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
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Act of 1934
For Quarter ended September 30, 1995
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OR
Transition Report Pursuant to Section 13 or 15(d) of the Securities
- ---
Exchange Act of 1934
For the transition period from to
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Commission File No. 0-8232
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McFarland Energy, Inc.
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(Exact name of registrant as specified in its charter)
Delaware 95-2756635
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
10425 South Painter Avenue, Santa Fe Springs, California 90670
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (310) 944-0181
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None
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Former name, former address and former fiscal year, 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
---- ----
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
5,232,546 Shares
McFarland Energy, Inc.
Consolidated Statements of Operations
(Unaudited)
Three Months Nine Months
Ended Sept. 30, Ended Sept. 30,
------------------------ -------------------------
1995 1994 1995 1994
---------- ----------- ----------- -----------
Revenues:
Oil and gas $5,003,000 $4,367,000 $ 14,333,000 $10,617,000
Interest and other 101,000 39,000 343,000 123,000
Gain on sale of assets 5,000 --- 124,000 12,000
---------- ----------- ----------- -----------
5,109,000 4,406,000 14,800,000 10,752,000
---------- ----------- ----------- -----------
Costs and expenses:
Crude oil and gas production 1,710,000 1,847,000 5,195,000 4,799,000
Exploration, dry holes and
abandonments 291,000 131,000 974,000 604,000
Depletion and depreciation 1,096,000 1,037,000 3,430,000 2,505,000
General and administrative 496,000 483,000 1,660,000 1,667,000
Litigation settlement --- --- (17,158,000) ---
Property impairments --- --- 5,515,000 ---
Interest 104,000 240,000 447,000 477,000
Other --- 10,000 489,000 155,000
---------- ----------- ----------- -----------
3,697,000 3,748,000 552,000 10,207,000
---------- ----------- ----------- -----------
Income before income taxes 1,412,000 658,000 14,248,000 545,000
---------- ----------- ----------- -----------
Income taxes:
Current --- --- 212,000 ---
Deferred 86,000 --- 1,796,000 ---
---------- ----------- ----------- -----------
86,000 --- 2,008,000 ---
---------- ----------- ----------- -----------
Net income $1,326,000 $ 658,000 $12,240,000 $ 545,000
========== =========== =========== ===========
Net income per common share $0.25 $0.13 $2.34 $0.10
===== ===== ===== =====
Weighted average number of shares
outstanding 5,230,775 5,199,859 5,226,678 5,199,526
========== =========== =========== ===========
(See notes following)
2
McFarland Energy, Inc.
Consolidated Balance Sheets
(Unaudited)
September 30, December 31,
1995 1994
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ASSETS
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Current Assets:
Cash and short-term investments $ 5,748,000 $ 1,864,000
Accounts receivable 4,588,000 5,698,000
Crude oil inventory 307,000 280,000
Materials and supplies inventory 165,000 290,000
Prepaids and other current assets 7,000 638,000
----------- -----------
Total current assets 10,815,000 8,770,000
----------- -----------
Property and Equipment 90,336,000 84,829,000
Less accumulated depletion and
depreciation 59,076,000 51,090,000
----------- -----------
31,260,000 33,739,000
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Other Assets 282,000 1,036,000
----------- -----------
$42,357,000 $43,545,000
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
Current Liabilities:
Accounts payable $ 1,677,000 $ 2,359,000
Royalties and revenue payable 1,302,000 1,657,000
Other accrued liabilities 536,000 1,212,000
Current portion of long-term debt --- 750,000
----------- -----------
Total current liabilities 3,515,000 5,978,000
----------- -----------
Convertible Notes 2,600,000 2,600,000
----------- -----------
Production Payment Notes 3,236,000 3,481,000
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Long-term Debt --- 12,650,000
----------- -----------
Deferred Income Taxes 2,041,000 205,000
----------- -----------
Stockholders' Equity:
Common stock, $1.00 par value 5,232,000 5,212,000
Additional paid-in capital 18,910,000 18,836,000
Retained earnings (deficit) 6,823,000 (5,417,000)
----------- -----------
30,965,000 18,631,000
----------- -----------
$42,357,000 $43,545,000
=========== ===========
(See notes following)
3
McFarland Energy, Inc.
