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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended SEPTEMBER 30, 1997
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 or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
1616 SOUTH VOSS, SUITE 1000, HOUSTON, TEXAS 77057
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (713) 507-5000
NONE
(Former name or former address, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Indicate the number of shares of each of the issuer's classes of common stock,
as of the latest practicable date:
CLASS OUTSTANDING AS OF OCTOBER 31, 1997
Common stock, $.01 par value 102,982,078
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TABLE OF CONTENTS
PAGE
PART I FINANCIAL INFORMATION (UNAUDITED) ----
Item 1. Consolidated Financial Statements
Consolidated Statement of Operations for the Three
and Nine Months ended September 30, 1997 and 1996 3
Consolidated Balance Sheet at September 30, 1997
and December 31, 1996 4
Consolidated Statement of Cash Flows for the Three
and Nine Months ended September 30, 1997 and 1996 5
Consolidated Statement of Shareholders' Equity at
September 30, 1997 6
Notes to Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 12
PART II OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders 19
Item 6. Exhibits and Reports on Form 8-K 19
SIGNATURE 20
2
SANTA FE ENERGY RESOURCES, INC.
CONSOLIDATED STATEMENT OF OPERATIONS (UNAUDITED)
(IN MILLIONS, EXCEPT PER SHARE DATA)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------ ------------------
1997 1996 1997 1996
------- ------- ------- -------
REVENUES:
Sales of crude oil and liquids produced ..... $ 68.8 $ 114.2 $ 305.2 $ 323.7
Sales of natural gas produced ............... 32.2 25.5 99.4 75.3
Sales of crude oil purchased ................ 0.6 9.8 20.5 11.0
Other ....................................... 0.2 (0.1) 0.4 0.6
------- ------- ------- -------
TOTAL REVENUES .......................... 101.8 149.4 425.5 410.6
------- ------- ------- -------
COSTS AND EXPENSES:
Production and operating .................... 32.7 48.5 134.3 136.8
Cost of crude oil purchased ................. 0.6 9.7 22.0 10.8
Exploration, including dry hole costs ....... 9.6 5.4 29.0 16.9
Depletion, depreciation and amortization .... 30.9 38.7 100.0 106.1
Impairment of oil and gas properties ........ -- -- -- 10.4
General and administrative .................. 5.0 6.4 22.2 20.3
Taxes (other than income) ................... 4.1 6.8 18.2 19.4
Loss (gain) on disposition of assets ........ (1.9) -- (4.0) 0.5
------- ------- ------- -------
TOTAL COSTS AND EXPENSES ................ 81.0 115.5 321.7 321.2
------- ------- ------- -------
INCOME FROM OPERATIONS ......................... 20.8 33.9 103.8 89.4
Interest income ............................. 0.4 0.5 2.2 1.5
Interest expense ............................ (5.1) (9.6) (20.6) (28.9)
Interest capitalized ........................ 1.6 1.2 5.1 3.7
Other income (expense) ...................... (0.1) (0.2) (0.4) (0.7)
------- ------- ------- -------
Income before income taxes and minority interest 17.6 25.8 90.1 65.0
Income taxes
Current .................................. (1.2) (2.5) (6.3) (6.5)
Deferred ................................. (5.3) (6.8) (28.0) (12.0)
------- ------- ------- -------
Total income taxes ...................... (6.5) (9.3) (34.3) (18.5)
Income before minority interest ................ 11.1 16.5 55.8 46.5
Minority interest in Monterey Resources, Inc. (0.4) -- (4.7) --
------- ------- ------- -------
NET INCOME ..................................... 10.7 16.5 51.1 46.5
Preferred dividend requirement .............. -- (3.7) (3.6) (11.1)
Premium on conversion of 7% preferred stock . -- -- (8.5) --
------- ------- ------- -------
EARNINGS ATTRIBUTABLE TO COMMON SHARES ......... $ 10.7 $ 12.8 $ 39.0 $ 35.4
======= ======= ======= =======
EARNINGS PER COMMON SHARE ...................... $ 0.10 $ 0.14 $ 0.40 $ 0.39
======= ======= ======= =======
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING .. 102.9 90.7 97.1 90.6
======= ======= ======= =======
SEE ACCOMPANYING NOTES.
3
SANTA FE ENERGY RESOURCES, INC.
