U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-QSB
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QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES AND EXCHANGE ACT OF 1934
For the quarterly period ended
June 30, 1997
Commission File Number 1-12322
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SABA PETROLEUM COMPANY
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(Exact name of small business issuer as specified in its charter)
Delaware 47-0617589
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
3201 Airpark Drive, Suite 201
Santa Maria, CA 93455
(Address of principal executive offices)
Issuer's telephone number, including area code: (805) 347-8700
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the issuer was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
YES X NO_____
At August 8, 1997, 10,690,461 shares of common stock, $.001 par value, were
outstanding.
Transitional Small Business Disclosure Format. [ ] Yes [X] No
SABA PETROLEUM COMPANY
CONTENTS
Page(s)
PART I.-FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheet as of June 30, 1997 3
Condensed Consolidated Statements of Income for the six
and three month periods ended June 30, 1997 and 1996 4
Condensed Consolidated Statements of Cash Flows for
the six months ended June 30, 1997 and 1996 5
Notes to Condensed Consolidated Financial Statements 6-10
Item 2. Management's Discussion and Analysis 11-19
PART II.-OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 20
SIGNATURES 21
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<CAPTION>
PART I - FINANCIAL INFORMATION
SABA PETROLEUM COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET
June 30, 1997
(Unaudited)
<S> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 743,180
Accounts receivable, net of allowance for doubtful
accounts of $71,300 5,791,759
Other current assets 3,606,314
----------------
Total current assets 10,141,253
----------------
Property and equipment (Note 3):
Oil and gas properties (full cost method) 55,089,489
Land, plant and equipment 7,598,858
----------------
62,688,347
Less accumulated depletion and depreciation (18,435,163)
----------------
Total property and equipment 44,253,184
----------------
Other assets 2,061,348
================
$ 56,455,785
================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities $ 9,410,206
Current portion of long-term debt 3,658,113
----------------
Total current liabilities 13,068,319
Long-term debt, net of current portion (Note 3) 20,109,307
Other liabilities and deferred taxes 692,626
Minority interest in consolidated subsidiary 818,927
----------------
Total liabilities 34,689,179
----------------
Commitments and contingencies (Note 6)
Stockholders' equity:
Preferred stock - $.001 par value, authorized
50,000,000 shares; none issued -
Common stock - $.001 par value, authorized
150,000,000 shares; issued and outstanding
10,663,034 shares 10,663
Capital in excess of par value 15,011,401
Retained earnings 6,751,727
Cumulative translation adjustment (7,185)
----------------
----------------
Total stockholders' equity 21,766,606
----------------
$ 56,455,785
================
The accompanying notes are an integral part of these consolidated financial
statements.
</TABLE>
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<TABLE>
<CAPTION>
SABA PETROLEUM COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
<S> <C> <C> <C> <C>
Six Months Three Months
Ended June 30 Ended June 30
1997 1996 1997 1996
Revenues:
Oil and gas sales $ 17,363,664 $ 14,603,688 $ 7,695,072 $ 7,640,802
Other 471,763 786,430 576,881 362,026
--------------- --------------- --------------- ---------------
Total revenues 17,835,427 15,390,118 8,271,953 8,002,828
--------------- --------------- --------------- ---------------
Expenses:
Production costs 8,433,089 7,180,776 4,187,879 3,778,786
General and administrative 2,098,533 1,667,961 1,172,111 964,204
Depletion, depreciation and 3,233,287 2,368,405 1,646,327 1,227,905
amortization
--------------- --------------- --------------- ---------------
Total expenses 13,764,909 11,217,142 7,006,317 5,970,895
--------------- --------------- --------------- ---------------
Operating income 4,070,518 4,172,976 1,265,636 2,031,933
--------------- --------------- --------------- ---------------
Other income (expense):
Other 273,540 (83,226) 70,101 (22,380)
Interest expense (830,785) (1,197,740) (439,985) (588,653)
--------------- --------------- --------------- ---------------
Total other income (expense) (557,245) (1,280,966) (369,884) (611,033)
--------------- --------------- --------------- ---------------
Income before income taxes 3,513,273 2,892,010 895,752 1,420,900
Provision for taxes on income (1,470,000) (1,301,500) (382,491) (607,500)
Minority interest in earnings
of consolidated subsidiary (94,391) (100,647) (5,961) (79,025)
--------------- --------------- --------------- ---------------
Net income $ 1,948,882 $ 1,489,863 $ 507,300 $ 734,375
=============== =============== =============== ===============
Net earnings per common share:
Primary $ 0.18 $ 0.16 $ 0.05 $ 0.08
=============== =============== =============== ===============
Fully-diluted $ 0.17 $ 0.16 $ 0.05 $ 0.08
=============== =============== =============== ===============
Weighted average common and
common equivalent shares
outstanding:
Primary 11,151,434 9,082,622 11,231,551 9,139,124
=============== =============== =============== ===============
Fully-diluted 12,232,057 11,895,021 12,222,305 12,025,834
=============== =============== =============== ===============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
SABA PETROLEUM COMPANY AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF
CASH FLOWS For the Six Months Ended June 30, 1997 and 1996 (Unaudited)
<TABLE>
<S> <C> <C>
1997 1996
Cash flows from operating activities:
Net income $ 1,948,882 $ 1,489,863
Adjustments to reconcile net income to net cash
provided by operations:
Depletion, depreciation and amortization 3,233,287 2,368,405
Amortization of unearned compensation - 8,500
Compensation expense attributable to non-employee option - 91,600
Minority interest in earnings of consolidated subsidiary 94,391 100,647
Gain on issuance of shares of subsidiary (5,533) -
Changes in:
Accounts receivable 1,563,136 (1,540,620)
Other assets 149,463 278,060
Accounts payable and accrued liabilities 2,042,242 (1,544,309)
----------------- ----------------
----------------- ----------------
Net cash provided by operating activities 9,025,868 1,252,146
----------------- ----------------
Cash flows from investing activities:
Expenditures for property and equipment (12,531,621) (2,648,227)
----------------- ----------------
----------------- ----------------
Net cash used in investing activities (12,531,621) (2,648,227)
----------------- ----------------
Cash flows from financing activities:
Proceeds from notes payable and long-term debt 12,423,705 6,700,712
Principal payments on notes payable and long-term debt (9,105,508) (5,575,275)
(Increase) decrease in notes receivable 200,586 (284,056)
Increase in deferred loan costs - (165,777)
Net change in accounts with affiliated companies (132,236) (12,901)
Net proceeds from issuance of common stock 130,000 329,992
----------------- ----------------
----------------- ----------------
Net cash provided by financing activities 3,516,547 992,695
----------------- ----------------
Effect of exchange rate changes on cash and cash equivalents (1,650) 44
----------------- ----------------
Net increase (decrease) in cash 9,144 (403,342)
Cash at beginning of period 734,036 640,287
----------------- ----------------
Cash at end of period $ 743,180 $ 236,945
================= ================
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
SABA PETROLEUM COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. General
The accompanying unaudited condensed consolidated financial statements have
been prepared on a basis consistent with the accounting principles and
policies reflected in the financial statements for the year ended December
31, 1996 and should be read in conjunction with the consolidated financial
statements and notes thereto included in the Company's 1996 Form 10-KSB. In
the opinion of management, the accompanying unaudited condensed consolidated
financial statements contain all adjustments (consisting of normal recurring
accruals only) necessary to present fairly the Company's consolidated
financial position as of June 30, 1997, and the consolidated results of
operations for the six and three month periods ended June 30, 1997 and 1996
and the consolidated cash flows for the six month periods ended June 30,
1997 and 1996.
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 128, "Earnings Per Share." Statement
of Financial Accounting Standards No. 128 specifies the computation,
presentation, and disclosure requirements for earnings per share and is
effective for financial statements issued for periods ending after December
15, 1997. Management has not yet determined the impact that adoption of
Statement of Financial Accounting Standard No. 128 is expected to have on
the financial statements of the Company.
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130, "Reporting Comprehensive Income" and
Statement of Financial Accounting Standards No. 131, " Disclosure About
Segments of an Enterprise and Related Information." Both Statements are
effective for fiscal years beginning after December 15, 1997. Management has
not yet determined the impact that adoption of the Statements is expected to
have on the financial statements of the Company.
2. Statements of Cash Flows
Following is certain supplemental information regarding cash flows for the
six month periods ended June 30, 1997 and 1996:
<TABLE>
<S> <C> <C>
1997 1996
Interest paid $ 889,000 $ 1,228,000
============ =============
Income taxes paid $ 1,640,000 $ 643,000
============ =============
</TABLE>
Non-cash investing and financing transactions:
Debentures in the principal amount of $2,157,000 were converted into
493,006 shares of Common Stock during the six months ended June 30, 1997.
Cumulative foreign currency translation gains (losses) in the amount of
($18,729) and $1,003 were recorded during the six month periods ended June
30, 1997 and 1996, respectively.