Consolidated Statements of Cash Flows
(Unaudited)
Nine Months Ended Sept. 30,
----------------------------
1995 1994
----------- ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $12,240,000 $ 545,000
Adjustments to reconcile net income to
net cash provided by operating activities:
Depletion and depreciation 3,430,000 2,505,000
Dry holes, abandonments and impairments 6,428,000 605,000
Deferred income taxes 1,796,000 ---
(Gain) on sale of assets (124,000) (12,000)
Other 428,000 ---
Change in assets and liabilities:
Decrease (increase) in:
Receivables 1,110,000 (1,076,000)
Inventory (79,000) (92,000)
Prepaids and other current assets 631,000 277,000
Increase (decrease) in:
Accounts payable (932,000) (273,000)
Royalties and revenue payable (355,000) 400,000
Other accrued expenses (674,000) 137,000
----------- ------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 23,899,000 3,016,000
----------- ------------
CASH FLOWS (USED IN) FROM INVESTING ACTIVITIES:
Purchase of property and equipment,
including dry holes (6,650,000) (20,631,000)
Proceeds from sales of property and equipment 142,000 12,000
Other 44,000 5,000
----------- ------------
NET CASH USED IN INVESTING ACTIVITIES (6,464,000) (20,614,000)
----------- ------------
CASH FLOWS (USED IN) FROM FINANCING ACTIVITIES:
Payments on debt (13,645,000) (58,000)
Exercise of stock options 94,000 6,000
Issuance of production payment notes --- 3,957,000
Proceeds from long-term borrowing --- 12,000,000
----------- ------------
NET CASH (USED IN) FROM FINANCING ACTIVITIES (13,551,000) 15,905,000
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS 3,884,000 (1,693,000)
Cash and cash equivalents
at the beginning of the year 1,864,000 2,557,000
----------- ------------
CASH AND CASH EQUIVALENTS
AT SEPTEMBER 30, 1995 AND 1994 $ 5,748,000 $ 864,000
=========== ============
(See notes following)
4
McFarland Energy, Inc.
Notes to Unaudited Financial Statements
September 30, 1995
Note 1. Statement from Management
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The information furnished in this report reflects all adjustments which, in
the opinion of management, are necessary to present fairly the financial
position at September 30, 1995 and December 31, 1994 and the results of
operations for the three and nine months ended September 30, 1995 and 1994.
Note 2. Principles of Consolidation
- ------- ---------------------------
The consolidated financial statements include the accounts of McFarland
Energy, Inc. and its wholly-owned subsidiary, Carl Oil & Gas Co. ("Company").
All intercompany accounts and transactions have been eliminated in
consolidation.
Note 3. Settlement of Chevron Lawsuit
- ------- -----------------------------
On January 16, 1995, the Company announced that it had settled with Chevron
the lawsuit of McFarland Energy, Inc. v. Chevron U.S.A., Inc. (Case No.
----------------------------------------------
BC023747) for the sum of $25,673,000. In September 1994, a Los Angeles Superior
Court jury trial awarded the Company compensatory and punitive damages totalling
$47,300,000. On January 13, 1995, the Company and Chevron entered into a final
settlement agreement and funds in the amount of $25,673,000 were wired to the
Company on January 17, 1995. Of the total settlement amount, $8,292,000 was
paid to the Company's outside attorneys and the Company incurred various other
costs totalling $223,000. The net settlement amount of $17,158,000 was
recognized as a gain in the first quarter of 1995.
Note 4. Property Impairments
- ------- --------------------
In March 1995, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 121, "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed
Of." This statement requires that long-lived assets be reviewed for impairment
whenever events or changes in circumstances indicate that the carrying amount of
an asset may not be recoverable. It establishes guidelines for determining
recoverability based on future net cash flows from the use of the asset and for
the measurement of the impairment loss. Impairment loss under SFAS No. 121 is
calculated as the difference between the carrying amount of the asset and its
fair value. Any impairment loss is recorded in the current period in which the
recognition criteria are first applied and met.
