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, 1996
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) 507-5000
------------------------
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 [ ]
Shares of Common Stock outstanding at April 15, 1996 -- 90,542,795
PART I - FINANCIAL STATEMENTS
PAGE
----
Consolidated Statement of Operations
Three Months Ended March 31, 1996
and 1995........................... 2
Consolidated Balance Sheet
March 31, 1996 and December 31,
1995............................... 3
Consolidated Statement of Cash Flows
Three Months Ended March 31, 1996
and 1995........................... 4
Consolidated Statement of
Shareholders' Equity
Three Months Ended March 31, 1996
and 1995........................... 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,
--------------------
1996 1995
--------- ---------
Revenues
Crude oil and liquids........... $ 94.5 $ 79.0
Natural gas..................... 24.9 15.0
Crude oil marketing and
trading........................ 4.1 2.9
Other........................... -- 1.7
--------- ---------
123.5 98.6
--------- ---------
Costs and Expenses
Production and operating........ 43.8 38.6
Exploration, including dry hole
costs.......................... 5.6 6.0
Depletion, depreciation and
amortization................... 32.3 31.3
General and administrative...... 6.0 5.9
Taxes (other than income)....... 6.1 4.3
Loss (gain) on disposition of
oil and gas properties......... 0.2 --
--------- ---------
94.0 86.1
--------- ---------
Income from Operations............... 29.5 12.5
Interest income................. 0.5 0.8
Interest expense................ (9.6) (10.1)
Interest capitalized............ 1.3 0.9
Other income (expense).......... (0.3) 2.2
--------- ---------
Income Before Income Taxes........... 21.4 6.3
Income tax expense.............. (8.8) (2.7)
--------- ---------
Net Income........................... 12.6 3.6
Preferred dividend
requirement.................... (3.7) (3.7)
--------- ---------
Earnings (Loss) Attributable to
Common Shares...................... $ 8.9 $ (0.1)
========= =========
Earnings (Loss) Attributable to
Common Shares Per Share............ $ 0.10 $ --
========= =========
Weighted Average Number of Shares
Outstanding (in millions).......... 90.4 90.1
========= =========
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,
1996 1995
----------- ------------
(UNAUDITED)
ASSETS
Current Assets
Cash and cash equivalents....... $ 50.4 $ 42.6
Accounts receivable............. 93.0 89.0
Inventories..................... 9.7 10.5
Other current assets............ 18.4 17.2
----------- ------------
171.5 159.3
----------- ------------
Properties and Equipment, at cost
Oil and gas (on the basis of
successful efforts
accounting).................... 2,386.3 2,336.3
Other........................... 36.2 35.6
----------- ------------
2,422.5 2,371.9
Accumulated depletion,
depreciation, amortization and
impairment..................... (1,513.5) (1,482.4)
----------- ------------
909.0 889.5
----------- ------------
Other Assets
Receivable under gas balancing
arrangements................... 5.7 5.8
Other........................... 8.1 10.2
----------- ------------
13.8 16.0
----------- ------------
$ 1,094.3 $ 1,064.8
=========== ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Accounts payable................ $ 75.6 $ 73.1
Interest payable................ 17.1 7.9
Current portion of long-term
debt........................... 35.0 --
Other current liabilities....... 27.9 28.6
----------- ------------
155.6 109.6
----------- ------------
Long-Term Debt....................... 309.4 344.4
----------- ------------
Deferred Revenues.................... 5.5 4.9
----------- ------------
Other Long-Term Obligations.......... 24.4 24.2
----------- ------------
Deferred Income Taxes................ 70.7 64.0
----------- ------------
Commitments and Contingencies (Note
3)................................. -- --
----------- ------------
Convertible Preferred Stock.......... 80.0 80.0
----------- ------------
Shareholders' Equity
