<PAGE>
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------
FORM 10-Q
[x] Quarterly Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 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. 0-21411
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COSTILLA ENERGY, INC.
(Exact name of registrant as specified in its charter)
---------------
DELAWARE 75-2658940
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
400 WEST ILLINOIS, SUITE 1000
MIDLAND, TEXAS 79701
(Address of principal executive offices) (Zip code)
(915) 683-3092
(Registrant's telephone number, including area code)
Not applicable
(Former name, former address and former fiscal year,
if changed since last report)
---------------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES X NO
--- ---
NUMBER OF SHARES OF COMMON STOCK OUTSTANDING AS OF APRIL 30, 1997.... 10,476,500
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<PAGE>
COSTILLA ENERGY, INC.
FORM 10-Q
TABLE OF CONTENTS
PAGE
----
PART I - FINANCIAL INFORMATION
ITEM 1. Financial Statements
Consolidated Balance Sheets as of March 31, 1997
(unaudited) and December 31, 1996. . . . . . . . . . . . . . 3
Consolidated Statements of Operations for the three
months ended March 31, 1997 and 1996 (unaudited) . . . . . . 4
Consolidated Statements of Cash Flows for the three
months ended March 31, 1997 and 1996 (unaudited) . . . . . . 5
Notes to Consolidated Financial Statements (unaudited) . . . . 6
ITEM 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations. . . . . . . . . . . . . 9
PART II - OTHER INFORMATION
ITEM 6. Exhibits and Reports on Form 8-K . . . . . . . . . . . . . . . 13
Signatures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
2
<PAGE>
PART I -- FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
COSTILLA ENERGY, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1997 1996
---------- ---------
ASSETS (UNAUDITED)
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 11,002 $ 12,618
Accounts receivable:
Trade, net 5,659 6,675
Affiliates - 332
Oil and gas sales 10,999 9,031
Prepaid and other current assets 2,136 1,753
---------- ---------
Total current assets 29,796 30,409
---------- ---------
PROPERTY, PLANT AND EQUIPMENT, AT COST:
Oil and gas properties, using the successful efforts
method of accounting:
Proved properties 152,172 140,477
Unproved properties 7,115 4,482
Accumulated depletion, depreciation and amortization (25,208) (20,435)
---------- ---------
134,079 124,524
Other property and equipment, net 2,884 2,420
---------- ---------
Total property, plant and equipment 136,963 126,944
---------- ---------
OTHER ASSETS:
Deferred charges 4,438 4,503
Note receivable - other 250 250
Note receivable - affiliate 684 684
---------- ---------
Total other assets 5,372 5,437
---------- ---------
$ 172,131 $ 162,790
---------- ---------
---------- ---------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current maturities of long-term debt $ 98 $ 98
Trade accounts payable 16,208 12,718
Undistributed revenue 5,042 3,517
Other current liabilities 6,372 3,756
---------- ---------
Total current liabilities 27,720 20,089
---------- ---------
LONG-TERM DEBT, LESS CURRENT MATURITIES 100,244 100,262
---------- ---------
OTHER NONCURRENT LIABILITIES 1,113 1,870
---------- ---------
DEFERRED INCOME TAXES 191 -
---------- ---------
STOCKHOLDERS' EQUITY :
Preferred stock, $.10 par value (3,000,000 shares
authorized; no shares outstanding) - -
Common stock, $.10 par value (20,000,000 shares authorized;
10,476,500 shares outstanding at March 31, 1997 and
10,475,000 shares outstanding at December 31, 1996) 1,048 1,047
Additional paid-in capital 41,095 41,081
Retained earnings (deficit) 720 (1,559)
---------- ---------
Total stockholders' equity 42,863 40,569
---------- ---------
COMMITMENTS AND CONTINGENCIES - -
---------- ---------
$ 172,131 $ 162,790
---------- ---------
---------- ---------
</TABLE>
See accompanying notes to consolidated financial statements.
