UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Quarterly Period Ended June 30, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Transition Period from to
----------- -----------
Commission File No. 1-12108
ENSERCH EXPLORATION, INC.
(formerly Lone Star Energy Plant Operations, Inc.)
(Exact name of Registrant as specified in its charter)
Texas
(State or other jurisdiction of incorporation or organization)
75-2421863
(I.R.S. Employer Identification No.)
6688 North Central Expressway, Suite 1000, Dallas, Texas 75206-3922
(Address of principal executive office) (Zip Code)
(214)692-4300
(Registrant's telephone number, including Area Code)
Indicate by check mark whether the Registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Act
of 1934 during the preceding twelve months (or for such shorter period
that the Registrant was required to file such reports) and (2) has been
subject to such filing requirements for the past 90 days.
Yes X No
----- -----
Number of shares of Common Stock of Registrant outstanding as of
August 8, 1997: 126,919,427
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
ENSERCH EXPLORATION, INC.
CONDENSED STATEMENTS OF CONSOLIDATED OPERATIONS (UNAUDITED)
Three Months Ended Six Months Ended
June 30 June 30
------------------ ----------------
1997 1996 1997 1996
------- ------- ------- --------
(In thousands except per share amounts)
Revenues
Natural gas $46,313 $57,015 $ 103,651 $110,399
Oil and condensate 24,292 24,445 49,364 43,731
Natural gas liquids 1,092 2,101 2,791 3,644
Cogeneration operations 2,872 2,925 5,475 5,284
Other 688 483 783 883
------ -------- ------- --------
Total 75,257 86,969 162,064 163,941
------ -------- ------- --------
Costs and Expenses
Production and operating 12,425 18,134 25,050 36,928
Exploration 984 3,308 3,758 6,168
Depreciation and amortization 28,887 35,207 55,838 68,032
Write down of oil and
gas properties 385,200
Unusual charges 2,183 2,183
Cogeneration operations 2,767 2,820 5,158 4,964
General, administrative and other 7,083 8,261 14,471 16,512
Taxes, other than income 4,342 4,805 8,954 10,973
------ -------- ------- --------
Total 58,671 72,535 500,612 143,577
------ -------- ------- --------
Operating Income (Loss) 16,586 14,434 (338,548) 20,364
Other Income (Expense) - Net (50) 27 (76) 116
Interest Income 34 86
Interest and Other Financing Costs (7,158) (6,288) (13,085) (12,029)
------ -------- ------- --------
Income (Loss) Before Income Taxes 9,412 8,173 (351,623) 8,451
Income Taxes (Benefit) 3,368 2,839 (123,072) 2,912
------ -------- ------- --------
Net Income (Loss) $ 6,044 $ 5,334 $(228,551)$ 5,539
====== ======== ======= ========
Net Income (Loss) Per Share $ .05 $ .04 $ (1.80)$ .04
====== ======== ======= ========
Weighted Average Shares
Outstanding 126,723 126,559 126,666 126,540
======= ======== ======= ========
See accompanying Notes.
1
ENSERCH EXPLORATION, Inc.
CONDENSED STATEMENTS OF CONSOLIDATED CASH FLOWS (UNAUDITED)
Six Months Ended
June 30
-----------------------
1997 1996
-------- --------
(In Thousands)
OPERATING ACTIVITIES
Net income (loss) $(228,551) $ 5,539
Write down of oil and gas properties 385,200
Depreciation and amortization 55,846 68,039
Deferred income tax expense (benefit) (124,949) 4,576
Other (1,277) (7,637)
Changes in current operating
assets and liabilities
Accounts receivable 30,588 (7,319)
Other current assets 11,218 404
Accounts payable (24,440) (12,198)
Other current liabilities 457 1,064
--------- ---------
Net cash flows from operating activities 104,092 52,468
--------- ---------
INVESTING ACTIVITIES
Additions to property, plant and equipment (85,721) (107,227)
Proceeds from disposition of property,
plant and equipment 2,212 13,738
Changes in property, plant and
equipment accruals (10,868) 397
--------- ---------
Net cash flows used in
investing activities (94,377) (93,092)
--------- ---------
FINANCING ACTIVITIES
Borrowings under bank revolving
credit agreement 40,000 115,000
Repayment of borrowings under
bank revolving credit agreement (65,000) (53,000)
Borrowings under short term
financing agreement 81,400
Repayments under short term
financing agreement (76,400)
Change in temporary advances with
affiliated companies 15,764 (24,162)
Change in deferred payable to
affiliated company (1,434)
Change in advances under
leasing arrangements (697) 6,703
Payments of capital lease obligations (2,551) (2,249)
Issuance of common stock 2 74
--------- ---------
Net cash flows from (used in)
financing activities (7,482) 40,932
--------- ---------
Net Increase in Cash 2,233 308
Cash at Beginning of Period 1,358 1,565
--------- ---------
Cash at End of Period $ 3,591 $ 1,873
========= =========
See accompanying Notes.
