---------------------- -- 1.1
Exploration, including dry hole
costs-------------------------- 5.0 7.1
Depletion, depreciation and
amortization------------------- 32.1 37.6
General and administrative------- 7.6 7.0
Taxes (other than income)-------- 7.4 7.1
Restructuring charges------------ 7.0 --
Loss (gain) on disposition of oil
and gas properties------------- (9.4) 0.7
90.3 103.3
Income (Loss) from Operations-------- -- 12.0
Interest income------------------ 0.2 1.2
Interest expense----------------- (10.3) (13.7)
Interest capitalized------------- 0.9 1.1
Other income (expense)----------- 0.9 (0.2)
Income (Loss) Before Income Taxes---- (8.3) 0.4
Income tax benefit (expense)----- 5.8 (0.8)
Net Income (Loss)-------------------- (2.5) (0.4)
Preferred dividend requirement------- (1.8) (1.8)
Earnings (Loss) Attributable to
Common Shares---------------------- $ (4.3) $ (2.2)
Earnings (Loss) Attributable to
Common Shares Per Share------------ $ (0.05) $ (0.02)
Weighted Average Number of Shares
Outstanding (in millions)---------- 89.9 89.6
The accompanying notes are an integral part of these financial statements.
2
SANTA FE ENERGY RESOURCES, INC.
CONSOLIDATED BALANCE SHEET
(IN MILLIONS OF DOLLARS)
MARCH 31, DECEMBER 31,
1994 1993
(UNAUDITED)
ASSETS
Current Assets
Cash and cash equivalents-------- $ 3.2 $ 4.8
Accounts receivable-------------- 78.4 87.4
Inventories---------------------- 9.7 8.7
Assets held for sale------------- 49.1 59.5
Other current assets------------- 11.7 12.2
152.1 172.6
Investment in Hadson Corporation----- 57.0 56.2
Properties and Equipment, at cost
Oil and gas (on the basis of
successful efforts
accounting)-------------------- 2,081.0 2,064.3
Other---------------------------- 27.0 27.3
2,108.0 2,091.6
Accumulated depletion,
depreciation, amortization and
impairment--------------------- (1,289.8) (1,258.9)
818.2 832.7
Other Assets
Receivable under gas balancing
arrangements------------------- 4.0 3.9
Other---------------------------- 10.9 11.5
14.9 15.4
$ 1,042.2 $ 1,076.9
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Accounts payable----------------- $ 85.0 $ 93.5
Interest payable----------------- 0.8 10.2
Current portion of long-term
debt--------------------------- 42.9 44.3
Other current liabilities-------- 16.2 18.1
144.9 166.1
Long-Term Debt----------------------- 403.5 405.4
Deferred Revenues-------------------- 8.2 8.6
Other Long-Term Obligations---------- 43.9 48.8
Deferred Income Taxes---------------- 41.0 44.4
Commitments and Contingencies (Note
5)--------------------------------- -- --
Convertible Preferred Stock---------- 80.0 80.0
Shareholders' Equity
Preferred stock------------------ -- --
Common stock--------------------- 0.9 0.9
Paid-in capital------------------ 498.3 496.9
Unamortized restricted stock
awards------------------------- (0.1) (0.1)
Accumulated deficit-------------- (178.1) (173.8)
Foreign currency translation
adjustment--------------------- (0.3) (0.3)
320.7 323.6
$ 1,042.2 $ 1,076.9
The accompanying notes are an integral part of these financial statements.
