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 JUNE 30, 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 August 1, 1996 -- 90,676,064
PART I - FINANCIAL STATEMENTS
PAGE
----
Consolidated Statement of Operations
Three Months and Six Months Ended June 30, 1996 and 1995............. 2
Consolidated Balance Sheet
June 30, 1996 and December 31, 1995.................................. 3
Consolidated Statement of Cash Flows
Three Months and Six Months Ended June 30, 1996 and 1995............. 4
Consolidated Statement of
Shareholders' Equity
Six Months Ended June 30, 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 SIX MONTHS ENDED
JUNE 30, JUNE 30,
--------------------- ----------------------
1996 1995 1996 1995
---------- ---------- ---------- ----------
Revenues
Crude oil and liquids ......... $ 105.7 $ 88.1 $ 200.2 $ 167.1
Natural gas ................... 24.9 18.7 49.8 33.7
Crude oil marketing and
trading ..................... 5.2 3.2 9.3 6.1
Other ......................... 0.3 (0.3) 0.3 1.4
---------- ---------- ---------- ----------
136.1 109.7 259.6 208.3
---------- ---------- ---------- ----------
Costs and Expenses
Production and operating ...... 44.0 37.6 87.8 76.2
Exploration, including dry hole
costs ....................... 5.9 5.1 11.5 11.1
Depletion, depreciation and
amortization ................ 35.1 31.8 67.4 63.1
Impairment of oil and gas
properties .................. 10.4 -- 10.4 --
General and administrative .... 7.9 6.9 13.9 12.8
Taxes (other than income) ..... 6.5 5.8 12.6 10.1
Loss (gain) on disposition of
oil and gas properties ...... 0.3 -- 0.5 --
---------- ---------- ---------- ----------
110.1 87.2 204.1 173.3
---------- ---------- ---------- ----------
Income from Operations ............. 26.0 22.5 55.5 35.0
Interest income ............... 0.5 0.7 1.0 1.5
Interest expense .............. (9.7) (9.8) (19.3) (19.9)
Interest capitalized .......... 1.2 1.2 2.5 2.1
Other income (expense) ........ (0.2) (0.8) (0.5) 1.4
---------- ---------- ---------- ----------
Income Before Income Taxes ......... 17.8 13.8 39.2 20.1
Income tax expense ............ (0.4) (6.2) (9.2) (8.9)
---------- ---------- ---------- ----------
Net Income ......................... 17.4 7.6 30.0 11.2
Preferred dividend
requirement ................. (3.7) (3.7) (7.4) (7.4)
---------- ---------- ---------- ----------
Earnings (Loss) Attributable to
Common Shares .................... $ 13.7 $ 3.9 $ 22.6 $ 3.8
========== ========== ========== ==========
Earnings (Loss) Attributable to
Common Shares
Per Share ........................ $ 0.15 $ 0.04 $ 0.25 $ 0.04
========== ========== ========== ==========
Weighted Average Number of Shares
Outstanding
(in millions) .................... 90.6 90.3 90.5 90.2
========== ========== ========== ==========
The accompanying notes are an integral part of these financial statements.
2
SANTA FE ENERGY RESOURCES, INC.
CONSOLIDATED BALANCE SHEET
(IN MILLIONS OF DOLLARS)
JUNE 30, DECEMBER 31,
1996 1995
-------- --------
(UNAUDITED)
Current Assets
Cash and cash equivalents .................... $ 43.3 $ 42.6
Accounts receivable .......................... 89.3 89.0
Inventories .................................. 11.7 10.5
Other current assets ......................... 19.3 17.2
-------- --------
163.6 159.3
-------- --------
Properties and Equipment, at cost
Oil and gas (on the basis of
successful efforts accounting) .............. 2,446.1 2,336.3
Other ........................................ 38.5 35.6
-------- --------
2,484.6 2,371.9
Accumulated depletion,
depreciation, amortization and
impairment .................................. (1,549.3) (1,482.4)
-------- --------
935.3 889.5
-------- --------
Other Assets
Receivable under gas balancing
arrangements ................................ 5.1 5.8
Other ........................................ 8.5 10.2
-------- --------
13.6 16.0
-------- --------
$ 1,112.5 $ 1,064.8
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Accounts payable ............................. $ 85.9 $ 73.1
Interest payable ............................. 7.9 7.9
Current portion of long-term
debt ........................................ 35.0 --
Other current liabilities .................... 30.8 28.6
-------- --------
159.6 109.6
-------- --------
Long-Term Debt .................................... 309.4 344.4
-------- --------
Deferred Revenues ................................. 4.5 4.9
-------- --------
Other Long-Term Obligations ....................... 26.3 24.2
-------- --------
Deferred Income Taxes ............................. 69.2 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 .............................. 504.6 501.4
Accumulated deficit .......................... (133.1) (155.7)
Foreign currency translation
adjustment .................................. (0.3) (0.3)
-------- --------
463.5 437.7
-------- --------
$ 1,112.5 $ 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 SIX MONTHS ENDED
