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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 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 OF INCORPORATION) (I.R.S. EMPLOYER 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
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
NAME OF EACH EXCHANGE ON
TITLE OF EACH CLASS WHICH REGISTERED
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COMMON STOCK, $.01 PAR VALUE NEW YORK STOCK EXCHANGE
PREFERRED SHARE PURCHASE RIGHTS NEW YORK STOCK EXCHANGE
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
NONE
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 by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of the voting stock held by non-affiliates of
the registrant as of February 2, 1998 was approximately $1,000,758,919.
Shares of common stock outstanding at February 2, 1998: 102,520,882
DOCUMENTS INCORPORATED BY REFERENCE:
Notice of Annual Meeting of Shareholders and Proxy Statement dated March 20,
1998 (in Part III)
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TABLE OF CONTENTS
PAGE
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PART I
Items 1. and 2. Business and Properties.............. 1
Santa Fe Excluding Monterey
Resources, Inc..................... 1
Reserves............................. 2
Production and Development
Activities......................... 2
Exploration Activities............... 6
Drilling Activities.................. 9
Producing Wells...................... 9
Domestic Acreage..................... 10
Foreign Acreage...................... 10
Santa Fe Energy Trust................ 10
Current Markets for Oil and Gas...... 11
Other Business Matters............... 12
Item 3. Legal Proceedings.................... 15
Item 4. Submission of Matters to a Vote of
Security Holders................... 15
PART II
Item 5. Market for Registrant's Common Equity
and Related Stockholder Matters.... 16
Item 6. Selected Financial Data.............. 16
Item 7. Management's Discussion and Analysis
of Financial Condition and Results
of Operations...................... 16
Item 8. Consolidated Financial Statements and
Supplementary Data................. 29
Item 9. Changes in and Disagreements with
Accountants on Accounting and
Financial Disclosures.............. 29
PART III
Item 10. Directors and Executive Officers of
the Registrant..................... 29
Item 11. Executive Compensation............... 29
Item 12. Security Ownership of Certain
Beneficial Owners and Management... 29
Item 13. Certain Relationships and Related
Transactions....................... 29
PART IV
Item 14. Exhibits, Financial Statement
Schedules and Reports on Form
8-K................................ 30
SIGNATURES.......................................... 64
PART I
CERTAIN DEFINITIONS
As used herein, the following terms have the specific meanings set out:
"Bbl" means barrel. "MBbl" means thousand barrels. "MMBbl" means million
barrels. "Mcf" means thousand cubic feet. "MMcf" means million cubic feet.
"Bcf" means billion cubic feet. "MMBtu" means million British thermal units.
"BOE" means barrel of oil equivalent. "MBOE" means thousand barrels of oil
equivalent and "MMBOE" means million barrels of oil equivalent. Natural gas
volumes are converted to barrels of oil equivalent using the ratio of 6.0 Mcf of
natural gas to 1.0 barrel of crude oil. "MMcfe" means million cubic feet of
natural gas equivalents. Oil volumes are converted to Mcf of natural gas
equivalent using the ratio of 1.0 barrel of oil to 6.0 Mcf of natural gas.
Unless otherwise indicated, natural gas volumes are stated at the official
temperature and pressure basis of the area in which the reserves are located.
"Replacement cost" refers to the cost per BOE of reserves added during a year
calculated by using a fraction, of which the numerator is equal to the costs
incurred by the Company for property acquisition, exploration and development
and of which the denominator is equal to proved reserve additions from
extensions, discoveries, improved recovery, acquisitions and revisions of
previous estimates. "Improved recovery," "enhanced oil recovery" and "EOR"
include all methods of supplementing natural reservoir forces and energy, or
otherwise increasing ultimate recovery from a reservoir, such as waterfloods and
CO2 (carbon dioxide) injection.
SANTA FE EXCLUDING MONTEREY RESOURCES, INC.
Santa Fe Energy Resources, Inc. ("Santa Fe" or "the Company") is
engaged in the exploration, development and production of crude oil and natural
gas in the continental and offshore United States and in certain international
areas. As described in Note 2 of the Notes to the Consolidated Financial
Statements, the Company completed the Spin Off of Monterey Resources, Inc.
("Monterey") on July 25, 1997. As a result of this transaction, management
believes the consolidated results for 1997 are not representative of the
Company's on-going operations. Consequently, in order to provide public
investors with more relevant information, the following discussions focus on the
results of the Company, excluding Monterey. Except where indicated all
historical information presented in Part I reflects the results of the Company
excluding Monterey.
ITEMS 1 AND 2. BUSINESS AND PROPERTIES
The Spin Off of Monterey changed the nature of the Company's business in
many respects. The Company's operations are smaller, more balanced between the
production of light oil and natural gas, more focused internationally and more
exploration oriented. Financially, the Company has lower debt and on a per unit
of production basis, lower production costs, higher exploration expenses and
higher depletion, depreciation and amortization costs. The Company's domestic
core areas of operations are in the Permian Basin of West Texas and Southeastern
New Mexico and offshore Gulf of Mexico. Its international core areas are
Southeast Asia, South America and West Africa. The Company conducts development
activities in each of its core areas and is growing more rapidly in the
international area where it has recently brought discoveries in Indonesia and
Gabon on production. The Company's exploration activities are conducted
primarily in the Gulf of Mexico and in each of the international core areas,
particularly Southeast Asia and West Africa, and to a lesser degree in Southeast
New Mexico.
At December 31, 1997 worldwide proved oil and gas reserves totalled 171.1
MMBOE, an increase of 38% from the 124.3 MMBOE at the beginning of the year.
Year-end reserves were comprised of 129.0 MMBbls of crude oil and liquids and
252.6 Bcf of natural gas, of which approximately 64% were domestic and 36% were
foreign. In 1997, the Company replaced 326% of its production, and for the
three-year period ended December 31, 1997 the Company replaced 215% of its
production. Production in 1997 averaged 30.3 MBbls of crude oil and liquids and
174.7 MMcf of natural gas per day, representing a 9% increase on a BOE basis
from 1996.
1
Capital expenditures for exploration and development projects and
acquisitions totalled $265 million in 1997 and are expected to be approximately
$277 million in 1998. Because the actual amounts expended in the future and the
results therefrom will be influenced by numerous factors, including many beyond
the Company's control, no assurances can be given as to the amounts that will be
expended. In 1997 approximately 38% of such expenditures were for international
concessions. In 1998 international capital expenditures are expected to increase
principally due to development activity in Indonesia, Argentina and Gabon. In
1997 the Company participated in the drilling of 105 development wells (60
domestic and 45 international) and 43 exploratory wells (37 domestic and 6
international) of which, 97 development and 17 exploratory wells were
successfully completed.
RESERVES
The following tables set forth information regarding changes in the
Company's estimates of proved net reserves from January 1, 1995 to December 31,
1997 and the Company's estimated proved developed reserves at December 31 of
each of the years 1994 through 1997.
INCREASES (DECREASES)
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NET
REVISIONS EXTENSIONS, PURCHASES
BALANCE AT OF DISCOVERIES (SALES) OF BALANCE
BEGINNING OF PREVIOUS IMPROVED AND MINERALS AT END
PERIOD ESTIMATES RECOVERY ADDITIONS IN PLACE PRODUCTION OF PERIOD
------------- ---------- --------- ----------- ----------- ----------- ----------
1995
Oil and condensate (MMBbls)..... 67.1 8.5 2.4 4.4 6.2 (8.9) 79.7
Natural gas (Bcf)............... 229.0 1.4 0.2 36.9 18.0 (52.8) 232.7
Oil equivalents (MMBOE)......... 105.2 8.7 2.5 10.7 9.2 (17.8) 118.5
1996
Oil and condensate (MMBbls)..... 79.7 5.7 -- 2.2 5.6 (10.1) 83.1
Natural gas (Bcf)............... 232.7 22.2 -- 41.9 10.2 (59.8) 247.2
Oil equivalents (MMBOE)......... 118.5 9.4 -- 9.2 7.3 (20.1) 124.3
1997
Oil and condensate (MMBbls)..... 83.1 11.2 10.6 24.9 10.3 (11.1) 129.0
Natural gas (Bcf)............... 247.2 39.1 -- 36.1 (6.0) (63.8) 252.6
Oil equivalents (MMBOE)......... 124.3 17.7 10.6 30.9 9.3 (21.7) 171.1(a)
DECEMBER 31,
---------------------------------------------------
1997 1996 1995 1994
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PROVED DEVELOPED RESERVES (MMBOE)............................................ 141.8 103.2 95.0 82.7
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(a) At December 31, 1997, 3.9 MMBOE were subject to a 90% net profits interest
held by Santa Fe Energy Trust. See "Santa Fe Energy Trust."
Ryder Scott Company ("Ryder Scott"), a firm of independent petroleum
engineers, prepared the above estimates of the Company's total proved reserves
at December 31, 1994, 1995, 1996 and 1997.
PRODUCTION AND DEVELOPMENT ACTIVITIES
CENTRAL DIVISION
The Company's producing properties in the Central Division consist
primarily of long-lived enhanced oil recovery properties in the Permian Basin of
West Texas and oil and natural gas properties in Southeastern New Mexico.
Central Division production averaged 17.8 MBbls of crude oil and liquids and
2
56.9 MMcf of natural gas per day in 1997, a 17% increase on a BOE basis from
1996. During 1997 the Division spent $79.5 million on development projects and
acquisitions and participated in 47 gross (18.0 net) development wells, 41 gross
(15.8 net) of which were successful.
The Company is engaged in development activities primarily through the use
of secondary waterfloods and tertiary CO2 floods on its properties in mature
fields in the Permian Basin of West Texas and development drilling on producing
properties discovered or acquired by the Company. The Company has extensive
experience in the use of waterfloods, which involves the injection of water into
a reservoir to drive hydrocarbons into producing wellbores. Following the
waterflood phase, certain fields may continue to produce in response to tertiary
EOR projects, such as the injection of CO2 which mixes with the oil and improves
the efficiency of the waterflood. The Wasson and Reeves fields are the most
significant of the Company's enhanced oil recovery properties.
The Company has been active in the Wasson field in the Permian Basin of
West Texas since 1939. The Company's interests in this field consist principally
of royalty and working interests in four units, operated by Altura Energy, Ltd.
and an affiliate of Atlantic Richfield Company, which are presently under CO2
flood. Most of the expenditures for plant, facilities, wells and equipment
necessary for such tertiary recovery projects have been made. In addition, while
expenditures relating to the purchase of CO2 for the Wasson field are expected
to continue, CO2 can be recycled and, therefore, such expenditures should
decline in the future.
In 1997 the Wasson field accounted for approximately 16% of the Company's
crude oil and liquids production. Since initiation of CO2 flooding operations in
1984, the field's previous production decline has been reversed. Reservoir
engineering studies prepared on behalf of the Company indicate additions to
proved reserves in this field can be made through continuing EOR and development
projects.
The Company is the operator and owns a 72% average net revenue interest in
the Reeves field in West Texas. While this field has been under waterflood since
1965, from 1991 through 1996 the Company drilled infill wells to reduce well
spacing from 40 acres to 20 acres and performed workover operations which
improved oil recovery from the waterflood program. In 1997 the program was
continued with eight new wells and 16 workovers. Based on the success of these
programs to date, the Company plans to continue the program in 1998 at
approximately the same level as 1997. In 1997, the Reeves field accounted for
approximately 6% of the Company's crude oil and liquids production.
The Company continued its development activities in Lea and Eddy Counties
in Southeastern New Mexico with a total of 30 gross (11.2 net) development wells
completed in 1997. Production from this area in 1997 averaged 10.5 MBOE per day
and at year end averaged 12.2 MBOE per day. The Cisco Canyon project, known as
the Indian Basin field, in Eddy County continues to be the Company's most
significant project in the area. Net production averaged 5.3 MBOE per day for
1997 and represented 9% of the Company's total production. In addition, the
Company's Gaucho Unit in Lea County produced 5.5 MMcf of natural gas per day net
to the Company at year end 1997 from two wells. A third well was successfully
completed in early January 1998, increasing net natural gas production to 10
MMcf per day. Development drilling will continue on both projects in 1998.
The acquisition of interests in two secondary recovery properties in West
Texas for $40 million added production of approximately 1.5 MBOE per day.
GULF DIVISION
The Company's production in the Gulf Division averaged 96.1 MMcf of natural
gas per day and 3.4 MBbls of crude oil and liquids per day in 1997. The decrease
in production from 1996 levels (3.2% on a BOE basis) was due principally to the
disposition of properties which were producing approximately 13.0 MMcf of
natural gas per day at the time of sale. The Company replaced a significant
portion of the production lost due to the sale of these properties with new
production from wells brought on line in 1997. Gulf Division properties
accounted for 55% of the Company's 1997 natural gas production and 42% of the
Company's proved natural gas reserves at year-end 1997.
3
The Company's producing fields in the Gulf of Mexico are in shallow water
areas (less than 400 feet of water) where the Company has considerable
experience in drilling and field operations. The Gulf Division participates in
48 producing fields on 89 blocks, 14 of which are Company operated.
In 1997 the Division spent $38 million on development projects and
acquisitions and expects a comparable level of spending in 1998. In the first
half of 1998 the Division expects to hook up five new wells which should add
approximately 20 MMcfe of natural gas per day.
INTERNATIONAL DIVISION
The Company's international production and development operations are
currently focused in Indonesia, Argentina and Gabon. In 1997 the International
Division accounted for 30% of the Company's crude oil and liquids and 12% of the
Company's natural gas production, with production concentrated in Indonesia
(Salawati Basin, Salawati Island and Jabung Blocks) and Argentina (El Tordillo,
Sierra Chata and Tupungato fields). Production from the Mudi field in Indonesia
commenced in late December 1997, and production from the Makmur field on the
Jabung Block in Indonesia and the Tchatamba Marine discovery in Gabon began in
January 1998. The Company expects production from its Tchatamba South discovery
in Gabon to commence production in 1999. International proved reserves at year
end 1997 accounted for 43% of the Company's crude oil and liquids reserves and
14% of the Company's natural gas reserves.
The Company's international production averaged 9.2 MBbls of crude oil and
liquids and 21.7 MMcf of natural gas per day in 1997, an 11.3% increase on a BOE
basis from 1996. Production averaged 11.1 MBbls of crude oil and liquids per day
and 24.3 MMcf of natural gas per day in the fourth quarter of 1997, up over 30%
on a BOE basis from the fourth quarter of 1996. In 1997 the Company spent $90.7
million on international development projects and acquisitions ($54.8 million in
Argentina, $30.7 million in Indonesia and $5.2 million in Gabon) and
participated in 45 gross (10.6 net) development wells, 43 gross (10.0 net) of
which were successful. The Company expects to spend approximately $100.0 million
in 1998 on international development projects and participate in 68 gross (21.9
net) international development wells.
INDONESIA. The Company operates four producing concessions in Indonesia:
Salawati Basin, Salawati Island, Tuban and Jabung. In 1997, the Company's net
Indonesian production averaged 4.3 MBbls of crude oil and liquids per day. The
Company sells its Indonesian crude oil production for U.S. dollars generally to
markets outside of Indonesia.
The Company is the operator of a joint venture (the "Salawati Basin Joint
Venture") formed in 1970 to explore for and develop hydrocarbon reserves in the
Salawati Basin area of Irian Jaya, Indonesia's eastern most province. At
December 31,1997, the Company held a 33 1/3% participation interest in the
Salawati Basin Joint Venture. The Salawati Basin Joint Venture operates under a
production sharing contract (a "PSC") with the Indonesia state oil agency
("Pertamina"), which expires in the year 2020. As of December 31, 1997 the
contract covered an area of approximately 238,000 acres. Production occurs from
seven oil and three gas condensate fields, and averaged approximately 6.7 MBbls
per day (approximately 2.3 MBbls per day net to the company) for the year ended
December 31, 1997.
The Company is also a participant in a joint venture with Pertamina to
explore, develop and produce oil and natural gas on the Salawati Island Block of
Irian Jaya. The effective date of the joint venture was April 23, 1990 with a
term of 30 years. At December 31, 1997 the Company held a 16 2/3% participation
interest in the block which covers approximately 536,000 acres. The Company and
Pertamina (with its 50% interest) jointly operate the contract area under the
terms of a Joint Operating Body (a "JOB"). Sales from the Matoa field began in
January of 1993 and in 1997 the field produced approximately 5.8 MBbls of oil
per day (approximately 1.4 MBbls per day net to the Company) from 25 wells.
Crude oil production commenced in August 1997 from the North Geragai field
on the Jabung Block in central Sumatra. The Company holds a 30% interest and is
the operator of the Jabung Block under the terms of a PSC with Pertamina. The
Jabung Block Contract date was February 27, 1993 with a contract term of 30
years. The block covers approximately 2,034,000 acres. In the first quarter of
1995 the Company completed the North Geragai discovery well. In August 1997 the
field commenced production and at year end was
4
producing 6.3 MBbls of oil per day (1.7 MBbls per day net to the Company) from
12 wells, two of which were horizontal wells. Additional development wells are
planned in 1998.
In August 1995 the Northeast Betara No. 1 exploratory well on the Jabung
Block, located approximately 25 miles northeast of the North Geragai No. 1,
tested 420 barrels of condensate and 22 MMcf of natural gas per day gross,
approximately 55% of which was carbon dioxide, from three intervals. A second
well tested 204 barrels of condensate and 12 MMcf of natural gas per day. The
Company expects to drill two additional appraisal wells in 1998 to further
evaluate the field. The Company is currently evaluating marketing alternatives
with respect to these reserves.
The Makmur No. 2 well was drilled to confirm the December 1996 Makmur
discovery and was completed as an oil well and tested at approximately 2,900
barrels of oil per day. In January 1998 the Makmur field on the Jabung Block
commenced production at 580 gross barrels of oil per day from the Makmur No. 2
well. Early production of the Makmur field was facilitated by the nearby North
Geragai field infrastructure. Two wells have been drilled and eleven development
wells in the Makmur field are planned in 1998 which are expected to
significantly increase the oil production rate.
Oil production commenced at the end of December 1997 from the Mudi field on
the Tuban Block and averaged approximately 950 net barrels per day from the Mudi
#6 and #7 wells during January 1998. The Company's Tuban Block is on the island
of Java, where a total of eleven wells (ten successful) have been drilled
through year end 1997. Three additional development wells are planned in 1998.
The Company has a 12.5% equity interest in the Tuban Block on approximately
1,370,000 acres. The Company and Pertamina (with a 50% interest) jointly operate
the contract area under terms of a JOB. The Company expects net production on
this Block to increase to 4.5 MBbls of oil per day by the end of 1998.
The contracts under which the Company operates the Salawati Basin Joint
Venture and the Tuban Block entitle the participants to recover all expenditures
related to the operation (the "cost recovery amount") by allocating to the
participants a portion of the crude oil production ("cost oil") sufficient, at
the Indonesia government official crude oil price ("ICP"), to offset the cost
recovery amount. ICP is determined by the Indonesian government based on the
average market prices of a basket of world crude oil prices. All unrecovered
costs in any calendar year are carried forward to future years. The balance of
production after deducting the cost recovery amount is allocated to Pertamina
and the participants (66% is allocated to Pertamina with respect to the Salawati
Basin Joint Venture and 71% is allocated to Pertamina with respect to the Tuban
Block). After the first five years of production, 25% of the production
allocated to the participants must be sold into the Indonesian domestic market
for $0.20 per barrel.
Under the terms of the contracts which the Company operates the Salawati
Island Block and the Jabung Block, the joint venture participants are allowed to
recover the cost recovery amount, after an initial 20% (approximately 8% to the
joint venture participants and 12% to Pertamina) has been deducted, by
allocating to the joint venture participants cost oil sufficient to cover the
cost recovery amount. All unrecovered costs in any calendar year are carried
forward to future years. The balance of production after allocation of cost oil
is allocated approximately 62% to Pertamina and 38% to the joint venture
participants. After the first five years of production, 25% of the production
allocated to the joint venture participants must be sold into the Indonesian
domestic market for 10% to 15% of ICP.
ARGENTINA. In the El Tordillo field production averaged 22.6 MBbls of oil
per day (gross) in 1997, an increase of over 12.1 MBbls of oil per day (gross)
since the Company's acquisition in 1991. Field production net to the Company
averaged 4.3 MBbls of oil per day in 1997. The Company expects to drill 26
development wells, continue the workover program and expand the existing
waterflood projects in 1998.
The Company's Sierra Chata field averaged 120 MMcf of natural gas per day
of gross production in 1997. In January 1998 Sierra Chata No. 18 was
successfully completed. The Company expects to drill two additional development
wells in 1998 in order to maintain deliverability.
Production from the Sierra Chata field is sold under a gas contract with
certain "take-or-pay" and "delivery-or-pay" obligations with MetroGas S. A.,
a Buenos Aires gas distribution company and to the Chilean market via the
GasAndes Pipeline. In addition, natural gas produced in excess of contract
5
requirements is sold on the spot market. Sales from the field averaged 20.9 MMcf
per day net to the Company during 1997, based on the Company's 19.9% working
interest in the Block.
In August, 1997 the Company purchased 100% working interest (80% net
revenue interest) in the Tupungato field in the Cuyo Basin from Anderson
Exploration, Ltd. for $38.2 million including working capital. At December 31,
1997 the field was producing 1,430 gross (1,144 net) barrels of oil per day from
36 wells. The Company expects to drill eight development wells, perform
workovers and expand the waterflood project in 1998.
GABON. Oil production commenced in January 1998 from the Tchatamba Marine
field in the offshore Kowe permit at a rate of 3,050 gross barrels per day, and
is currently producing 15,000 gross barrels per day. The Company holds an 18.75%
participatory interest (net of the Gabonese government's 25% interest) in the
exploitation license area covering the Tchatamba Marine field, and a 25%
participatory interest in the remainder of the block's exploration area. Under
the terms of the Kowe Block Production Sharing Contract the Gabonese government
may elect to take a 25% participatory interest in any exploitation areas. At
year end the contract area covered approximately 629,500 acres.
The Company participated in the discovery of the South Tchatamaba field in
1997. The discovery well, Tchatamaba South #1, tested at a rate of 7.7 MBbls
from two zones. Development activities will be undertaken in 1998 to commence
oil production from the field in the first half of 1999.
EXPLORATION ACTIVITIES
The Company drilled 43 gross exploratory wells (15.9 net wells) in 1997, of
which 17 (6.6 net) were successful, and plans to participate in the drilling of
approximately 50 gross exploratory wells in 1998. The Company generally develops
its own prospects, in many cases utilizing 3-D seismic data. A large portion of
the Company's undeveloped acreage position has been acquired through federal
lease sales and through entering into concessions with foreign governments.
Prior to drilling more expensive wells, the Company generally brings in partners
to share the costs while retaining operatorship, and in certain instances, is
able to get its partners to pay part of the Company's share of the cost to drill
a well. The exploration program is most active internationally where up to 25
exploratory wells are planned for 1998.
DOMESTIC
At year end 1997, the Company held an interest in 391,161 gross undeveloped
acres (228,827 net acres) in the Gulf of Mexico, 175,472 gross acres (116,974
net acres) of which are located in the Flex Trend in water depths between 400
and 2,500 feet. New exploratory leasehold totaling 55,094 gross acres (41,521
net acres) and 34,510 gross exploratory acres (12,385 net acres) was acquired by
the Company in 1997 in the Flex trend and shelf areas of the Gulf, respectively.
