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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended MARCH 31, 1998
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File Number 1-7667
SANTA FE ENERGY RESOURCES, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 36-2722169
(STATE OR OTHER JURISDICTION (I.R.S. EMPLOYER
OF INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
1616 SOUTH VOSS, SUITE 1000, HOUSTON, TEXAS 77057
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE (713) 507-5000
NONE
(FORMER NAME OR FORMER ADDRESS, IF CHANGED SINCE LAST REPORT)
INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS REQUIRED
TO BE FILED BY SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 DURING
THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE REGISTRANT WAS
REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH FILING
REQUIREMENTS FOR THE PAST 90 DAYS. YES |X| NO |_|
INDICATE THE NUMBER OF SHARES OF EACH OF THE ISSUER'S CLASSES OF COMMON STOCK,
AS OF THE LATEST PRACTICABLE DATE:
CLASS OUTSTANDING AS OF APRIL 30, 1998
COMMON STOCK, $.01 PAR VALUE 102,806,779
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TABLE OF CONTENTS
PAGE
PART I FINANCIAL INFORMATION (UNAUDITED)
Item 1. Consolidated Financial Statements
Consolidated Statement of Operations for the Three Months
ended March 31, 1998 and 1997 3
Consolidated Balance Sheet at March 31, 1998 and
December 31, 1997 4
Consolidated Statement of Cash Flows for the Three Months
ended March 31, 1998 and 1997 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 9
PART II OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 15
SIGNATURE 16
2
SANTA FE ENERGY RESOURCES, INC.
CONSOLIDATED STATEMENT OF OPERATIONS (UNAUDITED)
(IN MILLIONS, EXCEPT PER SHARE DATA)
Three Months Ended
March 31,
------------------
1998 1997(1)
------- -------
Revenues:
Sales of crude oil and liquids produced ................ $ 39.8 $ 127.3
Sales of natural gas produced .......................... 28.8 36.7
Sales of crude oil purchased ........................... -- 9.6
Other .................................................. 0.2 0.3
------- -------
Total revenues .................................... 68.8 173.9
------- -------
Costs and expenses:
Production and operating ............................... 25.3 52.2
Cost of crude oil purchased ............................ -- 10.7
Exploration, including dry hole costs .................. 12.2 9.3
Depletion, depreciation and amortization ............... 28.1 33.6
General and administrative ............................. 4.4 7.1
Taxes (other than income) .............................. 4.1 7.5
Loss (gain) on disposition of assets ................... -- (2.3)
------- -------
Total costs and expenses .......................... 74.1 118.1
------- -------
Income (loss) from operations .............................. (5.3) 55.8
Interest income ........................................ 2.2 0.9
Interest expense ....................................... (3.8) (7.7)
Interest capitalized ................................... 1.7 1.6
Other income (expense) ................................. -- (0.1)
------- -------
Income (loss) before income taxes and minority
interest ................................................. (5.2) 50.5
Current income taxes ................................ 2.6 (4.5)
Deferred income taxes ............................... 2.3 (15.4)
------- -------
Income (loss) before minority interest ..................... (0.3) 30.6
Minority interest in Monterey Resources, Inc. .......... -- (2.7)
------- -------
Net income (loss) .......................................... (0.3) 27.9
Preferred dividend requirement ......................... -- (2.4)
------- -------
Earnings (loss) attributable to common shares .............. $ (0.3) $ 25.5
======= =======
Earnings (loss) attributable to common shares per share
Basic .................................................. $ -- $ 0.28
======= =======
Diluted ................................................ $ -- $ 0.27
======= =======
Weighted average number of shares outstanding
Basic .................................................. 102.7 91.2
======= =======
Diluted ................................................ 105.7 103.0
======= =======
(1)Includes results of Monterey Resources, Inc.
See accompanying notes.
3
SANTA FE ENERGY RESOURCES, INC.