JUNE 30, JUNE 30,
-------------------- --------------------
1996 1995 1996 1995
----- ----- ------ ------
Operating Activities:
Net income ................................. $ 17.4 $ 7.6 $ 30.0 $ 11.2
Adjustments to reconcile net income
(loss) to net cash provided by
operating activities:
Depletion, depreciation and
amortization ....................... 35.1 31.8 67.4 63.1
Impairment of oil and gas
properties ......................... 10.4 -- 10.4 --
Deferred income taxes ................. (1.5) 5.0 5.2 6.8
Net loss (gain) on
disposition of
properties ......................... 0.3 -- 0.5 --
Exploratory dry hole
costs .............................. 1.1 1.4 1.4 4.2
Other ................................. 0.9 0.5 1.4 (1.0)
Changes in operating assets and liabilities:
Decrease (increase) in
accounts receivable ................ (4.3) 2.4 (0.3) 9.4
Decrease (increase) in
inventories ........................ (2.0) (2.3) (1.2) (3.2)
Increase (decrease) in
accounts payable ................... (4.5) 10.8 9.5 (3.5)
Increase (decrease) in
interest payable ................... (9.2) 3.6 -- (0.6)
Increase (decrease) in
income taxes payable ............... 1.3 0.9 1.4 1.1
Net change in other assets
and liabilities .................... 14.2 (2.3) 0.8 (7.9)
----- ----- ------ ------
Net Cash Provided by Operating
Activities .................................... 59.2 59.4 126.5 79.6
----- ----- ------ ------
Investing Activities:
Capital expenditures, including
exploratory dry hole costs ............... (45.3) (60.6) (84.4) (106.2)
Acquisitions of producing
properties ............................... (18.3) (27.6) (35.3) (27.8)
Net proceeds from sales of
properties ............................... 0.1 54.6 0.4 58.7
----- ----- ------ ------
Net Cash Used in Investing
Activities .................................... (63.5) (33.6) (119.3) (75.3)
----- ----- ------ ------
Financing Activities:
Issuance of common stock ................... 0.9 -- 0.9 --
Principal payments on long-term
borrowings ............................... -- -- -- (10.0)
Cash dividends paid ........................ (3.7) (3.7) (7.4) (7.4)
----- ----- ------ ------
Net Cash Used in Financing
Activities .................................... (2.8) (3.7) (6.5) (17.4)
----- ----- ------ ------
Net Cash Provided (Used) in the
Period ........................................ (7.1) 22.1 0.7 (13.1)
Cash and Cash Equivalents at
Beginning of Period ........................... 50.4 18.5 42.6 53.7
----- ----- ------ ------
Cash and Cash Equivalents at End of
Period ........................................ $ 43.3 $ 40.6 $ 43.3 $ 40.6
===== ===== ====== ======
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........... -- -- 0.3 -- 3.2 -- -- 3.2
Net income......................... -- -- -- -- -- 30.0 -- 30.0
Dividends declared................. -- -- -- -- -- (7.4) -- (7.4)
------ ------ ------ ------ -------- ----------- ----------- --------------
Balance at June 30, 1996............. 10.7 $91.4 90.6 $0.9 $ 504.6 $(133.1) $(0.3) $463.5
====== ====== ====== ====== ======== =========== =========== ==============
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........... -- -- 0.3 -- 2.1 -- -- 2.1
Foreign currency translation
adjustment........................ -- -- -- -- -- -- 0.1 0.1
Net income......................... -- -- -- -- -- 11.2 -- 11.2
Dividends declared................. -- -- -- -- -- (7.4) -- (7.4)
------ ------ ------ ------ -------- ----------- ----------- --------------
Balance at June 30, 1995............. 10.7 $91.4 90.3 $0.9 $ 501.0 $(163.7) $(0.3) $429.3
====== ====== ====== ====== ======== =========== =========== ==============
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
June 30, 1996 and the Company's results of operations and cash flows for the
three-month and six-month periods ended June 30, 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-month and six-month periods ended June 30, 1996 and 1995 (in millions of
dollars):
THREE MONTHS SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
--------------------- -------------------
1996 1995 1996 1995
-------- ---------- -------- --------
Interest payments............ 18.5 5.5 18.5 19.2
Income tax payments.......... 1.9 0.3 2.1 0.8
In addition, during the three months ended June 30, 1996 the Company received a
$4.6 million income tax refund and 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 has open crude oil hedges on (i) an average of 11,300 barrels
per day for the period July to September 1996 at an average NYMEX WTI price of
$19.13 per barrel and (ii) provided that the NYMEX WTI price exceeds an average
of $17.00 per barrel, up to an additional 4,700 barrels per day for the period
July through September 1996 at an average NYMEX WTI price of $18.65 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 $18.99 per barrel. During the first six months of
1996 crude oil hedges resulted in a $9.0 million decrease in revenues.
