<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, 1998
COMMISSION FILE NUMBER 333-12707
MARINER ENERGY, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 86-0460233
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
580 WESTLAKE PARK BLVD., SUITE 1300
HOUSTON, TEXAS 77079
(Address of principal executive offices including Zip Code)
(281) 584-5500
(Registrant's telephone number)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirement for the past 90 days. Yes [ ] No [X]
Note: The Company is not subject to the filing requirements of the
Securities Exchange Act of 1934. This quarterly report is filed
pursuant to contractual obligations imposed on the Company by an
Indenture, dated as of August 1, 1996, under which the Company is the
issuer of certain debt.
As of August 13, 1998, there were 1,000 shares of the registrant's
common stock outstanding.
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MARINER ENERGY, INC.
FORM 10-Q
JUNE 30, 1998
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
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<S> <C>
PART I - FINANCIAL INFORMATION
Item 1. Independent Certified Public Accountants' Report on Review of Interim Financial Information.................. 1
Balance Sheets at June 30, 1998 (unaudited) and December 31, 1997............................................ 2
Statements of Operations for the three and six-months ended June 30, 1998 and 1997 (unaudited)............... 3
Statements of Cash Flows for the three and six-months ended June 30, 1998 and 1997 (unaudited)............... 4
Notes to Financial Statements (unaudited).................................................................... 5
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations........................ 7
Item 3. Quantitative and Qualitative Disclosures about Market Risk.................................................. 12
PART II - OTHER INFORMATION
Item 1. Legal Proceedings........................................................................................... 13
Item 2. Changes in Securities and Use of Proceeds................................................................... 13
Item 3. Defaults Upon Senior Securities............................................................................. 13
Item 4. Submission of Matters to a Vote of Security Holders......................................................... 13
Item 5. Other Information........................................................................................... 13
Item 6. Exhibits and Reports on Form 8-K............................................................................ 13
SIGNATURE ........................................................................................................... 14
</TABLE>
<PAGE> 3
PART I, ITEM 1.
INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS' REPORT ON REVIEW OF INTERIM FINANCIAL
INFORMATION
Board of Directors and Stockholder
Mariner Energy, Inc.
Houston, Texas
We have reviewed the accompanying balance sheet of Mariner Energy, Inc. as of
June 30, 1998 and the related statements of operations for the three and
six-month periods ended June 30, 1998 and 1997 and of cash flows for the
six-month periods ended June 30, 1998 and 1997. 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, 1997, and the related statements
of operations, stockholder's equity, and cash flows for the year ended December
31, 1997 (not presented herein), and in our report dated March 20, 1998, 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,
1997 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, 1998
1
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MARINER ENERGY, INC.
BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
June 30, December 30,
1998 1997
------------ ------------
(Unaudited)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 3,293 $ 9,131
Receivables 22,485 18,585
Prepaid expenses and other 4,629 3,628
------------ ------------
Total current assets 30,407 31,344
------------ ------------
PROPERTY AND EQUIPMENT:
Oil and gas properties, at full cost:
Proved 270,012 222,829
Unproved, not subject to amortization 72,419 36,526
------------ ------------
Total 342,431 259,355
Other property and equipment 2,804 2,222
Accumulated depreciation, depletion and amortization (100,213) (84,236)
------------ ------------
Total property and equipment, net 245,022 177,341
------------ ------------
OTHER ASSETS, NET OF AMORTIZATION 3,742 3,892
------------ ------------
TOTAL ASSETS $ 279,171 $ 212,577
============ ============
LIABILITIES AND STOCKHOLDER'S EQUITY
CURRENT LIABILITIES:
Accounts payable $ 3,898 $ 5,556
Accrued liabilities 40,602 29,908
Accrued interest 4,479 4,443
------------ ------------
Total current liabilities 48,979 39,907
------------ ------------
OTHER LIABILITIES 5,270 1,922
LONG-TERM DEBT:
Subordinated notes 99,625 99,574
Revolving Credit Facility 42,250 14,000
------------ ------------
Total long-term debt 141,875 113,574
------------ ------------
STOCKHOLDER'S EQUITY:
Common stock, $1 par value; 1,000 shares authorized,
issued and outstanding 1 1
Additional paid-in-capital 124,875 96,075
Accumulated deficit (41,829) (38,902)
------------ ------------
Total stockholder's equity 83,047 57,174
------------ ------------
TOTAL LIABILITIES and STOCKHOLDER'S EQUITY $ 279,171 $ 212,577
============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
2
<PAGE> 5
MARINER ENERGY, INC.
