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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, 1998
COMMISSION FILE NUMBER 333-12707
MARINER ENERGY, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 86-0460233
(State or other jurisdiction of (I.R.S. Employer
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 requirement for the past 90 days. Yes No X
--- ---
Note: The Company is not subject to the filing requirements of the
Securities Exchange Act of 1934. This quarterly report is filed
pursuant to contractual obligations imposed on the Company by an
Indenture, dated as of August 1, 1996, under which the Company is the
issuer of certain debt.
As of November 13, 1998, there were 1,000 shares of the registrant's
common stock outstanding.
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MARINER ENERGY, INC.
FORM 10-Q
SEPTEMBER 30, 1998
TABLE OF CONTENTS
Page
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PART I - FINANCIAL INFORMATION
Item 1. Independent Certified Public Accountants' Report on Review of Interim Financial Information . . . . . . . . 1
Balance Sheets at September 30, 1998 (unaudited) and December 31, 1997 . . . . . . . . . . . . . . . . . . . . . 2
Statements of Operations for the three and nine-months ended September 30, 1998 and 1997 (unaudited) . . . . . . 3
Statements of Cash Flows for the nine-months ended September 30, 1998 and 1997 (unaudited) . . . . . . . . . . . 4
Notes to Financial Statements (unaudited) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations . . . . . . . . 7
Item 3. Quantitative and Qualitative Disclosures about Market Risk . . . . . . . . . . . . . . . . . . . . . . 14
PART II - OTHER INFORMATION
Item 1. Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
Item 2. Changes in Securities and Use of Proceeds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
Item 3. Defaults Upon Senior Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
Item 4. Submission of Matters to a Vote of Security Holders . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
Item 5. Other Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
Item 6. Exhibits and Reports on Form 8-K . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
SIGNATURE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
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PART I, ITEM 1.
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 balance sheet of Mariner Energy, Inc. as of
September 30, 1998 and the related statements of operations for the three-month
and nine-month periods ended September 30, 1998 and 1997 and cash flows for the
nine-month periods ended September 30, 1998 and 1997. 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, 1997, and the related
statements of operations, stockholder's equity, and cash flows for the year
ended December 31, 1997 (not presented herein), and in our report dated March
20, 1998, 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, 1997 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 12, 1998
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MARINER ENERGY, INC.
BALANCE SHEETS
(IN THOUSANDS)
September 30, December 31,
1998 1997
--------- ---------
(Unaudited)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 133 $ 9,131
Receivables 15,919 18,585
Prepaid expenses and other 4,496 3,628
--------- ---------
Total current assets 20,548 31,344
--------- ---------
PROPERTY AND EQUIPMENT:
Oil and gas properties, at full cost:
Proved 287,604 222,829
Unproved, not subject to amortization 74,412 36,526
--------- ---------
Total 362,016 259,355
Other property and equipment 3,135 2,222
Accumulated depreciation, depletion and amortization (108,869) (84,236)
--------- ---------
Total property and equipment, net 256,282 177,341
--------- ---------
OTHER ASSETS, NET OF AMORTIZATION 3,802 3,892
--------- ---------
TOTAL ASSETS $ 280,632 $ 212,577
========= =========
LIABILITIES AND STOCKHOLDER'S EQUITY
CURRENT LIABILITIES:
Accounts payable $ 12,393 $ 5,556
Accrued liabilities 18,678 29,908
Accrued interest 1,854 4,443
--------- ---------
Total current liabilities 32,925 39,907
--------- ---------
OTHER LIABILITIES 5,499 1,922
LONG-TERM DEBT:
Subordinated notes 99,611 99,574
Revolving Credit Facility 51,000 14,000
Affiliate Credit Facility 10,000 --
--------- ---------
Total long-term debt 160,611 113,574
--------- ---------
STOCKHOLDER'S EQUITY:
Common stock, $1 par value; 1,000 shares authorized,
issued and outstanding 1 1
Additional paid-in-capital 125,067 96,075
Accumulated deficit (43,471) (38,902)
--------- ---------
Total stockholder's equity 81,597 57,174
--------- ---------
TOTAL LIABILITIES and STOCKHOLDER'S EQUITY $ 280,632 $ 212,577
========= =========
The accompanying notes are an integral part of these financial statements.