CONSOLIDATED BALANCE SHEET
(IN MILLIONS)
SEPTEMBER 30, DECEMBER 31,
1997 1996
-------- --------
(unaudited)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents .......................................... $ 5.4 $ 14.6
Accounts receivable ................................................ 54.6 109.1
Inventories ........................................................ 14.6 13.6
Other current assets ............................................... 21.1 35.2
-------- --------
95.7 172.5
-------- --------
PROPERTIES AND EQUIPMENT, AT COST:
Oil and gas (successful efforts method of accounting) .............. 1,621.0 2,539.8
Other .............................................................. 21.9 34.4
-------- --------
1,642.9 2,574.2
Accumulated depletion, depreciation, amortization and impairment ... (1,030.4) (1,664.4)
-------- --------
612.5 909.8
-------- --------
OTHER ASSETS:
Receivable under gas balancing arrangements ........................ 1.5 4.5
Other .............................................................. 16.2 33.2
-------- --------
17.7 37.7
-------- --------
$ 725.9 $1,120.0
======== ========
LIABILITIES AND SHAREHOLDER'S EQUITY
CURRENT LIABILITIES:
Accounts payable ................................................... $ 65.3 $ 115.4
Income taxes payable ............................................... 12.8 21.4
Interest payable ................................................... 4.1 6.0
Other current liabilities .......................................... 21.2 36.6
-------- --------
103.4 179.4
-------- --------
Long-term debt ........................................................ 102.5 278.5
Deferred revenues ..................................................... 5.4 4.0
Other long-term obligations ........................................... 24.8 27.5
Deferred income taxes ................................................. 39.2 53.8
Minority interest in Monterey Resources, Inc. ......................... -- 30.3
Commitments and contingencies (See Note 7) ............................ -- --
Convertible preferred stock, 7% Series, $0.01 par value, 5.0 million
shares authorized and issued, none outstanding (1.2 million in 1996) -- 19.7
SHAREHOLDERS' EQUITY:
Preferred stock, $0.01 par value, 38.1 million shares authorized,
none issued ...................................................... -- --
$.732 Series A preferred stock, $0.01 par value, 10.7 million shares
authorized and issued, none outstanding (10.7 million in 1996) ... -- 91.4
Common stock, $0.01 par value, 200.0 million shares authorized,
102.9 million shares issued and outstanding (90.7 million in 1996) 1.0 0.9
Paid-in capital .................................................... 727.3 601.0
Accumulated deficit ................................................ (276.9) (166.5)
Unamortized restricted stock awards ................................ (0.8) --
-------- --------
450.6 526.8
-------- --------
$ 725.9 $1,120.0
======== ========
SEE ACCOMPANYING NOTES.
4
SANTA FE ENERGY RESOURCES, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED)
(IN MILLIONS)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
----------------------------------------
1997 1996 1997 1996
------- ------- ------- -------
OPERATING ACTIVITIES:
Net income ......................................... $ 10.7 $ 16.5 $ 51.1 $ 46.5
ADJUSTMENTS TO RECONCILE NET INCOME TO NET CASH
PROVIDED BY OPERATING ACTIVITIES:
Depletion, depreciation and amortization ........ 30.9 38.7 100.0 106.1
Impairment of oil and gas properties ............ -- -- -- 10.4
Deferred income taxes ........................... 5.3 6.8 28.0 12.0
Net loss (gain) on disposition of assets ........ (1.9) -- (4.0) 0.5
Exploratory dry hole costs ...................... 4.7 1.1 13.0 2.5
Minority interest in Monterey Resources, Inc. ... 0.4 -- 4.7 --
Other ........................................... 1.8 0.9 4.2 2.3
CHANGES IN OPERATING ASSETS AND LIABILITIES:
Decrease (increase) in accounts receivable ...... 14.7 (2.7) 24.4 (3.0)
Decrease (increase) in inventories .............. (0.5) (1.2) (2.4) (2.4)
Increase (decrease) in accounts payable ......... 3.0 (2.1) 1.7 7.4
Increase (decrease) in interest payable ......... 4.4 (3.6) 4.4 (3.6)
Increase (decrease) in income taxes payable ..... (4.2) 1.4 (8.7) 2.8
Net change in other assets and liabilities ...... (25.4) 0.8 3.9 1.6
------- ------- ------- -------
NET CASH PROVIDED BY OPERATING ACTIVITIES .............. 43.9 56.6 220.3 183.1
------- ------- ------- -------
INVESTING ACTIVITIES:
Capital expenditures, including exploratory dry hole
costs ............................................. (47.1) (58.5) (164.8) (142.9)
Acquisition of producing properties ................ (163.5) (2.5) (198.2) (37.8)
Net proceeds from sale of properties ............... 29.6 0.1 32.5 0.5
Other .............................................. 8.3 -- 8.3 --
------- ------- ------- -------
NET CASH USED IN INVESTING ACTIVITIES .................. (172.7) (60.9) (322.2) (180.2)
------- ------- ------- -------
FINANCING ACTIVITIES:
Issuance of common stock ........................... 0.6 0.6 2.2 1.5
Net change in long-term debt ....................... 93.0 -- 99.0 --
Cash dividends paid ................................ (1.3) (3.7) (8.5) (11.1)
------- ------- ------- -------
NET CASH PROVIDED (USED) BY FINANCING ACTIVITIES ....... 92.3 (3.1) 92.7 (9.6)
------- ------- ------- -------
Net decrease in cash ................................... (36.5) (7.4) (9.2) (6.7)
Cash and cash equivalents at beginning of period ....... 41.9 43.3 14.6 42.6
------- ------- ------- -------
Cash and cash equivalents at end of period ............. $ 5.4 $ 35.9 $ 5.4 $ 35.9
======= ======= ======= =======
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Interest paid ...................................... $ 0.2 $ 12.9 $ 15.5 $ 31.4
Income taxes paid .................................. $ 4.3 $ 0.7 $ 13.7 $ 2.8
SEE ACCOMPANYING NOTES.
5
SANTA FE ENERGY RESOURCES, INC.