Under the successful efforts method of accounting for oil and gas operations,
the Company periodically assessed its proved properties for impairments by
comparing the aggregate net book carrying
5
McFarland Energy, Inc.
Notes to Unaudited Financial Statements
September 30, 1995
(Continued)
amount of all proved properties with their aggregate future net cash flows. At
December 31, 1994, the future net cash flows of these proved properties was
$65,000,000 as compared to the net book carrying amount of $33,000,000. The new
statement requires that the impairment review be performed on the lowest level
of asset groupings for which there are identifiable cash flows. In the case of
the Company, this results in a property by property impairment review.
The Company adopted SFAS No. 121 in the first quarter of 1995, and primarily
as a result of significantly lower natural gas prices, recorded an impairment
loss on certain oil and gas properties totalling $4,765,000. In addition, the
Company wrote-off its investment in a natural gas marketing and gas gathering
company in the amount of $750,000. The impairment loss on the oil and gas
properties was calculated as the difference between the asset book carrying
amounts and future net cash flow projections, giving consideration to recent
prices, pricing trends and discount rates. These projections represent the
Company's best estimate of fair value based on the information available.
Note 5. Credit Agreement
- ------- ----------------
On April 20, 1994, the Company entered into a new credit agreement with its
bank ("Credit Agreement") which consisted of a $5,000,000 unsecured revolving
line of credit facility and a $6,000,000 seven-year term loan facility.
On September 20, 1994, the Company amended the Credit Agreement in order to
finance its acquisition of the Oak Hill Field, Rusk County, Texas properties.
The amendment increased the revolving line of credit facility to $10,000,000 and
replaced the bank's offshore interest rate option with a LIBOR plus 1.5%
optional rate. Under the amended agreement, the revolving credit facility is to
be used for working capital, capital expenditures and oil and gas property
acquisitions. At the option of the Company, the interest rate on borrowed funds
is either the reference rate, a rate of interest publicly announced by the bank;
the fixed rate, the rate agreed upon between the Company and the bank; or LIBOR
plus 1.5%. In January 1995, the Company repaid all of the outstanding borrowing
on the revolving line of credit. At September 30, 1995, there was no
outstanding borrowing under this facility.
The term loan credit facility consisted of a seven-year term loan up to
$6,000,000 and repayable over twenty-four successive quarterly equal
installments commencing on June 1, 1995. The interest rate on borrowed funds
was either the bank's reference rate plus .5%, a negotiated fixed rate or LIBOR
plus 2%. In conjunction with the acquisition of the Star Fee property, the
Company borrowed $6,000,000 under the term loan facility. The term loan was
collateralized by two of the Company's principal crude oil producing properties.
In March 1995, the Company repaid all the outstanding borrowing under the term
loan facility. At September 30, 1995, there was no outstanding borrowing under
this facility.
The Credit Agreement contains certain covenants which require maintenance of
minimum levels of net worth and working capital, maintenance of minimum or
maximum financial ratios, and certain limitations on the incurrence of liens or
encumbrances on the Company's assets. The Company is
6
McFarland Energy, Inc.
Notes to Unaudited Financial Statements
September 30, 1995
(Continued)
required to pay a quarterly commitment fee of .375% per annum on the unused
portion of the revolving credit facility. There were no compensating balance
requirements.
Note 6. Production Payment Notes
- ------- ------------------------
On April 22, 1994, the Company issued $3,624,000 of 5% seven-year production
payment notes ("Notes") in conjunction with the Star Fee property acquisition.
Interest payments are due quarterly, while monthly principal payments occur when
the average monthly crude oil selling price of the property's production exceeds
$12.00 per barrel. When the monthly average selling price is between $12.00 and
$15.01 per barrel, the sum of the principal payments will be equal to $1.00 per
each net revenue barrel produced from the property in that month. When the
monthly average selling price exceeds $15.00 per barrel, the sum of the
principal payments will be equal to $2.00 per each net revenue barrel produced
from the property in that month.
