1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
________________
FORM 10-Q
________________
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
________________
For the quarterly period ended June 30, 1997
Commission file number 1-13108
________________
VASTAR RESOURCES, INC.
(Exact name of registrant as specified in its charter)
________________
Delaware 95-4446177
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
15375 Memorial Drive
Houston, Texas 77079
(Address of principal executive offices) (Zip code)
__________________
(281) 584-6000
(Registrant's telephone number, including area code)
__________________
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
--- ---
Number of shares of Common Stock, $.01 par value, outstanding as of
June 30, 1997: 97,263,551.
2
PART I. FINANCIAL INFORMATION
VASTAR RESOURCES, INC.
CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
CONSOLIDATED STATEMENT OF INCOME
Three Months Ended Six Months Ended
June 30, June 30,
------------------ ----------------
(Millions of dollars 1997 1996 1997 1996
except per share amounts) ----- ----- ----- -----
REVENUES
Net sales and other operating
revenues ............................ $216.7 $217.6 $498.4 $440.9
Other revenues ........................ 13.2 12.1 15.1 15.6
----- ----- ----- -----
Net revenues ........................ 229.9 229.7 513.5 456.5
----- ----- ----- -----
EXPENSES
Operating expenses .................... 36.2 33.6 68.9 66.1
Exploration expenses .................. 26.1 35.2 96.9 75.0
Selling, general and administrative
expenses ............................ 16.5 14.9 31.2 27.1
Taxes other than income taxes ......... 10.0 9.7 24.6 19.7
Depreciation, depletion and
amortization ........................ 73.1 72.3 143.7 135.6
Interest .............................. 11.4 12.3 24.4 25.7
----- ----- ----- -----
Total expenses ...................... 173.3 178.0 389.7 349.2
----- ----- ----- -----
Income before income taxes ............ 56.6 51.7 123.8 107.3
Income tax provision (benefit)......... ( 1.7) ( 2.0) 2.6 ( 2.0)
----- ----- ----- -----
Net income ............................ $ 58.3 $ 53.7 $121.2 $109.3
===== ===== ===== =====
Earned per share ...................... $ 0.60 $ 0.55 $ 1.25 $ 1.12
===== ===== ===== =====
Cash dividends paid per share
of common stock ...................... $0.075 $ 0.075 $0.150 $0.150
===== ===== ===== =====
The accompanying notes are an integral part of
the consolidated financial statements.
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VASTAR RESOURCES, INC.
CONSOLIDATED BALANCE SHEET
(Unaudited)
June 30, December 31,
1997 1996
-------- --------
(Millions of dollars)
ASSETS
Current assets:
Cash and cash equivalents ....................... $ 17.4 $ 21.9
Accounts receivable:
Trade ......................................... 261.1 470.4
Related parties ............................... 35.4 27.1
Inventories ..................................... 13.0 12.5
Prepaid expenses and other assets ............... 47.5 74.6
------- -------
Total current assets ............................ 374.4 606.5
Oil and gas properties and equipment, net ......... 1,384.3 1,332.6
------- -------
Total assets ...................................... $ 1,758.7 $ 1,939.1
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable ................................ $ 268.5 $ 469.6
Accrued liabilities ............................. 58.1 81.5
------- -------
Total current liabilities ....................... 326.6 551.1
Long-term debt .................................... 643.3 778.4
Deferred liabilities and credits .................. 214.0 214.0
Deferred income taxes ............................. 174.8 102.2
STOCKHOLDERS' EQUITY
Common stock, $.01 par value; authorized, 110,000,000
shares; issued and outstanding, 97,263,551 shares
as of June 30, 1997 and 97,260,551 shares as of
December 31, 1996 ............................... 1.0 1.0
Capital in excess of par value of stock ........... 454.1 454.1
Accumulated deficit ............................... (55.1) (161.7)
------- -------
Total stockholders' equity ........................ 400.0 293.4
------- -------
Total liabilities and stockholders' equity ........ $ 1,758.7 $ 1,939.1
======= =======
The accompanying notes are an integral part of
the consolidated financial statements.
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VASTAR RESOURCES, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
Six Months Ended
June 30,
-------------------
1997 1996
(Millions of dollars) ----- -----
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income ............................................... $ 121.2 $ 109.3
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation, depletion and amortization ............... 143.7 135.6
Deferred income taxes .................................. 72.6 (2.3)
Dry hole expense and undeveloped leasehold amortization. 45.5 35.8
Gain on asset sales .................................... (10.9) (11.9)
Net change in accounts receivable, inventories
and accounts payable .................................. (0.6) 42.4
Other .................................................. 0.6 (13.9)
----- -----
Net cash provided by operating activities ................ 372.1 295.0
----- -----
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to oil and gas properties and equipment,
including dry hole costs ................................ (239.4) (246.7)
Proceeds from asset sales ................................ 12.9 13.8
Other .................................................... (0.4) 0.7
----- -----
Net cash used by investing activities .................... (226.9) (232.2)
----- -----
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from long-term debt issuance .................... 95.0 ---
Repayments of long-term debt ............................. (230.1) (20.0)
Dividends paid ........................................... (14.6) (14.6)
Other .................................................... --- 0.1
----- -----
Net cash used by financing activities .................... (149.7) (34.5)
----- -----
Net change in cash and cash equivalents .................. (4.5) 28.3
Cash and cash equivalents at beginning of period ......... 21.9 5.3
----- -----
Cash and cash equivalents at end of period ............... $ 17.4 $ 33.6
===== =====
The accompanying notes are an integral part of
the consolidated financial statements.