3
SANTA FE ENERGY RESOURCES, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED)
(IN MILLIONS OF DOLLARS)
THREE MONTHS ENDED
MARCH 31,
1994 1993
Operating Activities:
Net income (loss)---------------- $ (2.5) $ (0.4)
Adjustments to reconcile net
income (loss) to net cash
provided by operating
activities:
Depletion, depreciation and
amortization--------------- 32.1 37.6
Restructuring charges-------- 1.0 --
Deferred income taxes-------- (3.4) (0.4)
Net loss (gain) on
disposition of
properties----------------- (9.4) 0.7
Exploratory dry hole
costs---------------------- 0.6 1.3
Other------------------------ (0.1) 0.7
Changes in operating assets and
liabilities:
Decrease (increase) in
accounts receivable-------- 9.0 2.3
Decrease (increase) in income
tax refund receivable------ -- 16.2
Decrease (increase) in
inventories---------------- (1.0) (4.7)
Increase (decrease) in
accounts payable----------- 2.8 (3.4)
Increase (decrease) in
interest payable----------- (9.4) (8.9)
Increase (decrease) in income
taxes payable-------------- (0.1) 1.3
Net change in other assets
and liabilities------------ (5.3) (0.7)
Net Cash Provided by Operating
Activities------------------------- 14.3 41.6
Investing Activities:
Capital expenditures, including
exploratory dry hole costs----- (30.5) (30.0)
Acquisitions of producing
properties, net of related
debt--------------------------- (0.6) (4.7)
Net proceeds from sales of
properties--------------------- 20.3 7.4
Increase in partnership interest
due to reinvestment------------ -- (0.5)
Net Cash Used in Investing
Activities------------------------- (10.8) (27.8)
Financing Activities:
Net change in debt--------------- (3.3) (30.1)
Cash dividends paid-------------- (1.8) (5.3)
Net Cash Used in Financing
Activities------------------------- (5.1) (35.4)
Net Decrease in Cash and Cash
Equivalents------------------------ (1.6) (21.6)
Cash and Cash Equivalents at
Beginning of Period---------------- 4.8 83.8
Cash and Cash Equivalents at End of
Period----------------------------- $ 3.2 $ 62.2
The accompanying notes are an integral part of these financial statements.
4
SANTA FE ENERGY RESOURCES, INC.
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY (UNAUDITED)
(SHARES AND DOLLARS IN MILLIONS)
FOREIGN
UNAMORTIZED CURRENCY
RESTRICTED TRANSLA- TOTAL
COMMON STOCK PAID-IN STOCK ACCUMULATED TION SHAREHOLDERS'
SHARES AMOUNT CAPITAL AWARDS DEFICIT ADJUSTMENT EQUITY
Balance at December 31, 1993--------- 89.8 $0.9 $ 496.9 $ (0.1) $ (173.8) $ (0.3) $ 323.6
Issuance of common stock----------- 0.1 -- 1.4 -- -- -- 1.4
Net loss--------------------------- -- -- -- -- (2.5) -- (2.5)
Dividends declared----------------- -- -- -- -- (1.8) -- (1.8)
Balance at March 31, 1994------------ 89.9 $0.9 $ 498.3 $ (0.1) $ (178.1) $ (0.3) $ 320.7
Balance at December 31, 1992--------- 89.5 $0.9 $ 494.3 $ (0.4) $ (78.0) $ (0.2) $ 416.6
Issuance of common stock----------- 0.2 -- 1.8 -- -- -- 1.8
Amortization of restricted
stock awards---------------------- -- -- -- 0.1 -- -- 0.1
Net loss--------------------------- -- -- -- -- (0.4) -- (0.4)
Dividends declared----------------- -- -- -- -- (5.3) -- (5.3)
Balance March 31, 1993--------------- 89.7 $0.9 $ 496.1 $ (0.3) $ (83.7) $ (0.2) $ 412.8
The accompanying notes are an integral part of these financial statements.
5
SANTA FE ENERGY RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(1) ACCOUNTING POLICIES
The unaudited consolidated financial statements of Santa Fe Energy
Resources, Inc. ('Santa Fe' or the 'Company') reflect, in the opinion of
management, all adjustments, consisting only of normal and recurring
adjustments, necessary to present fairly the Company's financial position at
March 31, 1994 and the Company's results of operations and cash flows for the
three-month periods ended March 31, 1994 and 1993. Interim period results are
not necessarily indicative of results of operations or cash flows for a
full-year period.
These financial statements and the notes thereto should be read in
conjunction with the Company's annual report on Form 10-K for the year ended
December 31, 1993.
(2) CORPORATE RESTRUCTURING PROGRAM
In the fourth quarter of 1993 the Company adopted a corporate restructuring
program which includes (i) the concentration of capital spending in the
Company's core operating areas; (ii) the disposition of non-core assets; (iii)
the elimination of the $0.04 per share quarterly common stock dividend; and (iv)
an evaluation of the Company's capital and cost structures.