In 1997 the Company participated in 22 gross exploratory wells (7.6 net wells)
in its Gulf Division. The Company drilled 15 exploratory wells in the shallow
waters of the shelf and successfully completed six wells. Seven gross
exploratory wells were drilled in the deeper water Flex trend with no commercial
success.
In Southeastern New Mexico the Company continued its exploration program
with focus on multiple Permian and Pennsylvanian aged oil and gas reservoirs
ranging in depth from 1,500 to 16,000 feet. This focus which delivered the
Gaucho discovery in 1996, has yielded a multi-zone discovery at the Hackberry
Prospect in 1997. At the Hackberry Prospect, where the Company holds 4,320 gross
acres (1,676 net acres) the first well was completed and tested at 3.6 gross
MMcf per day from the lower Morrow formation. Testing in the Atoka section
yielded an additional 1.3 MMcf per day gross. Other pays indicated on logs
include the middle Morrow and Delaware sands. The Company drilled 15 gross
exploratory wells (6.1 net wells) in 1997, of which 10 (4.7 net) were
successful. The Company plans to continue exploration activity at the same level
in 1998.
INTERNATIONAL
The Company's exploration activities outside the United States have been
concentrated in Southeast Asia and West Africa. At year end, the Company held
interests in 25 contracts in eight countries. Total acreage associated with
these contract areas amounts to approximately 16,257,100 gross acres (7,893,700
6
net acres) of which approximately 16,140,900 gross acres (7,864,400 net acres)
are undeveloped. In 1997 the Company incurred $10.4 million of capital
expenditures on its international exploration program and expects to increase
its spending in 1998.
INDONESIA. After drilling three successful discovery wells on the Jabung
Block in previous years, in 1997 the Company participated in the drilling of the
Senyerang #1 well, which failed to encounter commercial oil or gas and was
plugged and abandoned. The Company plans to drill seven exploratory wells in
Indonesia in 1998, three on the Jabung Block.
CHINA. In January, 1997 the Company signed a contract covering a portion
of the offshore Pearl River Mouth Basin designated as Block 15/34 with the China
National Offshore Oil Company (CNOOC). The block, which lies approximately 50
miles south of Hong Kong, covers an area of approximately 800,000 acres and
includes several prospect areas. The Company has completed its obligatory 2-D
seismic acquisition and reprocessing programs and expects to fulfill its
contractual obligations in 1998 by drilling at least one well and acquiring 3-D
seismic data. The Company holds a 50% share of the working interest in the block
and is the operator.
In December, 1996 the Company signed a Production Sharing Contract with
CNOOC on Block 27/11 which adjoins Block 15/34. The block consists of
approximately 765,000 acres and is operated by Kerr-McGee Corporation who has
fulfilled the obligatory seismic acquisition and reprocessing programs for the
block. The required initial exploratory well will be drilled in 1998, and the
Company holds a 20% working interest in the block.
In June, 1997 the Company entered into an agreement by which it will earn a
25% interest in Block 15/35 which adjoins Block 15/34 and covers approximately
233,500 acres. The Company will earn its interest by participating in the
drilling of the initial exploratory well on the block and by paying a
disproportionate share of the costs. This well is expected to be drilled in the
first half of 1998.
In January, 1997 the Company signed a PSC with CNOOC covering Block 23/28,
an area of approximately 550,000 acres just north of Hainan Island within the
Beibu Gulf Basin. Several prospect areas have been identified from the analysis
of previously existing and newly acquired seismic data. The Company expects to
drill at least one well in 1998 to test these prospect areas. The Company
currently holds an 80% interest in the block and is the operator.
GABON. In 1995 the Company participated in the drilling of the Tchatamba
Marine #1 Upper Madiela discovery on the Kowe permit in offshore Gabon. The
Company participated in the drilling of two additional wildcats on the Kowe
permit in 1997. One of those wells, the Tchatamba South #1 was completed as a
discovery in two zones. The Upper Madiela Formation yielded oil at rates of
4,700 gross barrels per day of 44 degree API gravity oil from perforations
between 6,080 and 6,207 feet. An interval in the Cap Lopez Formation also tested
oil at rates of 3,000 gross barrels of 42 degree API gravity oil from a
perforated interval of 5,193 to 5,212 feet. Further delineation activity
including the drilling of at least one additional well is scheduled for 1998.
The Missoumba #1 wildcat well was drilled on the Kowe permit, but failed to find
commercial hydrocarbons and was abandoned. At least three additional exploratory
wells are expected to be drilled in 1998. The Company holds a 25% working
interest in the permit area of approximately 614,000 acres. In 1997 the
Company's exploratory rights in this block were extended for two years until
1999 by the government of Gabon.
COTE D'IVOIRE. In October, 1996 the Company signed a contract to explore
Block CI-24, an area of approximately 196,000 acres in offshore Cote d'Ivoire
just to the southeast of Abidjan. In 1997 the Company met its initial seismic
processing and interpretation obligations and has exercised its option to enter
into the second phase of the contract which requires one well to be drilled. The
Company expects to drill the well in 1998. The Company currently holds a 90%
working interest in this block and is the operator.
In April, 1997 the Company signed a contract covering Block CI-202 which
also covers portions of offshore Cote d'Ivoire and adjoins Block CI-24 to the
east. This block covers an area of approximately
7
163,000 acres and will be evaluated in 1998 with an obligatory 3-D seismic
program. The Company currently holds 90% of the working interest in this block
and is the operator.
GHANA. In June, 1997 the Company signed a contract for the Keta Block, an
area of approximately 2,594,000 acres covering both onshore and offshore
portions of the delta of the Volta River. A significant portion of this block
lies in the deeper waters of the Volta River Delta. The Company is obligated to
reprocess existing seismic data, to acquire new data and to drill at least one
exploratory well during the three-year primary term of the agreement. The
Company holds 100% of the working interest in the block and is the operator.
8
DRILLING ACTIVITIES
The table below sets forth, for the periods indicated, the number of wells
drilled in which the Company had an economic interest. As of December 31, 1997
wells in the process of drilling or completing included 9 gross (2.9 net)
domestic exploratory wells, 16 gross (9.2 net) domestic development wells, 2
gross (0.6 net) foreign exploratory wells and 8 gross (2.5 net) foreign
development wells.
YEAR ENDED DECEMBER 31,
-----------------------------------------------------------
1997 1996 1995
----------------- ----------------- -----------------
GROSS NET GROSS NET GROSS NET
----- --------- ----- --------- ----- ---------
DEVELOPMENT WELLS
Domestic:
Completed as natural gas
wells................... 32.0 7.5 12.0 3.8 13.0 6.3
Completed as oil wells..... 22.0 9.8 28.0 14.7 47.0 25.3
Dry holes.................. 6.0 2.2 8.0 3.0 4.0 1.5
Foreign:
Completed as natural gas
wells................... 2.0 0.4 5.0 1.1 3.0 0.9
Completed as oil wells..... 41.0 9.6 21.0 4.6 17.0 3.2
Dry holes.................. 2.0 0.6 1.0 0.2 5.0 1.1
----- --------- ----- --------- ----- ---------
105.0 30.1 75.0 27.4 89.0 38.3
----- --------- ----- --------- ----- ---------
EXPLORATORY WELLS
Domestic:
Completed as natural gas
wells................... 9.0 2.9 10.0 5.1 13.0 6.3
Completed as oil wells..... 7.0 3.4 6.0 2.9 9.0 3.3
Dry holes.................. 21.0 7.5 8.0 3.0 5.0 2.1
Foreign:
Completed as natural gas
wells................... -- -- 1.0 0.2 2.0 0.8
Completed as oil wells..... 1.0 0.3 2.0 0.7 3.0 0.9
Dry holes.................. 5.0 1.8 6.0 1.9 3.0 0.8
----- --------- ----- --------- ----- ---------
43.0 15.9 33.0 13.8 35.0 14.2
----- --------- ----- --------- ----- ---------
148.0 46.0 108.0 41.2 124.0 52.5
===== ========= ===== ========= ===== =========
PRODUCING WELLS
The following table sets forth the Company's ownership in producing wells
at December 31, 1997.
U.S.(A) ARGENTINA INDONESIA(B) TOTAL
----------------- ----------------- ----------------- -----------------
GROSS NET GROSS NET GROSS NET GROSS NET
----- --------- ----- --- ----- --- ----- ---------
Oil.................................. 8,477 966 436 122 390 123 9,303 1,211
Natural gas.......................... 575 160 17 3 9 3 601 166
----- --------- ----- --- ----- --- ----- ---------
9,052 1,126 453 125 399 126 9,904 1,377
===== ========= ===== === ===== === ===== =========
- ------------
(a) Includes 67 gross wells with multiple completions.
(b) Includes three gross wells with multiple completions.
9
DOMESTIC ACREAGE
The following table summarizes developed and undeveloped fee and leasehold
acreage in the United States at December 31, 1997. Excluded from such
information is acreage in which ownership interest is limited to royalty,
overriding royalty and other similar interests.
UNDEVELOPED DEVELOPED
-------------------- --------------------
STATE GROSS NET GROSS NET
- --------------------------------- --------- --------- --------- ---------
(IN ACRES)
Alabama - Offshore............... 23,040 7,440 5,760 5,760
Alabama - Onshore................ -- -- 824 112
Arkansas......................... 329 60 818 182
Colorado......................... 1,192 1,048 5,931 5,249
Kansas........................... 93 63 3,833 874
Louisiana - Offshore............. 239,589 120,465 198,283 74,367
Louisiana - Onshore.............. 4,724 1,386 6,791 1,568
Michigan......................... 8,293 4,396 -- --
Mississippi...................... 300 84 2,991 523
Montana.......................... 3,450 428 670 43
New Mexico....................... 165,130 102,956 56,620 29,544
New York......................... -- -- 189 47
North Dakota..................... 2,963 986 4,117 991
Oklahoma......................... 6,631 5,417 21,569 8,091
Pennsylvania..................... 20 20 25 3
Texas - Offshore................. 128,532 100,922 48,540 17,955
Texas - Onshore.................. 149,934 105,270 186,360 131,857
Utah............................. 1,363 531 2,685 1,394
Wyoming.......................... 18,023 9,260 23,202 10,693
--------- --------- --------- ---------
753,606 460,732 569,208 289,253
========= ========= ========= =========
FOREIGN ACREAGE
The following table summarizes foreign acreage at December 31, 1997.
UNDEVELOPED DEVELOPED
-------------------------- --------------------
COUNTRY GROSS NET GROSS NET
- ---------------------------- ------------ ------------ --------- ---------
(IN ACRES)
Argentina................... 1,426,590 447,628 99,887 25,807
China....................... 2,343,453 1,287,363 -- --
Colombia.................... 423,420 317,565 -- --
Cote d'Ivoire............... 359,040 323,136 -- --
Ecuador..................... 494,000 172,900 -- --
Gabon....................... 1,007,163 346,207 -- --
Ghana....................... 2,593,920 2,593,920 -- --
Indonesia................... 7,493,360 2,375,659 16,260 3,513
------------ ------------ --------- ---------
16,140,946 7,864,378 116,147 29,320
============ ============ ========= =========
SANTA FE ENERGY TRUST
The Santa Fe Energy Trust (the "Trust") was formed in 1992 to hold
6,300,000 Depository Units ("Depository Units"), each consisting of beneficial
ownership of one unit of undivided interest in the Trust and a $20 face amount
beneficial ownership interest in a $1,000 face amount zero coupon United States
10
Treasury obligation maturing on or about February 15, 2008. The Trust will be
liquidated on February 15, 2008. The assets of the Trust consist of certain oil
and gas properties conveyed by the Company.
The properties conveyed to the Trust consisted of two term royalty
interests in two production units in the Wasson field in West Texas and a net
profits royalty interest in certain royalty and working interests in a
diversified portfolio of properties located in twelve states. At December 31,
1997, 3.9 MMBOE of the Company's estimated proved reserves were subject to such
net profits interest. The reserve estimates included herein reflect the
conveyance of the Wasson term royalties to the Trust.
For any calendar quarter ending on or prior to December 31, 2002, the Trust
will receive support payments to the extent that such payments are required to
provide distributions of $0.40 per Depository Unit per quarter or $2.52 million
in the aggregate. Such support payments, if needed, will come from the Company's
remaining royalty interest in one of the production units in the Wasson field
described above, and are non-recourse to the Company. If such additional
payments are made, certain proceeds otherwise payable to the Trust in subsequent
quarters may be reduced to recoup the amount of such payments. The aggregate
amount of the support payments (net of any amounts recouped) is limited to $20.0
million on a revolving basis. Through the end of 1995, the Trust had received
support payments totalling $2,074,000. During 1996 and the first six months of
1997 the Company recouped all of such payments. Dependent on various factors,
such as sales volumes and prices and the level of operating costs and capital
expenditures incurred, proceeds payable to the Trust with respect to operations
in subsequent quarters may not be sufficient to make distributions of $0.40 per
quarter. In such instances the Company would be required to make support
payments.
CURRENT MARKETS FOR OIL AND GAS
Substantially all of the Company's oil and gas production is sold at market
responsive prices. The revenues generated by the Company's operations are highly
dependent upon the prices of, and demand for, oil and gas. The price received by
the Company for its crude oil and natural gas depends upon numerous factors, the
majority of which are beyond the Company's control, including economic
conditions in the United States and elsewhere, the world political situation as
it affects OPEC, the Middle East and other producing countries, the actions of
OPEC and governmental regulation. The fluctuation in world oil prices continues
to reflect market uncertainty regarding the balance of world demand for and
supply of oil and gas. Crude oil prices fell in the fourth quarter of 1997 and
early 1998 in part due to uncertainties about the strength of some Asian
economies. The fluctuation of natural gas prices reflects the seasonal swings of
storage inventory, weather conditions, and increasing utilization of natural gas
for electric generation as it affects overall demand. Decreases in the prices of
oil and gas have had, and could have in the future, an adverse effect on the
Company's development and exploration programs, proved reserves, revenues,
profitability and cash flow. See Item 7. "Management's Discussion and Analysis
of Financial Condition and Results of Operations -- General."
In Argentina, the Company markets its crude oil for U.S. dollars under
market responsive terms. Production from the El Tordillo field is generally
exported from Argentina and sold into the international market. Production from
the Tupungato field is sold under a long-term contract to a local refinery under
market responsive terms. Gas from the Sierra Chata field is sold under long-term
contracts in Argentina and Chile for prices ranging between $1.15 and $1.34 per
MMBtu. Gas production in excess of the contract requirements is sold on the
local spot market.
The Company sells its Indonesian crude oil production for U.S. dollars
generally to markets outside of Indonesia. The Company currently sells its crude
oil production from the Jabung Block to the Indonesian state oil agency for U.S.
dollars. The Company is currently in the process of applying for a license to
export crude oil from the Jabung Block.
The Company sells its Gabonese crude oil production for U.S. dollars into
the international markets.
The Company periodically hedges a portion of its oil and natural gas
production to manage its exposure to volatility in prices of oil and natural
gas. See Item 7. "Management's Discussion and Analysis
11
of Financial Condition and Results of Operations -- General" for a discussion
of the Company's hedging activities.
OTHER BUSINESS MATTERS
COMPETITION
The Company faces competition in all aspects of its business, including,
but not limited to, acquiring reserves, leases, licenses and concessions;
obtaining goods, services and labor needed to conduct its operations and manage
the Company; and marketing its oil and gas. The Company's competitors include
multinational energy companies, government-owned oil and gas companies, other
independent producers and individual producers and operators. Many competitors
have greater financial and other resources than the Company. The Company
believes that the well-defined nature of the reservoirs in its long-lived oil
fields, its expertise in EOR methods in these fields, its active development and
exploration program, its financial flexibility and its experienced management
may give it a competitive advantage over some other producers.
REGULATION OF CRUDE OIL AND NATURAL GAS
The petroleum industry is subject to various types of regulation throughout
the world, including regulation in the United States by state and federal
agencies. Domestic legislation affecting the oil and gas industry is under
constant review for amendment or expansion, frequently increasing the regulatory
burden. Also, numerous departments and agencies, both state and federal, are
authorized by statute to issue and have issued rules and regulations binding on
the oil and gas industry and its individual members, compliance with which is
often difficult and costly and which may carry substantial penalties for
non-compliance. Although the regulatory burden on the oil and gas industry
increases the cost of doing business and, consequently, affects profitability,
generally these burdens do not appear to affect the Company any differently or
to any greater or lesser extent than other companies in the industry with
similar types and quantities of production. While the Company is a party to
several regulatory proceedings before governmental agencies arising in the
ordinary course of business, the Company does not believe that the outcome of
such proceedings will have a material adverse affect on its operations or
financial condition. Set forth below is a general description of certain state
and federal regulations which have an effect on the Company's operations.
STATE REGULATION. State statutes and regulations require permits for
drilling operations, drilling bonds and reports concerning operations. Most
states in which the Company operates also have statutes and regulations
governing the conservation of oil and gas and the prevention of waste, including
the unitization or pooling of oil and gas properties and rates of production
from oil and gas wells. Rates of production may be regulated through the
establishment of maximum daily production allowables on a market demand or
conservation basis or both.
FEDERAL REGULATION. A portion of the Company's oil and gas leases are
granted by the federal government and administered by the Bureau of Land
Management ("BLM") and the Minerals Management Service ("MMS"), both of
which are federal agencies. Such leases are issued through competitive bidding,
contain relatively standardized terms and require compliance with detailed BLM
and MMS regulations and orders (which are subject to change by the BLM and the
MMS). For offshore operations, lessees must obtain MMS approval for exploration
plans and development and production plans prior to the commencement of such
operations. In addition to permits required from other agencies (such as the
Coast Guard, Army Corps of Engineers and Environmental Protection Agency),
lessees must obtain a permit from the BLM or the MMS prior to the commencement
of drilling. The interstate transportation of natural gas is regulated by the
Federal Energy Regulatory Commission ("FERC") under the Natural Gas Act of
1938 and, to a lesser extent, the Natural Gas Policy Act of 1978 (collectively,
the "Acts"). Since 1991, FERC's regulatory efforts have centered largely
around its generic rulemaking proceedings, Order No. 636. Through Order No. 636
and successor orders, FERC has undertaken to restructure the interstate pipeline
industry with the goal of providing enhanced access to, and competition among,
alternative gas suppliers. By requiring interstate pipelines to "unbundle"
their sales services and to provide their customers with direct
12
access to any upstream pipeline capacity held by pipelines, Order No. 636 has
enabled pipeline customers to choose the levels of transportation and storage
service they require, as well as to purchase gas directly from third-party
merchants other than the pipelines. In general, Order No. 636 has facilitated
the transportation of gas and the direct access to end-user markets.
With the completion of the Order No. 636 implementation process on the FERC
level, FERC's natural gas regulatory efforts have turned towards a number of
other important policies, all of which could significantly affect the marketing
of gas. Some of the more notable of these regulatory initiatives include (i) the
unbundling of the wholesale electric industry through generic rulemaking
proceedings in Order Nos. 888 and 889 and their successor orders, which has
already been recognized as encouraging electric utilities to seek out more
competitive sources of (or alternatives to) supplies for their gas fired
generation units, (ii) FERC's ongoing efforts, aided by the participation of
various industry segments through the rulemaking process in Order No. 587 and
its successor orders, to implement uniform standards for pipeline electronic
bulletin boards, electronic data exchange, and basic business and operational
practices of the pipelines, (iii) the issuance of a merger policy statement, as
well as the consideration and approval of a surge in merger applications and
approvals (especially a number of so called "convergence" mergers between
electric utilities and gas companies), (iv) increased acceptance of market and
other non-cost-based rates, such as negotiated rates, for interstate pipeline
transmission and storage capacity, (v) an inquiry into the appropriate nature
and extent of continuing FERC regulation of offshore pipelines, (vi) the
revisitation of the treatment of pipeline companies' capital structures and how
the related rates-of-return should be calculated, and (vii) the examination,
through an informal "roundtable" process, of certain general topics affecting
the current energy industry (such as the financial outlook of the gas pipeline
industry and the evolution of information technology issues). The on-going and
evolving nature of these regulatory initiatives make it impossible at this time
to predict their ultimate impact upon marketing natural gas.
Numerous states have implemented regulatory initiatives requiring local
distribution companies ("LDCs") to develop (to various degrees) unbundled
transportation and related service options and rates, while many other states
are at different stages in the unbundling process. Typically, these programs are
designed to allow the LDCs' commercial, industrial, and, in more and more cases,
residential, customers to have access to transportation service on the LDC,
coupled with an ability to select third-party city-gate gas suppliers.
Similarly, several states are also addressing the unbundling of the retail
electric markets, ranging from the consideration of initial unbundling proposals
to permitting, in varying degrees, the implementation of programs allowing
direct retail access. These developments have already led a number of industry
participants to redirect significant marketing resources to these emerging
energy markets.
ENVIRONMENTAL REGULATION
Various federal, state and local laws and regulations covering the
discharge of materials into the environment, or otherwise relating to the
protection of the environment, may affect the Company's operations and costs. In
particular, the Company's oil and gas exploration, development, production and
EOR operations, its activities in connection with storage and transportation of
liquid hydrocarbons and its use of facilities for treating, processing,
recovering or otherwise handling hydrocarbons and wastes therefrom are subject
to stringent environmental regulation by governmental authorities. Such
regulation has increased the cost of planning, designing, drilling, installing,
operating and abandoning the Company's oil and gas wells and other facilities.
The Company has expended significant resources, both financial and managerial,
to comply with environmental regulations and permitting requirements and
anticipates that it will continue to do so in the future in order to comply with
stricter industry and regulatory safety standards such as those described below.
Although the Company believes that 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 and there can be no
assurance that significant costs and liabilities will not be incurred in the
future. Moreover, it is possible that other developments, such as increasingly
strict environmental laws, regulations and enforcement policies thereunder, and
claims for damages to property, employees, other persons and the environment
resulting from the Company's operations, could result in substantial costs and
liabilities in the future. Although the resulting costs cannot be accurately
estimated at
13
this time, these requirements and risks typically apply to companies with types,
quantities and locations of production similar to those of the Company and to
the oil and gas industry in general.
OFFSHORE PRODUCTION. Offshore oil and gas operations are subject to
regulations of the United States Department of the Interior, the Department of
Transportation, the United States Environmental Protection Agency ("EPA") and
certain state agencies. In particular, the Federal Water Pollution Control Act
of 1972, as amended ("FWPCA"), imposes strict controls on the discharge of oil
and its derivatives into navigable waters. The FWPCA provides for civil and
criminal penalties for any discharges of petroleum in reportable quantities and,
along with the Oil Pollution Act of 1990 and similar state laws, imposes
substantial liability for the costs of oil removal, remediation and damages.
