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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 JUNE 30, 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 August 12, 1999, there were 1,378 shares of the registrant's common
stock outstanding.
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MARINER ENERGY, INC.
FORM 10-Q
JUNE 30, 1999
TABLE OF CONTENTS
Page
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PART I- FINANCIAL INFORMATION
Item 1. Balance Sheets at June 30, 1999 (unaudited) and December 31, 1998...........................................1
Statements of Operations for the three and six months ended
June 30, 1999 and 1998 (unaudited)....................................................................2
Statements of Cash Flows for the six months ended June 30, 1999 and 1998 (unaudited)........................3
Notes to Financial Statements (unaudited)...................................................................4
Independent Certified Public Accountants' Report on Review of Interim Financial Information.................7
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.......................8
Item 3. Quantitative and Qualitative Disclosures about Market Risk.................................................15
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. MARINER ENERGY, INC.
BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
June 30, December 31,
1999 1998
------------ ------------
(Unaudited)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 524 $ 2
Receivables 17,433 16,007
Prepaid expenses and other 7,266 7,234
------------ ------------
Total current assets 25,223 23,243
------------ ------------
PROPERTY AND EQUIPMENT:
Oil and gas properties, at full cost:
Proved 333,354 316,056
Unproved, not subject to amortization 85,777 84,076
------------ ------------
Total 419,131 400,132
Other property and equipment 3,590 3,300
Accumulated depreciation, depletion and amortization (183,289) (167,846)
------------ ------------
Total property and equipment, net 239,432 235,586
------------ ------------
OTHER ASSETS, NET OF AMORTIZATION 3,291 3,513
------------ ------------
TOTAL ASSETS $ 267,946 $ 262,342
============ ============
LIABILITIES AND STOCKHOLDER'S EQUITY
CURRENT LIABILITIES:
Accounts payable $ 8,074 $ 20,375
Accrued liabilities 13,048 29,082
Accrued interest 4,898 4,503
Revolving Credit Facility -- 53,400
Affiliate Credit Facility 25,000 --
------------ ------------
Total current liabilities 51,020 107,360
------------ ------------
OTHER LIABILITIES 3,415 2,824
LONG-TERM DEBT:
Senior Subordinated Notes 99,648 99,624
Revolving Credit Facility 44,000 --
Affiliate Credit Facility -- 25,000
------------ ------------
Total long-term debt 143,648 124,624
------------ ------------
STOCKHOLDER'S EQUITY:
Common stock, $1 par value; 2,000 and 1,000 shares authorized, 1,378 and
1,000 issued and outstanding,
at June 30, 1999 and December 31, 1998, respectively 1 1
Additional paid-in-capital 172,317 124,856
Accumulated deficit (102,455) (97,323)
------------ ------------
Total stockholder's equity 69,863 27,534
------------ ------------
TOTAL LIABILITIES and STOCKHOLDER'S EQUITY $ 267,946 $ 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 June 30 Six Months Ended June 30
---------------------------- ----------------------------
1999 1998 1999 1998
------------ ------------ ------------ ------------
REVENUES:
Oil sales $ 2,739 $ 2,663 $ 4,624 $ 5,995
Gas sales 12,085 11,946 21,222 22,985
------------ ------------ ------------ ------------
Total revenues 14,824 14,609 25,846 28,980
------------ ------------ ------------ ------------
COSTS AND EXPENSES:
Lease operating expenses 3,189 2,384 5,764 4,851
Depreciation, depletion and amortization 8,337 7,888 15,803 16,274
General and administrative expenses 1,282 1,059 2,821 1,853
Provision for litigation -- -- -- 2,960
------------ ------------ ------------ ------------
Total costs and expenses 12,808 11,331 24,388 25,938
------------ ------------ ------------ ------------
OPERATING INCOME 2,016 3,278 1,458 3,042
INTEREST:
Income 11 153 21 283
Expense (3,671) (3,385) (6,611) (6,252)
------------ ------------ ------------ ------------
INCOME (LOSS) BEFORE TAXES (1,644) 46 (5,132) (2,927)
PROVISION FOR INCOME TAXES -- -- -- --
------------ ------------ ------------ ------------
NET INCOME (LOSS) $ (1,644) $ 46 $ (5,132) $ (2,927)
============ ============ ============ ============
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)
Six Months Ended June 30
----------------------------
1999 1998
------------ ------------
OPERATING ACTIVITIES:
Net loss $ (5,132) $ (2,927)
Adjustments to reconcile net loss to net cash
provided by (used for) operating activities:
Depreciation, depletion and amortization 16,059 16,756
Provision for litigation -- 2,960
Changes in operating assets and liabilities:
Receivables (2,249) (3,900)
Other current assets (32) (1,001)
Other assets 222 (190)
Accounts payable and accrued liabilities (27,940) 9,072
------------ ------------
Net cash provided by (used for) operating activities (19,072) 20,770
------------ ------------
INVESTING ACTIVITIES:
Additions to oil and gas properties (38,757) (83,076)
Sale of mineral interest 19,757 --
Additions to other property and equipment (290) (582)
------------ ------------
Net cash used in investing activities (19,290) (83,658)
------------ ------------
FINANCING ACTIVITIES:
Proceeds from (repayment of) revolving credit facility (9,400) 28,250
Sale of common stock -- 28,800
Capital contributed by parent 23,284 --
Proceeds from the affiliate credit facility 25,000 --
------------ ------------
Net cash provided by financing activities 38,061 57,050
------------ ------------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 522 (5,838)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 2 9,131
------------ ------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 524 $ 3,293
============ ============
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.