The Company has open natural gas hedges on (i) an average of approximately
50 MMcf per day of its Gulf Coast production for the period July to December
1996 at an approximate break-even price of $1.70
6
SANTA FE ENERGY RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED)
per Mcf and (ii) an average of approximately 30 MMcf per day of its Permian
Basin production for the period July to December 1996 at an approximate
break-even price of $1.52 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 $10.8
million in the first six months of 1996.
In addition to its oil and gas sales hedges, during the first six months of
1996 the Company 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. Such
hedges, which terminated at the end of the second quarter, resulted in a $3.2
million increase in production and operating costs in the first six months 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 second quarter of 1996, the loss to the Company with respect to its open
oil and gas hedges during the last six months of 1996 would be approximately
$14.1 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 and provide landfill
cover. 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 $1.7 million and such costs have been provided for in
the financial statements. Another consent decree has been entered into allowing
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 $52.0 million will
be credited against future expenses. The Company cannot currently estimate the
cost of any subsequent phases of work or final remediation which may be required
by the EPA.
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,
7
SANTA FE ENERGY RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED)
trespass, strict liability and infliction of emotional distress. A second
lawsuit has been filed by thirty-three additional homeowners and the Company and
the other PRPs intend to enter into a Joint Defense Agreement. At this stage of
the lawsuits, the Company is not able to estimate costs or potential liability.
In 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. Total past and future
costs for remediation are estimated to be approximately $8.0 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. Efforts are underway
to identify additional PRPs. The cost of such a remediation design plan is
estimated to be $1.0 million and the Company has provided for such costs in the
financial statements, assuming that the costs will be equally divided among the
eight PRPs.
In 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 for such costs in the
financial statements assuming that the costs will be divided equally among the
thirteen PRPs. 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 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.
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
8
SANTA FE ENERGY RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED)
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 June 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 second quarter of
1996 of $13.7 million, or $0.15 per share, compared to earnings of $3.9 million,
or $0.04 per share, in the second quarter of 1995. The increased earnings
resulted from increased production and higher prices. Crude oil and liquids
production of 74,300 barrels per day in the second quarter of 1996 represents
the highest quarterly average in the Company's history. Natural gas production
averaged 164.3 MMcf per day in the second quarter of 1996 compared to 148.4 MMcf
per day in the second quarter of 1995. The Company's average hedged sales price
for crude oil and liquids of $15.80 per barrel in the second quarter of 1996 was
$0.76 per barrel higher than the second quarter of 1995. Similarly, the
Company's average hedged sales price for natural gas increased $0.35 per Mcf
from the prior year to $1.76 in the second quarter of 1996.
Earnings to common shares for the first six months of 1996 totalled $22.6
million or $0.25 per share, compared to $3.8 million, or $0.04 per share, in the
first six months of 1995. Crude oil and liquids production averaged 72,300
barrels per day in the first half of 1996 compared to 64,700 barrels per day in
the first half of 1995 and natural gas production averaged 159.1 MMcf per day in
the first half of 1996 compared to 139.5 Mmcf per day in the first half of 1995.
The Company's average hedged sales price for crude oil and liquids averaged
$15.38 per barrel in the first half of 1996 compared to $14.45 per barrel in the
first half of 1995. The Company's average hedged sales price for natural gas
averaged $1.79 per Mcf in the first half of 1996 compared to $1.36 per Mcf in
the first half 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 second
quarter of 1996 of $16.43 per barrel, compared to $20.04 per barrel for West
Texas Intermediate ("WTI") crude oil (an industry posted price generally
indicative of prices for sweeter light crude oil). In the second quarter of 1996
the Company's average sales price for California heavy crude oil was $15.56 per
barrel, approximately 78% 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
$16.62 per barrel in the second quarter of 1996 to a low of $13.53 per barrel
for the fourth quarter of 1995. Based on operating results for the first six
months 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 $23.1 million change in income from operations and a
$17.4 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
10
(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 six
months 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 $3.3 million change in income from operations and a
$2.5 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 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 has open crude oil hedges on (i) an average of 11,300 barrels
per day for the period July through September 1996 at an average NYMEX WTI price
of $19.13 per barrel and (ii) provided that the NYMEX WTI price exceeds an
average of $17.00 per barrel, up to an additional 4,700 barrels per day for the
period July through September 1996 at an average NYMEX WTI price of $18.65 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 $18.99 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 (4.5)
21.00 (3.0)
20.00 (1.5)
19.00 --
18.00 1.5
During the first six months of 1996 crude oil hedges resulted in a $9.0 million
decrease in revenues.