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VASTAR RESOURCES, INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1. Introduction.
The foregoing information is unaudited and has been prepared from the
records of Vastar Resources, Inc. ("Vastar" or the "Company"). In the opinion
of management, the financial information reflects all adjustments (consisting
only of items of a normal recurring nature) necessary for a fair presentation
of the Company's financial position and results of operations in conformity
with generally accepted accounting principles. Such statements are presented
in accordance with the requirements of Regulation S-X which does not require
all disclosures normally required by generally accepted accounting principles
or those normally required on Form 10-K. These interim financial statements
should be read in conjunction with the annual financial statements for the
year ended December 31, 1996, and the Notes thereto contained in the Company's
Form 10-K and the first quarter Form 10-Q for the quarter ended March 31, 1997.
Certain previously reported amounts have been restated to conform with
classifications adopted in 1997.
NOTE 2. Summary of Significant Accounting Policies.
Hedging and Related Activities.
The Company utilizes derivative instruments in the form of natural gas
and crude oil price swap and price collar agreements in order to manage price
risk associated with future crude oil and natural gas production and fixed-
price crude oil and natural gas purchase and sale commitments. Such
agreements are accounted for as hedges using the deferral method of
accounting. Gains and losses resulting from these transactions are deferred
and included in other assets or accrued liabilities, as appropriate, until
recognized as operating income in the Company's Consolidated Statement of
Income as the physical production required by the contracts is delivered. The
cash flows related to any recognized gains or losses associated with these
hedges are reported as cash flows from operations. If the hedge is terminated
prior to expected maturity, gains or losses are deferred and included in
income in the same period as the physical production required by the contracts
is delivered.
The Company also uses derivative instruments in the form of interest rate
swaps primarily as a hedge against interest exposure on variable rate debt and
such agreements are accounted for as hedges using the accrual method of
accounting. The differences to be paid or received on swaps designated as
hedges are included in interest expense during the period to which the payment
or receipt relates. The related amounts payable to, or receivable from, the
counterparties are included in other assets or accrued liabilities. The cash
flows related to any recognized gains or losses associated with these hedges
are reported as cash flows from operations. The Company is currently not a
party to any interest rate swaps.
The conditions to be met for a derivative instrument to qualify as a
hedge are the following: (1) item to be hedged exposes the Company to price
or interest rate risk; (2) the derivative reduces the risk exposure and is
designated as a hedge at the time the derivative contract is entered into; and
(3) at the inception of the hedge and throughout the hedge period there is a
high correlation of changes in the market value of the derivative instrument
and the fair value of the underlying items being hedged.
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VASTAR RESOURCES, INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Unaudited)
When the designated item associated with a derivative instrument matures,
is sold, extinguished or terminated, derivative gains or losses are recognized
as part of the gain or loss on sale or settlement of the underlying item.
When a derivative instrument is associated with an anticipated transaction
that is no longer expected to occur or if correlation no longer exists the
gain or loss on the derivative is recognized in income to the extent the
futures results have not been offset by the effects of price or interest rate
changes on the hedged item since the inception of the hedge.
New Accounting Standard.
In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 128, Earnings Per Share,
("SFAS 128"). This Statement specifies the computation, presentation and
disclosure requirements for Earnings Per Share. This statement is effective
for financial statements for both interim and annual periods ending after
December 15, 1997. The Company does not expect the adoption of SFAS 128 to
have a significant impact on its calculation of earnings per share.
NOTE 3. Net Sales and Other Operating Revenues.
Three Months Ended Six Months Ended
June 30, June 30,
------------------- -----------------
(Millions of dollars) 1997 1996 1997 1996
------ ------ ------ ------
Sales and other operating revenues:
Unrelated parties ................ $ 698.5 $ 602.6 $1,734.2 $1,289.1
Related parties (1)<F1>........... 65.0 65.4 133.8 137.6
----- ----- ------ -----
Total 763.5 668.0 1,868.0 1,426.7
Less:
Purchases (2) <F2>................ (522.4) (433.7) (1,321.5) (956.8)
Delivery expenses ................ (24.4) (16.7) (48.1) (29.0)
----- ----- ----- -----
Net sales and
other operating revenues ......... $ 216.7 $ 217.6 $ 498.4 $ 440.9
===== ===== ===== =====
- -----------------
<FN>
<F1>(1) The weighted average lifting and purchase cost per Mcfe associated
with proprietary production and third party purchased volumes multiplied by
the related party sales volumes results in average costs of $41.1 million
and $40.9 million for the three months ended June 30, 1997 and 1996,
respectively, and $84.1 million and $101.0 million for the six months ended
June 30, 1997 and 1996, respectively.