The Company's non-core asset disposition program includes the sale of its
natural gas gathering and processing assets to Hadson Corporation ('Hadson'),
the sale to Vintage Petroleum, Inc. of certain southern California and Gulf
Coast oil and gas producing properties and the sale to Bridge Oil (U.S.A.) Inc.
of certain Mid-Continent and Rocky Mountain oil and gas producing properties and
undeveloped acreage. Based on the evaluation of its capital and cost structures,
the Company (i) implemented a cost reduction program which includes the
reduction of its salaried work force by approximately 20%, an improvement in the
efficiency of its information systems and reductions in other general and
administrative costs and (ii) determined to proceed with a refinancing of
certain of its long-term debt.
In implementing the corporate restructuring program, in 1993 the Company
recorded restructuring charges of $38.6 million comprised of (i) losses on
property dispositions of $27.8 million; (ii) long-term debt repayment penalties
of $8.6 million; and (iii) accruals for certain personnel benefits and related
costs of $2.2 million. In the first quarter of 1994 the Company recorded
additional restructuring charges of $7.0 million comprised of severance,
benefits and relocation expenses associated with the cost reduction program.
(3) STATEMENT OF CASH FLOWS
The Company made interest and income tax payments as follows during the
three months ended March 31, 1994 and 1993 (in millions of dollars):
1994 1993
Interest payments-------------------- 21.2 21.5
Income tax payments------------------ 0.8 0.8
6
(4) INVESTMENT IN HADSON CORPORATION
The following table summarizes the Company's investment in Hadson
Corporation ('Hadson') and the changes in such investment during the three
months ended March 31, 1994 (in millions of dollars):
INVESTMENT IN
PREFERRED COMMON
STOCK STOCK TOTAL
Investment at December 31, 1993------ 48.7 7.5 56.2
Preferred dividends, paid in-kind---- 1.4 -- 1.4
Equity in loss attributable to common
shares----------------------------- -- (0.6) (0.6)
Investment at March 31, 1994--------- 50.1 6.9 57.0
The following table summarizes Hadson's results of operations for the three
months ended March 31, 1994 (in millions of dollars):
Revenues----------------------------- 193.2
Expenses----------------------------- (192.8)
Income before income taxes----------- 0.4
Income taxes------------------------- --
Net income--------------------------- 0.4
Preferred dividend requirement------- (1.4)
Loss attributable to common
shares----------------------------- (1.0)
(5) COMMITMENTS AND CONTINGENCIES
NATURAL GAS HEDGING PROGRAM
In the third quarter of 1992 the Company initiated a hedging program with
respect to its sales of natural gas. The Company has used various instruments
whereby monthly settlements are based on the differences between the price or
range of prices specified in the instruments and the settlement price of certain
natural gas futures contracts quoted on the New York Mercantile Exchange. In
instances where the applicable settlement price is less than the price specified
in the contract, the Company receives a settlement based on the difference; in
instances where the applicable settlement price is higher than the specified
prices the Company pays an amount based on the difference. The instruments
utilized by the Company differ from futures contracts in that there is no
contractual obligation which requires or allows for the future delivery of the
product. For the three months ended March 31, 1994 and 1993, hedges resulted in
a reduction in natural gas revenues of $0.3 million and $0.8 million,
respectively.
The Company has open natural gas hedging contracts covering approximately
6.0 Bcf during the period March through September 1994. The 'approximate
break-even price' (the average of the monthly settlement prices of the
applicable futures contracts which would result in no settlement being due to or
from the Company) with respect to such contracts is approximately $1.89 per Mcf.
The Company has no other outstanding natural gas hedging instruments.
ENVIRONMENTAL REGULATION
Federal, state and local laws and regulations relating to environmental
quality control affect the Company in all of its oil and gas operations. The
Company has been identified as one of over 250 potentially responsible parties
('PRPs') at a superfund site in Los Angeles County, California. The site was
operated by a third party as a waste disposal facility from 1948 until 1983. The
Environmental Protection Agency ('EPA') is requiring the PRPs to undertake
remediation of the site in
7
several phases, which include site monitoring and leachate control, gas control
and final remediation. In 1989, the EPA and a group of the PRPs entered into a
consent decree covering the site monitoring and leachate control phases of
remediation. The Company is a member of the group that is responsible for
carrying out this first phase of work, which is expected to be completed in five
to eight years. The maximum liability of the group, which is joint and several
for each member of the group, for the first phase is $37.0 million, of which the
Company's share is expected to be approximately $2.4 million ($1.3 million after
recoveries from working interest participants in the unit at which the wastes
were generated) payable over the period that the phase one work is performed.