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MARINER ENERGY, INC.
STATEMENTS OF OPERATIONS (UNAUDITED)
(IN THOUSANDS)
Three Months Ended September 30, Nine Months Ended September 30,
-------------------------------- -------------------------------
1998 1997 1998 1997
----------- ------------ ----------- -----------
REVENUES:
Oil sales $ 2,338 $ 4,904 $ 8,405 $ 12,974
Gas sales 12,683 11,391 36,323 32,645
-------- -------- -------- --------
Total revenues 15,021 16,295 44,728 45,619
-------- -------- -------- --------
COSTS AND EXPENSES:
Lease operating expenses 3,105 2,762 8,684 7,918
Depreciation, depletion and 8,749 8,555 25,023 22,436
Impairment of oil and gas properties -- -- -- 28,514
General and administrative expenses 1,565 883 3,417 2,252
Provision for litigation -- -- 2,960 --
-------- -------- -------- --------
Total costs and expenses 13,419 12,200 40,084 61,120
-------- -------- -------- --------
OPERATING INCOME (LOSS) 1,602 4,095 4,644 (15,501)
INTEREST:
Income 16 107 299 355
Expense (3,260) (2,596) (9,512) (7,874)
-------- -------- -------- --------
INCOME (LOSS) BEFORE TAXES (1,642) 1,606 (4,569) (23,020)
PROVISION FOR INCOME TAXES -- -- -- --
NET INCOME (LOSS) $ (1,642) $ 1,606 $ (4,569) $(23,020)
======== ======== ======== ========
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)
Nine Months Ended September 30,
-------------------------------
1998 1997
----------- ------------
OPERATING ACTIVITIES:
Net loss $ (4,569) $ (23,020)
Adjustments to reconcile net loss to
net cash provided by operating activities:
Depreciation, depletion and amortization 25,287 23,083
Impairment of oil and gas properties -- 28,514
Provision for litigation 2,960 --
Changes in operating assets and liabilities:
Receivables 2,666 (1,315)
Prepaid expenses and other (868) (256)
Other assets 90 (125)
Accounts payable and accrued liabilities (6,982) 4,804
--------- ---------
Net cash provided by operating activities 18,584 31,685
--------- ---------
INVESTING ACTIVITIES:
Additions to oil and gas properties (102,661) (40,257)
Additions to other property and equipment (913) (488)
--------- ---------
Net cash used in investing activities (103,574) (40,745)
--------- ---------
FINANCING ACTIVITIES:
Proceeds from revolving credit facility, net 37,000 2,500
Affiliate credit facility 10,000 --
Equity contribution 28,992 170
Payment of debt issue costs -- (34)
--------- ---------
Net cash provided by financing activities 75,992 2,636
--------- ---------
DECREASE IN CASH AND CASH EQUIVALENTS (8,998) (6,424)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 9,131 10,819
--------- ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 133 $ 4,395
========= =========
The accompanying notes are an integral part of these financial statements.
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MARINER ENERGY, INC.
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
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, 1997. The
results of operations and cash flows for the nine-months ending September 30,
1998 are not necessarily indicative of the results for the full year.
2. Oil and Gas Properties
Under the full cost method of accounting for oil and natural gas
properties, the net carrying value of proved oil and natural gas properties is
limited to an estimate of the future net revenues, discounted at 10%, from
proved oil and natural 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. No impairment charge was
required during the nine months ending September 30, 1998.
3. Credit Facilities
Following the semi-annual borrowing base redetermination review, effective
May 4, 1998, the borrowing base under the Company's revolving credit facility
(the "Revolving Credit Facility") with NationsBank of Texas, N.A.
("NationsBank") as agent for a group of lenders, was increased from $58 million
to $60 million. The Company, NationsBank and the group of lenders have agreed
to an extension of the Revolving Credit Facility's maturity date from June 28,
1999 to October 1, 1999.