<F2>(2) Includes purchases from related parties at a cost of $2.9 million and
$3.6 million for the three months ended June 30, 1997 and 1996,
respectively, and $8.0 million and $10.1 million for the six months ended
June 30, 1997 and 1996, respectively.
</FN>
- 5 -
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VASTAR RESOURCES, INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Unaudited)
NOTE 4. Exploration Expenses.
Three Months Ended Six Months Ended
June 30, June 30,
------------------- -----------------
(Millions of dollars) 1997 1996 1997 1996
------ ------ ------ ------
Dry hole costs .................... $ 4.6 $ 13.9 $ 31.0 $ 22.6
Geological and geophysical ........ 3.3 7.8 30.3 24.9
Undeveloped leasehold amortization. 7.7 6.9 14.5 13.2
Staff ............................. 9.2 5.5 17.7 12.5
Lease rentals ..................... 1.3 1.1 3.4 1.8
----- ----- ----- -----
Total ........................ $ 26.1 $ 35.2 $ 96.9 $ 75.0
===== ===== ===== =====
NOTE 5. Per Share Data.
Earned per share is computed based upon the weighted average number of
common shares outstanding during the period. The dilutive effect of common
stock equivalents was not significant. The following table reflects the
weighted average number of common shares outstanding for the specified
periods.
1997 1996
---------- ----------
Three months ended June 30, ........... 97,262,343 97,254,434
Six months ended June 30, ............. 97,261,551 97,252,218
- 6 -
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VASTAR RESOURCES, INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Unaudited)
NOTE 6. Commitments and Contingencies.
The Company and its subsidiaries are involved in a number of lawsuits,
all of which have arisen in the ordinary course of the Company's business.
The Company believes that any ultimate liability resulting from any of these
suits will not have a material adverse effect on the financial position or
results of operations of the Company.
The operations and financial position of Vastar continue to be affected
from time to time in varying degrees by domestic and foreign political
developments, as well as legislation and regulations pertaining to
restrictions on oil and gas production, imports and exports, natural gas
regulations, tax increases, environmental regulations and cancellation of
contract rights. Both the likelihood of such occurrences and their overall
effect on the Company vary greatly and are not predictable. These
uncertainties are part of a number of items that Vastar has taken and will
continue to take into account in periodically establishing accounting
reserves.
Vastar and Atlantic Richfield Company ("ARCO") have agreements whereby
Vastar has agreed to indemnify ARCO against certain claims or liabilities which
ARCO may incur relating to ARCO's historical ownership and operation of
Vastar's properties, including liabilities under laws relating to the
protection of the environment and the workplace and liabilities arising out of
certain litigation. Under such agreements, ARCO has agreed to indemnify Vastar
with respect to other claims or liabilities and other matters of litigation not
related to Vastar's business or properties reflected in the consolidated
financial statements.
The Company has long-term contracts with certain cogeneration facilities
which have an approximate average remaining life of 13 years. These contracts
cover an average of 75 MMcfd of the Company's natural gas production for the
remaining term of the contracts at an average price of approximately $2.50,
adjusted annually.
In September 1996, the Company entered into a contract for the major
upgrade and operation of a semisubmersible drilling rig for a three-year deep
water drilling program in the Gulf of Mexico, commencing late 1997. This
contract along with other contracts for support equipment are anticipated to
cost approximately $160 million over the term of the contract.
- 7 -
9
VASTAR RESOURCES, INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Unaudited)
NOTE 7. Taxes.
The provision (benefit) for taxes on income is comprised of the
following:
Three Months Ended Six Months Ended
June 30, June 30,
----------------- ----------------
(Millions of dollars) 1997 1996 1997 1996
------ ------ ------ ------
Federal:
Current ........................ $ (10.7) $ ( 1.0) $ (71.5) $ ( 1.9)
Deferred ....................... 7.8 ( 2.2) 71.5 ( 2.7)
------ ------ ------ ------
Total federal ................ (2.9) ( 3.2) 0.0 ( 4.6)
------ ------ ------ ------
State:
Current ........................ 0.7 1.5 1.5 2.2
Deferred ....................... 0.5 (0.3) 1.1 0.4
------ ------ ------ ------
Total state .................. 1.2 1.2 2.6 2.6
------ ------ ------ ------
Total income tax provision (benefit) $ (1.7) $ ( 2.0) $ 2.6 $ ( 2.0)
===== ====== ====== ======
Refer to Management's Discussion and Analysis of Financial Condition and
Results of Operations for a discussion of the components of the federal income
tax provision for the six months ended June 30, 1997.