The EPA and a group of PRPs of which the Company is a member have also entered
into a subsequent consent decree with respect to the second phase of work (gas
control). The liability of this group has not been capped, but is estimated to
be $130.0 million. The Company's share of costs of this phase, however, is
expected to be approximately of the same magnitude as that of the first phase
because more parties are involved in the settlement. The Company has provided
for costs with respect to the first two phases, but it cannot currently estimate
the cost of any subsequent phases of work or final remediation which may be
required by the EPA.
In 1989, Adobe received requests from the EPA for information pursuant to
Section 104(e) of CERCLA with respect to the D. L. Mud and Gulf Coast Vacuum
Services superfund sites located in Abbeville, Louisiana. The EPA has issued its
record of decision at the Gulf Coast Site and on February 9, 1993 the EPA issued
to all PRP's at the site a settlement order pursuant to Section 122 of CERCLA.
Earlier, an emergency order pursuant to Section 106 of CERLA was issued on
December 11, 1992, for purposes of containment due to the Louisiana rainy
season. On December 15, 1993 the Company entered into a sharing agreement with
other PRP'S to participate in the final remediation of the Gulf Coast site. The
Company's share of the remediation is approximately $600,000 and includes its
proportionate share of those PRPs who do not have the financial resources to
provide their share of the work at the site. A former site owner has already
conducted remedial activities at the D. L. Mud Site under a state agency
agreement. The extent, if any, of any further necessary remedial activity at the
D. L. Mud Site has not been finally determined.
The Company has received a request for information from the EPA regarding
the Lee Acres Landfill CERCLA site in New Mexico. The Company advised the EPA
that it was not able to locate any information indicating that it had used that
facility. The Company is investigating its potential connection, if any, to this
facility and is not able to estimate its share of costs, if any, for the site at
this time.
On April 4, 1994, the Company received a request from the EPA for
information pursuant to Section 104(a) of CERCLA and a letter ordering the
Company and seven other PRPs to negotiate with the EPA regarding implementation
of a remedial plan for a site located in Santa Fe Springs, California. The
Company owned the property on which the site is located from 1921 to 1932. After
the Company sold the property, hazardous wastes were allegedly disposed there by
a third party who operated a disposal site. The EPA estimates that the total
past and future costs for remediation will approximate $9 million. The Company
believes that it has valid defenses to liability. While it is still
investigating its exposure, if any, for the remedial costs, the Company does not
believe that any such costs would be material.
EMPLOYMENT AGREEMENTS
The Company has entered into employment agreements with certain key
employees. The initial term of each agreement expired on December 31, 1990 and,
on January 1, 1991 and beginning on each January 1 thereafter, is automatically
extended for one-year periods, unless by September 30 of any year the Company
gives notice that the agreement will not be extended. The term of the
8
agreements is automatically extended for 24 months following a change of
control. The consummation of the merger of Adobe Resources into the Company in
1992 constituted a change of control as defined in the agreements.
In the event that following a change of control employment is terminated for
reasons specified in the agreements, the employee would receive: (i) a lump sum
payment equal to two years' base salary; (ii) the maximum possible bonus under
the terms of the Company's incentive compensation plan; (iii) a lapse of
restrictions on any outstanding restricted stock grants and full payout of any
outstanding Phantom Units; (iv) cash payment for each outstanding stock option
equal to the amount by which the fair market value of the common stock exceeds
the exercise price of the option; and, (v) life, disability and health benefits
for a period of up to two years. In addition, payments and benefits under
certain employment agreements are subject to further limitations based on
certain provisions of the Internal Revenue Code.
OTHER MATTERS
The Company has several long-term contracts ranging up to fifteen years for
the supply and transportation of approximately 30 million cubic feet per day of
natural gas. In the aggregate, these contracts involve a minimum commitment on
the part of the Company of approximately $10 million per year.
There are other claims and actions, including certain other environmental
matters, pending against the Company. In the opinion of management, the amounts,
if any, which may be awarded in connection with any of these claims and actions
could be significant to the results of operations of any period but would not be
material to the Company's consolidated financial position.
9
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
For the three months ended March 31, 1994 the Company reported a loss to
common shares of $4.3 million, or $0.05 per share. The loss includes a $7.0
million restructuring charge related to a cost reduction program implemented by
the Company (see -- Liquidity and Capital Resources). At March 31, 1994 the
Company's long-term debt totalled $446.4 million, a portion of which the Company
intends to refinance to reduce required debt amortization in the near-term and
provide additional financial flexibility in the current low oil price
environment (see -- Liquidity and Capital Resources).