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY (UNAUDITED)
(IN MILLIONS)
$.732
SERIES A
CONVERTIBLE UNAMORTIZED
PREFERRED STOCK COMMON STOCK RESTRICTED TOTAL
--------------- -------------- PAID-IN ACCUMULATED STOCK SHAREHOLDERS'
SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT AWARDS EQUITY
---- ----- ----- ---- ------ -------- ------- ------
Balance at December 31, 1996 ........ 10.7 $91.4 91.0 $0.9 $601.0 $(166.5) $-- $526.8
Issuance of common stock
Employee stock
compensation and savings
plans .......................... -- -- 0.5 -- 6.9 -- (2.4) 4.5
Conversion of convertible
preferred stock, 7%
series ......................... -- -- 2.3 -- 28.1 (8.5) -- 19.6
Conversion of $.732 Series
A preferred stock .............. (10.7) (91.4) 9.1 0.1 91.3 -- -- --
Amortization of restricted
stock awards .................... -- -- -- -- -- -- 1.6 1.6
Net income ....................... -- -- -- -- -- 51.1 -- 51.1
Preferred dividends declared ..... -- -- -- -- -- (3.6) -- (3.6)
Spin Off of Monterey
Resources, Inc. ................. -- -- -- -- -- (149.4) -- (149.4)
---- ----- ----- ---- ------ ------- ----- ------
Balance at September 30, 1997 ....... -- $-- 102.9 $1.0 $727.3 $(276.9) $(0.8) $450.6
==== ===== ===== ==== ====== ======= ===== ======
SEE ACCOMPANYING NOTES.
6
SANTA FE ENERGY RESOURCES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1. ACCOUNTING POLICIES
The consolidated financial statements at September 30, 1997 and for the
three and nine months then ended are unaudited and reflect all adjustments
(consisting of only normal and recurring adjustments) which are, in the opinion
of management, necessary for a fair presentation of the financial position and
operating results for the interim periods. The consolidated financial statements
should be read in conjunction with the consolidated financial statements and
notes thereto, together with management's discussion and analysis of financial
condition and results of operations, contained in the Company's Annual Report on
Form 10-K for the year ended December 31, 1996. The results for the three and
nine months ended September 30, 1997 are not necessarily indicative of the
results which may be expected for any other interim period or for the year
ending December 31, 1997.
In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 128, "Earnings per Share" ("FAS
128"), which revises the computation and disclosure requirements for earnings
per share information. FAS 128 is effective for financial statements for periods
ending after December 15, 1997, and earlier application is not permitted.
Earnings per share data for all prior periods will be restated to conform with
the provisions of FAS 128. The adoption of FAS 128 is not expected to have a
material effect on the Company's earnings per share data.
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130, "Reporting Comprehensive Income" ("FAS
130"), and Statement of Financial Accounting Standards No. 131, "Disclosures
about Segments of an Enterprise and Related Information" ("FAS 131"). Both
Statements are effective for fiscal years beginning after December 15, 1997.
Neither Statement will affect the Company's reported consolidated net income.
NOTE 2. RECLASSIFICATIONS
Certain amounts in the 1996 financial statements for the three and nine
months ended September 30, 1996 have been reclassified to conform with 1997
presentation.
NOTE 3. SPIN OFF OF MONTEREY RESOURCES, INC.
In 1996 the Company formed Monterey Resources Inc. ("Monterey") to assume
the operations of the Company's Western Division (the "Western Division") which
conducted the Company's oil and gas operations in the State of California. In
November 1996, prior to the initial public offering (the "IPO") discussed below,
pursuant to a contribution and conveyance agreement (the "Contribution
Agreement"), among other things: (i) the Company contributed to Monterey
substantially all of the assets and properties of the Western Division, subject
to the retention by the Company of a production payment, as defined below, and
certain other assets; (ii) the Company retained a $30.0 million production
payment (the "Production Payment") with respect to certain properties in the
Midway-Sunset field; (iii) Monterey assumed all obligations and liabilities of
the Company associated with or allocated to the assets and properties of the
Western Division, including $245.0 million of indebtedness in respect of Santa
Fe's 10.23% Series E Notes due 1997, 10.27% Series F Notes due 1998 and 10.61%
Series G Notes due 2005 (the "Series E Notes", "Series F Notes" and "Series G
Notes", respectively) and (iv) Monterey agreed to purchase from the Company an
$8.3 million promissory note receivable related to the sale to a third party
7
SANTA FE ENERGY RESOURCES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
NOTE 3. SPIN OFF OF MONTEREY RESOURCES, INC. (CONTINUED)
of certain surface acreage located in Orange County, California. Also prior to
the IPO, Monterey and the Company entered into a $75.0 million revolving credit
facility with a group of banks (the "Monterey Credit Facility") and borrowed
$16.0 million which was retained by the Company.
In November 1996 Monterey sold 9,335,000 shares of its common stock for
total consideration of $123.6 million (after deducting underwriting discounts of
$9.1 million and other related costs of $2.6 million). The proceeds from the IPO
were used in part to (i) repay the Series E Notes and Series F Notes ($70.0
million) and pay a prepayment penalty thereon of $2.5 million; (ii) retire the
Production Payment ($30.0 million); (iii) repay the $16.0 million outstanding
under the Monterey Credit Facility; and (iv) pay a $2.0 million fee with respect
to a supplement to the indenture relating to the Company's 11% Senior
Subordinated Debentures due 2004. Subsequent to the IPO, Monterey issued $175.0
million in aggregate principal amount of 10.61% Senior Notes due 2005 (the
"Monterey Senior Notes") to holders of the Series G Notes in exchange for the
cancellation of such notes and paid a $1.3 million consent fee in connection
therewith.