3
<PAGE>
COSTILLA ENERGY, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
THREE MONTHS ENDED
MARCH 31,
------------------------
1997 1996
---------- ----------
REVENUES:
Oil and gas sales $ 19,613 $ 8,833
Other 765 118
---------- ----------
20,378 8,951
---------- ----------
EXPENSES:
Oil and gas production 7,369 3,659
General and administrative 1,515 1,362
Exploration and abandonments 1,340 228
Depreciation, depletion and amortization 4,914 1,909
Interest 2,708 1,781
---------- ----------
17,846 8,939
---------- ----------
Income before federal income taxes 2,532 12
PROVISION FOR FEDERAL INCOME TAXES
Current 62 -
Deferred 191 -
---------- ----------
NET INCOME $ 2,279 $ 12
---------- ----------
---------- ----------
INCOME PER SHARE:
Net income $ 0.22 $ 0.00
---------- ----------
---------- ----------
WEIGHTED AVERAGE SHARES OUTSTANDING 10,476 5,200
---------- ----------
---------- ----------
See accompanying notes to consolidated financial statements.
4
<PAGE>
COSTILLA ENERGY, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
-----------------------
1997 1996
---------- ----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
NET INCOME $ 2,279 $ 12
ADJUSTMENTS TO RECONCILE NET INCOME TO NET CASH
PROVIDED BY OPERATING ACTIVITIES:
Depreciation, depletion and amortization 4,914 1,909
Exploration and abandonments 47 -
Amortization of deferred charges 151 78
Deferred income tax expense 191 -
Other noncash - 30
Gain (loss) on sale of oil and gas properties 30 (30)
Gain on investment transactions (757) -
---------- ----------
6,855 1,999
Changes in operating assets and liabilities:
Increase in accounts receivable (621) (7)
Increase in other assets (407) (361)
Increase in accounts payable 5,015 723
Increase in other liabilities 2,618 144
Decrease in deferred revenue - (222)
---------- ----------
Net cash provided by operating activities 13,460 2,276
---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to oil and gas properties (15,207) (4,749)
Proceeds from sale of oil and gas properties 867 -
Additions to other property and equipment (671) (383)
---------- ----------
Net cash used in investing activities (15,011) (5,132)
---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings under long-term debt - 3,000
Payments of long-term debt (18) -
Proceeds from issuance of common stock, net 14 -
Deferred loan and financing costs (61) -
---------- ----------
Net cash provided (used) by financing activities (65) 3,000
---------- ----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (1,616) 144
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 12,618 2,866
---------- ----------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 11,002 $ 3,010
---------- ----------
---------- ----------
</TABLE>
See accompanying notes to consolidated financial statements.
5
<PAGE>
COSTILLA ENERGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1997
(UNAUDITED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The interim financial information as of March 31, 1997, and for the three
months ended March 31, 1997 and 1996, is unaudited. Certain information and
footnote disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been condensed or
omitted in this Form 10-Q pursuant to the rules and regulations of the
Securities and Exchange Commission. However, in the opinion of management,
these interim financial statements include all the necessary adjustments to
fairly present the results of the interim periods and all such adjustments are
of a normal recurring nature. The interim consolidated financial statements
should be read in conjunction with the audited financial statements for the year
ended December 31, 1996.
Costilla Energy, Inc. ("Costilla" or the "Company") was incorporated in
Delaware in June 1996 to consolidate and continue the activities previously
conducted by Costilla Energy, L.L.C., a Texas limited liability company (the
"LLC"), and its wholly owned subsidiaries, to acquire the assets of CSL
Management Corporation (which owned certain office equipment used by the
Company), and to acquire the stock of Valley Gathering Company. Costilla was
formed for the purpose of conducting a $60 million initial public offering of
common stock and a $100 million senior notes offering (the "Offerings"), which
Offerings were completed in early October 1996.
The Company is an oil and gas exploration and production concern with
properties located principally in West Texas, South Texas, and the Rocky
Mountain regions of the United States.