SUPERFUND. The Comprehensive Environmental Response, Compensation and
Liability Act ("CERCLA"), also known as the "Superfund" law, imposes
liability, without regard to fault or the legality of the original conduct, on
certain classes of persons that contributed to the release of a "hazardous
substance" into the environment. These persons include the owner or operator of
a site and companies that disposed or arranged for the disposal of the hazardous
substance found at a site. CERCLA also authorizes the EPA and, in some cases,
third parties to take actions in response to threats to the public health or the
environment and to seek to recover from the responsible classes of persons the
costs they incur. In the course of its operations, the Company has generated and
will generate wastes that may fall within CERCLA's definition of "hazardous
substances". The Company may be responsible under CERCLA for all or part of the
costs to clean up sites at which such wastes have been disposed. Certain
properties owned or used by the Company or its predecessors have been
investigated under state and Federal Superfund statutes, and the Company has
been and could be named a potentially responsible party ("PRP") for the
cleanup of some of these sites.
Adobe Resources Corporation, which was merged into the Company in 1992, was
named as a PRP with respect to the Gulf Coast Services Superfund site located in
Abbeville, Louisiana. The Company has entered into a sharing agreement with
other PRPs to participate in the final remediation of this site. The remediation
phase is expected to be completed in 1998, after which will begin the monitoring
phase. The Company estimates its share of the remediation and monitoring phases
to be $150,000, which has been provided for in the Company's financial
statements.
Pursuant to the Contribution Agreement, Monterey agreed to indemnify and
hold harmless the Company from and against any costs incurred in the future
relating to environmental liabilities in respect to any property or interest
located in California and formerly owned or operated by the former Western
Division or its predecessors.
AIR EMISSIONS. The operations of the Company are subject to local, state
and federal regulations for the control of emissions from sources of air
pollution. Legal and regulatory requirements in this area are increasing, and
there can be no assurance that significant costs and liabilities will not be
incurred in the future as a result of new regulatory developments. In
particular, the 1990 Clean Air Act Amendments impose additional requirements
that may affect the Company's operations, including permitting of existing
sources and control of hazardous air pollutants. The Company has been and may in
the future be subject to administrative enforcement actions for failure to
comply strictly with air regulations or permits. These administrative actions
are generally resolved by payment of a monetary penalty and correction of any
identified deficiencies. Alternatively, regulatory agencies may require the
Company to forego construction or operation of certain air emission sources.
OTHER. The Company is subject to the requirements of the federal
Occupational Safety and Health Act ("OSHA") and comparable state statutes. The
OSHA hazard communication standard, the EPA community right-to-know regulations
under Title III of the federal Superfund Amendment and Reauthorization Act and
similar state statutes require the Company to organize information about
hazardous materials used or produced in its operations. Certain of this
information must be provided to employees, state and local governmental
authorities and local citizens.
Although generally less stringent, the Company's foreign operations are
subject to similar foreign laws respecting environmental and worker safety
matters.
14
INSURANCE COVERAGE MAINTAINED WITH RESPECT TO OPERATIONS
The Company maintains insurance policies covering its operations in amounts
and areas of coverage normal for a company of its size in the oil and gas
exploration and production industry. These include, but are not limited to,
workers' compensation, employers' liability, automotive liability and general
liability. In addition, an umbrella liability and operator's extra expense
policies are maintained. All such insurance is subject to normal deductible
levels. The Company does not insure against all risks associated with its
business either because insurance is not available or because it has elected not
to insure due to prohibitive premium costs.
EMPLOYEES
At December 31, 1997, the Company had 1,209 total employees, including 823
foreign nationals working in Indonesia and Argentina. The Company believes that
its relations with its employees are satisfactory.
ITEM 3. LEGAL PROCEEDINGS
The Company, its subsidiaries and other related companies are named
defendants in several lawsuits and named parties in certain governmental
proceedings arising in the ordinary course of business. While the outcome of
lawsuits or other proceedings against the Company cannot be predicted with
certainty, the Company does not expect these matters to have a material adverse
effect on its financial position, results of operations, or liquidity.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of the Company's shareholders in the
fourth quarter of 1997.
15
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The Company's common stock is listed on the New York Stock Exchange and
trades under the symbol SFR. The following table sets forth information as to
the last sales price per share of the Company's common stock as quoted on the
Consolidated Tape System for each calendar quarter in 1996 and 1997.
LOW HIGH
---- -----
1996
1st Quarter..................... 8 3/8 10 1/2
2nd Quarter..................... 10 1/4 12 3/8
3rd Quarter..................... 11 1/4 14 1/4
4th Quarter..................... 13 15 1/8
1997
1st Quarter..................... 12 1/2 15 7/8
2nd Quarter..................... 12 5/8 15 3/4
3rd Quarter(a).................. 8 1/16 15 1/2
4th Quarter..................... 9 7/8 14 1/16
- ------------
(a) On July 25, 1997 the Company distributed pro rata to its common shareholders
all of the shares of Monterey common stock that it owned by means of a
tax-free distribution. The market price of the Company's common stock
declined to reflect the distribution of 0.44 common shares of Monterey for
each common share of Santa Fe. Between the distribution date and November 4,
1997, the date that Monterey's common shares were exchanged for shares of
Texaco, Inc. pursuant to the merger agreement between the two companies, the
market price of Monterey's common shares ranged from a low of $13.875 to a
high of $21.1875 in the third quarter of 1997 and ranged from a low of
$19.9375 to a high of $21.5625 in the fourth quarter of 1997.
Except for the distribution of shares of Monterey Common Stock described
above, the Company has not paid dividends on its common stock since the third
quarter of 1993. The determination of the amount of future cash dividends, if
any, to be declared and paid is in the sole discretion of the Company's Board of
Directors and will depend on the Company's financial condition, earnings and
funds from operations, the level of its capital and exploration expenditures,
dividend restrictions in its financing agreements, its future business prospects
and other matters as the Company's Board of Directors deems relevant. For a
discussion of certain restrictions on the Company's ability to pay dividends,
see Item 7. "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Financing Activities."
At December 31, 1997 the Company had approximately 36,010 shareholders of
record.
ITEM 6. SELECTED FINANCIAL DATA
See Item 7. "Management's Discussion and Analysis of Financial Condition
and Results of Operations -- Consolidated Results, Including Monterey."
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
As described in Note 2 of the Notes to the Consolidated Financial
Statements, the Company completed the Spin Off of Monterey on July 25, 1997. The
consolidated financial statements for the year ended December 31, 1997 include
seven months of Monterey's results. As a result of the Spin Off, management
believes the consolidated results are not representative of the Company's
on-going operations. Consequently, in order to provide public investors with
more relevant information, the following discussions focus on the results of the
Company, excluding Monterey. Except where indicated all historical information
presented in Part II reflects the results of the Company excluding Monterey.
The Spin Off of Monterey changed the nature of the Company's business in
many respects. The Company's operations are smaller, more balanced between the
production of light oil and natural gas, more focused internationally and more
exploration oriented. Financially, the Company has lower debt and on a
16
per unit of production basis, lower production costs, higher exploration
expenses and higher depletion, depreciation and amortization costs. The
Company's domestic core areas of operations are in the Permian Basin of West
Texas and Southeastern New Mexico and offshore Gulf of Mexico. Its international
core areas are Southeast Asia, South America and West Africa. The Company
conducts development activities in each of its core areas and is growing more
rapidly in the international area where it has recently brought discoveries in
Indonesia and Gabon on production. The Company's exploration activities are
conducted primarily in the Gulf of Mexico and in each of the international core
areas, particularly Southeast Asia and West Africa, and to a lesser degree in
Southeast New Mexico.
Basic and diluted earnings per share are the same for all periods
presented.
The Company reported earnings to common shares for the fourth quarter of
1997 of $3.6 million, or $0.04 per share, compared to a loss to common shares of
$51.9 million, or $0.57 per share, in the fourth quarter of 1996, including
non-recurring items. Adjusted for non-recurring items, earnings attributable to
common shares were $0.04 in the fourth quarter of 1997 compared to $0.07 per
share in the same period of 1996. The 1996 non-recurring items were related to
property impairments, the preferred stock repurchase premium and expenses
related to the Monterey IPO. Crude oil and liquids sales of 32.4 MBbls per day
represented a 4.7 MBbls per day increase compared with the same period in 1996.
Similarly, the Company's natural gas sales increased in the fourth quarter of
1997 by 7.2 MMcf per day to 173.0 MMcf from 165.8 MMcf per day in the fourth
quarter of 1996. The Company's average hedged sales price for crude oil and
liquids of $17.19 per barrel was $4.28 per barrel lower than the fourth quarter
of 1996. The Company's average realized sales price for natural gas increased to
$2.54 per Mcf compared with the fourth quarter of 1996 realized price of $2.07
per Mcf, net of a $0.42 per Mcf hedging expense. No natural gas was hedged in
the fourth quarter of 1997.
In 1997, including non-recurring items, the Company reported net income to
common shares for the full year of 1997 of $23.2 million, or $0.24 per share,
compared with a loss to common shares of $55.5 million, or $0.61 per share, in
1996. The major non-recurring item in 1997 was a non-cash charge for the
conversion of preferred stock while the 1996 adjustments were related to the
preferred stock repurchase premium, property impairments and expenses related to
the Monterey IPO. Adjusted for non-recurring items, earnings attributable to
common shares were $0.32 in 1997 compared to $0.04 in 1996. Crude oil production
averaged 30.3 MBbls per day in 1997, up over 10% from 1996. The Company's hedged
sales price for crude oil and liquids averaged $18.02 in 1997, compared with
$18.66 in 1996. Average natural gas production of 174.7 MMcf per day exceeded
1996 results by 7%. The Company's sales price for natural gas averaged $2.25 in
1997, up 23% from the $1.83 received in 1996. The 1996 gas price included a
$0.35 per Mcf loss from hedging transactions.
At December 31, 1997 worldwide proved oil and gas reserves totalled 171.1
MMBOE, an increase of 38% from the 124.3 MMBOE at the beginning of the year.
Year-end reserves were comprised of 129.0 MMBbls of crude oil and liquids and
252.6 Bcf of natural gas, of which approximately 64% were domestic and 36% were
foreign. In 1997, the Company replaced 326% of its production, and for the
three-year period ended December 31, 1997 the Company replaced 215% of its
production. Oil now accounts for approximately 75% of total reserves, and 83% of
total reserves are classified as proved developed. International reserves
increased to 36% of total reserves from 23% in 1996.
In 1997, oil production accounted for approximately 51% of total production
and 30% of the Company's oil production was from international operations.
Approximately 88% of the Company's natural gas is produced domestically.
17
UNAUDITED FINANCIAL STATEMENTS AND OPERATING SCHEDULES
EXCLUDING MONTEREY
The following unaudited financial statements were derived from the
consolidated financial statements of the Company included elsewhere herein and
set forth the results of the Company, excluding Monterey Resources, Inc. and its
predecessor operations, the Western Division of the Company. Income taxes were
computed on a separate company basis as if the Company had filed returns
excluding Monterey and its predecessor operations. Similarly, the operating
schedules exclude the results of Monterey and its predecessor operations.
SANTA FE EXCLUDING MONTEREY
STATEMENT OF OPERATIONS
(UNAUDITED)
YEAR ENDED DECEMBER 31,
-------------------------------
1997 1996 1995
--------- --------- ---------
(IN MILLIONS, EXCEPT PER SHARE
DATA)
Revenues:
Sales of crude oil and
liquids....................... $ 196.0 $ 185.5 $ 143.1
Sales of natural gas............ 137.5 104.5 75.2
Other........................... -- 0.4 12.4
--------- --------- ---------
Total revenues........ 333.5 290.4 230.7
--------- --------- ---------
Costs and expenses:
Production and operating........ 87.6 80.6 69.7
Exploration, including dry hole
costs......................... 48.2 32.8 21.0
Depletion, depreciation and
amortization.................. 105.5 110.7 100.8
Impairment of oil and gas
properties.................... -- 57.4 30.2
General and administrative...... 20.5 21.1 19.6
Taxes (other than income)....... 14.7 17.2 11.3
Loss (gain) on disposition of
assets........................ (3.6) (12.2) 0.3
--------- --------- ---------
Total costs and
expenses........... 272.9 307.6 252.9
--------- --------- ---------
Income (loss) from operations........ 60.6 (17.2) (22.2)
Interest income................. 1.5 1.8 10.7
Interest expense................ (12.1) (12.6) (6.7)
Interest capitalized............ 5.7 4.0 5.1
Other income (expense).......... (0.6) (1.0) (1.0)
--------- --------- ---------
Income (loss) before income taxes and
extraordinary item................. 55.1 (25.0) (14.1)
Current income taxes............ 6.0 (6.1) 2.2
Deferred income taxes........... (25.9) 24.3 7.6
--------- --------- ---------
Income (loss) before extraordinary
item............................... 35.2 (6.8) (4.3)
Extraordinary item -- debt
extinguishment costs.......... -- (1.5) --
--------- --------- ---------
Net income (loss).................... 35.2 (8.3) (4.3)
Preferred dividend
requirement................... (3.6) (13.5) (14.8)
Convertible preferred premium... (8.4) (33.7) --
--------- --------- ---------
Earnings (loss) attributable to
common shares........................ $ 23.2 $ (55.5) $ (19.1)
========= ========= =========
Basic and Diluted earnings (loss)
attributable to common
shares per share
Before extraordinary item....... $ 0.24 $ (0.59) $ (0.21)
Extraordinary item -- debt
extinguishment costs.......... -- (0.02) --
--------- --------- ---------
Per common share................ $ 0.24 $ (0.61) $ (0.21)
========= ========= =========
Weighted average number of shares
outstanding.......................... 98.6 90.6 90.2
========= ========= =========
18
SANTA FE EXCLUDING MONTEREY
BALANCE SHEET
(UNAUDITED)
DECEMBER 31,
----------------------
1997 1996
---------- ----------
(IN MILLIONS, EXCEPT
AS NOTED)
ASSETS
Current assets:
Cash and cash equivalents....... $ 5.6 $ 5.3
Accounts receivable............. 70.9 65.8
Inventories..................... 14.5 11.9
Other current assets............ 21.8 27.8
---------- ----------
112.8 110.8
---------- ----------
Properties and equipment, at cost:
Oil and gas (successful efforts
method of accounting).......... 1,682.4 1,523.7
Other........................... 16.8 20.2
---------- ----------
1,699.2 1,543.9
Accumulated depletion,
depreciation, amortization and
impairment..................... (1,049.5) (1,013.1)
---------- ----------
649.7 530.8
---------- ----------
Other assets:
Receivable under gas balancing
arrangements................... 1.3 4.4
Other........................... 25.1 35.8
---------- ----------
26.4 40.2
---------- ----------
$ 788.9 $ 681.8
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable................ $ 106.7 $ 86.0
Income taxes payable............ 6.5 15.6
Interest payable................ 1.4 1.3
Other current liabilities....... 19.4 32.5
---------- ----------
134.0 135.4
---------- ----------
Long-term debt....................... 121.7 103.5
Deferred revenues.................... 3.7 4.1
Other long-term obligations.......... 36.3 28.2
Deferred income taxes................ 38.5 22.0
Commitments and contingencies........ -- --
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, 103.0 million
shares issued and outstanding
(90.7 million in 1996)......... 1.0 0.9
Paid-in capital................. 728.2 601.3
Accumulated deficit............. (273.2) (324.4)
Treasury stock, at cost,
57.3 thousand shares
(18.7 thousand in 1996).. (0.6) (0.3)
Unamortized restricted stock
awards......................... (0.7) --
---------- ----------
454.7 368.9
---------- ----------
$ 788.9 $ 681.8
========== ==========
19
SANTA FE EXCLUDING MONTEREY
STATEMENT OF CASH FLOWS
(UNAUDITED)
YEAR ENDED DECEMBER 31,
-------------------------------------
1997 1996 1995
--------- ------------- ---------
(IN MILLIONS)
Operating activities:
Net income (loss)............... $ 35.2 $ (8.3) $ (4.3)
Adjustments to reconcile net
income to net cash provided by
operating activities:
Depletion, depreciation and
amortization............... 105.5 110.7 100.8
Impairment of oil and gas
properties................. -- 57.4 30.2
Deferred income taxes......... 25.9 (25.2) (7.6)
Loss (gain) on disposition of
assets..................... (3.6) (12.2) 0.3
Exploratory dry hole costs.... 23.7 10.9 4.5
Other......................... 5.1 6.7 2.4
Changes in operating assets and
liabilities................... 1.4 1.8 (27.5)
--------- ------------- ---------
Net cash provided by operating
activities......................... 193.2 141.8 98.8
--------- ------------- ---------
Investing activities:
Capital expenditures, including
exploratory dry hole costs.... (172.7) (142.0) (136.5)
Acquisition of producing
properties, net of related
debt.......................... (84.9) (34.9) (32.5)
Proceeds from sale of investment
in Hadson Corporation......... -- -- 55.2
Collection on production
payment....................... -- 30.0 --
Settlements with subsidiary,
net........................... -- 30.3 21.5
Net proceeds from disposition of
assets........................ 32.5 24.9 7.2
Dividends received from Monterey
Resources, Inc................ 16.8 -- --
Investment in Monterey
Resources, Inc................ -- (0.5) --
--------- ------------- ---------
Net cash used in investing
activities......................... (208.3) (92.2) (85.1)
--------- ------------- ---------
Financing activities:
Issuance of Santa Fe Energy
Resources, Inc. common
stock......................... 2.8 2.4 --
Purchase of 7% Series
convertible preferred stock... -- (94.0) --
Net change in long-term debt.... 18.2 20.0 (10.0)
Cash dividends paid............. (5.1) (14.8) (14.8)
Treasury stock purchased........ (0.5) (0.5) --
--------- ------------- ---------
Net cash provided (used) by financing
activities......................... 15.4 (86.9) (24.8)
--------- ------------- ---------
Net increase (decrease) in cash and
cash equivalents................... 0.3 (37.3) (11.1)
Cash and cash equivalents at
beginning of period................ 5.3 42.6 53.7
--------- ------------- ---------
Cash and cash equivalents at end of
period............................. $ 5.6 $ 5.3 $ 42.6
========= ============= =========
20
SANTA FE EXCLUDING MONTEREY
OPERATING SCHEDULES
(UNAUDITED)
YEAR ENDED DECEMBER 31,
-------------------------------------
1997 1996 1995
--------- ----------- ---------
CRUDE OIL AND LIQUIDS PRODUCED
REVENUES (IN MILLIONS)
Sales
Domestic................... $ 139.4 $ 142.7 $ 99.5
Argentina.................. 30.5 25.8 13.8
Indonesia.................. 27.4 29.5 30.8
--------- ----------- ---------
197.3 198.0 144.1
Hedging....................... 2.2 (10.2) 2.5
Net profits payments.......... (3.5) (2.3) (3.5)
--------- ----------- ---------
$ 196.0 $ 185.5 $ 143.1
========= =========== =========
VOLUMES (MBBLS/DAY)
Domestic...................... 21.1 19.5 16.7
Argentina..................... 4.9 3.7 2.6
Indonesia..................... 4.3 4.3 5.2
--------- ----------- ---------
30.3 27.5 24.5
========= =========== =========
SALES PRICES ($/BBL)
Unhedged
Domestic................... $ 18.07 $ 19.96 $ 16.34
Argentina.................. 16.93 19.06 14.72
Indonesia.................. 17.58 18.92 16.10
Total...................... 17.82 19.68 16.12
Hedged........................ 18.02 18.66 16.40
NATURAL GAS PRODUCED
REVENUES (IN MILLIONS)
Sales
Domestic................... $ 133.1 $ 120.9 $ 71.4
Argentina.................. 10.1 9.7 5.3
Indonesia.................. 0.1 0.1 0.2
--------- ----------- ---------
143.3 130.7 76.9
Hedging....................... -- (21.4) (0.3)
Net profits payments.......... (5.8) (4.8) (1.4)
--------- ----------- ---------
$ 137.5 $ 104.5 $ 75.2
========= =========== =========
VOLUMES (MMCF/DAY)
Domestic...................... 153.0 142.2 132.4
Argentina..................... 21.4 20.8 11.9
Indonesia..................... 0.3 0.4 0.4
--------- ----------- ---------
174.7 163.4 144.7
========= =========== =========
SALES PRICES ($/MCF)
Unhedged
Domestic................... $ 2.38 $ 2.32 $ 1.48
Argentina.................. 1.30 1.27 1.23
Indonesia.................. 1.04 1.04 1.05
Total...................... 2.25 2.18 1.46
Hedged........................ 2.25 1.83 1.45
21
YEAR ENDED DECEMBER 31,
----------------------------------------
1997 1996 1995
--------- ----------- ---------
(UNAUDITED)
COSTS AND EXPENSES PER BOE
Production and operating(a)...... $ 4.05(d) $ 4.03 $ 3.92
Exploration, including dry hole
costs.......................... 2.23(d)(e) 1.64 1.19
Depletion, depreciation and
amortization................... 4.86 5.39(g) 5.61(g)
General and administrative....... 0.93(d)(e)(f) 0.88(h) 1.10
Taxes (other than income)(b)..... 0.68 0.86 0.63
Interest, net(c)................. 0.23 0.34 0.32(i)
--------- ----------- ---------
Total Costs and Expenses.... $ 12.98 $ 13.14 $ 12.77
========= =========== =========
- ------------
(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 benefit of $1.3 million General and administrative ($.06 per BOE),
$0.3 million Production and operating ($.01 per BOE) and $0.4 million
Exploration costs and expenses ($.02 per BOE) related to a pension
curtailment benefit from the Monterey Spin Off in 1997.
(e) Excludes effect of $0.5 million General and administrative ($.02 per BOE)
and $0.1 million Exploration costs and expenses ($.01 per BOE) related to
compensation expenses resulting from the Spin Off in 1997.
(f) Excludes effect of $1.1 million in administrative costs related to the Spin
Off of Monterey ($.05 per BOE) in 1997.
(g) Excludes effect of unproved property writedowns of $0.13 per BOE in 1996 and
$0.06 per BOE in 1995.
(h) Excludes effect of $1.6 million charge related to the abandonment of an
office lease and $2.0 million in costs and expenses related to the Monterey
IPO ($.18 per BOE) in 1996.
(i) Excludes effect of $8.3 million of interest income on federal income tax
refunds, $5.0 million benefit for adjustments to provisions for potential
state income tax obligations and $1.5 million benefit for adjustments to
certain financing costs recorded in prior periods ($0.83 per BOE) in 1995.
22
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. 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. Crude oil prices fell in the fourth quarter of 1997 and early 1998 in
part due to uncertainties about the strength of some Asian economies. In 1997
the actual average crude oil and liquids sales price (unhedged) received by the
Company 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. The Company's average
crude oil and liquids sales price (unhedged) received in January 1998 was $13.80
per barrel. Based on operating results for 1997, the Company 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 $6.1 million change in net
income and a $7.5 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 the Company in 1997
for its natural gas ranged from a high of $2.54 per Mcf in the fourth quarter of
1997 to a low of $1.91 per Mcf in the second quarter of 1997. Based on operating
results for 1997, the Company 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. With regard to the Company's Argentina
operations, the Company sells its natural gas production under long-term
contracts at prices ranging from $1.15 to $1.34 per MMbtu. The foregoing
estimates do not give effect to changes in any other factors, such as the effect
of the Company's oil hedging program, its debt levels and related interest
expense or the level of capital expenditures, that might result from a change in
crude oil and natural gas prices.