A reconciliation of the income tax provision (benefit) as compared to
the tax based on the federal statutory rate for the specified period is as
follows:
Three Months Ended Six Months Ended
June 30, June 30,
------------------ ----------------
(Millions of dollars) 1997 1996 1997 1996
------ ------ ------ ------
Income before taxes ................ $ 56.6 $ 51.7 $ 123.8 $ 107.3
====== ====== ====== ======
Tax at 35% ......................... $ 19.8 $ 18.1 $ 43.3 $ 37.6
Increase (reduction) in taxes
resulting from:
State income taxes (net
of federal effect) ........ 0.8 0.9 1.7 1.8
Tax credits and other ........ (22.3) (21.0) (42.4) (41.4)
------ ------ ------ ------
Income tax provision (benefit)... $ (1.7) $ ( 2.0) $ 2.6 $ ( 2.0)
====== ====== ====== ======
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VASTAR RESOURCES, INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Unaudited)
NOTE 8. Long-term Debt.
Long-term debt is comprised of the following:
June 30, December 31,
(Millions of dollars) 1997 1996
------- -------
8.75% Notes, due in 2005................ $ 149.4 $ 149.4
6.95% Notes, due in 2006................ 75.0 75.0
6.96% Notes, due in 2007................ 75.0 ---
Commercial Paper........................ 343.9 554.0
------- -------
Total................................... $ 643.3 $ 778.4
======= =======
The Company entered into an amended and restated revolving credit
agreement dated as of March 31, 1997 which extended the term of Vastar's credit
facility until March 31, 2002. As of June 30, 1997, the Company had no debt
outstanding under this facility.
NOTE 9. Subsequent Events.
Dividend
On July 23, 1997, the Company declared a quarterly dividend of $0.075
per share of common stock, payable on September 2, 1997, to stockholders of
record on August 8, 1997.
Marketing Alliance
On August 8, 1997, the Company entered into a Formation Agreement with
SEI Holdings, Inc., a Delaware corporation ("SEI") and a subsidiary of the
Southern Company, to combine certain natural gas and power trading and
marketing operations of the two companies and create a new energy services
company. The new company will be named Southern Company Energy Marketing L.P.
("SCEM" or the "Venture"). SCEM will be managed, through subsidiaries, by SEI
and Vastar and is expected to begin gas marketing September 1, 1997, and power
marketing as soon as practicable upon receipt of approvals from the Federal
Energy Regulatory Commission. Pursuant to the agreement, SEI has agreed to
contribute its Atlanta-based energy marketing and trading operations, Southern
Energy Trading and Marketing, to the Venture and Vastar has agreed to
contribute substantially all of the operations of its Vastar Gas Marketing,
Inc. and Vastar Power Marketing, Inc. subsidiaries. Vastar's gas processing
plant assets and related businesses and Vastar's contracts with cogeneration
facilities will not be contributed to the Venture. Under the terms of the
transaction, SEI will pay Vastar an initial cash payment of $40 million and
have an initial 60 percent ownership interest in SCEM, with Vastar holding a 40
percent interest. On July 1, 2001, the interests of SEI and Vastar will shift
to 75 percent and 25 percent, respectively. During the year 2002, SEI has an
option to purchase an additional 5 percent interest in the Venture from Vastar
for $80 million (the "SEI Call Option") and on January 1, 2003, Vastar has an
option to sell to SEI its remaining interest for $210 million (or $130 million
if the SEI Call Option has been exercised). For the first five years of
operation, Vastar is guaranteed, subject to certain exceptions, a minimum
- 9 -
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VASTAR RESOURCES, INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Unaudited)
earnings distribution from the Venture of $20 million for the year 1998, $20
million for the year 1999, $25 million for the year 2000, $30 million for the
year 2001 and $30 million for the year 2002. Under very limited conditions,
SEI has an additional option to purchase Vastar's entire interest in the
Venture commencing on September 1, 1997, and expiring on December 31, 2007, for
$580 million (or $500 million if the SEI Call Option has been exercised) or a
certain multiple of earnings whichever is higher.
In connection with the Formation Agreement, Vastar has agreed to enter
into a Gas Purchase and Sale Agreement with SCEM for a primary term expiring on
December 31, 2007, pursuant to which Vastar will commit to sell, and the
Venture will commit to purchase (subject to certain partial releases or early
termination), substantially all of the gas produced and owned or controlled by
Vastar within the lower 48 states of the United States, Canada and Mexico, at
market-based prices. The Gas Purchase and Sale Agreement excludes certain gas
from the commitment and also reserves to Vastar certain rights, including gas
processing rights. The agreement will require that Vastar make available to
the Venture a minimum monthly quantity of gas.
Vastar management expects the transaction to close with respect to the
gas assets on or about September 1, 1997, and with respect to the power assets
as soon as practicable upon receipt of approvals from the Federal Energy
Regulatory Commission. Each closing is subject to certain conditions precedent
outlined in the Formation Agreement. The Formation Agreement, without
exhibits, has been filed as an exhibit to this Form 10-Q. To the extent the
exhibits to the Formation Agreement become material contracts they will be
filed after their execution.