2. DERIVATIVE FINANCIAL INSTRUMENTS
The Company utilizes derivative financial instruments to manage well-
defined interest rate and commodity price risks. The Company is exposed to
credit losses in the event of nonperformance by the counterparties to its
interest rate swap agreements and its commodity hedges. The Company
anticipates, however, that such counterparties will be able to fully satisfy
their obligations under the contracts. The Company does not obtain collateral
or other security to support financial instruments subject to credit risk but
monitors the credit standing of the counterparties.
COMMODITY HEDGES. The Company utilizes option contracts to hedge the
effect of price changes on future oil and gas production. If market prices of
oil and gas exceed the strike price of put options, the options will expire
unexercised, therefore reducing the effective price received for oil and gas
sales by the cost of the related option.
The following table sets forth the future volumes hedged by year and the
weighted-average strike price of the option contracts at March 31, 1997:
<TABLE>
OIL GAS
VOLUME VOLUME STRIKE PRICE
(BBLS) (MMBTU) PER BBL/MMBTU
--------- --------- -----------------
<S> <C> <C> <C>
Oil:
1997 . . . . . . . . . 1,687,500 - $16.59 - $20.65(a)
Gas:
1997 . . . . . . . . . - 3,150,000 $1.78(b)
</TABLE>
(a) Represents the weighted-average price of a purchased put option
contract and of a collar established with the purchase of a put option
contract and the sale of a call option contract.
(b) Represents the strike price on purchased put option contracts.
6
<PAGE>
INTEREST RATE SWAP AGREEMENTS. Prior to the Offerings, the Company
utilized two interest rate swap agreements to reduce the potential impact of
increases in interest rates on floating-rate long-term debt. Concurrent with
the issuance of the $100 million of 10.25% fixed-rate senior notes in early
October 1996, the two interest rate swap agreements ceased to be hedges. These
interest rate swap agreements were marked-to-market and the related liability
recorded. The liability for the two interest rate swap agreements was $955,000
at March 31, 1997 and $1,712,000 at December 31, 1996. The average balance of
this liability during the quarter ended March 31, 1997 was approximately
$1,500,000. During the quarter ended March 31, 1997, the Company recorded
investment gains of $541,000 on the interest rate swap agreements. The
following table sets forth the terms, fixed rates, and notional amounts of the
interest rate swap agreements in place as of March 31, 1997:
NOTIONAL
PRINCIPAL FIXED
TERM AMOUNT INTEREST RATE
-------------------------------- ----------- -------------
Jan. 25, 1996 to Jan. 25, 1999 $24 million 7.50%
May 24, 1995 to May 27, 1997 (a) $60 million 5.99%
- -----------------
(a) Subject to extension until May 24, 1999 at the option of the
counterparty.
3. SALE OF INTEREST IN REPUBLIC GAS PARTNERS, LLC
On March 6, 1997, the Company sold its 40.5% interest in a Delaware limited
liability company which owns and operates a gas pipeline and associated
facilities in Louisiana. This membership interest had been held for resale.
The Company sold its interest to another member of the limited liability company
for $1,071,150. This amount represented the Company's actual investment of
$1,019,771 plus interest of $51,379 since the date of the Company's original
investment in April, 1996. The effective date of the sale was the date of the
Company's original investment in April, 1996. The Company received a cash
payment of $918,184 on March 6, 1997. In addition, the Company received a
$152,966 note due in full on July 1, 1997, which accrues interest at 5.62% per
annum.
4. INCOME TAXES
At December 31, 1996, the Company had provided a valuation allowance equal
to its net deferred tax asset of $1,712,000. In light of the Company's
continued profitable operations as evidenced by its second consecutive quarter
of net income before income taxes, it now appears more likely than not that the
Company will be able to utilize a portion of its available carryforwards to the
extent that such utilization offsets the deferred tax liability generated in the
three month period ended March 31, 1997.
7
<PAGE>
COSTILLA ENERGY, INC.