The Notes are due February 1, 2001. The Company has the option to make the
final payment of the outstanding balance in either cash, Company common stock,
or a combination of both. The market value per share of common stock delivered
will be based on the average quoted closing price on the National Association of
Securities Dealers Stock Market System for the twenty trading days prior to
January 20, 2001. The Notes are collateralized by one of the Company's
principal crude oil properties.
Note 7. Convertible Notes
- ------- -----------------
On January 4, 1993, the Company refinanced its previously issued convertible
notes with the issuance of a single $2,600,000 convertible note to its largest
institutional shareholder. The note bears interest at 8% per annum and is due
January 4, 2003. The terms of the new note call for quarterly interest payments
through January 4, 2003, or up to the date of conversion. The Company has the
option to convert the note to its common stock at any time after January 4, 1996
provided that the Company's common stock has been quoted by the National
Association of Securities Dealers at a weighted average price of $6.50 per
share, or higher, for at least nineteen out of twenty consecutive business days.
This note may also be converted at the option of the note holder at any time
after January 4, 1994 at the rate of one share of the Company's common stock for
each $6.50 principal amount.
The note is subordinate to any senior indebtedness incurred by the Company and
restricts payment of dividends on common stock if there exists any unpaid
accrued interest.
Note 8. Commitments and Contingencies
- ------- -----------------------------
The Company has certain contingent liabilities with respect to litigation,
claims, taxes, government regulations, and contractual agreements arising from
the ordinary course of business. While there are always risks inherent in the
resolution of any contingency, it is the opinion of management that such
contingent liabilities will not result in any loss which would have an adverse
material effect on the Company's financial position.
7
McFarland Energy, Inc.
Management's Discussion and Analysis
of Financial Condition and Results of Operations
Liquidity and Capital Resources
-------------------------------
Liquidity
- ---------
Net cash provided by operating activities before changes in assets and
liabilities through the nine months ended September 30, 1995 totalled
$24,198,000. The 1995 cash flow included the net proceeds from the Company's
settlement of its lawsuit with Chevron U.S.A., Inc.( "Chevron" ) in January,
1995. See Note 3. of Notes to Unaudited Financial Statements. Proceeds from
the settlement, net of attorney fees and other third-party costs totalled
$17,158,000. Current year operating cash flow for the nine month period,
excluding the lawsuit settlement proceeds and related estimated taxes, totalled
$7,336,000, or an increase of 93% over the prior year. The significantly
higher cash flow reflected a 33% increase in crude oil production and a 79%
increase in natural gas production. The 1995 cash flow also benefited from
higher average crude oil prices and lower lifting costs on a per barrel of oil
equivalent basis.
Crude oil production in 1995 totalled 891,000 barrels, or an average of 3,300
barrels per day. This significant increase in current year production reflects
the continued success of the Company's development drilling and steam injection
programs at its two core California Midway Sunset Field properties, the McDonald
and Star Fee. In the first half of 1995, the Company drilled a total of twenty-
one wells and recompleted five wells on these two properties. In 1995, daily
oil production from the McDonald property has averaged better than 1,500 gross
barrels per day, while the Star Fee is now also producing in excess of 1,500
barrels per day. In the third quarter of 1995, companywide daily production
averaged in excess of 3,400 barrels, an increase of 7% over the first half of
the year.
Natural gas production through September 30, 1995 averaged 6,200 MCF per day,
an increase of 79% over the same period in 1994. The significant increase in
natural gas production was attributable to the Company's East Texas and
California Northern San Joaquin Valley operations. In the second quarter of
1995, the Company drilled and completed the final two wells of its four in-fill
well development drilling program at the Oak Hill Field. Third quarter gas
production from the Oak Hill Field averaged 3,500 MCF per day. While in the
Northern San Joaquin Valley, currently eight wells are on production and one
well remains shut-in. Production from the Northern San Joaquin Valley in 1995
has averaged 1,600 MCF per day. The Company's gas production in this area
continues to be curtailed by approximately 30% as a result of the prevailing low
gas prices.