Preferred stock................. -- --
$.732 Series A preferred
stock.......................... 91.4 91.4
Common stock.................... 0.9 0.9
Paid-in capital................. 503.5 501.4
Accumulated deficit............. (146.8) (155.7)
Foreign currency translation
adjustment..................... (0.3) (0.3)
----------- ------------
448.7 437.7
----------- ------------
$ 1,094.3 $ 1,064.8
=========== ============
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,
--------------------
1996 1995
--------- ---------
Operating Activities:
Net income...................... $ 12.6 $ 3.6
Adjustments to reconcile net
income (loss) to net cash
provided by operating
activities:
Depletion, depreciation and
amortization............. 32.3 31.3
Deferred income taxes...... 6.7 1.8
Net loss (gain) on
disposition of
properties............... 0.2 --
Exploratory dry hole
costs.................... 0.3 2.8
Other...................... 0.5 (1.5)
Changes in operating assets and
liabilities:
Decrease (increase) in
accounts receivable...... 4.0 7.0
Decrease (increase) in
inventories.............. 0.8 (0.9)
Increase (decrease) in
accounts payable......... 14.0 (14.3)
Increase (decrease) in
interest payable......... 9.2 (4.2)
Increase (decrease) in
income taxes payable..... 0.1 0.2
Net change in other assets
and liabilities.......... (13.4) (5.6)
--------- ---------
Net Cash Provided by Operating
Activities......................... 67.3 20.2
--------- ---------
Investing Activities:
Capital expenditures, including
exploratory dry hole costs..... (39.1) (45.6)
Acquisitions of producing
properties..................... (17.0) (0.2)
Net proceeds from sales of
properties..................... 0.3 4.1
--------- ---------
Net Cash Used in Investing
Activities......................... (55.8) (41.7)
--------- ---------
Financing Activities:
Principal payments on long-term
borrowings..................... -- (10.0)
Cash dividends paid............. (3.7) (3.7)
--------- ---------
Net Cash Used in Financing
Activities......................... (3.7) (13.7)
--------- ---------
Net Cash Provided (Used) in
the Period......................... 7.8 (35.2)
Cash and Cash Equivalents at
Beginning of Period................ 42.6 53.7
--------- ---------
Cash and Cash Equivalents at End of
Period............................. $ 50.4 $ 18.5
========= =========
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)
$.732
SERIES A
CONVERTIBLE FOREIGN
PREFERRED STOCK COMMON STOCK CURRENCY TOTAL
--------------- --------------- PAID-IN ACCUMULATED TRANSLATION SHAREHOLDERS'
SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT ADJUSTMENT EQUITY
------ ------ ------ ------ -------- ----------- ----------- --------------
Balance at December 31, 1995......... 10.7 $91.4 90.3 $0.9 $ 501.4 $(155.7) $(0.3) $437.7
Issuance of common stock........... -- -- 0.2 -- 2.1 -- -- 2.1
Net income......................... -- -- -- -- -- 12.6 -- 12.6
Dividends declared................. -- -- -- -- -- (3.7) -- (3.7)
------ ------ ------ ------ -------- ----------- ----------- --------------
Balance at March 31, 1996............ 10.7 $91.4 90.5 $0.9 $ 503.5 $(146.8) $(0.3) $448.7
====== ====== ====== ====== ======== =========== =========== ==============
Balance at December 31, 1994......... 10.7 $91.4 90.0 $0.9 $ 498.9 $(167.5) $(0.4) $423.3
Issuance of common stock........... -- -- 0.1 -- 1.8 -- -- 1.8
Foreign currency translation
adjustment........................ -- -- -- -- -- -- 0.1 0.1
Net income......................... -- -- -- -- -- 3.6 -- 3.6
Dividends declared................. -- -- -- -- -- (3.7) -- (3.7)
------ ------ ------ ------ -------- ----------- ----------- --------------
Balance at March 31, 1995............ 10.7 $91.4 90.1 $0.9 $ 500.7 $(167.6) $(0.3) $425.1
====== ====== ====== ====== ======== =========== =========== ==============
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, 1996 and the Company's results of operations and
cash flows for the three-month periods ended March 31, 1996 and 1995.
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, 1995.