In the second quarter of 1999, the Company sold a 63% working interest in
its Pluto Deepwater Gulf exploitation project. Net proceeds from this sale were
approximately $19.8 million.
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 June 30, 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.
In 1999, LLC has contributed the net proceeds of $47.5 million 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,
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1999 through April 30, 2000 will be payable at maturity by LLC. At June 30,
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 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.
In May 1999, the Company established a $25 million borrowing-based,
short-term credit facility with ECT. This facility matures on December 31, 1999
and has an annual interest rate of LIBOR plus 2.5%, with interest payments due
quarterly. As of June 30, 1999, the Company had fully drawn this facility.
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 January 1999, the Company entered into a 36 month long-term natural gas fixed
price swap ("Fixed Price Swap") to establish the price the Company receives for
a portion of its natural gas production at $2.18 per Mmbtu. In May 1999, the
Company entered into a five month market-sensitive swap ("Market Sensitive
Swap") where the Company pays to the counterparty $2.60 per Mmbtu in return for
a market sensitive price. The effect of the Market Sensitive Swap is to limit
hedging losses on a portion of the Fixed Price Swap described above. In the
six-month period ended June 30, 1999, the Company recognized approximately $0.9
million in losses before recovery in the cash market as a result of these
contracts. The following table sets forth the Company's open hedging positions
as of June 30, 1999.
Average Strike Price ($ per Mmbtu) Fair Value at
Daily -------------------------------------- June 30, 1999
Time Period Volume Floor Ceiling Fixed Price (in thousands)
- ----------- ----------- ----- ------- ----------- --------------
NATURAL GAS (Mmbtu)
July 1 - October 31, 1999 60 $1.85 $ 2.05 -- $ (1,994)
November 1 - December 31, 1999
Fixed Price Swap 44 -- -- $ 2.18 $ (1,240)
Market Sensitive Swap 20 -- -- $ 2.60 $ 58
January 1 - December 31, 2000
Fixed Price Swap 30 -- -- $ 2.18 $ (2,784)
Market Sensitive Swap 20 -- -- $ 2.60 $ 60
January 1 - December 31, 2001
Fixed Price Swap 12 -- -- $ 2.18 $ (1,139)
January 1 - October 31, 2002
Fixed Price Swap 6 -- -- $ 2.18 $ (476)
CRUDE OIL (Bbl)
July 1 - December 31, 1999 1,200 -- -- $ 16.54 $ (520)
At the counterparty's option, the Company's costless collar on natural
gas covering the period July 1, 1999 through October 31, 1999 can be extended at
a floor price of $2.00 per Mmbtu and a ceiling of $2.70 per Mmbtu for the period
November 1999 through March 2000. Subsequent to June 30, 1999, the Company
entered into an oil hedge for the period November 1, 1999 through December 31,
2000. Average notional quantities for the period November and December 1999 are
1,550 barrels per day at an average price of $19.89 per barrel. Average notional
quantities for January 1 through December 31, 2000 are 4,050 barrels per day at
an average price of $18.72 per barrel. All hedging contracts mentioned above
were entered into with an affiliate of the Company. Including these
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contracts, hedging arrangements for 1999 cover approximately 59% of the
Company's expected 1999 equivalent production.
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.
Flow Line Sale - The Company has entered into negotiations with an
affiliate to sell the Pluto flow line and related facilities and enter into a
firm transportation agreement for the same flow line.