The costs and expenses related to the retirement of the Company's
outstanding debt, as discussed above, and approximately $3.4 million of deferred
debt issue costs and related transaction costs were reflected in the Company's
1996 Statement of Operations as an extraordinary item, net of $3.2 million in
income taxes.
Prior to the Spin Off, the Company owned 82.8% of Monterey's outstanding
common stock. On July 25, 1997 the Company distributed pro rata to its common
shareholders all of the shares of Monterey's common stock that it owned by means
of a tax-free distribution (the "Spin Off"). Pursuant to the terms of a letter
agreement dated June 13, 1996, upon consummation of the Spin Off, fees
aggregating $3.3 million were paid by Monterey to Chase Securities Inc. and
Petrie Parkman & Co., Inc. In addition, a fee of $0.4 million was paid to GKH
Partners, L.P., of which $0.2 million was paid by the Company and $0.2 million
was paid by Monterey. One of the Company's directors is associated with Chase
Securities and another is associated with GKH Partners.
Monterey agreed to indemnify the Company if at any time during the
one-year period subsequent to consummation of the Spin Off (or if certain tax
legislation is enacted and is applicable, such longer period as is required for
the Spin Off to be tax free to the Company) Monterey takes certain actions, the
effects of which result in the Spin Off being taxable to the Company.
NOTE 4. PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENT INFORMATION
The accompanying unaudited pro forma financial information of the Company
for the three and nine months ended September 30, 1997 and 1996 have been
prepared as if the Monterey Spin Off had occurred at the beginning of 1997 and
1996, respectively.
8
SANTA FE ENERGY RESOURCES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
NOTE 4. PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENT INFORMATION
(CONTINUED)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------- -----------------
1997 1996 1997 1996
------- ------ ------- -------
(IN MILLIONS, EXCEPT PER SHARE DATA)
Total revenues .................. $ 80.1 $ 72.4 $ 244.3 $ 205.7
Income from operations .......... 14.3 9.6 53.3 14.5
Net income ...................... 8.1 1.2 31.4 7.5
Earnings (loss) to common shares $ 8.1 $ (2.5) $ 19.3 $ (3.6)
======= ====== ======= =======
Earnings (loss) per common share $ 0.08 $(0.03) $ 0.20 $ (0.04)
======= ====== ======= =======
Weighted average number of common
shares outstanding ......... 102.9 90.7 97.1 90.6
- ------------
1. Costs and expenses related to the Spin Off of Monterey have been excluded
from the three months and nine months ended September 30, 1997 pro forma
presentations as follows: at three months ended September 30, 1997, (i) $2.0
million in pension curtailments and (ii) $0.6 million in compensation
expenses; at nine months ended September 30, 1997, (i), (ii) and (iii) $1.1
million in Spin Off related costs and expenses, which were recorded in the
second quarter of 1997.
NOTE 5. STATEMENT OF CASH FLOWS "SUPPLEMENTAL DISCLOSURE OF NONCASH
TRANSACTIONS"
The following balances represent noncash adjustments to the Company's
Consolidated Balance Sheet as of September 30, 1997. The adjustments represent
Monterey Resources' acquisition of McFarland Energy, Santa Fe's Spin Off of
Monterey Resources and Santa Fe's acquisition of interests in the Tupungato
field in Argentina.
McFARLAND MONTEREY TUPUNGATO
ACQUISITION SPIN OFF ACQUISITION TOTAL
----------- --------- ----------- ----------
(IN MILLIONS OF DOLLARS)
Accounts receivable ......... $ 7.0 $ (38.4) $ 1.3 $ (30.1)
Inventories ................. 0.3 (2.4) 0.7 (1.4)
Accounts payable ............ 0.5 (27.6) 0.6 (26.5)
Income taxes payable ........ -- 0.1 -- 0.1
Interest payable ............ -- (6.3) -- (6.3)
Other assets and liabilities (0.3) 10.1 1.2 11.0
Long-term debt .............. 2.3 (277.3) -- (275.0)
9
SANTA FE ENERGY RESOURCES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
NOTE 6. CONVERTIBLE PREFERRED
In the second quarter of 1997 the Company redeemed all 10.7 million
outstanding shares of its $.732 Series A Convertible Preferred Stock (the
"DECS") for 9.1 million shares of common stock and converted all 1.2 million
outstanding shares of its Convertible Preferred Stock, Series 7% (the "7%
Preferred") for 2.3 million shares of common stock. The conversion of the 7%
Preferred resulted in a noncash reduction in earnings to common shares (which is
reflected as a premium on conversion of 7% preferred stock in the statement of
operations) of $8.5 million. The conversion of the DECS had no effect on the
Company's earnings to common shares.
NOTE 7. COMMITMENTS AND CONTINGENCIES
OIL AND GAS HEDGING. 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 a product. Gains or losses on hedging activities are
recognized in oil and gas revenues in the period in which the hedged production
is sold.