(2) STATEMENT OF CASH FLOWS
The Company made interest and income tax payments as follows during
the three months ended March 31, 1996 and 1995 (in millions of dollars):
1996 1995
----- --------
Interest payments............... -- 13.7
Income tax payments............. 0.2 0.5
In addition, during the three months ended March 31, 1995 the Company
received a $1.0 million income tax refund.
(3) COMMITMENTS AND CONTINGENCIES
OIL AND GAS HEDGING
The Company hedges a portion of its oil and gas sales to provide a
certain minimum level of cash flow from its sales of oil and gas. While
the hedges are generally intended to reduce the Company's exposure to
declines in market price, the Company's gain from increases in market
price may be limited. The Company uses various financial instruments
whereby monthly settlements are based on differences between the prices
specified in the instruments and the settlement prices of certain
futures contracts quoted on the New York Mercantile Exchange ("NYMEX")
or certain other indices. Generally, 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
price, 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. Gains or losses on hedging activities
are recognized in oil and gas revenues in the period in which the hedged
production is sold.
The Company currently has open crude hedges on (i) an average of
7,800 barrels per day for the period April to September 1996 at an
average NYMEX WTI price of $18.84 per barrel and (ii) provided that the
NYMEX WTI price is greater than approximately $17.00 per barrel, up to
an additional 8,000 barrels per day for the period April through
September 1996 at an average NYMEX WTI price of $18.68 per barrel. The
"break-even price" (the average of the daily settlement prices which
result in no settlement being due to or from the Company) with respect
to all such contracts is approximately $18.75 per barrel. During the
first quarter of 1996 crude oil hedges resulted in a $3.5 million
decrease in revenues.
The Company currently has open natural gas hedges on (i) an average
of approximately 53.3 MMcf per day of its Gulf Coast production for the
period April to December 1996 at an approximate break-even price of
$1.68 per Mcf and (ii) an average of approximately 30 MMcf per day of
its Permian Basin production for the period April to December 1996 at an
approximate break-even price of $1.51 per Mcf, based on index
6
SANTA FE ENERGY RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED)
prices at certain settlement points. Due to its location, Permian Basin
gas sells at a discount to Gulf Coast gas. Natural gas sales hedges
resulted in a decrease in revenues of $5.7 million in the first quarter
of 1996.
In addition to its oil and gas sales hedges, for the second quarter
of 1996 the Company has hedged 20 MMcf per day of the natural gas it
purchases for use in its steam generation operations in the San Joaquin
Valley of California. Monthly settlements are based on the difference
between the settlement price quoted on the NYMEX and the index price for
San Juan Basin natural gas. Gains or losses are recognized in production
and operating costs in the period in which the hedged gas is consumed in
operations.
In instances where the difference between the NYMEX price and the
San Juan Basin index price is greater than $0.53, the Company pays an
amount based on the difference and in instances where the difference is
less than $0.53, the Company receives a payment based on the difference.
Each $0.10 per Mcf change in the spread between the NYMEX price and the
San Juan Basin index price results in a monthly increase or decrease in
production and operating costs of $60,000. Such hedges resulted in a
$1.7 million increase in production and operating costs in the first
quarter of 1996.
Based on the settlement prices of the applicable NYMEX futures
contracts or the estimated prices with respect to certain other indices
in effect at the end of the first quarter of 1996, the loss to the
Company with respect to the currently open oil and gas hedges during the
last nine months of 1996 would be approximately $12.5 million. The
actual gains or losses realized by the Company from such hedges may vary
significantly from the foregoing amount due to the volatility of the
futures markets and other indices.
INDEMNITY AGREEMENT WITH SANTA FE PACIFIC CORPORATION ("SFP")
In December 1990 SFP distributed all of the shares of the Company
it held to its shareholders (the "Spin-Off"). At the time of the
Spin-Off, the Company and SFP entered into an agreement to protect SFP
from federal and state income taxes, penalties and interest that would
be incurred by SFP if the Spin-off were determined to be a taxable event
resulting primarily from actions taken by the Company during a one-year
period that ended December 4, 1991. If the Company were required to make
payments pursuant to the agreement, such payments could have a material
adverse effect on its financial condition; however, the Company does not
believe that it took any actions during such one-year period that would
have such an effect on the Spin-Off.
