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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 MARCH 31, 1999
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 May 13, 1999, there were 1,378 shares of the registrant's common
stock outstanding.
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MARINER ENERGY, INC.
FORM 10-Q
MARCH 31, 1999
TABLE OF CONTENTS
Page
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PART I - FINANCIAL INFORMATION
Item 1. Balance Sheets at March 31, 1999 (unaudited) and December 31, 1998....................................... 1
Statements of Operations for the three months ended March 31, 1999 and 1998 (unaudited).................. 2
Statements of Cash Flows for the three months ended March 31, 1999 and 1998 (unaudited).................. 3
Notes to Financial Statements (unaudited)................................................................ 4
Independent Certified Public Accountants' Report on Review of Interim Financial Information.............. 6
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.................... 7
Item 3. Quantitative and Qualitative Disclosures about Market Risk............................................... 13
PART II - OTHER INFORMATION
Item 1. Legal Proceedings........................................................................................ 13
Item 2. Changes in Securities.................................................................................... 14
Item 3. Defaults Upon Senior Securities.......................................................................... 14
Item 4. Submission of Matters to a Vote of Security Holders...................................................... 14
Item 5. Other Information........................................................................................ 14
Item 6. Exhibits and Reports on Form 8-K......................................................................... 14
SIGNATURE ........................................................................................................ 14
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PART I, ITEM 1. MARINER ENERGY, INC.
BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
March 31, December 31,
1999 1998
------------ ------------
(Unaudited)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 48 $ 2
Receivables 15,027 16,007
Prepaid expenses and other 6,317 7,234
------------ ------------
Total current assets 21,392 23,243
------------ ------------
PROPERTY AND EQUIPMENT:
Oil and gas properties, at full cost:
Proved 329,338 316,056
Unproved, not subject to amortization 94,649 84,076
------------ ------------
Total 423,987 400,132
Other property and equipment 3,448 3,300
Accumulated depreciation, depletion and amortization (175,139) (167,846)
------------ ------------
Total property and equipment, net 252,296 235,586
------------ ------------
OTHER ASSETS, NET OF AMORTIZATION 3,438 3,513
------------ ------------
TOTAL ASSETS $ 277,126 $ 262,342
============ ============
LIABILITIES AND STOCKHOLDER'S EQUITY
CURRENT LIABILITIES:
Accounts payable $ 28,531 $ 20,375
Accrued liabilities 20,263 29,082
Accrued interest 1,858 4,503
Revolving Credit Facility -- 53,400
------------ ------------
Total current liabilities 50,652 107,360
------------ ------------
OTHER LIABILITIES 3,112 2,824
LONG-TERM DEBT:
Subordinated notes 99,636 99,624
Revolving Credit Facility 52,500 --
Affiliate Credit Facility -- 25,000
------------ ------------
Total long-term debt 152,136 124,624
------------ ------------
STOCKHOLDER'S EQUITY:
Common stock, $1 par value; 2,000 and 1,000 shares authorized, 1,378 and
1,000 issued and outstanding,
at March 31, 1999 and 1998, respectively 1 1
Additional paid-in-capital 172,036 124,856
Accumulated deficit (100,811) (97,323)
------------ ------------
Total stockholder's equity 71,226 27,534
------------ ------------
TOTAL LIABILITIES and STOCKHOLDER'S EQUITY $ 277,126 $ 262,342
============ ============
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 March 31,
-----------------------------
1999 1998
----------- -----------
REVENUES:
Oil sales $ 1,884 $ 3,332
Gas sales 9,137 11,039
----------- -----------
Total revenues 11,021 14,371
----------- -----------
COSTS AND EXPENSES:
Lease operating expenses 2,575 2,467
Depreciation, depletion and amortization 7,466 8,386
General and administrative expenses 1,538 794
Provision for litigation -- 2,960
----------- -----------
Total costs and expenses 11,579 14,607
----------- -----------
OPERATING INCOME (LOSS) (558) (236)
INTEREST:
Income 10 130
Expense (2,940) (2,867)
