SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(MARK ONE)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended: March 31, 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 number: 0-10156
CAIRN ENERGY USA, INC.
(Exact name of registrant as specified in its charter)
Delaware 23-2169839
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
8235 Douglas Avenue, Suite 1221, Dallas, Texas 75225
(Address of principal executive offices) (Zip Code)
(214) 369-0316
(Registrant's telephone number, including area code)
(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
The number of shares outstanding of each of the issuer's classes of
common stock as of April 30, 1996:
17,558,593 shares of common stock, par value $.01
CAIRN ENERGY USA, INC.
INDEX
Page No.
------------
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Statements of Operations for the three
months ended March 31, 1996 and 1995 . . . . . . . . . . . . . . 3
Balance Sheets at March 31, 1996 and December 31, 1995. . . . 4
Statement of Changes in Stockholders' Equity for the
three months ended March 31, 1996 . . . . . . . . . . . . . 6
Statements of Cash Flows for the three months
ended March 31, 1996 and 1995 . . . . . . . . . . . . . . . 7
Notes to Financial Statements . . . . . . . . . . . . . . . . 8
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations . . . . . . . . . . . . . 10
PART II. OTHER INFORMATION
Item 1. Legal Proceedings . . . . . . . . . . . . . . . . . . . 13
Item 2. Changes in Securities . . . . . . . . . . . . . . . . . 13
Item 3. Defaults Upon Senior Securities . . . . . . . . . . . . 13
Item 4. Submission of Matters to a Vote of Security Holders . . 13
Item 5. Other Information . . . . . . . . . . . . . . . . . . . 13
Item 6. Exhibits and Reports on Form 8-K . . . . . . . . . . . 13
2
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
CAIRN ENERGY USA, INC.
STATEMENTS OF OPERATIONS
Three months ended March 31, 1996 and 1995
Three months ended
March 31,
---------------------------
1996 1995
---------- ----------
(in thousands except
per share amounts)
Revenues:
Oil and gas. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 7,253 $ 5,002
Other revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34 32
--------------------
Total revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,287 5,034
. --------------------
Expenses:
Lease operating expenses and production taxes . . . . . . . . . . . . 628 530
Depreciation, depletion and amortization . . . . . . . . . . . . . . . 3,244 2,750
Administrative expenses . . . . . . . . . . . . . . . . . . . . . . . 382 327
Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 443 620
--------------------
Total expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,697 4,227
--------------------
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 2,590 $ 807
. ====== ======
Net income per common and common equivalent share . . . . . . . . . . . $0.15 $0.05
. ====== ======
Weighted average common and common
equivalent shares outstanding . . . . . . . . . . . . . . . . . . . . 17,555 15,963
. ====== ======
See accompanying notes.
3
CAIRN ENERGY USA, INC.
BALANCE SHEETS
March 31, 1996 and December 31, 1995
ASSETS
------------
. . . . . March 31, December 31,
1996 1995
. . . . . ---------------------------------------
(in thousands)
Current assets:
Cash and cash equivalents . . . . . . . . . . . . . . . . . $ 1,787 $ 3,553
Accounts receivable . . . . . . . . . . . . . . . . . . . . 5,537 4,340
Prepaid expenses . . . . . . . . . . . . . . . . . . . . . 559 447
. ------------------------
Total current assets . . . . . . . . . . . . . . . . . . . . 7,883 8,340
Property and equipment at cost:
Oil and gas properties, based on full cost accounting . . . 171,317 157,100
Other equipment . . . . . . . . . . . . . . . . . . . . . . 844 712
. ------------------------
. . . . . . 172,161 157,812
Less accumulated depreciation, depletion and amortization . (63,149) (59,905)
. ------------------------
Net property and equipment . . . . . . . . . . . . . 109,012 97,907
Deferred charges, net of amortization . . . . . . . . . . . . 481 564
. ------------------------
Total assets . . . . . . . . . . . . . . . . . . . . . . . . $117,376 $106,811
. . ==============
See accompanying notes.
4
CAIRN ENERGY USA, INC.