STATEMENTS OF OPERATIONS (UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
Three Months Ended June 30 Six Months Ended June 30
-------------------------- --------------------------
1998 1997 1998 1997
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
REVENUES:
Oil sales $ 2,701 $ 5,122 $ 6,067 $ 8,070
Gas sales 12,291 10,519 23,640 21,254
---------- ---------- ---------- ----------
Total revenues 14,992 15,641 29,707 29,324
---------- ---------- ---------- ----------
COSTS AND EXPENSES:
Lease operating expenses 2,767 2,677 5,578 5,156
Depreciation, depletion and amortization 7,888 6,652 16,274 13,881
Impairment of oil and gas properties -- -- -- 28,514
General and administrative expenses 1,059 831 1,853 1,369
Provision for litigation -- -- 2,960 --
---------- ---------- ---------- ----------
Total costs and expenses 11,714 10,160 26,665 48,920
---------- ---------- ---------- ----------
OPERATING INCOME (LOSS) 3,278 5,481 3,042 (19,596)
INTEREST:
Income 153 164 283 248
Expense (3,385) (2,639) (6,252) (5,278)
---------- ---------- ---------- ----------
INCOME (LOSS) BEFORE TAXES 46 3,006 (2,927) (24,626)
PROVISION FOR INCOME TAXES -- -- -- --
---------- ---------- ---------- ----------
NET INCOME (LOSS) $ 46 $ 3,006 $ (2,927) $ (24,626)
========== ========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
3
<PAGE> 6
MARINER ENERGY, INC.
STATEMENTS OF CASH FLOWS (UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
Six Months Ended June 30
--------------------------
1998 1997
---------- ----------
<S> <C> <C>
OPERATING ACTIVITIES:
Net loss $ (2,927) $ (24,626)
Adjustments to reconcile net loss to net cash provided by operating
activities:
Depreciation, depletion and amortization 16,756 14,303
Impairment of oil and gas properties -- 28,514
Provision for litigation 2,960 --
Changes in operating assets and liabilities:
Receivables (3,900) 1,359
Prepaid expenses and other (1,001) (531)
Other assets (190) --
Accounts payable and accrued liabilities 9,072 2,647
---------- ----------
Net cash provided by (used in) operating activities 20,770 21,666
---------- ----------
INVESTING ACTIVITIES:
Additions to oil and gas properties (83,076) (19,698)
Additions to other property and equipment (582) (342)
---------- ----------
Net cash used in investing activities (83,658) (20,040)
---------- ----------
FINANCING ACTIVITIES:
Proceeds from revolving credit facility 43,250 --
Payments on revolving credit facility (15,000) --
Equity contribution 28,800
Payment of debt issue costs -- (29)
---------- ----------
Net cash provided by financing activities 57,050 (29)
---------- ----------
INCREASE (DECREASE) IN CASH AND CASH EQUIV (5,838) 1,597
CASH AND CASH EQUIV. AT BEGINNING OF PERIOD 9,131 10,819
---------- ----------
CASH AND CASH EQUIV. AT END OF PERIOD $ 3,293 $ 12,416
========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
4
<PAGE> 7
MARINER ENERGY, INC.
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
1. Basis of Presentation
The financial statements of Mariner Energy, Inc. (the "Company") included
herein have been prepared, without audit, pursuant to the rules and regulations
of the Securities and Exchange Commission ("SEC"). Accordingly, they reflect all
adjustments (consisting only of normal, recurring accruals) which are, in the
opinion of management, necessary for a fair presentation of the financial
results for the interim periods. Certain information and notes normally included
in financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted pursuant to such rules and
regulations, although the Company believes that the disclosures are adequate to
make the information presented not misleading. These financial statements should
be read in conjunction with the financial statements and notes thereto included
in the Company's 10-K for the year ended December 31, 1997.
2. Oil and Gas Properties
Under the full cost method of accounting for oil and natural gas properties,
the net carrying value of proved oil and natural gas properties is limited to an
estimate of the future net revenues, discounted at 10%, from proved oil and
natural 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. No impairment charge was required during the period ending
June 30, 1998.
3. Revolving Credit Facility
Following the semi-annual borrowing base redetermination review, effective
May 4, 1998, the borrowing base under the Company's revolving credit facility
(the "Revolving Credit Facility") with NationsBank of Texas, N.A.
("NationsBank") as agent for a group of lenders, was increased from $58 million
to $60 million. The Company, NationsBank and the group of lenders have agreed to
an extension of the Revolving Credit Facility's maturity date from June 28, 1999
to October 1, 1999.
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
three and six-month period ending June 30, 1998, the Company hedged
approximately 75% and 51%, respectively, of its natural gas production and none
of its crude oil production, the results of which were included in oil and gas
revenues. At June 30, 1998, the Company had natural gas hedging contracts,
including related basis differentials, in place for July through October 1998
with notional volumes of 40,000 Mmbtu per day at $2.33 per Mmbtu.