2
ENSERCH EXPLORATION, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(June 30, 1997 Unaudited)
June 30 December 31
1997 1996
-------- -----------
(In thousands)
ASSETS
Current Assets
Cash $ 3,591 $ 1,358
Accounts receivable - trade 46,624 65,926
Accounts receivable - affiliated companies 5,263 16,549
Temporary advances - affiliated companies 453 13,410
Other 7,048 18,266
-------- ---------
Total current assets 62,979 115,509
-------- ---------
Property, Plant and Equipment (at cost)
Oil and gas properties (full cost method) 2,497,768 2,806,536
Other 23,231 22,084
---------- ----------
Total 2,520,999 2,828,620
Less accumulated depreciation
and amortization 1,131,818 1,081,902
---------- ----------
Net property, plant and equipment 1,389,181 1,746,718
---------- ----------
Other Assets 15,459 14,654
---------- ----------
Total $1,467,619 $1,876,881
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Accounts payable - trade $ 64,642 $ 91,026
Accounts payable - affiliated companies 8,924
Temporary advances - affiliated companies 2,807
Short term borrowings 5,000
Advances under leasing arrangements 4,760 5,457
Current portion of capital lease obligations 9,608 3,250
Other 12,300 11,843
---------- ----------
Total current liabilities 99,117 120,500
---------- ----------
Bank Revolving Credit Agreement 90,000 115,000
---------- ----------
Capital Lease Obligations 232,826 241,735
---------- ----------
Deferred Income Taxes 148,852 273,801
---------- ----------
Other Liabilities 27,531 28,249
---------- ----------
Company-Obligated Mandatorily Redeemable
Preferred Securities of Subsidiary 150,000 150,000
---------- ----------
Common Shareholders' Equity
Common stock (200,000 shares authorized;
126,920 and 126,736 shares outstanding) 126,920 126,736
Paid in capital 821,229 819,475
Accumulated earnings (deficit) (226,259) 2,292
Unamortized restricted stock compensation (2,385) (677)
Treasury stock (212) (230)
---------- ----------
Common shareholders' equity 719,293 947,596
---------- ----------
Total $1,467,619 $1,876,881
========== ==========
See accompanying Notes.
3
ENSERCH EXPLORATION, INC.
Notes to Condensed Consolidated Financial Statements
1. BASIS OF PRESENTATION - On August 5, 1997, the previously
announced merger of ENSERCH Corporation ("ENSERCH") and Texas
Utilities Company and the related merger of EEX and Lone Star
Energy Plant Operations, Inc. ("LSEPO") were completed. Under the
terms of the EEX/LSEPO merger, LSEPO changed its name to "Enserch
Exploration, Inc." ("New EEX"), shares of EEX were automatically
converted into shares of New EEX on a one-for-one basis in a tax-
free transaction, New EEX issued 691,631 shares of common stock
to ENSERCH in exchange for outstanding LSEPO common stock and
ENSERCH distributed to its shareholders, on a pro rata basis, all
of the shares of New EEX common stock it owned. In addition, the
merger fixed LSEPO's working capital at $3.5 million. For
financial reporting purposes, the EEX/LSEPO merger will be
treated as a combination of entities under common control.