- 10 -
12
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Sales and production volumes and average price statistics for the
specified periods are as follows:
Three Months Ended Six Months Ended
June 30, June 30,
------------------ ----------------
1997 1996 1997 1996
------ ------ ------ ------
Natural gas
Sales (MMcfd)*<F3> ................ 2,774 2,562 3,218 2,539
Production (MMcfd) ................ 880 882 877 885
Average sales price (per Mcf) ..... $ 2.09 $ 1.93 $ 2.40 $ 2.22
Average wellhead price (per Mcf) .. $ 1.72 $ 1.67 $ 2.02 $ 1.62
Crude oil
Sales (MBbld) ..................... 102.4 106.8 100.3 102.8
Production (MBbld) ................ 35.8 34.2 34.8 34.6
Average realized price (per Bbl)... $ 20.09 $ 21.02 $ 22.05 $ 20.19
Natural gas liquids
Production (MBbld) ................ 17.0 14.8 17.2 12.7
Average realized price (per Bbl) .. $ 11.93 $ 12.92 $ 13.72 $ 13.47
Total Production (MMcfed/net) ....... 1,197 1,176 1,189 1,169
<FN>
- ---------------------
<F3>* As used herein, the terms "Bcf," "MMcf" and "Mcf" mean billion,
million and thousand cubic feet, respectively; the terms "Bcfd," "MMcfd" and
"Mcfd" mean billion, million and thousand cubic feet per day, respectively;
the terms "MMBbl" and "MBbl" mean million and thousand barrels, respectively;
the term "Bbl" means barrel; the terms "MMBbld" and "MBbld" mean million and
thousand barrels per day, respectively. In calculating Mcf and Bbl
equivalents, one Bbl is equal to six Mcf.
</FN>
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13
The following table sets forth the statements of income for the specified
periods:
Three Months Ended Six Months Ended
June 30, June 30,
------------------ ----------------
(Millions of dollars) 1997 1996 1997 1996
------ ------ ------ ------
REVENUES
Natural gas
Sales ........................... $ 526.4 $ 450.6 $ 1,399.1 $ 1,026.5
Purchases ....................... (375.8) (301.3) (1,042.6) (717.9)
Delivery expenses ............... (17.0) (14.6) (38.5) (25.8)
------ ------ ------ ------
Net sales - natural gas ...... 133.6 134.7 318.0 282.8
------ ------ ------ ------
Crude oil
Sales ........................... 178.2 197.8 378.5 368.4
Purchases ....................... (111.5) (130.9) (236.7) (238.9)
Delivery expenses ............... (1.4) (1.4) (3.0) (2.5)
------ ------ ------ ------
Net Sales - crude oil ........ 65.3 65.5 138.8 127.0
------ ------ ------ ------
Natural gas liquids and other
Sales ........................... 58.9 19.6 90.4 31.8
Purchases and other costs ....... (41.1) (2.2) (48.8) (0.7)
------ ------ ------ ------
Net sales - NGLs and other ... 17.8 17.4 41.6 31.1
------ ------ ------ ------
Net sales and other operating
revenues ...................... 216.7 217.6 498.4 440.9
Other revenues .................... 13.2 12.1 15.1 15.6
------ ------ ------ ------
Net revenues ................. 229.9 229.7 513.5 456.5
------ ------ ------ ------
EXPENSES
Operating expenses ................ 36.2 33.6 68.9 66.1
Exploration expenses .............. 26.1 35.2 96.9 75.0
Selling, general and administrative
expenses ........................ 16.5 14.9 31.2 27.1
Taxes other than income taxes ..... 10.0 9.7 24.6 19.7
Depreciation, depletion and
amortization .................... 73.1 72.3 143.7 135.6
Interest .......................... 11.4 12.3 24.4 25.7
------ ------ ------ ------
Total expenses .................. 173.3 178.0 389.7 349.2
------ ------ ------ ------
Income before income taxes ........ 56.6 51.7 123.8 107.3
Income tax provision (benefit)..... (1.7) (2.0) 2.6 (2.0)
------ ------ ------ ------
Net income ........................ $ 58.3 $ 53.7 $ 121.2 $109.3
====== ====== ====== ======
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14
SECOND QUARTER 1997 vs. SECOND QUARTER 1996.
Net income for the second quarter of 1997 was $58.3 million, compared to
$53.7 million for the second quarter of 1996. The nine percent increase in
earnings was primarily the result of lower exploration expenses during the
current period.
Natural gas sales increased by $75.8 million to $526.4 million in the
second quarter of 1997. The higher revenues were the result of an eight
percent increase in sales volumes to an average of 2.8 Bcfd and an eight
percent increase in the average natural gas sales price in the second quarter
of 1997 as compared to the second quarter of 1996. The price improvement
resulted from smaller basis differentials, especially in the San Juan Basin
area when compared to Henry Hub prices. Reflected in natural gas revenues for
the second quarter of 1997 and 1996 was the unfavorable impact of $2.3 million
and $11.3 million, respectively, related to the Company's hedging activities.