----------- -----------
INCOME (LOSS) BEFORE INCOME TAXES (3,488) (2,973)
PROVISION FOR INCOME TAXES -- --
----------- -----------
NET INCOME (LOSS) $ (3,488) $ (2,973)
=========== ===========
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)
Three Months Ended March 31,
------------------------------
1999 1998
------------- -------------
OPERATING ACTIVITIES:
Net income (loss) $ (3,488) $ (2,973)
Adjustments to reconcile net income (loss) to
net cash provided by operating activities:
Depreciation, depletion and amortization 7,704 8,614
Provision for litigation -- 2,960
Changes in operating assets and liabilities:
Receivables 157 (9,157)
Other current assets 917 (773)
Other assets (38) (175)
Accounts payable and accrued liabilities (3,306) (8,610)
------------- -------------
Net cash provided by (used for) operating activities 1,946 (10,114)
------------- -------------
INVESTING ACTIVITIES:
Additions to oil and gas properties (23,855) (28,227)
Additions to other property and equipment (148) (43)
------------- -------------
Net cash used for investing activities (24,003) (28,270)
------------- -------------
FINANCING ACTIVITIES:
Proceeds from (repayment of) revolving credit facility (900) 27,000
Capital Contributed by Parent 23,003 --
------------- -------------
Net cash provided by financing activities 22,103 27,000
------------- -------------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 46 (11,384)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 2 9,131
------------- -------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD(*) $ 48 $ (2,253)
============= =============
(*) Negative amount represents outstanding checks in excess of short-term
investments.
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 Form 10-K for the year ended December 31,
1998.
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. Price increases subsequent to March
31, 1999 were sufficient to avoid an impairment charge at March 31, 1999, but
given the unpredictable volatility of future prices, impairments may be required
in the future.
3. Revolving Credit Facility
Following the semi-annual borrowing base redetermination in May
1999, the borrowing base under the Company's revolving credit facility (the
"Revolving Credit Facility"), with Bank of America as agent for a group of
lenders, was reaffirmed at $60 million and the maturity date of the facility was
extended from October 1, 1999 to October 1, 2002. As part of the
redetermination, the Company pledged certain mineral interests to secure the
Revolving Credit Facility. Accordingly, the Revolving Credit Facility was
reclassified from a current liability to a non-current liability as of March 31,
1999.
4. Affiliate Credit Facilities
During the first quarter of 1999, the Company's parent, Mariner
Energy LLC ("LLC") and Enron Capital & Trade Resources Corp. ("ECT") amended an
existing unsecured, subordinated credit facility (the "LLC Facility") provided
by ECT to LLC to increase the amount available thereunder from $25 million to
$50 million. LLC has contributed the proceeds from the LLC Facility to the
Company in the form of common equity. The facility requires that any funds
received pursuant to a private or public equity or debt offering by LLC must
first be applied to repay the amount outstanding thereunder. Once funds
outstanding under the facility have been repaid, those funds may not be
reborrowed. The facility has been amended to extend its maturity date from April
30, 1999 to April 30, 2000 and to give ECT the option to convert the facility to
equity in LLC at any time through maturity. Interest accruing on the outstanding
principal under the facility from April 15, 1999 through April 30, 2000 will be
payable at maturity by LLC. At March 31, 1999, LLC had fully drawn this facility
and contributed the net proceeds to the Company as equity.
The Board of Directors of LLC has resolved not to require the use
of cash flow from the Company's operations or sales of the Company's stock or
assets to repay the amounts outstanding under
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the LLC Facility. Consequently, the Company has reclassified the LLC Facility
balance as of January 1, 1999, net of capitalized fees, to equity. This
reclassification was not included in the cash flow statement as it represented a
non-cash transaction.
Subsequent to March 31, 1999, the Company also established a $25
million borrowing-based, short-term credit facility with ECT (the "ECT
Facility"). This facility matures on December 31, 1999 and has an annual
interest rate of LIBOR plus 2.5%.