YEAR ENDED DECEMBER 31, 1997 COMPARED WITH YEAR ENDED DECEMBER 31, 1996
OIL AND GAS REVENUES. Total revenues from crude oil and natural gas sales
increased by 15% to $333.5 million for the year ended December 31, 1997 compared
with $290.4 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. The Company's crude
oil and liquids production for 1997 increased over 10% to 30.3 MBbls per day
from 27.5 MBbls per day in 1996. The production increase was primarily due to
property acquisitions in the Permian Basin and Argentina, the Company's ongoing
exploration and development program and commencement of production at the N.
Geragai field in Indonesia. Natural gas production increased to 174.7 MMcf per
day in 1997 compared with 163.4 MMcf per day for the same period in 1996. New
wells in the Central Division and in the Gulf of Mexico more than offset normal
production declines and the loss of production from property sales in the Gulf.
Crude oil prices realized in 1997 averaged $18.02 per barrel, including a $0.20
per barrel hedging benefit, compared with 1996 when the average realized oil
price was $18.66 per barrel, net of a $1.02 per barrel hedging expense. Natural
gas prices realized in 1997 averaged $2.25 per Mcf, compared with an average of
$1.83 per Mcf in 1996, net of a $0.35 per Mcf hedging expense. No natural gas
was hedged in 1997.
COSTS AND EXPENSES. Production and operating expense for the year ended
December 31, 1997 increased to $87.6 million from $80.6 million in 1996 due to
increased crude oil and natural gas production, as noted above. Operating costs
per unit of production remained essentially the same at $4.05 per BOE (net of
various adjustments as noted above) versus $4.03 in 1996. Exploration expense in
1997 increased to $48.2 million from $32.8 million in 1996, primarily due to
increased drilling activity and dry hole expense in the Gulf of Mexico.
Depletion, depreciation and amortization expense for 1997 decreased to $105.5
million from $110.7 million for the same period of 1996, primarily due to the
effect of proved property impairments recorded in 1996. Gain from the
disposition of assets was $8.6 million higher in 1996 compared with 1997 due to
a $12.3 million gain on the sale of the Company's Olinda surface property in
1996.
23
Income taxes for 1996 included an $8.3 million deferred tax benefit related
to certain foreign expenditures incurred in prior periods. The extraordinary
expense item of $1.5 million reported in 1996 represents costs and expenses, net
of related income taxes, associated with the retirement of certain of the
Company's debt in association with the Monterey IPO. See Note 2 to the
Consolidated Financial Statements. The preferred dividend requirement decreased
$9.9 million in 1997 due to the purchase and conversion of all of the Company's
outstanding preferred stock, which included the Convertible Preferred Stock, 7%
Series (the "7% Preferred") and the $.732 Series A Convertible Preferred (the
"DECS"). In November 1996 the Company purchased 3.8 million of the outstanding
shares of its 7% Preferred for $24.50 per share. The $33.7 million excess of the
cost of the acquired shares ($94.0 million, including related costs of $1.7
million) over the book value of such shares is reflected in the Statement of
Operations as a convertible preferred premium. In the second quarter of 1997,
the Company converted the remaining 1.2 million outstanding shares of 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 convertible preferred premium in the Statement of Operations) of
$8.4 million in 1997. Also, in the second quarter of 1997, the Company redeemed
all 10.7 million outstanding shares of its DECS for 9.1 million shares of common
stock which had no effect on the Company's earnings to common shares.
YEAR ENDED DECEMBER 31, 1996 COMPARED WITH YEAR ENDED DECEMBER 31, 1995
OIL AND GAS REVENUES. Total revenues for 1996 of $290.4 million exceeded
1995 revenues by $59.7 million or 26% due to increased production and product
prices. The Company's crude oil and liquids production increased 12% to 27.5
MBbls per day from 1995 principally due to acquisitions in the Permian Basin and
the Company's ongoing exploration and development program. The Company's natural
gas production increased 13% to 163.4 MMcf per day in 1996 due to production
from new wells in the Gulf of Mexico and Southeastern New Mexico and a full year
of production from the Sierra Chata field in Argentina. The Company's average
realized oil price rose $2.26 to $18.66 in 1996, and the Company's realized gas
price increased 26% from $1.45 in 1995 to $1.83 in 1996.
COSTS AND EXPENSES. Production and operating expense for 1996 increased
16% to $80.6 million from 1995 principally due to increased production volumes
as discussed above. Exploration expense of $32.8 million was up $11.8 million
from 1995 due to increased exploration activity in the Gulf of Mexico and on
international concessions. Depletion, depreciation and amortization expense
increased $9.9 million from 1995 primarily due to increased production. In 1996
the Company recorded proved property impairments of $57.4 million, compared with
$30.2 million of impairments in 1995. General and administrative expense
increased in 1996 to $21.1 million principally due to $2.0 million of expenses
related to the Monterey IPO. Taxes other than income increased 52% to $17.2
million in 1996 due to increased production, severance and ad valorem taxes. As
discussed above, in 1996 the Company recorded a $12.3 million gain on the sale
of its Olinda surface property.
Interest income for 1995 included $7.4 million related to a $12.0 million
refund with respect to the audit of the Company's federal income tax returns for
1981 through 1985 and $0.8 million related to a $1.3 million refund with respect
to the audit of Adobe Resources Corporation's federal income tax returns for
1984 and 1985. Interest expense for 1995 includes a $5.0 million benefit
reflecting adjustments to provisions made in prior periods for potential state
income tax obligations. Income taxes for 1995 include a $5.0 million benefit
related to the previously discussed federal income tax audit refunds and a $1.3
million benefit related to the adjustments to provisions in prior periods for
potential state income tax obligations.
LIQUIDITY AND CAPITAL RESOURCES
CAPITAL EXPENDITURES. The Company's primary needs for cash are for
exploration, development and acquisitions of oil and gas properties. The Company
spent $265.2 million for capital expenditures in 1997 and expects to spend
approximately $277.0 million in 1998. Because the actual amounts expended in the
future and the results therefrom will be influenced by numerous factors,
including many beyond the Company's control, no assurances can be given as to
the amounts that will be expended. In addition to the expected capital
expenditures, the Board of Directors has authorized the Company to buy back up
to
24
$50 million of its common stock to meet the requirements of outstanding stock
options and to satisfy the stock requirements of employee benefit plans. In 1997
the Company purchased 53,500 common shares for approximately $0.5 million.
CAPITAL RESOURCES. The Company's capital resources consisted of cash flow
from operating activities of $193.2 million and proceeds from property sales of
$32.5 million in 1997, and funds available under its bank credit facilities.
Effective November 13, 1996, the Company entered into a revolving credit
agreement (the "Credit Agreement") which matures November 13, 2001. The
agreement permits the Company 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 the Company's option. At December 31, 1997, the Company had no
borrowings outstanding under the Credit Agreement. The Company had two letters
of credit outstanding under the Credit Agreement at December 31, 1997 for $3.5
million and one letter of credit outside the Credit Agreement for $1.8 million
related to certain foreign operations.
The Credit Agreement and the indenture for the Debentures (see Note 7 to
the Consolidated Financial Statements) include covenants that restrict the
Company's ability to take certain actions, including the ability to incur
additional indebtedness and to pay dividends or repurchase capital stock. Under
the most restrictive of these covenants, at December 31, 1997 the Company could
incur up to $512.5 million of additional indebtedness and pay dividends of or
repurchase up to $50.6 million of its capital stock. As of March 10, 1998 the
Company had borrowings under the Credit Agreement of $50.0 million.
In addition to the Credit Agreement the Company 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 Agreement. At December 31,
1997, the Company had $22.2 million of borrowings outstanding under these
facilities, which have been classified as long-term debt on the balance sheet.
As of March 10, 1998 the Company increased its borrowings under these facilities
to $23.4 million.
The Company has historically funded its operations and capital spending
programs with cash flow from operations and borrowings under bank credit
facilities. The Company believes that cash flow from operations and the
borrowing availability under the Credit Agreement will be sufficient to meet its
anticipated capital requirements for 1998. Cash flow from operating activities
totalled $193.2 million for the year ended December 31, 1997, and net cash used
for capital expenditures and producing property acquisitions in such period
totalled $257.6 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. See Items 1
and 2. "Business and Properties, Other Business Matters -- Environmental
Regulation" and Note 13 to the Consolidated Financial Statements.
INDONESIA. In the last quarter of 1997 and early 1998 many Asian countries
experienced significant devaluations in their currencies, which have resulted in
disruptions and uncertainties in financial markets. During the same period world
commodity prices have fallen, including the price of crude oil, in part due to
uncertainties about the strength of some Asian economies. The Company's Asian
producing operations are located in Indonesia which has suffered substantial
devaluation of its currency.
25
The effect of this currency devaluation has been to reduce certain
operating and administrative costs incurred by the Company in its Indonesian
operations, thus reducing the number of cost recovery barrels it retains in
reimbursement of such expenses, and to reduce the value of certain receivables
and payables which are denominated in the local currency, the rupiah. In
addition, the Company has experienced delays in collecting some receivables, but
has been able to collect the amounts owed in full. The Company has experienced
disruptions in the delivery of some services and goods which has led to delays
in certain operations and associated production.
The Company sells its Indonesian production for U.S. dollars generally
outside of Indonesia. The Company currently sells its production from the North
Geragai and Makmur fields to the Indonesian state oil agency for U.S. dollars.
In January 1998, these fields produced 1.7 MBbls per day net to the Company. The
Company is currently in the process of applying for a license to export crude
oil from these fields.
In 1997 the Company's Indonesian operations generated $2.8 million of
income from operations and $7.3 million in cash flow from operating activities.
The Company expects these amounts to increase in 1998 due to the commencement of
production from the Mudi and Makmur fields and a full year of production from
the North Geragai field. While the financial uncertainties in Asia have not had
a significant effect on the Company's operations in Indonesia to date, the
Company cannot predict with any certainty the future effects of this financial
disruption, if any, on its income from Indonesian operations and future
development activity in Indonesia.
OTHER. The Company has initiated a project to ensure that all of its
computer software systems are year 2000 compliant. This project is expected to
be completed prior to March 31, 1999 and the Company estimates that the cost of
the project will be less than $1.0 million. The Company is also reviewing year
2000 compliance by certain purchasers in order to determine any exposure to the
Company for year 2000 issues. The Company does not anticipate that there will be
any significant exposure areas.
DIVIDENDS 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 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.
CONSOLIDATED RESULTS, INCLUDING MONTEREY
On a consolidated basis the Company reported total revenues of $514.7
million, total costs and expenses of $403.9 million and earnings to common
shares of $42.7 million or $0.43 per share for the year ended December 31, 1997.
These results reflect the consolidation of Monterey Resources for the first
seven months of the year. For the year ended December 31, 1996 the Company
reported total revenues of $583.3 million, total costs and expenses of $493.8
million and a loss to common shares of $10.8 million or $0.12 per share. For the
year ended December 31, 1995 the Company reported total revenues of $449.4
million, total costs and expenses of $395.5 million and earnings to common
shares of $11.8 million or $0.13 per share. Monterey Resources is included in
the Company's consolidated results for the entire 1996 and 1995 periods.
YEAR ENDED DECEMBER 31, 1997 COMPARED WITH YEAR ENDED DECEMBER 31, 1996
OIL AND GAS REVENUES. Total revenues from crude oil and natural gas
produced decreased to $493.8 million in 1997 from $561.2 million in 1996. The
decrease is primarily due to the contribution of Monterey for a full year in
1996 compared with seven months in 1997. Monterey contributed $292.3 million in
crude oil and natural gas revenues in 1996 compared with $180.8 million in 1997.
The loss of revenue due to the Spin Off of Monterey was partially offset by
higher production volumes and increased natural gas prices in 1997.
COSTS AND EXPENSES. Total costs and expenses decreased to $403.9 million
in 1997 from $493.8 million in 1996. The decrease is primarily due to the Spin
Off of Monterey as discussed above. In 1996, the
26
Company recorded $57.4 million of proved property impairments. The gain on
disposition of properties in 1996 includes a $12.3 million gain from the sale of
the Olinda surface property.
Income taxes in 1996 include an $8.3 million deferred tax benefit related
to certain foreign expenditures incurred in prior periods. The extraordinary
expense item of $6.0 million is related to the retirement of certain of the
Company's debt in association with the Monterey IPO. See Note 2 to the
Consolidated Financial Statements. The Company's preferred dividend requirement
decreased in 1997 due to the purchase and conversion of all of the Company's
outstanding preferred stock. The Company recognized reductions in earnings
attributable to common shares of $8.4 million and $33.7 million in 1997 and
1996, respectively, related to the repurchase and conversion of the Company's 7%
Preferred as described above. See Notes 9 and 10 to the Consolidated Financial
Statements.
YEAR ENDED DECEMBER 31, 1996 COMPARED WITH YEAR ENDED DECEMBER 31, 1995
OIL AND GAS REVENUES. Total revenues from crude oil and natural gas sales
increased 33% from $436.2 million in 1995 to $582.3 million in 1996. Revenues
from the sale of crude oil and liquids produced increased $103.0 million,
primarily reflecting increased sales prices ($65.6 million) and increased
volumes ($52.1 million). Such increases were partially offset by a $13.4 million
hedging loss in 1996 compared to a $2.4 million hedging gain in 1995. Revenues
from the sale of natural gas produced increased $28.7 million, primarily
reflecting increased sales prices ($39.5 million) and increased volumes ($13.7
million). Such increases were partially offset by a $21.4 million hedging loss
in 1996 compared to a loss of $0.3 million in 1995.
COSTS AND EXPENSES. Costs and expenses totalled $493.8 million in 1996
compared to $395.5 million in 1995. Production and operating costs increased
$32.6 million, primarily reflecting higher production volumes. The $11.1 million
increase in exploration costs primarily reflects higher geological and
geophysical expenditures ($6.4 million) and higher dry hole costs ($5.7
million). The increase in depletion, depreciation and amortization primarily
reflects higher production volumes. The Company recorded impairments of oil and
gas properties of $57.4 million in 1996 and $30.2 million in 1995. The increase
in general and administrative expense primarily reflects $3.3 million in
expenses related to the Monterey IPO. The increase in taxes other than income
primarily reflects higher production and severance taxes due to higher prices
and volumes and higher ad valorem taxes. The gain on disposition of properties
in 1996 includes a $12.3 million gain on the sale of the Olinda surface
property.
Interest income for 1995 includes $7.4 million related to a $12.0 million
refund with respect to the audit of the Company's federal income tax returns for
1981 through 1985 and $0.8 million related to a $1.3 million refund with respect
to the audit of Adobe's federal income tax returns for 1984 and 1985. Interest
expense for 1995 includes a $5.0 million benefit reflecting adjustments to
provisions made in prior periods for potential state income tax obligations.
Income taxes for 1996 include a $8.3 million deferred tax benefit related to
certain foreign expenditures incurred in prior periods. Income taxes for 1995
include a $5.0 million benefit related to the previously discussed federal tax
audit refunds and a $1.3 million benefit related to adjustments to provisions in
prior periods for potential state income tax obligations. The extraordinary item
reported in 1996 represents costs and expenses associated with the retirement of
certain of the Company's debt in association with the Monterey IPO. See Note 2
to the Consolidated Financial Statements.
27
SELECTED FINANCIAL DATA
YEAR ENDED DECEMBER 31,(A)
----------------------------------------------------------
1997 1996 1995 1994 1993
---------- ---------- ---------- ---------- ----------
(IN MILLIONS, EXCEPT AS NOTED)
CONSOLIDATED SELECTED FINANCIAL DATA,
INCLUDING MONTEREY
INCOME STATEMENT DATA
Revenues........................ $ 514.7 $ 583.3 $ 449.4 $ 404.2 $ 449.5
Income (loss) from operations... 110.8 89.5 53.9 48.2 (113.0)
Earnings (loss) attributable to
common shares................. $ 42.7 $ (10.8) $ 11.8 $ 5.4 $ (84.1)
Basic and diluted per share data
(in dollars)
Before extraordinary item..... $ 0.43 $ (0.05) $ 0.13 $ 0.06 $ (0.94)
Extraordinary item -- debt
extinguishment............. -- (0.07) -- -- --
Per common share.............. $ 0.43 $ (0.12) $ 0.13 $ 0.06 $ (0.94)
Weighted average number of
shares outstanding............ 98.6 90.6 90.2 89.9 89.7
BALANCE SHEET DATA (AT PERIOD END)
Properties and equipment, net... $ 649.7 $ 909.8 $ 889.5 $ 843.0 $ 832.7
Total assets.................... 788.9 1,129.1 1,073.8 1,081.0 1,076.9
Long-term debt.................. 121.7 278.5 344.4 350.4 405.4
Convertible preferred stock..... -- 19.7 80.0 80.0 80.0
Shareholders' equity............ 454.7 526.8 437.7 423.3 323.6
Cash dividends declared on
common
stock......................... $ -- $ -- $ -- $ -- $ 10.8
- ------------
(a) Certain prior period amounts have been reclassified to conform to 1997
presentation.
FORWARD-LOOKING STATEMENTS
In its discussion and analysis of financial condition and results of
operations and elsewhere herein, 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," "anticipates," "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.
28
ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See the Consolidated Financial Statements, and supplementary data listed in
the accompanying Index to Financial Statements, Supplemental Data and Financial
Statement Schedules on page 30 herein. Information required by other schedules
required under Regulation S-X is either not applicable or is included in the
financial statements or notes thereto.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
ITEM 11. EXECUTIVE COMPENSATION
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information called for by Items 10 through 13 is incorporated by
reference from the Company's definitive Proxy Statement to be filed on March 20,
1998, pursuant to Regulation 14A in connection with its Annual Meeting of
Shareholders to be held May 11, 1998, which is incorporated herein by reference.
29
SANTA FE ENERGY RESOURCES, INC.
INDEX TO FINANCIAL STATEMENTS, SUPPLEMENTAL
DATA AND FINANCIAL SCHEDULE
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULE, AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this report:
(1) Consolidated Financial Statements:
PAGE
----
Report of Management............ 31
Report of Independent
Accountants.................... 32
Consolidated Statement of
Operations for the years ended
December 31, 1997, 1996 and
1995........................... 33
Consolidated Balance Sheet at
December 31, 1997 and 1996..... 34
Consolidated Statement of Cash
Flows for the years ended
December 31, 1997, 1996 and
1995........................... 35
Consolidated Statement of
Shareholders' Equity for the
years ended
December 31, 1997, 1996 and
1995........................... 36
Notes to the Consolidated
Financial Statements........... 37
Signatures...................... 64
(2) Consolidated Financial Statement Schedules:
Schedule II -- Valuation and
Qualifying Accounts............ 65
All other schedules have been omitted because they
are not applicable or the required information is
presented in the consolidated financial statements
or the notes to the consolidated financial
statements.
(3) Exhibits
See Index of Exhibits which appear on page 66 herein.
(b) Reports on Form 8-K
None
30
REPORT OF MANAGEMENT
To the Stockholders of Santa Fe Energy Resources, Inc.
Management of Santa Fe is responsible for preparing the accompanying
financial statements and for assuring their integrity and objectivity. The
statements were prepared in accordance with generally accepted accounting
principles and fairly represent the transactions and financial position of the
Company. The financial statements include amounts that are based on management's
best estimates and judgments.
The Company's financial statements have been audited by Price Waterhouse
LLP, independent accountants, selected by the Audit Committee and approved by
the stockholders. Management has made available to Price Waterhouse LLP all of
the Company's financial records and related data, as well as the minutes of
stockholders' and directors' meetings.
Management of the Company has established and maintains a system of
internal accounting controls that is designed to provide reasonable assurance
that assets are safeguarded, transactions are properly recorded and executed in
accordance with management's authorization, and the books and records accurately
reflect the disposition of assets. The system of internal controls includes
appropriate division of responsibility. The Company maintains an internal audit
department that conducts a comprehensive program of internal audits and
independently assesses the effectiveness of the internal controls.
The Board of Directors exercises its oversight role with respect to the
Company's system of internal controls primarily through its Audit Committee,
which is composed of directors who are not officers or employees of the Company.
It meets regularly with members of management, the internal auditors and the
independent accountants to discuss the adequacy of the Company's internal
controls, financial statements and the nature, extent and results of the audit
effort. Both the internal auditors and the independent accountants have free and
direct access to the Audit Committee without the presence of management.
James L. Payne Janet F. Clark
Chairman of the Board, President, Vice President
Chief Executive Officer and Director Chief Financial Officer and Treasurer
(Principal Executive Officer) (Principal Financial and Accounting Officer)
31
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of
Santa Fe Energy Resources, Inc.
In our opinion, the consolidated financial statements listed in the index
appearing under Item 14(a)(1) and (2) on page 30 present fairly, in all material
respects, the financial position of Santa Fe Energy Resources, Inc. and its
subsidiaries at December 31, 1997 and 1996, and the results of their operations
and their cash flows for each of the three years in the period ended December
31, 1997, in conformity with generally accepted accounting principles. These
financial statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
generally accepted auditing standards which require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above.
As discussed in Note 1 to the consolidated financial statements, the Company
changed its method of accounting for the impairment of long-lived assets in 1995
to comply with the provisions of Statement of Financial Accounting Standards No.
121.
PRICE WATERHOUSE LLP
Houston, Texas
February 23, 1998
32
SANTA FE ENERGY RESOURCES, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
(IN MILLIONS, EXCEPT PER SHARE DATA)
YEAR ENDED DECEMBER 31,
-------------------------------
1997 1996 1995
--------- --------- ---------
Revenues:
Sales of crude oil and liquids
produced...................... $ 355.7 $ 455.4 $ 352.4
Sales of natural gas produced... 138.1 105.8 77.1
Sales of crude oil purchased.... 20.5 21.1 6.7
Other........................... 0.4 1.0 13.2
--------- --------- ---------
Total revenues............. 514.7 583.3 449.4
--------- --------- ---------
Costs and expenses:
Production and operating........ 158.9 188.4 155.8
Cost of crude oil purchased..... 22.0 20.8 6.5
Exploration, including dry hole
costs......................... 49.1 34.5 23.4
Depletion, depreciation and
amortization.................. 127.8 148.2 133.2
Impairment of oil and gas
properties.................... -- 57.4 30.2
General and administrative...... 28.1 30.1 26.9
Taxes (other than income)....... 21.6 26.5 19.2
Loss (gain) on disposition of
assets........................ (3.6) (12.1) 0.3
--------- --------- ---------
Total costs and expenses... 403.9 493.8 395.5
--------- --------- ---------
Income from operations............... 110.8 89.5 53.9
Interest income................. 2.5 1.9 10.7
Interest expense................ (23.8) (37.6) (32.5)
Interest capitalized............ 6.7 5.2 5.8
Other income (expense).......... (0.6) (1.0) (1.6)
--------- --------- ---------
Income before income taxes, minority
interest and extraordinary item.... 95.6 58.0 36.3
Current income taxes............ (8.9) (22.7) (2.0)
Deferred income taxes........... (27.3) 8.4 (7.7)
--------- --------- ---------
Income before minority interest and
extraordinary item................. 59.4 43.7 26.6
Minority interest in Monterey
Resources, Inc................ (4.7) (1.3) --
--------- --------- ---------
Income before extraordinary item..... 54.7 42.4 26.6
Extraordinary item -- debt
extinguishment costs.......... -- (6.0) --
--------- --------- ---------
Net income........................... 54.7 36.4 26.6
Preferred dividend
requirement................... (3.6) (13.5) (14.8)
Convertible preferred premium... (8.4) (33.7) --
--------- --------- ---------
Earnings (loss) attributable to
common shares...................... $ 42.7 $ (10.8) $ 11.8
========= ========= =========
Basic and Diluted earnings (loss)
attributable to
common shares per share
Before extraordinary item....... $ 0.43 $ (0.05) $ 0.13
Extraordinary item -- debt
extinguishment costs.......... -- (0.07) --
--------- --------- ---------
Per common share................ $ 0.43 $ (0.12) $ 0.13
========= ========= =========
Weighted average number of shares
outstanding........................ 98.6 90.6 90.2
========= ========= =========
SEE ACCOMPANYING NOTES.