Oil and gas production costs on a barrel of oil equivalent basis ( "BOE" ) has
continued to fall. For the nine month period ended September 30, 1995, BOE
lifting costs averaged $4.43 per barrel as compared to $5.79 per barrel in the
same period a year ago. This represents a 24% reduction in the Company's
average lifting costs and reflects the combination of higher production volumes,
an increased proportion of lower cost natural gas production and overall
increased operating efficiencies. In addition, the Company has been
particularly successful at lowering its BOE lifting costs at its core Midway
Sunset Field properties. In 1995, lifting costs at these properties has
averaged a little less than $4.00 per barrel. In the third quarter, companywide
BOE lifting costs averaged $4.10 per barrel, down 11% from the first half
average of $4.62 per barrel.
8
McFarland Energy, Inc.
Management's Discussion and Analysis
of Financial Condition and Results of Operations
Liquidity and Capital Resources
-------------------------------
(Continued)
Companywide crude oil prices thus far in 1995 have remained above 1994 levels.
Crude prices in California have been especially strong. The Company's
predominate Midway Sunset Field crude has averaged $13.85 per barrel in 1995 as
compared to $11.24 per barrel a year ago. Of particular importance, is the
narrowed price differential between the "heavy" Midway Sunset Field crude and
the benchmark West Texas Intermediate ("WTI") crude. Prior to 1995, this price
differential typically ranged between $7.00 to $9.00 per barrel. Thus far in
1995, the differential has been between $3.00 to $5.00 per barrel. The
principal reasons behind this dramatic reduction in the price differential are
higher West Coast crude oil demand, declining Alaska North Slope production and
the pending repeal of the ban on the export of Alaskan crude. The Company
believes that these items represent fundamental changes in the California crude
markets which will have a very positive impact on our future operating cash
flows and the value of our California oil reserves.
The Company has a hedging agreement with a local refiner that covers 2,000
barrels per day and runs to November 1, 1996. The objective of the hedge is to
ensure the Company an acceptable level of cash flow from the sale of its crude
oil. Under the terms of the hedge agreement, when the prevailing posted price
for Midway Sunset Field crude is between $8.50-$11.49 per barrel, the Company
receives an amount equal to the difference between $11.50 and the prevailing
price, times 2,000 barrels per day. Conversely, when the Midway Sunset Field
posted price is between $13.25-$16.25, the Company pays to the refiner an amount
equal to the difference between the prevailing price and $13.25, up to a maximum
of $3.00 per barrel, times 2,000 barrels per day. During the nine months ended
September 30, 1995, the Company paid the refiner $482,000. Should the Midway
Sunset Field posted price remain at its current level of $12.25 per barrel, the
hedge will not have any effect on the Company's revenues for the remainder of
1995.
Natural gas prices have remained weak throughout 1995. The Company received
an average price of $1.20 per MCF during the nine month period ended September
30, 1995, which was 37% lower than the $1.89 per MCF received a year ago.
California gas prices have been especially weak, reflecting excess supply and
soft demand. For most of 1995, the Company's lower BTU gas produced in the
Northern San Joaquin Valley has been selling for less than $1.00 per MCF. In
response to these low gas prices, the Company has curtailed approximately 30% of
its production capacity in the Northern San Joaquin Valley. At this time, it is
uncertain how long the current domestic natural gas market conditions will
persist and what impact this will have on the Company's future cash flow and
financial results.
On January 13, 1995, the Company and Chevron entered into a final settlement
agreement on the lawsuit of McFarland Energy, Inc. v. Chevron U.S.A., Inc.( Case
No. BC023747 ). Funds were wired to the Company on January 17, 1995 in the
amount of $25,673,000, of which the Company realized $17,158,000 after attorney
fees and other costs. With the net proceeds, the Company paid-off all of its
outstanding bank debt in the first quarter of 1995 and invested the remaining
funds in top-rated commercial paper.
9
McFarland Energy, Inc.
Management's Discussion and Analysis
of Financial Condition and Results of Operations
Liquidity and Capital Resources
-------------------------------
(Continued)
The Company presently maintains an unsecured $10,000,000 revolving line of
credit facility with a major bank which expires on March 31, 1996. The
revolving line of credit facility is to be used for producing property
acquisitions. At September 30, 1995, there was no outstanding borrowing. The
Company believes that it has substantially greater borrowing capacity should the
need arise in order to make one or more significant producing property
acquisitions.