BALANCE SHEETS
March 31, 1996 and December 31, 1995
LIABILITIES AND STOCKHOLDERS' EQUITY
-----------------------------------------------------------
. . . . . March 31, December 31,
1996 1995
. . . . . ---------------------------------------
(in thousands)
Current liabilities:
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . $ 902 $ 499
Accrued lease operating expenses . . . . . . . . . . . . . . . . 323 578
Accrued well costs . . . . . . . . . . . . . . . . . . . . . . . 6,046 6,194
Other accrued liabilities . . . . . . . . . . . . . . . . . . . . 178 254
. ------------------------
Total current liabilities . . . . . . . . . . . . . . . . . . . . . 7,449 7,525
Long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . 23,500 15,500
Stockholders' equity:
Common stock, $.01 par value;
30,000,000 shares authorized;
Shares issued and outstanding:
March 31, 1996 - 17,558,216
December 31, 1995 - 17,550,480 . . . . . . . . . . . . . . . 176 176
Additional paid-in capital . . . . . . . . . . . . . . . . . . . 94,771 94,720
Accumulated deficit . . . . . . . . . . . . . . . . . . . . . . . (8,520) (11,110)
. ------------------------
Total stockholders' equity . . . . . . . . . . . . . . . . . . . . 86,427 83,786
. ------------------------
Total liabilities and stockholders' equity . . . . . . . . . . . . $117,376 $106,811
. ======= =======
See accompanying notes.
CAIRN ENERGY USA, INC.
Statement of Changes in Stockholders' Equity
Three months ended March 31, 1996
(in thousands)
Additional Total
Common Stock Paid-In AccumulatedStockholders'
Shares Amount Capital Deficit Equity
Balance at
December 31,
1995 17,550 $176 $94,720 $(11,110) $83,786
Exercise of
stock options 7 - 42 - 42
Other 1 - 9 - 9
Net income - - - 2,590 2,590
--------------------------------------------------------------
Balance at
March 31, 1996 17,558 $176 $94,771 $(8,520) $86,427
==============================================================
See accompanying notes.
CAIRN ENERGY USA, INC.
STATEMENTS OF CASH FLOWS
Three months ended March 31, 1996 and 1995
March 31, March 31,
1996 1995
--------------------------
(in thousands)
Increase (decrease) in cash and cash equivalents
Net income . . . . . . . . . . . . . . . . . . . . $ 2,590 $ 807
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation, depletion and amortization . . . . 3,244 2,750
Amortization of loan costs . . . . . . . . . . . 95 88
Change in operating assets and liabilities:
Accounts receivable . . . . . . . . . . . . . (1,197) (1,920)
Prepaid expenses . . . . . . . . . . . . . . . (112) (204)
Accounts payable . . . . . . . . . . . . . . . 403 (945)
Accrued liabilities . . . . . . . . . . . . . (316) 47
Deferred revenue . . . . . . . . . . . . . . . - (25)
Advances (repayments) from (to) Cairn Energy PLC (6) 2
. . . . . . . . . . . . . . --------------------
Net cash provided by operating activities . . . . . . 4,701 600
Cash flows from investing activities:
Exploration and development expenditures . . . . . . (14,366) (7,849)
Increase in other equipment . . . . . . . . . . . . (132) (146)
. . . . . . . . . . . . . . --------------------
Net cash used in investing activities . . . . . . . . (14,498) (7,995)
Cash flows from financing activities:
Loan costs . . . . . . . . . . . . . . . . . . . . . (11) (53)
Proceeds from long-term debt . . . . . . . . . . . . 8,000 7,000
Exercise of stock options . . . . . . . . . . . . . 42 -
. . . . . . . . . . . . . . --------------------
Net cash provided by financing activities . . . . . . 8,031 6,947
. . . . . . . . . . . . . . --------------------
Net change in cash and cash equivalents . . . . . . . (1,766) (448)
Cash and cash equivalents at beginning of period . . 3,553 2,182
. . . . . . . . . . . . . . --------------------
Cash and cash equivalents at end of period . . . . . $ 1,787 $ 1,734
. . . . . . . . . . . . . . ====== ======
Supplemental cash flow information -
Interest paid in cash . . . . . . . . . . . . . . . $ 346 $ 538
See accompanying notes.
CAIRN ENERGY USA, INC.
