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 quarterly period ended March 31, 1996
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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.
5,644,359 Shares
McFarland Energy, Inc.
Consolidated Statements of Operations
(Unaudited)
Three Months Ended March 31,
-----------------------------
1996 1995
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Revenues:
Oil and gas $5,647,000 $ 4,403,000
Interest and other 106,000 117,000
Gain on sale of assets 69,000 ---
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5,822,000 4,520,000
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Costs and expenses:
Crude oil and gas production 1,838,000 1,672,000
Exploration, including dry holes 417,000 213,000
Depletion and depreciation 1,086,000 1,196,000
General and administrative 701,000 540,000
Litigation settlement --- (17,158,000)
Property impairments --- 5,515,000
Interest 64,000 228,000
Other 40,000 462,000
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4,146,000 (7,332,000)
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Income before income taxes 1,676,000 11,852,000
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Income taxes:
Current 35,000 212,000
Deferred 461,000 1,566,000
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496,000 1,778,000
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Net income $1,180,000 $ 10,074,000
========== ============
Net income per common share $0.21 $1.93
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Weighted average number of shares outstanding 5,642,442 5,220,984
========== ============
(See notes following)
2
McFarland Energy, Inc.
Consolidated Balance Sheets
(Unaudited)
March 31, December 31,
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1996 1995
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ASSETS
- ------
Current Assets:
Cash and short-term investments $ 5,138,000 $ 6,974,000
Accounts receivable 4,778,000 4,026,000
Crude oil inventory 341,000 259,000
Materials and supplies inventory 188,000 131,000
Prepaids and other current assets 444,000 610,000
Deferred tax assets 1,588,000 1,588,000
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Total current assets 12,477,000 13,588,000
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Property and Equipment 86,493,000 89,099,000
Less accumulated depletion and depreciation 53,112,000 55,266,000
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33,381,000 33,833,000
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Other Assets 155,000 272,000
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$46,013,000 $47,693,000
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LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
Current Liabilities:
Accounts payable $ 2,454,000 $ 2,170,000
Royalties and revenue payable 1,624,000 1,345,000
Income taxes payable 35,000 283,000
Other accrued liabilities 1,430,000 4,997,000
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Total current liabilities 5,543,000 8,795,000
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Convertible Note --- 2,600,000
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Production Payment Notes 3,043,000 3,139,000
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Deferred Income Taxes 1,225,000 764,000
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Stockholders' Equity:
Common stock, $1.00 par value 5,644,000 5,239,000
Additional paid-in capital 21,154,000 18,932,000
Retained earnings 9,404,000 8,224,000
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36,202,000 32,395,000
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$46,013,000 $47,693,000
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(See notes following)
3
McFarland Energy, Inc.
Consolidated Statement of Cash Flows
(Unaudited)
Three Months Ended March 31,
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1996 1995
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CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 1,180,000 $ 10,074,000
Adjustments to reconcile net income to
net cash provided by operating activities:
Depletion and depreciation 1,086,000 1,196,000
Dry holes, abandonments and impairments 332,000 5,724,000
Deferred income taxes 461,000 1,566,000
(Gain) on sale of assets (69,000) ---
Other --- 428,000
Change in assets and liabilities:
Decrease (increase) in:
Receivables (753,000) 1,067,000
Inventory (139,000) (46,000)
Prepaids and other current assets 166,000 265,000
Increase (decrease) in:
Accounts payable 283,000 (468,000)
Royalties and revenue payable 279,000 (314,000)
Taxes payable (248,000) 212,000
Other accrued expenses (137,000) (701,000)
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NET CASH PROVIDED BY OPERATING ACTIVITIES 2,441,000 19,003,000
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CASH FLOWS (USED IN) FROM INVESTING ACTIVITIES:
Purchase of property and equipment, including dry holes (965,000) (1,514,000)
Amounts included in accrued liabilities (3,429,000) ---
Proceeds from sales of property and equipment 69,000 ---
Other 117,000 (5,000)
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NET CASH USED IN INVESTING ACTIVITIES (4,208,000) (1,519,000)
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CASH FLOWS (USED IN) FROM FINANCING ACTIVITIES:
Payments on debt (96,000) (13,475,000)
Exercise of stock options 27,000 69,000
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NET CASH USED IN FINANCING ACTIVITIES (69,000) (13,406,000)
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NET (DECREASE) INCREASE IN CASH AND
CASH EQUIVALENTS (1,836,000) 4,078,000
Cash and cash equivalents at the beginning of the year 6,974,000 1,864,000
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CASH AND CASH EQUIVALENTS AT MARCH 31,
1996 AND 1995 $ 5,138,000 $ 5,942,000
=========== ============
(See notes following)
4
McFarland Energy, Inc.
Notes to Unaudited Financial Statements
March 31, 1996
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 March 31, 1996 and December 31, 1995 and the results of operations
for the three months ended March 31, 1996 and 1995.
