<PAGE> 1
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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, 1997
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 requirements* for the past 90 days. Yes X No
----- -----
*Although the registrant has no class of securities registered pursuant
to Section 12 of the Securities and Exchange Act of 1934 (the "Exchange
Act"), the registrant is required pursuant to Section 314(a)(1) of the
Trust Indenture Act of 1939, and is contractually obligated to holders
of certain debt, to file with the Commission such of the supplementary
and periodic information, documents, and reports which may be required
pursuant to Section 13 of the Exchange Act in respect of a security listed
and registered on a national securities exchange.
As of August 13, 1997, there were 1,000 shares of the registrant's
common stock outstanding.
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<PAGE> 2
MARINER ENERGY, INC.
FORM 10-Q
JUNE 30, 1997
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
- ------------------------------------------------------------------------------------------------------------------
<S> <C>
PART I - FINANCIAL INFORMATION
Item 1. Balance Sheets at June 30, 1997 and December 31, 1996................................................. 1
Statements of Operations for the six months ended June 30, 1997, for the three months ended
June 30, 1997 and June 30, 1996 (Mariner Energy, Inc.) and the three months ended
March 31, 1996 (Predecessor Company)............................................................... 2
Statements of Cash Flows for the six months ended June 30, 1997, for the three months ended
June 30, 1996 (Mariner Energy, Inc.) and the three months ended March 31, 1996
(Predecessor Company).............................................................................. 3
Notes to Financial Statements.......................................................................... 4
Independent Certified Public Accountants' Report on Review of Interim Financial Information............ 5
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.................. 6
Item 3. Quantitative and Qualitative Disclosures about Market Risk............................................ 11
PART II - OTHER INFORMATION
Item 1. Legal Proceedings..................................................................................... 12
Item 2. Changes in Securities................................................................................. 12
Item 3. Defaults Upon Senior Securities....................................................................... 12
Item 4. Submission of Matters to a Vote of Security Holders................................................... 12
Item 5. Other Information..................................................................................... 12
Item 6. Exhibits and Reports on Form 8-K...................................................................... 12
SIGNATURE ..................................................................................................... 13
</TABLE>
<PAGE> 3
PART I, ITEM 1. MARINER ENERGY, INC.
BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
June 30, December 31,
1997 1996
--------- ---------
(Unaudited)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 12,416 $ 10,819
Receivables 12,212 13,571
Prepaid expenses and other 949 418
--------- ---------
Total current assets 25,577 24,808
--------- ---------
PROPERTY AND EQUIPMENT:
Oil and gas properties, at full cost:
Proved 191,686 169,728
Unproved, not subject to amortization 19,051 21,310
--------- ---------
Total 210,737 191,038
Other property and equipment 2,013 1,671
Accumulated depreciation, depletion and amortization (66,957) (24,600)
--------- ---------
Total property and equipment, net 145,793 168,109
--------- ---------
OTHER ASSETS, NET OF AMORTIZATION 3,634 3,832
--------- ---------
TOTAL ASSETS $ 175,004 $ 196,749
========= =========
LIABILITIES AND STOCKHOLDER'S EQUITY
CURRENT LIABILITIES:
Accounts payable $ 7,020 $ 2,930
Accrued liabilities 10,454 12,288
Accrued interest 4,388 3,996
--------- ---------
Total current liabilities 21,862 19,214
--------- ---------
ACCRUAL FOR FUTURE ABANDONMENT COSTS 1,169 957
LONG-TERM DEBT:
Subordinated notes 99,546 99,525
Revolving Credit Facility -- --
--------- ---------
Total long-term debt 99,546 99,525
--------- ---------
STOCKHOLDER'S EQUITY:
Common stock, $1 par value; 1,000 shares authorized,
issued and outstanding 1 1
Additional paid-in-capital 95,744 95,744
Accumulated deficit (43,318) (18,692)
--------- ---------
Total stockholder's equity 52,427 77,053
--------- ---------
TOTAL LIABILITIES and STOCKHOLDER'S EQUITY $ 175,004 $ 196,749
========= =========
</TABLE>
The accompanying notes are an integral part of these
financial statements.