5. Commitments and Contingencies
Hedging - The Company uses crude oil and natural gas price swaps
and other similar hedging transactions to reduce its exposure to price
decreases. In the three-month period ended March 31, 1999, none of the Company's
production was covered by hedging contracts. During that time period, the
Company entered into a natural gas commodity price hedging contract under a
costless collar covering the period April through October 1999, with an
extension of the contract at the counterparty's option for the same volumes for
the period November 1999 through March 2000 at a higher price. In March 1999,
the Company also entered into a three-year natural gas hedging agreement
covering the period November 1999 through October 2002. The following table sets
forth the Company's open hedging positions as of March 31, 1999.
Average Fair Value at
Daily March 31,
Volume Strike Price ($ per Mmbtu) 1999
-----------------------------------------------
Time Period (Mmbtu) Floor Ceiling Fixed Price (in thousands)
- ----------- ------- ----- ------- ----------- --------------
April 1 - October 31, 1999 60 $1.85 $2.05 - $ (291)
November 1 - December 31,1999 44 - - $2.18 $ (504)
January 1 - December 31, 2000 30 - - $2.18 $ (1,084)
January 1 - December 31, 2001 12 - - $2.18 $ (526)
January 1 - October 31, 2002 6 - - $2.18 $ (301)
Subsequent to March 31, 1999, the Company entered into two oil
commodity price hedging contracts for a combined 1,200 barrels of oil per day
for the period May through December 1999 at an average price of $16.54 per
barrel. All hedging contracts mentioned above were entered into with an
affiliate of the Company. Including these contracts, hedging arrangements for
1999 cover approximately 55% of the Company's expected 1999 equivalent
production for the year.
Deepwater Rig - The Company executed a letter of intent in
February 1998 regarding the provision of a Deepwater rig to the Company and
another company on an equally shared basis for five years beginning in late 1999
or early 2000. The Company is currently in discussions with the owner of the rig
to determine if a mutually acceptable drilling contract can be negotiated.
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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 balance sheet of Mariner Energy, Inc. as of
March 31, 1999 and the related statements of operations and cash flows for the
three-month periods ended March 31, 1999 and 1998. 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, 1998, and the related statements
of operations, stockholder's equity, and cash flows for the year ended December
31, 1998 (not presented herein), and in our report dated April 14, 1999, 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,
1998 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
May 13, 1999
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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 three-month periods
ended March 31, 1999 and 1998 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, 1998, filed
with the Securities and Exchange Commission on April 15, 1999.
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, Year 2000 readiness 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 and other factors described in the Company's annual report on Form
10-K for the year ended December 31, 1998, filed with the Securities and
Exchange Commission on April 15, 1999.
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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 March 31,
------------------------------
1999 1998
------------- -------------
Total revenue, $MM $ 11.0 $ 14.4
EBITDA, $MM (a) 6.9 11.1
Net income (loss), $MM (3.5) (3.0)
Production:
Oil and condensate (Mbbls) 169 231
Natural gas (Mmcf) 4,915 4,644
Natural gas equivalents (Mmcfe) 5,929 6,032
Average sales prices post-hedging:
Oil and condensate ($/Bbl) $ 11.17 $ 14.41
Natural gas ($/Mcf) 1.86 2.38
Natural gas equivalents ($/Mcfe) 1.86 2.38
Cash Margin (b) per Mcfe:
Revenue (pre-hedge) $ 1.86 $ 2.39
Hedging impact -- (0.01)
Lease operating expenses (0.43) (0.41)
Gross G&A costs (0.56) (0.37)
------------- -------------
Cash Margin $ 0.87 $ 1.60
============= =============
Capital Expenditures, $MM:
Exploration: -- --
Leasehold and G&G cost 4.8 11.4
Drilling 0.6 8.3
Development & other 16.1 6.9
Capitalized G&A and interest costs 2.5 1.7
------------- -------------
Total $ 24.0 $ 28.3
============= =============
(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) - 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 FIRST QUARTER OF 1999
NET PRODUCTION decreased 2% to 5.9 Bcfe for the first quarter of 1999 from
6.0 Bcfe for the first quarter of 1998. Production from the Company's offshore
Gulf of Mexico properties increased to 3.8 Bcfe in the quarter ended March 31,
1999, compared to 3.1 Bcfe in the same period of 1998, primarily as a result of
production from two new wells in the Rembrandt field located in Galveston block
151. This increase was offset by reduced production from the Company's Sandy
Lake field onshore Texas due to production problems in two wells in the field.