Crude oil sales hedges resulted in an increase in revenues of $0.4 million
during the third quarter of 1997 and $2.1 million for the first nine months of
1997, compared to a decrease in revenues of $4.4 million during the third
quarter of 1996 and $13.4 million for the first nine months of 1996. At
September 30, 1997 the Company had open crude oil sales hedges on 522,000
barrels during the period October 1997 to December 1997. The instruments used
have floors ranging from $20.00 to $20.50 per barrel and ceilings ranging from
$20.10 to $22.50 per barrel. Under the terms of the instruments, if the
aggregate average of the applicable daily settlement prices is below the floor,
the Company will receive a settlement based on the difference, and if the
aggregate average of the applicable daily settlement prices is above the
ceiling, the Company will be required to pay an amount based on the difference.
Based on the October 1997 settlement price of the applicable NYMEX futures
contract, the Company would recognize a $0.5 million loss with respect to such
hedges at September 30, 1997. The actual gains or losses realized by the Company
from these hedges may vary significantly due to the volatility of the futures
markets.
The Company has had no open natural gas sales hedges during 1997. Natural
gas sales hedges resulted in a decrease in revenues of $4.2 million during the
third quarter of 1996 and $15.0 million for the first nine months of 1996.
ENVIRONMENTAL MATTERS. The Company's oil and gas operations are subject to
stringent environmental regulation by government authorities. Such regulation
has increased the costs of planning, designing, drilling, installing, operating
and abandoning oil and gas wells and associated 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
10
SANTA FE ENERGY RESOURCES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
NOTE 7. COMMITMENTS AND CONTINGENCIES (CONTINUED)
environmental regulations, the risk of substantial costs and liabilities are
inherent to 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 in the past, the Company intends to fund
the future costs of environmental compliance from operating cash flows.
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.
11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
As described in Note 3 of the Notes to the Consolidated Financial
Statements, the Company completed the Spin Off of Monterey on July 25, 1997. As
a result of this transaction, management believes the consolidated results are
not representative of Santa Fe's on-going operations. Consequently, the
following discussions focus on the results of Santa Fe, excluding Monterey.
The Spin Off of Monterey has changed the nature of Santa Fe's Business in
many respects. Operationally, the Company is smaller, more balanced between the
production of light oil and natural gas, more focused internationally and more
exploration oriented. Financially, Santa Fe has lower debt and on a per unit of
production basis, lower production costs, higher exploration expenses and higher
depletion, depreciation and amortization costs. Domestically, the Company's core
areas of operations are in the Permian Basin of West Texas and Southeastern New
Mexico and offshore Gulf of Mexico. Internationally, the Company's core areas
are South America, West Africa and Southeast Asia. Development activities are
conducted in each of the Company's core areas and are growing most rapidly in
the international area where the Company is bringing discoveries in Indonesia
and Gabon on production in 1997 and 1998 as well as continuing development on
its producing fields in Indonesia and Argentina. Santa Fe's exploration
activities are conductied primarily in the Gulf of Mexico where the Company has
expanded its program into the deeper water "flex trend" and in each of the
international core areas, particularly Southeast Asia and West Africa.
GENERAL
As an independent oil and gas producer, Santa Fe'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. 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. Since the beginning of 1997 the actual average crude oil sales price
(unhedged) received by Santa Fe ranged from a high of $20.50 per barrel in the
first quarter of 1997 to a low of $16.79 per barrel in the third quarter of
1997. Based on operating results for the first nine months of 1997, Santa Fe
estimates that on an annualized basis a $1.00 per barrel increase or decrease in
its average crude oil sales prices would result in a corresponding $6.3 million
change in net income and a $7.8 million change in cash flow from operating
activities. 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 received by Santa Fe
since the beginning of 1997 for its natural gas ranged from a high of $2.53 per
Mcf in the first quarter of 1997 to a low of $1.91 per Mcf in the second quarter
of 1997. Based on operating results for the first nine months of 1997, Santa Fe
estimates that on an annualized basis a $0.10 per Mcf increase or decrease in
its average natural gas sales price would result in a corresponding $3.8 million
change in net income and a $4.7 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 Santa Fe's oil hedging program or its debt levels
and related interest expense, that might result from a change in oil and natural
gas prices.
As of October 31, 1997, Santa Fe has entered into hedging agreements on
394,000 Bbls of oil production during the period November 1997 through February
1998. The instruments used have floors ranging from $20.00 to $21.00 per barrel
and ceilings ranging from $20.10 to $23.00 per barrel. Under the terms of the
instruments, if the aggregate average of the applicable daily settlement prices
is below the floor, Santa Fe will receive a settlement based on the difference,
and if the aggregate average of the applicable daily settlement prices is above
the ceiling, Santa Fe will be required to pay an amount based on the difference.
Based on the October 1997 settlement price of $21.36, Santa Fe would recognize a
$0.3 million loss with respect to such hedges at October 31, 1997. The actual
gains or losses realized by Santa Fe from these hedges may vary significantly
due to the volatility of the futures markets.
12
On August 12, 1997, Santa Fe continued its international expansion by
purchasing from Anderson Exploration Ltd. of Canada all of its interests in the
Tupungato field in the Cuyo Basin of Argentina together with interests in
exploratory concessions in the Neuquen Basin for $38.2 million including working
capital. Current net production from the properties in the Tupungato field,
which Santa Fe will operate with a one hundred percent working interest, is
approximately 1,200 barrels of oil per day, with future expectations of 2,500
barrels per day through developmental drilling and waterflood projects over the
next two years.