1
<PAGE> 4
MARINER ENERGY, INC.
STATEMENTS OF OPERATIONS (UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
Predecessor
Company
--------
Three Three Three
Six Months Months Months Months
Ended Ended Ended Ended
June 30, June 30, June 30, March 31,
1997 1997 1996 1996
-------- -------- -------- --------
<S> <C> <C> <C> <C>
REVENUES:
Oil sales $ 8,070 $ 5,122 $ 3,505 $ 3,644
Gas sales 21,254 10,519 12,444 10,134
-------- -------- -------- --------
Total revenues 29,324 15,641 15,949 13,778
-------- -------- -------- --------
COSTS AND EXPENSES:
Lease operating expenses 5,156 2,677 2,629 2,872
Depreciation, depletion and amortization 13,881 6,652 8,409 6,309
Impairment of oil and gas properties 28,514 -- 22,500 --
General and administrative expenses 1,369 831 734 712
-------- -------- -------- --------
Total costs and expenses 48,920 10,160 34,272 9,893
-------- -------- -------- --------
OPERATING INCOME (LOSS) (19,596) 5,481 (18,323) 3,885
INTEREST:
Related party income -- -- -- 2,110
Other income 248 164 146 57
Related party expense -- -- -- (381)
Other expense (5,278) (2,639) (2,681) (3,010)
Write-off bridge loan fees -- -- (1,011) --
-------- -------- -------- --------
INCOME (LOSS) BEFORE INCOME TAXES (24,626) 3,006 (21,869) 2,661
PROVISION FOR INCOME TAXES -- -- -- --
-------- -------- -------- --------
NET INCOME (LOSS) $(24,626) $ 3,006 $(21,869) $ 2,661
======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of these
financial statements.
2
<PAGE> 5
MARINER ENERGY, INC.
STATEMENTS OF CASH FLOWS (UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
Predecessor
Company
-------
Six Months Three Months Three Months
Ended Ended Ended
June 30, June 30, March 31,
1997 1996 1996
-------- --------- -------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net income (loss) $(24,626) $ (21,869) $ 2,661
Adjustments to reconcile net income (loss) to
net cash provided by operating activities:
Depreciation, depletion and amortization 14,303 9,607 6,437
Impairment of oil and gas properties 28,514 22,500 --
Imputed interest -- 1,322 --
Changes in operating assets and liabilities:
Receivables 1,359 1,342 (1,873)
Receivable from affiliates -- -- (2,109)
Other current assets (531) (656) (307)
Other assets -- (185) --
Accounts payable and accrued liabilities 2,647 1,733 832
Payables to affiliates -- -- (11)
-------- --------- -------
Net cash provided by operating activities 21,666 13,794 5,630
-------- --------- -------
INVESTING ACTIVITIES:
Purchase of Predecessor Company, net of cash
purchased of $5,438 -- (184,742) --
Additions to oil and gas properties (19,698) (10,701) (7,495)
Additions to other property and equipment (342) (239) (153)
Proceeds from sale of oil and gas properties -- 7,524 --
Issuance of long-term receivable to affiliates -- -- (1,000)
Repayment of long-term receivable from affiliates -- -- 3,000
-------- --------- -------
Net cash used in investing activities (20,040) (188,158) (5,648)
-------- --------- -------
FINANCING ACTIVITIES:
Principal payments of long-term debt -- (50,000) --
Payments of debt issue costs (29) -- --
Proceeds from long-term debt -- 92,000 --
Proceeds from revolving credit facility -- 50,000 --
Additional capital contributed by Parent
(Mariner Holdings, Inc.) -- 92,150 --
Sale of common stock -- 610 --
-------- --------- -------
Net cash provided by financing activities (29) 184,760 --
-------- --------- -------
INCREASE (DECREASE) IN CASH AND CASH EQUIV 1,597 10,396 (18)
CASH AND CASH EQUIV. AT BEGINNING OF PERIOD 10,819 -- 5,456
-------- --------- -------
CASH AND CASH EQUIV. AT END OF PERIOD $ 12,416 $ 10,396 $ 5,438
======== ========= =======
</TABLE>
The accompanying notes are an integral part of these
financial statements.