Mariner Holdings, Inc., the company's parent, entered into an agreement
with an affiliate to provide a $25 million unsecured, subordinated credit
facility (the "Facility"), the funds from which are being contributed to the
Company. This Facility accrues interest at an annual rate of LIBOR plus 2.5%
and requires a structuring fee of 4% of the borrowed amount. The Facility
requires that a portion of the proceeds of any private or public equity or debt
offering by the Company's parent be applied to repay amounts outstanding under
that facility, following which no additional amounts will be available for
borrowing under the Facility. If financing does not become available by March
1, 1999, the Facility will be converted to equity. At September 30, 1998, the
Company's parent had $10 million outstanding from this Facility. The entire
amount is classified as long-term since it will either be repaid from a
long-term debt facility or permanent equity financing.
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
three and nine-month periods ending September 30, 1998, the Company hedged
approximately 72% and 50%, respectively, of its natural gas production and none
of its crude oil production, the results of which hedges were included in oil
and gas revenues. At September 30, 1998, the Company had natural gas hedging
contracts, including related basis differentials, in place for October and
November 1998 with notional volumes of 40,000 and 43,000 Mmbtu per day at $2.33
and $2.12 per Mmbtu, respectively.
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5. Deepwater Rig Commitment
To support its deepwater strategy, the Company has entered into a letter of
intent regarding the commitment of a deepwater rig to Mariner and another
company on an equally shared basis for five years beginning in late 1999 or
early 2000. Currently, the rig is being upgraded to be capable of drilling in
water depths to 6,000 feet.
6. Provision for Litigation
As reported in the Company's 1997 10-K, the Company is the defendant in
litigation in the state district court of Hardin County, Texas in which
litigation the plaintiff, ETOCO, Inc., sought damages of $8.2 million plus
court costs related to the Company's operations in the Sandy Lake field. On
April 22, 1998, the jury returned a verdict partially in favor of the plaintiff
in the amount of $2.4 million, before attorney's fees and interest. Attorney's
fees of approximately $0.5 million have been awarded, for a total judgment of
$2.9 million, which accrues interest at 10% per annum. The Company believes
that the verdict is not supported by the evidence and intends to vigorously
contest the verdict in the trial court and then, if necessary, in the appellate
courts. In the first quarter of 1998, a $3.0 million charge was recorded to
provide for this litigation-related cost contingency. Results of the contested
verdict should be known within 12 to 24 months.
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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, 1998 and 1997 and the three-month periods ended September 30,
1998 and 1997 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, 1997, filed with the
Securities and Exchange Commission on March 30, 1998.
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standard No. 133 "Accounting for Derivative Instruments
and Hedging Activities". The new standard requires companies to record
derivatives on the balance sheet as assets or liabilities, measured at fair
value. Gains or losses resulting from changes in the values of those
derivatives would be accounted for depending on the use of the derivative and
whether it qualifies for hedge accounting. The Company has not determined the
impact which would result from this new standard. This new standard will
become effective for the year ending December 31, 2000.
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 natural 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,
------------------------------ --------------------------------
1998 1997 1998 1997
------------ ------------ ------------- -------------
Total revenue, $MM $ 15.0 $ 16.3 $ 44.7 $ 45.6
EBITDA, $MM (a) 10.3 12.7 32.6 35.4
Impairment of oil & gas properties, $MM (b) -- -- -- 28.5
Net income (loss), $MM (1.6) 1.6 (4.6) (23.0)
Production:
Oil and condensate (Mbbls) 183 266 625 701
Natural Gas (Mmcf) 5,108 4,702 14,591 13,237
Natural Gas equivalents (Mmcfe) 6,206 6,298 18,341 17,443
Average realized sales prices:
Oil and condensate ($/Bbl) $ 12.75 $ 18.38 $ 13.46 $ 18.50
Natural Gas ($/Mcf) 2.49 2.42 2.49 2.47
Natural Gas equivalents ($/Mcfe) 2.42 2.59 2.44 2.61
Cash Margin per Mcfe (c):
Revenue (pre-hedge) $ 2.21 $ 2.64 $ 2.34 $ 2.75
Hedging impact 0.21 (0.05) 0.10 (0.14)
Lease operating expenses (0.50) (0.44) (0.47) (0.45)
Gross G&A costs (0.56) (0.32) (0.45) (0.31)
------------ ------------ ------------- -------------
Cash Margin $ 1.36 $ 1.83 $ 1.52 $ 1.85
============ ============ ============= =============
Capital Expenditures, $MM:
Exploration:
Leasehold and G&G costs $ 3.5 $ 9.9 $ 43.8 $ 15.7
Drilling 2.1 2.0 19.3 6.2
Development & other 11.6 7.5 33.8 15.2
Capitalized G&A and interest costs 2.7 1.3 6.7 3.6
------------ ------------ ------------- -------------
Total $ 19.9 $ 20.7 $ 103.6 $ 40.7
============ ============ ============= =============
(a) - EBITDA equals earnings before interest, income taxes, depreciation,
depletion, amortization, provision for litigation and impairment of oil and gas
properties. EBITDA 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.