Notes to Financial Statements
1. Basis of Presentation
In the opinion of management, the accompanying unaudited financial
statements reflect all adjustments (consisting only of normal
recurring adjustments) which are necessary for a fair presentation of
the financial position of the Company at March 31, 1996, the results
of its operations for the three months ended March 31, 1996 and 1995
and the results of its cash flows for the three months ended March 31,
1996 and 1995. These financial statements should be read in
conjunction with the notes to the Company's annual financial
statements, which were included in the Company's Annual Report on Form
10-K for the year ended December 31, 1995, filed with the Securities
and Exchange Commission (the "Commission") on March 5, 1996.
The consolidated financial statements include the accounts of the
Company and its wholly-owned subsidiary. All intercompany accounts
and transactions have been eliminated in consolidation.
2. Long-term debt.
Long-term debt at March 31, 1996 and December 31, 1995, consisted of
the following:
March 31, December 31,
1996 1995
Revolving credit agreement $23,500,000 $15,500,000
========= =========
The Company has a $50 million credit facility (the INCC Credit
Agreement) with Internationale Nederlanden (U.S.) Capital Corporation
(INCC) and Mees Pierson, N.V., under which the current borrowing base
is $45 million. The INCC Credit Agreement is secured by substantially
all of the Company's assets. It contains financial covenants which
require the Company to maintain a ratio of current assets to current
liabilities (excluding the current portion of related debt) of no less
than 1.0 to 1.0 and a tangible net worth of not less than $40 million.
The Company is currently in compliance with such financial covenants.
At March 31, 1996, the Company had outstanding borrowings of $23.5
million under this facility. Outstanding borrowings accrue interest
at either INCC's fluctuating base rate or INCC's reserve adjusted
Eurodollar rate plus 1.5%, at the Company's option. On March 31,
1997, the borrowings outstanding under this facility will be converted
to a term loan that requires various quarterly principal payments
through December 31, 1999. Interest is payable quarterly on any base
12
rate borrowings and payable on maturity of any Eurodollar borrowings.
The INCC Credit Agreement does not permit the Company to pay or
declare any cash or property dividends or otherwise make any
distribution of capital. The Company is obligated to pay a quarterly
fee equal to one-half of 1% per annum of the unused portion of the
borrowing base under the facility and a Letter of Credit fee for each
Letter of Credit in the amount of one and one-half percent (1.5%) per
annum of the face amount of such Letter of Credit.
The Company's ability to borrow under the INCC Credit Agreement is
dependent upon the reserve value of its oil and gas properties. If
the reserve value of the Company's borrowing base declines, the amount
available to the Company under the INCC Credit Agreement will be
reduced and, to the extent that the borrowing base is less than the
amount then outstanding under the INCC Credit Agreement, the Company
will be obligated to repay such excess amount on 30-days notice from
INCC or to provide additional collateral. INCC and Mees Pierson, N.V.
have substantial discretion in determining the reserve value of the
borrowing base.
The carrying value of the Company's long-term debt approximates fair
value.
13
3. Property and Equipment.
The Company capitalized approximately $439,000 and $421,000 of
internal costs during the three months ended March 31, 1996 and 1995,
respectively. Such capitalized costs include salaries and related
benefits of individuals directly involved in the Company's
acquisition, exploration, and development activities, based on a
percentage of their time devoted to such activities.
14
CAIRN ENERGY USA, INC.
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
Results of Operations
The following table sets forth certain information regarding the
production volumes of, average sales prices received for, average
production costs associated with, and average depletion rate
associated with the Company's sales of oil and gas for the periods
indicated.
Three months
ended March 31,
-------------------------------
1996 1995
---------- ----------
Net Production:
Gas (MMcf) . . . . . . . . 2,368 2,256
Oil (MBbl) . . . . . . . . 70 74
Average Sales Price:
Gas (per Mcf) (1) . . . . $ 2.46 $ 1.62
Oil (per Bbl) . . . . . . . $19.85 $17.71
Average Production Costs:
(per Mcfe) (2) . . . . . . $ 0.23 $ 0.20
Depletion rate: (per Mcfe) . $ 1.15 $ 0.98
------------------
(1) Includes natural gas liquids.