Accordingly, the operations and assets and liabilities of EEX and
LSEPO have been recorded at their historical amounts in the
accompanying Condensed Statements of Consolidated Operations and
Cash Flows for the three months and six months ended June 30,
1997 and 1996 and the Condensed Consolidated Balance Sheets as of
June 30, 1997 and December 31, 1996. The number of common shares
outstanding has been increased to reflect the 691,631 additional
shares issued in the merger and the June 30, 1997 pro forma
adjustment of LSEPO's working capital to $3.5 million is
reflected in the accompanying Condensed Consolidated Balance
Sheets.
2. EEX is conducting a review and evaluation of the commercial
feasibility of its non-producing oil and gas properties. On
August 4, 1997, the Company announced, based upon a preliminary
evaluation, that it expects a material downward revision of its
oil and natural gas reserves, primarily in its behind pipe and
proved undeveloped reserves in East Texas and its proved
undeveloped reserves in the deep-water Gulf of Mexico. While
additional analysis is required and is currently in progress, it
is anticipated at this time that the amount of the downward
revision of its proved non-producing reserves will fall within a
range of 500 to 700 billion cubic feet equivalent. EEX
anticipates that this evaluation and the determination of
both the extent of the revision and the financial impact on
the Company will be completed by the end of the third quarter.
3. At March 31, 1997, the unamortized capitalized costs of U.
S. oil and gas properties exceeded the SEC-prescribed cost center
ceiling by approximately $250 million. Accordingly, a write down
of oil and gas properties of $250 million after-tax ($385 million
pre-tax) was recorded in March 1997.
4. Unusual charges related to the relocation and restructuring
of the Company recorded in the second quarter 1997 include
employee severance of $1.6 million, professional services of $.3
million and office and employee relocation of $.3 million.
5. Earnings per share applicable to common stock are based on
the weighted average number of common shares outstanding during
the period, including common equivalent shares when dilutive.
6. In the opinion of management, all adjustments (consisting
only of normal recurring accruals) necessary for a fair
presentation of the financial position, results of operations and
cash flows for the interim periods included herein have been
made. Certain items in prior periods have been reclassified to
be consistent with the current presentation.
4
INDEPENDENT ACCOUNTANTS' REPORT
Enserch Exploration, Inc.:
We have reviewed the accompanying condensed consolidated balance
sheet of Enserch Exploration, Inc. and subsidiaries (the
"Company") as of June 30, 1997, and the related condensed
statements of consolidated operations for the three months and
six months ended June 30, 1997 and 1996, and the condensed
statements of consolidated cash flows for the six months ended
June 30, 1997 and 1996. 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 principally of
applying analytical review procedures to financial data and
making inquiries of persons responsible for financial and
accounting matters. It is substantially less in scope than an
audit 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 such condensed 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 consolidated balance sheet of the Company
as of December 31, 1996, and the related statements of
consolidated operations, cash flows and owners' equity for the
year then ended (not presented herein); and in our report dated
February 10, 1997 (March 7, 1997 as to the third paragraph of
Note 4), we expressed an unqualified opinion on those
consolidated financial statements. In our opinion, the
information set forth in the accompanying condensed consolidated
balance sheet as of December 31, 1996, is fairly stated in all
material respects, in relation to the consolidated balance sheet
from which it has been derived.
As discussed in Note 2, the Company announced on August 4, 1997,
that it expects a material downward revision of its oil and
natural gas reserves.
DELOITTE & TOUCHE LLP
Dallas, Texas
August 8, 1997
5
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations
OVERVIEW
On August 5, 1997, the previously announced merger of ENSERCH
and Texas Utilities Company and the related merger of EEX and
Lone Star Energy Plant Operations, Inc. ("LSEPO") were
completed. Under the terms of the EEX/LSEPO merger, LSEPO
changed its name to "Enserch Exploration, Inc." ("New EEX"),
shares of EEX were automatically converted into shares of New
EEX on a one-for-one basis in a tax-free transaction, New EEX
issued 691,631 shares of common stock to ENSERCH in exchange for
outstanding LSEPO common stock and ENSERCH distributed to its
shareholders, on a pro rata basis, all of the shares of New EEX
common stock it owned. In addition, the merger fixed LSEPO's
working capital at $3.5 million. For financial reporting
purposes, the EEX/LSEPO merger will be treated as a combination
of entities under common control. Accordingly, the operations
and assets and liabilities of EEX and LSEPO have been recorded
at their historical amounts in the accompanying financial
statements. The number of common shares outstanding has been
increased to reflect the 691,631 additional shares issued in the
merger and the June 30, 1997 pro forma adjustment of LSEPO's
working capital to $3.5 million is reflected in the accompanying
Condensed Consolidated Balance Sheets.