(b) - 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.
(c) - 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 1998
NET PRODUCTION decreased 2% to 6.2 Bcfe for the third quarter of 1998 from
6.3 Bcfe for the third quarter of 1997. Production of natural gas in the third
quarter of 1998 increased nine percent to 5.1 billion cubic feet (Bcf) compared
to 4.7 Bcf during the same period last year despite the fact that several
offshore fields were shut-in during portions of August and September due to
hurricanes and tropical storms in the Gulf of Mexico. Oil Production during
the third quarter of 1998 was 183,000 barrels compared to 266,000 barrels
during the third quarter of 1997. The anticipated decline in oil production
occurred at the Company's Sandy Lake field as production shifted to natural gas
which more than offset the reduced oil production on an equivalent unit of
production basis.
OIL AND GAS REVENUES decreased 8% to $15.0 million for the third quarter of
1998 from $16.3 million for the third quarter of 1997. The reduction in
revenue, primarily attributable to a decline in oil prices and oil production,
was partially offset by an increase in natural gas production. Hedging
activities for the third quarter of 1998 increased the average realized sales
price received per Mcfe by $0.21 and revenues by $1.3 million. By comparison,
in the third quarter of 1997, hedging activities reduced the average realized
sales price received by $0.05 per Mcfe and revenues by $0.3 million. During
the third quarter of 1998, approximately 59% of the Company's equivalent
production was subject to hedge positions, compared with approximately 56% for
the same quarter in 1997.
LEASE OPERATING EXPENSES increased 11% to $3.1 million for the third
quarter of 1998, from $2.8 million for the third quarter of 1997, due primarily
to the increase in the number of producing properties as compared to the same
time period for 1997.
DEPRECIATION, DEPLETION AND AMORTIZATION EXPENSE (DD&A) increased 1% to
$8.7 million for the third quarter of 1998, from $8.6 million for the third
quarter of 1997, primarily due to a 4% increase in the unit-of-production DD&A
rate to $1.41 per Mcfe from a post-impairment rate of $1.36 per Mcfe. The
higher rate for the third quarter of 1998 was primarily due to higher drilling
and completion costs.
GENERAL AND ADMINISTRATIVE EXPENSES, which are net of overhead
reimbursements received by the Company from other working interest owners,
increased 78% to $1.6 million for the third quarter of 1998, from $0.9 million
for the third quarter of 1997, due primarily to increased personnel related
costs in 1998 and lower overhead reimbursement from drilling program partners.
INTEREST EXPENSE increased 27% to $3.3 million for the third quarter of
1998, from $2.6 million for the third quarter of 1997 due primarily to a higher
average debt level.
INCOME (LOSS) BEFORE INCOME TAXES as a result of the foregoing was $1.6
million net loss, down from net income of $1.6 million reported for the same
period in 1997, primarily due to lower oil prices and production.
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RESULTS OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998
NET PRODUCTION increased 5% to 18.3 Bcfe for the nine months ended
September 30, 1998 from 17.4 Bcfe for the nine months ended September 30, 1997.
The increase was due to the expanded capacity at the Sandy Lake processing
plant which became operational during the first quarter of 1997 and production
which began subsequent to September 30, 1997 from two offshore discoveries made
in 1996. This increase was offset in part by the natural production decline on
offshore properties.
OIL AND GAS REVENUES of $44.7 million for the nine months ended September
30, 1998 decreased $0.9 million, or 2%, compared with $45.6 million for the
same period in 1997. The decrease was the result of a 7% decline in realized
oil and natural gas prices (on an equivalent Mcf basis) between the two
periods, net of hedging, and a decrease in production as described above.
