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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 SEPTEMBER 30, 1997
COMMISSION FILE NUMBER 333-12707
MARINER ENERGY, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 86-0460233
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification Number)
580 WESTLAKE PARK BLVD., SUITE 1300
HOUSTON, TEXAS 77079
(Address of principal executive offices including Zip Code)
(281) 584-5500
(Registrant's telephone number)
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
----- ------
*Although the registrant has no class of securities registered pursuant to
Section 12 of the Securities Exchange Act of 1934 (the "Exchange Act"), the
registrant is required pursuant to Section 314(a)(1) of the Trust Indenture
Act of 1939, and is contractually obligated to holders of certain debt, to
file with the Commission such of the supplementary and periodic
information, documents, and reports which may be required pursuant to
Section 13 of the Exchange Act in respect of a security listed and
registered on a national securities exchange.
As of November 13, 1997, there were 1,000 shares of the registrant's common
stock outstanding.
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MARINER ENERGY, INC.
FORM 10-Q
SEPTEMBER 30, 1997
TABLE OF CONTENTS
Page
- ------------------------------------------------------------------------------------------------------------
PART I - FINANCIAL INFORMATION
Item 1. Balance Sheets at September 30, 1997 and December 31, 1996..................................... 1
Statements of Operations for the three months ended September 30, 1997
and September 30, 1996, for the nine months ended September 30,
1997, the six months ended September 30, 1996 (Mariner Energy,
Inc.) and the three months ended March 31, 1996 (Predecessor
Company.................................................................................... 2
Statements of Cash Flows for the nine months ended September 30, 1997,
for the six months ended September 30, 1996 (Mariner Energy, Inc.)
and the three months ended March 31, 1996 (Predecessor Company)............................ 3
Notes to Financial Statements.................................................................. 4
Independent Certified Public Accountants' Report on Review of Interim Financial Information.... 5
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.......... 6
Item 3. Quantitative and Qualitative Disclosures about Market Risk..................................... 11
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.............................................................................. 12
Item 2. Changes in Securities.......................................................................... 12
Item 3. Defaults Upon Senior Securities................................................................ 12
Item 4. Submission of Matters to a Vote of Security Holders............................................ 12
Item 5. Other Information............................................................................... 12
Item 6. Exhibits and Reports on Form 8-K............................................................... 12
SIGNATURE............................................................................................... 13
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PART I, ITEM 1. MARINER ENERGY, INC.
BALANCE SHEETS
(IN THOUSANDS)
September 30, December 31,
1997 1996
------------- ------------
(Unaudited)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 4,395 $ 10,819
Receivables 14,886 13,571
Prepaid expenses and other 674 418
------------- ------------
Total current assets 19,955 24,808
------------- ------------
PROPERTY AND EQUIPMENT:
Oil and gas properties, at full cost:
Proved 201,632 169,728
Unproved, not subject to amortization 29,664 21,310
------------- ------------
Total 231,296 191,038
Other property and equipment 2,159 1,671
Accumulated depreciation, depletion and amortization (75,476) (24,600)
------------- ------------
Total property and equipment, net 157,979 168,109
------------- ------------
OTHER ASSETS, NET OF AMORTIZATION 3,651 3,832
------------- ------------
TOTAL ASSETS $ 181,585 $ 196,749
============= ============
LIABILITIES AND STOCKHOLDER'S EQUITY
CURRENT LIABILITIES:
Accounts payable $ 6,643 $ 2,930
Accrued liabilities 15,617 12,288
Accrued interest 1,758 3,996
------------- ------------
Total current liabilities 24,018 19,214
------------- ------------
ACCRUAL FOR FUTURE ABANDONMENT COSTS 1,300 957
LONG-TERM DEBT:
Subordinated notes 99,562 99,525
Revolving Credit Facility 2,500 --
------------- ------------
Total long-term debt 102,062 99,525
------------- ------------
STOCKHOLDER'S EQUITY:
Common stock, $1 par value; 1,000 shares authorized,
issued and outstanding 1 1
Additional paid-in-capital 95,914 95,744
Accumulated deficit (41,710) (18,692)
------------- ------------
Total stockholder's equity 54,205 77,053
------------- ------------
TOTAL LIABILITIES and STOCKHOLDER'S EQUITY $ 181,585 $ 196,749
============= ============
The accompanying notes are an integral part of these financial statements.