GENERAL
As an independent oil and gas producer, the Company's results of operations
are dependent upon the difference between the prices received for oil and gas
and the costs of finding and producing such resources. A substantial portion of
the Company's crude oil production is from long-lived fields where EOR methods
are being utilized. The market price of the heavy (i.e., low gravity, high
viscosity) and sour (i.e., high sulfur content) crude oils produced in these
fields is lower than sweeter, light (i.e., low sulfur and low viscosity) crude
oils, reflecting higher transportation and refining costs. The lower price
received for the Company's domestic heavy and sour crude oil is reflected in the
average sales price of the Company's domestic crude oil and liquids (excluding
the effect of hedging transactions) for the first quarter of 1994 of $9.64 per
barrel, compared to $13.16 per barrel for West Texas Intermediate crude oil (an
industry posted price generally indicative of spot prices for sweeter light
crude oil). In addition, the lifting costs of heavy crude oils are generally
higher than the lifting costs of light crude oils. As a result of these narrower
margins, even relatively modest changes in crude oil prices may significantly
affect the Company's revenues, results of operations, cash flows and proved
reserves. In addition, prolonged periods of high or low oil prices may have a
material effect on the Company's financial position.
Crude oil prices are subject to significant changes in response to
fluctuations in the domestic and world supply and demand and other market
conditions as well as the world political situation as it affects OPEC, the
Middle East and other producing countries. The period since mid-1990 has
included some of the largest fluctuations in oil prices in recent times,
primarily due to the political unrest in the Middle East. The actual average
sales price (unhedged) received by the Company ranged from a high of $23.92 per
barrel in the fourth quarter of 1990 to a low of $10.00 per barrel for the first
quarter of 1994. The Company's average sales price for its 1993 oil production
was $12.93 per barrel. Based on operating results of 1993, the Company estimates
that a $1.00 per barrel increase or decrease in average crude oil sales prices
would have resulted in a corresponding $21.6 million change in 1993 income from
operations and a $16.2 million change in 1993 cash flow from operating
activities. The Company also estimates that a $0.10 per Mcf increase or decrease
in average natural gas sales prices would have resulted in a corresponding $5.8
million change in 1993 income from operations and a $4.4 million change in 1993
cash flow from operating activities. The foregoing estimates do not give effect
to changes in any other factors, such as the effect of the Company's hedging
program or depreciation and depletion, that would result from a change in oil
and natural gas prices.
In the third quarter of 1992 a hedging program was initiated with respect to
the Company's sales of natural gas. See Note 5 to the Consolidated Financial
Statements.
In November 1992, 5,725,000 Depositary Units consisting of interests in
Santa Fe Energy Trust (the 'Trust') were sold in a public offering. For any
calendar quarter ending on or prior to December 21, 2002, the Trust will receive
additional royalty payments to the extent necessary to distribute $0.40 per
Depositary Unit per quarter. The source of such payments, if needed, will be
limited to the Company's remaining royalty interest in certain of the properties
conveyed to the Trust. The aggregate amount of such payments will be limited to
$20.0 million on a revolving basis. The
10
Company was required to make additional royalty payments of $362,000 and
$506,000 with respect to the distributions made by the Trust for operations
during the quarters ended December 31, 1993 and March 31, 1994, respectively.