In February 1996, the Company issued 14,000 shares of Common Stock to a
director of the Company in settlement of an obligation in the amount of
$42,000.
Debentures in the principal amount of $156,000 were converted into
35,656 shares of Common Stock during the six months ended June 30, 1996.
SABA PETROLEUM COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The Company incurred a charge to operations, and a credit to Stockholders'
Equity, in the amount of $91,600 resulting from the issuance of stock
options to a consultant during the six months ended June 30, 1996.
3. Long-Term Debt
Long-term debt consists of the following at June 30, 1997:
<TABLE>
<S> <C>
9% convertible senior subordinated debentures - due 2005 $ 4,281,000
Revolving loan agreement with a bank 15,650,000
Demand revolving loan agreement with a bank 2,444,766
Capital lease obligations 375,054
Promissory notes-CAPCO 1,016,600
---------------
23,767,420
Less current portion 3,658,113
===============
$ 20,109,307
===============
</TABLE>
On December 26, 1995, the Company issued $11,000,000 of 9% convertible
senior subordinated debentures ("Debentures") due December 15, 2005. On
February 7, 1996, the Company issued an additional $1,650,000 of Debentures
pursuant to the exercise of an over-allotment option by the underwriting
group. The Debentures are convertible into Common Stock of the Company, at
the option of the holders of the Debentures, at any time prior to maturity
at a conversion price of $4.38 per share, subject to adjustment in certain
events. The Company has reserved 3,000,000 shares of its Common Stock for
the conversion of the Debentures. The principal use of proceeds from the
sale of the Debentures was to retire short-term indebtedness incurred by the
Company in connection with its acquisitions of producing oil and gas
properties in Colombia. A portion of the proceeds was used to reduce the
balance outstanding under the Company's revolving credit agreement.
Debentures in the amount of $6,212,000 were converted into 1,419,846 shares
of Common Stock during the year ended December 31, 1996. An additional
$2,157,000 of Debentures were converted into 493,006 shares of Common Stock
during the six-month period ended June 30, 1997.
The revolving loan ("Agreement") is subject to semi-annual redeterminations
and will be converted to a three-year term loan on July 1, 1999. Funds
advanced under the facility are collateralized by substantially all of the
Company's U.S. oil and gas producing properties and the common stock of its
principal U.S. subsidiaries. Interest is payable at the prime rate plus
0.25%, or LIBOR rate pricing options plus 2.25%. At June 30, 1997, the
borrowing base for the revolving loan was $18.2 million. The weighted
average interest rate for borrowings outstanding under the revolving loan at
June 30, 1997 was 8.2%. Effective August 1, 1997, the borrowing base for the
revolving loan was increased to $19.1 million, subject to a monthly
reduction of $400,000, beginning September 1, 1997. In accordance with the
terms of the Agreement, and after giving effect to the Company's anticipated
capital requirements, $3.3 million of the loan balance is classified as
currently payable at June 30, 1997. The Agreement
SABA PETROLEUM COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
requires, among other things, that the Company maintain at least a 1 to 1
working capital ratio, stockholders' equity of $6,250,000, a ratio of cash
flow to debt service of not less than 1.25 to 1.0 and general and
administrative expenses at a level not greater than 20% of revenue, all as
defined in the Agreement. Additionally, the Company is restricted from
paying dividends and advancing funds in excess of specified limits to
affiliates. The Company was in compliance with the terms of the Agreement at
June 30, 1997.
The Company's Canadian subsidiary has available a demand revolving reducing
loan in the face amount of $2.8 million. Interest is payable at a variable
rate equal to the Canadian prime rate plus 0.75% per annum (5.5% at June 30,
1997). The loan is collateralized by the subsidiary's oil and gas producing
properties, and a first and fixed floating charge debenture in the principal
amount of $3.6 million over all assets of the company. Effective July 1,
1997, the borrowing base will reduce at the rate of $58,000 per month. In
accordance with the terms of the loan agreement, $315,000 of the loan
balance is classified as currently payable at June 30, 1997. Although the
bank can demand payment in full of the loan at any time, it has provided a
written commitment not to do so except in the event of default.
The Company leases certain equipment under agreements which are classified
as capital leases. Lease payment terms vary from three to four years. The
effective interest rate on the total amount of capitalized leases at June
30, 1997 was 8.82%.
4. Common Stock and Stock Options
As of June 30, 1997, the Company had outstanding options to certain
employees of the Company for the purchase of 653,000 shares of Common Stock.
These options become exercisable over a period of five years from the date
of issue. The exercise price of the options is the fair market value of the
Common Stock at the date of grant. Options to acquire 89,000 shares of
Common Stock were exercised during the six month period ended June 30, 1997.
Options to acquire 269,000 shares of Common Stock were exercisable at June
30, 1997.
On May 30, 1997, the Company issued options to acquire 595,000 shares of
Common Stock to certain officers and employees in accordance with the
provisions of the 1996 Incentive Equity Plan. The options have an exercise
price of 110% of the market value at date of grant and become exercisable
over various periods ranging from two to five years from the date of grant.
No options were exercised during the period ended June 30, 1997.
On May 30, 1997, the Company's Board of Directors authorized, on a deferred
basis, the issuance of 200,000 shares of Common Stock to the Company's
President, the issuance of such shares being contingent upon the officer
remaining in the employ of the Company for a period of two years succeeding
the expiration of his existing employment contract at December 31, 1999,
with such shares to be issued in two equal installments of 100,000 shares
each at the end of each of the two succeeding years.
SABA PETROLEUM COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Additionally, the Board of Directors authorized the issuance of 100,000
shares of performance shares to the Company's President, issuable at the end
of calendar year 1997 provided that certain operating results are reported
by the Company at the end of the year.
5. Contingencies
The Company is subject to extensive Federal, state, and local
environmental laws and regulations. These requirements, which change
frequently, regulate the discharge of materials into the environment.
The Company believes that it is in compliance with existing laws and
regulations.
Environmental Contingencies
Pursuant to the purchase and sale agreement of an asphalt refinery in Santa
Maria, California, the sellers agreed to perform certain remediation and
other environmental activities on portions of the refinery property through
June 1999. Because the purchase and sale agreement contemplates that the
Company might also incur remediation obligations with respect to the
refinery, the Company engaged an independent consultant to perform an
environmental compliance survey for the refinery. The survey did not
disclose required remediation in areas other than those where the seller is
responsible for remediation, but did disclose that it was possible that all
of the required remediation may not be completed in the five-year period.
The Company, however, believes that all required remediation will be
completed by the seller within the five-year period. Environmental
compliance surveys such as those the Company has had performed are limited
in their scope and should not be expected to disclose all environmental
contamination as may exist.Pursuant to the purchase and sale agreement of an
asphalt refinery in Santa Maria, California, the sellers agreed to perform
certain remediation and other environmental activities on portions of the
refinery property through June 1999. Because the purchase and sale agreement
contemplates that the Company might also incur remediation obligations with
respect to the refinery, the Company engaged an independent consultant to
perform an environmental compliance survey for the refinery. The survey did
not disclose required remediation in areas other than those where the seller
is responsible for remediation, but did disclose that it was possible that
all of the required remediation may not be completed in the five-year
period. The Company, however, believes that all required remediation will be
completed by the seller within the five year period. Environmental
compliance surveys such as those the Company has had performed are limited
in their scope and should not be expected to disclose all environmental
contamination as may exist.
The Colombian Ministry of the Environment ("Ministry") issued a resolution
dated June 7, 1995 that set forth a number of measures aimed at correcting
certain deficiencies that the Ministry has allegedly found in environmental
aspects of certain of the Company's Colombia properties. Among such
measures, the Ministry ordered the temporary closing of one of five
production modules and of any wells processed in that module until Texas
Petroleum Company, the former owner and operator of the properties, provided
a document detailing the timetable to implement some of the measures
described above. The temporary closing of the module did not have a
substantial effect on total production because substantially all of the
crude oil which would otherwise have been processed in the closed module was
directed to other production modules. The resolution also ordered the
opening of an environmental investigation of Texas Petroleum Company's
operation of the properties. The document containing the requested timetable
was presented to the Ministry on July 6, 1995. On June 18, 1996, the
Ministry issued a resolution which allowed the current operator of the
properties to reopen the module, while requiring its efforts to finalize
correction of the cited deficiencies.
In accordance with the Articles of Association for the Cocorna Concession,
the Concession expired during the first quarter and the property interest
reverted to Ecopetrol. The property is presently under operation by
Ecopetrol. Under the terms of the acquisition of the Concession, the Company
and the operator were required to perform various environmental remedial
operations, which the operator advises have been substantially, if not
wholly, completed. The Company and the operator are awaiting an inspection
of the Concession area by Colombian officials to determine whether the
government concurs with the operator's conclusions. Based upon the advice of
the operator, the Company does not anticipate any significant future
expenditures associated with the environmental requirements for the Cocorna
Concession.