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MARINER ENERGY, INC.
STATEMENTS OF OPERATIONS (UNAUDITED)
(IN THOUSANDS)
Predecessor
Company
----------------
Three Months Three Months Nine Months Six Months Three Months
Ended Ended Ended Ended Ended
September 30, September 30, September 30, September 30, March 31,
1997 1996 1997 1996 1996
--------------- --------------- --------------- ---------------- ----------------
REVENUES:
Oil sales $ 4,904 $ 3,334 $ 12,974 $ 6,839 $ 3,644
Gas sales 11,391 13,468 32,645 25,912 10,134
-------- -------- ---------- ---------- ---------
Total revenues 16,295 16,802 45,619 32,751 13,778
-------- -------- ---------- ---------- ---------
COSTS AND EXPENSES:
Lease operating expenses 2,762 2,582 7,918 5,211 2,872
Depreciation, depletion and
amortization 8,555 9,265 22,436 17,674 6,309
Impairment of oil and gas
properties - - 28,514 22,500 -
General and administrative
expenses 883 803 2,252 1,537 712
-------- -------- ---------- ---------- ---------
Total costs and expenses 12,200 12,650 61,120 46,922 9,893
-------- -------- ---------- ---------- ---------
OPERATING INCOME (LOSS) 4,095 4,152 (15,501) (14,171) 3,885
INTEREST:
Related party income - - - - 2,110
Other income 107 164 355 310 57
Related party expense - - - - (381)
Other expense (2,596) (2,421) (7,874) (5,102) (3,010)
Write-off bridge loan fees - (1,381) - (2,392) -
-------- -------- ---------- ---------- ---------
INCOME (LOSS) BEFORE INCOME TAXES 1,606 514 (23,020) (21,355) 2,661
PROVISION FOR INCOME TAXES - - - - -
-------- -------- ---------- ---------- ---------
NET INCOME (LOSS) $ 1,606 $ 514 $ (23,020) $ (21,355) $ 2,661
======== ======== ========== ========== =========
The accompanying notes are an integral part of these financial statements.
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MARINER ENERGY, INC.
STATEMENTS OF CASH FLOWS (UNAUDITED)
(IN THOUSANDS)
Predecessor
Company
-----------
Nine Six Months Three Months
Months Ended Ended Ended
September 30, September 30, March 31,
1997 1996 1996
------------- ------------- ------------
OPERATING ACTIVITIES:
Net income (loss) $ (23,020) $ (21,355) $ 2,661
Adjustments to reconcile net income (loss) to
net cash provided by operating activities:
Depreciation, depletion and amortization 23,083 20,441 6,437
Impairment of oil and gas properties 28,514 22,500 --
Imputed interest -- 1,322 --
Changes in operating assets and liabilities:
Receivables (1,315) 4,386 (1,873)
Receivable from affiliates -- -- (2,109)
Other current assets (256) (620) (307)
Other assets (125) -- --
Accounts payable and accrued liabilities 4,804 5,392 832
Payables to affiliates -- -- (11)
------------- -------------- ------------
Net cash provided by operating activities 31,685 32,066 5,630
------------- -------------- ------------
INVESTING ACTIVITIES:
Purchase of Predecessor Company, net of cash
purchased of $5,438 -- (184,742) --
Additions to oil and gas properties (40,257) (27,955) (7,495)
Additions to other property and equipment (488) (619) (153)
Proceeds from sale of oil and gas properties -- 7,528 --
Issuance of long-term receivable to affiliates -- -- (1,000)
Repayment of long-term receivable from affiliates -- -- 3,000
------------- -------------- ------------
Net cash used in investing activities (40,745) (205,788) (5,648)
------------- -------------- ------------
FINANCING ACTIVITIES:
Principal payments on long-term debt -- (92,000) --
Principal payments on revolving credit facility -- (50,000) --
Payments of debt issue costs (34) (3,715) --
Proceeds from subordinated notes -- 99,506 --