The Company has open natural gas hedges on (i) an average of approximately
50 MMcf per day of its Gulf Coast production for the period July through
December 1996 at an approximate break-even price of $1.70 per Mcf and (ii) an
average of approximately 30 MMcf per day of its Permian Basin production for the
period July through December 1996 at an approximate break-even price of $1.52
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 $10.8 million in the first
six months 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 $153,000
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.
11
In addition to its oil and gas sales hedges, during the first six months of
1996 the Company 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.
Such hedges, which terminated at the end of the second quarter, resulted in a
$3.2 million increase in production and operating costs in the first six months
of 1996.
RESULTS OF OPERATIONS
REVENUES
The following table reflects the components of the Company's crude oil and
liquids and natural gas revenues:
THREE MONTHS SIX MONTHS ENDED
ENDED JUNE 30, JUNE 30,
-------------------- --------------------
1996 1995 1996 1995
--------- --------- --------- ---------
CRUDE OIL AND LIQUIDS
REVENUES ($MILLIONS)
Sales
Domestic
California Heavy......... 61.0 49.8 117.0 93.4
Other.................... 37.5 26.9 69.2 51.7
--------- --------- --------- ---------
98.5 76.7 186.2 145.1
Argentina................ 6.2 3.7 10.5 7.1
Indonesia................ 7.7 8.4 14.8 16.7
Hedging..................... (5.5) 0.4 (9.0) 0.4
Net Profits Payments........ (1.2) (1.1) (2.3) (2.2)
--------- --------- --------- ---------
105.7 88.1 200.2 167.1
========= ========= ========= =========
VOLUMES (MBBLS/DAY)
Domestic
California Heavy............ 43.1 38.1 42.1 38.0
Other....................... 22.8 19.0 22.3 18.7
--------- --------- --------- ---------
65.9 57.1 64.4 56.7
Argentina..................... 3.7 2.6 3.3 2.5
Indonesia..................... 4.7 5.5 4.6 5.5
--------- --------- --------- ---------
74.3 65.2 72.3 64.7
========= ========= ========= =========
SALES PRICES ($/BBL)
Unhedged
Domestic
California Heavy......... 15.56 14.36 15.27 13.59
Other.................... 18.09 15.55 17.00 15.29
Total.................... 16.43 14.76 15.87 14.15
Argentina................... 18.42 15.82 17.41 15.44
Indonesia................... 17.74 16.72 17.76 16.68
Total....................... 16.62 14.97 16.06 14.42
Hedged........................ 15.80 15.04 15.38 14.45
NATURAL GAS
REVENUES ($MILLIONS)
Sales......................... 31.4 19.0 62.7 34.4
Hedging....................... (5.1) -- (10.8) --
Net Profits Payments.......... (1.4) (0.3) (2.1) (0.7)
--------- --------- --------- ---------
24.9 18.7 49.8 33.7
========= ========= ========= =========
VOLUMES (MMCF/DAY)............... 164.3 148.4 159.1 139.5
SALES PRICES ($/MCF)
Unhedged...................... 2.10 1.41 2.17 1.36
Hedged........................ 1.76 1.41 1.79 1.36
Total revenues increased 24% from $109.7 million in the second quarter of
1995 to $136.1 million in the second quarter of 1996. Crude oil and liquids
revenues increased from $88.1 million in the second
12
quarter of 1995 to $105.7 million in the second quarter of 1996 reflecting an
increase in oil and liquids production from 65,200 barrels per day in the second
quarter of 1995 to 74,300 barrels per day in the second quarter of 1996 and
improved market conditions which resulted in an increase in the Company's
unhedged average sales price from $14.97 per barrel in 1995 to $16.62 per barrel
in 1996. Crude oil and liquids revenues for the second quarter of 1996 include a
$5.5 million loss on hedging transactions. Natural gas revenues increased from
$18.7 million in the second quarter of 1995 to $24.9 million in the second
quarter of 1996 as the Company's average sales price (unhedged) increased from
$1.41 per Mcf in 1995 to $2.10 per Mcf in 1996 and sales volumes increased from
148.4 MMcf per day in 1995 to 164.3 MMcf per day in 1996. The increase in
natural gas sales volumes includes a 6.9 MMcf per day increase in production
from the Company's Sierra Chata field in Argentina which began production in the
second quarter of 1995. Natural gas revenues for the second quarter of 1996
include a $5.1 million loss on hedging transactions.