Second quarter 1997 natural gas purchases increased by $74.5 million
from the second quarter of 1996 to $375.8 million. This increase was a result
of the combined effect of an increase in the cost of gas purchased and a 15
percent increase in natural gas purchased volumes which rose to an average of
approximately 1.9 Bcfd. Such volume increase was necessary to meet higher
sales levels resulting from increased marketing activities.
Second quarter 1997 natural gas production averaged 880 MMcfd, essentially
the same volume reported for the second quarter 1996. Volume increases at
High Island 24-L, the continued ramp-up of Vastar's San Juan Basin area gas
rate and the recent start-ups of the South Pass 60 Bastian Bay well and the
Mobile Bay 904 well nearly offset natural field declines.
Crude oil sales in the second quarter of 1997 were $178.2 million, down
$19.6 million from the same period last year as a result of a six percent
decrease in sales price.
Crude oil production for the second quarter 1997 increased slightly as
compared to the same period last year, primarily as a result of increased
production volumes at South Pass 60 and Eugene Island 175.
Net sales for natural gas liquids (NGLs) and other products were
up slightly for the second quarter of 1997 as compared to the same period last
year. The increase is a result of higher NGL production available for sale.
NGLs production averaged 17.0 MBbld, up from the same period last year due to
increased processing in the Mid-Continent and Gulf Coast areas. Also included
in Net sales for NGLs and other products is approximately $39.0 million of
sales and purchases of electrical power attributable to the ramp-up of power
marketing activities during the second quarter of this year.
Second quarter 1997 exploration expenses were $26.1 million compared to
$35.2 million reported for the same period in 1996. The $9.1 million decrease
was primarily related to lower dry hole costs and geological and geophysical
costs partially offset by higher staff costs. The lower dry hole costs and
geological and geophysical costs resulted from the timing of activity during
each year; the higher staff costs during the second quarter of 1997 were a
result of higher consulting and contracting services.
- 13 -
15
The income tax benefit of $1.7 million in the second quarter of 1997
reflected higher pre-tax earnings as compared to the same period in 1996. The
income tax benefit for second quarter 1997 and 1996 included the net benefit
of $22.2 million and $21.0 million, respectively, of Internal Revenue Code
Section 29 tax credits for non-conventional fuels.
SIX MONTHS ENDED JUNE 30, 1997 VS. SIX MONTHS ENDED JUNE 30, 1996.
Net income for the six months ended June 30, 1997 was $121.2
million, compared to $109.3 million for the same period of 1996. The earnings
increase reflects higher commodity prices and NGL produced volumes, partially
offset by higher costs.
Net sales and other operating revenues increased by $57.5 million to
$498.4 million for the first six months of 1997, as compared to
the same period last year, primarily as a result of higher overall
commodity prices and higher NGL volumes.
Natural gas sales increased by $372.6 million to $1,399.1 million for the
first six months of 1997. The higher revenues were primarily the result of
higher commodity prices for natural gas throughout the first six months of
1997. As a result of a strong market demand, the average sales price for
natural gas increased by $0.18 per Mcf to $2.40 per Mcf during the first six
months of 1997. Natural gas sales volumes rose 679 MMcfd to an average of
approximately 3.2 Bcfd. Reflected in natural gas revenues for the first six
months in 1997 and 1996 was $18.2 million and $34.0 million, respectively in
hedging losses.
For the first six months of 1997, gas purchases increased by $324.7
million to $1,042.6 million from the same period last year. This increase was
a result of the combined effect of a 41 percent increase in the natural gas
purchased volumes and a slight increase in the average purchase price for
natural gas. The higher purchased volumes were necessary to meet higher sales
levels.
Natural gas production for the first six months of 1997 declined slightly
as compared to the same period last year. Volume increases at High
Island 24-L, continued ramp-up of Vastar's San Juan Basin area gas rate and
the recent start-ups of the South Pass 60 Bastian Bay well and the Mobile Bay
904 well nearly offset natural field declines.
Crude oil production for the first half of 1997 was essentially the same
as compared to the first half of 1996. Development efforts at South Pass 60
and Eugene Island 175 offset natural field declines.
Net sales for NGLs and other products increased $10.5 million for the first
six months of 1997 as compared to the first six months of 1996 primarily as a
result of higher NGL production and prices. NGL production averaged 17.2 MBbld,
up 35 percent from the same period last year. The change reflects increased
processing of Mid-Continent and Gulf Coast area gas. Also included in Net sales
for NGLs and other products is approximately $43.0 million of sales and
purchases of electrical power attributable to the ramp-up of power marketing
activities during the second quarter of this year.
- 14 -
16
Exploration costs during the first six months of 1997 increased $21.9
million, or 29 percent, when compared to the same time period in 1996. This
increase was primarily a result of increased dry hole, geological and
geophysical and staff costs. Dry hole costs for the first six months of 1997
were $31.0 million as compared to $22.6 million for the same period last year.