(2) Includes direct lifting costs (labor, repairs and maintenance,
materials and supplies) and the administrative costs of
production offices, insurance and property and severance taxes.
Three months ended March 31, 1996 and 1995
Revenues. Total revenues increased $2.3 million (45%) to $7.3 million
for the three months ended March 31, 1996 from $5.0 million for the
three months ended March 31, 1995. The primary reason for the
increase was higher oil and gas prices during the first quarter of
1996 coupled with new production from the Company's interests in
Vermilion Block 203 and Main Pass Block 262. The Company's average
net production for the quarter ended March 31, 1996 was approximately
26.3 MMcf of gas per day and 776 Bbls of oil and condensate per day
compared with average per day production during the same quarter in
1995 of 25.1 MMcf of gas and 823 Bbls of oil and condensate.
Expenses. Total expenses increased $471,000 (11%) to $4.7 million for
the three months ended March 31, 1996 from $4.2 million for the three
months ended March 31, 1995. Depreciation, depletion and amortization
increased $494,000 (18%) to $3.2 million for the three months ended
March 31, 1996 from $2.7 million for the same period in 1995 due to
increased production coupled with an increase in the depletion rate.
15
A significant part of the depletion rate increase is due to the costs
associated with four exploration wells which were determined to be dry
being added to the full cost pool without the addition of new
reserves. Lease operating expenses and production taxes increased
$99,000 (19%) to $628,000 for the three months ended March 31, 1996
from $529,000 for the same period in 1995 due to increased production
and increased oil and gas revenue.
Administration expenses increased $55,000 (17%) to $382,000 for the
three months ended March 31, 1996 from $327,000 for the same period in
1995 due primarily to an increase in personnel expense (consisting of
salaries, insurance and the Company's contributions to the 401(k)
Profit Sharing Plan), partially offset by overhead reimbursement
related to South Timbalier Block 249.
Interest expense decreased by $177,000 (29%) to $443,000 for the
quarter ended March 31, 1996 from $620,000 for the three months ended
March 31, 1995. Interest expense decreased because of lower average
outstanding debt coupled with lower average interest rates at March
31, 1996 than at the same date in 1995.
Net Income. Net income increased $1.8 million (221%), or $0.10 per
share to $2.6 million, or $0.15 per share for the quarter ended March
31, 1996 from $807,000, or $0.05 per share for the same period in
1995. The primary reason for the increase was higher oil and gas
prices coupled with new production.
Capital Resources and Liquidity
At March 31, 1996, the Company had existing cash and cash investments
of $1.8 million. Net cash provided by operating activities was $4.7
million for the three months ended March 31, 1996 compared with
$600,000 for the same period in 1995. The primary reason for this
increase in cash provided by operating activities was higher results
of operations (or earnings before depreciation, depletion and
amortization) coupled with decreased working capital requirements.
Net cash used in investing activities for the three months ended March
31, 1996 was $14.5 million compared with $8.0 million for the same
period in 1995. This increase was principally due to expenditures for
exploration and development projects.
Net cash provided by financing activities for the first quarter of
1996 was $8.0 million compared with $6.9 million for the same period
in 1995. The cash provided by financing activities for the period
consisted mainly of borrowings under the Company's revolving credit
facility which were used to fund a portion of the Company's capital
spending program.
During the quarter the Company drilled successful exploration wells on
East Cameron Block 350 and on Ship Shoal Block 261. Development plans
for East Cameron Block 350 call for the installation of a platform by
the end of 1996 with completion and further drilling operation planned
for the first quarter of 1997. On Ship Shoal 261 plans are being
prepared for the rapid development of this field with first production
16
expected before year-end 1996. Four exploration wells drilled in the
first quarter were dry.
In general, because the Company's oil and gas reserves are depleted by
production, the success of its business strategy is dependent on a
continuous exploration and development program. Therefore, the
Company's capital requirements relate primarily to the acquisition of
undeveloped leasehold acreage and exploration and development
activities. In addition to pursuing a number of existing exploration
prospects, the Company was the high bidder on 26 blocks in the Gulf
of Mexico Central Area Lease Sale held on April 24, 1996. The
Company's interest in these blocks ranges from 25 to 60 percent. If
all 26 blocks are awarded, the Company's obligation for the lease
rentals and bonuses will be approximately $7.2 million which will be
funded from cash flow from operations.