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
several phases, which include site monitoring and leachate control, gas
control and final remediation. In November 1988 the EPA and a group of
PRPs that includes the Company entered into a consent decree covering
the site monitoring and leachate control phases of remediation. The
Company was a member of the group Coalition Undertaking Remediation
Efforts ("CURE") which was responsible for constructing and operating
the leachate treatment plant. This phase is now complete and the
Company's share of costs with respect to this phase was $1.6 million
($0.9 million after recoveries from working interest participants in the
unit in which the wastes were generated). Another consent decree
provides for the predesign, design and construction of a gas plant to
harness and market methane gas emissions. The Company is a member of the
New CURE group which is responsible for the gas plant construction and
operation and landfill cover. Currently, New CURE is in the design stage
of the gas plant. The Company's share of costs of this phase is expected
to be $3.0 million (based on an agreement with the other working
interest participants in the unit to assume $1.3 million of the original
settlement amount, the Company's net share of such costs is $1.7
million) and such costs have been provided for in the financial
7
SANTA FE ENERGY RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED)
statements. The Company cannot currently estimate the cost of any
subsequent phases of work or final remediation which may be required by
the EPA. Another consent decree is currently being executed by the PRPs
and will be logged with the court for approval. This consent decree
allows for the settlement of the pending lawsuits against the
municipalities and transporters not named by the EPA. The settlement
payment by such municipalities and transporters totals approximately
$70.0 million of which approximately $55.0 million will be credited
against future expenses. The Company has entered into a Joint Defense
Agreement with the other PRPs to defend against a lawsuit filed
September 7, 1994 by ninety-five homeowners alleging, among other
things, nuisance, trespass, strict liability and infliction of emotional
distress. At this stage of the lawsuit the Company is not able to
estimate costs or potential liability.
On April 4, 1994 the Company received a request from the EPA for
information pursuant to Section 104(e) 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. During that time the property was leased to
another company and in 1932 the property was sold to that company.
During the time the other company leased or owned the property,
hazardous wastes were allegedly disposed at the site. The EPA estimates
that the total past and future costs for remediation will approximate
$9.4 million. The Company filed its response to the Section 104(e) order
setting forth its position and defenses based on the fact that the other
company was the lessee and operator of the site during the time the
Company was the owner of the property. However, the Company has also
given its Notice of Intent to comply with the EPA's order to prepare a
remediation design plan. Six of the other PRPs have also notified the
EPA of their intent to comply. The cost of such a remediation design
plan is estimated to be $1.0 million. To date there has been no
agreement on how to allocate costs among the PRPs. The Company has
provided for such costs in the financial statements, assuming that the
costs will be equally divided among the PRPs.
On March 23, 1995 the Company and twelve other companies received
notice that they have been identified as PRPs by the California
Department of Toxic Substances Control (the "DTSC") as having generated
and/or transported hazardous waste to the Environmental Protection
Corporation ("EPC") Eastside Landfill during its fourteen-year operation
from 1971 to 1985. EPC has since liquidated all assets and placed the
proceeds in trust for closure and post-closure activities. However,
these monies will not be sufficient to close the site. The PRPs have
entered into an enforceable agreement with the DTSC to characterize the
contamination at the site and prepare a focused remedial investigation
and feasibility study. The DTSC has agreed to implement reasonable
measures to bring new PRPs into the agreement. The DTSC will address
subsequent phases of the cleanup, including remedial design and
implementation in a separate order agreement. The cost of the remedial
investigation and feasibility study is estimated to be $1.0 million and
the Company has provided $80,000 in the financial statements as its
estimated share of such costs. The costs of subsequent phases cannot be
estimated until the remedial investigation and feasibility study is
completed.
EMPLOYMENT AGREEMENTS
The Company has entered into employment agreements with eight key
employees. The initial term of seven of the agreements 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 agreements is automatically
extended for a minimum of 24 months following a change of control. The
consummation of the the Company's merger with Adobe in 1992 constituted
a change of control as defined in the agreements. The initial term of
the other agreement will expire December 31, 1996 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 agreement is automatically extended
for a minimum of 24 months following a change of control.