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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
June 30, 1999 and the related statements of operations for the three-month and
six-month periods ended June 30, 1999 and 1998 and of cash flows for the
six-month periods ending June 30, 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
August 12, 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 and six-month
periods ended June 30, 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, 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 Six Months Ended
June 30 June 30
----------------------- ------------------------
1999 1998 1999 1998
---------- ---------- ---------- ----------
Total revenue, $MM $ 14.8 $ 14.6 $ 25.8 $ 29.0
EBITDA(a), $MM 10.4 11.2 17.3 22.3
Net income (loss), $MM (1.6) -- (5.1) (2.9)
Production:
Oil and condensate (Mbbls) 179 210 348 441
Natural Gas (Mmcf) 5,668 4,839 10,583 9,483
Natural Gas equivalents (Mmcfe) 6,742 6,099 12,671 12,129
Average realized sales prices:
Oil and condensate ($/Bbl) $ 15.27 $ 12.68 $ 13.28 $ 13.59
Natural Gas ($/Mcf) 2.13 2.47 2.01 2.42
Natural Gas equivalents ($/Mcfe) 2.20 2.40 2.04 2.39
Cash Margin(b), per Mcfe:
Revenue (pre-hedge) $ 2.34 $ 2.32 $ 2.11 $ 2.35
Hedging impact (0.14) 0.08 (0.07) 0.04
Lease operating expenses (0.47) (0.39) (0.45) (0.40)
Gross G&A costs (0.42) (0.40) (0.49) (0.39)
---------- ---------- ---------- ----------
Cash Margin $ 1.31 $ 1.61 $ 1.10 $ 1.60
========== ========== ========== ==========
Capital Expenditures, $MM:
Exploration:
Leasehold and G&G costs(c) $ (4.9) $ 29.0 $ (0.1) $ 40.3
Drilling (0.2) 8.8 0.4 17.2
Development & other(c) (1.8) 15.9 14.3 22.8
Capitalized G&A and interest costs 2.2 1.7 4.7 3.4
---------- ---------- ---------- ----------
Total $ (4.7) $ 55.4 $ 19.3 $ 83.7
========== ========== ========== ==========
(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) - 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.
(c) - In the second quarter of 1999, Leasehold and G&G costs and Development &
other costs were reduced by $12.2 million and $7.6 million, respectively, as a
result of the sale of 63% working interest in the Company's Pluto Deepwater Gulf
exploitation project.
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RESULTS OF OPERATIONS FOR THE SECOND QUARTER OF 1999
NET PRODUCTION increased 11% to 6.7 Bcfe for the second quarter of 1999 from
6.1 Bcfe for the second quarter of 1998. Production from the Company's offshore
Gulf of Mexico properties increased to 4.9 Bcfe in the quarter ended June 30,
1999 from 3.3 Bcfe in the same period of 1998, primarily as a result of the
commencement in production from a new well in the Dulcimer field located in
Garden Banks block 367 and 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 continuing 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 the expected commencement of
production from the Pluto field in the fourth quarter.
OIL AND GAS REVENUES increased 1% to $14.8 million for the second quarter of
1999 from $14.6 million for the second quarter of 1998, primarily due to an 11%
increase in production offset in part by an 8% decrease in realized prices, to
$2.20 per Mcfe in the second quarter of 1999 from $2.40 per Mcfe in the same
period of 1998.
LEASE OPERATING EXPENSES increased 34% to $3.2 million for the second quarter
of 1999, from $2.4 million for the second quarter of 1998, primarily due to the
higher offshore production discussed above and the two well workovers in the
Company's Sandy Lake field.
DEPRECIATION, DEPLETION, AND AMORTIZATION EXPENSE (DD&A) increased 6% to $8.3
million for the second quarter of 1999 from $7.9 million for the second quarter
of 1998, as a result of the 11% increase in equivalent volumes produced, offset
in part by a decrease in the unit-of-production depreciation, depletion, and
amortization rate to $1.24 per Mcfe from $1.29 per Mcfe. The lower rate for the
second 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 21% to
$1.3 million for the second quarter of 1999 from $1.1 million for the second
quarter of 1998, due primarily to increased personnel-related costs in 1999
required for the Company to pursue its Deepwater Gulf exploration and
development plan.
INTEREST EXPENSE for the second quarter of 1999 increased 8% to $3.7 million
from $3.4 million in the second quarter of 1998, primarily due to additional
borrowings by the Company under the $25 million affiliate credit facility
obtained in May 1999.
INCOME (LOSS) BEFORE INCOME TAXES was a $1.6 million loss for the second
quarter of 1999, primarily as a result of the increased expenses as discussed
above.
