SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 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: June 30, 1995
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______________ to _______________
Commission file number: 0-10156
CAIRN ENERGY USA, INC.
(Exact name of registrant as specified in its charter)
Delaware 23-2169839
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
8235 Douglas Avenue, Suite 1221, Dallas, Texas 75225
(Address of principal executive offices) (Zip Code)
(214) 369-0316
(Registrant's telephone number, including area code)
____________________________________________________
(Former name, former address and former fiscal year, if changed since
last report.)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such
shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90
days.
Yes X No
The number of shares outstanding of each of the issuer's classes of
common stock as of July 31, 1995:
15,983,150 shares of common stock, par value $.01
<PAGE>
<PAGE> CAIRN ENERGY USA, INC.
INDEX
Page No.
--------
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Statements of Operations for the three and six
months ended June 30, 1995 and 1994 . . . . . . . . . . . 3
Balance Sheets at June 30, 1995 and December 31, 1994. . . . 4
Statement of Changes in Stockholders' Equity for the
six months ended June 30, 1995 . . . . . . . . . . . . . . 6
Statements of Cash Flows for the six months
ended June 30, 1995 and 1994 . . . . . . . . . . . . . . . 7
Notes to Financial Statements . . . . . . . . . . . . . . . 8
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations . . . . . . . . . . . . 11
PART II. OTHER INFORMATION
Item 1. Legal Proceedings . . . . . . . . . . . . . . . . . . 15
Item 2. Changes in Securities . . . . . . . . . . . . . . . . 15
Item 3. Defaults Upon Senior Securities . . . . . . . . . . . 15
Item 4. Submission of Matters to a Vote of Security Holders . 15
Item 5. Other Information . . . . . . . . . . . . . . . . . . 15
Item 6. Exhibits and Reports on Form 8-K . . . . . . . . . . 16
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
CAIRN ENERGY USA, INC.
STATEMENTS OF OPERATIONS
For the Three and Six months ended June 30, 1995 and 1994
<TABLE>
Three months ended Six months ended
June 30, June 30,
------------------------ ------------------------
1995 1994 1995 1994
---------- ---------- ---------- ----------
(in thousands except per share amounts)
<CAPTION>
Revenues:
<S> <C> <C> <C> <C>
Natural gas and crude oil. . . . $ 7,807 $ 2,393 $12,808 $ 5,355
Other revenue . . . . . . . . . 43 11 75 26
---------- ---------- ---------- ----------
Total revenues . . . . . . . . . . 7,850 2,404 12,883 5,381
---------- ---------- ---------- ----------
Expenses:
Lease operating expenses
and production taxes . . . . . 1,034 583 1,563 1,278
Depreciation, depletion and
amortization . . . . . . . . . 4,022 1,034 6,772 2,318
Administrative expenses . . . . 493 344 820 739
Interest . . . . . . . . . . . . 737 241 1,357 445
---------- ---------- ---------- ----------
Total expenses . . . . . . . . . . 6,286 2,202 10,512 4,780
---------- ---------- ---------- ----------
Net income . . . . . . . . . . . . $ 1,564 $ 202 $ 2,371 $ 601
========== ========== ========== ==========
Net income per common and
common equivalent share . . . . $ 0.10 $ 0.02 $ 0.15 $ 0.05
========== ========== ========== ==========
Weighted average common and common
equivalent shares outstanding . 15,976 12,463 15,970 12,463
========== ========== ========== ==========
See accompanying notes.
</TABLE>
<PAGE>
CAIRN ENERGY USA, INC.
BALANCE SHEETS
June 30, 1995 and December 31, 1994
<TABLE>
ASSETS
---------
June 30, December 31,
1995 1994
---------- ----------
(in thousands)
<CAPTION>
Current assets:
<S> <C> <C>
Cash and cash equivalents . . . . . . . . . . . . . . . . . . $ 1,553 $ 2,182
Accounts receivable . . . . . . . . . . . . . . . . . . . . . 5,451 2,031
Receivable from Phemus Corporation . . . . . . . . . . . . . 3,900 -
Receivable from Cairn Energy PLC . . . . . . . . . . . . . . - 48
Prepaid expenses . . . . . . . . . . . . . . . . . . . . . . 625 136
---------- ----------
Total current assets . . . . . . . . . . . . . . . . . . . . . 11,529 4,397
Property and equipment at cost:
Oil and gas properties, based on full cost accounting . . . . 141,846 129,758
Other equipment . . . . . . . . . . . . . . . . . . . . . . . 638 564
---------- ----------
142,484 130,322
Less accumulated depreciation, depletion and amortization . . (53,066) (46,373)
---------- ----------
Net property and equipment . . . . . . . . . . . . . . 89,418 83,949
Deferred charges, net of amortization . . . . . . . . . . . . . 713 835
---------- ----------
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . $101,660 $ 89,181
========== ==========
See accompanying notes.