Total Company production for the remainder of 1999 is anticipated to increase
primarily as a result of production from the Dulcimer field, which began in
April 1999 and is currently producing 23 million cubic feet of natural gas per
day net to Mariner, and scheduled production from the Pluto field, which is
expected to commence in the fourth quarter of 1999.
OIL AND GAS REVENUES decreased 24% to $11.0 million for the first quarter of
1999 from $14.4 million for the first quarter of 1998. Realized prices declined
22 percent to $1.86 per Mcfe in the first quarter 1999 compared to $2.38 per
Mcfe in the same period last year, in addition to the production decrease
discussed above.
LEASE OPERATING EXPENSES increased 4% to $2.6 million for the first quarter
of 1998, from $2.5 million for the first quarter of 1998, due primarily to
higher offshore production discussed above.
DEPRECIATION, DEPLETION AND AMORTIZATION EXPENSE (DD&A) decreased 11% to $7.5
million for the first quarter of 1999, from $8.4 million for the first quarter
of 1998, as a result of the 2% decrease in equivalent volumes produced and
decrease in the unit-of-production depreciation, depletion and amortization rate
to $1.26 per Mcfe from $1.39 per Mcfe. The lower rate for the first quarter of
1999 was primarily due to the $50.8 million non-cash full cost ceiling test
impairment recorded in 1998.
GENERAL AND ADMINISTRATIVE EXPENSES, which are net of overhead reimbursements
received by the Company from other working interest owners, increased 94% to
$1.5 million for the first quarter of 1999, from $0.8 million for the first
quarter of 1998, due primarily to increased personnel related costs in 1999
needed for the Company to transition to larger, more complex projects.
INTEREST EXPENSE for the first quarter of 1999 was relatively unchanged from
the first quarter of 1998.
INCOME (LOSS) BEFORE INCOME TAXES was a $3.5 million loss for the first
quarter of 1999 primarily as a result of the oil and gas revenue decreases
mentioned above.
LIQUIDITY, CAPITAL EXPENDITURES AND CAPITAL RESOURCES
At March 31, 1999, the Company had a working capital deficit of approximately
$29.3 million, compared to a working capital deficit of $84.1 million at
December 31, 1998. The reduction in the working capital deficit was primarily a
result of the reclassification of the Company's Revolving Credit Facility back
to long-term debt. At December 31, 1998, the Revolving Credit Facility was
scheduled to mature on October 1, 1999, requiring the classification of
outstanding borrowings as current liabilities. Subsequent to December 31, 1998,
agreement was reached with the Company's bank group to extend the facility's
maturity to October 1, 2002, allowing the classification of the March 31, 1999
balance of $52.5 million as long-term debt. The Company expects its 1999 capital
expenditures, including capitalized indirect costs, to be $50 to $55 million,
which will exceed cash flow from operations. To obtain the necessary funds to
reduce the working capital deficit and continue its planned capital expenditure
program, in April 1999, the Company established a $25 million short-term credit
facility with ETC. However, there can be no assurance that the Company's access
to capital will be sufficient to meet its needs for capital.
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As such, the Company may be required to reduce its planned capital expenditures
and forego planned exploratory drilling or 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's net cash inflows equaled its net cash outflows the first three
months of 1999. The Company's primary sources of cash during the first three
months of 1999 were $23.0 million in proceeds from a capital contribution from
LLC, and $1.9 million from operations. The primary uses of cash for the same
period were for capital expenditures associated with exploration and development
($24.0 million) and net payments on the Revolving Credit Facility ($0.9
million).
Net cash provided by operating activities was $1.9 million in the first three
months of 1999, an increase of $12.1 million from the same period of 1998. A
quarter to quarter decrease in operating cash flow before changes in working
capital of approximately $4.5 million was due primarily to lower commodity
prices and a $3.0 million provision for litigation, and was more than offset by
a $16.6 million increase in net cash provided by changes in working capital.