The Company's operating needs and capital spending programs have been
funded by borrowings under its bank credit facilities, proceeds from
public offerings of its Common Stock and cash flows from operations.
The Company expects to continue with an active exploration program and
to drill up to 16 additional exploration wells in 1996. The Company
expects capital expenditures during 1996 to total approximately $54
million. At March 31, 1996, the Company's capital resources consisted
primarily of available borrowing capacity under the INCC Credit
Agreement ($21.5 million) and cash flow from operations. Management
believes that cash flow from operations along with the amount
available under the INCC Credit Agreement will be sufficient to
finance the currently planned development expenditures.
If the Company is successful in substantially all of its currently
scheduled exploration prospects, additional funds may be required in
order to conduct the necessary development activities. If necessary,
the Company may seek to raise additional capital in public or private
equity or debt markets. No assurance can be given that the Company
will be able to raise such capital if needed or on terms that are
favorable to the Company. Any resulting lack of sufficient capital
may require the Company to reduce its interest in such properties or
to forego developing such reserves. In addition, the Company does not
act as operator with respect to its properties. The Company may not
be able to control the development activities or the associated costs
with respect to properties operated by other parties.
17
The Company's revenues and the value of its oil and gas properties
have been and will continue to be affected by changes in oil and gas
prices. The Company's ability to maintain current borrowing capacity
and to obtain additional capital on attractive terms is also
substantially dependent on oil and gas prices (Note 2). Oil and gas
prices are subject to significant seasonal and other fluctuations that
are beyond the Company's ability to control or predict. Although
certain of the Company's costs and expenses are affected by the level
of inflation, inflation has not had a significant effect on the
Company's results of operations during 1995 or the first three months
of 1996.
In an effort to reduce the effects of the volatility of the price of
oil and gas on the Company's operations, management has adopted a
policy of hedging oil and gas prices, usually when such prices are at
or in excess of the prices anticipated in the Company's operating
budget, through the use of commodity futures, options, forward
contracts and swap agreements. Hedging transactions are limited by
the Board of Directors such that no transaction may fix an oil and gas
price for a term of more than 12 months, and the aggregate oil and gas
production covered by all transactions may not exceed 50% of the
Company's budgeted production for any 12-month period from the date of
the transaction or 75% of the Company's budgeted production for any
single month from the date of the transaction. By hedging its oil and
gas prices, the Company intends to mitigate the risk of future
declines in oil and gas prices. Under certain contracts should oil or
gas prices increase above the contract rate, the Company will not
participate in the higher prices for the production.
The Company has entered into a number of gas price swap transactions
under which the Company receives a fixed price per MMBtu and pays a
floating price based on the settlement prices for the NYMEX Natural
Gas futures contract for the delivery month. In total under these
contracts the Company has fixed the price of 3,345,000 MMBtu of gas
for the period January to September 1996 at an average price of $1.935
per MMBtu. During the first quarter of 1996 and 1995 oil and gas
revenues were decreased $847,000 and increased $25,000, respectively,
as a result of hedging transactions.
The Company may enter into certain interest rate hedging contracts.
By hedging its interest rate under its credit facility, the Company
would intend to mitigate the risk of future increases in interest
rates. Should interest rates decrease below the contract rate, the
Company will not participate in the lower interest rate for the
portion of the credit facility under the hedging contract. The
Company currently has no interest rate hedging contracts in place.
18
CAIRN ENERGY USA, INC.
PART II - OTHER INFORMATION
ITEM 1 - LEGAL PROCEEDINGS
No new material developments.
ITEM 2 - CHANGES IN SECURITIES
None
ITEM 3 - DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5 - OTHER INFORMATION
None
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
None
19
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 thereunto duly authorized.
CAIRN ENERGY USA, INC.
(Registrant)
Date: May 1, 1996 /s/ Michael R. Gilbert
Michael R. Gilbert
President
/s/ J. Munro M. Sutherland
J. Munro M. Sutherland
Senior Vice President and
Treasurer
(Principal Financial Officer)
20