RESULTS OF OPERATIONS
Enserch Exploration, Inc. (EEX) reported second quarter 1997 net
income of $6 million ($.05 per share), 13% higher than the same
period in 1996. Second quarter 1997 operating income was $17
million, compared to $14 million in 1996. For the first six
months of 1997, EEX had a net loss of $229 million ($1.80 per
share), including the impact of a first quarter $250 million
(after-tax) ($385 million pre-tax) write down of oil and gas
properties under the full cost method of accounting. Excluding
the write-down, net income for the first six months of 1997 was
$22 million ($.17 per share), compared with $5.5 million ($.04
per share) for 1996; operating income was $47 million in 1997,
compared to $20 million in 1996.
Results of operations for 1997 and 1996 were impacted by the
following unusual items:
A $2.2 million (before tax) ($1.4 million after-tax) unusual
charge in the second quarter 1997 related to the reorganization
and restructuring of operations and the relocation of corporate
headquarters to Houston, Texas. EEX anticipates completing the
reorganization and restructuring plan and recording a significant
charge against earnings in the third quarter 1997.
A first quarter 1997 write down of oil and gas properties of
$250 million (after-tax) ($385 million pre-tax). The write down
resulted in a 19% reduction in the 1997 amortization rate.
6
The Rocky Mountain area properties were sold in late 1996.
Revenues, costs and expenses and production volumes attributable
to these properties for the periods ended June 30, 1996 were:
Second Quarter Six Months
(Dollars in millions)
Revenues
Natural gas $4.1 $9.5
Oil and condensate $1.6 $2.9
Natural gas liquids $0.6 $1.0
Costs and Expenses
Production & operating $1.7 $3.1
Depreciation & amortization $4.5 $8.8
Taxes other than income $0.3 $0.9
Production Volumes
Natural gas (MMcf) 3,211 6,551
Oil and condensate (MBbls) 79 159
Natural gas liquids (MBbls) 74 121
The Cooper Project equipment and facilities were refinanced
and the associated operating sublease was capitalized in December
1996. The pro forma impact of this transaction on results of
operations for the three months and six months ended June 30,
1996 was to decrease production and operating costs $4.1 million
and $8.3 million, increase depreciation and amortization expense
$1.4 million and $4.1 million and increase interest and other
financing costs $2.4 million and $4.8 million, respectively.
In the following comparisons of results of operations, both 1997
and 1996 historical amounts have been adjusted to exclude the
unusual and non-recurring transactions described above. In
addition, amortization for 1996 has been recalculated on a pro
forma basis assuming that the 1997 write down of oil and gas
properties and the refinancing of the Cooper facilities in late
1996 occurred on January 1, 1996.
QUARTERS ENDED JUNE 30, 1997 AND 1996 - Revenues for 1997 were
$75 million, a $5.5 million (7%) decrease from 1996, reflecting
a $6.6 million (12%) decrease in natural gas revenues resulting
from lower second quarter 1997 prices ($4.3 million) and
production ($2.3 million). The average natural gas sales price
per thousand cubic feet (Mcf) was $2.13 in 1997 compared with
$2.33 in 1996. Natural gas production for 1997 was 21.7 billion
cubic feet (Bcf), down from 22.7 Bcf in 1996, primarily due to
reduced output from a non-operated offshore property resulting
from water encroachment and from an operated offshore property
which was shut-in pending repairs. The reduction in natural gas
revenues was partially offset by a $1.1 million (4%) increase in
oil and other revenues, primarily the result of higher crude oil
production. The average crude oil sales price per barrel was
$18.95 in 1997
7
compared with $18.87 in 1996. Crude oil production increased 6%
in 1997 to 1,282 thousand barrels (MBbls), due principally to
the continued development of the Cooper Project and new wells in
other areas. Overall, oil and gas production in the 1997 second
quarter was reduced somewhat because the Cooper facility was
shut-in for approximately three weeks to allow for maintenance,
repair and completion activities.