RESULTS OF OPERATIONS
REVENUES
The following table reflects the components of the Company's crude oil and
liquids and natural gas revenues:
THREE MONTHS
ENDED MARCH 31,
1994 1993
Crude Oil and Liquids
Revenues ($/Millions)
Sales
Domestic
California Heavy------------- 29.2 39.0
Other------------------------ 21.1 35.0
50.3 74.0
Argentina-------------------- 2.3 2.7
Indonesia-------------------- 6.8 6.4
Net Profits Payments----------- (0.8) (2.6)
58.6 80.5
Volumes (MBbls/day)
Domestic
California Heavy--------------- 37.8 36.9
Other-------------------------- 20.2 24.1
58.0 61.0
Argentina------------------------ 2.5 2.0
Indonesia------------------------ 5.5 4.3
66.0 67.3
Sales Prices ($/Bbl)
Unhedged
Domestic
California Heavy------------- 8.60 11.73
Other------------------------ 11.59 16.18
Total------------------------ 9.64 13.49
Argentina---------------------- 10.27 15.45
Indonesia---------------------- 13.74 16.25
Total-------------------------- 10.00 13.73
Hedged--------------------------- 10.00 13.73
Natural Gas
Revenues ($/Millions)
Sales---------------------------- 29.3 31.3
Hedging-------------------------- (0.3) (0.8)
Net Profits Payments------------- (0.9) (1.9)
28.1 28.6
Volumes (MMcf/day)----------------- 155.5 177.8
Sales Prices ($/Mcf)
Unhedged------------------------- 2.10 1.96
Hedged--------------------------- 2.07 1.91
11
Total revenues declined 22% from $115.3 million in the first quarter of 1993
to $90.3 million in the first quarter of 1994 primarily due to lower oil prices
in 1994. The average price realized per barrel of oil in 1994 was $10.00, a 27%
decrease from the $13.73 realized in 1993. Daily average oil production
decreased 1,300 barrels per day during the first quarter of 1994 primarily
reflecting the sale to Vintage Petroleum, Inc. ('Vintage') in the fourth
quarter of 1993 of properties which produced approximately 3,200 barrels
per day, partially offset by increased production in Indonesia and
Argentina. Natural gas production declined to an average of 155.5 MMcf per
day in the first quarter of 1994 compared to 177.8 MMcf per day in the first
quarter of 1993. However, production for the 1993 period included a positive
adjustment of approximately 16.7 MMcf per day related to production in prior
periods from certain nonoperated properties. In addition, the 1993 volumes
include approximately 7.0 MMcf per day attributable to the properties sold to
Vintage. Natural gas sales prices (hedged) for 1994 averaged $2.07 per Mcf,
approximately 8% higher than the $1.91 realized in 1993. Natural gas revenues
for 1994 and 1993 were reduced by $0.3 million ($0.03 per Mcf) and $0.8 million
($0.05 per Mcf), respectively, by losses on hedging transactions.
COSTS AND EXPENSES
The following table sets forth, on the basis of the barrel of oil equivalent
('BOE') produced by the Company during the applicable period, certain of the
Company's costs and expenses (in dollars):
THREE MONTHS
ENDED MARCH 31,
1994 1993
Production and operating costs per
BOE (a)---------------------------- 4.91 4.90
Exploration, including dry hole costs
per BOE---------------------------- 0.61 0.82
Depletion, depreciation and
amortization per BOE--------------- 3.88 4.31
General and administrative costs per
BOE-------------------------------- 0.92 0.80
Taxes other than income per BOE
(b)-------------------------------- 0.90 0.82
Interest, net, per BOE (c)----------- 1.11 1.31
(a) Excluding related production, severance and ad valorem taxes.
(b) Includes production, severance and ad valorem taxes.
(c) Reflects interest expense less amounts capitalized and interest income.
Total costs and expenses for the first quarter of 1994 of $90.3 million were
13% lower than the $103.3 million reported for the first quarter of 1993.
Exploration expenses were down $2.1 million primarily reflecting lower
geological and geophysical costs with respect to foreign operations and lower
dry hole costs. Depletion, depreciation and amortization ('DD&A') decreased $5.5
million primarily reflecting the effect of property impairments taken in the
fourth quarter of 1993 and the sale of properties to Vintage. On a BOE basis
DD&A decreased by 10% from $4.31 per barrel to $3.88 per barrel. Costs and
expenses for the first quarter of 1994 include $7.0 million in restructuring
charges (see -- Liquidity and Capital Resources) and a $9.4 million gain on the
sale of certain oil and gas properties.
Interest expense for the first quarter of 1994 includes a credit of $2.4
million reflecting adjustments to provisions made in prior periods with respect
to interest on certain federal income tax audit adjustments. Other income
(expense) for the first quarter of 1994 includes $1.5 million in dividend income
on Hadson Corporation ('Hadson') preferred stock (paid in-kind) and a $0.7
million loss on the Company's equity in Hadson common stock. Income taxes for
the first quarter of 1994 includes a $3.0 million benefit of adjustments to
provisions made in prior periods with respect to certain federal income tax
audit adjustments.