Capital Resources
- -----------------
At September 30, 1995, the Company had net working capital of $7,300,000, an
increase of 161% from the beginning of the year. This sharp increase in net
working capital reflected the settlement proceeds resulting from the Chevron
lawsuit and the strong 1995 operating results.
For the nine months ended September 30, 1995, capital expenditures totalled
$6,650,000. Development and other activities accounted for 87% or $5,798,000,
while exploration activities totalled $852,000 or 13% of the total.
Development activities in 1995 were principally related to the Company's
development drilling programs in the Oak Hill Field in East Texas and the Midway
Sunset Field in California. In the Oak Hill Field, the Company completed its
four in-fill development well drilling program and had all four wells on
production by the end of the second quarter. In the Midway Sunset Field, the
Company completed the drilling of twenty-one development wells and five well
recompletions on the McDonald and Star Fee properties. Total cost of these
development drilling activities was $4,548,000.
Exploration expenditures in 1995 consisted of the drilling of two wells in the
Northern San Joaquin Valley and two wells in the Sacramento Valley of
California. One well was successfully completed and is currently shut-in.
Other exploration expenditures were incurred for prospect development costs. In
light of the prevailing low California natural gas prices, the Company has
reduced its budgeted exploratory activities for the remainder of the year.
The Company believes that it will be able to fund its remaining 1995 capital
expenditure projects with its internally generated cash flow and existing cash
balances. However, should the need arise, it could utilize its available
revolving line of credit facility to fund its commitments.
New Accounting Pronouncement
- ----------------------------
In March 1995, the Financial Accounting Standards Board ("FASB") issued
Statement of Accounting Standards No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of". The Company
adopted this new statement in the first quarter of 1995.
10
McFarland Energy, Inc.
Management's Discussion and Analysis
of Financial Condition and Results of Operations
Liquidity and Capital Resources
-------------------------------
(Continued)
The effect of the adoption of FASB No.121 resulted in the recognition of an
impairment write-down of certain oil and gas properties and other assets
totalling $5,515,000. See Note 4. of Notes to Unaudited Financial Statements
for further details.
11
McFarland Energy, Inc.
Management's Discussion and Analysis
of Financial Condition and Results of Operations
Results of Operations
---------------------
Nine Months Ended September 30, 1995 and 1994
---------------------------------------------
For the nine months ended September 30, 1995, oil and gas revenues increased
35% to $14.3 million. This significant increase was primarily due to higher
crude oil and natural gas production combined with higher crude oil prices in
1995.
Crude oil production in 1995 increased 33% to 891,000 barrels, as compared to
671,000 barrels in the prior year. This significant increase was primarily
attributable to the Company's successful development drilling program at its two
core properties in the Midway Sunset Field in California. For the nine month
period in 1995, the daily average gross production from the McDonald property
increased 20% to more than 1,500 barrels per day, while the Star Fee property
averaged in excess of 1,300 barrels per day.
Natural gas production in 1995 totalled 1,685,000 MCF, an increase of 79% from
the prior year. This significant increase was primarily attributable to higher
production from the Company's East Texas and California Northern San Joaquin
Valley operations. In the Oak Hill Field in East Texas, the net daily average
production totalled 2,600 MCF per day. While in the Northern San Joaquin
Valley, eight wells were on production averaging over 1,600 MCF per day, net to
the Company.
The average crude oil price received in 1995, excluding the effects of the
hedge, was $14.22 per barrel, as compared to the $12.34 per barrel received a
year ago. In 1995, the hedge program decreased revenues by $482,000 or $0.54
per barrel. In 1994, the hedge program increased the crude price received by
$0.52 per barrel and increased revenues by $446,000. Natural gas prices
averaged $1.20 per MCF in 1995 as compared to $1.89 per MCF received in 1994.
Oil and gas production costs for 1995 increased 8% to $5,195,000. However, on
a barrel of oil equivalent basis ("BOE"), the average lifting cost was $4.43 per
BOE as compared to $5.79 per BOE in 1994, or 24% lower. This significant
decrease in BOE lifting costs reflects higher oil and gas production volumes in
1995 and increased operating efficiencies.
