1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(Mark One)
x Quarterly report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the quarterly period ended March 31, 1998
or
o Transition report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the transition period from __________ to _______________
Commission file number: 000-23701
SOUTHWEST ROYALTIES, INC. SOUTHWEST
ROYALTIES
(Exact Name of Registrant as HOLDINGS, INC.
Specified in Its Charter) (Exact
Name of Registrant as
Specified in Its Charter)
Delaware Delaware
(State or Other Jurisdiction of (State or
Other Jurisdiction of
Incorporation or Organization)
Incorporation or Organization)
75-1917432 75-2724264
(I.R.S. Employer (I.R.S.
Employer
Identification Number) Identification Number)
407 North Big Spring, Suite 300
Midland, Texas 79701
(Address of Principal Executive Offices) (Zip
Code)
Registrants' Telephone Number, Including Area Code: (915) 686-9
927
Not Applicable
(Former name, former address and former fiscal year, if changed
since last report)
Indicate by check 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 March 31, 1998
for Southwest Royalties, Inc......100
Number of shares of common stock outstanding as of March 31, 1998
for Southwest Royalties Holdings, Inc..1,075,868
<PAGE>
SOUTHWEST ROYALTIES, INC.
SOUTHWEST ROYALTIES HOLDINGS, INC.
TABLE OF CONTENTS
PART I - FINANCIAL INFORMATION
Page
Item 1. Consolidated Financial Statements
Consolidated Balance Sheets as of March 31, 1998 (unaudited)
and December 31, 1997 3
Consolidated Statements of Operations for the three months
ended
March 31, 1998 and 1997 (unaudited) 5
Consolidated Statements of Cash Flows for the three months
ended
March 31, 1998 and 1997 (unaudited) 7
Notes to Consolidated Financial Statements 9
Item 2. Management's Discussion and Analysis of Financial
Condition and
Results of Operations 13
PART II - OTHER INFORMATION
Item 6. Exhibits and
Reports on Form 8-K 17
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. Consolidated Financial Statements
SOUTHWEST ROYALTIES HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
March 31,December 3
1,
ASSETS 1998
1997
- -----------------------------------------------------------------
- -------------------------------------- -------------
(unaudited)
Current assets
Cash and cash equivalents $25,240 $27,365
Accounts receivable, net of allowance of $230 and $254,
respectively 6,587 8,376
Receivables from related parties 2,042 2,556
Other current assets 1,351 1,209
----------
- ---------
Total current assets 35,220
39,506
----------
- ---------
Oil and gas properties, using the full cost method of accounting
Proved 192,510
188,432
Unproved 4,547 4,554
----------
- ---------
197,057
192,986
Less accumulated depletion, depreciation and amortization
45,810 42,240
----------
- ---------
Oil and gas properties, net 151,247
150,746
----------
- ---------
Rental property, net 81,689
81,373
----------
- ---------
Other property and equipment, net 5,600 5,556
----------
- ---------
Other assets
Restricted cash 7,392 8,064
Equity investment in subsidiary 1,951 2,443
Real estate investments 4,187 4,203
Deferred debt costs, net of accumulated amortization of
$1,414 and $903, respectively 9,015 9,382
Noncompete covenants, net of accumulated amortization
of $18 1,584 -
Other, net 5,320 4,170
----------
- --------- Total other assets
29,449 28,262
----------
- ---------
Total assets $ 303,205 $
305,443
======= ======
(continued)
<PAGE>
SOUTHWEST ROYALTIES HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (continued)
(in thousands, except share data)
LIABILITIES, MINORITY INTEREST, REDEEMABLE
COMMON STOCK AND STOCKHOLDERS' DEFICIT
March 31, December 31,
- -----------------------------------------------------------------
- ------------------- 1998 1997
----------
----------
(unaudited)
Current liabilities
Current maturities of long-term debt $2,924 $ 1,878
Accounts payable 5,430
7,119
Accounts payable to related parties - 64
Accrued expenses 3,698
4,049
Accrued interest payable 10,601
5,401
Deferred income taxes - 254
----------
- ----------
Total current liabilities 22,653 18,765
----------
- ----------
Long-term debt 282,572 28
1,764
----------
- ----------
Other long-term liabilities 1,760 1,809
-----------
- ----------
Deferred income taxes 238 2,094
-----------
- ----------
Minority interest 1,490 1,861
-----------
- ----------
Redeemable common stock of subsidiary 2,703 2,666
-----------
- ----------
Redeemable common stock 8,290 8,290
----------
- ----------
Stockholders' deficit
Preferred stock - $1 par value; 5,000,000 shares authorized;
none issued - -
Common stock - $.10 par value; 5,000,000 shares authorized;
1,161,037 issued at March 31, 1998 and December 31, 1997
116 116
Additional paid-in capital 2,196 2,196
Accumulated deficit (14,023) (9
,321)
Note receivable from an officer and stockholder (1
,700) (1,707)
Less: treasury stock - at cost; 214,215
shares at March 31, 1998 and December 31, 1997 (3
,090) (3,090)
----------- ---
- --------
Total stockholders' deficit (16,501)(11,806)
-----------------
Total liabilities, minority interest, redeemable common stock
and stockholders' deficit $ 303,205 $
305,443
====== ======
The accompanying notes are an integral part of these consolidated
financial statements.