SABA PETROLEUM COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
In 1993, the Company acquired a producing mineral interest in California
from a major oil company ("Seller"). At the time of acquisition, the
Company's investigation revealed that the Seller had suffered a discharge of
diluent (a light oil based fluid which is often mixed with heavier grade
crudes). The purchase agreement required the Seller to remediate the area of
the diluent spill. After the Company assumed operation of the property, the
Company became aware of the fact that diluent was seeping into a drainage
area, which traverses the property. The Company took action to eliminate the
fluvial contamination and requested that the Seller bear the cost of
remediation. The Seller has taken the position that its obligation is
limited to the specified contaminated area and that the source of the
contamination is not within the area that the Seller has agreed to
remediate. The Company has commenced an investigation into the source of the
contamination to ascertain whether it is physically part of the area which
the Seller agreed to remediate or is a separate spill area. Investigation
and discussions with the Seller are ongoing. Should the Company be required
to remediate the area itself, the cost to the Company could be significant.
The Company has spent approximately $165,000 to date in remediation
activities, and present estimates are that the cost of complete remediation
could approach $1 million. Since the investigation is not complete, an
accurate estimate of cost cannot be made.
In 1995, the Company agreed to acquire, for less than $50,000, an oil and
gas interest in California on which a number of oil wells had been drilled
by the seller. None of the wells were in production at the time of
acquisition. The acquisition agreement required that the Company assume the
obligation to abandon any wells that the Company did not return to
production, irrespective of whether certain consents of third parties
necessary to transfer the property to the Company would be obtained. The
Company has been unable to secure all of the requisite consents to transfer
the property but nevertheless may have the obligation to abandon the wells.
The Company is evaluating its drilling options and is considering whether to
continue to attempt to secure the transfer consents. A preliminary estimate
of the cost of abandoning the wells and restoring the well sites is
approximately $800,000. The Company is currently unable to assess its
exposure to third parties if the Company elects to plug such wells without
first obtaining necessary consent.
The Company, as is customary in the industry, is required to plug and
abandon wells and remediate facility sites on its properties after
production operations are completed. The cost of such operation will be
significant and will occur, from time to time, as properties are abandoned.
There can be no assurance that material costs for remediation or other
environmental compliance will not be incurred in the future. The incurrence
of such environmental compliance costs could be materially adverse to the
Company. No assurance can be given that the costs of closure of any of the
Company's other oil and gas properties would not have a material adverse
effect on the Company.
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS
The following discussion should be read in conjunction with the condensed
consolidated financial statements of the Company and notes thereto, included
elsewhere herein.
Overview
The Company is an independent energy company engaged in the acquisition,
exploration and development of oil and gas properties. To date, the Company has
grown primarily through the acquisition of producing properties with significant
exploration and development potential in the United States, Colombia and Canada.
This strategy has enabled the Company to assemble a significant inventory of
properties over the past five years. The Company's strategy has expanded to
emphasize growth through exploration and development drilling.
The Company's revenues are primarily comprised of oil and gas sales attributable
to properties in which the Company owns a majority or substantial interest. The
Company accounts for its oil and gas producing activities under the full cost
method of accounting. Accordingly, the Company capitalizes, in separate cost
centers, all costs incurred in connection with the acquisition of oil and gas
properties and the exploration for and development of oil and gas reserves. The
Company's financial statements have been consolidated to reflect the operations
of its subsidiaries, including the Company's approximate 74% ownership interest
in Beaver Lake Resources Corporation, a Canadian public company.
The Company's operating performance is influenced by several factors, the most
significant of which are the price received for its oil and gas and the
Company's production volumes. The price received by the Company for its oil
produced in North America is influenced by the world price for crude oil, as
adjusted for the particular grade of oil. The oil produced from the Company's
California properties is predominantly a heavy grade of oil, which is typically
sold at a discount to lighter oil. Heavy oil producers, however, have benefited
recently from a decline in the price differential between light and heavy oil
and the rise in oil prices generally. The oil produced from the Company's
Colombian properties is predominantly a heavy grade of oil. The prices received
by the Company for its Colombian produced oil are determined based on formulas
set by Ecopetrol. Additional factors influencing operating performance include
production expenses, overhead requirements, the Company's method of depleting
reserves, and cost of capital.
Acquisition, Exploration and Development
Drilling activity during the quarter ended June 30, 1997, consisted of one gross
(1.0 net) horizontal oil well that was abandoned due to downhole stability
problems and one gross (.87 net) gas well that was plugged and abandoned as a
dry hole in Canada; the drilling and completion of one gross (1.0 net)
horizontal oil well and the drilling and completion of one pair (2 gross and
net) of Steam Assisted Gravity Drainage ("SAGD") wells in Santa Barbara County,
California; and the drilling and completion of four gross (1.0 net) oil wells
and the drilling of one gross (.25 net) well which was in progress in Colombia.
Production from the SAGD wells is expected to commence in September 1997 when
construction of surface injection equipment is completed.
In July, 1997 drilling operations commenced on the fifth horizontal well in the
California 1997 drilling program, as well as on a re-entry location in Lea
County, New Mexico to test the Cisco formation at the Company's Southwest Tatum
Prospect. In August, 1997 a re-entry operation commenced in Alberta, Canada in a
second attempt to establish production in the Wabamum formation.
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS (continued)
The Company plans to continue drilling activities on its present properties
throughout the remainder of 1997, including as many as 26 additional horizontal
oil wells in California. Permits have been secured for a total of 21 drilling
locations in Colombia.
Results of Oil and Gas Producing OperationsResults of Oil and Gas Producing
Operations
Results of the Company's oil and gas producing activities for the six and three
month periods ended June 30, 1997 and 1996 are as follows:
<TABLE>
<S> <C> <C> <C> <C>
Six Months Ended June 30, 1997 United
Total Canada Colombia
States
Oil and gas sales $ 17,363,664 $ 10,554,957 $ 1,249,110 $ 5,559,597
Production costs $ 8,433,089 $ 5,081,512 $ 503,617 $ 2,847,960
Depletion $ 2,938,140 $ 1,792,000 $ 155,805 $ 990,335
General and administrative $ 2,098,533 $ 1,782,786 $ 216,788 $ 98,959
expenses
Oil volume (Bbls) 1,066,407 555,784 54,822 455,801
Gas volume (Mcf) 1,096,629 732,222 364,407 -
Barrels of oil equivalent 1,249,179 677,821 115,557 455,801
(BOE)
Average per BOE:
Sales price $ 13.90 $ 15.57 $ 10.81 $ 12.20
Production costs $ 6.75 $ 7.50 $ 4.36 $ 6.25
Depletion $ 2.35 $ 2.64 $ 1.35 $ 2.17
General and administrative $ 1.68 $ 2.63 $ 1.88 $ 0.22
expenses
Six Months Ended June 30, 1996 United
Total Canada Colombia
States
Oil and gas sales $ 14,603,688 $ 6,859,207 $ 1,333,645 $ 6,410,836
Production costs $ 7,180,776 $ 3,927,488 $ 476,761 $ 2,776,527
Depletion $ 2,099,225 $ 991,305 $ 132,840 $ 975,080
General and administrative $ 1,563,530 $ 1,184,881 $ 289,211 $ 89,438
expenses
Oil volume (Bbls) 971,367 377,074 62,597 531,696
Gas volume (Mcf) 806,035 495,304 310,731 -
Barrels of oil equivalent 1,105,707 459,625 114,386 531,696
(BOE)
Average per BOE:
Sales price $ 13.21 $ 14.92 $ 11.66 $ 12.06
Production costs $ 6.49 $ 8.54 $ 4.16 $ 5.22
Depletion $ 1.89 $ 2.15 $ 1.16 $ 1.83
General and administrative $ 1.41 $ 2.58 $ 2.53 $ 0.17
expenses
Three Months Ended June 30, United
1997
Total States Canada Colombia
Oil and gas sales $ 7,695,072 $ 4,931,516 $ 511,880 $ 2,251,676
Production costs $ 4,187,879 $ 763,131 $ 280,355 $ 1,144,393
Depletion $ 1,488,091 $ 936,086 $ 86,703 $ 465,302
General and administrative $ 1,172,111 $ 994,218 $ 115,116 $ 62,777
expenses
Oil volume (Bbls) 531,984 297,175 27,148 207,625
Gas volume (Mcf) 532,999 335,796 197,203 -
Barrels of oil equivalent (BOE) 620,781 353,141 60,015 207,625
Average per BOE:
Sales price $ 12.40 $ 13.96 $ 8.53 $ 10.84
Production costs $ 6.75 $ 7.82 $ 4.67 $ 5.51
Depletion $ 2.40 $ 2.65 $ 1.44 $ 2.24
General and administrative $ 1.89 $ 2.82 $ 1.92 $ 0.30
expenses
Three Months Ended June 30, United
1996
Total States Canada Colombia
Oil and gas sales $ 7,640,802 $ 3,583,696 $ 757,401 $ 3,299,705
Production costs $ 3,778,786 $ 1,962,936 $ 274,632 $ 1,541,218
Depletion $ 1,094,106 $ 532,690 $ 74,041 $ 487,375
General and administrative $ 864,559 $ 659,332 $ 157,702 $ 47,525
expenses
Oil volume (Bbls) 492,262 194,628 33,978 263,656
Gas volume (Mcf) 390,705 228,292 162,413 -
Barrels of oil equivalent (BOE) 557,380 232,677 61,047 263,656
Average per BOE:
Sales price $ 13.71 $ 15.40 $ 12.41 $ 12.52
Production costs $ 6.78 $ 8.43 $ 4.49 $ 5.84
Depletion $ 1.96 $ 2.28 $ 1.21 $ 1.85
General and administrative $ 1.55 $ 2.83 $ 2.58 $ 0.18
expenses
</TABLE>
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS (continued)
Results of Refining Operations
In June 1995, the Company entered into a processing agreement with an
unaffiliated company pursuant to which the latter company purchases crude
(including that produced by the Company), delivers the crude to the refinery,
reimburses the Company's out of pocket costs for refining, then markets the
asphalt and other refinery products. Profits from the refinery operations
(computed after recovery of crude costs and other costs of operations) are
generally shared equally by the Company and the unaffiliated company. The
processing agreement has a term which ends December 31, 1998.