Proceeds from long-term debt -- 92,000 --
Proceeds from revolving credit facility 2,500 50,000 --
Additional capital contributed by Parent
(Mariner Holdings, Inc.) -- 92,150 --
Sale of common stock 170 610 --
------------- -------------- ------------
Net cash provided by financing activities 2,636 188,551 --
------------- -------------- ------------
INCREASE (DECREASE) IN CASH AND CASH EQUIV. (6,424) 14,829 (18)
CASH AND CASH EQUIV. AT BEGINNING OF PERIOD 10,819 -- 5,456
------------- -------------- ------------
CASH AND CASH EQUIV. AT END OF PERIOD $ $4,395 $ 14,829 $ 5,438
============= ============== ============
The accompanying notes are an integral part of these financial statements.
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MARINER ENERGY, INC.
NOTES TO FINANCIAL STATEMENTS
1. Basis of Presentation
The financial statements of Mariner Energy, Inc. (the "Company") included
herein have been prepared, without audit, pursuant to the rules and regulations
of the Securities and Exchange Commission ("SEC"). Accordingly, they reflect all
adjustments (consisting only of normal, recurring accruals) which are, in the
opinion of management, necessary for a fair presentation of the financial
results for the interim periods. Certain information and notes normally included
in financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted pursuant to such rules and
regulations, although the Company believes that the disclosures are adequate to
make the information presented not misleading. These financial statements should
be read in conjunction with the financial statements and notes thereto included
in the Company's 10-K for the year ended December 31, 1996.
For the three months ended March 31, 1996, Hardy Oil & Gas USA Inc. (the
"Predecessor Company"), was a wholly owned subsidiary of Hardy Holdings, Inc.,
which is a wholly owned subsidiary of Hardy Oil & Gas plc, a public company
incorporated in the United Kingdom. In an acquisition effective April 1, 1996,
Mariner Holdings, Inc. acquired all the capital stock of the Company from Hardy
Holdings Inc. as part of a management-led buyout financed by Joint Energy
Development Investments Limited Partnership, an affiliate of Enron Capital &
Trade Resources Corp. The aggregate purchase price was approximately $185.5
million, including $14.5 million for net working capital. As a result of the
sale of Hardy Oil & Gas USA Inc.'s common stock, the Predecessor Company changed
its name to Mariner Energy, Inc.
2. Oil and Gas Properties
Under the full cost method of accounting for oil and gas properties, the net
carrying value of proved oil and gas properties is limited to an estimate of the
future net revenues, discounted at 10%, from proved oil and gas reserves based
on period-end prices and costs plus the lower of cost or estimated fair value of
unproved properties. As a result of this limitation and reduced product prices
in March 1997, a non-cash full cost ceiling test impairment charge of $28.5
million was recorded in the quarter ended March 31, 1997. Price increases
subsequent to March 31, 1997 were sufficient to avoid the impairment charge,
but, given the unpredictable volatility of future prices, the Company elected to
record the charge in order to conservatively state the book value of its assets.
3. Revolving Credit Facility
Following the semi-annual borrowing base redetermination review, effective
November 5, 1997, the borrowing base under the revolving credit facility (the
"Revolving Credit Facility") with NationsBank of Texas, N.A. as agent for a
group of lenders remained unchanged at $58 million.