<PAGE>
SOUTHWEST ROYALTIES HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
(unaudited)
For the three months ended March 31,
- --------------------------------------------------
1998 1997
- ---------- ----------
Operating revenues
Oil and gas $ 9,711 $9,583
Well servicing - 3,131
Real estate 4,911 1,365
Other 438 244
---------- ----------
Total operating revenues 15,060 14,323
----------
- ----------
Operating expenses
Oil and gas production 5,453 4,002
Well servicing - 2,432
Real estate 2,138 554
General and administrative, net of related party management
and administrative fees of $897 and
$885, respectively 1,352 1,254
Depreciation, depletion and amortization 4,265
2,717
Other 375 295
----------
- ---------
Total operating expenses 13,583 11,254
----------
- ---------
Operating income 1,477 3,069
- ---------- ----------
(continued)
<PAGE>
SOUTHWEST ROYALTIES HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (continued)
(in thousands, except per share data)
For the three months ended March 31,
- -------------------------------------------------
1998 1997
- ------------ -----------
Other income (expense)
Interest and dividend income 443 186
Interest expense (8,353) (2,988)
Other 3 (33)
----------- ----------
- -
(7,907) (2,835)
----------- ----------
- -
Income (loss) before income taxes, minority interest and
equity earnings (6,430) 234
Income tax benefit (provision) 1,944 (75)
----------- ----------
- -
Income (loss) before minority interest and equity loss
(4,486) 159
Minority interest in subsidiaries, net of tax 106
48
Equity in loss of subsidiary, net of tax (322)
- -
----------- ----------
- -
Net income (loss) $ (4,702) $ 207
======= =======
Income (loss) per common share $ (4.37) $ .19
======= =======
Weighted average shares outstanding 1,075,868 1,083,294
======= =======
The accompanying notes are an integral part of these consolidated
financial statements
<PAGE>
SOUTHWEST ROYALTIES HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
For the three months ended March 31,
- ---------------------------------------------------
1998 1997
- ------------ ------------
Cash flows from operating activities
Net income (loss) $ (4,702) $ 207
Adjustments to reconcile net income (loss) to
net cash provided by operating activities:
Depreciation, depletion and amortization 4,265
2,717 Noncash interest
expense 648 158
Equity loss of subsidiary 322 -
Other noncash items (65) 33
Bad debt expense 5 -
Deferred income taxes (1,944) (64)
Minority interest in loss of subsidiary (106)
(48)
Changes in operating assets and liabilities-
Accounts receivable 2,297 (5,318)
Other current assets 10 (560)
Accounts payable and accrued expenses (2,100) 3,266
Accrued interest payable 5,201 403
Income taxes payable - (30)
------------ ---------
Net cash provided by operating activities 3,831 764
------------ ---------
Cash flows from investing activities
Proceeds from sale of oil and gas properties 220
20
Purchase of oil and gas properties (4,291) (10,667)
Purchase of other property and equipment and rental property
(1,036) (4,243)
Purchase of other assets (1,357) (446)
Purchase of noncompete covenants (1,602) -
Proceeds from sale of other assets 20 176
Proceeds from sale of other property and equipment -
117
Purchase of real estate investments - (329)
Change in restricted cash 672 (547)
Other 22 7
------------ ---
------
Net cash used by investing activities (7,352) (15,912)
------------ ---
------
(continued)
<PAGE>
SOUTHWEST ROYALTIES HOLDINGS, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
(in thousands)
(unaudited)
For the three months ended March 31,
- --------------------------------------------------
1998 1997
- ------------- -------------
Cash flows from financing activities
Proceeds from borrowings 2,092 12,701
Payments on debt (276) (1,914)
Payments on other long-term liabilities (49)
(22)
Increase in other long-term liabilities -
547
Cash received on subscriptions receivable -
2,710
Purchase of treasury stock - (552)
Issuance of redeemable common stock, net of issue costs
- - 2
Deferred debt cost (143) (52)
Dividends paid to minority interest owners (31)
(30)
Purchase of minority interest in subsidiary (197)
- -
------------------
Net cash provided by financing activities 1,396
13,390
- --------- ---------
Net decrease in unrestricted cash and cash equivalents
(2,125) (1,758)
Unrestricted cash and cash equivalents-
beginning of period 27,365 8,284
---------
- ---------
Unrestricted cash and cash equivalents - end of period
$ 25,240 $ 6,526
===== =====
Supplemental disclosures of cash flow information
Interest paid $ 2,504 $ 2,427
Income taxes received $ - $ 89
The accompanying notes are and integral part of these
consolidated financial statements.