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS (continued)
Processing operations for the six and three month periods ended June 30, 1997
and 1996 are as follows:
<TABLE>
<S> <C> <C> <C> <C>
Six Months Three Months
Ended June 30 Ended June 30
1997 1996 1997 1996
Crude oil throughput (Bbls) 659,889 543,345 375,320 301,051
Production:
Asphalt (tons) 72,855 63,954 40,937 35,646
Other products (Bbls) 249,480 186,306 144,552 102,590
Sales:
Asphalt (tons) 70,846 30,296 45,638 25,248
Other products (Bbls) 226,933 173,164 135,588 89,911
Processing fee income $212,232 $44,000 $212,232 $44,000
</TABLE>
The asphalt refining business is seasonal in nature, and is influenced by
several factors, including weatherconditions in the marketing area. A majority
of the Company's processing fee income is attributable to asphalt sales which
are recorded during the period April to October.
1997 compared to 1996
Oil and Gas Sales
Oil and gas sales increased $2.8 million (19.2%) and $100,000 (1.3%) for the six
and three month periods ended June 30, 1997, respectively, from $14.6 million
and $7.6 million for the same periods of 1996. Average sales price per BOE
increases (decreases) of $0.69 and ($1.31) for the six and three month periods
ended June 30, 1997, respectively, from $13.21 and $13.71 for the same periods
of 1996, resulted in increased (decreased) oil and gas sales of $865,000 and
($815,000), respectively.
Production increases of 143,000 BOE (12.9%) and 63,000 BOE (11.3% ), for the six
and three month periods ended June 30, 1997, respectively, from 1,106,000 BOE
and 557,000 BOE for the same periods of 1996 resulted in increased oil and gas
sales of $1.9 million and $869,000, respectively. The increase in oil and gas
production was primarily attributable to the Company's property acquisition in
Louisiana in November 1996 and the horizontal drilling program that began in
California in June 1996. The production increases include declines in Colombia
of 76,000 BOE and 56,000 BOE for the six and three month periods ended June 30,
1997, respectively, from the same periods of 1996 which resulted from the
reversion of the Cocorna Concession property interest in February 1997 and
normal production declines.
Other Revenues
Other revenues increased (decreased) ($315,000) (40.1%) and $215,000 (59.4%) for
the six and three month periods ended June 30, 1997, respectively, from $786,000
and $362,000 for the same periods in 1996. The decrease for the six month period
was due primarily to additional Velasquez-Galan Pipeline operating expenses in
the amount of $414,000 which were invoiced to the Company by the facility's
operator in the first quarter of the year. An increase of $170,000 in processing
fee income from the Company's asphalt refinery was the principal source of the
change for the three month period.
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS (continued)
Production Costs
Production costs increased $1.2 million (16.7%) and $400,000 (10.5%) for the six
and three month periods ended June 30, 1997, respectively, from $7.2 million and
$3.8 million for the same periods in 1996. Average production cost per BOE
increases (decreases) of $0.26 and ($0.03) for the six and three month periods
ended June 30, 1997, respectively, from $6.49 and $6.78 for the same periods in
1996, resulted in increased (decreased) production costs of $321,000 and
($21,000).
Production increases of 143,000 BOE and 63,000 BOE for the six and three month
periods ended June 30, 1997, respectively, from 1,106,000 BOE and 557,000 BOE
for the same periods of 1996 resulted in increased production costs of $932,000
and $430,000, respectively. In comparison with the six and three month periods
of the prior year, production volume changes for the same periods in 1997 were
increases of 218,000 BOE and 120,000 BOE, respectively, in the United States and
decreases of 76,000 BOE and 56,000 BOE, respectively, in Colombia. The increases
in the United States are primarily attributable to the Company's property
acquisition in Louisiana in November 1996 and the horizontal drilling program
that began in California in June 1996. Approximately one-half of the production
declines in Colombia resulted from the reversion of the Cocorna Concession
property interest in February 1997; the balance of the decrease was due to
normal production declines.
General and Administrative Expenses
General and administrative expenses increased $400,000 (23.5%) and $200,000
(20%) for the six and three month periods ended June 30, 1997, respectively,
from $1.7 million and $1.0 million for the same periods of 1996. The overall
increase in general and administrative expenses was due principally to the
increase in employment in the Company's domestic offices to support its planned
oil and gas property development programs.
Depletion, Depreciation and Amortization
Depletion, depreciation and amortization expenses increased $800,000 (33.3%) and
$400,000 (33.3%) for the six and three month periods ended June 30, 1997,
respectively, from $2.4 million and $1.2 million for the same periods of 1996.
Depletion expense increased $800,000 (38.1%) and $400,000 (36.4%) for the six
and three month periods ended June 30, 1997, respectively, from $2.1 million and
$1.1 million for the same periods of 1996. The increases were primarily
attributable to domestic production volume increases for the six and three month
periods ended June 30, 1997 of 218,000 BOE and 120,000 BOE, respectively, in
comparison with the same periods of 1996, and capital costs recorded by the
Company in its full cost pools beginning in the second quarter of 1996 and the
anticipated future development and abandonment costs to be incurred in
connection with the management of its oil and gas properties. Depreciation and
amortization expenses increased $11,000 and $16,000 for the six and three month
periods ended June 30, 1997, respectively, from $269,000 and $134,000 for the
same periods of 1996.
Other Income (Expense)
Other income (expense) increased to income of $274,000 and $70,000 for the six
and three month periods ended June 30, 1997, respectively, from expense of
$83,000 and $22,000 for the same periods of 1996. The changes were primarily due
to non-operational gains realized by the Company's Colombia operations.
Interest Expense
Interest expense decreased $400,000 (33.3%) and $200,000 (33.3%) for the six and
three month periods ended June 30, 1997, respectively, from $1.2 million and
$600,000 for the same periods of 1996. The decreases were due primarily to the
conversion of $8.4 million of Debentures to Common Stock occurring since April
1, 1996.
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS (continued)
Interest expense attributable to the Company's revolving line of credit
increased $77,000 and $66,000 for the six and three month periods ended June 30,
1997, respectively, from the same periods of 1996. The average debt balance
outstanding under this credit facility increased $2.7 million (30.0%) and $3.4
million (38.6%) for the six and three month periods ended June 30, 1997,
respectively, from $9.0 million and $8.8 million for the same periods of 1996,
due principally to the use of loan proceeds to fund a property acquisition and
development drilling activities. The weighted average interest rate for the
revolving line of credit decreased 21 basis points (2.3%) and 56 basis points
(6.1%) for the six and three month periods ended June 30, 1997, respectively,
from 9.29% and 9.25% for the same periods of 1996.
Provision for Taxes on Income
Provision for taxes on income increased $169,000 (13.0%) and decreased $225,000
(37.0%) for the six and three month periods ended June 30, 1997, respectively,
from the same periods of 1996. The Company's estimated effective tax rates were
43.0% in 1997 and 46.0% in 1996.
Net Income
Net income increased $459,000 (30.8%) and decreased $227,000 (30.9%) for the six
and three month periods ended June 30, 1997, respectively, from the same periods
of 1996. The changes in net income reflect the changes in oil and gas sales,
other revenues, production costs, general and administrative expenses,
depletion, depreciation and amortization expenses, interest expense, other
income (expense) and provision for taxes on income discussed above.
The Company's oil and gas producing business is not seasonal in nature.
Liquidity and Capital Resources
Since 1991, the Company's strategy has emphasized growth through the acquisition
of producing properties with significant exploration and development potential.
The Company recently expanded its focus to emphasize drilling, enhanced recovery
methods and increased production efficiencies. During the past five years, the
Company financed its acquisitions and other capital expenditures primarily
through secured bank financing, the creation of joint interest operations and
production payment obligations, and sales of Common Stock and the Debentures.