LIQUIDITY AND CAPITAL RESOURCES
Historically, the Company has generally funded capital and exploration
expenditures and working capital requirements from cash provided by operating
activities. Depending upon the future levels
12
of operating cash flows, which are significantly affected by oil and gas prices,
the restrictions on additional borrowings included in certain of the Company's
debt agreements, together with debt service requirements and dividends, may
limit the cash available for future exploration, development and acquisition
activities. Net cash provided by operating activities totaled $14.3 million in
the first quarter of 1994 and $41.6 million in the first quarter of 1993; net
cash used in investing activities (net of proceeds from the sales of properties)
in such periods totaled $10.8 million and $27.8 million, respectively.
The Company's cash flow from operating activities is a function of the
volumes of oil and gas produced from the Company's properties and the sales
prices realized therefor. Crude oil and natural gas are depleting assets. Unless
the Company replaces over the long term the oil and natural gas produced from
the Company's properties, the Company's assets will be depleted over time and
its ability to service and incur debt at constant or declining prices will be
reduced. The Company's cash flow from operations for the first quarter of 1993
reflects an average sales price (unhedged) for the Company's 1993 oil production
of $13.73 per barrel and the Company's average sales price for oil production
for the full year 1993 was $12.93 per barrel. In the first quarter of 1994, the
average sales price (unhedged) for the Company's oil production was $10.00 per
barrel. If such lower oil prices prevail throughout 1994, the Company's cash
flow from operating activities for 1994 will be significantly lower than that
for 1993.
In the fourth quarter of 1993 the Company adopted a corporate restructuring
program which includes (i) the concentration of capital spending in the
Company's core operating areas, (ii) the disposition of non-core assets, (iii)
the elimination of the $0.04 per share quarterly Common Stock dividend and (iv)
an evaluation of the Company's capital and cost structures to examine ways to
increase flexibility and strengthen the Company's financial performance.
The Company's capital program will be concentrated in three domestic core
areas -- the Permian Basin in Texas and New Mexico, the offshore Gulf of Mexico
and the San Joaquin Valley of California -- as well as its productive areas in
Argentina and Indonesia. The domestic program includes development activities in
the Delaware and Cisco-Canyon formations in west Texas and southeast New Mexico,
a development drilling program for the offshore Gulf of Mexico natural gas
properties and relatively low risk infill drilling in the San Joaquin Valley of
California. Internationally, the program includes development of the Company's
Sierra Chata discovery in Argentina with gas sales expected to commence in early
1995 and the Salawati Basin Joint Venture in Indonesia.
The Company's non-core asset disposition program includes the sale of its
natural gas gathering and processing assets to Hadson (completed in December
1993), the sale to Vintage of certain southern California and Gulf Coast oil and
gas producing properties (completed in November 1993) and the sale to Bridge Oil
(U.S.A.) Inc. ('Bridge') of certain Mid-Continent and Rocky Mountain oil and gas
producing properties and undeveloped acreage (completed in April 1994). In the
first quarter of 1994, the Company sold the remaining 575,000 Depositary Units
which it held in the Trust for $11.3 million and its interest in certain other
oil and gas properties for $8.3 million. As a result of the Vintage and Bridge
dispositions, the Company has sold properties having combined production during
1993 of 4.1 MBbls per day of oil and 21.7 MMcf per day of natural gas and
estimated proved reserves of approximately 16.7 MMBOE.
Based on current market conditions, the Company has authorized up to $130
million of capital expenditures in 1994, a level which should allow the Company
to replace its estimated 1994 production, although no assurance can be given
regarding such replacement. The Company intends to continue to monitor its
capital expenditure program throughout the balance of 1994 and may, in response
to industry conditions, including, without limitation, prevailing oil and
natural gas prices and the outlook therefor, revise such program.
Based on the review of its cost structure the Company has implemented a cost
reduction program that includes the reduction of its salaried work force by
approximately 20%, an improvement in the efficiency of its information systems
and reductions in other general and administrative costs. These
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measures, together with the Company's on-going efforts to reduce production
costs and the recent sale of its higher cost, non-core properties, are designed
to reduce costs and expenses by approximately $30.0 million from the 1993 level
(which reduction includes approximately $5.0 million of non-recurring costs).
Approximately $10.0 million of the estimated cost reduction is expected to be
in production and operating costs. Substantially all of this cost reduction
program is expected to be implemented by year end 1994.