3
<PAGE> 6
MARINER ENERGY, INC.
NOTES TO FINANCIAL STATEMENTS
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 has been condensed or omitted pursuant to such rules and
regulations, although the Company believes that the disclosures are adequate to
make the information presented not misleading. These financial statements
should be read in conjunction with the financial statements and notes thereto
included in the Company's 10-K for the year ended December 31, 1996.
For the three months ended March 31, 1996, Hardy Oil & Gas USA Inc. (the
"Predecessor Company"), was a wholly owned subsidiary of Hardy Holdings, Inc.,
which is a wholly owned subsidiary of Hardy Oil & Gas plc, a public company
incorporated in the United Kingdom. In an acquisition effective April 1, 1996,
Mariner Holdings, Inc. acquired all the capital stock of the Company from Hardy
Holdings Inc. as part of a management-led buyout financed by Joint Energy
Development Investments Limited Partnership, an affiliate of Enron Capital &
Trade Resources Corp. The aggregate purchase price was approximately $185.5
million, including $14.5 million for net working capital. As a result of the
sale of Hardy Oil & Gas USA Inc.'s common stock, the Predecessor Company
changed its name to Mariner Energy, Inc.
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. As a result of this limitation and reduced
product prices in March 1997, a non-cash full cost ceiling test impairment
charge of $28.5 million was recorded in the quarter ended March 31, 1997. Price
increases subsequent to March 31, 1997 were sufficient to avoid the impairment
charge, but, given the unpredictable volatility of future prices, the Company
elected to record the charge in order to conservatively state the book value of
its assets.
3. Revolving Credit Facility
Following the annual borrowing base redetermination review, effective April
10, 1997, the borrowing base under the revolving credit facility with
NationsBank of Texas, N.A. as agent for a group of lenders was increased from
$50 million to $58 million.
4. Hedging Program
The Company has entered into crude oil and natural gas price swaps or other
similar hedging transactions to reduce its exposure to price reductions. In the
first six months of 1997, the Company hedged 66% of its crude oil and natural
gas production, the results of which were included in oil and gas revenues. At
June 30, 1997, the Company had two outstanding natural gas hedging contracts,
one with notional volumes of 35,500 Mmbtu per day at $2.16 per Mmbtu for July
1997 and the other with notional volumes of 40,000 Mmbtu per day at $2.17 per
Mmbtu for the months of August through October 1997.
4
<PAGE> 7
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 financial statements of Mariner Energy, Inc.,
formerly Hardy Oil & Gas USA Inc. (the "Predecessor Company"), as listed in the
Table of Contents in Item 1. 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, 1996, and the related
statements of operations, stockholder's equity, and cash flows for the nine
months ended December 31, 1996 (not presented herein), and the three months
ended March 31, 1996 (stockholder's equity not presented herein); and, in our
report dated March 7, 1997, 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, 1996 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 13, 1997
5
<PAGE> 8
PART I, ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS.
The following review of operations for the six month periods ended June 30,
1997 and 1996 and the three month periods ended June 30, 1997 and 1996 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 Form 10-K for the year ended
December 31, 1996.
INFORMATION REGARDING FORWARD LOOKING STATEMENTS
All statements other than statements of historical fact included in this
quarterly report on Form 10-Q, including, without limitation, statements
contained in this "Management's Discussion and Analysis of Financial Condition
and Results of Operations" regarding the Company's financial position, business
strategy, plans and objectives of management of the Company for future
operations and industry conditions, are forward-looking statements. Although
the Company believes that the expectations reflected in such forward-looking
statements are reasonable, it can give no assurance that such expectations will
prove to have been correct.