<PAGE>
1. Organization and Summary of Significant Accounting Policies
Business
Southwest Royalties Holdings, Inc. ("SRH"), a Delaware
corporation was formed in June 1997 to serve as a holding company
for Southwest Royalties Inc. ("Southwest"), Sierra Well Service
Inc. ("Sierra") and Midland Red Oak Realty, Inc. ("Red Oak")
(collectively, the "Company"). Each shareholder of Southwest was
issued one share in SRH for each share of Southwest stock held.
Prior to the formation of SRH, Red Oak and Sierra were
subsidiaries of Southwest. Southwest paid a dividend of the
shares it owned in Red Oak and Sierra to SRH. After the
formation of SRH, Southwest and Red Oak became subsidiaries of
SRH and, as of July 1, 1997, Sierra was deconsolidated.
Southwest is principally involved in the business of oil and
gas development and production. Southwest is the general partner
of Southwest Partners II and III, which own common stock in
Sierra. Southwest sells its oil and gas production to a variety
of purchasers, with the prices it receives being dependent upon
the oil and gas commodity prices. Red Oak is principally involved
in real estate investment and development. Sierra is principally
involved in the business of oil and gas well services.
Principles of Consolidation
The consolidated financial statements include the accounts of
SRH and its subsidiaries, each of which are wholly owned, except
for Red Oak, Sierra, Midland Southwest Software (`Software") and
Threading Products International, LLC ("TPI"), a subsidiary of
Southwest. As of March 31, 1998, the Company owned approximately
81% of Red Oak, 39% of Sierra, 99% of Software and 98% of TPI.
Effective July 1, 1997, Sierra was deconsolidated and is
accounted for using the equity method. The consolidated
financial statements include the Company's proportionate share of
the assets, liabilities, income and expenses of oil and gas
limited partnerships for which it serves as managing general
partner. The Company accounts for its investments in Sierra,
Southwest Partners II and III using the equity method, as the
Company exercises significant influence over the operations of
these partnerships. All significant intercompany transactions
have been eliminated.
Commodity Hedging and Derivative Financial Instruments
The financial instruments that the Company accounts for as
hedging contracts must meet the following criteria: the
underlying asset must expose the Company to price risk that is
not offset in another asset or liability, the hedging contract
must reduce that price risk, and the instrument must be
designated as a hedge at the inception of the contract and
throughout the contract period. In order to qualify as a hedge,
there must be clear correlation between changes in the fair value
of the financial instrument and the fair value of the underlying
asset such that changes in the market value of the financial
instrument will be offset by the effect of price changes on the
exposed items.
Since the contracts are accounted for as hedges, premiums
paid for such contracts are amortized to oil and gas sales over
the term of the agreements. Unamortized premiums are included in
other assets in the consolidated balance sheet. Amounts
receivable under the commodity option contracts are accrued as an
increase in oil and gas sales for the applicable periods.
Interim Financial Statements
In the opinion of management, the unaudited consolidated
financial statements of the Company as of March 31, 1998 and 1997
include all adjustments and accruals, consisting only of normal
recurring accrual adjustments, which are necessary for a fair
presentation of the results for the interim periods. These
interim results are not necessarily indicative of results for a
full year. Certain amounts in the prior period financial
statements have been reclassified to conform with the current
period presentation.
<PAGE>
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 Report pursuant to the rules and regulations of
the Securities and Exchange Commission. These consolidated
financial statements should be read in conjunction with the
consolidated financial statements and notes thereto included in
the 1997 Form 10-K of the Company.
Noncompete covenants
Noncompete covenants are carried at cost less accumulated
amortization. The covenants are being amortized over their
contractual lives of 15 years.
Reporting comprehensive income.