Based on the review of its capital structure, the Company determined to
proceed with a refinancing in the belief that it will increase the Company's
financial flexibility, strengthen the Company's financial condition and permit
the Company to pursue aggressively its operating strategy. In this respect the
Company intends to issue in separate public offerings $100.0 million of Senior
Subordinated Debentures due in 2004 and 10.7 million shares of Dividend Enhanced
Convertible Stock ('DECS') which will automatically convert into 10.7 million
shares of common stock in 1998. The offerings of such securities will be made
concurrently, however, neither offering is dependent upon the completion of the
other. Proceeds from such offerings will be used to retire existing long-term
debt and for working capital purposes.
In implementing the corporate restructuring program, in 1993 the Company
recorded restructuring charges of $38.6 million comprised of (i) losses on
property dispositions of $27.8 million; (ii) long-term debt repayment penalties
of $8.6 million; and (iii) accruals for certain personnel benefits and related
costs of $2.2 million. In the first quarter of 1994 the Company recorded
additional restructuring charges of $7.0 million comprised of severance,
benefits and relocation expenses associated with the cost reduction program.
Effective March 16, 1994 the Company entered into an Amended and Restated
Revolving Credit Agreement (the 'Bank Facility') which consists of a five year
secured revolving credit agreement maturing December 31, 1998 ('Facility A') and
a three year unsecured revolving credit facility maturing December 31, 1996
('Facility B'). The aggregate borrowing limits under the terms of the Bank
Facility are $125.0 million (up to $90.0 million under Facility A and up to
$35.0 million under Facility B). Under certain circumstances, the aggregate
borrowing limits under the terms of the Bank Facility may be increased to $175.0
million (up to $90.0 million under Facility A and up to $85.0 million under
Facility B). Interest rates under the Bank Facility are tied to LIBOR or the
bank's prime rate with the actual interest rate reflecting certain ratios based
upon the Company's ability to repay its outstanding debt and the value and
projected timing of production of the Company's oil and gas reserves. These and
other similar ratios will also affect the Company's ability to borrow under the
Bank Facility and the timing and amount of any required repayments and
corresponding commitment reductions. At March 31, 1994, $70.0 million was
outstanding under the terms of Facility A.
The Company is a party to several long-term and short-term credit agreements
which restrict the Company's ability to take certain actions, including
covenants that restrict the Company's ability to incur additional indebtedness
and to pay dividends on its capital stock. Under the most restrictive covenant
in the Company's existing credit agreements, at March 31, 1994 the Company could
incur up to $61.7 million of additional indebtedness and pay dividends of up to
$18.4 million on its capital stock.
ENVIRONMENTAL MATTERS
Almost all phases of the Company's oil and gas operations are subject to
stringent environmental regulation by governmental authorities. Such regulation
has increased the costs of planning, designing, drilling, installing, operating
and abandoning oil and gas wells and other facilities. The Company has expended
significant financial and managerial resources to comply with such regulations.
Although the Company believes its operations and facilities are in general
compliance with applicable environmental regulations, risks of substantial costs
and liabilities are inherent in oil and gas operations. It is possible that
other developments, such as increasingly strict environmental laws, regulations
and enforcement policies or claims for damages to property, employees, other
persons and
14
the environment resulting from the Company's operations, could result in
significant costs and liabilities in the future. As it has done in the past, the
Company intends to fund its cost of environmental compliance from operating cash
flows. See Note 5 to the Consolidated Financial Statements.
DIVIDENDS
Dividends on the Company's convertible preferred stock are cumulative at an
annual rate of $1.40 per share. No dividends may be declared or paid with
respect to the Company's common stock if any dividends with respect to the
convertible preferred stock are in arrears. As part of the 1993 restructuring
program, the Company eliminated the payment of its $0.04 per share quarterly
dividend on its common stock. The determination of the amount of future cash
dividends, if any, to be declared and paid on the Company's common stock is in
the sole discretion of the Company's Board of Directors and will depend on
dividend requirements with respect to the convertible preferred stock, the
Company's financial condition, earnings and funds from operations, the level of
capital and exploration expenditures, dividend restrictions in financing
agreements, future business prospects and other matters the Board of Directors
deems relevant.
PART II
OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
None
(b) Reports on Form 8-K
DATE ITEM
February 8, 1994 5
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Company
has duly caused this report to be signed on its behalf by the undersigned
thereunto duly authorized.
SANTA FE ENERGY RESOURCES, INC.
(Registrant)
By /s/ MICHAEL J. ROSINSKI
Michael J. Rosinski
Vice President and Chief
Financial Officer
(Principal Financial and
Accounting Officer)
Houston, Texas
May 11, 1994
16