6
<PAGE> 9
RESULTS OF OPERATIONS
The following table sets forth certain information regarding results of
operations for the periods shown:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
---------------------------- --------------------------------
June 30, 1997 June 30, 1996 June 30, 1997 June 30, 1996(a)
------------- ------------- ------------- ----------------
<S> <C> <C> <C> <C>
Total revenue, $MM $ 15.7 $ 15.9 $ 29.3 $ 29.7
EBITDA, $MM (b) 12.1 12.6 22.8 22.8
Impairment of oil & gas properties (c) -- 22.5 28.5 22.5
Net income (loss), $MM 3.0 (21.9) (24.6) (19.2)(a)
Production:
Oil and condensate (Mbbls) 271 179 435 379
Natural gas (Mmcf) 4,370 5,071 8,535 10,178
Natural gas equivalents (Mmcfe) 5,996 6,145 11,145 12,452
Average sales prices post-hedging:
Oil and condensate ($/Bbl) $ 18.93 $ 19.62 $ 18.57 $ 18.88
Natural gas ($/Mcf) 2.41 2.45 2.49 2.22
Natural gas equivalents ($/Mcfe) 2.61 2.60 2.63 2.39
Cash Margin (d) per Mcfe:
Revenue (pre-hedge) $ 2.52 $ 2.63 $ 2.82 $ 2.59
Hedging impact 0.09 (0.03) (0.19) (0.20)
Lease operating expenses (0.45) (0.43) (0.46) (0.44)
Gross G&A costs (0.34) (0.27) (0.30) (0.30)
----------- ----------- ------------ ------------
Cash Margin $ 1.82 $ 1.90 $ 1.87 $ 1.65
=========== =========== ============ ============
Capital Expenditures, $MM:
Exploration $ 7.0 $ 8.8 $ 12.1 $ 13.6
Development & other 2.9 2.1 7.9 5.0
----------- ----------- ------------ ------------
Total $ 9.9 $ 10.9 $ 20.0 $ 18.6
=========== =========== ============ ============
</TABLE>
(a) - Includes first quarter 1996 results of Predecessor to Mariner Energy,
Inc. (formerly named "Hardy Oil & Gas USA Inc.") prior to the effective date of
its acquisition by Mariner Holdings, Inc. on April 1, 1996. Note that net
income (loss) amounts for the six months ended June 30, 1997 and 1996 are not
comparable due to differences in cost basis between Mariner and the Predecessor
Company. None of the other data in the table is impacted by the acquisition of
Hardy Oil & Gas USA Inc. by Mariner Holdings, Inc.
(b) - EBITDA equals earnings before interest, income taxes, depletion,
depreciation, amortization and impairment of oil and gas property.
(c) - See Note 2 to Financial Statements in Item 1. of this report on Form 10-Q
for further explanation of the ceiling test impairment charge.
(d) 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.
7
<PAGE> 10
RESULTS OF OPERATIONS FOR THE SECOND QUARTER OF 1997
NET PRODUCTION decreased 2% to 6.0 Bcfe for the second quarter of 1997 from
6.1 Bcfe for the second quarter of 1996. While production from onshore
properties rose 62% to 3.0 Bcfe for the second quarter of 1997 due to the Sandy
Lake plant expansion from 1.9 Bcfe for the same period in 1996, the overall
decrease was due to the natural production decline on offshore properties.
OIL AND GAS REVENUES for the second quarter of 1997 decreased $0.3 million,
or 2%, compared with the same quarter of 1996. The decrease was the result of
the decreased production discussed above, offset almost entirely by an increase
in realized oil and gas prices (on an equivalent Mcf basis) between the two
quarters, net of hedging. Hedging activities for the second quarter of 1997
increased the average realized sales price received per Mcfe by $0.09 and
revenues by $0.6 million. In the second quarter of 1996, hedging activities
decreased the average realized sales price received by $0.03 per Mcfe and
revenues by $0.2 million. During the second quarter of 1997, approximately 54%
of the Company's equivalent production was subject to hedge positions, compared
with approximately 30% for the same quarter in 1996.
LEASE OPERATING EXPENSES increased 4% to $2.7 million for the second
quarter of 1997, from $2.6 million for the second quarter of 1996, due
primarily to the increased production at the Sandy Lake processing facility.