Hedging activities for the nine months ended September 30, 1998 increased the
average realized sales price received per Mcfe by $0.10 and revenues by $1.8
million. In the first nine months of 1997, hedging activities decreased the
average realized sales price received by $0.14 per Mcfe and revenues by $2.4
million. During the first nine months of 1998, approximately 40% of the
Company's equivalent production was subject to hedge positions, compared with
approximately 62% for the first nine months of 1997.
LEASE OPERATING EXPENSES increased 10% to $8.7 million for the first nine
months of 1998, from $7.9 million for the first nine months of 1997, due
primarily to increased production volumes.
DEPRECIATION, DEPLETION AND AMORTIZATION EXPENSE (DD&A) increased 12% to
$25.0 million for the nine months ended September 30, 1998, from $22.4 million
for the same period in 1997, as a result of the production increase mentioned
above and a 5% increase in the unit-of-production depreciation, depletion and
amortization rate to $1.36 per Mcfe from $1.29 per Mcfe. The rate increase was
caused by increased capital expenditures during the period between October 1,
1997 and September 30, 1998, with relatively less proved reserve additions
during the same time period.
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. For the nine months ended September 30, 1998, no impairment was
recorded.
PROVISION FOR LITIGATION of $3.0 million was recorded in the first quarter
of 1998 to provide for a litigation- related cost contingency. The Company is
the defendant in litigation in the district court of Hardin County, Texas in
which the plaintiff, ETOCO, Inc., sought damages of $8.2 million plus court
costs related to the Company's operations in the Sandy Lake field. On April
22, 1998, the jury returned a verdict partially in favor of the plaintiff in
the amount of $2.4 million, before attorney's fees and interest. Attorney's
fees of approximately $0.4 million have been awarded, for a total judgment of
$2.8 million, which accrues interest at 10% per annum. The Company believes
that the verdict is not supported by the evidence and intends to vigorously
contest the verdict in the trial court and then, if necessary, in the appellate
courts. In the first quarter of 1998, a $3.0 million charge was recorded to
provide for this litigation-related contingency. Results of the contested
verdict should be known within 12 to 24 months.
GENERAL AND ADMINISTRATIVE EXPENSES, which are net of overhead
reimbursements received by the Company from other working interest owners,
increased 48% to $3.4 million for the nine months ended September 30, 1998,
from $2.3 million for the nine months ended September 30, 1997, due primarily
to increased personnel related costs and lower reimbursements from drilling
program partners in 1998.
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INTEREST EXPENSE increased 20% to $9.5 million for the first nine months of
1998, from $7.9 million for the first nine months of 1997, due primarily to a
higher average debt level in 1998.
INCOME (LOSS) BEFORE INCOME TAXES was a loss of $4.6 million for the nine
months ended September 30, 1998, compared with a $23.0 million loss for the
same period in 1997, as a result of the factors described above.
LIQUIDITY, CAPITAL EXPENDITURES AND CAPITAL RESOURCES
At September 30, 1998, the Company had cash and cash equivalents of
approximately $0.1 million and a working capital deficit of approximately $12.4
million, compared with a working capital deficit of $8.6 million at December
31, 1997. The $3.8 million decrease in working capital was primarily due to
increased exploration and drilling activity for 1998 as compared to 1997. The
Company expects to use cash flow from operations, additional debt borrowings or
issuance of private or public debt or equity to fund this deficit. However, the
Company may be required to reduce its planned capital expenditures and forego
planned exploratory drilling or to monetize portions of its proved reserves or
undeveloped inventory if additional capital resources are not available to the
Company on terms it considers reasonable.
The Company had a net cash outflow of $9.0 million for the first nine
months of 1998. The Company's primary sources of cash during the first nine
months of 1998 were from operations ($18.6 million), proceeds from the
Revolving Credit Facility and the Facility ($47.0 million), and proceeds from
the sale of common equity to existing shareholders of the Company's parent
($29.0 million). The primary use of cash for the same period was for capital
expenditures associated with exploration and development ($103.6 million).
Net cash provided by operating activities decreased by $13.1 million to
$18.6 million in the first nine months of 1998 from the corresponding period of
1997, primarily due to increased operating and administrative costs and changes
in working capital, which was partially offset by higher oil and gas sales
revenue.