CONSOLIDATED BALANCE SHEET
(IN MILLIONS, EXCEPT AS NOTED)
March 31, December 31,
1998 1997
----------- ------------
(unaudited)
ASSETS
Current assets:
Cash and cash equivalents ........................................... $ 3.7 $ 5.6
Accounts receivable ................................................. 72.9 70.9
Inventories ......................................................... 17.5 14.5
Other current assets ................................................ 25.6 21.8
-------- --------
119.7 112.8
-------- --------
Properties and equipment, at cost:
Oil and gas (successful efforts method of accounting) ............... 1,736.8 1,682.4
Other ............................................................... 16.9 16.8
-------- --------
1,753.7 1,699.2
Accumulated depletion, depreciation, amortization and impairment .... (1,077.0) (1,049.5)
-------- --------
676.7 649.7
-------- --------
Other assets ............................................................ 18.7 26.4
======== ========
$ 815.1 $ 788.9
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable .................................................... $ 84.4 $ 106.7
Income taxes payable ................................................ 4.4 6.5
Interest payable .................................................... 4.4 1.4
Other current liabilities ........................................... 14.2 19.4
-------- --------
107.4 134.0
-------- --------
Long-term debt .......................................................... 178.8 121.7
Deferred revenues ....................................................... 5.0 3.7
Other long-term obligations ............................................. 37.0 36.3
Deferred income taxes ................................................... 36.2 38.5
Commitments and contingencies (See Note 4) .............................. -- --
Shareholders' equity:
Preferred stock, $0.01 par value, 38.1 million shares authorized,
none issued ....................................................... -- --
Common stock, $0.01 par value, 200.0 million shares authorized,
103.0 million shares issued and outstanding (103.0 million in 1997) 1.0 1.0
Paid-in capital ..................................................... 728.2 728.2
Accumulated deficit ................................................. (273.5) (273.2)
Treasury stock, at cost, 0.2 million shares (0.1 million in 1997) ... (2.0) (0.6)
Unamortized restricted stock awards ................................. (3.0) (0.7)
-------- --------
450.7 454.7
-------- --------
$ 815.1 $ 788.9
======== ========
See accompanying notes.
4
SANTA FE ENERGY RESOURCES, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED)
(IN MILLIONS)
Three Months Ended
March 31,
---------------
1998 1997 (1)
------- --------
Operating activities:
Net income (loss) ........................................ $ (0.3) $ 27.9
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depletion, depreciation and amortization .............. 28.1 33.6
Deferred income taxes ................................. (2.3) 15.4
Loss (gain) on disposition of assets .................. -- (2.3)
Exploratory dry hole costs ............................ 3.6 5.1
Minority interest in Monterey Resources, Inc. ......... -- 2.7
Other ................................................. 0.9 1.0
Changes in operating assets and liabilities:
Decrease (increase) in accounts receivable ............ (2.0) (7.3)
Decrease (increase) in inventories .................... (3.0) 0.2
Increase (decrease) in accounts payable ............... (12.3) 6.3
Increase (decrease) in interest payable ............... 3.0 (1.9)
Increase (decrease) in income taxes payable ........... (2.1) 3.9
Net change in other assets and liabilities ............ 0.9 38.7
------ ------
Net cash provided by operating activities ..................... 14.5 123.3
------ ------
Investing activities:
Capital expenditures, including exploratory dry hole costs (58.7) (60.1)
Acquisition of producing properties ...................... (11.8) (31.5)
Net proceeds from disposition of assets .................. 1.5 2.6
------ ------
Net cash used in investing activities ......................... (69.0) (89.0)
------ ------
Financing activities:
Net change in long-term lines of credit .................. 57.1 (4.0)
Issuance of Santa Fe Energy Resources, Inc. common stock . -- 1.1
Treasury stock reissued .................................. 0.4 --
Treasury stock purchased ................................. (4.9) --
Cash dividends paid ...................................... -- (2.4)
------ ------
Net cash provided (used) by financing activities .............. 52.6 (5.3)
------ ------
Net increase (decrease) in cash ............................... (1.9) 29.0
Cash and cash equivalents at beginning of period .............. 5.6 14.6
====== ======
Cash and cash equivalents at end of period .................... $ 3.7 $ 43.6
====== ======
Supplemental disclosure of cash flow information:
Interest paid ............................................ $ 0.7 $ 9.4
Income taxes paid ........................................ $ 1.8 $ 0.8
(1)Includes results of Monterey Resources, Inc.