Supplemental cash and working capital are provided through internally generated
cash flows, secured bank financing and debt and equity financing.
During 1997 and 1996, the Company used a combination of secured bank financing,
the proceeds from the sale of the Debentures and internally generated cash flow
to fund its acquisitions and other capital expenditures.
Working Capital
The Company's working capital decreased in 1997 from $2.4 million at December
31, 1996 to a deficit of $2.9 million at June 30, 1997. This decrease was
primarily due to an increase of $2.2 million in accounts payable, due to the
Company's development expenditures at the end of the second quarter, and the
classification as a current liability of $3.2 million of revolving bank loan
indebtedness which may become payable during the next twelve months, depending
on the Company's future capital requirements and available funding sources.
Operating Activities
The Company's operating activities during 1997 provided net cash flow of $9.0
million. Changes in the non-cash components of working capital were responsible
for $3.8 million of this amount. Cash flows from operating activities provided
net cash flow of $1.3 million in 1996.
Investing Activities
Investing activities during 1997, consisting of oil and gas property
acquisition, development and exploration expenditures, resulted in a net cash
outflow of $12.5 million.
Investing activities during 1996, consisting principally of oil and gas property
acquisition, development and exploration expenditures, resulted in a net cash
outflow of $2.6 million.
Financing Activities
Financing activities during 1997 resulted in net cash flow of $3.5 million.
Borrowings under the Company's credit facilities provided $3.3 million of this
inflow. Proceeds from the exercise of options provided cash inflows in the
amount of $130,000 during 1997.
Financing activities during 1996, which provided net cash flow of $993,000,
consisted principally of activity on the Company's revolving line of credit and
proceeds from the issuance of Debentures, net of related financing costs, in the
amount of $1.4 million.
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS (continued)
Credit Facilities
In September 1993, the Company established a reducing, revolving line of credit
with Bank One, Texas, N.A. to provide funds for the retirement of a production
note payable, the retirement of other short-term fixed rate indebtedness and for
working capital. At June 30, 1997, the borrowing base under the credit agreement
was $18.2 million, subject to a monthly reduction of $435,000, of which $15.7
million was outstanding. Effective August 1, 1997, the borrowing base was
increased to $19.1 million, subject to a monthly reduction of $400,000.
In addition, the Company has received from Bank One, Texas, N.A. a commitment
for a term credit facility of $3.4 million to fund development projects in the
United States. The borrowing base for this facility will reduce at the rate of
$142,000 per month.
The Company's Canadian subsidiary has available a demand revolving reducing loan
in the face amount of $2.8 million. Effective July 1, 1997, the maximum
principal amount available under the loan will reduce at the rate of $58,000 per
month. At June 30, 1997, $2.4 million was outstanding.
The Company's budget for capital expenditures for the second half of 1997 is
$32.6 million. The expenditures will be made primarily for the development of
existing properties. Additional capital expenditures may be made for
acquisitions of producing properties, both domestically and internationally. The
Company has recently concluded negotiations with Pertamina, the Indonesia
state-owned oil company regarding an exploration block on the island of Java and
is awaiting final approvals by Indonesian officials. The initial commitment
including cash bonus, seismic and drilling costs for a period of up to three
years, is $19 million. Subsequent to June 30, 1997, the Company entered into a
letter of intent with another oil company pursuant to which the Company is to
acquire a 75% working interest in two licenses located onshore England south of
London. The licenses cover approximately 123,550 acres of land. Saba will pay
$300,000 and will acquire seismic and other data and will act as operator of the
project, assuming receipt of government approvals. The Company intends to
commence drilling a well by year-end at an estimated gross cost of $1,100,000
($825,000 to the Company's interest) as a dry hole and $1,550,000 gross
($1,165,000 net) as a completed well.The amount of capital expenditures will
change during future periods depending on market conditions, results of the
Company's development drilling program and other related economic factors,
including the price of oil and natural gas. The funds available (including those
from credit lines) for anticipated capital expenditures will be affected by
prices for oil and natural gas, results of the Company's development drilling
program and other factors beyond the control of the Company.
Should the Company be unable to obtain equity and/or debt financing in amounts
sufficient to fund projected activities, it may be constrained in its ability to
acquire and/or develop additional oil and gas properties.
New Accounting Standards
In February 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No.128, "Earnings Per Share." Statement of
Financial Accounting Standards No. 128 specifies
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS (continued)
the computation, presentation, and disclosure requirements for earnings per
share and is effective for financial statements issued for periods ending after
December 15, 1997. Management has not yet determined the impact that adoption of
Statement of Financial Accounting Standard No. 128 is expected to have on the
financial statements of the Company.
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130, "Reporting Comprehensive Income" and
Statement of Financial Accounting Standards No. 131, " Disclosure About Segments
of an Enterprise and Related Information." Both Statements are effective for
fiscal years beginning after December 15, 1997. Management has not yet
determined the impact that adoption of the Statements is expected to have on the
financial statements of the Company.
Safe Harbor for Forward-Looking Statements
Except for historical information contained herein, the statements in this
report are forward-looking statements that are made pursuant to the safe harbor
provisions of the Private Securities Litigation Reform Act of 1995.
Forward-looking statements involve known and unknown risks and uncertainties
which may cause the Company's actual results in future periods to differ
materially from forecasted results. These risks and uncertainties include, among
other things, volatility of oil prices, product demand, market competition,
risks inherent in the Company's international operations, including future
prices paid for oil produced at the Colombian oil properties, imprecision of
reserve estimates, and the Company's ability to replace and expand oil and gas
reserves. These and other risks are described elsewhere herein and in the
Company's other filings with the Securities and Exchange Commission.
<PAGE>
Saba Petroleum Company
PART II - OTHER INFORMATION
PART II
Item 2. Changes in Securities.
During May 1997, pursuant to a general solicitation of shareholders,
the shareholders of the Registrant voted to change the state of incorporation of
Registrant from Colorado to Delaware. During June 1997, such reincorporation was
effected. The material differences in the rights of the holders of Registrant's
common stock, $0.001, are described in Registrant's definitive proxy statement
dated April 25, 1997, which was filed with the Securities and Exchange
Commission under file number 001-13880. The material set forth on pages 12
through 25, inclusive, under the Caption "Proposal No. II-Reincorporation In
Delaware" is incorporated herein in response to this item by this reference. See
also, Item 4 of this Report.
Item 4. Submission of Matters to a vote of Security Holders.
(a) On May 30, 1997, Registrant held its annual meeting of shareholders.
(b) The annual meeting involved the election of directors of the
Registrant's for a term expiring at the end of Registrants 1997 annual
meeting, or until the successors to the directors have been elected and
qualified. At such meeting the entire board of directors was elected
and the persons listed in (c) were elected directors of Registrant for
the term stated above.
(c) The following shows the matters voted upon at the annual meeting, and
the results of such voting:
1. Election of Directors:
<TABLE>
<S> <C> <C> <C> <C> <C>
- --------------------- ------------------ ------------------ ------------------ ------------------ ------------------
Nominee Votes For Votes Against Withheld Abstentions Broker Nonvotes
- --------------------- ------------------ ------------------ ------------------ ------------------ ------------------
- --------------------- ------------------ ------------------ ------------------ ------------------ ------------------
Ilyas Chaudhary 8,436,054 140 9,660 500,983
- --------------------- ------------------ ------------------ ------------------ ------------------ ------------------
- --------------------- ------------------ ------------------ ------------------ ------------------ ------------------
Alex Cathcart 8,435,793 700 10,920 500,983
- --------------------- ------------------ ------------------ ------------------ ------------------ ------------------
- --------------------- ------------------ ------------------ ------------------ ------------------ ------------------
Walton Vance 8,436,469 140 6,748 500,983
- --------------------- ------------------ ------------------ ------------------ ------------------ ------------------
- --------------------- ------------------ ------------------ ------------------ ------------------ ------------------
William Hagler 8,419,773 87,640 36,120 500,983
- --------------------- ------------------ ------------------ ------------------ ------------------ ------------------
- --------------------- ------------------ ------------------ ------------------ ------------------ ------------------
Rodney C. Hill 8,435,519 2,730 10,808 500,983
- --------------------- ------------------ ------------------ ------------------ ------------------ ------------------
- --------------------- ------------------ ------------------ ------------------ ------------------ ------------------
Ronald Ormand 8,435,479 770 10,948 503,083
- --------------------- ------------------ ------------------ ------------------ ------------------ ------------------
- --------------------- ------------------ ------------------ ------------------ ------------------ ------------------
Faysal Sohail 8,435,259 4,410 10,948 500,983
- --------------------- ------------------ ------------------ ------------------ ------------------ ------------------
</TABLE>
2. Change of the State of Incorporation of the Registrant from Colorado to
Delaware:
<TABLE>
<S> <C> <C> <C> <C>
Nominee Votes For Votes Against Withheld Abstentions Broker Nonvotes
5,611,022 155,631 12,262
3. Adoption of the Company's 1997 Stock Option Plan for Non-Employee Directors.
Nominee Votes For Votes Against Withheld Abstentions Broker Nonvotes
8,184,788 267,390 56,464
4. Ratification of the selection of Coopers & Lybrand, L.L.P. as Registrant=s auditors for the year 1997.
Nominee Votes For Votes Against Withheld Abstentions Broker Nonvotes
8,481,693 17,472 9,453
</TABLE>
ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K
Exhibits filed for the quarter ended June 30, 1997 are as follows:
EXHIBIT NUMBER DESCRIPTION
10.38 Employment agreement with Alex Cathcart
10.39 Retainer Agreement with Rodney C. Hill, A
Professional Corporation
11.1 Computation of Earnings per Common Share
27.1 Financial Data Schedule
No reports were filed under Form 8-K during the quarter ended June 30, 1997.