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
Certain statements in this Form 10-Q constitute "forward-looking statements"
within the meaning of the Private Securities Litigation Reform Act of 1995 (the
"Reform Act"). Such forward-looking statements involve known and unknown risks,
uncertainties, and other factors which may cause the actual results,
performance, or achievements of Costilla to be materially different from any
future results, performance, or achievements expressed or implied by such
forward-looking statements. Such factors include, among others, the following:
the volatility of oil and gas prices, the Company's drilling results and ability
to replace oil and gas reserves, the availability of capital resources, the
reliance upon estimates of proved reserves, operating hazards and uninsured
risks, competition, government regulation, and the ability of the Company to
implement its business strategy, and other factors referenced in the Company's
recent prospectus for its initial public offering of common stock.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
GENERAL
Costilla is an independent energy company engaged in the exploration,
acquisition and development of oil and gas properties. The Company's
predecessor began operating in 1988 and through mid-1995 had grown primarily
through a series of small acquisitions of oil and gas properties and the
exploitation of those properties. In June 1995, Costilla consummated the
acquisition of certain oil and gas properties for a purchase price of
approximately $46.6 million ("the 1995 Acquisition"), and in June 1996, the 1996
Acquisition was consummated for a purchase price of approximately $38.7 million.
To date, the Company has achieved its high rate of growth primarily through
acquisitions. This has impacted its reported financial results in a number of
ways. Properties sold by others frequently have not received focused attention
prior to sale. After acquisition, certain of these properties are in need of
maintenance, workovers, recompletions and other remedial activity not
constituting capital expenditures, which substantially increase lease operating
expenses. The increased production and revenue resulting from these
expenditures is predominately realized in periods subsequent to the period of
expense. In addition, the rapid growth of the Company has required it to
develop operating, accounting and administrative personnel compatible with its
increased size. The Company believes it has now achieved a sufficient size to
expand its reserve base without a corresponding increase in its general and
administrative expense. The Company also believes it now has a sufficient
inventory of prospects and the professional staff necessary to follow a more
balanced program of exploration and exploitation activities to complement its
acquisition efforts.
Costilla's strategy is to increase its oil and gas reserves, production and cash
flow from operations through a two-pronged approach which combines an active
exploration program with the acquisition and exploitation of proved reserves.
In addition, Costilla continues to evaluate the acquisition of undeveloped
acreage for its exploration efforts. Costilla has in-house exploration
expertise using 3-D seismic technology to identify new drilling opportunities as
well as for the exploitation of acquired properties.
8
<PAGE>
Costilla has shown a significant increase in its oil and gas reserves and
production, especially due to the 1995 Acquisition and the 1996 Acquisition.
The following table sets forth certain operating data of Costilla for the
periods presented:
Three Months Ended
March 31,
-----------------------
1997 1996
------- ------
OIL AND GAS PRODUCTION:
Oil (Mbbls) 547 338
Gas (Mmcf) 3,285 1,643
MBOE (1) 1,095 612
AVERAGE SALES PRICES:
Oil (per Bbbl) $ 19.84 $ 17.32
Gas (per Mcf) 2.67 1.81
COSTS PER BOE (1):
Production cost $ 6.73 $ 5.98
Depreciation, depletion and
amortization 4.49 3.12
General and administrative expenses 1.38 2.23
- ---------------------
(1) BOE represents equivalent barrels of oil. In reference to natural
gas, natural gas equivalents are determined using the ratio of six Mcf
of natural gas to one barrel of crude oil, condensate or natural gas
liquids. MBOE represents one thousand barrels of oil equivalent.
Costilla uses the successful efforts method of accounting for its oil and gas
activities. Costs to acquire mineral interests in oil and gas properties, to
drill and equip exploratory wells that result in proved reserves, and to drill
and equip development wells are capitalized. Costs to drill exploratory wells
that do not result in proved reserves, geological, geophysical and seismic
costs, and costs of carrying and retaining unproved properties are expensed.
Capitalized costs of producing oil and gas properties, after considering
estimated dismantlement and abandonment costs and estimated salvage values, are
depreciated and depleted using the units-of-production method. Unproved oil and
gas properties that are individually significant are periodically reviewed for
impairment of value, and a loss is recognized at the time of impairment by
providing an impairment allowance. Other unproved properties are amortized
based on the Company's experience of successful drilling and average holding
period.
