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 June 30, 1996
----------------------------------------------------
OR
[_] Transition Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the transition period from to
--------------- ---------------
Commission File No. 0-8232
-----------
MCFARLAND ENERGY, INC.
- -------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
DELAWARE 95-2756635
- -------------------------------------------------------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
10425 SOUTH PAINTER AVENUE, SANTA FE SPRINGS, CALIFORNIA 90670
- -------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (310) 944-0181
------------------
None
- -------------------------------------------------------------------------------
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.
5,647,234 Shares
McFarland Energy, Inc.
Consolidated Statements of Operations
(Unaudited)
Three Months Six Months
Ended June 30, Ended June 30,
-------------------- ----------------------
1996 1995 1996 1995
---- ---- ---- ----
Revenues:
Oil and gas $6,083,000 $4,926,000 $11,730,000 $ 9,330,000
Interest and other 111,000 126,000 217,000 242,000
Gain on sale of assets 525,000 119,000 594,000 119,000
---------- ---------- ----------- ------------
6,719,000 5,171,000 12,541,000 9,691,000
---------- ---------- ----------- ------------
Costs and expenses:
Crude oil and gas production 1,710,000 1,813,000 3,548,000 3,485,000
Exploration, including dry holes
and abandonments 321,000 470,000 738,000 683,000
Depletion and depreciation 1,228,000 1,138,000 2,314,000 2,334,000
General and administrative 670,000 624,000 1,371,000 1,164,000
Litigation settlement --- --- --- (17,158,000)
Property impairments --- --- --- 5,515,000
Interest 47,000 115,000 111,000 343,000
Other --- 27,000 40,000 489,000
---------- ---------- ----------- ------------
3,976,000 4,187,000 8,122,000 (3,145,000)
---------- ---------- ----------- ------------
Income before income taxes 2,743,000 984,000 4,419,000 12,836,000
---------- ---------- ----------- ------------
Income taxes:
Current 35,000 --- 70,000 212,000
Deferred 755,000 144,000 1,216,000 1,710,000
---------- ---------- ----------- ------------
790,000 144,000 1,286,000 1,922,000
---------- ---------- ----------- ------------
Net income $1,953,000 $ 840,000 $ 3,133,000 $ 10,914,000
========== ========== =========== ============
Net income per common share $ 0.35 $ 0.16 $ 0.56 $ 2.09
========== ========== =========== ============
Weighted average number of shares
outstanding 5,646,401 5,228,276 5,643,922 5,224,630
========== ========== =========== ============
(See notes following)
2
McFarland Energy, Inc.
Consolidated Balance Sheets
(Unaudited)
June 30, December 31,
-------- ------------
1996 1995
---- ----
ASSETS
- ------
Current Assets:
Cash and short-term investments $ 6,077,000 $ 6,974,000
Accounts receivable 4,062,000 4,026,000
Crude oil inventory 273,000 259,000
Materials and supplies inventory 161,000 131,000
Prepaids and other current assets 218,000 610,000
Deferred tax assets 1,588,000 1,588,000
----------- -----------
Total current assets 12,379,000 13,588,000
----------- -----------
Property and Equipment 88,010,000 89,099,000
Less accumulated depletion and depreciation 53,976,000 55,266,000
----------- -----------
34,034,000 33,833,000
----------- -----------
Other Assets 155,000 272,000
----------- -----------
$46,568,000 $47,693,000
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
Current Liabilities:
Accounts payable $ 1,530,000 $ 2,170,000
Royalties and revenue payable 1,478,000 1,345,000
Income taxes payable --- 283,000
Other accrued liabilities 532,000 4,997,000
----------- -----------
Total current liabilities 3,540,000 8,795,000
----------- -----------
Convertible Note --- 2,600,000
----------- -----------
Production Payment Notes 2,880,000 3,139,000
----------- -----------
Deferred Income Taxes 1,980,000 764,000
----------- -----------
Stockholders' Equity:
Common stock, $1.00 par value 5,646,000 5,239,000
Additional paid-in capital 21,165,000 18,932,000
Retained earnings 11,357,000 8,224,000
----------- -----------
38,168,000 32,395,000
----------- -----------
$46,568,000 $47,693,000
=========== ===========
(See notes following)
3
McFarland Energy, Inc.