See accompanying notes.
5
SANTA FE ENERGY RESOURCES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1. ACCOUNTING POLICIES
The consolidated financial statements for the three months ended March
31, 1998 and 1997 are unaudited and reflect all adjustments (consisting of only
normal and recurring adjustments) which are, in the opinion of management,
necessary for a fair presentation of the financial position and operating
results for the interim periods. The consolidated financial statements should be
read in conjunction with the consolidated financial statements and notes
thereto, together with management's discussion and analysis of financial
condition and results of operations, contained in the Company's Annual Report on
Form 10-K for the year ended December 31, 1997. The results for the three months
ended March 31, 1998 are not necessarily indicative of the results which may be
expected for any other interim period or for the year ending December 31, 1998.
On July 25, 1997 the Company distributed pro rata to its common
shareholders all of the 82.8% of Monterey Resources, Inc. ("Monterey") common
stock that it owned by means of a tax-free distribution (the "Spin Off").
Consequently, the financial results of Monterey are included for the entire
period ended March 31, 1997 and excluded for the entire period ended March 31,
1998. See Item 2. "Management's Discussion and Analysis of Financial Condition
and Results of Operations" for a comparison of financial results excluding
Monterey.
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 affects the Company's reported consolidated net
income. Currently the Company has no comprehensive income other than net income.
In February 1998, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 132, "Employers' Disclosures
about Pensions and Other Postretirement Benefits" ("SFAS 132"). The Statement is
effective for fiscal years beginning after December 15, 1997. The Statement has
no effect on the Company's reported consolidated net income.
NOTE 2. EARNINGS PER SHARE
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 Three Months Ended March 31,
1998 1997
-------------------------------------- ----------------------------------------
Per-Share Per-Share
Income Shares Amount Income Shares Amount
------------ -------------- ---------- ------------ ------------ --------------
(in millions, except per share amounts)
Net Income (loss) ................................ $(0.3) $ 27.9
Less: Preferred dividends ........................ -- (2.4)
--------- ---------
Basic Earnings (loss) Per Share
Earnings (loss) attributable to common shares .... (0.3) 102.7 $ -- 25.5 91.2 $ 0.28
========= ======= ========= ===========
Effects of Dilutive Securities
Contingently issuable shares ..................... -- 3.0 -- 11.8
Preferred dividends .............................. -- -- 2.4 --
------------ -------------- --------- ---------
Diluted Earnings Per Share
Earnings available to common shareholders
and assumed conversions ........................ $(0.3) 105.7 $ -- $ 27.9 103.0 $ 0.27
========= ======= ========== ========= ========= ===========
6
The Company had 2.6 million and 0.8 million common shares which would be
issued upon the exercise of stock options which although dilutive in nature, did
not change earnings per share in the three months ended March 31, 1998 and 1997,
respectively. There were 1.4 million and 1.3 million stock options outstanding
in the three months ended March 31, 1998 and 1997, 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 0.4 million and 0.2 million common shares which
would be issued upon vesting of Phantom Units in the three months ended March
31, 1998 and 1997, respectively, which although dilutive in nature did not
change earnings per share. In the three months ended March 31, 1997, the Company
had 10.8 million common shares issuable upon the conversion of convertible
preferred stock which had a dilutive effect on earnings per share.
NOTE 3. 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.
During the three months ended March 31, 1998, the Company purchased 0.5 million
common shares for approximately $4.9 million.