In June 1997, the FASB issued Statement of Financial
Accounting Standards No. 130 "Reporting Comprehensive Income"
("SFAS 130") which establishes standards for reporting and
display of comprehensive income and its components in a full set
of general-purpose financial statements. Specifically, SFAS 130
requires that an enterprise (i) classify items of other
comprehensive income by their nature in a financial statement and
(ii) display the accumulated balance of other comprehensive
income separately from retained earnings and additional paid-in
capital in the equity section of a statement of financial
position. The effect of this statement is immaterial to the
Company.
Segment Reporting.
In June 1997, the FASB issued Statement of Financial
Accounting Standards No. 131 "Disclosures about Segments of and
Enterprise and Related Information" ("SFAS 131") which
establishes standards for public business enterprises for
reporting information about operating segments in annual
financial statements and requires that such enterprises report
selected information about operating segments in interim
financial reports issued to shareholders. This statement also
establishes standards for related disclosures about products and
services, geographic areas, and major customers. SFAS 131 is
effective for financial statements for periods beginning after
December 15, 1997.
2. Subsidiaries, Acquisitions and Dispostions
In February 1998, Red Oak acquired a real estate fee
management and brokerage company in Texas, for a cost of $1.6
million. The transaction was accounted for using the purchase
method. The results of operations of the acquired company are
included in the consolidated statements of operations from the
close date of the acquisition.
3. Commitments and Contingencies
The Company is subject to extensive federal, state and local
environmental laws and regulations. These laws, which are
constantly changing, regulate the discharge of materials into the
environment and may require the Company to remove or mitigate the
environmental effects of the disposal or release of petroleum or
chemical substances at various sites. Environmental expenditures
are expensed or capitalized depending on their future economic
benefit. Expenditures that relate to an existing condition
caused by past operations and that have no future economic
benefits are expensed. Liabilities for expenditures of a
noncapital nature are expensed when environmental assessment
and/or remediation is probable and the costs can be reasonably
estimated.
<PAGE>
Management recognizes a financial exposure that may require
future expenditures presently existing for oil and gas properties
and other operations. As of March 31, 1998, the Company has not
been fined, cited or notified of any environmental violations
which would have a material adverse effect upon capital
expenditures, earnings or the competitive position in the oil and
gas industry. However, management does recognize that by the
very nature of its business, significant costs could be incurred
to bring the Company into total compliance. The amount of such
future expenditures is not readily determinable due to several
factors, including the unknown magnitude of possible
contaminations, the unknown timing and extent of the corrective
actions which may be required, the determination of the Company's
liability in proportion to other responsible parties and the
extent to which such expenditures are recoverable from insurance
or indemnifications from prior owners of the Company's
properties. It is reasonably possible this estimate could change
materially in the near term.
In the normal course of its business, the Company is subject
to pending or threatened legal actions; in the opinion of
management, any such matters will be resolved without material
effect on the Company's operations, cash flow or financial
position.
4. Commodity Hedging and Derivative Financial Instruments
The Company, from time to time, uses option contracts to
reduce the effect of the volatility of price changes on
commodities the Company produces and sells as well as to lock in
prices to protect the economics related to certain capital
projects. In March 1998, the Company purchased put options on a
total of 13,000 MMBTU of natural gas per day, establishing a
floor price of $1.90 for 6,500 MMBTU per day and a floor price of
$1.70 for the remaining 6,500 MMBTU per day, for the period from
April 1, 1998 through October 31, 1998.
5. Lines of Business
The Company operates in three major segments: Oil and Gas
Activities (oil and gas acquisition, development, exploration and
production, as well as organizing and serving as managing general
partner for various public and private limited partnerships
engaged in oil and gas development and production), Oil and Gas
Well Servicing (provides well completion, recompletion and
production equipment, transportation services, tank supply rental
services and other support and well maintenance services to
operating oil and gas companies) and Real Estate Investment and
Management (owns and manages retail shopping centers and office
buildings). Other items include eliminations, manufacturing,
computer service and broker/dealer and the holding Company.
Effective July 1, 1997, Sierra, the oil and gas well servicing
business, was deconsolidated, therefore income statement
information for the three months ended March 31, 1998 is not
displayed in the tables and no balance sheet information is
displayed.