13
RESULTS OF OPERATIONS
The following tables set forth historical pro forma results, with income
taxes calculated on a separate return basis, for Santa Fe, excluding Monterey:
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
----------------- ------------------
1997 1996 1997 1996
------- ------ ------- -------
(IN MILLIONS, EXCEPT PER SHARE DATA)
REVENUES:
Sales of crude oil and liquids produced ... $ 47.7 $ 47.5 $ 145.5 $ 131.3
Sales of natural gas produced ............. 32.2 25.1 98.8 74.4
Other ..................................... 0.2 (0.2) -- --
------- ------ ------- -------
TOTAL REVENUES ......................... 80.1 72.4 244.3 205.7
------- ------ ------- -------
COSTS AND EXPENSES:
Production and operating .................. 22.1 20.0 63.0 59.5
Exploration, including dry hole costs ..... 9.5 5.1 28.1 15.7
Depletion, depreciation and amortization .. 27.6 28.9 77.7 78.1
Impairment of oil and gas properties ...... -- -- -- 10.4
General and administrative ................ 3.9 4.5 14.6 14.4
Taxes (other than income) ................. 3.2 4.3 11.3 12.6
Loss (gain) on disposition of assets ...... (1.9) -- (4.0) 0.5
------- ------ ------- -------
TOTAL COSTS AND EXPENSES ............... 64.4 62.8 190.7 191.2
------- ------ ------- -------
INCOME FROM OPERATIONS ........................ 15.7 9.6 53.6 14.5
Interest income ........................... 0.2 0.5 1.2 1.5
Interest expense .......................... (3.0) (3.2) (8.9) (9.6)
Interest capitalized ...................... 1.3 0.7 4.1 2.8
Other income (expense) .................... (0.1) (0.2) (0.4) (0.7)
------- ------ ------- -------
Income before income taxes .................... 14.1 7.4 49.6 8.5
Income taxes .............................. (5.1) (6.2) (18.0) (1.0)
------- ------ ------- -------
NET INCOME .................................... 9.0 1.2 31.6 7.5
Preferred dividend requirement ............ -- (3.7) (3.6) (11.1)
Premium on conversion of 7% preferred stock -- -- (8.5) --
------- ------ ------- -------
EARNINGS (LOSS) ATTRIBUTABLE TO COMMON SHARES . $ 9.0 $ (2.5) $ 19.5 $ (3.6)
======= ====== ======= =======
EARNINGS (LOSS) PER COMMON SHARE .............. $ 0.09 $(0.03) $ 0.20 $ (0.04)
======= ====== ======= =======
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING . 102.9 90.7 97.1 90.6
======= ====== ======= =======
14
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
--------------------- -----------------------
1997 1996 1997 1996
--------------------- -----------------------
PRODUCTION
Crude oil and liquids (MBbls/day)
Domestic ............................ 21.6 19.5 21.0 19.4
International ....................... 9.6 8.2 8.6 8.0
------- ------- ------- -------
Total ............................... 31.2 27.7 29.6 27.4
Natural Gas (MMcf/day) ................. 178.5 174.0 175.3 162.7
AVERAGE PRICES
Crude oil and liquids ($/Bbl)
Actual (unhedged) ................... $ 16.79 $ 20.06 $ 18.07 $ 19.07
Realized (hedged) ................... 16.90 18.62 18.32 17.71
Natural gas ($/Mcf)
Actual (unhedged) ................... $ 2.04 $ 1.91 $ 2.15 $ 2.08
Realized (hedged) ................... 2.04 1.65 2.15 1.74
COSTS AND EXPENSES (IN DOLLARS PER BOE)
Production and operating (a) ........... $ 4.01(d) $ 3.83 $ 3.94(d) $ 3.98
Exploration, including dry hole costs .. 1.75(d)(e) 0.98 1.77(d)(e) 1.05
Depletion, depreciation and amortization 4.92 5.54 4.84 5.23
General and administrative ............. 0.85(d)(e) 0.86 0.89(d)(e)(f) 0.86(g)
Taxes, other than income (b) ........... 0.56 0.82 0.70 0.84
Interest expense, net (c) .............. 0.23 0.39 0.22 0.35
- -------
a) Excludes related production, severance and ad valorem taxes.
b) Includes related production, severance and ad valorem taxes.
c) Reflects interest expense less amounts capitalized and interest income.
d) Excludes effect of $1.3 million General and Administrative, $0.3 million
Production and Operating and $0.4 million Exploration costs and expenses
related to a pension curtailment benefit from the Monterey Spin Off - $0.28
Per BOE and $0.08 Per BOE for the three and nine months ended september 30,
1997, respectively.
e) Excludes effect of $0.5 million General and Administrative and $0.1 million
Exploration costs and expenses related to compensation expenses resulting
from the Spin Off - $0.09 Per BOE And $0.02 Per BOE for the three and nine
months ended September 30, 1997, respectively.
f) Excludes effect of $1.1 million in administrative costs related to the Spin
Off of Monterey - $0.04 Per BOE for the nine months ended September 30, 1997.
g) Excludes effect of $1.6 million charge related to the abandonment of an
office lease - $0.06 per BOE for the nine months ended September 30, 1996.