8
SANTA FE ENERGY RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED)
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 certain long-term contracts ranging up to twelve
years for the supply and transportation of approximately 20 million
cubic feet per day of natural gas to the Company's operations in Kern
County, California. In the aggregate, these contracts involve a minimum
commitment on the part of the Company of approximately $9.6 million per
year (based on prices and transportation charges in effect for March
1996). In connection with the development of a gas field in Argentina in
which the Company has a 19.9% working interest, a gas contract for 106
million cubic feet of gas per day with "take-or-pay" and
"delivery-or-pay" obligations was executed in 1994 with a gas
distribution company.
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
The Company reported earnings to common shares for the first
quarter of 1996 of $8.9 million, or $0.10 per share, compared to a loss
of $0.1 million, or breakeven per share, in the first quarter of 1995.
The increased earnings resulted from higher prices and increased
production, combined with lower costs per barrel of oil equivalent
("BOE") produced. Crude oil and liquids production of 70,400 barrels per
day in the first quarter of 1996 represents the highest quarterly
average in the Company's history. Natural gas production averaged 154.0
MMcf per day in the first quarter of 1996 compared to 130.5 MMcf per day
in the first quarter of 1995. The Company's average hedged sales price
for crude oil and liquids of $14.93 per barrel in the first quarter of
1996 was $1.08 per barrel higher than the first quarter of 1995.
Similarly, the Company's average hedged sales price for natural gas
increased $0.52 per Mcf from the prior year to $1.83 in the first
quarter of 1996. The Company's total costs and expenses per BOE produced
declined $0.38 in the first quarter of 1996 as compared with the first
quarter of 1995.
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
material portion of the Company's crude oil production is from
long-lived fields in the San Joaquin Valley of California 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. 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.
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 1996 of $15.29 per barrel,
compared to $18.04 per barrel for West Texas Intermediate ("WTI") crude
oil (an industry posted price generally indicative of prices for sweeter
light crude oil). In the first quarter of 1996 the Company's average
sales price for California heavy crude oil was $14.97 per barrel,
approximately 83% of the average posted price for WTI.
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. During 1995 and
1996 the actual average sales price (unhedged) received by the Company
ranged from a high of $15.48 per barrel in the first quarter of 1996 to
a low of $13.53 per barrel for the fourth quarter of 1995. Based on
operating results for the first quarter of 1996, the Company estimates
that, on an annualized basis, a $1.00 per barrel increase or decrease in
its average domestic crude oil sales prices would result in a
corresponding $22.7 million change in income from operations and a $17.0
million change in 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 prices.
The price of natural gas fluctuates due to weather conditions, the
level of natural gas in storage, the relative balance between supply and
demand and other economic factors. The actual average sales price
(unhedged) received by the Company in 1995 and 1996 for its natural gas
ranged from a high of $2.23 per Mcf in the first quarter of 1996 to a
low of $1.31 per Mcf in the first quarter of 1995. Based on operating
results for the first quarter of 1996, the Company estimates that, on an
annualized basis, a $0.10 per Mcf increase or decrease in its average
domestic natural gas sales price would result in a corresponding $4.8
million change in income from operations and a $3.6 million change in
cash flow from operating activities. The foregoing estimates do not give
effect to changes in any other factors, such as the effect of
10
the Company's hedging program or depletion and depreciation, that would
result from a change in natural gas prices.
From time to time the Company hedges a portion of its oil and gas
sales to provide a certain minimum level of cash flow from its sales of
oil and gas. While the hedges are generally intended to reduce the
Company's exposure to declines in market price, the Company's gain from
increases in market price may be limited. The Company uses various
financial instruments whereby monthly settlements are based on
differences between the prices specified in the instruments and the
settlement prices of certain futures contracts quoted on the New York
Mercantile Exchange ("NYMEX") or certain other indices. Generally, 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 price, 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. Gains or losses on
hedging activities are recognized in oil and gas revenues in the period
in which the hedged production is sold.