The Company utilizes option contracts to hedge the effect of price changes on a
portion of its future oil and gas production. Premiums paid and amounts
receivable under the option contracts are amortized and accrued to oil and gas
sales, respectively. If market prices of oil and gas exceed the strike price of
put options, the options will expire unexercised, therefore, reducing the
effective price received for oil and gas sales by the cost of the related
option. Conversely, if market prices of oil and gas decline below the strike
price of put options, the options will be exercised, therefore, increasing the
effective price received for oil and gas sale by the proceeds received from the
related option. The net effect of the Company's commodity hedging activities
reduced oil and gas revenues by $510,000 for the three months ended March 31,
1997. There was no net effect from commodity hedging activities for the three
months ended March 31, 1996.
The Company utilizes interest rate swap agreements to reduce the potential
impact of increases in interest rates on floating-rate, long term debt. If
market rates of interest experienced during the applicable swap term are below
the rate of interest effectively fixed by the swap agreement, the rate of
interest incurred by the Company will exceed the rate that would have been
experienced under the Credit Agreement. The net effect of the Company's interest
rate hedging activities increased interest expense by $31,000 for the three
months ended March 31, 1996. Concurrent with the payment of all of the
Company's floating rate debt from proceeds of the Offerings in the fourth
quarter of 1996, the interest rate swap agreements ceased to qualify as hedges.
These interest rate swap agreements were marked-to-market and the related
liability recorded. The liability for the two interest rate swap agreements was
$955,000 at March 31, 1997. As a result of marking the agreements to market at
March 31, 1997, the Company recorded a net investment gain of approximately
$541,000 for the three month period then ended. At April 16, 1997 the value of
the agreements was an approximate $0.7 million liability.
9
<PAGE>
The Company's predecessors were classified as partnerships for federal income
tax purposes. Therefore, no income taxes were paid or provided for by the
company prior to the Offerings. Future tax amounts, if any, will be dependent
upon several factors, including but not limited to the Company's results of
operations.
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1997 COMPARED TO THREE MONTHS ENDED MARCH 31, 1996
The Company's total oil and gas revenues for the three months ended March 31,
1997 were $19,613,000, representing an increase of $10,780,000 (122%) over
revenues of $8,833,000 in 1996. This increase was primarily due to the 1996
Acquisition, which accounted for approximately $5,947,000 of the increase. The
remainder of the increase was due to a combination of increased product prices,
successful drilling activities and the enhancement of existing production. The
average oil price per barrel received in 1997 was $19.84 compared to $17.32 in
1996, a 15% increase, and the average gas price received in 1997 was $2.67
compared to $1.81 in 1996, a 47% increase.
Oil and gas production was 1,095 MBOE in 1997 compared to 612 MBOE in 1996, a
79% increase. Of the 483 MBOE increase, approximately 317 MBOE was due to the
properties acquired in the 1996 Acquisition. The remainder of the increase was
due to a combination of successful drilling activities and the enhancement of
existing production.
Other income was $765,000 for the three month period ended March 31, 1997
compared to $118,000 for the comparable 1996 first quarter period, representing
a 548% increase. Interest and other revenues were $255,000 for the three months
ended March 31, 1997 compared to $88,000 in 1996, representing an increase of
$167,000, virtually all of which was related to increased interest income due to
increased funds earning interest. Gains on investment transactions of $541,000
were recorded for the three months ended March 31, 1997. No comparable
transactions existed in 1996. These investment transactions are related to the
interest rate swap contracts which are now being marked-to-market at the end of
each reporting period.
Oil and gas production costs for the three month period ended March 31, 1997
were $7,369,000 ($6.73 per BOE), compared to $3,659,000 in 1996 ($5.98 per BOE),
representing an increase of $3,710,000 (101%), due principally to the 1996
Acquisition. On a per BOE basis, production costs increased $0.75 due primarily
to higher production costs per BOE for the properties acquired in the 1996
Acquisition.