SANTA FE (EXCLUDING MONTEREY)
THREE MONTHS ENDED SEPTEMBER 30, 1997 COMPARED WITH THREE MONTHS ENDED
SEPTEMBER 30, 1996
OIL AND GAS REVENUES. Revenues from crude oil and natural gas sales
increased by 10% to $79.9 million for the three months ended September 30, 1997
compared with $72.6 million for the same period in 1996. The increase was due
primarily to increased crude oil and natural gas production and improved natural
gas prices, partially offset by lower realized crude oil prices. Santa Fe's
crude oil and liquids production for the third quarter of 1997 increased over
12% to 31,200 barrels of production per day from 27,700 barrels of production
per day in the third quarter of 1996. The production increase was primarily due
to the initiation of production at the N. Geragai field in Indonesia and
property acquisitions in Argentina and the Permian Basin of West Texas. Despite
the sale of several properties in the Gulf Division, natural gas production
increased to 178.5 million cubic feet (MMcf) per day in the third quarter of
1997 compared with 174.0 MMcf per day for the same period in 1996. Crude oil
prices realized in the third quarter of 1997 averaged $16.90 per barrel,
including an $0.11 per barrel hedging benefit. For the same period in 1996, the
average realized oil price per barrel was $18.62, net of a $1.44 per barrel
hedging expense. Natural gas prices realized in the third quarter of 1997
averaged $2.04 per thousand
15
cubic feet (Mcf), compared with the third quarter 1996 average of $1.65 per Mcf,
net of a $0.26 per Mcf hedging expense.
COSTS AND EXPENSES. Production expense for the three months ended
September 30, 1997, increased to $22.1 million from $20.0 million during the
same period of 1996 due to increased crude oil and natural gas production, as
noted above. Exploration expense for the three months ended September 30, 1997,
increased to $9.5 million from $5.1 million for the same period of 1996. The
increase in exploration expense is due primarily to increased exploratory
drilling in the Gulf of Mexico. General and administrative expense decreased to
$3.9 million in the three months ended September 30, 1997, from $4.5 million for
the same period in 1996. The decrease was due primarily to a pension curtailment
benefit of $1.3 million, partially offset by compensation expenses of $0.5
million related to the Spin Off of Monterey.
NINE MONTHS ENDED SEPTEMBER 30, 1997 COMPARED WITH NINE MONTHS ENDED
SEPTEMBER 30, 1996
OIL AND GAS REVENUES. Revenues from crude oil and natural gas sales
increased by 19% to $244.3 million for the nine months ended September 30, 1997
compared with $205.7 million for the same period in 1996. The increase was due
primarily to increased crude oil and natural gas production and higher realized
prices, net of hedging gains and losses. For the first nine months of 1997,
crude oil and liquids production increased 8% to 29,600 barrels per day from
27,400 barrels per day for the 1996 period, principally due to property
acquisitions and Santa Fe's development program. Natural gas production
increased to 175.3 MMcf per day for the nine months ended 1997 from 162.7 MMcf
per day for the same period in 1996, due primarily to Santa Fe's development and
exploration programs. Crude oil prices realized in the first nine months of 1997
averaged $18.32 per barrel, including a $0.25 per barrel hedging benefit,
compared with an average price per barrel of $17.71, net of a $1.36 per barrel
hedging expense, in 1996. Natural gas prices realized in the first nine months
of 1997 averaged $2.15 per Mcf, compared with an average of $1.74 per Mcf, net
of a $0.34 per Mcf hedging expense, for the same period in 1996.
COSTS AND EXPENSES. Production expense for the nine months ended September
30, 1997, increased to $63.0 million from $59.5 million for the same period of
1996. While operating costs were up due to increased production, operating costs
expressed on a per unit of production basis remained substantially unchanged at
$3.94. Exploration expense for the nine months ended September 30, 1997,
increased to $28.1 million from $15.7 million for the same period of 1996. The
increase is due primarily to increased drilling activities in Santa Fe's Gulf
and International Divisions.
CONSOLIDATED
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1997 COMPARED WITH THREE AND
NINE MONTHS ENDED SEPTEMBER 30, 1996
On a consolidated basis the Company reported total revenues of $101.8
million, total costs and expenses of $81.0 million and earnings to common of
$10.7 million or $0.10 per share for the third quarter of 1997 and total
revenues of $425.5 million, total costs and expenses of $321.7 million and
earnings to common of $39.0 million or $0.40 per share for the nine months ended
September 30, 1997. These results reflect the consolidation of Monterey
Resources for the first month of the third quarter and first seven months of the
nine month period. For the third quarter of 1996 the Company reported total
revenues of $149.4 million, total costs and expenses of $115.5 million and
earnings to common of $12.8 million or $0.14 per share and total revenues of
$410.6 million, total costs and expenses of $321.2 million and earnings to
common of $35.4 million or $0.39 per share for the nine month period ending
September 30, 1996. Monterey Resources is included in the Company's consolidated
results for the entire 1996 comparable periods.
16
LIQUIDITY AND CAPITAL RESOURCES
CAPITAL EXPENDITURES. Santa Fe's primary needs for cash are for
exploration, development and acquisitions of oil and gas properties. Santa Fe
expects to spend approximately $265.0 million on capital expenditures in 1997.
Through September 30, 1997, $190.4 million had been expended. Funding for Santa
Fe's exploration, development and acquisition activities and its working capital
obligations is provided primarily by internally generated cash flow.