Consolidated Statements of Cash Flows
(Unaudited)
Six Months Ended June 30,
--------------------------
1996 1995
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 3,133,000 $ 10,914,000
Adjustments to reconcile net income to
net cash provided by operating activities:
Depletion and depreciation 2,314,000 2,334,000
Dry holes, abandonments and impairments 565,000 6,155,000
Deferred income taxes 1,216,000 1,710,000
Gain on sale of assets (594,000) (119,000)
Other --- 428,000
Change in assets and liabilities:
Decrease (increase) in:
Receivables (36,000) 556,000
Inventory (44,000) (100,000)
Prepaids and other current assets 392,000 473,000
Increase (decrease) in:
Accounts payable (640,000) (46,000)
Royalties and revenue payable 133,000 (133,000)
Taxes payable (283,000) ---
Other accrued expenses (86,000) (731,000)
----------- ------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 6,070,000 21,441,000
----------- ------------
CASH FLOWS (USED IN) FROM INVESTING ACTIVITIES:
Purchase of property and equipment, including dry holes (3,096,000) (5,758,000)
Amounts included in accrued liabilities (4,379,000) ---
Proceeds from sales of property and equipment 610,000 132,000
Other 117,000 ---
----------- ------------
NET CASH USED IN INVESTING ACTIVITIES (6,748,000) (5,626,000)
----------- ------------
CASH FLOWS (USED IN) FROM FINANCING ACTIVITIES:
Payments on debt (259,000) (13,551,000)
Exercise of stock options 40,000 81,000
----------- ------------
NET CASH USED IN FINANCING ACTIVITIES (219,000) (13,470,000)
----------- ------------
NET (DECREASE) INCREASE IN CASH AND
CASH EQUIVALENTS (897,000) 2,345,000
Cash and cash equivalents at the beginning of the year 6,974,000 1,864,000
----------- ------------
CASH AND CASH EQUIVALENTS AT JUNE 30,
1996 AND 1995 $ 6,077,000 $ 4,209,000
=========== ============
(See notes following)
4
McFarland Energy, Inc.
Notes to Unaudited Financial Statements
June 30, 1996
Note 1. Statement from Management
- ------- -------------------------
The information furnished in this report reflects all adjustments which, in
the opinion of management, are necessary to present fairly the financial
position at June 30, 1996 and December 31, 1995 and the results of operations
for the three and six months ended June 30, 1996 and 1995.
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. 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
- ------- -----------------------------
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
June 30, 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 represented
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 June 30, 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 .25% per annum on the unused portion of the revolving credit.
There are no compensating balance requirements.
6
McFarland Energy, Inc.
Notes to Unaudited Financial Statements
June 30, 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 of converting 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 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.
7
McFarland Energy, Inc.
Notes to Unaudited Financial Statements
June 30, 1996
(Continued)
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.
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 of 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 half of 1996, net cash provided by operating activities before
changes in current assets and liabilities totalled $6,634,000. This represented
a 55% increase from the prior year after adjusting for first half of 1995
nonrecurring items. Strong current year cash flow reflected record levels of
crude oil production, higher oil and gas prices and sharply lower per unit
production costs.
Companywide crude oil production in the first half of 1996 totalled 679,000
barrels, or better than 3,700 barrels per day. This established a new Company
record and represented a 17% increase over the 1995 average of 3,200 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. The 1996 twenty-one well development drilling program was completed in
the second quarter and provided partial benefit to the first half results. The
Company expects to realize the full beneficial effects from this drilling
program during the second half 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 were 16.4 million BOE and $71
million, respectively. The adjustments to the year end 1995 figures represent a
42% increase in quantities and a 19% increase in "SEC 10" value.