The increase in costs was attributable to the drilling of deeper, more complex
wells during the first half of 1997 when compared to the first half of 1996.
Staff costs increased primarily as a result of higher consulting and
contracting services.
Selling, general and administrative costs for the first six months of 1997
increased $4.1 million to $31.2 million as compared to the same time period
last year primarily as a result of ramping-up Vastar Gas Marketing and Vastar
Power Marketing activities, implementation of improved computer and software
technology and general cost increases.
For the first half of 1997 taxes other than income taxes increased $4.9
million, or 25 percent, as compared to the same time period last year. The
increase is primarily a result of higher production taxes driven by higher
product prices.
The income tax provision of $2.6 million in the first six months of 1997
reflected higher pre-tax earnings as compared to the $2.0 million benefit for
the same period in 1996. The income tax provision for first half of 1997 and
the benefit for the first half of 1996 included the net benefit of $42.4
million and $41.4 million, respectively, of Internal Revenue Code Section 29
tax credits for non-conventional fuels. In the first quarter of 1997, ARCO
and Vastar agreed to a second amendment to the Tax Sharing Agreement. The
amendment removed certain limitations under the original agreement and
generally allows Vastar to receive payment for all Section 29 credits in the
year generated. In return the Company agreed to a 3.25 percent reduction in
the tax payment it receives for credits generated from properties acquired by
the Company before June 1, 1995. ARCO and Vastar also agreed to apply the
same 3.25 percent reduction to the $61.4 million of Section 29 credits carried
forward as of December 31, 1996, in exchange for a $59.4 million tax payment
received in the first quarter 1997. Accordingly, the first quarter 1997 tax
provision included $2.0 million of tax expense related to the amendment which
consisted of a $59.4 million current tax benefit and a $61.4 million deferred
tax expense.
- 15 -
17
LIQUIDITY AND CAPITAL RESOURCES.
In the first half of 1997, cash flow from operations was $372.1 million,
compared to $295.0 million for the same period in 1996. This increase
was primarily due the receipt of $59.4 million from ARCO in the first
quarter of 1997 related to the second amendment to the Tax Sharing Agreement
and higher product prices.
Net cash used by investing activities in 1997 was $226.9 million,
basically flat as compared to the first half 1996.
The following table summarizes the Company's capital investments for the
comparative periods.
CAPITAL SPENDING SUMMARY
Three Months Ended Six Months Ended
June 30, June 30,
----------------- -----------------
(Millions of dollars) 1997 1996 1997 1996
------ ------ ------ ------
Exploratory drilling................. $ 26.1 $ 44.1 $ 52.7 $ 59.6
Development drilling................. 51.3 61.0 91.7 112.0
Property acquisitions................ 6.7 47.6 69.0 51.5
Other additions..................... 12.6 11.2 26.0 23.6
------- ------ ------- -------
Total additions to property,
plant and equipment....... 96.7 163.9 239.4 246.7
Geological and geophysical.......... 3.3 7.8 30.3 24.9
------- ------- ------- -------
Total capital program............ $ 100.0 $ 171.7 $ 269.7 $ 271.6
======= ======= ======= =======
Cash flow used by financing activities was $149.7 million in the first
half of 1997, reflecting a $135.1 million pay down of long-term debt (net of
new borrowings).
The Company entered into an amended and restated revolving credit
agreement dated as of March 31, 1997, which extended the term of Vastar's
credit facility until March 31, 2002. As of June 30, 1997, the Company had
no debt outstanding under this facility.
The Company's ratio of earnings to fixed charges for the six months ended
June 30, 1997 and 1996 was 6.1 and 5.2, respectively. This ratio was computed
by dividing earnings by fixed charges. For this purpose, earnings include
income before income taxes and fixed charges. Fixed charges include interest
and amortization of debt expenses and the estimated interest component of
rental expense.
- 16 -
18
RISK MANAGEMENT.
From time to time, the Company uses various hedging arrangements,
predominantly natural gas and crude oil price swaps, to manage the Company's
exposure to price risk from its natural gas and petroleum liquids production.
These hedging arrangements have the effect of locking in for a specified period
(at predetermined prices or ranges of prices) the prices the Company will
receive for the volumes to which the hedge relates. As a result, while these
hedging arrangements are structured to reduce the Company's exposure to
decreases in price associated with the hedged commodity, they can also limit
the benefit the Company might otherwise have received from any price increases
associated with the hedged commodity.
As a result of the various hedging transactions for natural gas and crude
oil, the Company realized $18.2 million and $34.0 million of pre-tax losses in
the first six months of 1997 and 1996, respectively. Since these transactions
were considered to be hedges on production, these losses were included in sales
and other operating revenues and were reflected in the average sales price of
the particular products.
The following table summarizes the Company's open positions as of June
30, 1997.