4. Hedging Program
The Company has entered into crude oil and natural gas price swaps or other
similar hedging transactions to reduce its exposure to price reductions. In the
first nine months of 1997, the Company hedged 62% of its crude oil and natural
gas production, the results of which were included in oil and gas revenues. At
September 30, 1997, the Company had three outstanding natural gas hedging
contracts, one with notional volumes of 40,000 Mmbtu per day at $2.17 per Mmbtu
for October 1997, one with notional volumes of 22,500 Mmbtu per day at $2.33 per
Mmbtu for November 1997, and another with notional volumes of 19,500 Mmbtu per
day at $2.84 per Mmbtu for November 1997.
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INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS' REPORT ON REVIEW OF INTERIM FINANCIAL
INFORMATION
Board of Directors and Stockholder
Mariner Energy, Inc.
Houston, Texas
We have reviewed the accompanying financial statements of Mariner Energy, Inc.,
formerly Hardy Oil & Gas USA Inc. (the "Predecessor Company"), as listed in the
Table of Contents in Item 1. These financial statements are the responsibility
of the Company's management.
We conducted our review in accordance with standards established by the American
Institute of Certified Public Accountants. A review of interim financial
information consists primarily of applying analytical procedures to financial
data and making inquiries of persons responsible for financial and accounting
matters. It is substantially less in scope than an audit conducted in accordance
with generally accepted auditing standards, the objective of which is the
expression of an opinion regarding the financial statements taken as a whole.
Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should
be made to the accompanying consolidated financial statements for them to be in
conformity with generally accepted accounting principles.
We have previously audited, in accordance with generally accepted auditing
standards, the balance sheet as of December 31, 1996, and the related statements
of operations, stockholder's equity, and cash flows for the nine months ended
December 31, 1996 (not presented herein), and the three months ended March 31,
1996 (stockholder's equity not presented herein); and, in our report dated March
7, 1997, we expressed an unqualified opinion on those financial statements. In
our opinion, the information set forth in the accompanying balance sheet as of
December 31, 1996 is fairly stated, in all material respects, in relation to the
balance sheet from which it has been derived.
/s/ DELOITTE & TOUCHE LLP
DELOITTE & TOUCHE LLP
Houston, Texas
November 11, 1997
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PART I, ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
The following review of operations for the nine month periods ended
September 30, 1997 and 1996 and the three month periods ended September 30, 1997
and 1996 should be read in conjunction with the financial statements of the
Company and Notes thereto included elsewhere in this Form 10-Q and with the
Financial Statements, Notes and Management's Discussion and Analysis of
Financial Condition and Results of Operations included in the Company's Annual
Report on Form 10-K for the year ended December 31, 1996, filed with the
Securities and Exchange Commission on March 27, 1997.
INFORMATION REGARDING FORWARD LOOKING STATEMENTS
All statements other than statements of historical fact included in this
quarterly report on Form 10-Q, including, without limitation, statements
contained in this "Management's Discussion and Analysis of Financial Condition
and Results of Operations" regarding the Company's financial position, business
strategy, plans and objectives of management of the Company for future
operations and industry conditions, are forward-looking statements. Although the
Company believes that the expectations reflected in such forward-looking
statements are reasonable, it can give no assurance that such expectations will
prove to have been correct, and actual results could differ materially from the
Company's expectations. Factors that could influence these results include, but
are not limited to, oil and gas price volatility, results of future drilling,
availability of drilling rigs, and future production and costs.