Natural gas production in the first half of 1996 was down 15% from the
prior to 913,000 mcf. This decline was primarily attributable to lower
production from the Company's gas wells in the California Northern San Joaquin
Valley. Thus far in 1996, the Company has drilled three wells in the Northern
San Joaquin Valley, two of which were dry holes. The one successful well is
presently awaiting pipeline hook-up. For the remainder of 1996, the Company
expects its gas production to continue to trail 1995 levels absent a significant
natural gas discovery or producing property acquisition.
In 1996, domestic crude oil prices have been above the prior year's level.
Companywide crude prices in the first half of the year averaged $15.81 per
barrel as compared to $14.33 per barrel received in the same period of 1995. The
market fundamentals in California have been particularly strong throughout the
year. Midway Sunset field crude averaged $15.38 per barrel during this period.
However, the Midway Sunset field price has weakened slightly since the end of
the second quarter, having fallen 7% from the first half average.
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
9
McFarland Energy, Inc.
Management's Discussion and Analysis
of Financial Condition and Results of Operations
Liquidity and Capital Resources
-------------------------------
(Continued)
of Midway Sunset field crude. When the monthly average Midway Sunset field
posted price is above the top of this range, the Company pays the refiner the
difference up to a maximum dollar amount of $3.00 per barrel. When the monthly
average Midway Sunset field posted price is below the bottom of the range, then
the refiner pays the Company the difference up to a maximum dollar amount of
$3.00 per barrel. Currently, the established range is $11.50 per barrel to
$13.25 per barrel. Therefore, 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, then the refiner pays the Company the
difference up to a maximum of $3.00 per barrel, or $6,000 per day. In the first
half of the year, the Company paid the refiner $651,000.
Natural gas prices throughout 1996 have been significantly above 1995
levels. In the first half of 1996, the Company's natural gas price averaged
$1.71 per mcf, up 39% from the 1995 average of $1.23 per mcf. Presently, the
Company is receiving prices well above $2.00 per mcf for its non-California gas
production. While the Company's Texas and Louisiana operations continue to
benefit from these sharply higher natural gas prices, prices in California have
remained relatively low. The Company's California operations account for
approximately 20% of companywide natural gas production.
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 for future producing property acquisitions. At June 30, 1996
there was no outstanding borrowing. 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 June 30, 1996 totalled $8,839,000, up 84% from the
end of 1995. In addition, the current ratio rose to 3.5 to 1 from 1.5 to 1. The
sharp rise in these two key fundamental measures of financial condition reflect
the Company's strong operating performance in the first half of 1996.
Capital expenditures in the first half of the year totalled $3,096,000.
Development activities totalled $2,256,000, while exploration related activities
totalled $669,000. Various other projects accounted for $171,000.
10
McFarland Energy, Inc.
Management's Discussion and Analysis
of Financial Condition and Results of Operations
Liquidity and Capital Resources
-------------------------------
(Continued)
Development activities consisted primarily of the 1996 development drilling
program at the Midway Sunset field and surface facility enhancements. For 1996,
the Company's program consisted of the drilling of twenty-one wells at its core
properties in the Midway Sunset field. Drilling was completed in the second
quarter at a cost of $1,845,000.
First half of 1996 exploration activities included the drilling of three
wells in the California Northern San Joaquin Valley. Two wells were dry holes,
while the third well has been completed and is awaiting pipeline hook-up. The
Company plans to drill at least three 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
---------------------
Six Months Ended June 30, 1996 and 1995
---------------------------------------
For the six months ended June 30, 1996, oil and gas revenues increased 26%
to $11.7 million from $9.3 million in the prior year. This significant increase
was primarily due to higher crude oil production and higher crude oil and
natural gas prices in the first half of 1996.
Crude oil production for 1996 totalled 679,000 barrels, an increase of 17%
over 1995. This significant increase was attributable to the Company's ongoing
development drilling program in the Midway Sunset field of California. Natural
gas production decreased 15% to 913,000 mcf, reflecting lower production from
the Company's gas wells in the California Northern San Joaquin Valley.