5. Deepwater Rig Commitment
To support its deepwater strategy, the Company has entered into a letter of
intent regarding the commitment of a deepwater rig to Mariner and another
company on an equally shared basis for five years beginning in late 1999 or
early 2000. Currently, the rig is being upgraded to be capable of drilling in
water depths to 6,000 feet.
5
<PAGE> 8
6. Provision for Litigation
As reported in the Company's 1997 10-K, Mariner Energy is the defendant in
litigation in the district court of Hardin County, Texas in which the plaintiff,
ETOCO, Inc., sought damages of $8.2 million plus court costs related to the
Company's operations in the Sandy Lake field. On April 22, 1998, the jury
returned a verdict partially in favor of the plaintiff in the amount of $2.4
million, before attorney's fees and interest. The Company strongly disagrees
with the jury verdict, and will vigorously contest the verdict in the trial
court and then, if necessary, in the appellate courts. In the first quarter of
1998, a $3.0 million charge was recorded to provide for this litigation-related
cost contingency. Results of the contested verdict should be known within 12 to
24 months.
6
<PAGE> 9
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,
1998 and 1997 and the three-month periods ended June 30, 1998 and 1997 should be
read in conjunction with the financial statements of the Company and Notes
thereto included elsewhere in this Form 10-Q and with the Financial Statements,
Notes and Management's Discussion and Analysis of Financial Condition and
Results of Operations included in the Company's Annual Report on Form 10-K for
the year ended December 31, 1997, filed with the Securities and Exchange
Commission on March 30, 1998.
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standard No. 133 "Accounting for Derivative Instruments and
Hedging Activities". The new standard requires companies to record derivatives
on the balance sheet as assets or liabilities, measured at fair value. Gains or
losses resulting from changes in the values of those derivatives would be
accounted for depending on the use of the derivative and whether it qualifies
for hedge accounting. The Company has not determined the impact which would
result from this new standard. This new standard will become effective for the
year ending December 31, 2000.
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, and actual results could differ materially from the
Company's expectations. Factors that could influence these results include, but
are not limited to, oil and natural gas price volatility, results of future
drilling, availability of drilling rigs, and future production and costs.
7
<PAGE> 10
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, June 30,
------------------------------ ------------------------------
1998 1997 1998 1997
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Total revenue, $MM $ 15.0 $ 15.6 $ 29.7 $ 29.3
EBITDA, $MM (a) 11.2 12.1 22.3 22.8
Impairment of oil & gas properties, $MM (b) -- -- -- 28.5
Net income (loss), $MM -- 3.0 (2.9) (24.6)
Production:
Oil and condensate (Mbbls) 210 271 441 435
Natural Gas (Mmcf) 4,839 4,370 9,483 8,536
Natural Gas equivalents (Mmcfe) 6,099 5,996 12,129 11,146
Average realized sales prices:
Oil and condensate ($/Bbl) $ 12.87 $ 18.93 $ 13.75 $ 18.57
Natural Gas ($/Mcf) 2.54 2.41 2.49 2.49
Natural Gas equivalents ($/Mcfe) 2.46 2.61 2.45 2.63
Cash Margin per Mcfe (c):
Revenue (pre-hedge) $ 2.38 $ 2.52 $ 2.41 $ 2.82
Hedging impact 0.08 0.09 0.04 (0.19)
Lease operating expenses (0.45) (0.45) (0.46) (0.46)
Gross G&A costs (0.40) (0.34) (0.39) (0.30)
------------ ------------ ------------ ------------
Cash Margin $ 1.61 $ 1.82 $ 1.60 $ 1.87
============ ============ ============ ============
Capital Expenditures, $MM:
Exploration:
Leasehold and G&G costs $ 29.0 $ 2.1 $ 40.3 $ 5.8
Drilling 8.8 3.7 17.2 4.3
Development & other 15.9 2.7 22.8 7.6
Capitalized G&A and interest costs 1.7 1.4 3.4 2.3
------------ ------------ ------------ ------------
Total $ 55.4 $ 9.9 $ 83.7 $ 20.0
============ ============ ============ ============
</TABLE>
(a) - EBITDA equals earnings before interest, income taxes, depreciation,
depletion, amortization, provision for litigation and impairment of oil and gas
properties. EBITDA should be used as a supplement to, and not as a substitute
for, net earnings and net cash provided by operating activities (as disclosed in
the financial statements) in analyzing the Company's results of operations and
liquidity.
(b) - See Note 2 to Financial Statements in Item 1. of this report on Form 10-Q
for further explanation of the ceiling test impairment charges.