Note 2. Principles of Consolidation
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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. In December 1995, Carl Oil & Gas Co. was merged into McFarland
and all of the operational and administrative functions of Carl were assumed by
McFarland.
Note 3. Settlement of Chevron Lawsuit
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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
March 31, 1996
(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. 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 March 31, 1996, 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.
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 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.
6
McFarland Energy, Inc.
Notes to Unaudited Financial Statements
March 31, 1996
(Continued)
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 Note
- ------- ----------------
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 bore interest at 8% per annum
and was due January 4, 2003. The terms of the new note called for quarterly
interest payments through January 4, 2003, or up to the date of conversion. The
Company had the option to convert the note to its common stock at any time after
January 4, 1996 provided that the Company's common stock had 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 was also convertible 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. On January 29, 1996, the Company
converted the note into 400,000 shares of the Company's common stock. Following
the conversion, the Company had a total of 5,639,234 common shares outstanding.
The note was subordinate to any senior indebtedness incurred by the Company
and restricted the payment of dividends on common stock if there existed 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.
Notes to Unaudited Financial Statements
March 31, 1996
(Continued)
The Company is subject to other possible loss contingencies pursuant to
federal, state and local environmental laws and regulations. These include
existing and potential obligations to investigate the effects of the release of
certain hydrocarbons or other substances at various sites; to remediate or
restore these sites; and to compensate others for damages and to make other
payments as required by law or regulation. These obligations relate to sites
owned by the Company or others, and are associated with past and present oil and
gas operations. The amount of such obligations is indeterminate and will depend
on such factors as the unknown nature and extent of contamination, the unknown
timing, extent and method remedial actions which may be required, the
determination of the Company's liability in proportion to other responsible
parties, and the state of the law.
8
McFarland Energy, Inc.
Management's Discussion and Analysis
of Financial Condition and Results of Operations
Liquidity and Capital Resources
-------------------------------
LIQUIDITY
- ---------
In the first quarter of 1996, net cash provided by operating activities
before changes in current assets and liabilities rose to $2,990,000. The current
quarter cash flow was up nearly 50% from the prior year, after adjusting for
nonrecurring items in the first quarter of 1995. The increased 1996 cash flow
reflected sharply higher crude oil production and higher oil and gas prices.
Companywide crude oil production in the first quarter of 1996 totalled
329,000 barrels, or better than 3,600 barrels per day. This established a new
Company record and represented a 9% increase over the average for 1995 of 3,300
barrels per day. The growth in crude oil production reflects the continuing
success of the Company's development activities at its core properties in the
Midway Sunset field. Thus far in 1996, the Company has completed its
planned twenty-one (21) well development drilling program and anticipates
further production increases from these activities beginning in the second
quarter of the year.
On April 17, 1996, the Company announced that the petroleum engineering and
consulting firm of Degolyer & MacNaughton ("D&M") had issued its report on an
evaluation of the Company's two core Midway Sunset field properties. D&M
estimated the proved reserves at these two properties to be 4.8 million net
barrels higher than previously estimated at December 31, 1995. After reflecting
these revised reserve estimates, the Company's barrel of oil equivalents ("BOE")
and pretax "SEC 10" value as of January 1, 1996 are 16.4 million BOE and $71
million, respectively. The adjustments to the year end 1995 figures represent a
42% increased in quantities and a 19% increase in "SEC 10" value.
Natural gas production in the first quarter declined 15% to 459,000 mcf
from 539,000 mcf a year ago. This decline was primarily attributable to lower
production from the Company's California Northern San Joaquin Valley gas wells.
The Company was unable to add any significant natural gas production through its
exploration activities in 1995. The 1996 budget calls for the drilling of up to
six (6) exploratory wells. Two (2) of the six (6) wells were drilled in the
first quarter, both were dry holes. For the remainder of 1996, the Company
expects its gas production to trail 1995 levels absent a significant natural
gas discovery or producing property acquisition.
Thus far in 1996, domestic crude oil prices have remained relatively
strong. Companywide crude prices in the first quarter averaged $15.36 per barrel
as compared to the 1995 average price of $13.96 per barrel. The California heavy
crude markets in particular, have shown tremendous strength, having recently
reached price levels not seen since the Persian Gulf crisis in late 1990. In
the first quarter, the average price for Midway Sunset field crude was $15.05
per barrel, up 14% from the first quarter of 1995. The higher California crude
prices are the result of improved West Coast market fundamentals and reflect
rising demand and "tight" supplies. While the current market conditions are
having a very favorable effect on the Company's operations, they could
represent permanent fundamental changes that would have long-term positive
effects on the Company's future operating results and cash flows.
9
McFarland Energy, Inc.