DEPRECIATION, DEPLETION AND AMORTIZATION EXPENSE (DD&A) decreased 20% to
$6.7 million for the second quarter of 1997, from $8.4 million for the second
quarter of 1996, as a result of a 19% decrease in the unit-of-production
depreciation, depletion and amortization rate to $1.11 per Mcfe from $1.37 per
Mcfe and the 2% reduction in equivalent volumes produced. The lower rate for
the second quarter of 1997 was primarily due to the $28.5 million non-cash full
cost ceiling test impairment recorded at the end of the first quarter of 1997.
IMPAIRMENT OF OIL AND GAS PROPERTIES amounting to $22.5 million was
recorded in the second quarter of 1996 for the non-cash full cost ceiling test
writedown relating to Mariner Holdings' acquisition of the Company. No
equivalent impairment was recorded during the second quarter of 1997.
GENERAL AND ADMINISTRATIVE EXPENSES, which are net of overhead
reimbursements received by the Company from other working interest owners,
increased 14% to $0.8 million for the second quarter of 1997, from $0.7 million
for the second quarter of 1996, due primarily to higher employment levels in
1997.
INTEREST EXPENSE decreased 4% to $2.6 million for the second quarter of
1997, from $2.7 million for the second quarter of 1996. During the second
quarter of 1996, $1.0 million of bridge loan fees were written off as a result
of refinancing the JEDI Bridge Loan with the Revolving Credit Facility.
INCOME (LOSS) BEFORE INCOME TAXES rose to income of $3.0 million for the
second quarter of 1997, from a $21.9 million loss for the same period in 1996,
as a result of the factors described above.
RESULTS OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 1997
NOTE: Where revenue and expense items discussed below would have been
affected in a pro forma presentation of the acquisition by Mariner Holdings of
the stock of the Company (formerly "Hardy Oil & Gas USA, Inc."), the pro forma
impact on that item is discussed.
NET PRODUCTION decreased 10% to 11.1 Bcfe for the six months ended June 30,
1997 from 12.4 Bcfe for the six months ended July 30, 1996. The decrease was
due to the sale of non-core Permian Basin wells in April 1996 and by natural
production decline on offshore properties.
8
<PAGE> 11
OIL AND GAS REVENUES for the six months ended June 30, 1997 decreased $0.4
million, or 1%, compared with the same period in 1996. The decrease was the
result of the decreased production discussed above, offset almost entirely by a
10% increase in realized oil and gas prices (on an equivalent Mcf basis)
between the two periods, net of hedging. Hedging activities for the six months
ended June 30, 1997 reduced the average realized sales price received per Mcfe
by $0.19 and revenues by $2.1 million. In the first six months of 1996, hedging
activities decreased the average realized sales price received by $0.20 per
Mcfe and revenues by $2.5 million. During the first six months of 1997,
approximately 66% of the Company's equivalent production was subject to hedge
positions, compared with approximately 38% for the first six months of 1996.
LEASE OPERATING EXPENSES decreased 5% to $5.2 million for the first six
months of 1997, from $5.5 million for the first six months of 1996, due
primarily to the sale of the non-core Permian Basin wells in April 1996 and the
reduced production volumes.
DEPRECIATION, DEPLETION AND AMORTIZATION EXPENSE (DD&A) decreased 5% to
$13.9 million for the six months ended June 30, 1997, from $14.7 million for
the same period in 1996, as a result of a 10% reduction in equivalent volumes
produced, which is partially offset by a 5% increase in the unit-of-production
depreciation, depletion and amortization rate to $1.24 per Mcfe from $1.18 per
Mcfe. On a pro forma basis, DD&A for the first six months of 1997 would have
decreased $1.7 million from $15.6 million in 1996. This was a result of net
production being 10% lower in the first six months of 1997, and a 1% decrease
in the DD&A rate from $1.25 per Mcfe to $1.24 per Mcfe. The pro forma rate
decrease was caused by the March 31, 1997 impairment of oil and gas properties,
offset by increased capital expenditures during the period between July 1, 1996
and June 30, 1997, with relatively less proved reserve additions during the
same time period.