(c) - 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.
8
<PAGE> 11
RESULTS OF OPERATIONS FOR THE SECOND QUARTER OF 1998
NET PRODUCTION increased 2% to 6.1 Bcfe for the second quarter of 1998 from
6.0 Bcfe for the second quarter of 1997. Production increased due to production
which began subsequent to June 30, 1997 from two offshore discoveries made in
1996.
OIL AND GAS REVENUES decreased 4% to $15.0 million for the second quarter of
1998 from $15.6 million for the second quarter of 1997. The decrease was the
result of lower realized oil and natural gas prices (on an equivalent Mcf basis)
between the two quarters, net of hedging, which was caused primarily by reduced
oil prices. Hedging activities for the second quarter of 1998 increased the
average realized sales price received per Mcfe by $0.08 and revenues by $0.5
million. In the second quarter of 1997, hedging activities increased the average
realized sales price received by $0.09 per Mcfe and revenues by $0.6 million.
During the second quarter of 1998, approximately 60% of the Company's equivalent
production was subject to hedge positions, compared with approximately 54% for
the same quarter in 1997.
LEASE OPERATING EXPENSES increased 3% to $2.8 million for the second quarter
of 1998, from $2.7 million for the second quarter of 1997, due primarily to the
increased production discussed above.
DEPRECIATION, DEPLETION AND AMORTIZATION EXPENSE (DD&A) increased 19% to
$7.9 million for the second quarter of 1998, from $6.7 million for the second
quarter of 1997, primarily due to a 16% increase in the unit-of-production DD&A
rate to $1.29 per Mcfe from a post impairment rate of $1.11 per Mcfe. The higher
rate for the second quarter of 1998 was primarily due to higher drilling and
completion costs.
GENERAL AND ADMINISTRATIVE EXPENSES, which are net of overhead
reimbursements received by the Company from other working interest owners,
increased 38% to $1.1 million for the second quarter of 1998, from $0.8 million
for the second quarter of 1997, due primarily to increased personnel related
costs in 1998 and lower overhead reimbursement from drilling program partners.
INTEREST EXPENSE increased 30% to $3.4 million for the second quarter of
1998, from $2.6 million for the second quarter of 1997 due primarily to a higher
average debt level.
INCOME (LOSS) BEFORE INCOME TAXES as a result of the foregoing was $46
thousand net income, down from net income of $3.0 million reported for the same
period in 1997 primarily due to lower oil prices and higher DD&A expenses.
9
<PAGE> 12
RESULTS OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 1998
NET PRODUCTION increased 9% to 12.1 Bcfe for the six months ended June 30,
1998 from 11.1 Bcfe for the six months ended June 30, 1997. The increase was due
to the expanded capacity at the Sandy Lake processing plant which became
operational during the first quarter of 1997 and production which began
subsequent to June 30, 1997 from two offshore discoveries made in 1996. This
increase was offset in part by the natural production decline on offshore
properties.
OIL AND GAS REVENUES of $29.7 million for the six months ended June 30, 1998
increased $0.4 million, or 1%, compared with $29.3 million for the same period
in 1997. The increase was the result of the increased production discussed
above, offset almost entirely by a 7% decrease in realized oil and natural gas
prices (on an equivalent Mcf basis) between the two periods, net of hedging.
Hedging activities for the six months ended June 30, 1998 increased the average
realized sales price received per Mcfe by $0.04 and revenues by $0.5 million. In
the first six months of 1997, hedging activities decreased the average realized
sales price received by $0.19 per Mcfe and revenues by $2.1 million. During the
first six months of 1998, approximately 40% of the Company's equivalent
production was subject to hedge positions, compared with approximately 66% for
the first six months of 1997.
LEASE OPERATING EXPENSES increased 8% to $5.6 million for the first six
months of 1998, from $5.2 million for the first six months of 1997, due
primarily to increased production volumes.
DEPRECIATION, DEPLETION AND AMORTIZATION EXPENSE (DD&A) increased 17% to
$16.3 million for the six months ended June 30, 1998, from $13.9 million for the
same period in 1997, as a result of the production increase mentioned above and
a 7% increase in the unit-of-production depreciation, depletion and amortization
rate to $1.34 per Mcfe from $1.25 per Mcfe. The rate increase was caused by
increased capital expenditures during the period between July 1, 1997 and June
30, 1998, 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. For the
six months ended June 30, 1998, no impairment was recorded.