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RESULTS OF OPERATIONS
The following table sets forth certain information regarding results of
operations for the periods shown:
Three Months Ended Nine Months Ended
---------------------------------------- ----------------------------------------
September 30, September 30, September 30, September 30,
1997 1996 1997 1996 (a)
-------------------- ------------------ ------------------ --------------------
Total revenue, $MM $ 16.3 $ 16.8 $ 45.6 $ 46.5
EBITDA, $MM (b) 12.7 13.4 35.4 36.2
Impairment of oil & gas properties (c) -- -- 28.5 22.5
Net income (loss), $MM 1.6 0.5 (23.0) (18.7)(a)
Production:
Oil and condensate (Mbbls) 266 191 701 570
Natural gas (Mmcf) 4,702 5,477 13,237 15,655
Natural gas equivalents (Mmcfe) 6,298 6,623 17,443 19,075
Average sales prices post-hedging:
Oil and condensate ($/Bbl) $ 18.38 $ 17.37 $ 18.50 $ 18.38
Natural gas ($/Mcf) 2.42 2.46 2.47 2.30
Natural gas equivalents ($/Mcfe) 2.59 2.53 2.61 2.44
Cash Margin (d) per Mcfe:
Revenue (pre-hedge) $ 2.64 $ 2.60 $ 2.75 $ 2.60
Hedging impact (0.05) (0.07) (0.14) (0.16)
Lease operating expenses (0.44) (0.39) (0.45) (0.42)
Gross G&A costs (0.32) (0.27) (0.31) (0.29)
---------- ---------- ---------- ---------
Cash Margin $ 1.83 $ 1.87 $ 1.85 $ 1.73
========== ========== ========== =========
Capital Expenditures, $MM:
Exploration $ 13.0 $ 16.1 $ 25.1 $ 30.0
Development & other 7.7 1.5 15.6 6.0
---------- ---------- ---------- ---------
Total $ 20.7 $ 17.6 $ 40.7 $ 36.0
========== ========== ========== =========
(a) - Includes first quarter 1996 results of Predecessor to Mariner Energy, Inc.
(formerly named "Hardy Oil & Gas USA Inc.") prior to the effective date of its
acquisition by Mariner Holdings, Inc. on April 1, 1996. Note that net income
(loss) amounts for the nine months ended September 30, 1997 and 1996 are not
comparable due to differences in cost basis between Mariner and the Predecessor
Company. None of the other data in the table is impacted by the acquisition of
Hardy Oil & Gas USA Inc. by Mariner Holdings, Inc.
(b) - EBITDA equals earnings before interest, income taxes, depreciation,
depletion, amortization and impairment of oil and gas properties.
(c) - See Note 2 to Financial Statements in Item 1. of this report on Form 10-Q
for further explanation of the ceiling test impairment charges.
(d) - Cash margin measures the net cash generated by a company's operations
during a given period, without regard to the period such cash is physically
received or spent by the company. Cash margin should be used as a supplement to,
and not as a substitute for, net earnings and net cash provided by operating
activities (as disclosed in the financial statements) in analyzing the Company's
results of operations and liquidity.
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RESULTS OF OPERATIONS FOR THE THIRD QUARTER OF 1997
NET PRODUCTION decreased 5% to 6.3 Bcfe for the third quarter of 1997
from 6.6 Bcfe for the third quarter of 1996. While production from onshore
properties rose 43% to 3.0 Bcfe for the third quarter of 1997 due to the Sandy
Lake plant expansion from 2.1 Bcfe for the same period in 1996, the overall
decrease was due to the natural production decline on offshore properties.
OIL AND GAS REVENUES decreased 3% to $16.3 million for the third
quarter of 1997 from $16.8 million for the third quarter of 1996. The decrease
was the result of lower production discussed above, offset partially by an
increase in realized oil and gas prices (on an equivalent Mcf basis) between the
two quarters, net of hedging. Hedging activities for the third quarter of 1997
decreased the average realized sales price received per Mcfe by $0.05 and
revenues by $0.3 million. In the third quarter of 1996, hedging activities
decreased the average realized sales price received by $0.07 per Mcfe and
revenues by $0.5 million. During the third quarter of 1997, approximately 56% of
the Company's equivalent production was subject to hedge positions, compared
with approximately 89% for the same quarter in 1996.
LEASE OPERATING EXPENSES increased 8% to $2.8 million for the third
quarter of 1997, from $2.6 million for the third quarter of 1996, due primarily
to the increased production at the Sandy Lake processing facility.