Average Range of
Product/Location Time Period Volume Prices
- ---------------- --------------------------- ---------- ----------------
Per Mcf
----------------
Gas/Henry Hub July 1 to December 31, 1997 193 MMcfd $1.90 -- $2.16
Gas/Henry Hub January 1 to December 31, 1998 183 MMcfd $1.95 -- $2.21
Gas/San Juan July 1 to December 31, 1997 102 MMcfd $1.80 -- $1.82
Per Bbl
----------------
Oil/Cushing July 1 to December 31, 1997 7.5 MBbld $19.00 -- $22.44
Based on forward price quotes from brokers and NYMEX forward prices as of
June 30, 1997, the deferred pre-tax loss to the Company for the hedged
transactions for 1997 and 1998 would be $18.5 million for natural gas and
crude oil. The actual gains or losses ultimately realized by the
Company from such hedges may vary significantly from the foregoing amounts due
to the volatility of the commodity markets.
The Company continues to evaluate its hedging positions in light of
current market conditions.
The Company has long-term contracts with certain cogeneration facilities
which have an approximate average remaining life of 13 years. These contracts
cover an average of 75 MMcfd of the Company's natural gas production for the
remaining term of the contracts at an average price of approximately $2.50,
adjusted annually.
During the second quarter of 1997, the Company's long-term sales
commitments did not exceed the total of proprietary production and other
natural gas production controlled through call rights with third-party
producers and marketing agreements with the Company's royalty owners.
- 17 -
19
NEW ACCOUNTING STANDARD.
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 128, Earnings Per Share, ("SFAS 128").
This Statement specifies the computation, presentation and disclosure
requirements for Earnings Per Share. This statement is effective for financial
statements for both interim and annual periods ending after December 15, 1997.
The Company does not expect the adoption of SFAS 128 to have a significant
impact on its calculation of earnings per share.
------------------------
Management cautions against projecting any future results based on
present earnings levels because of economic uncertainties, the extent and form
of existing or future governmental regulations and other possible actions by
governments.
The foregoing financial information is unaudited and has been prepared
from the books and records of the Company. In the opinion of Management, the
financial information reflects all adjustments, consisting only of normal
recurring adjustments, necessary for the fair presentation of the financial
position and results of operations in conformity with generally accepted
accounting principles.
- 18 -
20
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.
There have been no material developments with respect to the Company's
legal proceedings as previously reported in the Company's Form 10-K for
the year ending December 31, 1996 and the Company's Form 10-Q for the
quarter ending March 31, 1997.
Item 4. Submission of Matters to a Vote of Security Holders.
The Company's Annual Meeting of Stockholders was held on May 21, 1997, in
Houston, Texas. Stockholders voted on the election of eight directors for a
one year term expiring in 1998 and the appointment of independent accountants
for the year 1997. The voting results on these matters were as follows.
(a) Election of Directors:
Votes Received Votes Broker
Nominee For Withheld Non-votes
- ---------------- -------------- -------- ---------
Jimmie D. Callison 95,226,728 69,054 -0-
Terry G. Dallas 95,173,904 121,878 -0-
Charles D. Davidson 95,176,029 119,753 -0-
Marie L. Knowles 95,173,412 122,370 -0-
Robert C. LeVine 95,226,513 69,269 -0-
William D. Schulte 95,226,755 69,027 -0-
Steven J. Shapiro 95,176,029 119,753 -0-
Michael E. Wiley 95,173,053 122,729 -0-
(b) Approval of Appointment of Coopers & Lybrand L.L.P. as independent
accountants of the Company:
For: 95,281,150
Against: 10,100
Abstaining: 4,532
Broker Non-Votes: -0-
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits.
10.1 Amended and Restated Credit Agreement, dated as of March 31,
1997, among Vastar Resources, Inc., the Banks, the parties
thereto, Morgan Guaranty Trust Company of New York, as Agent,
and the Co-Agents listed therein.
10.2 Formation Agreement, dated as of August 8, 1997, by and
between SEI Holdings, Inc. and Vastar Resources, Inc.
12 Computation of Ratio of Earnings to Fixed Charges.
27 Financial Data Schedule.
(b) Reports on Form 8-K.
The following Current Reports on Form 8-K were filed during the
quarter ended June 30, 1997 and through the date hereof.
Date of Report Item No. Financial Statements
--------------- -------- --------------------
August 5, 1997 5 None
- 19 -
21
SIGNATURE
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.
VASTAR RESOURCES, INC.
(Registrant)
Dated: August 14, 1997 /s/ Joseph P. McCoy
------------------------------
Joseph P. McCoy
Vice President and Controller
(Duly Authorized Officer and
Principal Accounting Officer)
- 20 -
22
Exhibit Index
Exhibit No. Description
- ----------- --------------------------------
10.1 Amended and Restated Credit Agreement, dated as of March 31,
1997, among Vastar Resources, Inc., the Banks, the parties
thereto, Morgan Guaranty Trust Company of New York, as Agent,
and the Co-Agents listed therein.
10.2 Formation Agreement, dated as of August 8, 1997, by and
between SEI Holdings, Inc. and Vastar Resources, Inc.
12 Computation of Ratio of Earnings to Fixed Charges.
27 Financial Data Schedule.