Operating expenses were down 6% in the second quarter of 1997
compared to 1996, the result of lower exploration and general
and administrative expenses. Lower exploration expenses were
due to the refocusing of the exploration programs during the
first six months of 1997. Exploration expenses during the
remainder of the year are expected to increase somewhat over
current levels. General and administrative expenses for 1997
were $7.1 million, 14% less than 1996 due to ongoing
restructuring and cost reduction initiatives. Taxes, other than
income were $4.3 million, down 3% from 1996 primarily due to
lower revenues. Depreciation and amortization was $29 million
in 1997, unchanged from the prior year calculated on the pro
forma basis described above.
Interest and other financing costs for 1997 were $7.2 million, a
$1.5 million (18%) reduction from 1996, including the pro forma
Cooper Project adjustment described above. The decrease in 1997
is due to the reduction in debt from proceeds of Rocky Mountain
properties sold in late 1996 and slightly lower interest rates.
SIX MONTHS ENDED JUNE 30, 1997 AND 1996 - Revenues for 1997 were
$162 million, a $12 million (8%) increase from 1996, reflecting
a $2.8 million (3%) increase in natural gas revenues, and an
$8.7 million (18%) improvement in oil and other revenues.
Improved revenues were the result of higher average natural gas
and crude oil prices and higher crude oil production, offset by
lower natural gas production. The average natural gas sales
price per Mcf was $2.46 in 1997 compared with $2.27 in 1996.
Natural gas production for 1997 was 42.2 Bcf, down from 44.4 Bcf
in 1996 for the reasons cited above. Higher oil revenues in
1997 reflect a 10% improvement in both the average sales price
and sales volumes. Crude oil production was 2.4 MMBbls in 1997
compared to 2.2 MMBbls in 1996 due primarily to the continued
development of the Cooper Project. Overall, oil and gas
production in the first six months of 1997 was reduced somewhat
because the Cooper facility was shut-in for approximately five
weeks to allow for maintenance, repair and completion
activities.
Operating expenses were down 5% in 1997 compared to 1996.
Exploration expenses were down $2.4 million due to the
refocusing of the exploration programs described above. General
and administrative expenses were $14 million, 12% less than 1996
due to ongoing restructuring and cost reduction initiatives.
Taxes, other than income were $9 million, down 11% from 1996
primarily due to lower ad valorem tax accruals. Depreciation
and amortization was $56 million in 1997, the same as 1996
calculated on the pro forma basis described above.
Interest and other financing costs for 1997 were $13 million, a
$4 million (22%) reduction from 1996, including the pro forma
Cooper Project adjustment
8
described above. The decrease in 1997
is due to the reduction in debt from proceeds of Rocky Mountain
properties sold in late 1996 and slightly lower interest rates.
HEDGING ACTIVITIES
A portion of the risk associated with fluctuations in the price
of natural oil and gas is managed through the use of hedging
techniques such as oil and gas swaps, collars and futures
agreements. EEX fixed the price on second quarter 1997
production volumes of 12 Bcf of natural gas (54% of production)
at an average price of $2.37 per Mcf and 546 MBbls of oil (43%
of production) at an average price of $21.45 per Bbl. For the
first six months of 1997, EEX fixed the price on 28 Bcf of
natural gas (66% of production) at an average price of $2.78 per
Mcf and 93l MBbls of oil (38% of production) at an average price
of $22 per Bbl. In total oil and gas price hedging activities
increased second quarter 1997 revenues by $2.1 million, but
decreased second quarter 1996 revenues by $2 million. For the
first six months of 1997, oil and gas hedging activities
increased revenues by $1.6 million, but decreased revenues for
the first six months of 1996 by $7.7 million. At June 30, 1997,
EEX had outstanding swaps, collars and futures agreements that
were entered into as hedges extending through March 31, 1998, to
exchange payments on 15 Bcf of natural gas and 1,378 MBbls of
oil. At June 30, 1997, there were $.4 million of net unrealized
and unrecognized hedging gains based on the difference between
the strike price and the New York Mercantile Exchange futures
price for the applicable trading month. In addition, there were
$.2 million of realized gains on hedging activities which were
deferred and will be applied as an increase in revenues in the
third quarter of 1997 in the applicable month of physical sale
of production.