NOTE 4. COMMITMENTS AND CONTINGENCIES
Oil and Gas Hedging. From time to time the Company hedges a portion of
its oil and gas sales to provide a certain minimum level of cash flow from its
sales of oil and gas. While the hedges are generally intended to reduce the
Company's exposure to declines in market price, the Company's gain from
increases in market price may be limited. The Company uses various financial
instruments whereby monthly settlements are based on differences between the
prices specified in the instruments and the settlement prices of certain futures
contracts quoted on the New York Mercantile Exchange ("NYMEX") or certain other
indices. Generally, in instances where the applicable settlement price is less
than the price specified in the contract, the Company receives a settlement
based on the difference; in instances where the applicable settlement price is
higher than the specified price, the Company pays an amount based on the
difference. The instruments utilized by the Company differ from futures
contracts in that there is no contractual obligation which requires or allows
for the future delivery of a product. Gains or losses on hedging activities are
recognized in oil and gas revenues in the period in which the hedged production
is sold.
Crude oil sales hedges resulted in an increase in revenues of $0.2
million during the first quarter of 1998, compared to $0.3 million during the
first quarter of 1997. The Company had no open natural gas sales hedges during
the three months ended March 31, 1998 or 1997.
In March 1998, the Company entered into agreements which hedge an
average of approximately 7,300 barrels per day for the period April to September
1998. The instruments used have a floor of $16.00 per barrel and ceilings
ranging from $17.75 to $18.00 per barrel. Under the terms of the instruments, if
the aggregate average of the applicable daily settlement prices is below the
floor, the Company will receive a settlement based on the difference, and if the
aggregate average of the applicable daily settlement prices is above the
ceiling, the Company will be required to pay an amount based on the difference.
Based on the April 1998 settlement price of the applicable NYMEX futures
contract, the Company would recognize a $0.7 million gain with respect to such
hedges at April 30, 1998. The actual gains or losses realized by the Company
from these hedges may vary significantly due to the volatility of future
markets.
Environmental Matters. The Company's oil and gas operations are subject
to stringent environmental regulation by government authorities. Such regulation
has increased the costs of planning, designing, drilling, installing, operating
and abandoning oil and gas wells and associated facilities. The Company has
expended significant financial and managerial resources to comply with such
regulations. Although the Company believes its operations and facilities are in
general compliance with applicable 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
7
costs and liabilities in the future. As it has in the past, the Company intends
to fund the future costs of environmental compliance from operating cash flows.
There are other claims and actions, including certain 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.
8
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
As described in Note 1 of the Notes to the Consolidated Financial
Statements, the Company completed the Spin Off of Monterey on July 25, 1997. As
a result of this transaction, management believes the 1997 consolidated results
are not representative of the Company's on-going operations. Consequently, in
order to provide more relevant information, the following discussions focus on
the results of the Company, excluding Monterey.
Results of Operations
The following unaudited financial and operating schedules for the three
months ended March 31, 1997 were derived from the historical financial
statements of the Company and set forth the results of the Company, excluding
Monterey Resources, Inc. Income taxes for this period were computed on a
separate company basis as if the Company had filed returns excluding Monterey
and its predecessor operations.