RESULTS OF OPERATIONS FOR THE FIRST SIX MONTHS OF 1999
NET PRODUCTION increased 4% to 12.7 Bcfe for the first six months of 1999
from 12.1 Bcfe for the same period of 1998. Production from the Company's
offshore Gulf of Mexico properties increased to 8.7 Bcfe in the six month period
ending June 30, 1999 from 6.4 Bcfe in the same period of 1998, primarily as a
result of production commencing from a new well in the Dulcimer field located in
Garden Banks block 367 and 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 continuing 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 the expected commencement of
production from the Pluto field in the fourth quarter.
OIL AND GAS REVENUES decreased 11% to $25.8 million for the first six months
of 1999 from $29.0 million for the comparable period of 1998, primarily due to a
15% decrease in realized prices to $2.04 per Mcfe in
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the first six months of 1999 from $2.39 per Mcfe in the same period last year,
which decrease was offset in part by the production increase discussed above.
LEASE OPERATING EXPENSES increased 19% to $5.8 million for the first six
months of 1999, from $4.9 million for the comparable period of 1998, primarily
due to the higher offshore production discussed above and the two well workovers
in the Company's Sandy Lake field.
DEPRECIATION, DEPLETION, AND AMORTIZATION EXPENSE (DD&A) decreased 3% to
$15.8 million for the first six months of 1999 from $16.3 million for the
comparable period of 1998, as a result of the decrease in the unit-of-production
depreciation, depletion, and amortization rate to $1.25 per Mcfe from $1.34 per
Mcfe, offset in part by a 4% increase in equivalent volumes produced. The lower
rate for the first six months 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 52% to
$2.8 million for the first six months of 1999 from $1.9 million for the
comparable period of 1998, due primarily to increased personnel-related costs in
1999 required for the Company to pursue its Deepwater Gulf exploration and
development plan.
INTEREST EXPENSE for the first six months of 1999 increased 6% to $6.6
million from $6.3 million for the comparable period of 1998, primarily due to
additional borrowings by the Company under a $25 million affiliate credit
facility entered into during the second quarter of 1999.
INCOME (LOSS) BEFORE INCOME TAXES was a $5.1 million loss for the first six
months of 1999, primarily as a result of the oil and gas revenue decreases and
increased expenses discussed above.
LIQUIDITY, CAPITAL EXPENDITURES AND CAPITAL RESOURCES
As of June 30, 1999, the Company had a working capital deficit of
approximately $25.8 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 Company to
classify outstanding borrowings under the facility as current liabilities.
Subsequent to December 31, 1998, the Company reached an agreement with the
Company's bank group to extend the facility's maturity to October 1, 2002. As a
result, the Company classified the balance of $44.0 million under the facility
as long-term debt as of June 30, 1999. The Company expects its 1999 capital
expenditures, including capitalized indirect costs and reduced by proceeds from
the sale of 63% of the Company's Pluto project, to be $50 million to $55
million, which would exceed cash flow from operations. To obtain the necessary
funds to continue its planned capital expenditure program and reduce its working
capital deficit, in April 1999 the Company established a $25 million short-term
credit facility with ECT, which facility will mature on December 31, 1999. The
facility was fully drawn as of June 30, 1999. There can be no assurance that the
Company's access to capital will be sufficient to meet its needs for capital. 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 primary sources of cash during the first six months of 1999
were $23.3 million in proceeds from a capital contribution from LLC, $19.8
million in proceeds from a sale of a mineral interest and $25.0 million in
proceeds from an affiliate credit facility provided by ECT. The primary uses of
cash for the same period were $39.1 million for capital expenditures associated
with exploration and development, $9.4 million in net payments on the Revolving
Credit Facility and $27.9 million for the reduction of accounts payable.
Net cash used by operating activities was $19.1 million in the first six
months of 1999, a decrease of $39.8 million from the same period of 1998. A
period to period decrease of approximately $5.9 million in
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operating cash flow before changes in working capital was due primarily to lower
commodity prices, increased expenses, and a $3.0 million provision for
litigation in 1998. The remaining decrease of $34.0 million in net cash was used
for changes in working capital, primarily for payments of accounts payable.
Cash used in investing activities in the first six months of 1999 decreased
to $19.3 million from $83.7 million for the same period in 1998 due primarily to
fewer exploratory leasehold acquisitions and lower exploratory drilling
expenditures and reimbursements received from a partner on the Company's Pluto
project.