CAPITALIZED COSTS
At June 30, 1997, the Securities and Exchange Commission (SEC)
prescribed cost center ceiling limitation exceeded EEX's
unamortized capitalized costs of U. S. oil and gas properties.
However, oil and gas prices are subject to seasonal and other
fluctuations. A substantial decline in prices from June 30, 1997
levels or other factors, without mitigating circumstances, could
cause a future write down of capitalized costs and a non-cash
charge against income. On August 4, 1997 EEX announced it
expects a material downward revision of its oil and gas reserves
and a non-cash charge against income in the third quarter 1997.
See RECENT EVENTS below and Note 2 of Notes to Condensed
Consolidated Financial Statements for additional information.
At March 31, 1997, EEX's unamortized capitalized costs of U. S.
oil and gas properties exceeded the cost center ceiling
limitation by approximately $250 million. Accordingly, a non-
cash write down of oil and gas properties of $250 million after-
tax ($385 million pre-tax) was recorded in the first quarter
1997. The write down had no impact on cash flows.
9
LIQUIDITY AND CAPITAL RESOURCES
Cash Flows
EEX generated sufficient cash flows from operations to fund its
capital requirements and reduce financings by $23 million. Net
cash flows from operating activities were $104 million, an
increase of $52 million over 1996 largely due to higher
commodity prices during the first quarter of 1997 and changes in
current operating assets and liabilities. Net cash flows used
for investing activities in 1997 were $94 million, unchanged
from 1996.
EEX intends to utilize substantially all of its internally
generated cash flows for growth of the business and expects to
have ample cash flow from operations and the continuous
monetization of non-core assets to fund its business plans.
Borrowings under EEX's credit facilities may be used to
supplement temporary cash flow needs. EEX does not anticipate
paying cash dividends in the foreseeable future.
Capital Structure
Debt, including preferred securities of a subsidiary,
represented 40% of total capitalization of $1.2 billion at June
30, 1997, compared to 35% of total capitalization of $1.5
billion at December 31, 1996. The reduction in total
capitalization and the corresponding increase in debt as a
percentage of total capitalization was due primarily to the
reduction in shareholders' equity from the first quarter 1997
non-cash write down of oil and gas properties, partially offset
by earnings and reduced bank borrowings.
RECENT EVENTS
RESERVE REVISION
The ENSERCH/TUC Merger and EEX/LSEPO Merger and related EEX spin-
off were completed on August 5, 1997. In anticipation of the
spin-off and to position the Company as a competitive, fully-
independent oil and gas company, new EEX management initiated
restructuring programs in 1997 to improve cash flow from
existing core area properties through operating efficiencies and
cost reductions and geared the investment program towards a
stable reserve and production growth at significantly lower
finding and development costs. As part of these ongoing
restructuring programs, EEX, working with its outside reserve
engineers, DeGolyer & MacNaughton, is conducting a review and
evaluation of the commercial feasibility of its non-producing
oil and gas properties. On August 4, 1997, the Company
announced, based upon a preliminary evaluation, that it expects
a material downward revision of its proved oil and natural gas
reserves, primarily in its behind pipe and proved undeveloped
reserves in East Texas and its proved undeveloped reserves in
the deep-water Gulf of Mexico. While additional analysis is
required and is currently in progress, it is anticipated at this
time that the amount of the downward revision of its proved non-
producing reserves will fall within a range of 500 to 700
billion cubic feet equivalent.
10
This downward reserve reduction will not affect the Company's
current cash flow. Also, because the revision is expected to only
impact behind pipe and undeveloped reserves, the value impact
will be offset to an extent by the elimination of the capital
costs associated with these reserves and thus is not expected to
be proportionate to the reserve revision. EEX anticipates that
this evaluation and the determination of both the extent of the
revision and the financial impact on the Company will be
completed by the end of the third quarter.
OFFSHORE EXPLORATION JOINT VENTURE
On July 1, 1997 EEX announced agreement with Enterprise Oil Plc
("Enterprise") to participate in an exploration venture to
evaluate EEX's portfolio of offshore blocks in the deep water of
the Gulf of Mexico.