The average crude oil price received in 1996, excluding the effects of the
hedge, was $15.81 per barrel, a 10% increase over the $14.33 per barrel price
received in 1995. In 1996, the hedge program decreased revenues by $651,000 or
$0.97 per barrel. In 1995, the hedge program decreased revenues by $348,000 or
$0.60 per barrel. Natural gas prices increased 39% in 1996, averaging $1.71 per
mcf, as compared to $1.23 per mcf in 1995.
Oil and gas production costs for 1996 increased 2% to $3,548,000. However,
more importantly, the average lifting cost on a barrel of oil equivalent basis
("BOE") declined 8% from $4.62 per BOE in 1995 to $4.27 per BOE in 1996.
In May 1996, the Company sold its interest in a marginally economic oil
property in the Midway Sunset field to a third party for $543,500. As a result,
a gain on the sale of $525,000 was recognized in the second quarter of 1996.
Exploration, dry holes and abandonment costs in 1996 totalled $738,000,
reflecting two dry holes drilled in the Northern San Joaquin Valley and related
leasehold write-offs. General and administrative expense increased 18% to
$1,371,000 in 1996 as a result of increased salaries and wages, higher general
corporate expense and higher costs related to the Company's ongoing producing
property acquisition efforts. Interest expense for 1996 declined to $111,000 as
a result of the conversion of the convertible note in January 1996. See Note 7
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.
The litigation settlement in 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.
12
McFarland Energy, Inc.
Management's Discussion and Analysis
of Financial Condition and Results of Operations
Results of Operations
---------------------
Three Months Ended June 30, 1996 and 1995
-----------------------------------------
For the three months ended June 30, 1996, oil and gas revenues increased
23% to $6.1 million, reflecting higher crude oil production and higher crude oil
and natural gas prices in 1996.
Crude oil production in the second quarter of 1996 increased 15% to 349,000
barrels. Higher crude production was attributable to the Company's continuing
successful development activities at its core properties in the Midway Sunset
field. Natural gas production in the second quarter of 1996 was 454,000 mcf,
which was 15% lower than the same period in 1995. This decrease was primarily
attributable to the declining production from the Northern San Joaquin Valley
and Oak Hill field operations.
The average crude oil price received in the current quarter, excluding the
effects of the hedge, increased 8% to $16.22 per barrel. The effect of the hedge
program in the current quarter decreased revenues by $347,000 or $1.01 per
barrel. In 1995, the hedge program decreased revenues by $304,000 or $1.00 per
barrel. The average natural gas price received in 1996 increased 44% to $1.71
per mcf, as compared to $1.19 per mcf in the second quarter of 1995.
Oil and gas production costs in the second quarter of 1996 decreased to
$1,710,000, or a 6% decline from 1995. On a BOE basis, the average lifting cost
for the current quarter was $4.01 per BOE as compared to $4.62 per BOE in 1995.
In May 1996, the Company sold its interest in a marginally economic oil
property in the Midway Sunset field to a third party for $543,500. As a result,
a gain on the sale of $525,000 was recognized in the second quarter of 1996.
Exploration costs of $321,000 in 1996 represented various leasehold write-
offs in the Northern San Joaquin Valley and Sacramento Valley. Interest expense
for the quarter dropped to $47,000 due to the conversion of the convertible note
in January 1996. See Note 7 of Notes to Unaudited Financial Statements.
13
McFarland Energy, Inc.
Form 10-Q
June 30, 1996
Part II
Item 6. Exhibits and Reports on Form 8-K
- -----------------------------------------
(a) Exhibits: 10c Amendment to Business Loan Agreement
dated July 15, 1996
27 Financial Data Schedule
(b) Reports on Form 8-K: none
14
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: August 12, 1996 /s/ Ronald T. Yoshihara
-----------------------------------
Ronald T. Yoshihara
Treasurer
(Chief Financial Officer)
/s/ Eileen C. Sugita
-----------------------------------
Eileen C. Sugita
Controller
(Chief Accounting Officer)
15