The Company currently has open crude hedges on (i) an average of
7,800 barrels per day for the period April through September 1996 at an
average NYMEX WTI price of $18.84 per barrel and (ii) provided that the
NYMEX WTI price is greater than approximately $17.00 per barrel, up to
an additional 8,000 barrels per day for the period April through
September 1996 at an average NYMEX WTI price of $18.68 per barrel. The
"break-even price" (the average of the settlement prices which result in
no settlement being due to or from the Company) with respect to all such
contracts is approximately $18.75 per barrel. The following table
reflects estimated amounts due to or from the Company assuming the
stated settlement prices are in effect for the entire period the
aforementioned hedges are in effect.
SETTLEMENT PRICE DUE TO (FROM) COMPANY
(DOLLARS PER BARREL) (MILLIONS OF DOLLARS)
-------------------- ---------------------
22.00 (9.4)
21.00 (6.5)
20.00 (3.6)
19.00 (0.7)
18.00 2.2
During the first quarter of 1996 crude oil hedges resulted in a $3.5
million decrease in revenues.
The Company currently has open natural gas hedges on (i) an average
of approximately 53.3 MMcf per day of its Gulf Coast production for the
period April through December 1996 at an approximate break-even price of
$1.68 per Mcf and (ii) an average of approximately 30.0 MMcf per day of
its Permian Basin production for the period April through December 1996
at an approximate break-even price of $1.51 per Mcf, based on index
prices at certain settlement points. Due to its location, Permian Basin
gas sells at a discount to Gulf Coast gas. Natural gas sales hedges
resulted in a decrease in revenues of $5.7 million in the first quarter
of 1996.
With respect to the Gulf Coast production hedges, a $0.10 per Mcf
decrease or increase in the average settlement price for a month results
in a $163,000 increase or decrease in revenues, respectively. With
respect to the Permian Basin production hedges, a $0.10 per Mcf decrease
or increase in the average settlement price for a month results in a
$92,000 increase or decrease in revenues, respectively.
In addition to its oil and gas sales hedges for the second quarter
of 1996 the Company has hedged 20.0 MMcf per day of the natural gas it
purchases for use in its steam generation operations in the San Joaquin
Valley of California. Monthly settlements are based on the difference
between the settlement price quoted on the NYMEX and the index price for
San Juan Basin natural gas. Gains or losses are recognized in production
and operating costs in the period in which the hedged gas is consumed in
operations.
In instances where the difference between the NYMEX price and the
San Juan Basin index price is greater than $0.53, the Company pays an
amount based on the difference and in instances where the
11
difference is less than $0.53, the Company receives a payment based on
the difference. Each $0.10 per Mcf change in the spread between the
NYMEX price and the San Juan Basin index price results in a monthly
increase or decrease in production and operating costs of $60,000. Such
hedges resulted in a $1.7 million increase in production and operating
costs in the first quarter of 1996.