33
SANTA FE ENERGY RESOURCES, INC.
CONSOLIDATED BALANCE SHEET
(IN MILLIONS, EXCEPT AS NOTED)
DECEMBER 31,
------------------------
1997 1996
----------- -----------
ASSETS
Current assets:
Cash and cash equivalents....... $ 5.6 $ 14.6
Accounts receivable............. 70.9 112.3
Inventories..................... 14.5 13.6
Other current assets............ 21.8 37.0
----------- -----------
112.8 177.5
----------- -----------
Properties and equipment, at cost:
Oil and gas (successful efforts
method of accounting).......... 1,682.4 2,539.8
Other........................... 16.8 34.4
----------- -----------
1,699.2 2,574.2
Accumulated depletion,
depreciation, amortization and
impairment..................... (1,049.5) (1,664.4)
----------- -----------
649.7 909.8
----------- -----------
Other assets:
Receivable under gas balancing
arrangements................... 1.3 4.5
Other........................... 25.1 37.3
----------- -----------
26.4 41.8
----------- -----------
$ 788.9 $ 1,129.1
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable................ $ 106.7 $ 120.2
Income taxes payable............ 6.5 21.4
Interest payable................ 1.4 6.0
Other current liabilities....... 19.4 36.7
----------- -----------
134.0 184.3
----------- -----------
Long-term debt....................... 121.7 278.5
Deferred revenues.................... 3.7 4.0
Other long-term obligations.......... 36.3 31.7
Deferred income taxes................ 38.5 53.8
Minority interest in Monterey
Resources, Inc..................... -- 30.3
Commitments and contingencies (See
Note 13)........................... -- --
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, 103.0 million
shares issued and outstanding
(91.0 million in 1996)......... 1.0 0.9
Paid-in capital................. 728.2 601.3
Accumulated deficit............. (273.2) (166.5)
Treasury stock, at cost, 57.3
thousand shares (18.7 thousand
in 1996)....................... (0.6) (0.3)
Unamortized restricted stock
awards......................... (0.7) --
----------- -----------
454.7 526.8
----------- -----------
$ 788.9 $ 1,129.1
=========== ===========
SEE ACCOMPANYING NOTES.
34
SANTA FE ENERGY RESOURCES, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(IN MILLIONS)
YEAR ENDED DECEMBER 31,
-------------------------------
1997 1996 1995
--------- --------- ---------
Operating activities:
Net income...................... $ 54.7 $ 36.4 $ 26.6
Adjustments to reconcile net
income to net cash provided by
operating activities:
Depletion, depreciation and
amortization............ 127.8 148.2 133.2
Impairment of oil and gas
properties.............. -- 57.4 30.2
Deferred income taxes...... 27.3 (11.2) 7.7
Loss (gain) on disposition
of assets............... (3.6) (12.1) 0.3
Exploratory dry hole
costs................... 23.7 11.2 5.5
Minority interest in
Monterey Resources,
Inc..................... 4.7 1.3 --
Other...................... 5.7 6.7 2.4
Changes in operating assets and
liabilities:
Decrease (increase) in
accounts receivable..... 11.3 (19.8) (10.3)
Decrease (increase) in
inventories............. (2.3) (3.0) (1.4)
Increase (decrease) in
accounts payable........ 15.3 19.2 (5.4)
Increase (decrease) in
interest payable........ 1.7 (1.9) (0.6)
Increase (decrease) in
income taxes payable.... (15.0) 18.4 1.5
Net change in other assets
and liabilities......... 3.3 (22.7) (15.2)
--------- --------- ---------
Net cash provided by operating
activities......................... 254.6 228.1 174.5
--------- --------- ---------
Investing activities:
Capital expenditures, including
exploratory dry hole costs.... (218.6) (185.7) (189.4)
Acquisition of producing
properties, net of related
debt.......................... (197.8) (37.8) (33.8)
Proceeds from sale of investment
in Hadson Corporation......... -- -- 55.2
Net proceeds from disposition of
assets........................ 40.8 16.7 7.2
--------- --------- ---------
Net cash used in investing
activities......................... (375.6) (206.8) (160.8)
--------- --------- ---------
Financing activities:
Issuance of Monterey Resources,
Inc. common stock............. -- 123.6 --
Issuance of Santa Fe Energy
Resources, Inc. common
stock......................... 2.8 2.4 --
Purchase of 7% Series
convertible preferred stock... -- (94.0) --
Principal payments on long-term
borrowings.................... -- (70.0) (10.0)
Net change in long-term lines of
credit........................ 118.2 4.0 --
Cash dividends paid............. (8.5) (14.8) (14.8)
Treasury stock purchased........ (0.5) (0.5) --
--------- --------- ---------
Net cash provided (used) by financing
activities......................... 112.0 (49.3) (24.8)
--------- --------- ---------
Net decrease in cash and cash
equivalents........................ (9.0) (28.0) (11.1)
Cash and cash equivalents at
beginning of period................ 14.6 42.6 53.7
--------- --------- ---------
Cash and cash equivalents at end
of period..................... $ 5.6 $ 14.6 $ 42.6
========= ========= =========
Supplemental disclosure of cash flow
information:
Interest paid................... $ 11.5 $ 38.6 $ 37.6
Income taxes paid............... $ 17.8 $ 2.0 $ 1.6
SEE ACCOMPANYING NOTES.
35
SANTA FE ENERGY RESOURCES, INC.
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
(IN MILLIONS)
$.732
SERIES A
CONVERTIBLE
PREFERRED STOCK COMMON STOCK UNAMORTIZED
----------------- ----------------- PAID-IN ACCUMULATED TREASURY RESTRICTED
SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT STOCK STOCK AWARDS
------- ------- ------- ------- -------- ------------ --------- -------------
Balance at December 31, 1994......... 10.7 $ 91.4 90.0 $ 0.9 $498.5 $ (167.5) $-- -$-
Issuance of common stock
Employee stock compensation and
savings plans.................. -- -- 0.3 -- 2.6 -- -- --
Net income......................... -- -- -- -- -- 26.6 -- --
Dividends declared................. -- -- -- -- -- (14.8) -- --
------- ------- ------- ------- -------- ------------ --------- -------------
Balance at December 31, 1995......... 10.7 91.4 90.3 0.9 501.1 (155.7) -- --
Issuance and reissuance of common
stock
Employee stock compensation and
savings plans.................. -- -- 0.7 -- 6.7 -- 0.2 --
Issuance of Monterey Resources,
Inc. common stock................ -- -- -- -- 93.5 -- -- --
Purchase of 7% Series A convertible
preferred stock.................. -- -- -- -- -- (33.7) -- --
Net income......................... -- -- -- -- -- 36.4 -- --
Dividends declared................. -- -- -- -- -- (13.5) -- --
Purchase of treasury stock......... -- -- -- -- -- -- (0.5) --
------- ------- ------- ------- -------- ------------ --------- -------------
Balance at December 31, 1996......... 10.7 91.4 91.0 0.9 601.3 (166.5) (0.3) --
Issuance and reissuance of common
stock
Employee stock compensation and
savings plans.................. -- -- 0.7 -- 7.6 -- 0.2 (2.4)
Conversion of convertible
preferred stock, 7% series..... -- -- 2.2 -- 28.0 (8.4) -- --
Conversion of $.732 Series A
preferred stock................ (10.7) (91.4 ) 9.1 0.1 91.3 -- -- --
Amortization of restricted stock
awards........................... -- -- -- -- -- -- -- 1.7
Net income......................... -- -- -- -- -- 54.7 -- --
Preferred dividends declared....... -- -- -- -- -- (3.6) -- --
Purchase of treasury stock......... -- -- -- -- -- -- (0.5) --
Spin Off of Monterey Resources,
Inc.............................. -- -- -- -- -- (149.4) -- --
------- ------- ------- ------- -------- ------------ --------- -------------
Balance at December 31, 1997......... -- $ -- 103.0 $ 1.0 $728.2 $ (273.2) $(0.6) $(0.7)
======= ======= ======= ======= ======== ============ ========= =============
TOTAL
SHAREHOLDERS'
EQUITY
-------------
Balance at December 31, 1994......... $ 423.3
Issuance of common stock
Employee stock compensation and
savings plans.................. 2.6
Net income......................... 26.6
Dividends declared................. (14.8)
-------------
Balance at December 31, 1995......... 437.7
Issuance and reissuance of common
stock
Employee stock compensation and
savings plans.................. 6.9
Issuance of Monterey Resources,
Inc. common stock................ 93.5
Purchase of 7% Series A convertible
preferred stock.................. (33.7)
Net income......................... 36.4
Dividends declared................. (13.5)
Purchase of treasury stock......... (0.5)
-------------
Balance at December 31, 1996......... 526.8
Issuance and reissuance of common
stock
Employee stock compensation and
savings plans.................. 5.4
Conversion of convertible
preferred stock, 7% series..... 19.6
Conversion of $.732 Series A
preferred stock................ --
Amortization of restricted stock
awards........................... 1.7
Net income......................... 54.7
Preferred dividends declared....... (3.6)
Purchase of treasury stock......... (0.5)
Spin Off of Monterey Resources,
Inc.............................. (149.4)
-------------
Balance at December 31, 1997......... $ 454.7
=============
SEE ACCOMPANYING NOTES.
36
SANTA FE ENERGY RESOURCES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements of Santa Fe Energy Resources, Inc.
("Santa Fe" or the "Company") and its subsidiaries include the accounts of
all wholly owned subsidiaries and Monterey Resources, Inc. ("Monterey") until
Spin Off. Prior to its initial public offering in November 1996, the Company
owned 100% of the outstanding common stock of Monterey. At December 31, 1996,
the Company owned 82.8% of the outstanding common stock of Monterey (See Note
2). The Company's Spin Off of Monterey was completed July 25, 1997.
All significant intercompany accounts and transactions have been
eliminated. Certain amounts in prior periods have been reclassified to conform
to current presentation.
OIL AND GAS OPERATIONS
The Company follows the successful efforts method of accounting for its oil
and gas exploration and production activities. Costs (both tangible and
intangible) of productive wells and development dry holes, as well as the cost
of prospective acreage, are capitalized. The costs of drilling and equipping
exploratory wells which do not find proved reserves are expensed upon
determination that the well does not justify commercial development. Other
exploratory costs, including geological and geophysical costs and delay rentals,
are charged to expense as incurred.
Depletion and depreciation of proved properties are computed on an
individual field basis using the unit-of-production method based upon proved oil
and gas reserves attributable to the field. Certain other oil and gas properties
are depreciated or amortized on a straight-line basis.
In the fourth quarter of 1995 the Company changed its impairment policy to
conform to the provisions of Statement of Financial Accounting Standards No. 121
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets
to Be Disposed Of" ("SFAS 121"). In accordance with the provisions of SFAS
121, proved properties are reviewed to determine if the carrying value of the
property exceeds the expected undiscounted future net cash flows from the
operation of the property. Based on this review and the continuing evaluation of
development plans, production data, economics and other factors, as appropriate,
the Company records impairment (additional depletion and depreciation) to the
extent that the carrying value of the property exceeds the fair value of the
property based on discounted future net cash flows. In accordance with its
policy, the Company recorded impairments of $57.4 million in 1996 and $30.2
million in 1995. With respect to the impairments recorded in 1995, approximately
$22.1 million was due to the adoption of SFAS 121.
The Company provides for future abandonment and site restoration costs with
respect to certain of its oil and gas properties. The Company estimates that
with respect to these properties such future costs total approximately $25.9
million and such amount is being accrued over the expected life of the
properties. At December 31, 1997 and 1996 accumulated depletion, depreciation,
amortization and impairment includes $10.0 million and $16.6 million,
respectively, of such costs.
The value of undeveloped acreage is aggregated and the portion of such
costs estimated to be nonproductive, based on historical experience, is
amortized to expense over the average holding period. Additional amortization
may be recognized based upon periodic assessment of prospect evaluation results.
The cost of properties determined to be productive is transferred to proved
properties; the cost of properties determined to be nonproductive is charged to
accumulated amortization.
Maintenance and repairs are expensed as incurred; major renewals and
improvements are capitalized. Gains and losses arising from sales of assets are
included in income currently.
37
SANTA FE ENERGY RESOURCES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
REVENUE RECOGNITION
Revenues from the sale of crude oil and liquids produced are generally
recognized upon the passage of title, net of royalties and net profits
interests.
Revenues from natural gas production are generally recorded using the
entitlement method, net of royalties and net profits interests. Sales proceeds
in excess of the Company's entitlement are included in Deferred Revenues and the
Company's share of sales taken by others is included in Other Assets. At
December 31, 1997 the Company's deferred revenues for sales proceeds received in
excess of the Company's entitlement was $2.9 million with respect to 2.3 MMcf
and the asset related to the Company's share of sales taken by others was $1.3
million with respect to 1.0 MMcf.
The Company periodically hedges a portion of its oil and gas sales. See
Note 13 -- Commitments and Contingencies -- Oil and Gas Hedging.
Revenues from sales of crude oil purchased relate to the sales of low
viscosity crude oil purchased and blended with certain of Monterey's high
viscosity, low gravity crude oil production, either to facilitate pipeline
transportation or to realize higher margins. The cost to purchase such crude oil
is reflected as an expense.
EARNINGS PER SHARE
Earnings per share are based on the revised computation requirements for
earnings per share information as set forth in Statement of Financial Accounting
Standards No. 128, "Earnings per Share" ("SFAS 128"). See Note 3 -- Earnings
Per Share.
ACCOUNTS RECEIVABLE
Accounts Receivable relates primarily to sales of oil and gas and amounts
due from joint interest partners for expenditures made by the Company on behalf
of such partners. The Company reviews the financial condition of potential
purchasers and partners prior to signing sales or joint interest agreements. At
December 31, 1997 and 1996 the Company's allowance for doubtful accounts
receivable, which is reflected in the consolidated balance sheet as a reduction
in accounts receivable, totalled $2.7 million and $2.5 million, respectively.
Accounts receivable totalling $0.3 million and $1.1 million were written off as
uncollectible in 1997 and 1995, respectively.
INVENTORIES
Inventories are generally valued at the lower of cost (average price or
first-in, first-out) or market. Crude oil inventories at December 31, 1997 and
1996 were $3.7 million and $4.5 million, respectively, and materials and
supplies inventories at such dates were $10.8 million and $9.1 million,
respectively.
ENVIRONMENTAL EXPENDITURES
Environmental liabilities are recognized when the expenditures are
considered probable and can be reasonably estimated. Measurement of liabilities
is based on currently enacted laws and regulations, existing technology and
undiscounted site-specific costs. Generally, such recognition coincides with the
Company's commitment to a formal plan of action.
INCOME TAXES
The Company follows the asset and liability approach to accounting for
income taxes. Deferred tax assets and liabilities are determined using the tax
rate for the period in which those amounts are expected to be received or paid,
based on a scheduling of temporary differences between the tax bases of assets
and liabilities and their reported amounts. Under this method of accounting for
income taxes, any future changes in income tax rates will affect deferred income
tax balances and financial results.
38
SANTA FE ENERGY RESOURCES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FUNCTIONAL CURRENCY
The functional currency of the Company and its subsidiaries is the U.S.
dollar.
USE OF ESTIMATES
The preparation of the Company's financial statements in conformity with
generally accepted accounting principles requires the Company to make certain
estimates and assumptions that affect the reported amounts of assets and
liabilities and the disclosure of contingent assets and liabilities and the
periods in which certain items of revenue and expense are included. Actual
results may differ from such estimates.
NEW ACCOUNTING STANDARDS
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130, "Reporting Comprehensive Income"
("SFAS 130"), and Statement of Financial Accounting Standards No. 131,
"Disclosures about Segments of an Enterprise and Related Information" ("SFAS
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. 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
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.
39
SANTA FE ENERGY RESOURCES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
Prior to the Spin Off, Monterey purchased all of the common stock of
McFarland Energy, Inc. ("McFarland Energy") for $106.2 million in cash and
$2.3 million of assumed debt.
Pursuant to the Contribution Agreement, Monterey agreed to indemnify and
hold harmless the Company from and against any costs incurred in the future
relating to environmental liabilities of the Western Division assets (other than
those retained by the Company), and any costs or liabilities that may arise in
the future that are attributable to laws, rules or regulations in respect to any
property or interest therein located in California and formerly owned or
operated by the Western Division or its predecessors.
The following table sets forth certain financial information for the
Company, on an unaudited pro forma basis assuming that the Spin Off occurred
prior to the beginning of the periods presented(1):
FOR THE YEARS ENDED DECEMBER
31,
-------------------------------
1997 1996 1995
--------- --------- ---------
(IN MILLIONS, EXCEPT PER SHARE
DATA)
Revenues............................. $ 333.5 $ 290.4 $ 230.7
Income (loss) from operations........ 60.3 (15.1) (22.2)
Net income (loss).................... 35.0 (5.5) (4.3)
Earnings (loss) to common shares..... 23.0 (52.7) (19.1)
Basic and diluted earnings (loss)
attributable to common shares per
share.............................. $ 0.23 $ (0.58) $ (0.21)
- ------------
(1) Costs and expenses related to the Spin Off of Monterey have been excluded
from the year ended December 31, 1997 pro forma presentations as follows:
(i) $2.0 million in pension curtailments and (ii) $0.6 million in
compensation expenses; (iii) $1.1 million in Spin Off related costs and
expenses, and for the year ended December 31, 1996 as follows: (iv) $2.0
million in costs related to the Monterey IPO and (v) $1.5 million in debt
extinguishment costs, net of $1.0 million tax expense, related to the
Monterey IPO.
40
SANTA FE ENERGY RESOURCES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Company recorded the following reductions on the balance sheet as a
result of the Spin Off of Monterey (in millions):
Current Assets....................... $ 45.7
Property and equipment, net.......... 537.5
Other assets......................... 1.6
Current liabilities.................. 49.0
Long-term debt....................... 277.3
Other long-term obligations.......... 3.8
Deferred income taxes................ 74.2
Minority interest in Monterey
Resources, Inc..................... 31.1
Shareholders' equity................. 149.4
NOTE 3. EARNINGS PER SHARE
In February 1997, the Financial Accounting Standards Board issued SFAS 128,
"Earnings per Share", which revises the computation and disclosure
requirements for earnings per share information. The following table sets forth
the components of the Company's basic and diluted earnings per share
calculations based on the computation requirements of SFAS 128.
FOR THE YEARS ENDED DECEMBER 31,
---------------------------------------------------------------------------------------------
1997 1996 1995
----------------------------- ----------------------------- -----------------------------
PER-SHARE PER-SHARE PER-SHARE
INCOME SHARES AMOUNT INCOME SHARES AMOUNT INCOME SHARES AMOUNT
------ ------- ---------- ------ ------- ---------- ------ ------- ----------
(IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
Net Income........................... $54.7 $36.4 $26.6
Extraordinary items.................. -- 6.0 --
Less: Preferred dividends............ (12.0 ) (47.2 ) (14.8 )
------ ------ ------
Earnings (loss) before extraordinary
item............................... 42.7 $ 0.43 (4.8 ) $(0.05) 11.8 $ 0.13
Extraordinary item................... -- -- (6.0 ) (0.07) -- --
Basic and Diluted Earnings Per Share
Earnings (loss) attributable to
common shares...................... $ 42.7 98.6 $ 0.43 $(10.8 ) 90.6 $(0.12) $ 11.8 90.2 $ 0.13
====== ========== ======= ========== ======= ==========
The Company had 1.8 million, 0.7 million and 0.1 million common shares
which would be issued upon exercise of stock options which although dilutive in
nature, did not change earnings per share in 1997, 1996 and 1995, respectively.
There were 1.4 million, 1.9 million and 3.5 million stock options outstanding in
1997, 1996 and 1995, respectively, which were not included in the computation of
diluted earnings per share because the exercise price of these options was
greater than the average market price of the common shares. In addition, there
were 0.1 million common shares which would be issued upon vesting of the Phantom
Units in 1997 and in 1995 which although dilutive in nature did not change
earnings per share. The Company also had convertible preferred stock in 1997,
1996 and 1995 which was antidilutive.
NOTE 4. SANTA FE ENERGY TRUST
The Santa Fe Energy Trust (the "Trust") was formed in 1992 to hold
6,300,000 Depository Units ("Depository Units"), each consisting of beneficial
ownership of one unit of undivided interest in the Trust and a $20 face amount
beneficial ownership interest in a $1,000 face amount zero coupon United States
Treasury obligation maturing on or about February 15, 2008. The Trust will be
liquidated on February 15, 2008. The assets of the Trust consist of certain oil
and gas properties conveyed by the Company.
41
SANTA FE ENERGY RESOURCES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
For any calendar quarter ending on or prior to December 31, 2002, the Trust
will receive additional support payments to the extent that it needs such
payments to distribute $0.40 per Depository Unit per quarter. The source of such
support payments, if needed, will be limited to the Company's remaining royalty
interest in certain of the properties conveyed to the Trust. If such support
payments are made, certain proceeds otherwise payable to the Trust in subsequent
quarters may be reduced to recoup the amount of such support payments. The
aggregate amount of the additional royalty payments (net of any amounts
recouped) will be limited to $20.0 million on a revolving basis. Through the end
of 1995, the Trust had received support payments totalling $2,074,000. During
1996 and the first six months of 1997 Santa Fe recouped all of such payments. At
December 31, 1997 and 1996, Accounts Payable included $3.5 million and $3.1
million, respectively, due to the Trust.
NOTE 5. CASH FLOWS
The Company considers all highly liquid investments with a maturity of
three months or less when purchased to be cash equivalents.
The following balances represent noncash adjustments to the Company's
Consolidated Balance Sheet as of December 31, 1997, related to Monterey's
acquisition of McFarland Energy, the Company's Spin Off of Monterey and the
Company's acquisition of interests in the Tupungato field in Argentina.
McFarland Monterey Tupungato
Acquisition Spin Off Acquisition Total
------------ --------- ------------ ---------
(in millions)
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)
In December 1996 the Company sold the surface rights to approximately 116
surface acres in Orange County, California to an unaffiliated party for total
consideration of $24.2 million and recognized a $12.3 million gain. The Company
received $15.9 million in cash and an $8.3 million note which was purchased by
Monterey for cash. In 1997 Monterey received cash payment for the note.