Total revenues increased 25% from $208.3 million in the first half of 1995
to $259.6 million in the first half of 1996. Crude oil and liquids revenues
increased from $167.1 million in the first half of 1995 to $200.2 million in the
first half of 1996 reflecting an increase in oil and liquids production from
64,700 barrels per day in 1995 to 72,300 barrels per day in 1996 and improved
market conditions which resulted in an increase in the Company's unhedged
average sales price from $14.42 per barrel in 1995 to $16.06 per barrel in 1996.
Crude oil and liquids revenues for the first half of 1996 included a $9.0
million loss on hedging transactions. Natural gas revenues increased from $33.7
million in the first half of 1995 to $49.8 million in the first half of 1996 as
the Company's unhedged average sales price increased from $1.36 per Mcf in 1995
to $2.17 per Mcf in 1996 and sales volumes increased from 139.5 MMcf per day in
1995 to 159.1 MMcf per day in 1996. The increase in natural gas volumes included
a 12.1 MMcf per day increase in production from the Company's Sierra Chata field
in Argentina which began production in the second quarter of 1995. Natural gas
revenues for the first half of 1996 included a $10.8 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 SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
-------------------- --------------------
1996(A) 1995 1996(A) 1995
-------- --------- -------- ---------
Production and operating costs (b)... 4.76 4.59 4.88 4.78
Exploration, including dry hole...... 0.64 0.62 0.64 0.70
Depletion, depreciation and
amortization....................... 3.78 3.88 3.74 3.96
General and administrative costs
(c)................................ 0.68 0.85 0.64 0.80
Taxes other than income (d).......... 0.70 0.71 0.70 0.64
Interest, net (e).................... 0.86 0.98 0.87 1.02
- ------------
(a) Excludes $10.4 million impairment of oil and gas properties.
(b) Excluding related production, severance and ad valorem taxes.
(c) Excludes effect of $1.6 million charge related to the abandonment of an
office lease of $0.17 per BOE for the three months ended June 30, 1996 and
$0.09 per BOE for the six months ended June 30, 1996.
(d) Includes production, severance and ad valorem taxes.
(e) Reflects interest expense less amounts capitalized and interest income.
Costs and expenses for the second quarter of 1996 totalled $110.1 million
compared to $87.2 million in the second quarter of 1995. Production and
operating costs were up $6.4 million primarily reflecting higher production
volumes and $1.5 million in expenses related to hedges of natural gas purchased
in connection with steam generation operations in California (see -- General).
Depletion, depreciation and amortization increased principally due to higher
production volumes. The impairment of oil and gas properties recognized in the
second quarter of 1996 relates to an offshore Gulf Coast producing property.
General and
13
administrative costs for the second quarter of 1996 include $1.6 million related
to the abandonment of an office lease.
Costs and expenses for the first six months of 1996 totalled $204.1 million
compared to $173.3 million in the first six months of 1995. Production and
operating costs for the first six months of 1996 are $11.6 million higher than
the first six months of 1995 primarily reflecting higher production volumes and
$3.2 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 six months 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 six months 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.
Income taxes for the second quarter and first six months of 1996 include a
$6.8 million deferred tax benefit related to certain foreign expenditures
incurred in prior periods.
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.
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 $126.9 million in the first six months of 1996; net
cash used for capital expenditures and producing property acquisitions in such
period totalled $119.7 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 $210.0 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 June 30, 1996 the Company had
expended $120.3 million (including $35.3 million on acquisitions of producing
properties) 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
14
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 June 30, 1996,
$4.2 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
$60.0 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 June 30, 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
June 30, 1996 the Company could incur up to $205.5 million of additional
indebtedness and pay dividends of up to $133.4 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 $55.7 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 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.
FORWARD LOOKING STATEMENTS
In its discussion and analysis of financial condition and results of
operations, the Company included certain forward looking statements within the
meaning of Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934. Such forward looking statements are based on
the best data available at the time this report was filed with the Securities
and Exchange Commission; however, these projections could be substantially
affected by factors such as commodity pricing for oil and gas, exploration
risks, development and operating risks, political risks and competition.
15
PART II
OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
None
(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
August 13, 1996
17