RESULTS OF OPERATIONS
REVENUES
The following table reflects the components of the Company's crude
oil and liquids and natural gas revenues:
THREE MONTHS
ENDED MARCH 31,
--------------------
1996 1995
--------- ---------
CRUDE OIL AND LIQUIDS
REVENUES ($MILLIONS)
Sales
Domestic
California Heavy........... 56.0 43.6
Other...................... 31.7 24.8
--------- ---------
87.7 68.4
Argentina.................. 4.3 3.4
Indonesia.................. 7.1 8.3
Hedging....................... (3.5) --
Net Profits Payments.......... (1.1) (1.1)
--------- ---------
94.5 79.0
========= =========
VOLUMES (MBBLS/DAY)
Domestic
California Heavy.............. 41.1 37.9
Other......................... 22.0 18.2
--------- ---------
63.1 56.1
Argentina....................... 2.9 2.5
Indonesia....................... 4.4 5.6
--------- ---------
70.4 64.2
========= =========
SALES PRICES ($/BBL)
Unhedged
Domestic
California Heavy........... 14.97 12.80
Other...................... 15.87 15.02
Total...................... 15.29 13.52
Argentina..................... 16.13 15.04
Indonesia..................... 17.79 16.64
Total......................... 15.48 13.85
Hedged.......................... 14.93 13.85
NATURAL GAS
REVENUES ($MILLIONS)
Sales........................... 31.3 15.4
Hedging......................... (5.7) --
Net Profits Payments............ (0.7) (0.4)
--------- ---------
24.9 15.0
========= =========
VOLUMES (MMCF/DAY)................. 154.0 130.5
SALES PRICES ($/MCF)
Unhedged........................ 2.23 1.31
Hedged.......................... 1.83 1.31
Total revenues increased 25% from $98.6 million in the first
quarter of 1995 to $123.5 million in the first quarter of 1996. Crude
oil and liquids revenues increased from $79.0 million in the first
quarter of 1995
12
to $94.5 million in the first quarter of 1996 reflecting improved market
conditions which resulted in an increase in the Company's unhedged
average sales price from $13.85 per barrel in 1995 to $15.48 per barrel
in 1996 and an increase in oil and liquids production from 64,200
barrels per day in the first quarter of 1995 to 70,400 barrels per day
in the first quarter of 1996. Crude oil and liquids revenues for the
first quarter of 1996 include a $3.5 million loss on hedging
transactions. Natural gas revenues increased from $15.0 million in the
first quarter of 1995 to $24.9 million in the first quarter of 1996 as
the Company's average sales price (unhedged) increased from $1.31 per
Mcf in 1995 to $2.23 per Mcf in 1996 and sales volumes increased from
130.5 MMcf per day in 1995 to 154.0 MMcf per day in 1996. The increase
in sales volumes primarily reflects production from the Company's Sierra
Chata field in Argentina (17.3 MMcf per day in the first quarter of
1996) which began production in the second quarter of 1995. Natural gas
revenues for the first quarter of 1996 include a $5.7 million loss on
hedging transactions.
COSTS AND EXPENSES
The following table sets forth certain of the Company's costs and
expenses, expressed in dollars per barrel of oil equivalent ("BOE")
produced by the Company during the period:
THREE MONTHS ENDED
MARCH 31,
--------------------
1996 1995
--------- ---------
Production and operating costs (a)... 5.00 4.99
Exploration, including dry hole...... 0.64 0.78
Depletion, depreciation and
amortization....................... 3.70 4.04
General and administrative costs..... 0.69 0.76
Taxes other than income (b).......... 0.70 0.56
Interest, net (c).................... 0.89 1.07
- ------------
(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.
Costs and expenses for the first quarter of 1996 totalled $94.0
million compared to $86.1 million in the first quarter of 1995.
Production and operating costs for the first quarter of 1996 are $5.2
million higher than the first quarter of 1995 primarily reflecting
higher production volumes and $1.7 million in expenses related to hedges
of natural gas purchased in connection with steam generation operations
in California (See -- General). Taxes other than income in the first
quarter of 1995 includes benefits of $1.0 million related to an
adjustment to ad valorem taxes recorded in prior periods and $0.7
million related to the settlement of certain disputed sales and use
taxes.
Other income (expense) for the first quarter of 1995 includes a
$2.3 million gain on the sale of the Company's interest in Cherokee
Resources Incorporated, a privately-held oil and gas company.
In October 1995 the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 123 "Accounting for
Stock-Based Compensation" ("FAS 123"), which established financial
accounting and reporting standards for stock-based employee compensation
plans. FAS 123 encourages companies to adopt a fair value based method
of accounting for such plans but continues to allow the use of the
intrinsic value based method prescribed by Accounting Principles Board
Opinion No. 25 "Accounting for Stock Issued to Employees" ("Opinion
25"). Companies electing to continue accounting in accordance with
Opinion 25 must make pro forma disclosures of net income and earnings
per share as if the fair value based method defined in FAS 123 had been
applied. The Company will continue to account for stock-based
compensation in accordance with Opinion 25 and will make pro forma
disclosures in accordance with the provisions of FAS 123 beginning in
its 1996 annual financial statements.