Cash used in investing activities in the first nine months of 1998
increased $62.9 million to $103.6 million from $40.7 million for the same
period in 1997 due primarily to increased capital expenditures for exploration
and development activities.
Cash provided by financing activities was $76.0 million for the first nine
months of 1998 compared with $2.6 million for the same period in 1997. Sources
of this cash included net borrowings under the Revolving Credit Facility of
$37.0 million and borrowings under the Facility for $10 million. During the
first nine months of 1998, the Company's parent also completed the sale of
additional common equity to existing shareholders of the Company's parent, with
net proceeds of $29.0 million.
The energy markets have historically been very volatile, and there can be
no assurance that oil and natural 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.
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The following table sets forth the increase (decrease) in the
Company's oil and natural 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,
-------------------------------
1998 1997
------------ ---------
Increase (decrease) in natural gas sales (in thousands) . . . . . . $1,772 $(1,795)
Decrease in oil sales (in thousands) . . . . . . . . . . . . . . . - (614)
Effect of hedging transactions on average natural gas sales price
(per Mcf) . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0.12 (0.14)
Effect of hedging transactions on average oil sales price (per
Bbl) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - (0.88)
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, 1998.
--------------------------------
Weighted
Hedge Quantity Average Price
Mmbtu $/Mmbtu
-------------- -------------
October 1,240,000 $2.33
November 1998 1,200,000 $2.18
Capital expenditures for the first nine months of 1998, excluding
capitalized indirect costs of $6.7 million, amounted to $96.9 million and
consisted of $43.8 million of leasehold and G&G costs, $19.3 million for
exploratory drilling and $33.8 million for development. Leasehold and G&G
costs included lease bonus payments of $31.7 million relating to nine Deepwater
Gulf blocks the Company acquired through the March 1998 Outer Continental Shelf
Central Gulf of Mexico Oil and Gas Lease Sale 169 and eight Deepwater Gulf
blocks on which the Company was the apparent high bidder at the August 1998
Outer Continental Shelf Western Gulf of Mexico Oil and Gas Lease Sale 171. The
Company expects to pay an additional $4.5 million in the fourth quarter
relating to the 171 Lease Sale. As a result of the lease purchases, 1998
capital expenditures are expected to be $125 to $130 million, excluding
capitalized indirect costs.
Debt outstanding as of September 30, 1998 was approximately $160.6
million, including $99.6 million of subordinated senior notes, $51 million
drawn on the Revolving Credit Facility and $10 million under the Facility.
Following the semi-annual borrowing base redetermination on May 4, 1998, the
borrowing base under the Revolving Credit Facility was increased from $58
million to $60 million, giving the Company total available borrowing capacity
under the Revolving Credit Facility and the Facility of approximately $24
million at September 30, 1998. All amounts outstanding under the Revolving
Credit Facility are due October 1, 1999. Subsequent to September 30, 1998, the
Company had borrowed an additional $2.1 million under the Revolving Credit
Facility and an additional $10.0 million under the Facility, leaving total
availability of approximately $10.9 million as of November 11, 1998. There can
be no assurance that funds available to the Company under the Revolving Credit
Facility and the Facility will be sufficient for the Company to fund its
currently planned capital expenditures. The Company may be required to reduce
its planned capital expenditures and forego planned exploratory drilling or to
monetize portions of its proved reserves or undeveloped inventory if additional
capital resources are not available to the Company on terms it considers
reasonable.
In June 1998, existing shareholders of the Company's parent
contributed an aggregate of approximately $29.0 million of net equity capital
to the Company's parent, which in turn contributed that capital to the Company.
The proceeds of the equity investment were used to reduce borrowings on the
Revolving Credit Facility and to supplement funding of the Company's 1998
capital expenditure plan.