DEPRECIATION, DEPLETION AND AMORTIZATION EXPENSE (DD&A) decreased 8% to
$8.6 million for the third quarter of 1997, from $9.3 million for the third
quarter of 1996, as a result of a 3% decrease in the unit-of-production
depreciation, depletion and amortization rate to $1.36 per Mcfe from $1.40 per
Mcfe and the 5% reduction in equivalent volumes produced. The lower rate for the
third quarter of 1997 was primarily due to the $28.5 million non-cash full cost
ceiling test impairment recorded at the end of the first quarter of 1997.
GENERAL AND ADMINISTRATIVE EXPENSES, which are net of overhead
reimbursements received by the Company from other working interest owners,
increased 13% to $0.9 million for the third quarter of 1997, from $0.8 million
for the third quarter of 1996, due primarily to higher employment levels in
1997.
INTEREST EXPENSE increased 8% to $2.6 million for the third quarter of
1997, from $2.4 million for the third quarter of 1996, due to higher average
interest rates and higher average debt. During the third quarter of 1996, the
Company wrote off $1.4 million of bridge loan fees related to debt incurred in
connection with the Company's management-led buyout in the second quarter of
1996.
INCOME (LOSS) BEFORE INCOME TAXES rose 220% to $1.6 million for the
third quarter of 1997 from $0.5 million for the same period in 1996, primarily
as a result of the write-off of bridge loan fees in the third quarter of 1996.
RESULTS OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997
NOTE: Where revenue and expense items discussed below would have been
affected in a pro forma presentation of the acquisition by Mariner Holdings of
the stock of the Company (formerly "Hardy Oil & Gas USA, Inc."), the pro forma
impact on that item is discussed.
NET PRODUCTION decreased 9% to 17.4 Bcfe for the nine months ended
September 30, 1997 from 19.1 Bcfe for the nine months ended September 30, 1996.
The decrease was due to the sale of non-core
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Permian Basin wells in April 1996 and by natural production decline on offshore
properties, offset in part by increased production from the Sandy Lake field.
OIL AND GAS REVENUES decreased 2% to $45.6 million for the nine months
ended September 30, 1997 from $46.5 million for the same period in 1996. The
decrease was the result of lower production discussed above, offset almost
entirely by a 7% increase in realized oil and gas prices (on an equivalent Mcf
basis) between the two periods, net of hedging. Hedging activities for the nine
months ended September 30, 1997 reduced the average realized sales price
received per Mcfe by $0.14 and revenues by $2.4 million. In the first nine
months of 1996, hedging activities decreased the average realized sales price
received by $0.16 per Mcfe and revenues by $3.0 million. During the first nine
months of 1997, approximately 62% of the Company's equivalent production was
subject to hedge positions, compared with approximately 56% for the first nine
months of 1996.
LEASE OPERATING EXPENSES decreased 2% to $7.9 million for the first
nine months of 1997, from $8.1 million for the first nine months of 1996, due
primarily to the sale of the non-core Permian Basin wells in April 1996 and
reduced production volumes.
DEPRECIATION, DEPLETION AND AMORTIZATION EXPENSE (DD&A) decreased 7% to
$22.4 million for the nine months ended September 30, 1997, from $24.0 million
for the same period in 1996, as a result of a 9% reduction in equivalent volumes
produced, which is partially offset by a 2% increase in the unit-of-production
depreciation, depletion and amortization rate to $1.29 per Mcfe from $1.26 per
Mcfe. On a pro forma basis, giving effect to the March 31, 1997 impairment of
oil and gas properties, DD&A for the first nine months of 1997 would have
decreased 10% to $22.4 million from $24.9 million in 1996, resulting from
production being 9% lower in the first nine months of 1997, and a 1% decrease in
the DD&A rate to $1.29 per Mcfe from $1.30 per Mcfe.