<PAGE>
For the Three Months
Ended March 31,
1998 1997
---------------------
(in thousands)
Operating profit (loss) (unaudited)
Oil and gas $(546) $2,913
Well service - (45)
Real estate 1,978 455
Other and eliminations 45 (254)
---------
- --------
$1,477 $3,069
====== =====
Interest Expense
Oil and gas $5,558 $2,183
Well Service - 55
Real Estate 2,781 739
Other and eliminations 14 11
----------
- --------
$8,353 $2,988
====== =====
Depreciation, depletion and amortization
Oil and gas $3,691 $2,097
Well Service - 315
Real Estate 528 266
Other and eliminations 46 39
----------
- ---------
$4,265 $2,717
====== ======
Capital expenditures
Oil and gas $4,291 $10,667
Well service - 3,715
Real estate 528 53
----------
- ----------
$4,819 $14,435
====== ======
March 31, December
31,
1998 1997
- ---------- ----------
Identifiable assets
Oil and gas $202,111 $205,054
Real estate 99,973 98,890
Other and eliminations 1,121 1,499
----------
- ---------- $303,205
$ 305,443 ======
======
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.
General
Southwest Royalties Holdings, Inc., a Delaware corporation,
was formed in 1997 to serve as a holding company for Southwest
Royalties, Inc., Sierra Well Service, Inc. and Midland Red Oak
Realty, Inc. SRH is an independent oil and gas company engaged
in the acquisition, development and production of oil and gas
properties, primarily in the Permian Basin of West Texas and
southeastern New Mexico, through its wholly-owned subsidiary,
Southwest. Since 1983, Southwest has grown primarily through
selective acquisitions of producing oil and gas properties, both
directly and through the oil and gas partnerships it manages. SRH
also participates in the well servicing industry through its
affiliate, Sierra, and owns and manages real estate properties
through its subsidiary, Red Oak. References in this report to
the "Company" are to SRH and its consolidated subsidiaries,
including Southwest, Red Oak and Sierra, an unconsolidated
affiliate.
Southwest has grown principally through the acquisition of
producing properties, establishing a substantial base of
producing and undeveloped properties in the Permian Basin The
Company intends to increase its oil and gas reserves, production
and cash flow by concentrating on drilling low-risk development
wells and by conducting additional development activities such as
recompletions. During the first quarter of 1998, the Company
drilled 15 gross (6.4 net) wells, of which all were successfully
completed as productive.
The Company places emphasis on profitable acquisition
opportunities as long as such opportunities exist. However, the
Company understands the cyclical nature of the oil and gas
industry. Therefore, the Company also actively seeks to develop
its inventory of existing proved developed non-producing and
proved undeveloped reserves. The Company's staff and operations
can easily shift emphasis between acquisitions and reserve
development depending on market conditions. A significant
portion of the Company's reserves are proved undeveloped and are
therefore available for development.
Southwest's revenue, profitability and cash flow are
substantially dependent upon prevailing prices for crude oil and
natural gas and the volumes of crude oil and natural gas it
produces. In addition, Southwest's proved reserves and oil and
gas production will decline as crude oil and natural gas are
produced unless Southwest is successful in acquiring producing
properties or conducts successful exploration and development
activities.
In March 1998, the Company purchased put options on a total of
13,000 MMBTU of natural gas per day, establishing a floor price
of $1.90 for 6,500 MMBTU per day and a floor price of $1.70 for
the remaining 6,500 MMBTU per day, for the period April 1, 1998
through October 31, 1998.
Southwest uses the full cost method of accounting for its
investment in oil and gas properties. Under the full cost method
of accounting, all costs of acquisition, exploration and
development of oil and gas reserves are capitalized into a ''full
cost pool'' as incurred, and properties in the pool are depleted
and charged to operations using the gross revenues method based
on the ratio of current gross revenues to total proved future
gross revenues, computed based on current prices. Significant
downward revisions of quantity estimates or declines in oil and
gas prices that are not offset by other factors could result in a
write down for impairment of oil and gas properties. Once
incurred, a write-down of oil and gas properties is not
reversible at a later date, even if oil or natural gas prices
increase. During most of 1996 and 1997, the Company benefited
from higher oil prices as compared to previous years. However,
during the first quarter of 1998, oil prices were significantly
lower. A continuation of the oil price environment experienced
during the first quarter of 1998 will have an adverse affect on
the Company's revenues and operating cash flow. Also, further
declines in oil prices could result in a decrease in the carrying
value of the Company's oil and gas properties.
<PAGE>
Red Oak was formed by the Company in 1992 to acquire and
manage neighborhood and community shopping centers, other retail
and commercial properties and office buildings. These properties
are primarily leased, on a long-term basis, to major retail
companies, local specialty retailers and professional and
business tenants throughout secondary urban markets in the
southwestern United States. As of March 31, 1998, Red Oak owned
and operates 14 shopping centers, three office buildings and raw
land held for future development.
Effective July 1, 1997, Sierra was deconsolidated from the
financial statements of SRH and is subsequently reported using
the equity method of accounting. As such, comparisons of revenue
and expenses for the three months ended 1998 to the three months
ended 1997 are not relevant and therefore no discussion of such
results of operations are provided.