In 1995 the Company sold its holdings in Hadson Corporation for $55.2
million. Other Income (Expense) for 1995 includes a $1.8 million charge with
respect to the Company's loss on the sale. Subsequent to the sale, Hadson's name
was changed to LG&E Natural Marketing Inc. ("LG&E").
NOTE 6. INCOME TAXES
In December 1990 Santa Fe Pacific ("SFP"), currently known as Burlington
Northern Santa Fe Corporation, distributed all of the shares of the Company it
held to its shareholders (the "SFP Spin Off"). Through the date of the SFP
Spin Off the taxable income or loss of the Company was included in the
consolidated federal income tax return filed by SFP. The consolidated federal
income tax returns of SFP have been examined through 1990 and all years prior to
1986 are closed. Issues relating to the open years are being contested through
various stages of administrative appeal. The Company, in conjunction with the
SFP Spin Off, agreed to indemnify SFP should the transaction be determined to be
taxable to SFP because of the Company's actions. The Company does not believe it
has taken any action that would have such an effect. The Company has filed
separate consolidated federal income tax returns for periods subsequent to the
SFP Spin Off. The consolidated returns of the Company through 1991 have been
audited and are closed.
42
SANTA FE ENERGY RESOURCES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
In 1989, the Company received a notice of deficiency for certain state
franchise tax returns filed for the years 1978 through 1983 as part of the
consolidated tax returns of SFP. The matter was contested by the Company and
favorably resolved in 1994. In November 1996, the Company and Monterey executed
a tax sharing agreement which transferred to Monterey all obligations
attributable to these state franchise tax liabilities for years after 1983.
Total pretax income for the years ended December 31, 1997, 1996 and 1995
was taxed under the following jurisdictions (in millions):
1997 1996 1995
--------- --------- ---------
Domestic............................. $ 88.0 $ 46.4 $ 40.5
Foreign.............................. 7.6 2.4 (4.2)
--------- --------- ---------
$ 95.6 $ 48.8 $ 36.3
========= ========= =========
The Company's total income tax expense (benefit) for the years ended
December 31, 1997, 1996 and 1995 consisted of the following items (in millions):
1997 1996 1995
--------- --------- ---------
Current
U.S. federal.................... $ 2.3 $ 13.6 $ 1.5
State........................... 1.4 5.1 (2.1)
Foreign......................... 5.2 3.6 2.6
--------- --------- ---------
8.9 22.3(a) 2.0
--------- --------- ---------
Deferred
U.S. federal.................... 26.7 4.7 13.3
State........................... 0.7 1.3 (0.6)
Foreign......................... (0.1) (17.2)(b) (5.0)
--------- --------- ---------
27.3 (11.2)(a) 7.7
--------- --------- ---------
$ 36.2 $ 11.1 $ 9.7
========= ========= =========
- ------------
(a) Includes $3.2 million income tax benefit which is reflected in extraordinary
item -- debt extinguishment costs (see Note 2).
(b) Includes benefit of $8.3 million related to certain prior period foreign
expenditures.
43
SANTA FE ENERGY RESOURCES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Company's deferred income tax liabilities (assets) at December 31, 1997
and 1996 are composed of the following differences between financial and tax
reporting (in millions):
1997 1996
--------- ---------
Capitalized costs and write-offs..... $ 81.0 $ 99.9
State deferred liability............. -- 10.5
--------- ---------
Gross deferred liability............. 81.0 110.4
--------- ---------
Accruals not currently deductible for
tax purposes....................... (20.0) (0.7)
Alternative minimum tax
carryforwards...................... (15.2) (13.6)
Net operating loss carryforwards..... -- (25.0)
Foreign deferred asset............... (6.2) (8.1)
Other................................ (1.1) (9.2)
--------- ---------
Gross deferred assets................ (42.5) (56.6)
--------- ---------
Deferred tax liability............... $ 38.5 $ 53.8
========= =========
A reconciliation of the Company's total income tax expense computed by
applying the statutory U.S. federal income tax rate to the Company's total
income (loss) before income taxes for the years ended December 31, 1997, 1996
and 1995 is presented in the following table (in millions):
1997 1996 1995
--------- --------- ---------
U.S. federal income taxes at
statutory rate..................... $ 33.4 $ 17.1 $ 12.7
Increase (reduction) resulting from:
State income taxes, net of
federal effect................ 1.4 4.3 0.6
Foreign income taxes in excess
of (less than) U.S. rate...... 2.4 (14.4) (0.9)
U.S. tax on Foreign reinvested
earnings...................... 0.5 2.8 0.8
Prior period adjustments........ -- 1.7 (2.7)
Other........................... (1.5) (0.4) (0.8)
--------- --------- ---------
$ 36.2 $ 11.1 $ 9.7
========= ========= =========
NOTE 7. FINANCING AND DEBT
Long-term debt at December 31, 1997 and 1996 consisted of the following
balances (in millions):
DECEMBER 31,
-----------------------------------------------
1997 1996
--------------------- ---------------------
CURRENT LONG-TERM CURRENT LONG-TERM
------- --------- ------- ---------
Santa Fe
11% Senior Subordinated
Debentures.................... $ -- $ 99.5 $ -- $ 99.5
Lines of credit borrowings...... -- 22.2 -- 4.0
------- --------- ------- ---------
-- 121.7 -- 103.5
Monterey
Senior notes.................... -- -- -- 175.0
------- --------- ------- ---------
$ -- $ 121.7 $ -- $ 278.5
======= ========= ======= =========
Aggregate total maturities of long-term debt during the next five years are
as follows: 1998 -- none; 1999 -- none; 2000 -- none; 2001 -- $22.2 million and
2002 -- none.
44
SANTA FE ENERGY RESOURCES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Effective November 13, 1996 the Company entered into a revolving credit
agreement which matures November 13, 2001. The Credit Agreement permits the
Company to obtain revolving credit loans and issue letters of credit up to an
aggregate amount of $150.0 million, with the aggregate amount of letters of
credit outstanding at any time limited to $30.0 million. Borrowings under the
Credit Agreement are unsecured and interest rates are tied to the bank's prime
rate or eurodollar offering rate, at the Company's option. At December 31, 1997,
the Company had no borrowings outstanding under the Credit Agreement. The
Company had two letters of credit outstanding under the Credit Agreement at
December 31, 1997 for $3.5 million and one letter of credit outside the credit
Agreement for $1.8 million related to certain foreign operations.
In a public offering in May 1994 the Company issued $100.0 million of 11%
Senior Subordinated Debentures due 2004 (the "Debentures"). The Debentures
were issued for 99.266% of face value and the Company received proceeds of $96.1
million, after deducting related costs and expenses of $3.2 million. The
Debentures, which mature May 15, 2004, are not redeemable prior to May 15, 1999
and may be redeemed after such date at the option of the Company at prices set
forth in the indenture for the Debentures. Under certain circumstances, the
Company may be required to redeem the Debentures for 101% of the principal
amount. The Debentures are general unsecured subordinated obligations of the
Company.
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 Credit Agreement. At December 31, 1997, $22.2 million was outstanding under
these lines of credit. The amount outstanding at December 31, 1997 is classified
as long-term since the Credit Agreement is available and the Company intends to
refinance such amount on a long-term basis.
The Credit Agreement 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 or repurchase
capital stock. Under the most restrictive of these covenants, at December 31,
1997 the Company could incur up to $512.5 million of additional indebtedness and
pay dividends of or repurchase up to $50.6 million of its capital stock.
45
SANTA FE ENERGY RESOURCES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 8. SEGMENT INFORMATION
The principal business of the Company consists of the exploration,
development and acquisition of oil and gas properties and the production and
sale of crude oil and liquids and natural gas. Pertinent information with
respect to the Company's oil and gas business is presented in the following
table (in millions):
OIL AND GAS
-------------------------------------------
OTHER GENERAL
U.S. ARGENTINA INDONESIA FOREIGN CORPORATE TOTAL
------ --------- --------- ------- --------- --------
1997
Revenues........................ $446.3 $ 40.6 $ 27.8 $ -- $ -- $ 514.7
Income (loss) from operations... 133.0 16.3 (0.4) (3.1) (35.0) 110.8
Depletion, depreciation,
amortization and impairment... 108.6 8.5 6.9 0.2 3.6 127.8
Additions to property and
equipment..................... 346.6 54.2 33.7 12.1 5.1 451.7
Identifiable assets at December
31,........................... 493.0 125.4 96.6 14.9 59.0 788.9
1996
Revenues........................ 517.9 35.8 29.6 -- -- 583.3
Income (loss) from operations... 126.0 17.6 (11.3) (17.4) (25.4) 89.5
Depletion, depreciation,
amortization and impairment... 164.9 7.9 24.6 5.0 3.2 205.6
Additions to property and
equipment..................... 190.0 20.2 15.3 9.4 10.8 245.7
Identifiable assets at December
31,........................... 848.8 87.3 81.7 6.2 105.1 1,129.1
1995
Revenues........................ 398.6 19.2 31.6 -- -- 449.4
Income (loss) from operations... 87.9 3.6 0.8 (6.5) (31.9) 53.9
Depletion, depreciation,
amortization and impairment... 143.3 7.0 10.0 0.5 2.6 163.4
Additions to property and
equipment..................... 175.4 14.4 16.7 3.8 6.5 216.8
Identifiable assets at December
31,........................... 801.1 73.0 93.8 9.5 96.4 1,073.8
Crude oil and liquids and natural gas accounted for more than 95% of
revenues in 1997, 1996 and 1995. The following table (which with respect to
certain properties includes royalty and working interest owners' share of
production) reflects sales to purchasers who accounted for more than 10% of the
Company's total revenues (in millions):
YEAR ENDED DECEMBER 31,
-------------------------------
1997 1996 1995
--------- --------- ---------
Celeron Corporation.................. $ -- (a) $ 66.7 $ 62.1
Shell Oil Company.................... -- (a) 105.7 100.4
LG&E Energy Marketing, Inc........... 55.2 64.8 23.8
- ------------
(a) Sales represented less than 10% of total revenues.
NOTE 9. CONVERTIBLE PREFERRED STOCK, 7% SERIES
In November 1996 the Company purchased 3.8 million of the outstanding
shares of its Convertible Preferred Stock, Series 7% (the "7% Preferred") for
$24.50 per share. The excess of the cost of the acquired shares ($94.0 million,
including related costs of $1.7 million) over the book value of such shares,
$33.7 million, is reflected in the Statement of Operations as a Convertible
preferred premium. In the second
46
SANTA FE ENERGY RESOURCES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
quarter of 1997, the Company converted the remaining 1.2 million outstanding
shares of 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 Convertible preferred premium in the Statement of
Operations, of $8.4 million in 1997.
NOTE 10. SHAREHOLDERS' EQUITY
$.732 SERIES A CONVERTIBLE PREFERRED STOCK
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. There was no charge to
earnings as a result of the conversion of the DECS.
PREFERRED STOCK
The Board of Directors of the Company is empowered, without approval of the
shareholders, to cause shares of preferred stock to be issued in one or more
series, and to determine the number of shares in each series and the rights,
preferences and limitations of each series. Among the specific matters which may
be determined by the Board of Directors are: the annual rate of dividends; the
redemption price, if any; the terms of a sinking or purchase fund, if any; the
amount payable in the event of any voluntary liquidation, dissolution or winding
up of the affairs of the Company; conversion rights, if any; and voting powers,
if any.
TREASURY STOCK
The Company's Board of Directors has authorized the Company to buy back up
to $50 million of its common stock to meet the requirements of outstanding stock
options and to satisfy the stock requirements of employee benefit plans. In 1997
the Company purchased 53,500 common shares for approximately $0.5 million.
SHAREHOLDER RIGHTS PLAN
The Company has adopted a shareholder rights plan (the "Rights Plan")
whereby preferred stock purchase rights (the "Rights") were distributed to
holders of the Company's common stock. The Rights will expire on July 25, 1999.
The Rights will be exercisable only if a person acquires beneficial ownership of
15 percent or more of the Company's common stock (an "Acquiring Person"), or
commences a tender offer which would result in ownership of 15 percent or more
of such stock. Under the Rights Plan, one Right to purchase one one-hundredth of
a share of a new series of junior preferred stock of the Company at an exercise
price of $42.00 per one one-hundredth of a share (subject to adjustment) were
issued for each outstanding share of the Company's common stock held at the
close of business on March 3, 1997.
If any person becomes an Acquiring Person, each Right will entitle the
holder to purchase, at the Right's then current exercise price, shares of the
Company's common stock having a value of twice the Right's exercise price. In
addition, if, after a person becomes an Acquiring Person, the Company is
involved in a merger or other business combination transaction with another
person in which the Company is not the surviving corporation, or under certain
other circumstances, each Right will entitle its holder to purchase, at the
Right's then current exercise price, shares of common stock of the other person
having a value of twice the Right's exercise price.
The Company will generally be entitled to redeem the Rights in whole, but
not in part, at $0.01 per Right payable in cash or common stock, subject to
adjustment, at any time until 10 business days (subject to extension) after the
first public announcement that an Acquiring Person has become such.
The terms of the Rights may be amended by the Company without the approval
of the holders of the Rights at any time the Rights are redeemable. At any time
the Rights are no longer redeemable the terms
47
SANTA FE ENERGY RESOURCES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
may be amended only to (i) cure any ambiguity; (ii) correct or supplement any
provision which may be defective or inconsistent with other provisions; (iii)
shorten or lengthen any time period; or (iv) change or supplement the provisions
in any manner which the Company deems necessary or desirable, so long as such
change does not adversely affects the interests of the holders of the Rights.
NOTE 11. STOCK OPTION PLANS
Under the terms of the Santa Fe Energy Resources 1990 Incentive Stock
Compensation Plan (the "1990 Plan") the Company may grant options and awards
with respect to no more than 10,320,527 shares of common stock to officers,
directors and key employees. Under the terms of the Santa Fe Energy Resources
1995 Incentive Stock Compensation Plan (the "1995 Plan") the Company may grant
options and awards with respect to not more than 1,000,000 shares of common
stock per year to employees other than executive officers and directors. Awards
made under the terms of the 1990 Plan and the 1995 Plan (collectively the
"Plans") may be made in the form of Restricted Stock, Bonus Stock, Phantom
Units and Stock Appreciation Rights, as such terms are defined in the Plans.
Options under the terms of the Plans are granted at the average market
price on the date of grant and have a ten-year term with vesting periods ranging
from six months to three years. The following table summarizes the activity with
respect to options outstanding under the Plans during 1997, 1996 and 1995:
1997 1996 1995
--------------------------- --------------------------- ---------------------------
WEIGHTED AVG. WEIGHTED AVG. WEIGHTED AVG.
EXERCISE EXERCISE EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
(THOUSANDS) ($/SHARE) (THOUSANDS) ($/SHARE) (THOUSANDS) ($/SHARE)
----------- ------------- ----------- ------------- ----------- -------------
Outstanding at beginning of year..... 5,392.0 $ 12.07 4,441.7 $ 11.85 4,039.7 $ 12.23
Grants............................... 873.1 9.73 1,240.5 12.07 472.7 8.75
Revaluation due to Spin Off.......... 3,119.0 7.27 -- -- -- --
Cancellations........................ (919.7) 11.31 (9.9) 10.73 (61.3) 13.47
Exercises............................ (395.9) 7.23 (280.3) 8.73 (9.4) 9.41
----------- -----------
Outstanding at end of year........... 8,068.5 7.69 5,392.0 12.07 4,441.7 11.85
=========== =========== ===========
Exercisable at end of year........... 6,037.3 4,265.6 4,218.6
Weighted average fair value of
options granted during the year
($/share).......................... $ 5.73 $ 6.67 $ 4.80
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option-pricing model with the following assumptions: (i)
expected dividend yield -- 0.0%; (ii) expected stock price volatility -- 22 to
27%; (iii) risk-free interest rate -- 5 to 7%; and (iv) expected life of
options -- 10 years.
The following table summarizes certain information with respect to options
outstanding under the Plans at December 31, 1997:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
- ----------------------------------------------------------------------------------------- -----------------------------
WEIGHTED AVG. WEIGHTED AVG.
RANGE OF WEIGHTED AVG. EXERCISE EXERCISE
EXERCISE PRICES SHARES REMAINING LIFE PRICE SHARES PRICE
($/SHARE) (THOUSANDS) (YEARS) ($/SHARE) (THOUSANDS) ($/SHARE)
- ------------------------------------- ----------- -------------- ------------- ----------- -------------
4 - 7 4,351.7 7 $ 5.76 3,658.0 $ 5.56
8 - 12 3,036.5 6 9.10 1,699.0 8.43
13 - 15 680.3 3 13.79 680.3 13.79
----------- -----------
8,068.5 6,037.3
=========== ===========
In December 1995 the Company granted 0.1 million Phantom Units to certain
executive officers which were to be earned over a three-year period commencing
January 1, 1996. The Phantom Units vested as a
48
SANTA FE ENERGY RESOURCES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
result of the Monterey IPO. The Company recognized $1.6 million in expense in
1996 with respect to such Phantom Units.
In December 1997 the Company granted 0.1 million Phantom Units to certain
executive officers and key personnel which are to be earned over a three-year
period commencing January 1, 1998. During 1997, 1996 and 1995 the Company
granted 0.2 million, 0.1 million and 0.2 million, respectively, shares of
restricted stock to certain executive officers and other employees. At December
31, 1997 1.6 million shares were available for options or awards under the 1990
Plan and 0.3 million shares were available under the 1995 Plan.
In 1997 the Company issued 0.2 million shares of restricted stock under its
incentive compensation plan. These restricted shares vest one-third per year
over a three year period. The value of these shares at the grant date is being
amortized over the vesting period of the shares. At December 31, 1997 the
Company reported $0.7 million of unrecognized expense related to these shares in
shareholders' equity as "Unamortized restricted stock awards".
As a result of the Spin Off of Monterey in July 1997, all outstanding Stock
Options were adjusted to reflect the effect of the transaction on the value of
the Company's common stock. The anti-dilution formula utilized follows the
Internal Revenue Service approved guidelines for adjusting Qualified Incentive
Stock Options and took into account the average sales prices for the Company's
common stock for a period of time before and after the Spin Off. As a result of
the adjustment the number of options outstanding increased by a factor of 1.7045
and the strike price was reduced accordingly in order to preserve the value of
either in the money or out of the money spread in existence at the time. The
Company will receive the same overall consideration for the underlying
securities upon exercise of the option. All outstanding Phantom Units were also
adjusted utilizing the same formula. All other terms and conditions of the
options and the Phantom Units remained unchanged.
In October 1995 the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 123 "Accounting for Stock-Based
Compensation" ("SFAS 123"), which established financial accounting and
reporting standards for stock-based employee compensation plans. SFAS 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 method prescribed by
Accounting Principles Board Opinion No. 25 "Accounting for Stock Issued to
Employees" ("APB 25"). The Company has elected to continue to account for
stock-based compensation costs in accordance with APB Opinion No. 25. Earnings
(loss) attributable to common shares and the related per share amounts would
have been reduced as is reflected by the pro forma amounts in the following
table (in millions, except per share data):
YEAR ENDED DECEMBER 31,
-------------------------------
1997 1996 1995
--------- --------- ---------
AS REPORTED:
Earnings (loss) attributable to
common shares.................. $ 42.7 $ (10.8) $ 11.8
Basic and Diluted earnings
(loss) attributable to
common shares per share....... 0.43 (0.12) 0.13
PROFORMA:
Earnings (loss) attributable to
common shares.................. 41.4 (12.6) 10.9
Basic and Diluted earnings
(loss) attributable to
common shares per share....... 0.42 (0.14) 0.12
During the initial phase-in period, the effects of applying SFAS 123 for
recognizing compensation cost on a pro forma basis may not be representative of
the effects on reported earnings for future periods since the options granted
vest over several periods and additional awards will be made in future periods.
49
SANTA FE ENERGY RESOURCES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 12. PENSION AND OTHER EMPLOYEE BENEFIT PLANS
The Company has a defined benefit retirement plan (the "SFER Plan")
covering substantially all salaried employees not covered by collective
bargaining agreements and a nonqualified supplemental retirement plan (the
"Supplemental Plan"). The Supplemental Plan will pay benefits to participants
in the SFER Plan in those instances where the SFER Plan formula produces a
benefit in excess of limits established by ERISA and the Tax Reform Act of 1986.
Benefits payable under the SFER Plan are based on years of service and
compensation during the five highest paid years of service during the ten years
immediately preceding retirement. The Company's funding policy is to contribute
annually not less than the minimum required by ERISA and not more than the
maximum amount deductible for income tax purposes.
The following table sets forth the funded status of the SFER Plan and the
Supplemental Plan at December 31, 1997 and 1996 (in millions):
SFER PLAN SUPPLEMENTAL PLAN
-------------------- --------------------
1997 1996 1997 1996
--------- --------- --------- ---------
Plan assets at fair value, primarily
invested in common stocks and U.S.
and corporate bonds................ $ 37.1 $ 36.1 $ -- $ --
Actuarial present value of projected
benefit obligation:
Accumulated benefit obligations
Vested..................... (30.0) (30.8) (1.7) (1.6)
Nonvested.................. (2.1) (1.7) (0.2) (0.2)
Effects of projected future
salary increases.............. (6.8) (8.3) (1.0) (1.4)
--------- --------- --------- ---------
Excess of projected benefit
obligations over plan assets....... (1.8) (4.7) (2.9) (3.2)
Unrecognized net (gain) loss from
past experience different from the
assumed and effects of changes in
assumptions........................ (1.0) 1.2 (1.6) (1.1)
Unrecognized prior service costs..... (1.3) (1.9) 1.8 1.9
Unrecognized net (asset) obligation
being recognized over plan's
average remaining service life..... (0.7) (0.8) 0.1 0.2
--------- --------- --------- ---------
Accrued pension liability............ $ (4.8) $ (6.2) $ (2.6) $ (2.2)
========= ========= ========= =========
Major assumptions at year end
Discount rate................... 7.50% 7.50% 7.50% 7.50%
Long-term asset yield........... 9.50% 9.50% -- --
Rate of increase in future
compensation.................. 5.25% 5.25% 5.25% 5.25%
The following table sets forth the components of pension expense for the
SFER Plan and Supplemental Plan for 1997, 1996 and 1995 (in millions):
SFER PLAN SUPPLEMENTAL PLAN
------------------------- ----------------------
1997 1996 1995 1997 1996 1995
----- ----- ----- ---- ---- ----
Service cost......................... $ 1.6 $ 1.6 $ 1.3 $0.2 $0.1 $0.4
Interest cost........................ 2.9 2.9 2.7 0.3 0.2 0.4
Return on plan assets................ (6.6) (4.1) (5.5) -- -- --
Net amortization and deferral........ 3.1 0.8 2.5 0.1 -- 0.3
----- ----- ----- ---- ---- ----
$ 1.0 $ 1.2 $ 1.0 $0.6 $0.3 $1.1
===== ===== ===== ==== ==== ====
In 1997, as a result of the Spin Off of Monterey, the Company recognized a
curtailment gain of approximately $2.4 million related to its retirement plan
for the participating Monterey employees. In
50
SANTA FE ENERGY RESOURCES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
addition, in prior periods the Company sponsored a plan covering certain
hourly-rated employees associated with its California operations, and subsequent
to Spin Off the Company has no liability for this plan.