THREE MONTHS ENDED
MARCH 31,
------------------
1998 1997
-------- --------
(in millions, except
per share data)
Revenues:
Sales of crude oil and liquids ..................... $ 39.8 $ 52.7
Sales of natural gas ............................... 28.8 36.3
Other .............................................. 0.2 0.1
-------- --------
Total revenues ................................ 68.8 89.1
-------- --------
Costs and expenses:
Production and operating ........................... 25.3 21.1
Exploration, including dry hole costs .............. 12.2 9.0
Depletion, depreciation and amortization ........... 28.1 24.3
General and administrative ......................... 4.4 4.4
Taxes (other than income) .......................... 4.1 4.9
Loss (gain) on disposition of assets ............... -- (2.3)
-------- --------
Total costs and expenses ...................... 74.1 61.4
-------- --------
Income (loss) from operations .......................... (5.3) 27.7
Interest income .................................... 2.2 0.4
Interest expense ................................... (3.8) (3.0)
Interest capitalized ............................... 1.7 1.3
Other income (expense) ............................. -- (0.1)
-------- --------
Income (loss) before income taxes ...................... (5.2) 26.3
Current income taxes ............................ 2.6 4.0
Deferred income taxes ........................... 2.3 (13.3)
-------- --------
Net income (loss) ...................................... (0.3) 17.0
Preferred dividend requirement ..................... -- (2.4)
-------- --------
Earnings (loss) attributable to common shares .......... $ (0.3) $ 14.6
======== ========
Basic and diluted earnings (loss) attributable to
common shares per share ............................ $ -- $ 0.16
======== ========
Weighted average number of shares outstanding
Basic .............................................. 102.7 91.2
======== ========
Diluted ............................................ 105.7 103.0
======== ========
9
THREE MONTHS ENDED
MARCH 31,
----------------------
1998 1997
------- -------
PRODUCTION
Crude oil and liquids (MBbls/day)
Domestic ..................................... 21.4 20.6
Argentina .................................... 5.6 4.5
Indonesia .................................... 6.9 3.8
Gabon ........................................ 1.0 --
------- -------
Total ........................................ 34.9 28.9
Natural Gas (MMcf/day)
Domestic ..................................... 151.4 148.5
Argentina .................................... 25.3 18.8
Indonesia .................................... 0.3 0.4
------- -------
Total ........................................ 177.0 167.7
AVERAGE PRICES
Crude oil and liquids ($/Bbl)
Actual (unhedged) ............................ $ 12.83 $ 20.50
Realized (hedged) ............................ 12.92 20.64
Natural gas ($/Mcf) ............................. $ 1.92 $ 2.53
COSTS AND EXPENSES (IN DOLLARS PER BOE)
Production and operating (a) .................... $ 4.36 $ 4.11
Exploration, including dry hole costs ........... 2.10 1.76
Depletion, depreciation and amortization ........ 4.85 4.76
General and administrative ...................... 0.77 0.86
Taxes, other than income (b) .................... 0.72 0.96
Interest expense, net (c) ....................... 0.32(d) 0.24
- -----------
a) Excludes related production, severance and ad valorem taxes.
b) Includes related production, severance and ad valorem taxes.
c) Reflects interest expense less amounts capitalized and interest income.
d) Excludes effect of $1.9 million ($0.34 per BOE) of interest income on an
anticipated income tax refund.
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. For the twelve months ended March 31, 1998 the actual average crude
oil and liquids sales price (unhedged) received by the Company ranged from a
high of $17.15 per barrel in the fourth quarter of 1997 to a low of $12.83 per
barrel in the first quarter of 1998. The Company's average crude oil and liquids
sales price (unhedged) received in April 1998 was $12.61 per barrel. Based on
operating results for the first quarter of 1998, the Company estimates that on
an annualized basis a $1.00 per barrel increase or decrease in its average crude
oil sales price would result in a corresponding $7.4 million change in net
income and an $8.8 million change in cash flow from operating activities. The
price of domestic 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. 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 $1.35 per MMbtu. The actual average sales price received by
10
the Company for the twelve months ended March 31, 1998 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 the
first quarter of 1998, 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. 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.
THREE MONTHS ENDED MARCH 31, 1998 COMPARED WITH THREE MONTHS ENDED MARCH 31,
1997
The Company reported a loss to common shares for the three months ended
March 31, 1998 of $0.3 million, or break-even results per share, compared with
earnings to common shares of $14.6 million, or $0.16 per share, for the same
period in 1997 on a pro forma basis excluding Monterey.