Results of Operations
Three Months Ended March 31, 1998 compared to Three Months Ended
March 31, 1997
Revenues. Revenues for the Company increased $737,000, or 5%,
for the three months ended March 31, 1998 as compared to the same
period in 1997, reflecting increased revenues in each of the
Company's businesses, with the exception of Sierra which was
deconsolidated.
The following table summarizes production volumes, average
sales prices and period to period comparisons for the Company's
oil and gas operations, including the effect on revenues, for the
periods indicated:
Three Months Ended
March 31, PercentageRevenue
----------------------- IncreaseIncrease
1998 1997 (Decrease)
(Decrease)
------- ------- -------------- --------------
Production volumes:
Oil and condensate (MBbls) 469 272 72% $4,190
Natural gas (MMcf) 1,522 1,322 15% 510
Average sales prices:
Oil and condensate (per Bbl) $ 14.33 $ 21.27(33)% $(3,255)
Natural gas (per Mcf) 1.93 2.55 (24)% (944)
Oil and gas revenues increased $128,000, or 1%, for the three
months ended March 31, 1998 as compared to the same period in
1997, due to increases in oil and gas production and decrease in
average prices. Oil and gas production increased 72% and 15%,
respectively, due to several acquisitions throughout 1997 and a
non-recurring settlement with an unrelated operator for
approximately 10,300 barrels of oil. Changes in production
contributed $4.7 million to increased oil and gas revenues. The
average price per barrel of oil was $14.33, a decrease of 33%,
and the average price of natural gas was $1.93 per Mcf, a
decrease of 24%. These lower oil and gas prices, offset the
increase in oil and gas revenue due to production by
approximately $4.2 million.
Real estate revenues increased $3.5 million, or 260%, due
primarily to acquisitions completed in the last quarter of 1997.
Other operating revenues increased $194,000.
<PAGE>
Operating Expenses. Operating expenses, before general and
administrative expense and depreciation, depletion and
amortization, increased $683,000, or 9%, for the three months
ended March 31, 1998 as compared to the same period in 1997, due
primarily to costs associated with the growth in the Company's
businesses through acquisitions.
Oil and gas operating expense increased $1.5 million, or 36%,
due primarily to an increase in the number of oil and gas
properties owned by the Company during the period. The average
operating expense was $7.54 per Boe for the three months ended
March 31, 1998, a decrease of 7% from $8.13 per Boe for the same
period in 1997. The decrease on a Boe basis is due to a ongoing
effort to decrease operating costs.
Real estate operating expense increased $1.6 million, or 286%,
for the three months ended March 31, 1998 as compared to the same
period in 1997, due primarily to acquisitions. Other operating
expenses increased $80,000.
General and Administrative (''G&A'') Expense. G&A expense for
the Company increased $98,000, or 8%, for the three months ended
March 31, 1998 as compared to the same period in 1997, due
primarily to an increase in the Company's activities resulting
from recent acquisitions. Oil and gas G&A expense increased
approximately $544,000, or 89%, and was $1.60 per Boe, an
increase of 29% due primarily to additions to oil and gas
technical and administrative staff in conjunction with increases
in oil and gas acquisition and development activities. Real
estate G&A expense increased $176,000, or 193%, due primarily to
administrative staff increases necessitated by Red Oak's
significant growth. The G&A expenses for the first quarter of
1998 excluded Sierra, which accounted for $518,000 for the
comparable period in 1997.
Depreciation, Depletion and Amortization (''DD&A'') Expense.
DD&A expense for the Company increased $1.5 million, or 57%, for
the three months ended March 31, 1998 due to growth in each of
the Company's businesses. Oil and gas DD&A expense increased
approximately $1.6 million, or 76%. Oil and gas depletion was
$4.94 per Boe, an increase of 21% from the same period in 1997.
The increase in DD&A expense on an overall basis and per Boe is
due primarily to the decrease in the oil price used in the period
end reserve reports for March 31, 1998 compared to the reserve
reports used for the same period in 1997, which led to a higher
depletion rate under the units of revenue depreciation method.
Real estate DD&A expense increased approximately $262,000, or
98%, attributable primarily to the impact of acquisitions.
Interest Expense. Interest expense for the Company increased
$5.4 million, or 180%, primarily as a result of increased
borrowings incurred to fund a portion of the Company's
acquisitions and oil and gas development. Oil and gas interest
expense increased approximately $3.4 million, or 155%, as a
result of increased borrowings for development drilling and
acquisitions made in 1997. The average interest rate paid on
these borrowings also increased by approximately 1%. Real estate
interest expense increased $2.0 million, or 276%, due to
increased debt used to finance acquisitions as compared to the
same period in the prior year.