The agreement, covering approximately 78 blocks primarily in the
areas of Garden Banks, Green Canyon and Mississippi Canyon, is
subject to government approvals and certain pre-emption rights
on some of the blocks. Excluded from
the agreement are reserves at Green Canyon 254 (Allegheny
Project) and reserves and production facilities at Mississippi
Canyon and Garden Banks 388 (Cooper Project).
Under the agreement, approved by the Boards of each company,
Enterprise will pay $65 million, which will be used to fund
EEX's exploration drilling costs and in return receive an
immediate assignment of 50% of EEX's deepwater
portfolio. A further $35 million to be funded by Enterprise is
contingent on drilling successes and the announcement of at
least two commercial developments. Enterprise will immediately
become a full partner in the relevant Joint Operating
Agreements.
The companies intend to conduct a 10 to 12 well drilling program
over the next two and one-half years utilizing two rigs capable
of drilling in 3,300 feet of water. The rigs are under long-
term contract to EEX at below market day rates. The first well
has been spudded on the Llano prospect in Garden Banks 386.
11
ENSERCH EXPLORATION, INC.
SUMMARY OF OPERATING DATA FOR OIL & GAS PRODUCING ACTIVITIES (UNAUDITED)
Three Months Ended Six Months Ended
June 30 June 30
------------------- -----------------
1997 1996 1997 1996
------ ------ ------ ------
Operating Income (Loss)
(in millions) (a) $ 16.5 $ 14.3 $(338.9) $ 20.0
======= ======= ======= ======
Revenues (in millions)
Natural gas $ 46.3 $ 57.0 $ 103.7 $110.4
Oil and condensate 24.3 24.4 49.4 43.7
Natural gas liquids 1.1 2.1 2.8 3.7
Other .7 .5 .7 .9
------- ------ ------- ------
Total $ 72.4 $ 84.0 $ 156.6 $158.7
======= ====== ======= ======
Sales Volumes
Natural gas (MMcf) 21,725 25,939 42,151 50,910
Oil and condensate (MBbls) 1,282 1,292 2,429 2,374
Natural gas liquids (MBbls) 90 197 186 363
Total volumes (MMcfe) (b) 29,957 34,873 57,841 67,332
Average Sales Price
Natural gas (per Mcf) $ 2.13 $ 2.20 $ 2.46 $ 2.17
Oil and condensate (per Bbl) 18.95 18.92 20.32 18.42
Natural gas liquids (per Bbl) 12.13 10.66 15.01 10.04
Total product revenue(per Mcfe)(b) 2.39 2.40 2.69 2.34
Cost and Expenses (per Mcfe) (b)
Production and operating (c) $ .41 $ .52 $ .43 $ .55
Exploration .03 .09 .06 .09
Depreciation and amortization .96 1.01 .97 1.01
General, administration and other .24 .24 .25 .25
Taxes, other than income .14 .14 .15 .16
Net Wells
Drilled 13 36 29 54
Productive 13 25 24 42
(a) Six months ended June 30, 1997 includes a write down of oil and
gas properties of $250 million after-tax ($385 million pre-tax)
recorded in March 1997.
(b) Oil and natural gas liquids have been converted to Mcf
equivalents (Mcfe) on the basis of one barrel equals 6.0 Mcfe.
(c) Excludes related production, severance and ad valorem taxes.
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PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
EXHIBIT (15) - Letter of Deloitte & Touche LLP dated
August 8, 1997, regarding unaudited
interim financial statements
(b) Reports on Form 8-K
Current Report on Form 8-K dated May 30, 1997.
(News Release dated March 30, 1997: ENSERCH filed
supplemental request with IRS to confirm reliability
of prior IRS ruling regarding tax free status of
distribution of EEX stock.)
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act
of 1934, the Registrant has duly caused this report to be signed
on its behalf by the undersigned thereunto duly authorized.
ENSERCH EXPLORATION, INC.
(Registrant)
Dated August 8, 1997 By /s/R. S. Langdon
-------------------------------
R. S. Langdon
Executive Vice President,
Finance and Administration,
and Chief Financial Officer
Dated August 8, 1997 By /s/R. E.Schmitz
-------------------------------
R. E. Schmitz
Vice President
and Controller
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