General and administrative expenses for the three months ended March 31, 1997
were $1,515,000, representing an increase of $153,000 (12%) from 1996 of
$1,362,000. The increase is primarily due to an increase in personnel and
related costs necessary to accommodate the increased activities of the Company.
However, as noted above, production volumes increased 79% and, therefore,
general and administrative expenses per BOE decreased 38% to $1.38 per BOE for
the three months ended March 31, 1997 from the $2.22 per BOE in 1996.
Exploration and abandonment expense increased to $1,340,000 for the three months
ended March 31, 1997 compared to $228,000 in 1996. The Company incurred $81,000
of seismic costs for the three months ended March 31, 1997. No seismic costs
were incurred in the comparable period in 1996. Dry hole and abandonment costs
increased to $1,120,000 in 1997 from $228,000 in 1996.
Depreciation, depletion and amortization expense for the three month period
ended March 31, 1997 was $4,914,000 compared to $1,909,000 for 1996,
representing an increase of $3,005,000 (157%). During the 1997 period,
depreciation, depletion and amortization (D D & A) on oil and gas production was
provided at an average rate of $4.49 per BOE compared to $3.12 per BOE for 1996.
The increase was due in part to the 1996 Acquisition and also to the Company's
decision to increase the D D & A rate based upon the expectation of lower oil
and gas prices during 1997 than those experienced at December 31, 1996.
Interest expense was $2,708,000 for the three months ended March 31, 1997,
compared to $1,781,000 for the comparable period in 1996. The $927,000 (52%)
increase was attributable primarily to increased levels of debt.
10
<PAGE>
The average amounts of applicable interest-bearing debt in 1997 and 1996 were
$100,253,000 and $71,923,000, respectively. The effective annualized
interest rate in 1997 was 10.8%, as compared to 9.9% in 1996.
LIQUIDITY AND CAPITAL RESOURCES
NET CASH PROVIDED BY OPERATING ACTIVITIES
For the three months ended March 31, 1997, net cash provided by operating
activities increased to $13.5 million from $2.3 million for 1996. Cash provided
by operations, before changes in operating assets and liabilities, increased to
$6.9 million from $2.0 million for 1996 due in part to the 1996 Acquisition and
the increase in results of operations therefrom, and also due to increases in
oil and gas prices and increases in production from new drilling activities.
NET CASH USED IN INVESTING ACTIVITIES
Net cash used in investing activities for the three months ended March 31, 1997
was $15.0 million. Approximately $15.2 million was used for exploration and
development activities and $0.7 million was used for other property and
equipment. During the three months ended March 31, 1997, approximately $0.9
million net cash was provided by sales of oil and gas properties. For the three
months ended March 31, 1996, net cash used in investing activities was $5.1
million. Approximately $4.7 million was used for exploration and development
activities and $0.4 million primarily for other property and equipment.
NET CASH PROVIDED BY FINANCING ACTIVITIES
The Company incurred $3,000,000 of new debt in the three months ended March 31,
1996, which was used in its oil and gas activities, while no significant
transactions were incurred in the 1997 first quarter.
CAPITAL RESOURCES
Funding for the Company's business activities has historically been provided by
bank financings, cash flow from operations, private equity sales, property
divestitures and joint ventures with industry participants. The Company plans
to finance its continuing operations and execute its business strategy with cash
flow from operations, proceeds from the divestiture of non-core, non-strategic
assets and borrowings under the Credit Facility.
While the Company regularly engages in discussions relating to potential
acquisitions, the Company has no present agreement, commitment or understanding
with respect to any such acquisition, other than the acquisition of undeveloped
acreage and various mineral interests in its normal course of business. Any
future acquisition may require additional financing and will be dependent upon
financing arrangements available at the time.
The Company believes that cash flow from operations will be sufficient for its
budgeted 1997 capital expenditures. However, because the Company's ultimate
1997 capital expenditures, future cash flows and the availability of financing
are subject to a number of variables, there can be no assurance that the
Company's capital resources will be sufficient to maintain its capital
expenditures. In addition, if the Company is unable to generate sufficient cash
flow from operations to service its debt, it may be required to refinance all or
a portion of its debt, including the Notes, or to obtain additional financing.