Saba Petroleum Company
SIGNATURES
In accordance with the requirements of the Exchange Act, the issuer caused this
report to be signed on its behalf by the undersigned, thereunto duly authorized.
SABA PETROLEUM COMPANY
Date: August 19, 1997 By: /s/ Ilyas Chaudhary___________________
Ilyas Chaudhary
President
(Principal Executive
Officer)
Date: August 19, 1997 By: /s/ Walton C. Vance__________________
Walton C. Vance
Chief Financial Officer
(Principal Financial and
Accounting Officer)
EXHIBIT 10.38
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT (the "Agreement"), effective as of the 1st day of
March 1997, by and between SABA PETROLEUM COMPANY, a Colorado corporation
(hereinafter referred to as the "Company"), and ALEX S. CATHCART, an individual
(hereinafter referred to as the "Employee"), the following terms and conditions.
RECITALS
A. It is in the best interest of the Company to employ the services of
Employee as Executive Vice President of the Company and President and
Chief Operating Officer of the following subsidiaries of the Company:
(i) Sabacol, Inc.; (ii) Saba Offshore, Inc., and (iii) Saba Exploration
Company, subject to and in accordance with the terms and provisions set
forth below.
B. After independent review and consideration of the Agreement,
Employee desires to accept such employment subject to, and in
accordance with, the terms and provisions set forth below.
NOW, THEREFORE, for good and valuable consideration, the receipt and sufficiency
of which are hereby acknowledged, the parties agree as follows:
1. EMPLOYMENT RELATIONSHIP; TERM; RENEWAL
Subject to the other terms, conditions and provisions of this
Agreement, the Company hereby employs Employee and Employee hereby
accepts such employment for a period of two (2) years, commencing on
the Effective Date of this Agreement, as that term is defined below,
and subject to the termination provisions as provided herein below in
Paragraph 8. The Company shall have the option, in its sole discretion,
of extending this Agreement for an additional two (2) year term at the
expiration of the initial term.
2. COMPENSATION
2.1 Annual Compensation
Subject to the terms and provisions hereof, the Company shall
pay or cause to be paid to Employee during the term hereof an
annual salary plus a seven percent (7%) escalation per year as
described in Exhibit A hereto. Cash compensation shall be paid
in equal semi-monthly installments commencing on the Effective
Date hereof and provided only that such installments shall be
pro-rated in the event of any partial employment period
hereunder.
2.2 Additional Compensation
Employee may be further entitled to additional compensation in
the form of stock options in amounts and subject to the
conditions as set forth in Exhibit A attached hereto and
incorporated herein by reference.
2.3 Employment Taxes
All compensation and benefits shall be subject to customary
withholding taxes and other employment taxes as from time to time are
required by any governmental statute, ordinance, or regulation with
respect to such compensation paid by the Company to an employee.
3. EMPLOYEE BENEFITS AND REIMBURSEMENTS
A. Medical Insurance
During the term of this Agreement and the employment described
herein, the Company will pay the premium for standard medical
benefits for Employee and dependents. Such contribution to
begin with the Effective Date.
B. Reimbursement for Out-of-Pocket Expenses
Company shall, not less frequently than monthly, reimburse
Employee with respect to all ordinary out-of-pocket expenses
which, in the sole judgment of the Company, were incurred by
Employee in the course of and/or in the conduct of Company
business by Employee, provided Employee follows and complies
with Company reporting and receipts submission procedures.
C. Other Benefits
In addition to the foregoing, Employee shall also be provided
any other benefits of whatever kind or nature or shall be
permitted to participate in such other benefits or programs
which may, from time to time, be adopted or provided by the
Company and otherwise made available by the Company to other
employees or officers of Company under substantially the same
restrictions and limitations, if any and as applicable.
D. Relocation
Company will reimburse Employee for reasonable and necessary
moving costs incurred in the course of Employee relocation.
Company will make the final determination whether items of
moving costs are "reasonable and necessary."
E. Automobile
Employee shall receive the use of a suitable automobile.
4. SERVICES AND DUTIES OF EMPLOYEE
Employee agrees that, expressly in his capacity as an officer of the
Company, Employee will at all times loyally and conscientiously perform
all of the following duties, responsibilities, and obligations:
A. Those duties and responsibilities expressly or implicitly
contained in this Agreement;
B. Those duties and responsibilities customarily incident
to or required of such position(s)and/or office(s) as may,
from time to time, be assigned to Employee by the Board of
Directors;
C. Such other services, acts, or things necessary, prudent,
or advisable in the exercise of Employee's reasonable
judgment for the benefit of the Company and;
D. Such additional duties, responsibilities and
obligations and such other services,acts, and things
as, from time to time, may be designated by the Board of
Directors of the Company.
5. ALLOCATION OF EMPLOYEE TIME
By entering into this Agreement, it is the mutual intention of the
parties that Employee shall devote all of his productive time, ability,
and attention to the business of the Company and its subsidiaries,
including Beaver Lake Resources Corporation, and shall not, without the
prior written consent of the Board, which may be withheld for any
reason whatsoever, otherwise actively engage in other business
endeavors or pursuits, including, without limitation, the direct or
indirect rendition of any services of a business, commercial, or
professional nature to any other person or organization, whether for
compensation or otherwise. The President of the Company and its Board
of Directors shall consult with the Employee regarding the proper
allocation of Employee's time between the Company and its subsidiaries.
6. CONFIDENTIALITY AND TRADE SECRETS
Employee acknowledges and agrees that, in prior meetings with other
employees, representatives, officers and directors of the Company,
Employee has or will, during the term of employment, have access to,
become acquainted with, and/or develop or invent various Trade Secrets
and proprietary information consisting of and including, without
limitation, formulas, processes, plans, charts, concepts, procedures,
compilations, lists of data and information, records, specifications,
documents, contracts, reports, forms, manuals, names, addresses, and
telephone numbers and other information of customers, lenders,
investors, or identified prospective customers, lenders, or investors
(all of the foregoing sometimes collectively referred to as "Trade
Secrets") which are owned or have been or subsequently are developed,
compiled, organized or invented by the Company, the Employee, or the
Company's other employees. Employee, for the benefit of the Company and
as a condition of this Agreement, expressly agrees that Employee shall
not disclose any of the Trade Secrets, directly or indirectly; use them
in any way; or claim proprietary ownership interest therein, either
during or after the term of this Agreement except as required in the
performance of Employee's duties hereunder or as expressly authorized
by the written consent and permission of the Company after full
explanation and disclosure of any such proposed use or disclosure by
the Employee to the Company.
Employee further acknowledges and agrees that all Trade Secrets, as
defined above, whether now existing or hereafter developed are and
shall at all times be owned solely and exclusively by the Company and
Employee shall have no ownership interest therein or rights thereto.
7. EFFECTIVE DATE
The Effective Date of this Agreement shall be the day, month, and year
first set forth above.
8. TERMINATION UPON EVENT OF TERMINATION
8.1 Events of Termination
This Agreement shall terminate immediately upon the occurrence
of any of the following events:
A. Whenever the Company and Employee shall mutually
agree in writing to terminate this Agreement.
Employee to provide at least thirty (30) days notice
for termination;
B. Whenever the Company delivers written notice to
Employee terminating the Agreement for "cause"
including, among other things, Employee's material
gross negligence or intentional misconduct under the
terms of this Agreement, unless waived in writing and
signed by the Company in the Company's sole and
absolute discretion;
C. Upon the death of Employee;
D. Upon the permanent incapacity of Employee because of
illness, physical injury, other physical or mental
disability, or any reason such that it reasonably
appears that Employee will be unable to perform or
complete Employee's duties and responsibilities under
this Agreement.
If, for any reason other than those set forth immediately above, the
Company for any reason terminates this Agreement, then upon such
termination, in addition to the other provisions contained herein, the
Company shall pay to Employee as a severance allowance an amount equal
to six (6) months of the Employee's current salary.