The Company sponsors a pension plan for certain persons employed in foreign
locations (the "Foreign Plan"). The following table sets forth the funded
status of the Foreign Plan at December 31, 1997 and 1996 (in millions):
1997 1996
--------- ---------
Plan assets.......................... $ -- $ --
Actuarial present value of projected
benefit obligations:
Accumulated benefit obligations
Vested..................... (0.1) (0.1)
Nonvested.................. (0.2) (0.2)
Effects of projected future
salary increases............... (0.1) (0.1)
--------- ---------
Excess of projected benefit
obligation over plan assets........ (0.4) (0.4)
Unrecognized prior service cost...... 0.1 0.1
Unrecognized net gain from past
experience different from the
assumed and effects of changes in
assumptions........................ (0.1) --
--------- ---------
Accrued pension liability............ $ (0.4) $ (0.3)
========= =========
Major assumptions at year end
Discount rate................... 7.50% 7.50%
Rate of increase in future
compensation................... 5.00% 5.00%
The following table sets forth the components of pension expense for the
Foreign Plan for 1997, 1996 and 1995 (in millions of dollars):
YEAR ENDED DECEMBER 31,
-------------------------------
1997 1996 1995
--------- --------- ---------
Service cost......................... $ 0.1 $ 0.1 $ 0.1
Interest cost........................ -- -- --
Net amortization and deferral........ -- -- --
--------- --------- ---------
$ 0.1 $ 0.1 $ 0.1
========= ========= =========
51
SANTA FE ENERGY RESOURCES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
POSTRETIREMENT BENEFITS OTHER THAN PENSIONS
The Company provides health care and life insurance benefits for
substantially all employees who retire under the provisions of a
Company-sponsored retirement plan and their dependents. Participation in the
plans is voluntary and requires a monthly contribution by the retiree. The
following table sets forth the plan's funded status at December 31, 1997 and
1996 (in millions):
1997 1996
--------- ---------
Plan assets at fair value............ $ -- $ --
Accumulated postretirement benefit
obligation:
Retirees........................ (4.1) (4.2)
Eligible active participants.... (0.9) (1.0)
Other active participants....... (1.6) (2.1)
--------- ---------
Accumulated postretirement benefit
obligation in excess of plan
assets............................. (6.6) (7.3)
Unrecognized transition obligation... 2.6 3.7
Unrecognized net (gain) loss from
past experience different from that
assumed and effects of changes in
assumptions........................ (0.8) (0.2)
--------- ---------
Accrued postretirement benefit
cost............................... $ (4.8) $ (3.8)
========= =========
Assumed discount rate................ 7.50% 7.50%
Assumed rate of compensation
increase........................... 5.25% 5.25%
The Company's net periodic postretirement benefit cost for 1997, 1996 and
1995 includes the following components (in millions):
YEAR ENDED DECEMBER 31,
-------------------------------
1997 1996 1995
--------- --------- ---------
Service cost......................... $ 0.5 $ 0.5 $ 0.3
Interest cost........................ 0.5 0.5 0.5
Amortization of unrecognized
transition obligation.............. 0.2 0.3 0.3
--------- --------- ---------
$ 1.2 $ 1.3 $ 1.1
========= ========= =========
Estimated costs and liabilities have been developed assuming trend rates
for growth in future health care costs beginning with 7.0% for 1997 graded to
6.0% (5.5% for post age 65) by the year 2000 and remaining constant thereafter.
Increasing the assumed health care cost trend rate by one percent each year
would increase the accumulated postretirement benefit obligation as of December
31, 1997 by $0.5 million and the aggregate of the service cost and interest cost
components of the net periodic postretirement benefit cost for 1997 by $0.1
million.
In 1997, as a result of the Spin Off of Monterey, the Company recognized a
curtailment loss of approximately $0.3 million related to its retiree medical
plan for the participating Monterey employees.
SAVINGS PLAN
The Company has a savings plan available to substantially all salaried
employees and intended to qualify as a deferred compensation plan under Section
401(k) of the Internal Revenue Code (the "401(k) Plan"). The Company will
match employee contributions for an amount up to 4% of each employee's base
salary. In addition, if at the end of each fiscal year the Company's performance
for such year has exceeded certain predetermined criteria, each participant will
receive an additional matching contribution equal to 50% of the regular matching
contribution. The Company's contributions to the 401(k) Plan, which are made in
the form of the Company's common stock and charged to expense, totalled $1.6
million in 1997, $1.2 million in 1996 and $1.3 million in 1995.
52
SANTA FE ENERGY RESOURCES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Company also has a savings plan with respect to certain personnel
employed in foreign locations. The plan is an unsecured creditor of the Company
and at December 31, 1997 and 1996 the Company's liability with respect to the
plan totalled $0.4 million and $0.3 million, respectively.
NOTE 13. COMMITMENTS AND CONTINGENCIES
OIL AND GAS HEDGING
The Company periodically 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.
Crude oil sales hedges resulted in a $2.2 million increase in revenues in
1997 and a $13.4 million decrease in revenues in 1996. At December 31, 1997 the
Company had open crude oil sales hedges on an average of 1,000 barrels per day
for the period January to February 1998. Under the terms of the instruments, if
the average of the applicable daily settlement prices is below $21.00 per
barrel, the Company will receive a settlement based on the difference, and if
the average of the applicable daily settlement prices is above $23.00, the
Company will be required to pay an amount based on the difference.
At December 31, 1997 the Company had no open natural gas sales hedges.
Natural gas sales hedges resulted in a decrease in revenues of $21.4 million in
1996 and $0.3 million in 1995.
As of February 23, 1998, the Company has not entered into any additional
hedging agreements.
ENVIRONMENTAL REGULATION
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
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.
Adobe Resources Corporation, which was merged into the Company in 1992, was
named as a PRP with respect to the Gulf Coast Services Superfund site located in
Abbeville, Louisiana. The Company has entered into a sharing agreement with
other PRPs to participate in the final remediation of this site. The remediation
phase is expected to be completed in 1998, after which will begin the monitoring
phase. The Company estimates its share of the remediation and monitoring phases
to be approximately $150,000, which has been provided for in the Company's
financial statements.
53
SANTA FE ENERGY RESOURCES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
OPERATING LEASES
The Company has noncancellable agreements with terms ranging from one to
six years to lease office space, office equipment and certain production
equipment in foreign locations. Minimum rental payments due under the terms of
these agreements are: 1998 -- $13.2 million, 1999 -- $10.8 million, 2000 -- $8.3
million, 2001 -- $4.3 million, 2002 -- $3.9 million and $0.3 million thereafter.
Rental expense under the terms of noncancellable agreements totalled $10.8
million in 1997, $5.9 million in 1996 and $6.1 million in 1995.
OTHER MATTERS
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.
NOTE 14. FAIR VALUE OF FINANCIAL INSTRUMENTS
SFAS No. 107 "Disclosure About Fair Value of Financial Instruments"
requires the disclosure, to the extent practicable, of the fair value of
financial instruments which are recognized or unrecognized in the balance sheet.
The fair value of the financial instruments disclosed herein is not
representative of the amount that could be realized or settled, nor does the
fair value amount consider the tax consequences, if any, of realization or
settlement. The following table reflects the financial instruments for which the
fair value differs from the carrying amount of such financial instrument in the
Company's December 31, 1997 and 1996 balance sheets (in millions):
1997 1996
-------------------------- --------------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
---------------- ------ ---------------- ------
Liabilities:
Long-term debt.................. $121.7 $130.7 $278.5 $315.4
Convertible preferred stock, 7%
series........................ -- -- 19.7 28.4
Shareholders' Equity:
$.732 series A convertible
preferred stock............... -- -- 91.4 131.1
The fair value of the Company's 11% Senior Subordinated Debentures,
Convertible Preferred Stock, 7% Series and $.732 Series A Convertible Preferred
Stock is based on market prices. The fair value of the Company's fixed-rate
long-term debt is based on current borrowing rates available for financing with
similar terms and maturities. With respect to the Company's floating-rate debt
the carrying amount approximates fair value.
At December 31, 1997 the Company had open oil sales hedging contracts (see
Note 13). Based on the year-end 1997 settlement prices of the applicable NYMEX
futures contracts, the Company would recognize a gain of $0.3 million with
respect to such hedges in 1998. The actual gains or losses realized by the
Company from these hedges may vary significantly due to the volatility of the
futures markets and other indices.
54
SANTA FE ENERGY RESOURCES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 15. SUMMARIZED QUARTERLY FINANCIAL DATA (UNAUDITED)
The following table includes the results of Monterey for all of 1996 and
the first seven months of 1997.
1 QTR 2 QTR 3 QTR 4 QTR YEAR
--------- --------- --------- --------- ---------
(IN MILLIONS, EXCEPT PER SHARE DATA)
1997(a)
Revenues........................ $ 173.9 $ 149.8 $ 101.8 $ 89.2 $ 514.7
Gross profit(b)................. 62.9 37.3 25.8 12.9 138.9
Loss (gain) on sale of assets... (2.3) 0.2 (1.9) 0.4 (3.6)
Income from operations.......... 55.8 27.2 20.8 7.0 110.8
Net income...................... 27.9 12.5 10.7 3.6 54.7
Earnings attributable to common
shares........................ 25.5 2.9 10.7 3.6 42.7
Basic and diluted earnings
attributable to common shares
per share
Basic earnings per
share(c)................ $ 0.28 $ 0.03 $ 0.10 $ 0.04 $ 0.43
Diluted earnings per
share(c)................ 0.27 0.03 0.10 0.04 0.43
Weighted average shares
outstanding................... 91.2 97.0 102.9 103.0 98.6
1996(d)
Revenues........................ $ 123.7 $ 137.5 $ 149.4 $ 172.7 $ 583.3
Gross profit(b)................. 35.5 33.9 40.3 9.9 119.6
Impairment of oil and gas
properties.................... -- 10.4 -- 47.0 57.4
Loss (gain) on sale of assets... 0.2 0.3 -- (12.6) (12.1)
Income from operations.......... 29.5 26.0 33.9 0.1 89.5
Income (loss) before
extraordinary item............ 12.6 17.4 16.5 (4.1) 42.4
Extraordinary item -- debt
extinguishment costs.......... -- -- -- 6.0 6.0
Net income (loss)............... 12.6 17.4 16.5 (10.1) 36.4
Earnings (loss) attributable to
common shares.................. 8.9 13.7 12.8 (46.2) (10.8)
Basic and diluted earnings
(loss) attributable to common
shares per share
Before extraordinary
item.................... $ 0.10 $ 0.15 $ 0.14 $ (0.44) $ (0.05)
Extraordinary item......... -- -- -- (0.07) (0.07)
Per common share........... $ 0.10 $ 0.15 $ 0.14 $ (0.51) $ (0.12)
Weighted average shares
outstanding................... 90.4 90.6 90.7 90.9 90.6
- ------------
(a) The second quarter of 1997 includes an $8.4 million Convertible preferred
premium (see Note 9).
(b) Revenues less operating expenses other than general and administrative.
(c) Per share amounts do not add across due to the increase in average shares
outstanding after the second quarter of 1997.
(d) The fourth quarter of 1996 includes impairments of oil and gas properties of
$47.0 million (see Note 1), a $12.3 million gain on the sale of certain
surface lands (see Note 5), a $6.0 million extraordinary item with respect
to debt extinguishment costs (see Note 2) and a $33.7 million Convertible
preferred premium (see Note 9).
55
SANTA FE ENERGY RESOURCES, INC.
SUPPLEMENTAL INFORMATION TO
CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
OIL AND GAS RESERVES AND RELATED FINANCIAL DATA
Information with respect to the Company's oil and gas producing activities
is presented in the following tables. Reserve quantities as well as certain
information regarding future production and discounted cash flows were
determined by independent petroleum consultants, Ryder Scott Company.
OIL AND GAS RESERVES
The following table sets forth the Company's net proved oil and gas
reserves at December 31, 1994, 1995, 1996 and 1997 and the changes in net proved
oil and gas reserves for the years ended December 31, 1995, 1996 and 1997.
CRUDE OIL AND LIQUIDS (MMBBLS) NATURAL GAS (BCF)
------------------------------------------------------------- -------------------
TOTAL
OTHER EXCLUDING
U.S. ARGENTINA INDONESIA FOREIGN TOTAL MONTEREY U.S. ARGENTINA
--------- --------- --------- ------- --------- --------- --------- ---------
Proved reserves at December 31,
1994............................... 240.2 9.3 8.8 -- 258.3 67.1 204.8 37.0
Revision of previous estimates... 16.4 1.4 0.4 -- 18.2 8.5 1.0 1.3
Improved recovery techniques..... 15.3 0.8 -- -- 16.1 2.4 -- 0.2
Extensions, discoveries and other
additions...................... 1.7 2.2 0.5 -- 4.4 4.4 36.4 0.5
Purchases of minerals-in-place... 6.3 -- -- -- 6.3 6.2 18.0 --
Production....................... (21.3) (0.9) (1.9) -- (24.1) (8.9) (50.3) (4.3)
--------- --- --- ------- --------- --------- --------- ---
Proved reserves at December 31,
1995............................... 258.6 12.8 7.8 -- 279.2 79.7 209.9 34.7
Revisions of previous
estimates...................... 15.6 (0.2) 2.3 -- 17.7 5.7 25.9 (2.4)
Improved recovery techniques..... 14.4 -- -- -- 14.4 -- -- --
Extensions, discoveries and other
additions...................... 0.6 1.3 0.3 -- 2.2 2.2 40.8 1.1
Purchases of minerals-in-place... 10.7 2.8 -- -- 13.5 5.9 11.7 0.6
Sales of minerals-in-place....... (0.3) -- -- -- (0.3) (0.3) (2.1) --
Production....................... (24.3) (1.4) (1.5) -- (27.2) (10.1) (53.4) (7.6)
--------- --- --- ------- --------- --------- --------- ---
Proved reserves at December 31,
1996............................... 275.3 15.3 8.9 -- 299.5 83.1 232.8 26.4
Revisions of previous
estimates...................... 6.9 2.1 2.2 -- 11.2 11.2 22.7 16.4
Improved recovery techniques..... 10.6 -- -- -- 10.6 10.6 -- --
Extensions, discoveries and other
additions...................... 1.0 3.9 15.6 4.4 24.9 24.9 34.9 1.2
Purchases of minerals-in-place... 3.9 6.4 -- -- 10.3 10.3 7.0 --
Sales of minerals-in-place....... -- -- -- -- -- -- (13.0) --
Spin Off of Monterey Resources... (205.8) -- -- -- (205.8) -- (11.6) --
Production....................... (18.3) (1.8) (1.6) -- (21.7) (11.1) (56.5) (7.8)
--------- --- --- ------- --------- --------- --------- ---
Proved reserves at December 31,
1997............................... 73.6 25.9 25.1 4.4 129.0 129.0 216.3 36.2
========= === === ======= ========= ========= ========= ===
Proved developed reserves at December
31,
1994............................. 181.3 6.1 7.1 -- 194.5 54.3 178.2 1.3
1995............................. 206.5 7.1 6.0 -- 219.6 62.5 170.2 33.3
1996............................. 224.1 8.5 6.5 -- 239.1 68.1 193.6 25.9
1997............................. 68.0 15.2 21.8 -- 105.0 105.0 184.8 35.6
TOTAL
OTHER EXCLUDING
INDONESIA FOREIGN TOTAL MONTEREY
--------- ------- ----- ---------
Proved reserves at December 31,
1994............................... 0.6 -- 242.4 229.0
Revision of previous estimates... -- -- 2.3 1.4
Improved recovery techniques..... -- -- 0.2 0.2
Extensions, discoveries and other
additions...................... -- -- 36.9 36.9
Purchases of minerals-in-place... -- -- 18.0 18.0
Production....................... (0.1) -- (54.7) (52.8)
--- ------- ----- ---------
Proved reserves at December 31,
1995............................... 0.5 -- 245.1 232.7
Revisions of previous
estimates...................... (0.2) -- 23.3 22.2
Improved recovery techniques..... -- -- -- --
Extensions, discoveries and other
additions...................... -- -- 41.9 41.9
Purchases of minerals-in-place... -- -- 12.3 12.3
Sales of minerals-in-place....... -- -- (2.1 ) (2.1)
Production....................... (0.1) -- (61.1) (59.8)
--- ------- ----- ---------
Proved reserves at December 31,
1996............................... 0.2 -- 259.4 247.2
Revisions of previous
estimates...................... -- -- 39.1 39.1
Improved recovery techniques..... -- -- -- --
Extensions, discoveries and other
additions...................... -- -- 36.1 36.1
Purchases of minerals-in-place... -- -- 7.0 7.0
Sales of minerals-in-place....... -- -- (13.0) (13.0)
Spin Off of Monterey Resources... -- -- (11.6) --
Production....................... (0.1) -- (64.4) (63.8)
--- ------- ----- ---------
Proved reserves at December 31,
1997............................... 0.1 -- 252.6 252.6
=== ======= ===== =========
Proved developed reserves at December
31,
1994............................. 0.6 -- 180.1 170.7
1995............................. 0.5 -- 204.0 194.8
1996............................. 0.2 -- 219.7 210.2
1997............................. 0.1 -- 220.5 220.5
56
SANTA FE ENERGY RESOURCES, INC.
SUPPLEMENTAL INFORMATION TO
CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED)
Proved reserves are estimated quantities of crude oil and natural gas which
geological and engineering data indicate with reasonable certainty to be
recoverable in future years from known reservoirs under existing economic and
operating conditions. Proved developed reserves are proved reserves which can be
expected to be recovered through existing wells with existing equipment and
operating methods.
Indonesian reserves represent an entitlement to gross reserves in
accordance with a production sharing contract. These reserves include estimated
quantities allocable to the Company for recovery of operating costs as well as
quantities related to the Company's net equity share after recovery of costs.
Accordingly, these quantities are subject to fluctuations with an inverse
relationship to the price of oil. If oil prices increase, the reserve quantities
attributable to the recovery of operating costs decline. Although this reduction
would be offset partially by an increase in the net equity share, the overall
effect would be a reduction of reserves attributable to the Company. At December
31, 1997, the quantities include 0.9 million barrels which the Company is
contractually obligated to sell for $0.20 per barrel.
The Company has certain commitments with respect to the delivery of natural
gas which the Company believes it can fulfill from its proved reserves and
supply contracts with other companies.
At December 31, 1997, 1.7 million barrels of crude oil reserves and 13.2
billion cubic feet of natural gas reserves were subject to a 90% net profits
interest held by Santa Fe Energy Trust.
ESTIMATED PRESENT VALUE OF FUTURE NET CASH FLOWS
Estimated future net cash flows from the Company's proved oil and gas
reserves at December 31, 1997, 1996 and 1995 are presented in the following
table (in millions, except as noted):
TOTAL
OTHER EXCLUDING
U.S. ARGENTINA INDONESIA FOREIGN TOTAL MONTEREY
--------- ---------- ---------- -------- -------- ----------
1997
Future cash inflows.............. $ 1,653.8 $ 431.0 $ 412.9 $ 69.9 $2,567.6 $2,567.6
Future production costs.......... (657.4) (190.9) (142.3) (38.3) (1,028.9) (1,028.9)
Future development costs......... (118.1) (75.5) (83.0) (11.3) (287.9) (287.9)
Future income tax expenses....... (208.2) (24.4) (54.7) (5.6) (292.9) (292.9)
--------- ---------- ---------- -------- -------- ----------
Net future cash flows........ 670.1 140.2 132.9 14.7 957.9 957.9
Discount at 10% for timing of
cash flows..................... (259.2) (61.0) (55.0) (3.0) (378.2) (378.2)
--------- ---------- ---------- -------- -------- ----------
Present value of future net cash
flows from proved reserves..... $ 410.9 $ 79.2 $ 77.9 $ 11.7 $ 579.7 $ 579.7
========= ========== ========== ======== ======== ==========
Present value of pretax future
net cash flows from proved
reserves....................... $ 538.6 $ 93.1 $ 111.9 $ 16.1 $ 759.7 $ 759.7
========= ========== ========== ======== ======== ==========
Average sales prices:
Oil ($/Barrel)............... $ 16.30 $ 14.96 $ 16.59 $16.00 $ 16.06 $ 16.06
Natural gas ($/Mcf).......... 2.26 1.21 1.05 -- 2.11 2.11
57
SANTA FE ENERGY RESOURCES, INC.
SUPPLEMENTAL INFORMATION TO
CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED)
TOTAL
OTHER EXCLUDING
U.S. ARGENTINA INDONESIA FOREIGN TOTAL MONTEREY
--------- ---------- ---------- -------- -------- ----------
1996
Future cash inflows.............. $ 6,393.6 $ 377.7 $ 191.8 $-- $6,963.1 $2,793.8
Future production costs.......... (2,792.7) (138.8) (135.2) -- (3,066.7) (888.7)
Future development costs......... (286.7) (53.0) (22.5) -- (362.2) (191.6)
Future income tax expenses....... (999.2) (33.4) (11.9) -- (1,044.5) (461.2)
--------- ---------- ---------- -------- -------- ----------
Net future cash flows........ 2,315.0 152.5 22.2 -- 2,489.7 1,252.3
Discount at 10% for timing of
cash flows..................... (951.2) (54.3) (7.1) -- (1,012.6) (486.5)
--------- ---------- ---------- -------- -------- ----------
Present value of future net cash
flows from proved reserves..... $ 1,363.8 $ 98.2 $ 15.1 $-- $1,477.1 $ 765.8
========= ========== ========== ======== ======== ==========
Present value of pretax future
net cash flows from proved
reserves....................... $ 1,952.3 $ 119.6 $ 23.6 $-- $2,095.5 $1,047.7
========= ========== ========== ======== ======== ==========
Average sales prices:
Oil ($/Barrel)............... $ 20.35 $ 22.62 $ 21.67 $-- $ 20.51 $ 24.14
Natural gas ($/Mcf).......... 3.47 1.20 1.05 -- 3.24 3.33
1995
Future cash inflows.............. $ 4,191.2 $ 244.7 $ 137.4 $-- $4,573.3 $1,810.3
Future production costs.......... (1,852.8) (103.0) (63.0) -- (2,018.8) (635.2)
Future development costs......... (282.8) (36.1) (6.1) -- (325.0) (155.0)
Future income tax expenses....... (541.7) (11.8) (25.1) -- (578.6) (235.7)
--------- ---------- ---------- -------- -------- ----------
Net future cash flows........ 1,513.9 93.8 43.2 -- 1,650.9 784.4
Discount at 10% for timing of
cash flows..................... (672.0) (35.7) (13.0) -- (720.7) (322.2)
--------- ---------- ---------- -------- -------- ----------
Present value of future net cash
flows from proved reserves..... $ 841.9 $ 58.1 $ 30.2 $-- $ 930.2 $ 462.2
========= ========== ========== ======== ======== ==========
Present value of pretax future
net cash flows from proved
reserves....................... $ 1,143.1 $ 65.4 $ 48.7 $-- $1,257.2 $ 602.8
========= ========== ========== ======== ======== ==========
Average sales prices:
Oil ($/Barrel)............... $ 14.75 $ 15.66 $ 17.51 $-- $ 14.87 $ 17.76
Natural gas ($/Mcf).......... 1.88 1.27 1.03 -- 1.79 1.84
58
SANTA FE ENERGY RESOURCES, INC.