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The Company's parent entered into an agreement with an affiliate to
provide the Company's parent with a $25 million unsecured, subordinated credit
facility, the funds from which are being contributed to the Company. This
Facility accrues interest at an annual rate of LIBOR plus 2.5% and requires a
structuring fee of 4% of the borrowed amount. The Facility requires that a
portion of the proceeds of any private or public equity or debt offering by the
Company's parent be applied to repay amounts outstanding under that Facility,
following which no additional amounts will be available for borrowing under the
Facility. If financing does not become available by March 1, 1999, the
Facility will be converted to equity of the Company's parent. At September 30,
1998, the Company's parent had $10 million outstanding from this Facility. The
entire amount is classified as long-term debt since it will either be repaid
from a long-term debt facility or permanent equity financing or converted to
equity.
The Company believes it will have adequate cash flow in order for the
Company to fund its remaining planned activities in 1998. However, the Company
anticipates it will be required to raise additional debt and/or equity
financing to fund part of its 1999 planned activities. The Company's capital
resources still may not be sufficient to meet the Company's anticipated future
requirements for working capital, capital expenditures and scheduled payments
of principal and interest on its indebtedness. There can be no assurance that
anticipated growth will be realized, that the Company's business will generate
sufficient cash flow from operations or that future borrowings or equity
capital 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 on acceptable terms to complete a refinancing.
To support its deepwater strategy, the Company has entered into a
letter of intent regarding the commitment of a deepwater rig to Mariner and
another company on an equally shared basis for five years beginning in late
1999 or early 2000. Currently, the rig is being upgraded to be capable of
drilling in water depths to 6,000 feet.
YEAR 2000 READINESS DISCLOSURE
Year 2000 issues result from the inability of computer programs or
computerized equipment to accurately calculate, store or use a date subsequent
to December 31, 1999. The erroneous date can be interpreted in a number of
different ways; typically the year 2000 is represented as the year 1900. This
could result in a system failure or miscalculations causing disruptions of
operations, including, among other things, a temporary inability to process
transactions, send invoices or engage in similar normal business transactions.
The Company has reviewed the majority of its primary Information
Technology ("IT") systems with the vendors from which the systems were
purchased and believes these systems will be Year 2000 compliant during 1998.
The Company is further assessing less critical software systems, which
assessment should be complete before the end of 1998. The Company is also
reviewing its non-IT systems (such as technology embedded within its
operational equipment) and any material third-party relationships for Year 2000
problems that could affect the Company's operations. The Company expects to
complete this review by early 1999. The Company believes the potential impact,
if any, of these IT, non-IT or third party systems not being Year 2000
compliant should not materially impact the Company's ability to continue
exploration, drilling, production and sales activities. Based on reviews
conducted to date and other preliminary information, costs of addressing
potential problems are not expected to have a material adverse impact on the
Company's financial position, results of operations, or cash flow in future
periods. As part of the above mentioned review, the Company will address the
most reasonably likely worst-case Year 2000 scenarios and potential costs. The
Company will also develop a Year 2000 contingency plan for unknown events.
Statements in this paragraph are intended to be and are hereby designated "Year
2000 Readiness Disclosure" within the meaning of the Year 2000 Information and
Readiness Disclosure Act.
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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
As reported in the Company's 1997 10-K, Mariner Energy is the
defendant in litigation in the district court of Hardin County, Texas in which
the plaintiff, ETOCO, Inc., sought damages of $8.2 million plus court costs
related to the Company's operations in the Sandy Lake field. On April 22,
1998, the jury returned a verdict partially in favor of the plaintiff in the
amount of $2.4 million, before attorney's fees and interest. Attorney's fees
of approximately $0.5 million have been awarded, for a total judgment of $2.9
million, which accrues interest at 10% per annum. The Company believes that
the verdict is not supported by the evidence and intends to vigorously contest
the verdict in the trial court and then, if necessary, in the appellate courts.
In the first quarter of 1998, a $3.0 million charge was recorded to provide for
this litigation-related cost contingency. Results of the contested verdict
should be known within 12 to 24 months. Although no assurances can be given,
the Company believes that the ultimate outcome of the above litigation will not
have a material adverse effect on the Company's financial position. The Company
recorded a $3.0 million provision for litigation in the first quarter of 1998
relating to this case.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
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.
27.1 Financial Data Schedule
(b) The Company filed no Current Reports on Form 8-K during the
quarter ended September 30, 1998.
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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.
MARINER ENERGY, INC.
Date: November 13, 1998 /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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EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
27.1 Financial Data Schedule