8.2 Post-Termination Duties and Obligations
Upon termination for any of the foregoing Events;
A. Employee or the representative of Employee's estate,
in the event of the death of the Employee, shall be
entitled to receive that compensation earned by
Employee that Employee would otherwise be entitled to
up to the date of termination less such amounts as
are required by law to be withheld and deducted and;
B. Employee or the representative of Employee's estate,
in the event of the death of the Employee, shall
deliver to the Company all records, reports, files,
schedules, lists, equipment, tools, and any other
property in his possession or under his control
belonging to the Company and, as appropriate, in good
condition and repair, ordinary wear and tear
excepted.
9. COMPANY'S AUTHORITY
The Company expressly reserves the right to adopt and promulgate from
time to time, orally or in writing, Company rules, regulations,
directives and policies with respect to Company operations and systems,
business expense reimbursements, general employee standards, and
employee performance requirements and evaluation criteria (all of the
foregoing collectively referred to as "Company Policies"). Employee
agrees at all times to observe and comply with all Company Policies,
whether oral or in writing, as stated and as reasonably interpreted by
the Board of Directors.
10. PAID VACATION AND SICK LEAVE
A. Paid Vacation
Employee shall be entitled to a paid vacation of four weeks
per year.
B. Sick Leave
As determined by the Company, Employee shall be entitled to a
reasonable number of days of sick leave with full compensation
as specified in the current policy of the Company during each
calendar year. In determining what is a reasonable number of
days, the Company shall take into account previous periods of
illness or disability, the number of days of sick leave taken
in the current and preceding years, and any other relevant
factors it deems pertinent.
11. INDEMNIFICATION
The Company shall indemnify the Employee and hold him harmless for and
with respect to all costs and expenses incurred by Employee resulting
from any acts or decisions made by him in good faith while performing
services for the Company within the scope of his position and authority
hereunder.
12. NON-TRANSFERABILITY
This Agreement is personal to Employee and the services to be provided
by Employee are personal to and uniquely capable of performance by
Employee. Consequently, neither this Agreement nor any right, duties,
or obligations hereunder, or interests herein, shall be transferred,
assigned, conveyed, hypothecated, delegated or pledged, in whole or in
part, voluntarily or involuntarily, by operation of law or otherwise.
Any attempted transfer, assignment or delegation shall be null and
void.
13. NOTICES
All notices provided in or permitted pursuant to this Agreement shall
be in writing and shall be deemed to have been duly given when
delivered or mailed by United States certified mail, return receipt
requested, postage prepaid, addressed to Company at its principal
office address and to Employee at Employee's residence address on the
records of the Company or at such other addresses either party may have
furnished to the other party in writing in accordance herewith.
14. VALIDITY
The invalidity or unenforceability of any provision of this Agreement
shall not affect the validity or enforceability of any other provision
of this Agreement, which shall remain in full force and effect.
15. AMENDMENTS
Any modification to or amendment of this Agreement shall be effective
only if:
A. It is in writing;
B. It expressly refers to this Agreement; and
C. It is signed by all parties hereto.
16. CONSTRUCTION
This Agreement shall be construed without regard to any presumption or
other rule requiring construction against the party drafting a
document. It shall be construed neither for nor against any party, but
each provision shall be given reasonable interpretation in accordance
with the plain meaning of its terms and the expressed intent of the
parties.
17. ENTIRE AGREEMENT
This Agreement supersedes any and all prior agreements between the
parties thereto, if any, whether oral or written, with respect to the
employment of Employee by the Company and contains all of the
covenants, conditions, and agreements between the parties with respect
to the rendition of such services as herein contemplated or to be
performed hereunder. Each party acknowledges for the benefit of the
other;
A. That no representations, inducements, promises, or agreements,
orally or in writing, have been made by any party, or any person acting
or claiming to be acting on behalf of the other party and;
B. That no other agreement, statement, or promise with respect to such
employment which is not set forth herein shall be valid or binding.
18. ATTORNEY'S FEES
In the event of any dispute or disagreement under this Agreement
whether or not suit is instituted, or if any action is instituted, at
law or in equity, including, without limitation, an action for
declaratory or injunctive relief to enforce or interpret the provisions
of this Agreement, the prevailing party shall be entitled to be
reimbursed for all costs and expenses, including, without limitation,
reasonable attorneys' fees, which may be set by the court in the same
action if any action has been so commenced or in a separate action
brought for that purpose. Such right of reimbursement shall be in
addition to any other relief to which that party may be entitled.
19. GOVERNING LAW AND VENUE
Irrespective of the place of execution or performance, this Agreement
will be governed by and construed in accordance with the laws of the
State of California. The venue of any and all such actions brought
under or pursuant to this Agreement shall be Santa Barbara County,
California.
20. WAIVER
No provision of this Agreement may be modified, waived or discharged
unless such waiver modification or discharge is agreed to in writing
and signed by Employee and such Officer as may be authorized by the
Board. No waiver by either party thereto at any time of any breach of
any condition or provision of this Agreement shall be deemed a waiver
of or to the subsequent enforcement of each term and provision of this
Agreement.
21. BOARD OF DIRECTORS APPROVAL
This Agreement shall be subject to the approval of the Compensation
Committee of the Company's Board of Directors. If not so approved this
Agreement shall be null and void.
22. COORDINATION WITH BEAVER LAKE RESOURCES CORPORATION EMPLOYMENT AGREEMENT
This Agreement shall be coordinated with Employee's employment
agreement with Beaver Lake Resources Corporation ("BLRC"), such that
the compensation provisions of this Agreement shall govern and
supercede those provisions of Employee's agreement with BLRC.
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement as of the day,
month, and year first set forth above.
"COMPANY"
SABA PETROLEUM COMPANY
a Colorado CorporationBY: _____________________________
Ilyas Chaudhary, President
"EMPLOYEE"
- -----------------------------
Alex S. Cathcart
EXHIBIT A: COMPENSATION/OPTIONS GRANTED
<PAGE>
EXHIBIT "A"
ANNUAL COMPENSATION - STOCK OPTIONS
<TABLE>
<S> <C> <C> <C>
Exercise Price Number of
Year Salary Per Share (1) Option Shares
- -------------------------- ------------------------------ ---------------------------- ---------------------------
Initial Term
1 $115,000.00 $20.00 25,000
2 $123,000.00 $20.00 25,000
3 $123,000.00 $20.00 25,000
(Optional Term)
75,000
</TABLE>
(1) To be adjusted to 110% of the market price on May 30, 1997.
* The Employee may exercise the Option Shares in whole or in part at any time on
or after the Employment Anniversary date of the Employee in each of the two (2)
years of employment. For example: the option to purchase 25,000 shares of the
Company's common stock @ the subscribed price may be exercised by the Employee
giving the Company written notice of the Employee's intention to do so at any
time on or after March 1, 1998. Similarly, the second year option could not be
exercised until on or after March 1, 1999. The right to exercise Option Shares
shall vest on respective Employment Anniversary Dates, and shall accumulate. In
the event the employment of the Employee is terminated for any reason, by the
Employee or by the Company, with or without cause, Employee's rights hereunder
shall be limited to those Option Shares which have vested.
These Option Shares are granted pursuant to the Company's 1996 Incentive
Equity Plan and are subject to all the terms and conditions of said plan,
which is incorporated by reference herein.
The Company will prepare, or cause to be prepared and filed with the
appropriate regulatory agencies a registration statement(s) which will
cause the Employee's Option Shares to be registered under Section 12(g) of
the Securities Act of 1933; to be freely transferable; and, to be
represented by stock certificates without any restrictive legends.
EXHIBIT 10.39
March 16, 1997
Mr. Ilyas Chaudhary, President
Saba Petroleum Company
2301 Airport Drive, Suite 201
Santa Maria, Ca. 93455
Re: Representation of Saba Petroleum Company
Dear Mr. Chaudhary,
When accepted by you, this letter will constitute an agreement for the
representation of Saba Petroleum Company and its subsidiaries (collectively,
"Saba") by the undersigned, Rodney C. Hill, A Professional Corporation ("Hill"),
and the written fee agreement required under California law. The terms of the
engagement are as follows:
1. Saba engages Hill to act as its general counsel. Hill's
representation in such respect shall be to advise management and the Board of
Directors on legal matters relating to Saba, to assist management with the
negotiation and execution of agreements with third persons, to perform such
legal services for Saba as Hill deems to be within its areas of legal
competency, to hire and supervise outside counsel for Saba, to direct the
performance of legal services by such outside counsel and to negotiate and
approve for payment fees for legal services rendered by such outside counsel to
Saba.
2. The terms of the engagement shall be at will, such that Saba may
discharge Hill at any time with or without cause. Similarly, Hill may withdraw
from representation of Saba at any time, with or without cause, but in any such
instance, Hill shall assist such counsel as Saba may select to acquaint himself
on the matters on which Hill had been working; further, in such event, Saba
shall compensate Hill at the same billing rate charged Saba by such counsel for
the time expended in assisting such counsel and shall reimburse Hill for all out
of pocket expenditures incurred by Hill in rendering such assistance.