CAPITAL RESOURCES. Santa Fe's capital resources consist of cash flow from
operating activities and funds available under its bank credit facilities.
Effective November 13, 1996, Santa Fe entered into a revolving credit agreement
(the "Santa Fe Credit Agreement") which matures November 13, 2001. The agreement
permits Santa Fe to obtain revolving credit loans and issue letters of credit
with the maximum aggregate amounts outstanding limited to $150 million and $30
million, respectively. Borrowings under the agreement are unsecured and interest
rates are tied to the agent bank's prime rate or eurodollar offering rate, at
Santa Fe's option. At September 30, 1997, one letter of credit was outstanding
for $1.8 million related to certain foreign operations.
The Santa Fe Credit Agreement and the indenture for the Debentures include
covenants that restrict Santa Fe'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 September 30, 1997
Santa Fe could incur up to $512.8 million of additional indebtedness and pay
dividends of up to $49.3 million on its aggregate capital stock.
In addition to the "Santa Fe Credit Agreement" Santa Fe also 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 Credit Facility. At
September 30, 1997, Santa Fe had $3.0 million of borrowings outstanding under
these facilities.
Santa Fe has historically funded its operations and capital spending
programs with cash flow from operations and borrowings under bank credit
facilities. Santa Fe believes that cash flow from operations and the borrowing
availability under the Credit Facility will be sufficient to meet its
anticipated capital requirements for 1997. Earnings from operations before
exploration expense, depletion, depreciation and amortization expense and gain
or loss on disposition of assets totalled $155.4 million in the first nine
months of 1997, and net cash used for capital expenditures and producing
property acquisitions in such period totalled $204.2 million.
DIVIDENDS. The determination of the amount of future cash dividends, if
any, to be declared and paid on Santa Fe's common stock is at the sole
discretion of Santa Fe's Board of Directors and is dependent on financial
condition, earnings and available funds from operations, level of capital and
exploration expenditures, dividend restrictions as set forth in financing
agreements, future business prospects and other matters deemed relevant.
17
FORWARD-LOOKING STATEMENTS
In its discussion and analysis of financial condition and results of
operations, the Company has included certain statements (other than statements
of historical fact) that constitute 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. When used herein, the words "budget,"
"budgeted," "anticipate," "expects," "believes," "seeks," "goals," "intends" or
"projects" and similar expressions are intended to identify forward-looking
statements. It is important to note that the Company's actual results could
differ materially from those projected by such forward-looking statements.
Although the Company believes that the expectations reflected in such
forward-looking statements are reasonable and such forward-looking statements
are based upon the best data available at the time this report is filed with the
Securities and Exchange Commission, no assurance can be given that such
expectations will prove correct. Factors that could cause the Company's results
to differ materially from the results discussed in such forward-looking
statements include, but are not limited to, the following: production variances
from expectations, volatility of oil and gas prices, hedging results, the need
to develop and replace its reserves, the substantial capital expenditures
required to fund its operations, exploration risks, environmental risks,
uncertainties about estimates of reserves, competition, government regulation
and political risks, and the ability of the Company to implement its business
strategy. All such forward-looking statements in this document are expressly
qualified in their entirety by the cautionary statements in this paragraph
18
PART II. OTHER INFORMATION
ITEMS 1, 2, 3 & 5 ARE NOT APPLICABLE AND HAVE BEEN OMITTED.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At the Company's Annual Meeting of Stockholders, held July 8, 1997, the
following individuals were elected to the Board of Directors:
Marc J. Shapiro - Term expires at annual meeting of stockholders in 2000
William E. Greehey - Term expires at annual meeting of stockholders in
2000
The following members of the Board of Directors had terms which continued after
the meeting:
Melvyn N. Klein - Term expires at annual meeting of stockholders in 1998
James L. Payne - Term expires at annual meeting of stockholders in 1998
Allan V. Martini - Term expires at annual meeting of stockholders in 1999
Reuben F. Richards - Term expires at annual meeting of stockholders in
1999
Kathryn D. Wriston - Term expires at annual meeting of stockholders in
1999
The following proposals were approved at the Company's Annual meeting:
Affirmative Negative Votes
votes votes withheld
----- ----- --------
1. Election of two directors to the Board
of Directors: Marc J. Shapiro 90,552,861 370,081 -
William E. Greehey 90,601,368 321,574 -
2. Consider and ratify the appointment of 90,656,855 77,707 188,380
Price Waterhouse LLP as the independent
accountants of the Company for the
fiscal year ending December 31, 1997.
3. Consider and approve the distribution 78,142,509 188,747 286,198
of the common stock of Monterey
Resources, Inc. owned by the
Corporation to the holders of the
Corporation's common stock
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
None
(b) Reports on Form 8-K
DATE ITEM
---- ----
July 14, 1997 5
August 8, 1997 2
19
SIGNATURE
Pursuant to the requirements Section 13 or 15 (d) of the Securities Exchange Act
1934, the Registrant has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized, on the 14th day of November, 1997.
SANTA FE ENERGY RESOURCES, INC.
(Registrant)
Date: November 14, 1997 /s/ JANET F. CLARK
Janet F. Clark, Vice President,
Chief Financial Officer and Treasurer
(Principal Financial Officer and
Duly Authorized Officer)
20