IMPAIRMENT OF OIL AND GAS PROPERTIES amounting to $28.5 million was
recorded in the first quarter of 1997 for the non-cash full cost ceiling test
impairment using prices in effect at March 31, 1997. Price increases subsequent
to March 31, 1997 were sufficient to avoid the impairment charge, but, given
the unpredictable volatility of future prices, the Company elected to record
the charge in order to conservatively state the book value of its assets.
During the second quarter of 1996, a $22.5 million impairment of oil and gas
properties was recorded in conjunction with the full cost ceiling writedown
relating to Mariner Holdings' acquisition of the Company. On a pro forma basis,
the impairment recorded in 1996 would not have been required.
GENERAL AND ADMINISTRATIVE EXPENSES, which are net of overhead
reimbursements received by the Company from other working interest owners,
remained constant at $1.4 million for the six months ended June 30, 1997 and
1996. Higher employment costs in the second quarter of 1997 offset higher
overhead reimbursements in the first quarter of 1997.
INTEREST EXPENSE decreased 13% to $5.3 million for the first six months of
1997, from $6.1 million for the first six months of 1996, due primarily to the
22% decrease in average outstanding debt to $100.0 million, from $128.5
million, which was partially offset by a 13% increase in the average interest
rate paid on outstanding debt to 10.5%, from 9.32%. During the first six months
of 1996, the Company wrote off $1.0 million of loan fees related to the JEDI
Bridge Loan as a result of refinancing a portion of the amount with the
Revolving Credit Facility. Interest income also decreased 91% to $0.2 million
for the first six months of 1997, from $2.3 million for the first six months of
1996, due primarily to the collection of receivables from affiliates as part of
the acquisition by Mariner Holdings of the stock of the Company. On a pro forma
basis, interest expense would have increased by $0.1 million from the
historical first quarter of 1996 amount. Interest income would have decreased
by $2.1 million, due to the elimination of interest income related to
intercompany notes receivable that were repaid in connection with the
acquisition.
9
<PAGE> 12
INCOME (LOSS) BEFORE INCOME TAXES decreased to a loss of $24.6 million for
the six months ended June 30, 1997, from a $19.2 million loss for the same
period in 1996, as a result of the factors described above. On a pro forma
basis, the income for the historical first six months of 1996 would have been
$2.2 million, after the elimination of the full cost ceiling writedown and
adjustments to interest income and expense and recording additional DD&A
expense.
LIQUIDITY, CAPITAL EXPENDITURES AND CAPITAL RESOURCES
At June 30, 1997, the Company had cash and cash equivalents of
approximately $12.4 million and working capital of approximately $3.7 million.
During the first six months of 1997, the Company's primary source of cash was
from operations. The primary use of cash for the same period was for capital
expenditures associated with exploration and development.
The Company had a net cash inflow of $1.6 million for the first six months
of 1997, which was made up primarily of net cash inflow from operations of
$21.6 million, offset by capital expenditures of $20.0 million.
Net cash provided by operating activities increased by $2.2 million to
$21.6 million in the first six months of 1997 from the corresponding period of
1996, primarily due to higher natural gas and oil prices and reduced operating
and administrative costs, which was partially offset by lower production
volumes.
Cash flows used in investing activities in the first six months of 1997
decreased $173.8 million to $20.0 million due primarily to the second quarter
1996 purchase of the Predecessor Company for $184.7 million, which was
partially reduced by the $7.5 million sale of non-core Permian Basin wells in
the same quarter. The first quarter of 1996 included a $2.0 million net
collection of a long-term receivable from an affiliate of the Predecessor
Company. Capital expenditures increased $1.4 million to $20.0 million for the
first six months of 1997 from the same period in 1996.
The energy markets have historically been very volatile, and there can be
no assurance that oil and gas prices will not be subject to wide fluctuations
in the future. In an effort to reduce the effects of the volatility of the
price of oil and natural gas on the Company's operations, management has
adopted a policy of hedging oil and natural gas prices from time to time
through the use of commodity futures, options and swap agreements. While the
use of these hedging arrangements limits the downside risk of adverse price
movements, it may also limit future gains from favorable movements.