13
LIQUIDITY AND CAPITAL RESOURCES
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 received therefor. Since crude oil and natural gas are
depleting assets, unless the Company replaces the oil and gas produced
from its properties, the Company's assets will be depleted over time and
its ability to incur debt at constant or declining prices will be
reduced. The Company increased its proved reserves (net of production
and sales) by approximately 26% over the five years ended December 31,
1995; however, no assurances can be given that such increase will occur
in the future. Historically, the Company has generally funded
development and exploration expenditures and working capital
requirements from cash provided by operating activities. Depending upon
the future levels 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 and net proceeds
from sales of properties totalled $67.6 million in the first quarter of
1996; net cash used for capital expenditures and producing property
acquisitions in such period totalled $56.1 million.
The Company's 1995 capital program totalled approximately $204.6
million, a level which allowed the Company to more than replace its 1995
production. The Company expects to spend approximately $208.6 million on
its 1996 program. However, the actual amount expended by the Company in
1996 will be based upon numerous factors, the majority of which are
outside its control, including, without limitation, prevailing oil and
natural gas prices and the outlook therefor and the availability of
funds. Through March 31, 1996 the Company had expended $48.9 million
(including $17.0 million on acquisitions of producing properties in its
Central and Gulf Coast divisions) on its 1996 program.
Effective April 1, 1995 the Company entered into the Second Amended
and Restated Revolving Credit Agreement (the "Credit Agreement"), an
unsecured revolving credit agreement which matures December 31, 1998.
The maximum borrowing limits under the Credit Agreement are currently
$105.0 million, $65.0 million beginning February 28, 1997 and $30.0
million beginning February 28, 1998. Interest rates under the Credit
Agreement are tied to LIBOR or the bank's prime rate with the actual
interest rate based upon certain ratios and the value and projected
timing of production of the Company's oil and gas reserves. At March 31,
1996, $6.3 million in letters of credit were outstanding under the terms
of the Credit Agreement.
The Company has three short-term uncommitted lines of credit
totalling $50.0 million which are used to meet short-term cash needs.
Interest rates on borrowings under these lines of credit are typically
lower than rates paid under the Bank Facility. At March 31, 1996 no
amounts were outstanding under these lines of credit.
Certain of the Company's credit agreements and the indenture for
the Debentures include covenants that restrict the Company's ability to
take certain actions, including the ability to incur additional
indebtedness and to pay dividends on capital stock. Under the most
restrictive of these covenants, at March 31, 1996 the Company could
incur up to $203.4 million of additional indebtedness and pay dividends
of up to $121.4 million on its aggregate capital stock (including its
common stock, 7% Convertible Preferred Stock and Series A Preferred)
with the amount payable on its common stock limited to $54.5 million.
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
14
claims for damages to property, employees, other persons and 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.
DIVIDENDS
Dividends on the Company's 7% Convertible Preferred Stock and
Series A Preferred Stock are cumulative at an annual rate of $1.40 per
share and $0.732 per share, respectively. No dividends may be declared
or paid with respect to the Company's common stock if any dividends with
respect to the 7% Convertible Preferred Stock or Series A Preferred
Stock are in arrears. None of the dividends with respect to the
Company's 7% Convertible Preferred Stock and Series A Preferred Stock
are in arrears. The determination of the amount of future cash
dividends, if any, to be declared and paid on the Company's common stock
is at the sole discretion of the Company's Board of Directors and will
depend on dividend requirements with respect to the 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.
15
PART II
OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
EXHIBIT
NUMBER DESCRIPTION
------- -----------
10(a) -- Santa Fe Energy Resources, Inc. 1990 Incentive Stock
Compensation Plan, Third Amendment and Restatement.
(b) Reports on Form 8-K
None
16
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/ R. GRAHAM WHALING
R. Graham Whaling
Senior Vice President and
Chief Financial Officer
(Principal Financial and
Accounting Officer)
Houston, Texas
May 14, 1996
17