PROVISION FOR LITIGATION of $3.0 million was recorded in the first quarter
of 1998 to provide for a litigation-related cost contingency. Mariner Energy is
the defendant in litigation in the district court of Hardin County, Texas in
which the plaintiff, ETOCO, Inc., sought damages of $8.2 million plus court
costs related to the Company's operations in the Sandy Lake field. On April 22,
1998, the jury returned a verdict partially in favor of the plaintiff in the
amount of $2.4 million, before attorney's fees and interest. The Company
strongly disagrees with the jury verdict, and will vigorously contest the
verdict in the trial court and then, if necessary, in the appellate courts.
Results of the contested verdict should be known within 12 to 24 months.
GENERAL AND ADMINISTRATIVE EXPENSES, which are net of overhead
reimbursements received by the Company from other working interest owners,
increased 36% to $1.9 million for the first half of 1998, from $1.4 million for
the first half of 1997, due primarily to increased personnel related costs and
lower reimbursements from drilling program partners in 1998.
INTEREST EXPENSE increased 19% to $6.3 million for the first six months of
1998, from $5.3 million for the first six months of 1997, due primarily to a
higher average debt level in 1998.
10
<PAGE> 13
INCOME (LOSS) BEFORE INCOME TAXES was a loss of $2.9 million for the six
months ended June 30, 1998, compared with a $24.6 million loss for the same
period in 1997, as a result of the factors described above.
LIQUIDITY, CAPITAL EXPENDITURES AND CAPITAL RESOURCES
At June 30, 1998, the Company had cash and cash equivalents of approximately
$3.3 million and a working capital deficit of approximately $18.6 million,
compared with a working capital deficit of $8.6 million at December 31, 1997.
The $10.0 million decrease in working capital was primarily due to increased
exploration and drilling activity during the first six months of 1998. The
Company expects to use cash flow from operations and additional debt borrowings
to reduce this deficit. The Company's primary sources of cash during the first
six months of 1998 were from operations, proceeds from the revolving credit
facility and proceeds from the sale of common stock to existing shareholders.
The primary use of cash for the same period 1997 was for capital expenditures
associated with exploration and development.
The Company had a net cash outflow of $5.8 million for the first six months
of 1998, resulting from capital expenditures of $83.7 million, offset in part by
cash inflow from operations of $20.8 million, net cash inflow of $28.3 million
from the Company's revolving credit facility and $28.8 million from the sale of
common stock.
Net cash provided by operating activities decreased by $0.9 million to $20.8
million in the first six months of 1998 from the corresponding period of 1997,
primarily due to increased operating and administrative costs, which was
partially offset by higher oil and gas sales revenue.
Cash used in investing activities in the first six months of 1998 increased
$63.7 million to $83.7 million from $20.0 million for the same period in 1997
due primarily to increased capital expenditures for exploration and development
activities.
Cash provided by financing activities was $57.1 million for the first six
months of 1998 compared with none for the same period in 1997. Sources of this
cash included borrowings under the Revolving Credit Facility of $28.3 million.
During the first six months of 1998, the Company also completed the sale of
additional common stock to existing shareholders, with net proceeds of $28.8
million.
The energy markets have historically been very volatile, and there can be no
assurance that oil and natural gas prices will not be subject to wide
fluctuations in the future. 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 natural 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,
-------------------------
1998 1997
----------- -----------
<S> <C> <C>
Increase (decrease) in natural gas sales (in thousands) ..... $ 455 $ (1,465)
Decrease in oil sales (in thousands) ........................ -- (614)
Effect of hedging transactions on average natural gas
sales price (per Mcf) ................................. 0.05 (0.17)
Effect of hedging transactions on average oil sales price
(per Bbl) .............................................. -- (1.41)
</TABLE>
11
<PAGE> 14
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, 1998.
<TABLE>
<CAPTION>
------------------------------------------------------
Weighted
Hedge Quantity Average Price
Mmbtu $/Mmbtu
-------------------------- --------------------
<S> <C> <C>
July-October 1998............. 4,920,000 $ 2.33
</TABLE>
Capital expenditures for the first six months of 1998, excluding capitalized
indirect costs of $3.4 million, amounted to $80.3 million and consisted of $40.3
million of leasehold and G&G costs, $17.2 million for exploratory drilling and
$22.3 million for development. Leasehold and G&G costs included lease bonus
payments of $29.2 million where the Company was the successful bidder on 9
Deepwater Gulf blocks at the March 18, 1998 Outer Continental Shelf Central Gulf
of Mexico Oil and Gas Lease Sale 169. As a result of the lease purchases, 1998
capital expenditures are expected to be $120 to $125 million.