OIL AND GAS REVENUES. Revenues from crude oil and natural gas operations
totalled $68.8 million for the three months ended March 31, 1998 compared with
$89.1 million for the same period in 1997, principally due to lower realized
prices, partially offset by increased production. The Company's crude oil and
liquids production increased by 21% in the first quarter of 1998 to 34.9 MBbls
per day from 28.9 MBbls per day for the same period in 1997. The increase in oil
production was driven primarily by new production from the N. Geragai, Makmur
and Mudi fields in Indonesia and the Tchatamba field in Gabon. Natural gas
production increased by 6% in the first quarter of 1998 to 177.0 MMcf per day
compared with 167.7 MMcf per day for the same period in 1997. New wells in the
Permian Basin and in the Gulf of Mexico more than offset normal production
declines and the loss of production from property sales in the Gulf. The
Company's realized crude oil prices for the three months ended March 31, 1998
averaged $12.92 per barrel, including a $0.09 per barrel hedging benefit,
compared with the average realized oil price of $20.64 per barrel, net of a
$0.14 per barrel hedging benefit, for the same period in 1997. Realized natural
gas prices for the three months ended March 31, 1998 averaged $1.92 per Mcf,
compared with an average of $2.53 per Mcf for the same period in 1997.
COSTS AND EXPENSES. Production and operating expense and depletion,
depreciation and amortization expense increased $4.2 million and $3.8 million,
respectively, for the three months ended March 31, 1998 compared with the same
period in 1997, primarily due to increased crude oil and natural gas production,
as noted above. Production and operating costs per unit of production increased
to $4.36 per BOE in the three months ended March 31, 1998 compared with $4.11
for the same period in 1997, primarily due to workover costs and lower
production in the Gulf of Mexico. Exploration expense for the three months ended
March 31, 1998 increased to $12.2 million from $9.0 million for the same period
in 1997, primarily due to increased drilling activity and seismic costs. General
and administrative expense decreased by $0.09 on a unit of production basis to
$0.77 per BOE in the first quarter 1998 due to increased production and the
Company's ability to maintain general and administrative costs at a constant
level. Taxes other than income decreased approximately 16% to $4.1 million for
the three months ended March 31, 1998, primarily due to lower ad valorem and
production and severance taxes.
Interest income for the three months ended March 31, 1998 included a
$1.9 million benefit related to an anticipated income tax refund. Interest
expense for the first quarter of 1998 increased by $0.8 million compared with
the same period in 1997, reflecting the Company's increase in borrowings between
the comparative periods. Income taxes for the three months ended March 31, 1998
included a $2.4 million benefit related to the previously discussed income tax
refund. The decrease in the Company's preferred dividend requirement in the
first quarter of 1998 is due to the May 1997 purchase and conversion of all of
the Company's outstanding preferred stock.
11
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 $70.5 million for capital expenditures in the three months ended March 31,
1998, including $11.8 million for acquisitions, and expects to spend
approximately $277.0 million in 1998. In addition to the expected capital
expenditures, the 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, and at
March 31, 1998 the Company had spent $5.4 million to purchase 0.6 million shares
of its common stock. Because the actual amounts expended in the future for
capital expenditures and to purchase stock will be influenced by numerous
factors, including many beyond the Company's control, no assurances can be given
as to the amount that will actually be expended during the year.
CAPITAL RESOURCES. The Company's capital resources for the three months
ended March 31, 1998 consisted of cash flow from operating activities of $14.5
million, proceeds from property sales of $1.5 million and $57.1 million in
borrowings 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. The Company
is currently in the process of negotiating an increase in the maximum aggregate
borrowing amount to $275 million, which will mature on May 15, 2003. 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 March
31, 1998, the Company had $70.0 million in borrowings outstanding under the
Credit Agreement, which was classified as long-term debt on the balance sheet.
The Company had one letter of credit outstanding under the Credit Agreement at
March 31, 1998 for $1.7 million and one letter of credit outside the Credit
Agreement for $1.8 million.
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 March 31, 1998
the Company could incur up to $414.2 million of additional indebtedness and pay
dividends of or repurchase up to $45.8 million of its capital stock.