The following table sets forth the increase (decrease) in the Company's oil
and gas sales as a result of hedging transactions and the effects of hedging
transactions on prices during the periods indicated.
<TABLE>
<CAPTION>
Six Months Ended June 30
------------------------
1997 1996
------ -------
<S> <C> <C>
Increase (decrease) in natural gas sales (in thousands) .... $ (1,465) $ (2,411)
Increase (decrease) in oil sales (in thousands) ............ (614) (113)
Effect of hedging transactions on average gas sales price
(per Mcf) ............................................. (0.17) (0.24)
Effect of hedging transactions on average oil sales price
(per Bbl) ............................................. (1.41) (0.30)
</TABLE>
10
<PAGE> 13
The following table sets forth the Company's open hedging contracts for
natural gas and the weighted average prices hedged under various swap
agreements as of June 30, 1997.
<TABLE>
<CAPTION>
-------------- -----------
Hedge Quantity Fixed Price
Mmbtu $/Mmbtu
-------------- -----------
<S> <C> <C>
July 1997..................... 1,100,500 $2.16
August 1997................... 1,240,000 2.17
September 1997................ 1,200,000 2.17
October 1997.................. 1,240,000 2.17
</TABLE>
Total capital expenditures were $20.0 million for the first six months of
1997 of which $12.1 million was spent on exploration and $7.9 million on
development activities. The Company's capital expenditure budget for 1997 is
approximately $67 million. While delays have been encountered due to the
tightness in rig availability, the Company expects to approach the budgeted
level due to an active Deepwater Gulf drilling program over the last four
months of the year. The Company expects to fund these programs through cash
flow from operations and periodic borrowing under its presently undrawn
Revolving Credit Facility, under which the available borrowing base was
increased from $50 million to $58 million effective April 10, 1997. Actual
levels of capital expenditures may vary significantly due to a variety of
factors, including drilling results, oil and gas prices, industry conditions
including drilling rig availability, future acquisitions and availability of
capital. Though the 1997 capital budget does not include any acquisitions, the
Company expects to selectively pursue acquisition opportunities for proved
reserves where it believes significant operating improvement or exploration
potential exists.
The Company expects to fund its activities for the remainder of 1997
through a combination of cash flow from operations and the use of its Revolving
Credit Facility. Based upon the Company's current level of operations and
anticipated growth, management of the Company believes that available cash,
together with available borrowings under the Revolving Credit Facility and cash
provided by operating activities, will be adequate to meet the Company's
anticipated future requirements for working capital, capital expenditures and
scheduled payments of principal and interest on its indebtedness. However,
there can be no assurance that such anticipated growth will be realized, that
the Company's business will generate sufficient cash flow from operations or
that future borrowings 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 to complete a refinancing.
PART I, ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Not applicable
11
<PAGE> 14
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None
ITEM 2. CHANGES IN SECURITIES
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) The following exhibits are filed herewith.
27.1 Financial Data Schedule
(b) The Company filed no Current Reports on Form 8-K during the quarter
ended June 30, 1997.
12
<PAGE> 15
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.
MARINER ENERGY, INC.
Date: August 13, 1997 /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)
13
<PAGE> 16
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit
Number Description
- ------- -----------
<S> <C>
27.1 Financial Data Schedule
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> JUN-30-1997
<CASH> 12,416
<SECURITIES> 0
<RECEIVABLES> 12,212
<ALLOWANCES> 0
<INVENTORY> 36
<CURRENT-ASSETS> 25,577
<PP&E> 212,750
<DEPRECIATION> 66,957
<TOTAL-ASSETS> 175,004
<CURRENT-LIABILITIES> 21,862
<BONDS> 0
0
0
<COMMON> 1
<OTHER-SE> 52,426
<TOTAL-LIABILITY-AND-EQUITY> 175,004
<SALES> 29,324
<TOTAL-REVENUES> 29,324
<CGS> 0
<TOTAL-COSTS> 47,551
<OTHER-EXPENSES> 1,369
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 5,278
<INCOME-PRETAX> (24,626)
<INCOME-TAX> 0
<INCOME-CONTINUING> (24,626)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (24,626)
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