IMPAIRMENT OF OIL AND GAS PROPERTIES amounting to $28.5 million was
recorded in the first quarter of 1997 for the non-cash full cost ceiling test
impairment using prices in effect at March 31, 1997. Price increases subsequent
to March 31, 1997 were sufficient to avoid the impairment charge, but, given the
unpredictable volatility of future prices, the Company elected to record the
charge in order to conservatively state the book value of its assets. During the
second quarter of 1996, a $22.5 million impairment of oil and gas properties was
recorded in conjunction with the full cost ceiling writedown relating to Mariner
Holdings' acquisition of the Company. On a pro forma basis, the impairment
recorded in 1996 would not have been required.
GENERAL AND ADMINISTRATIVE EXPENSES, which are net of overhead
reimbursements received by the Company from other working interest owners,
remained constant at $2.2 million for the nine months ended September 30, 1997
and 1996. Higher employment costs in the nine months ended September 30, 1997
offset higher overhead reimbursements in the first quarter of 1997.
INTEREST EXPENSE decreased 2% to $7.9 million for the first nine months
of 1997, from $8.1 million for the first nine months of 1996, due primarily to
the 15% decrease in average outstanding debt to $100.1 million, from $117.6
million, which was partially offset by an 11% increase in the average interest
rate paid on outstanding debt to 10.49%, from 9.45%. During the first nine
months of 1996, the Company wrote off $2.4 million of bridge loan fees related
to debt incurred in connection with the Company's management-led buyout in the
second quarter of 1996. Interest income also decreased 84% to $0.4 million for
the first nine months of 1997, from $2.5 million for the first nine months of
1996, due primarily to the collection of receivables from affiliates as part of
the acquisition by Mariner Holdings of the stock of the Company. On a pro forma
basis, interest expense for the nine months of 1997 would
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have increased $0.1 million from $7.8 million in 1996. Interest income for the
nine months would be $0.4 million for both 1997 and pro forma 1996.
INCOME (LOSS) BEFORE INCOME TAXES decreased to a loss of $23.0 million
for the nine months ended September 30, 1997, from an $18.7 million loss for the
same period in 1996, primarily as a result of the $28.5 million impairment
recorded in the first quarter of 1997. On a pro forma basis, the income for the
first nine months of 1996 would have been $3.8 million, after the elimination of
the full cost ceiling writedown and adjustments to interest income and expense
and recording additional DD&A expense.
LIQUIDITY, CAPITAL EXPENDITURES AND CAPITAL RESOURCES
At September 30, 1997, the Company had cash and cash equivalents of
approximately $4.4 million and negative working capital of approximately $4.1
million. During the first nine months of 1997, the Company's primary source of
cash was from operations. The primary use of cash for the same period was for
capital expenditures associated with exploration and development.
The Company had a net cash outflow of $6.4 million for the first nine
months of 1997, resulting from capital expenditures of $40.7 million, offset by
cash inflow of $31.7 million from operations and $2.6 million from financing
activities.
Net cash provided by operating activities decreased by $6.0 million to
$31.7 million in the first nine months of 1997 from the corresponding period of
1996, primarily due to lower production volumes and lower cash from changes in
working capital.
Cash flows used in investing activities in the first nine months of
1997 decreased $170.7 million to $40.7 million due primarily to the second
quarter 1996 purchase of the Predecessor Company for $184.7 million, which was
partially reduced by the $7.5 million sale of non-core Permian Basin wells in
the same quarter. The first quarter of 1996 included a $2.0 million net
collection of a long-term receivable from an affiliate of the Predecessor
Company. Capital expenditures increased $4.7 million to $40.7 million for the
first nine months of 1997 from the same period in 1996.
The energy markets have historically been very volatile, and there can
be no assurance that oil and gas prices will not be subject to wide fluctuations
in the future. In an effort to reduce the effects of the volatility of the price
of oil and natural gas on the Company's operations, management has adopted a
policy of hedging oil and natural gas prices from time to time through the use
of commodity futures, options and swap agreements. While the use of these
hedging arrangements limits the downside risk of adverse price movements, it may
also limit future gains from favorable movements.