There can be no assurance that any such refinancing would be possible or that
any additional financing could be obtained.
The Company has a revolving credit facility ("the Credit Facility") with
NationsBank of Texas, N.A. (the "Bank"). The Credit Facility provides for a
revolving line of credit with the availability of funds and letters of credit
being subject to a borrowing base determination at least semi-annually. The
borrowing base provides for a maximum availability of $50.0 million (which
amount was also the initial borrowing base), $100,000 of which was borrowed at
March 31, 1997. Availability under the borrowing base is initially limited to
$20.0 million for working capital and $30.0 million for acquisitions of oil and
gas properties meeting certain criteria established by the Bank. Borrowings
under the Credit Facility bear interest at the Company's option at a floating
rate which is at or above the NationsBank, N.A. prime rate or the LIBOR rate,
depending on the percentage of committed funds which have been
11
<PAGE>
borrowed. Interest is payable quarterly and principal is amortized in twelve
equal installments commencing, October 1998. Under the Credit Facility, the
Company is obligated to pay certain fees to the Bank, including a commitment
fee based on the unused portion of the commitment. The Credit Facility
contains customary restrictive covenants (including restrictions on the
payment of dividends and the incurrence of additional indebtedness) and
requires the Company to maintain a current ratio of not less than 1.0 to 1.0,
a ratio of Adjusted EBITDA to interest expense of not less than 2.0 to 1 and
a minimum tangible net worth. At March 31, 1997, the Company's current ratio
was 1.4 to 1.0, the ratio of Adjusted EBITDA to interest expense was 4.4 to 1
and the Company exceeded the tangible net worth test. Borrowings under the
Credit Facility are secured by substantially all of the assets of the Company.
CAPITAL EXPENDITURES
The Company requires capital primarily for the exploration, development and
acquisition of oil and gas properties, the repayment of indebtedness and general
working capital needs. The Company's capital budget for 1997 is $26.0 million
of which approximately $7.2 will be expended for exploratory drilling,
approximately $13.6 million for exploitation activities, approximately $2.5
million for the purchase of undeveloped acreage and approximately $2.7 million
for new seismic projects. During the three months ended March 31, 1997,
approximately $15.2 million was expended in oil and gas activities. The Company
has previously stated that its capital budget is largely discretionary and may
be adjusted as appropriate during the year. While the first quarter capital
expenditures are not indicative of a full year of activity, the Company does
currently anticipate that it will increase the 1997 capital budget and will
announce such change upon completion of its review of current activities.
12
<PAGE>
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(A) EXHIBITS
Exhibit 27
(B) REPORTS ON FORM 8-K
The Company did not file a report on Form 8-K for the quarter for
which this report is filed.
13
<PAGE>
S I G N A T U R E S
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.
COSTILLA ENERGY, INC.
Date: May 14, 1997 By: /s/ BOBBY W. PAGE
-------------------------------
Bobby W. Page
Senior Vice President
and Chief Financial Officer
14
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
UNAUDITED FINANCIAL STATEMENTS OF COSTILLA ENERGY, INC. FOR THE THREE MONTH
PERIOD ENDED MARCH 31, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> MAR-31-1997
<CASH> 11,002
<SECURITIES> 0
<RECEIVABLES> 16,658
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 29,796
<PP&E> 162,699
<DEPRECIATION> (25,735)
<TOTAL-ASSETS> 172,131
<CURRENT-LIABILITIES> 27,720
<BONDS> 100,244
0
0
<COMMON> 1,048
<OTHER-SE> 41,815
<TOTAL-LIABILITY-AND-EQUITY> 172,131
<SALES> 19,613
<TOTAL-REVENUES> 20,378
<CGS> 7,369
<TOTAL-COSTS> 8,709
<OTHER-EXPENSES> 4,914
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,708
<INCOME-PRETAX> 2,532
<INCOME-TAX> 253
<INCOME-CONTINUING> 2,279
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,279
<EPS-PRIMARY> .22
<EPS-DILUTED> .22
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