Net Income. Due to the factors described above, net income for
the Company decreased $4.9 million to a loss of $4.7 million for
the three months ended March 31, 1998.
Liquidity and Capital Resources
As of March 31, 1998, the Company's consolidated cash balance
was $25.2 million, of which $23.3 was available to Southwest.
Funding for the Company's business activities has historically
been provided by operating cash flows, bank borrowings and debt
issuance, reserve-based financing and sales of equity. Any
future acquisitions may require additional financing and will be
dependent upon financing arrangements available at the time.
<PAGE>
As discussed previously, as of July 1, 1997, Sierra Well
Service was deconsolidated from SRH and is currently being
accounted for using the equity method of accounting; therefore,
cash flow information for Sierra is reported for the three months
ended March 31, 1997. For the comparable period in 1998, no cash
flow information for Sierra was reported.
Net Cash Provided by Operating Activities
Cash flows provided by operating activities from the
Company's operations were $3.8 million and $800 thousand for the
three months ended March 31, 1998 and 1997, respectively. The
increase is primarily attributable to increases in oil and gas
production and revenues resulting principally from acquisitions
in all the Company's businesses, which was offset by lower oil
prices, higher operating costs and interest expense.
Net Cash Used in Investing Activities
Cash flows used in investing activities by the Company were
$7.4 million for the three months ended March 31, 1998 and $15.9
million for the comparable period in 1997. Acquisitions and oil
and gas development activities were the primary uses of funds for
both periods.
In response to the decline in oil prices, the Company has
implemented an alternate short-term business plan for its oil and
gas operations that delays discretionary development and
exploratory projects until the oil prices strengthen. The Company
is pursuing a $5.8 million capital expenditure budget for 1998,
revised from its previous $17.8 million budget for oil and gas
activities. Further revisions may be necessary during the year
in response to market conditions. No amount has been budgeted for
oil and gas acquisitions, although the Company will continue to
search for strategic and complementary oil and gas acquisitions.
The Company anticipates capital expenditures in 1998 for Red Oak
of approximately $7.2 million for capital improvements, of which
$528,000 was expended in the first quarter of 1998. Red Oak has
not specified an amount for their 1998 acquisition budget;
however, any acquisitions would be funded by non-recourse debt.
Net Cash Provided by Financing Activities.
Cash provided by the Company's financing activities was $1.4
million and $13.4 million for the three months ended March 31,
1998 and 1997, respectively. Net cash provided by financing
activities was mainly used to fund real estate acquisitions in
1998.
Southwest Credit Facility. The Southwest Credit Facility was
amended to provide for a $75 million revolving line of credit
maturing in February 1999, subject to semi-annual borrowing base
redetermination. The initial borrowing base of $40 million is
subject to a $15 million available sub-limit for oil and gas
acquisitions, with the balance of the borrowing base available
for general corporate purposes. Borrowings accrue interest at
LIBOR plus a margin ranging from 1.75% to 2.50% and the facility
incurs a quarterly commitment fee of three-eighths of one percent
(3/8%) per annum on the daily average of the unadvanced amount of
the borrowing base. The Southwest Credit Facility is secured by
substantially all of Southwest's proved oil and gas properties.
The facility contains a number of covenants that limit loans and
advances, investments, and dividends, as well as setting a
minimum interest coverage ratio for SRH. The Company and its
lenders are currently reviewing the Southwest Credit Facility in
light of current oil prices and expect to be completed in May
1998. On March 27, 1998, the covenants were amended to remove the
tangible net worth requirement, increase allowable sales of
assets from $250,000 to at least $10 million and revise the
minimum interest coverage ratio to .7 to 1.0. It is possible, in
response to the downward trend in oil and gas prices experienced
in the last quarter of 1997 and continuing through the first
quarter of 1998, that the borrowing base may decrease
significantly and therefore limit the Company's ability to fund
future capital expenditures, acquisitions or general working
capital through the Southwest Credit Facility.
<PAGE>
For the remainder of 1998, Red Oak intends to acquire
additional real estate properties. Funding will likely be
obtained through an additional increase in the MROP Facility or
from other sources.
The Company believes that availability under the Southwest
Credit Facility, the Red Oak Acquisition Facilities, cash flow
from operations and current cash balances, will be sufficient for
planned operating and capital expenditure requirements for the
remainder of 1998. However, if the Company identifies
acquisitions in any of its businesses, additional financing will
be needed and the Company expects to evaluate all available
funding sources including equity and debt financing alternatives.