Debt outstanding as of June 30, 1998 was approximately $141.9 million,
including $100 million of subordinated senior notes and $42 million drawn on the
Revolving Credit Facility. Following the semi-annual borrowing base
redetermination, on May 4, 1998, the borrowing base under the Revolving Credit
Facility was increased from $58 million to $60 million, giving the Company
additional available borrowing capacity of approximately $18 million at June 30,
1998. All amounts outstanding under the Revolving Credit Facility are due
October 1, 1999. Subsequent to June 30, 1998, the Company borrowed an additional
$15 million as of August 12, 1998, on its Revolving Credit Facility.
In June 1998, existing shareholders of Mariner Holdings, Inc., the Company's
parent, contributed an aggregate of approximately $28.8 million of net equity
capital to Mariner Holdings, which in turn contributed that capital to the
Company. The proceeds of the equity investment were used to reduce borrowings on
the Revolving Credit Facility and to supplement funding of the Company's 1998
capital expenditure plan.
In order for the Company to fund its remaining planned activities in 1998,
the Company will be required to supplement its cash flows from operations and
revolving credit facility borrowings with additional debt financing or equity
contributions. The Company anticipates additional debt and/or equity financing
to fund its remaining 1998 planned activities. However, the Company's capital
resources still may not be sufficient to meet the Company's anticipated future
requirements for working capital, capital expenditures and scheduled payments of
principal and interest on its indebtedness. There can be no assurance that
anticipated growth will be realized, that the Company's business will generate
sufficient cash flow from operations or that future borrowings or equity capital
will be available in an amount sufficient to enable the Company to service its
indebtedness or make necessary capital expenditures. In addition, depending on
the levels of its cash flow and capital expenditures (the latter of which are,
to a large extent, discretionary), the Company may need to refinance a portion
of the principal amount of its senior subordinated debt at or prior to maturity.
However, there can be no assurance that the Company would be able to obtain
financing on acceptable terms to complete a refinancing.
To support its deepwater strategy, the Company has entered into a letter of
intent regarding the commitment of a deepwater rig to Mariner and another
company on an equally shared basis for five years beginning in late 1999 or
early 2000. Currently, the rig is being upgraded to be capable of drilling in
water depths to 6,000 feet.
PART I, ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Not applicable.
12
<PAGE> 15
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
As reported in the Company's 1997 Annual Report on Form 10-K, Mariner
Energy is the defendant in litigation in the district court of Hardin County,
Texas in which the plaintiff, ETOCO, Inc., sought damages of $8.2 million plus
court costs related to the Company's operations in the Sandy Lake field. On
April 22, 1998, the jury returned a verdict partially in favor of the plaintiff
in the amount of $2.4 million, before attorney's fees and interest. The Company
strongly disagrees with the jury verdict, and will vigorously contest the
verdict in the trial court and then, if necessary, in the appellate courts.
Results of the contested verdict should be known within 12 to 24 months.
Although no assurances can be given, the Company believes that the ultimate
outcome of the above litigation will not have a material adverse effect on the
Company's financial position. The Company recorded a $3.0 million provision for
litigation in the first quarter of 1998 relating to this case.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) The following exhibits are filed herewith.
10.1 Second Amendment to the Credit Agreement dated August 11,
1998
27.1 Financial Data Schedule
(b) The Company filed no Current Reports on Form 8-K during the quarter
ended June 30, 1998.
13
<PAGE> 16
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
MARINER ENERGY, INC.
Date: August 13, 1998 /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)
14
<PAGE> 17
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ----------- -----------
<S> <C>
10.1 Second Amendment to the Credit Agreement dated August 11,
1998
27.1 Financial Data Schedule
</TABLE>
<PAGE> 1
EXHIBIT 10.1
SECOND AMENDMENT TO CREDIT AGREEMENT
THIS SECOND AMENDMENT TO CREDIT AGREEMENT (this "Second Amendment") is
made and entered into as of the 11th day of August, 1998, by and among MARINER
ENERGY, INC., a Delaware corporation ("Borrower"), NATIONSBANK, N.A., as Agent
("Agent"), TORONTO DOMINION (TEXAS), INC., as Co-Agent ("Co-Agent") and the
financial institutions listed on Schedule 1 hereto (individually a "Bank" and
collectively "Banks").