Cash provided by financing activities was $38.9 million for the first six
months of 1999 compared to $57.1 million for the same period in 1998. The
Company's primary source of cash for the first six months of 1999 was $23.3
million in proceeds from a capital contribution from LLC, which funds were
provided to LLC through a credit facility with ECT, and $25.0 million from a
short-term credit facility with ECT, offset in part by a net $9.4 million
repayment of borrowings under 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. 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.
Six Months Ended June 30,
-------------------------
1999 1998
------- ------
Increase (decrease) in natural gas sales (in thousands)................ $ (843) $455
Decrease in oil sales (in thousands)................................... (96) --
Effect of hedging transactions on average natural gas sales price
(per Mcf).............................................................. (0.08) 0.05
Effect of hedging transactions on average oil sales price
(per Bbl).............................................................. (0.28) --
A table setting forth the Company's open hedging positions as of June 30,
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 June 30, 1999, the Company entered into an oil hedge for the
period November 1, 1999 through December 31, 2000. Average notional quantities
for November and December 1999 are 1,550 barrels per day at an average price of
$19.89 per barrel. Average notional quantities for January 1 through December
31, 2000 are 4,050 barrels per day at an average price of $18.72 per barrel.
Hedging arrangements for 1999 cover approximately 59% of the Company's
anticipated equivalent production for the year. Hedging arrangements for 2000,
2001 and 2002 cover approximately 45%, 9% and 3% of the Company's anticipated
equivalent production for those years, respectively.
Capital expenditures for the first six months of 1999 were $34.4 million,
excluding a reduction of $19.8 million related to the Company's sale of a 63%
working interest in the Pluto project and $4.7 million of capitalized indirect
costs. Capital expenditures included $12.5 million for exploration activities
and $21.9 million for
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development. Included in exploration expenditures was $8.9 million for lease
bonus payments on three deepwater Gulf of Mexico blocks awarded to the Company
in the March, 1999 Central Gulf of Mexico Lease Sale.
During the six month period, 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 late 1999 or early 2000 to
quantify reserve estimates and to ensure appropriate development.
Leasehold and geological expenditures in the first six months of 1999
amounted to $12.1 million, before leasehold cost reimbursements. The Company was
the 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 was $8.9 million, all of which was paid by June 30, 1999. Leasehold costs
were reduced by approximately $12.2 million as a result of a reimbursement
received for the sale of 63 percent of the Company's Pluto project in June of
1999. Expenditures for development activities included facility costs for the
Company's Pluto project and completion and facility costs for the Dulcimer
field. Development expenditures were also reduced by approximately $ 7.6 million
as a result of the partial sale of the Company's ownership in the Pluto project.
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. The
majority of the Company's share of exploratory costs on one of the anticipated
Deepwater Gulf wells would be covered by the Company's partners in the well. The
Company also expects to drill two or three development wells, possibly including
the appraisal well on the Aconcagua discovery, and to complete the drilling of
the production well and related facilities necessary for the Pluto project to
commence production in the fourth quarter of 1999. Total capital expenditures
for 1999 including capitalized indirect costs and reduced by proceeds from the
sale of 63% of the Company's Pluto Deepwater Gulf exploitation project are
expected to be between $50 million and $55 million.
The Company has entered into negotiations with an affiliate to sell the Pluto
flow line and related facilities and enter into a firm transportation agreement
for the same flow line.
Debt outstanding as of June 30, 1999 was approximately $168.7 million,
including $99.7 million of senior subordinated notes, $44.0 million drawn on the
Revolving Credit Facility, both of which were classified as long-term debt, and
$25 million drawn on the short-term credit facility with ECT. 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 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.
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.
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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. At
June 30, 1999, LLC had fully drawn this facility and contributed the net
proceeds to the Company as 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.
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 probably
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.
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 future expected 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 include 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 September 1999.
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Currently the Company has substantially completed is upgrade of all
significant software applications to be year 2000 compliant. A review of non-IT
systems such as technology embedded within its operational equipment has been
performed. Equipment upgrades as a result of this review are expected to be
minor and completed by October 1999. The Company is in the process of obtaining
Year 2000 readiness assurances from significant vendors, suppliers and
customers.
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
None.
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 Amended and Restated Credit Agreement between Mariner Energy
and Bank of America, N.A. dated June 28, 1999.
27.1 Financial Data Schedule
(b) The Company filed no Current Reports on Form 8-K during the quarter
ended June 30, 1999.
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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: August 13, 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
NUMBER DESCRIPTION
- ------- -----------
10.1 Amended and Restated Credit Agreement between Mariner Energy
and Bank of America, N.A. dated June 28, 1999.
27.1 Financial Data Schedule