Other Issues
The Company has reviewed and evaluated its information systems
to determine if its systems accurately process data referencing
the year 2000. Substantially all necessary programming
modifications to correct year 2000 referencing in internal
accounting and operating systems have been made. However, the
Company has not completed its evaluation of its vendors and
suppliers systems to determine the effect, if any, the non-
compliance of such systems would have on the operations of the
Company. The Company expects to have all evaluations completed
by early 1999.
Comprehensive income consists of the change in equity of a
business enterprise during a period from transactions and other
events and circumstances from nonowner sources. Specifically,
this includes net income and other comprehensive income, which is
made up of certain changes in assets and liabilities that are not
reported in a statement of operations but are included in the
balances within a separate component of equity in a statement of
financial position. Such changes include, but are not limited to,
unrealized gains for marketable securities and future contracts,
foreign currency translation adjustments and minimum pension
liability adjustments.
PART II - OTHER INFORMATION
Item 6.
Reports on Form 8-K
None.
Exhibits
The following instruments and documents are included as
Exhibits to this Report. Exhibits incorporated by reference are
so indicated by parenthetical information.
Exhibit Number Description
-------------------- ----------------
27* Financial Data Schedule.
* Filed herewith.
<PAGE>
SIGNATURES
SOUTHWEST ROYALTIES, INC.
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the registrant has duly caused
this report to be signed on its behalf by the undersigned,
thereto duly authorized.
SOUTHWEST ROYALTIES, INC.
By: /s/ H. H. Wommack, III
-------------------------------------
- --------------
H.H. Wommack, III, Chairman,
President,
and Chief Executive Officer
Date: May 14, 1998
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below by the following persons
on behalf of the registrant and in the capacities and on the
dates indicated.
SIGNATURE TITLE DATE
----------------- -------- --------
/s/ H.H. Wommack, III
-----------------------------
Chairman/President/ May 14, 1998
H. H. Wommack, III Chief Executive Officer
/s/ Bill E. Coggin
----------------------------- Vice
President/Chief May 14, 1998
Bill E. Coggin Financial Officer
/s/ H. Allen Corey
-----------------------------
H. Allen Corey Director/Secretary May 14, 1998
<PAGE>
SIGNATURES
SOUTHWEST ROYALTIES HOLDINGS, INC.
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the registrant has duly caused
this report to be signed on its behalf by the undersigned,
thereto duly authorized.
SOUTHWEST ROYALTIES HOLDINGS, INC.
By: /s/ H. H. Wommack, III
-------------------------------------
- --------------
H.H. Wommack, III, Chairman,
President,
and Chief Executive Officer
Date: May 14, 1998
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below by the following persons
on behalf of the registrant and in the capacities and on the
dates indicated.
SIGNATURE TITLE DATE
----------------- -------- --------
/s/ H.H. Wommack, III
-----------------------------
Chairman/President/ May 14, 1998
H. H. Wommack, III Chief Executive Officer
/s/ Bill E. Coggin
----------------------------- Vice
President/Chief May 14, 1998
Bill E. Coggin Financial Officer
/s/ H. Allen Corey
-----------------------------
H. Allen Corey Director/Secretary May 14, 1998
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule cotains summary financial information extracted from the
Balance Sheet at March 31, 1998 (Unaudited) and the Statement of Operations
for the Three Months Ended March 31, 1998 (Unaudited) and is qualified in
its entirety by reference to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> MAR-31-1998
<CASH> 25,240,000
<SECURITIES> 0
<RECEIVABLES> 6,817,00
<ALLOWANCES> (230,000)
<INVENTORY> 0
<CURRENT-ASSETS> 35,220,000
<PP&E> 289,991,000
<DEPRECIATION> (51,455,000)
<TOTAL-ASSETS> 303,205,000
<CURRENT-LIABILITIES> 22,653,000
<BONDS> 282,572,000
10,993,000
0
<COMMON> 116,000
<OTHER-SE> (16,617,000)
<TOTAL-LIABILITY-AND-EQUITY> 303,205,000
<SALES> 9,711,000
<TOTAL-REVENUES> 15,060,000
<CGS> 5,453,000
<TOTAL-COSTS> 7,966,000
<OTHER-EXPENSES> 4,265,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 8,353,000
<INCOME-PRETAX> (6,430,000)
<INCOME-TAX> (1,944,000)
<INCOME-CONTINUING> (4,702,000)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (4,702,000)
<EPS-PRIMARY> (4.37)
<EPS-DILUTED> (4.37)
</TABLE>