WHEREAS, Borrower, Agent and NationsBank of Texas, N.A. (in its
individual capacity, "NationsBank of Texas") entered into that certain Credit
Agreement dated June 28, 1996 (the "Original Credit Agreement");
WHEREAS, by various Assignment and Assumption Agreements dated August
12, 1996, NationsBank of Texas assigned thirty percent (30%) of the Total
Commitment to Toronto Dominion (Texas), Inc., twenty percent (20%) of the Total
Commitment to The Bank of Nova Scotia and twenty percent (20%) of the Total
Commitment to ABN AMRO Bank, N.V., Houston Agency, and pursuant to said
Assignment and Assumption Agreements, such financial institutions assumed the
obligations of NationsBank of Texas with respect to such assigned portions of
the Total Commitment;
WHEREAS, NationsBank of Texas, as Agent, Toronto Dominion (Texas),
Inc., as Co-Agent, and the Banks entered into that certain First Amendment to
Credit Agreement dated August 12, 1996 (the "First Amendment") (the Original
Credit Agreement, as amended by the First Amendment, is referred to herein as
the "Credit Agreement");
WHEREAS, NationsBank of Texas merged with and into NationsBank, N.A.,
so that Agent is the successor in interest by merger in such capacity to
NationsBank of Texas; and
WHEREAS, Borrower, Agent, Co-Agent and Banks desire to extend the
maturity date of the facility described in the Credit Agreement and to amend
certain other terms and provisions of the Credit Agreement, as set forth herein.
NOW, THEREFORE, FOR AND IN CONSIDERATION of the mutual covenants and
agreements contained herein, the parties hereto agree as follows:
1. The definition of "Agent" set forth in Section 1.1 of the Credit
Agreement is deleted in its entirety, and the following is substituted in its
place:
"Agent" means NationsBank, N.A. in its capacity as agent for Banks
hereunder or any successor thereto.
<PAGE> 2
2. The definition of "Maturity Date" set forth in Section 1.1 of the
Credit Agreement is deleted in its entirety, and the following is substituted in
its place:
"Maturity Date" means October 1, 1999.
3. Schedule 1 attached to the Credit Agreement is deleted in its
entirety, and Schedule 1 attached to this Second Amendment is substituted
therefor.
4. Borrower hereby represents and warrants to Agent, Co-Agent and each
Bank as follows:
(a) Borrower has (i) begun analyzing the operations of Borrower and
its subsidiaries and affiliates that could be adversely affected by
failure to become Year 2000 compliant (that is, that computer
applications, embedded microchips and other systems will be able to
perform date-sensitive functions prior to and after December 31, 1999),
and (ii) developed a plan for becoming Year 2000 compliant in a timely
manner, the implementation of which is on schedule in all material
respects. Borrower reasonably believes that it will become Year 2000
compliant for its operations and those of its subsidiaries and
affiliates on a timely basis, except to the extent that a failure to do
so could not reasonably expected to have a material adverse affect upon
the financial condition of Borrower;
(b) Borrower reasonably believes any suppliers and vendors that are
material to the operations of Borrower or its subsidiaries and
affiliates will be Year 2000 compliant for their own computer
applications except to the extent that a failure to do so could not
reasonably be expected to have a material adverse affect upon the
financial condition of Borrower; and
(c) Borrower will promptly notify Agent in the event Borrower
determines that any computer application which is material to the
operations of Borrower, its subsidiaries or any of its material vendors
or suppliers will not be fully Year 2000 compliant on a timely basis,
except to the extent that such failure could not reasonably be expected
to have a material adverse affect upon the financial condition of
Borrower.
5. The closing of the transactions contemplated by this Second
Amendment is subject to the satisfaction of the following conditions:
(a) All legal matters incident to the transactions herein
contemplated shall be satisfactory to counsel to Agent; and
(b) Agent shall have received a fully executed copy of this Second
Amendment.
-2-
<PAGE> 3
6. Except as amended hereby, the Credit Agreement shall remain
unchanged, and the terms, conditions and covenants of the Credit Agreement shall
continue and be binding upon the parties hereto.
7. Within thirty (30) days of the next action, whether by consent or at
a meeting, of the Board of Directors of Borrower and Guarantor, Borrower will
deliver an executed copy of resolutions of the Board of Directors of Borrower
and Guarantor in form and substance reasonably satisfactory to Agent ratifying
the execution, delivery and performance of this Second Amendment and all
documents, instruments and certificates referred to herein.
8. Each of the terms defined in the Credit Agreement is used in this
Second Amendment with the same meaning, except as otherwise indicated in this
Second Amendment. Each of the terms defined in this Second Amendment is used in
the Credit Agreement with the same meaning, except as otherwise indicated in the
Credit Agreement.
9. This Second Amendment may be executed in any number of counterparts,
each of which shall constitute an original, but all of which, when taken
together, shall constitute but one agreement.
10. THIS SECOND AMENDMENT SHALL BE DEEMED TO BE A CONTRACT UNDER,
SUBJECT TO, AND SHALL BE CONSTRUED FOR ALL PURPOSES IN ACCORDANCE WITH THE LAWS
OF THE STATE OF TEXAS.
11. THE CREDIT AGREEMENT, AS AMENDED, REPRESENTS THE FINAL AGREEMENT
BETWEEN THE PARTIES AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR,
CONTEMPORANEOUS OR SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES.