Cash used in investing activities in the first three months of 1999 decreased
to $24.0 million from $28.3 million for the same period in 1998 due primarily to
lower exploratory leasehold acquisition and exploratory drilling expenditures,
offset in part by increased capital expenditures for development activities
related primarily to the Company's "Dulcimer" and "Pluto" projects.
Cash provided by financing activities was $22.1 million for the first three
months of 1999 compared to $27.0 million for the same period in 1998. The
Company's primary source of cash for the first three months of 1999 was $23.0
million in proceeds from a capital contribution from LLC, which funds were
provided to LLC through a credit facility with ECT, offset in part by a net $0.9
million repayment of borrowings against the Company's Revolving Credit Facility.
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. During the first quarter of 1999, oil and natural
gas prices decreased from year-end 1998 levels, then recovered above year-end
1998 levels by early May 1999. To reduce the effects of the volatility of the
price of oil and natural gas on the Company's operating cash flow, 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 natural gas sales as a result of hedging transactions and the effects of
hedging transactions on prices during the periods indicated.
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Three Months Ended March 31,
------------------------------
1999 1998
------------ -------------
Increase (decrease) in natural gas sales (in thousands) .............. -- $ (56)
Decrease in oil sales (in thousands) ................................. -- --
Effect of hedging transactions on average natural gas sales price
(per Mcf) ......................................................... -- (0.01)
Effect of hedging transactions on average oil sales price (per Bbl) ... --
A table setting forth the Company's open hedging positions as of March 31,
1999 is contained in footnote 5. "Commitments and Contingencies" in the
footnotes to the financial statements in Part I, Item 1. of this report.
Subsequent to March 31, 1999, the Company entered into two oil commodity
price hedging contracts for a combined 1,200 barrels of oil per day for the
period May through December 1999 at an average price of $16.54 per barrel.
Including these contracts, hedging arrangements for 1999 cover approximately 55%
of the Company's anticipated equivalent production for the year. Hedging
arrangements for 2000, 2001 and 2002 cover approximately 30%, 10% and 3% of the
Company's anticipated equivalent production for those years, respectively.
Capital expenditures for the first three months of 1999, excluding
capitalized indirect costs of $2.5 million, were $21.5 million with $5.4 million
related to exploration and $16.0 million related to development.
Of the $5.4 million related to exploration, expenditures for exploratory
drilling for the quarter amounted to $0.6 million. During the quarter, the
Company announced a significant discovery in the Deepwater Gulf of Mexico on its
Aconcagua prospect located in Mississippi Canyon block 305 in 7,100 feet of
water. As a result of previous arrangements, Mariner's share of the exploratory
drilling costs for this well was covered by its partners. An appraisal well is
planned for the second half of 1999 to quantify reserve estimates and to ensure
appropriate development.
Leasehold and geological expenditures in the first quarter amounted to $4.8
million. The Company was the apparent high bidder on three blocks in the
Deepwater Gulf of Mexico at the Central Gulf of Mexico oil and gas lease sale
held in March 1999. Mariner's share of the bids is $8.9 million, of which $1.8
million was paid in the first quarter. Expenditures for development activities
included facility costs for the Company's Pluto project and completion and
facility costs for the Dulcimer field.
During the remainder of 1999, the Company intends to continue to pursue a
flexible plan in order to maximize the opportunity for growth in proved reserves
and related value while conserving cash. The Company expects to drill three or
four exploratory wells, including two or three in the Deepwater Gulf, and three
or four development wells, including the appraisal well on the Aconcagua
discovery. Total capital expenditures for 1999 excluding capitalized indirect
costs are now expected to be between $40 million and $45 million.
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Debt outstanding as of March 31, 1999 was approximately $152.1 million,
including $99.6 million of subordinated senior notes and $52.5 million drawn on
the Revolving Credit Facility. Following the semi-annual borrowing base
redetermination, in May 1999, the borrowing base under the Revolving Credit
Facility was reaffirmed at $60 million and the maturity date of the facility was
extended from October 1, 1999 to October 1, 2002. As part of the
redetermination, the Company pledged certain mineral interests to secure the
Revolving Credit Facility.