Management's Discussion and Analysis
of Financial Condition and Results of Operations
Liquidity and Capital Resources
-------------------------------
(Continued)
The Company maintains a hedging arrangement 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. The hedge is based on a price range of the posted price of Midway
Sunset field crude. Currently, the established range is $11.50 per barrel to
$13.25 per barrel. Under the prevailing agreement, when the monthly weighted
average Midway Sunset field posted price is above $13.25 per barrel, the Company
pays the refiner the difference between the monthly average and $13.25 up to a
maximum of $3.00 per barrel, or $6,000 per day. When the average price is below
$11.50 per barrel, the refiner pays the Company the difference up to a maximum
of $3.00 per barrel, or $6,000 per day. In the first quarter, the Company paid
the refiner $304,000.
Natural gas prices in the first quarter increased to $1.72 per mcf from the
1995 average of $1.24 per mcf. Throughout the first quarter, the Company's
Texas and Louisiana operations benefitted from higher natural gas prices, while
prices in California remained relatively low. The Company's California
operations, which account for approximately 20% of companywide natural gas
production, will continue to be negatively impacted by these weak market
conditions.
In January 1996, the Company elected to convert its $2,600,000 8%
convertible note, which was held by a large public company, into 400,000 shares
of McFarland Energy, Inc. common stock. The conversion of the note will save
the Company $208,000 of interest expense annually.
The Company presently maintains an unsecured $10,000,000 revolving line of
credit facility which expires on June 1, 1996. The credit facility is to be
used for producing property acquisitions. The Company plans to renew the
facility at its expiration. The Company believes that it has substantially
greater borrowing capacity in order to make a significant producing property
acquisition.
CAPITAL RESOURCES
- -----------------
Net working capital at March 31, 1996 totalled $6,934,000, up 45% from the
end of 1995. This increase reflected the Company's strong operating performance
in the first quarter.
Capital expenditures in the first quarter totalled $965,000. Development
activities totalled $541,000, while exploration related activities totalled
$339,000. Various other projects accounted for $85,000.
Development activities consisted primarily of the 1996 development drilling
program at the Midway Sunset field and related surface facility enhancements.
For 1996, the Company's program calls for the drilling of twenty-one (21) wells
at a total cost of approximately $2,100,000. The Company expects to have all
drilling completed by early May.
10
McFarland Energy, Inc.
Management's Discussion and Analysis
of Financial Condition and Results of Operations
Liquidity and Capital Resources
-------------------------------
(Continued)
First quarter exploration activities included the drilling of two (2) wells
in the California Northern San Joaquin Valley. Both wells were dry holes. The
Company plans to drill four (4) additional exploratory wells later in the year.
The Company believes that it will be able to fund its remaining 1996
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.
11
McFarland Energy, Inc.
Management's Discussion and Analysis
of Financial Condition and Results of Operations
Results of Operations
---------------------
Three Months Ended March 31, 1996 and 1995
------------------------------------------
In the first quarter of 1996, oil and gas revenues increased 28% to $5.6
million from $4.4 million in the prior year. Higher crude oil production and
higher oil and gas prices were primarily responsible for the increased revenues
in 1996.
Crude oil production for 1996 totalled 329,000 barrels, an increase of 21%
over 1995. This significant growth reflects the benefits from the on-going
development drilling program in the Midway Sunset field. Natural gas production
decreased 15% to 459,000 mcf in 1996, primarily due to the declining production
from the Northern San Joaquin Valley gas wells in California.
The average crude oil price received in 1996, excluding the effects of the
hedge, was $15.36 per barrel as compared to $13.58 per barrel in 1995. In 1996,
the hedge program decreased revenues by $304,000 or $0.93 per barrel. In 1995,
the hedge program decreased revenues by $44,000 , or $0.16 per barrel. Natural
gas prices averaged $1.72 per mcf in 1996 as compared to $1.28 per mcf received
in the first quarter of 1995.
Oil and gas production costs for 1996 increased 10% to $1,838,000. However,
the average lifting cost on a per barrel of oil equivalent basis ("BOE")
declined 2% to $4.53 per BOE as compared to $4.62 per BOE in 1995.
The 1996 exploration expense reflected two dry holes drilled in the
Northern San Joaquin Valley and the write-off of related leasehold costs.
General and administrative expense increased 30% to $701,000 in 1996 as a result
of increased salaries and wages and higher general corporate expenses. Interest
expense declined to $64,000 in 1996 as a result of the conversion of convertible
note in January 1996. See Note 7 of Notes to Unaudited Financial Statements.
The litigation settlement in the first quarter of 1995 reflected the net
proceeds of $17,158,000 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.
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. In 1995, 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.
Form 10-Q
March 31, 1996
Part II
Item 6. Exhibits and Reports on Form 8-K
- ----------------------------------------
(a) Exhibits: 27 Financial Data Schedule
(b) Reports on Form 8-K: none
13
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: May 13, 1996 Ronald T Yoshihara
----------------------- -----------------------------
Ronald T Yoshihara
Treasurer
(Chief Financial Officer)
Eileen C. Sugita
-----------------------------
Eileen C. Sugita
Controller
(Chief Accounting Officer)
14