SUPPLEMENTAL INFORMATION TO
CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED)
The following tables sets forth the changes in the present value of
estimated future net cash flows from proved reserves during 1997, 1996 and 1995
(in millions):
TOTAL
OTHER EXCLUDING
U.S. ARGENTINA INDONESIA FOREIGN TOTAL MONTEREY
--------- --------- --------- -------- ------- ----------
1997
Balance at beginning of year..... $ 1,363.8 $ 98.2 $ 15.1 $-- $1,477.1 $765.8
--------- --------- --------- -------- ------- ----------
Increase (decrease) due to:
Sales of oil and gas, net of
production costs of $177.1
million................... (271.4) (26.9) (10.8) -- (309.1) (241.5)
Net changes in prices and
production costs.......... (444.7) (73.8) 16.0 -- (502.5) (474.6)
Extensions, discoveries and
improved recovery......... 107.0 7.3 64.0 16.1 194.4 195.8
Purchase of
minerals-in-place......... 24.0 32.2 -- -- 56.2 57.0
Spin Off of Monterey
Resources................. (932.2) -- -- -- (932.2) --
Sales of
minerals-in-place......... (36.3) -- -- -- (36.3) (36.3)
Development costs
incurred.................. 325.7 54.6 30.7 5.2 416.2 208.0
Changes in estimated
volumes................... 28.4 14.7 11.7 -- 54.8 74.9
Changes in estimated
development costs......... (294.9) (44.9) (25.4) (5.2) (370.4) (163.6)
Interest factor -- accretion
of discount............... 80.6 10.2 2.2 -- 93.0 92.6
Income taxes................ 460.9 7.6 (25.6) (4.4) 438.5 101.6
--------- --------- --------- -------- ------- ----------
(952.9) (19.0) 62.8 11.7 (897.4) (186.1)
--------- --------- --------- -------- ------- ----------
$ 410.9 $ 79.2 $ 77.9 $ 11.7 $ 579.7 $579.7
========= ========= ========= ======== ======= ==========
1996
Balance at beginning of year..... $ 841.9 $ 58.1 $ 30.2 $-- $ 930.2 462.2
--------- --------- --------- -------- ------- ----------
Increase (decrease) due to:
Sales of oil and gas, net of
production costs of $210.8
million................... (311.7) (25.6) (13.9) -- (351.2) (236.7)
Net changes in prices and
production costs.......... 552.1 35.0 (8.3) -- 578.8 312.5
Extensions, discoveries and
improved recovery......... 169.1 16.4 0.8 -- 186.3 122.9
Purchase of
minerals-in-place......... 92.5 19.2 -- -- 111.7 73.4
Sales of
minerals-in-place......... (3.3) -- -- -- (3.3) (2.7)
Development costs
incurred.................. 145.4 19.5 12.9 -- 177.8 123.9
Changes in estimated
volumes................... 152.3 6.6 3.1 -- 162.0 43.6
Changes in estimated
development costs......... (100.8) (23.4) (22.8) -- (147.0) (122.9)
Interest factor -- accretion
of discount............... 113.7 6.6 3.0 -- 123.3 61.3
Income taxes................ (287.4) (14.2) 10.1 -- (291.5) (71.7)
--------- --------- --------- -------- ------- ----------
521.9 40.1 (15.1) -- 546.9 303.6
--------- --------- --------- -------- ------- ----------
$ 1,363.8 $ 98.2 $ 15.1 $-- $1,477.1 $765.8
========= ========= ========= ======== ======= ==========
59
SANTA FE ENERGY RESOURCES, INC.
SUPPLEMENTAL INFORMATION TO
CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED)
TOTAL
OTHER EXCLUDING
U.S. ARGENTINA INDONESIA FOREIGN TOTAL MONTEREY
--------- --------- --------- -------- ------- ----------
1995
Balance at beginning of year..... $ 680.4 $ 31.2 $ 28.3 $-- $ 739.9 $335.3
--------- --------- --------- -------- ------- ----------
Increase (decrease) due to:
Sales of oil and gas, net of
production costs of $172.6
million................... (244.7) (11.8) (13.2) -- (269.7) (133.5)
Net changes in prices and
production costs.......... 178.2 13.9 9.1 -- 201.2 91.2
Extensions, discoveries and
improved recovery......... 110.3 4.6 4.2 -- 119.1 78.8
Purchase of
minerals-in-place......... 56.6 -- -- -- 56.6 55.1
Development costs
incurred.................. 145.4 13.7 11.3 -- 170.4 119.8
Changes in estimated
volumes................... 19.9 9.6 0.3 -- 29.8 21.8
Changes in estimated
development costs......... (105.6) (2.4) (10.2) -- (118.2) (92.2)
Interest factor -- accretion
of discount............... 88.7 4.4 4.2 -- 97.3 46.3
Income taxes................ (87.3) (5.1) (3.8) -- (96.2) (60.4)
--------- --------- --------- -------- ------- ----------
161.5 26.9 1.9 -- 190.3 126.9
--------- --------- --------- -------- ------- ----------
$ 841.9 $ 58.1 $ 30.2 $-- $ 930.2 $462.2
========= ========= ========= ======== ======= ==========
Estimated future cash flows represent an estimate of future net cash flows
from the production of proved reserves using estimated sales prices and
estimates of the production costs, ad valorem and production taxes, and future
development costs necessary to produce such reserves. No deduction has been made
for depletion, depreciation or any indirect costs such as general corporate
overhead or interest expense.
The sales prices used in the calculation of estimated future net cash flows
are based on the prices in effect at year end. Such prices have been held
constant except for known and determinable escalation.
Operating costs and ad valorem and production taxes are estimated based on
current costs with respect to producing oil and gas properties. Future
development costs are based on the best estimate of such costs assuming current
economic and operating conditions.
Income tax expense is computed based on applying the appropriate statutory
tax rate to the excess of future cash inflows less future production and
development costs over the current tax basis of the properties involved. While
applicable investment tax credits and other permanent differences are considered
in computing taxes, no recognition is given to tax benefits applicable to future
exploration costs or the activities of the Company that are unrelated to oil and
gas producing activities.
The information presented with respect to estimated future net revenues and
cash flows and the present value thereof is not intended to represent the fair
value of oil and gas reserves. Actual future sales prices and production and
development costs may vary significantly from those in effect at year end and
actual future production may not occur in the periods or amounts projected. This
information is presented to allow a reasonable comparison of reserve values
prepared using standardized measurement criteria and should be used only for
that purpose.
60
SANTA FE ENERGY RESOURCES, INC.
SUPPLEMENTAL INFORMATION TO
CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED)
COSTS INCURRED IN OIL AND GAS PRODUCING ACTIVITIES
The following table includes all costs incurred, whether capitalized or
charged to expense at the time incurred (in millions):
TOTAL
OTHER EXCLUDING
U.S. ARGENTINA INDONESIA FOREIGN TOTAL MONTEREY
--------- --------- --------- ------- ------ ---------
1997
Property acquisition costs:
Unproved................... $ 14.9 $-- $ 0.2 $ 2.1 $ 17.2 $ 17.1
Proved..................... 185.2 37.4 -- 0.2 222.8 84.3
Exploration costs............... 48.5 2.1 6.0 9.0 65.6 64.5
Development costs............... 115.6 17.2 30.7 5.2 168.7 128.3
--------- --------- --------- ------- ------ ---------
$ 364.2 $56.7 $36.9 $16.5 $474.3 $ 294.2
========= ========= ========= ======= ====== =========
1996
Property acquisition costs:
Unproved................... $ 31.6 $-- $-- $ 1.8 $ 33.4 $ 33.3
Proved..................... 30.2 7.4 -- 0.2 37.8 34.4
Exploration costs............... 29.5 0.1 2.4 11.4 43.4 41.7
Development costs............... 115.2 12.1 12.9 3.9 144.1 97.1
--------- --------- --------- ------- ------ ---------
$ 206.5 $19.6 $15.3 $17.3 $258.7 $ 206.5
========= ========= ========= ======= ====== =========
1995
Property acquisition costs:
Unproved................... $ 13.0 $-- $ 0.7 $ 0.1 $ 13.8 $ 13.7
Proved..................... 33.8 -- -- -- 33.8 32.5
Exploration costs............... 27.7 1.2 7.7 7.2 43.8 41.3
Development costs............... 111.5 13.7 11.3 0.5 137.0 89.2
--------- --------- --------- ------- ------ ---------
$ 186.0 $14.9 $19.7 $ 7.8 $228.4 $ 176.7
========= ========= ========= ======= ====== =========
61
SANTA FE ENERGY RESOURCES, INC.
SUPPLEMENTAL INFORMATION TO
CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED)
CAPITALIZED COSTS RELATED TO OIL AND GAS PRODUCING ACTIVITIES
The following table sets forth information concerning capitalized costs at
December 31, 1997 and 1996 related to the Company's oil and gas operations (in
millions):
TOTAL
OTHER EXCLUDING
U.S. ARGENTINA INDONESIA FOREIGN TOTAL MONTEREY
----------- --------- --------- ------- ----------- ---------
1997
Oil and gas properties:
Unproved................... $ 65.2 $ 4.9 $ 11.9 $ 4.0 $ 86.0 $ 86.0
Proved..................... 1,290.6 143.5 145.5 14.9 1,594.5 1,594.5
Other...................... 1.9 -- -- -- 1.9 1.9
Accumulated amortization of
unproved properties........... (18.5) (2.1) (4.8) (2.8) (28.2) (28.2)
Accumulated depletion,
depreciation and impairment of
proved properties............. (903.9) (32.4) (70.2) (3.7) (1,010.2) (1,010.2)
Accumulated depreciation of
other oil and gas
properties.................... (0.7) -- -- -- (0.7) (0.7)
----------- --------- --------- ------- ----------- ---------
$ 434.6 $ 113.9 $ 82.4 $12.4 $ 643.3 $ 643.3
=========== ========= ========= ======= =========== =========
1996
Oil and gas properties:
Unproved................... $ 63.8 $ 4.5 $ 11.8 $ 1.9 $ 82.0 $ 81.6
Proved..................... 2,236.8 90.3 113.9 5.3 2,446.3 1,440.1
Other...................... 11.5 -- -- -- 11.5 1.9
Accumulated amortization of
unproved properties........... (18.9) (2.4) (4.4) (1.4) (27.1) (26.9)
Accumulated depletion,
depreciation and impairment of
proved properties............. (1,523.9) (23.4) (63.8) (3.5) (1,614.6) (971.3)
Accumulated depreciation of
other oil and gas
properties.................... (4.4) -- -- -- (4.4) (0.9)
----------- --------- --------- ------- ----------- ---------
$ 764.9 $ 69.0 $ 57.5 $ 2.3 $ 893.7 $ 524.5
=========== ========= ========= ======= =========== =========
62
SANTA FE ENERGY RESOURCES, INC.
SUPPLEMENTAL INFORMATION TO
CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED)
RESULTS OF OPERATIONS FROM OIL AND GAS PRODUCING ACTIVITIES
The following table sets forth the Company's results of operations from oil
and gas producing activities for the years ended December 31, 1997, 1996 and
1995 (in millions):
TOTAL
OTHER EXCLUDING
U.S. ARGENTINA INDONESIA FOREIGN TOTAL MONTEREY
--------- --------- --------- ------- ------- ---------
1997
Revenues......................... $ 446.3 $40.6 $27.8 $ -- $ 514.7 $ 333.5
Production costs:
Production and operating
costs...................... (128.1) (13.3) (16.7) (0.8 ) (158.9) (87.6)
Taxes (other than income).... (17.8) (0.4) -- -- (18.2) (12.5)
Cost of crude oil purchased...... (22.0) -- -- -- (22.0) --
Exploration, including dry hole
costs.......................... (37.9) (2.2) (4.6) (4.4 ) (49.1) (48.2)
Depletion, depreciation,
amortization and impairments... (108.6) (8.4) (6.9) (0.6 ) (124.5) (102.5)
Gain (loss) on disposal of
properties..................... 3.6 -- -- -- 3.6 3.6
--------- --------- --------- ------- ------- ---------
135.5 16.3 (0.4) (5.8 ) 145.6 86.3
Income taxes..................... (48.8) (4.9) 0.1 2.2 (51.4) (30.0)
--------- --------- --------- ------- ------- ---------
$ 86.7 $11.4 $(0.3) $ (3.6 ) $ 94.2 $ 56.3
========= ========= ========= ======= ======= =========
1996
Revenues......................... $ 517.9 $35.8 $29.6 $ -- $ 583.3 $ 290.4
Production costs:
Production and operating
costs...................... (162.4) (10.0) (15.7) (0.3 ) (188.4) (80.6)
Taxes (other than income).... (22.2) (0.2) -- -- (22.4) (14.2)
Cost of crude oil purchased...... (20.8) -- -- -- (20.8) --
Exploration, including dry hole
costs.......................... (21.9) (0.1) (0.6) (11.9 ) (34.5) (32.8)
Depletion, depreciation,
amortization and impairments... (164.9) (7.9) (24.6) (5.0 ) (202.4) (166.3)
Gain (loss) on disposal of
properties..................... 0.3 -- -- (0.2 ) 0.1 0.1
--------- --------- --------- ------- ------- ---------
126.0 17.6 (11.3) (17.4 ) 114.9 (3.4)
Income taxes..................... (49.6) (5.3) 2.9 3.5 (48.5) (0.1)
--------- --------- --------- ------- ------- ---------
$ 76.4 $12.3 $(8.4) $(13.9 ) $ 66.4 $ (3.5)
========= ========= ========= ======= ======= =========
1995
Revenues......................... $ 398.6 $19.2 $31.6 $ -- $ 449.4 $ 230.7
Production costs:
Production and operating
costs...................... (130.6) (7.1) (17.7) (0.4 ) (155.8) (69.7)
Taxes (other than income).... (16.5) (0.3) -- -- (16.8) (10.0)
Cost of crude oil purchased...... (6.5) -- -- -- (6.5) --
Exploration, including dry hole
costs.......................... (13.6) (1.2) (3.1) (5.5 ) (23.4) (21.0)
Depletion, depreciation,
amortization and impairments... (143.3) (7.0) (10.0) (0.5 ) (160.8) (129.7)
Gain (loss) on disposal of
properties..................... (0.2) -- -- (0.1 ) (0.3) (0.3)
--------- --------- --------- ------- ------- ---------
87.9 3.6 0.8 (6.5 ) 85.8 --
Income taxes..................... (34.8) (1.1) (1.2) -- (37.1) (2.0)
--------- --------- --------- ------- ------- ---------
$ 53.1 $ 2.5 $(0.4) $ (6.5 ) $ 48.7 $ (2.0)
========= ========= ========= ======= ======= =========
Income taxes are computed by applying the appropriate statutory rate to the
results of operations before income taxes. Applicable tax credits and allowances
related to oil and gas producing activities have been taken into account in
computing income tax expenses. No deduction has been made for indirect cost such
as corporate overhead or interest expense.
63
SIGNATURES
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 10th day of
March, 1998.
SANTA FE ENERGY RESOURCES, INC.
(Registrant)
Date: March 10, 1998 /s/JANET F. CLARK
JANET F. CLARK, VICE PRESIDENT,
CHIEF FINANCIAL OFFICER AND TREASURER
(PRINCIPAL FINANCIAL AND ACCOUNTING
OFFICER)
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed by the following persons on behalf of the registrant and
in the capacities and on the date indicated.
SIGNATURE AND TITLE
- -------------------------------------
JAMES L. PAYNE, Chairman
of the Board, President,
Chief Executive Officer and Director
(PRINCIPAL EXECUTIVE OFFICER)
JANET F. CLARK, Vice President,
Chief Financial Officer and Treasurer
(PRINCIPAL FINANCIAL AND ACCOUNTING
OFFICER)
DIRECTORS
- -------------------------------------
William E. Greehey /s/JANET F. CLARK
Melvyn N. Klein JANET F. CLARK, VICE PRESIDENT,
Allan V. Martini CHIEF FINANCIAL OFFICER AND TREASURER
Reuben F. Richards ATTORNEY IN FACT
Kathryn D. Wriston
Date: March 10, 1998
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SANTA FE ENERGY RESOURCES, INC.
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
THREE YEARS ENDED DECEMBER 31, 1997
(IN MILLIONS)
- ----------------------------------------------------------------------
- ----------------------------------------------------------------------
1997 1996 1995
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Accounts receivable:
Balance at beginning of period..... $ 2.5 $ 2.0 $ 3.1
Charge (credit) to income....... 0.5 0.5 --
Net amounts written off......... (0.3) -- (1.1)
--------- --------- ---------
Balance at the end of period....... $ 2.7 $ 2.5 $ 2.0
========= ========= =========
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INDEX OF EXHIBITS
NUMBER DESCRIPTION
- ------------------------ ------------------------------------------------------------------------------------------
3(a) -- Restated Certificate of Incorporation (incorporated by reference to Exhibit 3.1 of the
Form S-2 Registration Statement of Santa Fe Energy Resources, Inc. ("SFER, Inc.")
Commission File No. 33-32831).
*3(b) -- Bylaws, as amended February 23, 1998.
4(b) -- Rights Agreement dated as of March 3, 1997, between SFER, Inc. and First Chicago Trust
Company of New York, as Rights Agent (incorporated by reference to Exhibit 1 to SFER,
Inc.'s Form 8-A filed February 28, 1997).
4(c) -- Form of Amended Certificate of Designation of Series A Junior Participating Preferred
Stock of SFER, Inc. (incorporated by reference to Exhibit 1 to SFER, Inc.'s Form 8-A filed
February 28, 1997).
4(f) -- Form of Indenture dated as of May 25, 1994 and Form of Debenture relating to SFER, Inc.'s
11% Senior Subordinated Debentures due 2004 (incorporated by reference to Exhibit 4.1 of
the Form S-3 Registration Statement of SFER, Inc. Commission File No. 33-52849).
4(g) -- First Supplemental Indenture, dated as of October 21, 1996, Between SFER, Inc. and State
Street Bank and Trust Company, as Trustee, relating to SFER, Inc.'s 11% Senior
Subordinated Debentures due 2004 (incorporated by reference to Exhibit 10.1 to SFER,
Inc.'s Quarterly Report on Form 10-Q for the quarter ended September 30, 1996).
10(a) -- Agreement for the Allocation of the Consolidated Federal Income Tax Liability Among the
Members of the Santa Fe Pacific Corporation Affiliated Group, as amended, dated December
23, 1983 (incorporated by reference to Exhibit 10.8 of the Form S-2 Registrations
Statement of SFER, Inc., Commission File No. 33-32831).
10(b) -- SFER, Inc. Incentive Compensation Plan, as amended (incorporated by reference to Exhibit
10(b) to SFER, Inc.'s Annual Report on Form 10-K for the year ended December 31, 1995).
10(c) -- SFER, Inc. 1990 Incentive Stock Compensation Plan, Third Amendment and Restatement
(incorporated by reference to Exhibit 10(a) to SFER, Inc.'s Quarterly Report on Form 10-Q
for the quarter ended March 31, 1996).
10(d) -- Examples of Employment Agreements entered into with executive officers of SFER, Inc.
(incorporated by reference to Exhibit 10(d) to SFER, Inc.'s Annual Report on Form 10-K for
the year ended December 31, 1996).
10(e) -- Example of Indemnification Agreements with SFER, Inc.'s directors and officers
(incorporated by reference to Exhibit 10(b) to SFER, Inc.'s Annual Report on Form 10-K for
the year ended December 31, 1995).
10(f) -- Spin Off Tax Indemnification Agreement between SFER, Inc. and Santa Fe Pacific
Corporation. (incorporated by reference to Exhibit 10(f) to SFER, Inc.'s Annual Report on
Form 10-K for the year ended December 31, 1996).
10(g) -- Agreement Concerning Taxes among SFER, Inc., certain subsidiaries of SFER, Inc. and Santa
Fe Pacific Corporation. (incorporated by reference to Exhibit 10(g) to SFER, Inc.'s Annual
Report on Form 10-K for the year ended December 31, 1996).
10(h) -- Santa Fe Energy Resources Supplemental Retirement Plan effective as of December 4, 1990.
(incorporated by reference to Exhibit 10(h) to SFER, Inc.'s Annual Report on Form 10-K for
the year ended December 31, 1996).
10(i) -- SFER, Inc. Deferred Compensation Plan, effective as of January 1, 1991 as amended and
restated, effective February 1, 1994 (incorporated by reference to Exhibit 10(p) to SFER,
Inc.'s Annual Report on Form 10-K for the year ended December 31, 1993).
10(j) -- Gas Marketing Agreement, dated as of December 14, 1993, between SFER, Inc., Santa Fe
Energy Operating Partners, L.P. and Adobe Gas Pipeline Company (incorporated by reference
to Exhibit 10(t) to SFER, Inc.'s Annual Report on Form 10-K for the year ended December
31, 1993).
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NUMBER DESCRIPTION
- ------------------------ ------------------------------------------------------------------------------------------
10(k) -- Credit Agreement dated as of November 13, 1996 among SFER, Inc., the banks signatory
thereto, and The Chase Manhattan Bank, as Administrative Agent and ABN AMRO Bank, N.V., as
Co-Agent. (incorporated by reference to Exhibit 10(k) to SFER, Inc.'s Annual Report on
Form 10-K for the year ended December 31, 1996).
10(m) -- Agreement for the Allocation of Consolidated Federal Income Tax Liability and State and
Local Taxes among the members of the SFER, Inc. Affiliated Group dated November 19, 1996
(incorporated by reference to Exhibit 10.2 to Monterey Resources, Inc.'s [Commission File
No. 1-12311] Annual Report on Form 10-K for the year ended December 31, 1996).
10(n) -- Agreement Concerning Taxes and Tax Indemnifications upon Spin Off, dated November 19,
1996, between Monterey Resources, Inc. and SFER, Inc. (incorporated by reference to
Exhibit 10.3 to Monterey Resources, Inc.'s [Commission File No. 1-12311] Annual Report on
Form 10-K for the year ended December 31, 1996).
10(p) -- Agreement Regarding Shelf Registration Statement dated March 24, 1995 between SFER, Inc.
and HC Associates, GKH Partners, L.P., GKH Investments, L.P., Ernest H. Cockrell Texas
Testamentary Trust and Carol Cockrell Jennings Texas Testamentary Trust (incorporated by
reference to Exhibit 10(o) to SFER, Inc.'s Annual Report on Form 10-K for the year ended
December 31, 1995).
10(q) -- Conveyance and Contribution Agreement dated as of November 1, 1996, between Monterey
Resources, Inc and SFER, Inc. (incorporated by reference to Monterey Resources, Inc.'s
[Commission File No. 1-12311] Annual Report on Form 10-K for the year ended December 31,
1996).
*21 Subsidiaries of the registrant.
*23(a) Consent of Independent Accountants.
*23(b) -- Consent of Ryder Scott Company.
*24 Powers of Attorney.
*27 Financial Data Schedule
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* Filed herewith
67