In April 1999, the Company also established a $25 million borrowing-based,
short-term credit facility with ECT to obtain funds needed to execute the
Company's 1999 capital expenditure program and for short-term working capital
needs. The ECT Facility matures on December 31, 1999, and is expected to be
repaid from internally-generated cash flows.
In April 1999, the Company repaid $2.5 million under the Revolving Credit
Facility and borrowed $10 million under the ECT Facility, leaving total
availability of approximately $25 million as of April 30, 1999. There can be no
assurance that funds available to the Company under the Revolving Credit
Facility and the ECT Facility will be sufficient for the Company to fund its
currently planned capital expenditures. Further, there can be no assurance that
the Company's cash flows will be sufficient to repay the ECT Facility when it
matures in December 1999. 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.
During the first quarter of 1999, LLC and ECT amended the LLC Facility to
increase the amount available thereunder from $25 million to $50 million. LLC
has contributed the net proceeds from the LLC Facility to the Company in the
form of common equity. The facility requires that a portion of the proceeds of
any private or public equity or debt offering by LLC be applied to repay amounts
outstanding under that facility, following which no additional amounts will be
available for borrowing under the facility. The facility has also been amended
to extend its maturity from April 30, 1999 to April 30, 2000, and to give ECT
the option to convert the facility to equity in the Company's parent at any time
through maturity. At March 31, 1999, LLC had fully drawn this facility and
contributed the net proceeds to the Company as equity.
The Company believes it will have adequate cash flow in order for the Company
to fund its remaining planned activities in 1999. However, the Company
anticipates it will be required to raise additional debt and/or equity financing
to fund part of its planned activities in the year 2000. 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.
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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 performed an initial assessment of its primary Information
Technology ("IT") systems with the vendors from which the systems were purchased
and believes these systems were Year 2000 compliant as of December 31, 1998.
Subsequent to the initial assessment conducted in 1998, a formal Year 2000
readiness program was initiated to confirm initial assessment results and to
establish a program to receive Year 2000 readiness assurances from vendors,
suppliers, and customers. The program scope was also expanded to include
assessments of the Company's non-IT systems, such as technology embedded within
its operations equipment. The goal of the Company is to complete its formal
assessment, testing and remediation (where needed) by October 1999. A consulting
firm has been engaged to assist in this effort. 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. Costs to date have been immaterial as are expected future expenditures.
The Company relies on other producers and transmission companies to conduct
its basic operations. Should any third party with which the Company has a
material relationship fail, the impact could be a significant challenge to the
Company's ability to perform its basic operations. Examples of such changes are
an inability to transport production to market or an inability to continue
drilling activities. 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. The Company is scheduled to have these plans completed by July 1999.
Statements in this section are intended to be and are hereby designated "Year
2000 Readiness Disclosure" within the meaning of the Year 2000 Information and
Readiness Disclosure Act.
PART I, ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
See Part I, Item 2. "Management's Discussion and Analysis of Financial
Condition and Results of Operations".
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
As reported in the Company's 1998 Form 10-K, on February 8, 1999, the Company
settled a claim awarded to ETOCO, Inc. in the district court of Hardin County,
Texas for the amount previously provided by the Company.
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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.
10.1 Second Amended and Restated Credit Agreement dated as of
April 15, 1999 between Mariner Energy LLC and Enron
Capital & Trade Resources Corp.
10.2 Revolving Credit Agreement dated as of April 15, 1999
between Mariner Energy, Inc. and Enron Capital & Trade
Resources Corp.
27.1 Financial Data Schedule
(b) The Company filed no Current Reports on Form 8-K during the quarter ended
March 31, 1999.
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: May 17, 1999 /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
NO. DESCRIPTION
------- -----------
10.1 Second Amended and Restated Credit Agreement dated as
of April 15, 1999 between Mariner Energy LLC and Enron
Capital & Trade Resources Corp.
10.2 Revolving Credit Agreement dated as of April 15, 1999
between Mariner Energy, Inc. and Enron Capital & Trade
Resources Corp.
27.1 Financial Data Schedule