THERE ARE NO UNWRITTEN ORAL AGREEMENTS BETWEEN THE PARTIES.
IN WITNESS WHEREOF, the parties have caused this Second Amendment to be
executed by their duly authorized officers as of the day and year first above
written.
MARINER ENERGY, INC.
By: /s/ Frank A. Pici
---------------------------------------
Frank A. Pici
Title:Vice President of Finance and CFO
---------------------------------
-3-
<PAGE> 4
NATIONSBANK, N.A., as Agent
By: /s/ James R. Allred
---------------------------------------
James R. Allred
Title:Senior Vice President
---------------------------------
TORONTO DOMINION (TEXAS), INC.,
as Co-Agent
By: /s/ Jimmy Simien
---------------------------------------
Jimmy Simien
Title:Vice President
---------------------------------
NATIONSBANK, N.A.
By: /s/ James R. Allred
---------------------------------------
James R. Allred
Title:Senior Vice President
---------------------------------
TORONTO DOMINION (TEXAS), INC.
By: /s/ Jimmy Simien
---------------------------------------
Jimmy Simien
Title:Vice President
---------------------------------
THE BANK OF NOVA SCOTIA
By: /s/ F.C.H. Ashby
---------------------------------------
F.C.H. Ashby
Title:Senior Manager - Loan Operations
---------------------------------
-4-
<PAGE> 5
ABN AMRO BANK, N.V., Houston Agency
By: ABN AMRO North America, Inc., as agent
By: /s/ Charles W. Randall
-----------------------------------
Charles W. Randall
Title:Senior Vice President
-----------------------------
By: /s/ Stephanie Balette
-----------------------------------
Stephanie Balette
Title:Assistant Vice President
-----------------------------
Guarantor joins in the execution of this Second Amendment to evidence
that it hereby agrees and consents to all of the matters contained in this
Second Amendment and further agrees that (i) its liability under those three
certain Guarantys, each dated August 12, 1996, each being executed by Guarantor
for the benefit of a Bank (the "Guarantys") shall not be reduced, altered,
limited, lessened or in any way affected by the execution and delivery of this
Second Amendment or any of the instruments or documents referred to herein by
the parties hereto, except as specifically set forth herein or therein, (ii) the
Guarantys are hereby renewed, extended, ratified, confirmed and carried forward
in all respects, (iii) the Guarantys are and shall remain in full force and
effect and are and shall remain enforceable against Guarantor in accordance with
their terms and (iv) the Guarantys shall cover all indebtedness of Borrower to
the Banks described in the Credit Agreement as amended hereby.
MARINER HOLDINGS, INC.
By: /s/ Frank A. Pici
---------------------------------------
Frank A. Pici
Title:Vice President of Finance and CFO
---------------------------------
"GUARANTOR"
-5-
<PAGE> 6
SCHEDULE 1
Financial Institutions
<TABLE>
<CAPTION>
Financial Domestic Eurodollar Lending Commitment
Institution Lending Office Office Percentage Commitment
----------- -------------- ------ ---------- ----------
<S> <C> <C> <C> <C>
NationsBank, N.A. 700 Louisiana, 700 Louisiana, 30% $45,000,000
8th Floor 8th Floor
Houston, Texas Houston, Texas
77002 77002
Toronto Dominion 909 Fannin, 909 Fannin, 30% $45,000,000
(Texas), Inc. Suite 1700 Suite 1700
Houston, Texas Houston, Texas
77010 77010
The Bank of Nova 600 Peachtree St., 600 Peachtree St., 20% $30,000,000
Scotia N.E., Suite 2700 N.E., Suite 2700
Atlanta, Georgia Atlanta, Georgia
30308 30308
ABN AMRO Three Riverway, Three Riverway, 20% $30,000,000
Bank, N.V., Suite 1700 Suite 1700
Houston Agency Houston, Texas Houston, Texas
77056 77056
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 3,293
<SECURITIES> 0
<RECEIVABLES> 22,485
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 30,407
<PP&E> 345,235
<DEPRECIATION> 100,213
<TOTAL-ASSETS> 279,171
<CURRENT-LIABILITIES> 48,979
<BONDS> 0
0
0
<COMMON> 1
<OTHER-SE> 83,046
<TOTAL-LIABILITY-AND-EQUITY> 279,171
<SALES> 29,707
<TOTAL-REVENUES> 29,707
<CGS> 0
<TOTAL-COSTS> 26,665
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 6,252
<INCOME-PRETAX> (2,927)
<INCOME-TAX> 0
<INCOME-CONTINUING> (2,927)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,927)
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