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. As of March 31, 1998, $25.0 million is available to
the Company from these facilities under the Credit Agreement. Interest rates on
borrowings under these lines of credit are typically lower than rates paid under
the Credit Agreement. At March 31, 1998, the Company had $9.3 million of
borrowings outstanding under these facilities, which was classified as long-term
debt on the balance sheet.
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, the borrowing
availability under the Credit Agreement and from other capital markets will be
sufficient to meet its anticipated capital requirements for 1998.
INDONESIA. In the last quarter of 1997 and early 1998 many Asian
countries experienced significant devaluation 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 and some civil unrest.
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
12
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 Jabung
Block to the Indonesian state oil agency for U.S. dollars. For the three months
ended March 31, 1998, the Jabung Block produced 1.8 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.
The Company's Indonesian operations generated $0.5 million of income
from operations and $7.4 million in cash flow from operating activities for the
three months ended March 31, 1998. While the financial uncertainties in Asia and
civil unrest in Indonesia. 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 these disruptions, 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.
CONSOLIDATED RESULTS, INCLUDING MONTEREY
On a consolidated basis the Company reported total revenues of $68.8
million, total costs and expenses of $74.1 million and a loss to common shares
of $0.3 million or break-even results per share for the three months ended March
31, 1998 compared with total revenues of $173.9 million, total costs and
expenses of $118.1 million and earnings to common shares of $25.5 for the same
period in 1997. Such 1997 results reflect the consolidation of Monterey
Resources for the entire period.
THREE MONTHS ENDED MARCH 31, 1998 COMPARED WITH THREE MONTHS ENDED MARCH 31,
1997
OIL AND GAS REVENUES. Total revenues from crude oil and natural gas
produced decreased to $68.6 million in the three months ended March 31, 1998
from $164.0 million for the same period in 1997. The decrease is due to the
contribution of Monterey for the full period in 1997 combined with lower
realized prices in the first quarter of 1998. Crude oil prices realized for the
three months ended March 31, 1998 averaged $12.92 per barrel, including a $0.09
per barrel hedging benefit, compared with the same period in 1997 when the
average realized oil price was $18.06 per barrel, net of a $0.05 per barrel
hedging benefit. Natural gas prices realized for the three months ended March
31, 1998 averaged $1.92 per Mcf, compared with an average of $2.51 per Mcf in
the 1997 period.
COSTS AND EXPENSES. Total costs and expenses decreased to $74.1 million
in 1998 from $118.1 million in 1997. The decrease is primarily due to the Spin
Off of Monterey as discussed above.
Interest income for the three months ended March 31, 1998 included a
$1.9 million benefit related to an anticipated income tax refund. Interest
expense for the first quarter of 1998 decreased by $3.9 million compared with
the same period in 1997, due to the elimination of Monterey's debt for which
interest expense was included for the entire 1997 period. Income taxes for the
three months ended March 31, 1998 included a $2.4 million benefit related to the
previously discussed income tax refund. The decrease in the Company's preferred
dividend requirement in the first quarter of 1998 is due to the 1997 purchase
and conversion of all of the Company's outstanding preferred stock.
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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 and
development risks, environmental risks, uncertainties about estimates of
reserves, competition, government regulation and political and litigation 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.
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PART II. OTHER INFORMATION
ITEMS 1, 2, 3, 4 & 5 ARE NOT APPLICABLE AND HAVE BEEN OMITTED.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
None
(b) Reports on Form 8-K
Date Item
15
SIGNATURE
Pursuant to the requirements Section 13 or 15 (d) of the Securities Exchange Act
1934, the Registrant has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized, on the 14th day of May, 1998.
SANTA FE ENERGY RESOURCES, INC.
(Registrant)
Date: MAY 14, 1998 /s/ JANET F. CLARK
------------------------ ----------------------------------
Janet F. Clark, Senior Vice President,
Chief Financial Officer and Treasurer
(Principal Financial Officer and Duly
Authorized Officer)
16