Exploration, dry holes and abandonment costs of $974,000 in 1995 represented
three dry holes drilled in the Sacramento and Northern San Joaquin Valleys,
leasehold write-offs and property abandonment costs. Depletion and depreciation
expense was 37% higher in 1995 as a result of the incremental depletion related
to the Star Fee and Oak Hill properties.
In the first quarter of 1995, the Company adopted the Statement of Financial
Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed of," which requires that long-
lived assets be reviewed for impairment on a property by property basis. See
Note 4. of Notes to Unaudited Financial Statements. As a result, the Company
recorded an impairment loss of $4,765,000 on certain oil and gas properties and
a write-down of $750,000 on its investment in a natural gas marketing and gas
gathering company.
12
McFarland Energy, Inc.
Management's Discussion and Analysis
of Financial Condition and Results of Operations
Results of Operations
---------------------
Nine Months Ended September 30, 1995 and 1994
---------------------------------------------
(Continued)
Litigation settlement reflects the net proceeds received from the settlement
of the Company's lawsuit with Chevron U.S.A., Inc. in January, 1995. See Note
3. of Notes to Unaudited Financial Statements.
Other expense of $489,000 represented the write-down of tubular inventories
and accruals for estimated future environmental costs.
13
McFarland Energy, Inc.
Management's Discussion and Analysis
of Financial Condition and Results of Operations
Results of Operations
---------------------
Three Months Ended September 30, 1995 and 1994
----------------------------------------------
For the three months ended September 30, 1995, oil and gas revenues increased
14% to $5.0 million, reflecting higher crude oil and natural gas production.
Crude oil production in the third quarter of 1995 totalled 314,000 barrels, an
increase of 15% from a year ago. Current quarter production from the McDonald
and Star Fee properties increased 21% and 36%, respectively, from the third
quarter of 1994.
Natural gas production increased 70% to 615,000 MCF in the third quarter as
compared to 362,000 MCF in 1994. Higher production from the Northern San
Joaquin Valley and the Oak Hill Field were principally responsible for the
current quarter increase.
The average crude oil price received in the third quarter of 1995 was $13.96,
excluding the effects of the hedge. The hedge program decreased the current
quarter's revenues by $133,000 or $0.42 per barrel. Natural gas prices averaged
$1.16 per MCF in 1995 as compared to $1.68 per MCF in 1994.
Production costs in the third quarter of 1995 decreased 7% to $1,710,000. On
a barrel of oil equivalent basis, lifting costs averaged $4.10 per BOE as
compared to $5.52 per BOE in the third quarter of 1994. Sharply higher crude
oil and natural gas production and increased operating efficiencies were the
principal reasons for the significant decline in BOE lifting costs.
Exploration, dry holes and abandonments of $291,000 primarily represented
property abandonment costs.
14
McFarland Energy, Inc.
Form 10-Q
September 30, 1995
Part II
Item 1. Legal Proceedings
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Update to Item 3(a) - Legal Proceedings regarding Operating Industries, Inc.
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("OII") site in Monterey Park, California, as reported in Form 10-K for the year
- --------------------------------------------------------------------------------
ended December 31, 1994
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The Company has received an additional settlement offer from the EPA proposing
settlement of the first three "operating units" at OII for an amount
substantially greater than previously proposed. Consistent with its responses
to past settlement proposals, the Company has rejected the proposed settlement
based on its defenses to liability associated with the OII site. While there
can be no assurance that the Company will be able to settle any claims
associated with this matter, management believes that any settlement or
judgement, in the event this matter is litigated, will not have a material
adverse impact on its financial condition.
Item 6. Exhibits and Reports on Form 8-K
- ----------------------------------------
(a) Exhibits: (27) Financial Data Schedule
(b) Reports on Form 8-K: none
15
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
McFARLAND ENERGY, INC.
Date: November 10, 1995 Ronald T Yoshihara
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Ronald T Yoshihara
Treasurer
(Chief Financial Officer)
J. C. McFarland
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J. C. McFarland
Chief Executive Officer
16