3. It is expected that Hill shall devote a substantial amount of its legal
practice time and efforts to the representation of Saba, but Hill shall be
entitled to continue representation of the client which it presently represents.
The precise amount of time to be devoted by Hill to the representation of Saba
shall be determined by Hill. However, in the event that Hill deems that a
conflict, actual or potential, exists between its representation of Saba and any
new client or former client, Hill shall be entitled to withdraw from the
representation of Saba (and such client or former client) in respect to the
matter as to which Hill believes such a possible conflict exists and cause third
party counsel to Saba to represent Saba with respect to such matter without the
participation therein by Hill is aware of such a potential conflict, which is in
respect of the dealings between Saba and
Geo Petroleum, Inc.; Saba agrees that Hill may represent neither Saba nor Geo
Petroleum, Inc. with respect to their dealings with each other. The clients that
Hill will continue representing in matters not relating to Saba include Geo
Petroleum, Inc., Mark A. Nahabedian, Capco Resources, Ltd., G.R. Nance, B.A.
Ogle, Jonah Goldrich, Drake Capital Securities, Inc., Riverby Ltd., and their
respective affiliates. In addition, Saba understands that Hill has various and
gas interests and will continue to acquire and develop such interests in
association with others. Hill shall not be required to offer any such interests
(whether existing or hereafter sought or acquired) to Saba, but Hill shall not
actively compete with Saba for the acquisition of any such interests. At Saba's
election, Rodney C. Hill shall be a vice-president of Saba, but shall not be an
employee of Saba, but rather an employee loaned by Hill to Saba.
4. Saba shall compensate Hill on a monthly basis at the annual rate of
$150,000, reduced by any compensation which Rodney C. Hill, the sole shareholder
of Hill, annually receives as a director of Saba. For such purpose, Hill shall
be compensated at an interim rate of $10,000 per month and An adjustment shall
be made in December of each year or at such earlier time as Hill's
representation of Saba or membership on the Board of Directors shall cease.
Hill's compensation shall be reviewed on an annual basis and shall be adjusted
if so agreed by Saba and Hill. Saba shall also grant to Hill, effective March
15, 1997, options to purchase 125,000 shares of the common stock of Saba at an
exercise price of $___per share. Such options shall be subject to adjustment in
the case of stock dividends, splits, reclassification or other event which would
give rise to an adjustment in options, warrants, or rights to purchase or
acquire the common stock of Saba held by any third person. The number of options
to be granted to Hill shall be reduced annually by the number of options
acquired by Hill under Saba's directors option plan. Options granted to Hill
shall vest 20% per year on the 15th day of March. Saba shall cause the shares
underlying Hill's options to be registered under the Securities Act of 1933 and
approved for such listing on such exchange or market as the common stock of Saba
may be listed, all no later than the day on which such options shall become
exercisable.
5. Hill shall maintain its offices in Santa Barbara, California , for its
performance of services to Saba. Saba shall install and maintain, at its cost
and on a trial basis, a video teleconferencing system, including ISDN
facilities, between Saba's offices and that of Hill. To perform its duties to
Saba, Hill will be required to be present at Saba's offices in Santa Maria
frequently, but it is anticipated that it will not be presently more than eight
days per month. Should Hill spe3nd the night in Santa Maria, Saba will reimburse
or bear Hill's hotel and
incidental expenses at the Santa Maria Inn or equivalent facility. Saba shall
reimburse Hill for its out of pocket expenses which have been incurred for the
benefit of Saba, including telephone (other than local charges), travel, postage
and other expenses.
6. Saba shall cause Rodney C. Hill and his spouse to be included in all
benefit and medical plans maintained by Saba, save those plans for which
eligibility is limited to employees of Saba. Should Rodney C. Hill and his
spouse not be eligible for coverage under medical and dental plans maintained,
from time to time, by Saba, Saba will pay to Hill an amount equal to that which
would be paid by Saba to the insurer were Rodney C. Hill and his spouse covered
by the apposite medical or dental plan.
7. Saba will pay to Hill an automobile allowance of $400 per month, which
shall compensate Hill for car rental and usage. In addition, Saba shall
reimburse Hill on a monthly basis 1/24 of the cost of insurance on the
automobile acquired by Hill and 1/24 of the annual license and registration fees
for such car. As Hill leases a new automobile ( which shall not be more than
once every two years) Saba shall reimburse Hill for 50% of the deposit and other
first month's charges (save pre-paid rental) due under the lease.
Saba is advised that it should have this letter of agreement reviewed by
counsel other than Hill, so that Saba may have an unbiased and disinterested
opinion as to the contents and effect thereof. After such review and
consideration as Saba determines appropriate, kindly sign and return one copy of
this letter to the undersigned, and it will constitute the retention and fee
agreement required by the Rules of Professional Conduct.
Yours very truly,
Rodney C. Hill, A Professional Corporation
By________________________________
Rodney C. Hill, its President
ACCEPTED AND AGREED TO On this ____ day of March, 1997.
SABA PETROLEUM COMPANY
EXHIBIT 11.1
==========================================
Computations of Earnings Per Common
Share
==========================================
For the Six and Three Months Ended
June 30, 1997 and 1996
<TABLE>
<S> <C> <C> <C> <C>
Six Months Three Months
Ended June 30 Ended June 30
1997 1996 1996 1997
Primary Earnings
Net income before minority interestin
earnings of consolidated 2,043,273 1,590,510 513,261 813,400
subsidiary
Minority interest in earnings of
consolidated subsidiary (94,391) (100,647) (5,961) (79,025)
------------------- ----------------- -------------------- -------------------
Net income available to Common 1,948,882 1,489,863 507,300 734,375
=================== ================= ==================== ===================
Primary Shares
Weighted average number of
Common Shares outstanding 10,471,946 8,529,978 10,561,814 8,547,898
Additional shares assuming
issuance of shares underlying 679,488 552,644 669,737 591,226
options
------------------- ----------------- -------------------- -------------------
Primary Shares 11,151,434 982,622 11,231,551 9,139,124
=================== ================= ==================== ===================
Primary Earnings per Common Share
Net income available to Common $0.175 $0.164 $0.045 $0.080
=================== ================= ==================== ===================
Fully Diluted Earnings
Net income before minority interest
in earnings of consolidated 2,043,273 1,590,510 513,261 813,400
subsidiary
Minority interest in earnings of (94,391) (100,647) (5,961) (79,025)
consolidated subsidiary
Plus interest expense attributable
to Debentures, net of related income 107,800 396,164 53,258 200,842
taxes
------------------- ----------------- -------------------- -------------------
Net income available to Common 2,056,682 1,886,027 560,558 935,217
=================== ================= ==================== ===================
Fully Diluted Shares
Weighted average number of 10,471,946 8,529,978 10,561,814 8,547,898
Common Shares outstanding
Additional shares assuming issuance:
Of shares underlying options 679,488 552,644 669,737 591,226
Of convertible common shares
@ $4.375 per share
underlying:
$6,438,000 from 1/1/97 1,471,543 1,471,543 0
$11,000,000 from 1/1/96 2,514,286 2,514,286
$1,650,000 from 2/7/96 300,471 377,143
Less shares actually issued (390,920) (2,358) (480,788) (4,718)
upon conversions ------------------- ----------------- -------------------- ----------------
Fully Diluted Shares 12,232,057 11,895,021 12,222,305 12,025,835
=================== ================= ==================== ================
Fully Diluted Earnings per Common share
Net income $0.168 $0.159 $0.046 $0.078
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from (A) the
Company's condensed consolidated balance sheet at June 30, 1997 and condensed
consolidated statement of income for the six months ended June 30,
1997. And is Qualified in its entirety by reference to such (B) financial
statements presented in quarterly report form 10-QSB for the quarterly period
ended June 30, 1997.
</LEGEND>
<CIK> 0000312340
<NAME> Saba Petroleum Company
<MULTIPLIER> 1,000
<CURRENCY> 0
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> Dec-31-1997
<PERIOD-START> Jan-01-1997
<PERIOD-END> Jun-30-1997
<EXCHANGE-RATE> 1
<CASH> 743
<SECURITIES> 0
<RECEIVABLES> 5,863
<ALLOWANCES> (71)
<INVENTORY> 0
<CURRENT-ASSETS> 10,141
<PP&E> 62,688
<DEPRECIATION> (18,435)
<TOTAL-ASSETS> 56,456
<CURRENT-LIABILITIES> 13,068
<BONDS> 20,109
0
0
<COMMON> 15,022
<OTHER-SE> 6,745
<TOTAL-LIABILITY-AND-EQUITY> 56,456
<SALES> 0
<TOTAL-REVENUES> 17,835
<CGS> 0
<TOTAL-COSTS> 13,765
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 831
<INCOME-PRETAX> 3,513
<INCOME-TAX> 1,470
<INCOME-CONTINUING> 2,043
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,949
<EPS-PRIMARY> .18
<EPS-DILUTED> .17
</TABLE>