The following table sets forth the increase (decrease) in the Company's
oil and gas sales as a result of hedging transactions and the effects of hedging
transactions on prices during the periods indicated.
Nine Months
Ended September 30,
-------------------
1997 1996
----- -----
Increase (decrease) in natural gas sales (in thousands)................... $(1,795) $(2,171)
Increase (decrease) in oil sales (in thousands)........................... (614) (811)
Effect of hedging transactions on average gas sales price
(per Mcf)............................................................
(0.14) (0.14)
Effect of hedging transactions on average oil sales price
(per Bbl)............................................................
(0.88) (1.42)
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The following table sets forth the Company's open hedging contracts for
natural gas and the weighted average prices hedged under various swap agreements
as of September 30, 1997.
---------------------------------------------------
Hedge Quantity Fixed Price
Mmbtu $/Mmbtu
--------------- --------------
October 1997......... 1,240,000 $2.17
November 1997........ 675,000 2.33
November 1997........ 585,000 2.84
Total capital expenditures were $40.7 million for the first nine months of
1997 of which $25.1 million was spent on exploration and $15.6 million on
development activities. The Company's capital expenditure budget for 1997 is
approximately $67 million. As a result of an active fourth quarter exploratory
drilling program, the acquisition of a 31% interest in the "Pluto/Blood, Sweat &
Tears" Deepwater Gulf of Mexico exploitation project located in Mississippi
Canyon blocks #673, 674, 717 and 718, and the acquisition of an additional 16%
working interest in the Company's 1996 discovery at Mississippi Canyon #357,
full year 1997 capital expenditures are now expected to total approximately $75
million. The Company expects to fund these programs through cash flow from
operations and periodic borrowing under its Revolving Credit Facility, under
which the available borrowing base was increased from $50 million to $58 million
effective April 10, 1997. Actual levels of capital expenditures may vary
significantly due to a variety of factors, including drilling results, oil and
gas prices, industry conditions including drilling rig availability, future
acquisitions and availability of capital.
Based upon the Company's current level of operations and anticipated growth,
the Company believes that available cash, together with available borrowings
under the Revolving Credit Facility and cash provided by operating activities,
will be adequate to meet the Company's anticipated future requirements for
working capital, capital expenditures and scheduled payments of principal and
interest on its indebtedness. However, there can be no assurance that such
anticipated growth will be realized, that the Company's business will generate
sufficient cash flow from operations or that future borrowings will be available
in an amount sufficient to enable the Company to service its indebtedness or
make necessary capital expenditures. In addition, depending on the levels of its
cash flow and capital expenditures (the latter of which are, to a large extent,
discretionary), the Company may need to refinance a portion of the principal
amount of its senior subordinated debt at or prior to maturity. However, there
can be no assurance that the Company would be able to obtain financing to
complete a refinancing.
PART I, ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Not applicable
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Part II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None
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
(a) The following exhibits are filed herewith.
10.1 Promissory Note, dated July 1, 1997, from Frank A. Pici
to the Company.
10.2 Security Agreement, dated July 1, 1997, among Frank A.
Pici and the Company.
27.1 Financial Data Schedule
(b) The Company filed no Current Reports on Form 8-K during the quarter
ended September 30, 1997.
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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.
MARINER ENERGY, INC.
Date: November 13, 1997 /s/ Frank A. Pici
-----------------------------
Frank A. Pici
Vice President of Finance and
Chief Financial Officer
(Principal Financial Officer and
Officer Duly Authorized to Sign
on Behalf of the Registrant)
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INDEX TO EXHIBITS
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
10.1 Promissory Note, dated July 1, 1997, from Frank A. Pici to
the Company.
10.2 Security Agreement, dated July 1, 1997, among Frank A. Pici
and the Company.
27.1 Financial Data Schedule