</TABLE>
4
<PAGE>
CAIRN ENERGY USA, INC.
BALANCE SHEETS
June 30, 1995 and December 31, 1994
LIABILITIES AND STOCKHOLDERS' EQUITY
----------
<TABLE>
June 30, December 31,
1995 1994
---------- ----------
(in thousands)
<CAPTION>
Current liabilities:
<S> <C> <C>
Accounts payable . . . . . . . . . . . . . . . . . . . . . . $ 445 $ 1,286
Accrued lease operating expenses . . . . . . . . . . . . . . 666 528
Accrued well costs . . . . . . . . . . . . . . . . . . . . . 2,456 1,701
Deferred revenue . . . . . . . . . . . . . . . . . . . . . . 67 152
Other accrued liabilities . . . . . . . . . . . . . . . . . . 255 216
Current maturities of long-term debt . . . . . . . . . . . . 4,188 -
---------- ----------
Total current liabilities . . . . . . . . . . . . . . . . . . . 8,077 3,883
Long-term debt . . . . . . . . . . . . . . . . . . . . . . . . 29,312 23,500
Stockholders' equity:
Common stock, $.01 par value;
30,000,000 shares authorized;
Shares issued and outstanding:
June 30, 1995 - 15,983,150
December 31, 1994 - 15,963,080 . . . . . . . . . . . . . 160 160
Additional paid-in capital . . . . . . . . . . . . . . . . . 78,085 77,983
Accumulated deficit . . . . . . . . . . . . . . . . . . . . . (13,974) (16,345)
---------- ----------
Total stockholders' equity . . . . . . . . . . . . . . . . . . 64,271 61,798
---------- ----------
Total liabilities and stockholders' equity . . . . . . . . . . $101,660 $ 89,181
========== ==========
See accompanying notes.
</TABLE>
5
<PAGE>
CAIRN ENERGY USA, INC.
Statement of Changes in Stockholders' Equity
Six months ended June 30, 1995
(in thousands)
<TABLE>
Additional Total
Common Stock Paid-In Accumulated Stockholders'
Shares Amount Capital Deficit Equity
<CAPTION>
Balance at
December 31,
<S> <C> <C> <C> <C> <C>
1994 15,963 $160 $77,983 $(16,345) $61,798
Exercise of
Stock Options 20 - 102 102
Net income 2,371 2,371
--------------------------------------------------------------------
Balance at
June 30,
1995 15,983 $160 $78,085 $(13,974) $64,271
====================================================================
See accompanying notes.
</TABLE>
6
<PAGE>
CAIRN ENERGY USA, INC.
STATEMENTS OF CASH FLOWS
Six months ended June 30, 1995 and 1994
<TABLE>
June 30, June 30,
1995 1994
---------- ----------
(in thousands)
<CAPTION>
Increase (decrease) in cash and cash equivalents
Cash flows from operating activities:
<S> <C> <C>
Net income . . . . . . . . . . . . . . . . . . . . . . . . . $ 2,371 $ 601
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation, depletion and amortization . . . . . . . . . 6,772 2,319
Amortization of loan costs . . . . . . . . . . . . . . . . 177 91
Change in operating assets and liabilities:
Accounts receivable . . . . . . . . . . . . . . . . . . (3,420) 590
Prepaid expenses . . . . . . . . . . . . . . . . . . . . (489) (113)
Accounts payable . . . . . . . . . . . . . . . . . . . . (841) 370
Accrued liabilities . . . . . . . . . . . . . . . . . . 177 (994)
Deferred revenue . . . . . . . . . . . . . . . . . . . . (85) -
Advances (repayments) from (to) Cairn Energy PLC . . . . 48 280
---------- ----------
Net cash provided by operating activities . . . . . . . . . . . 4,710 3,144
Cash flows from investing activities:
Exploration and development expenditures . . . . . . . . . . . (17,066) (6,407)
Proceeds from sale of natural gas and crude oil properties . . 1,833 276
Increase in other equipment . . . . . . . . . . . . . . . . . (153) (44)
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . - (72)
---------- ----------
Net cash used in investing activities . . . . . . . . . . . . . (15,386) (6,247)
Cash flows from financing activities:
Proceeds from long-term debt . . . . . . . . . . . . . . . . . 10,000 3,500
Repayment of long-term debt . . . . . . . . . . . . . . . . . - (100)
Exercise of stock options . . . . . . . . . . . . . . . . . . 102 -
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . (55) (131)
---------- ----------
Net cash provided by financing activities . . . . . . . . . . . 10,047 3,269
---------- ----------
Net change in cash and cash equivalents . . . . . . . . . . . . (629) 166
Cash and cash equivalents at beginning of period . . . . . . . 2,182 343
---------- ----------
Cash and cash equivalents at end of period . . . . . . . . . . $ 1,553 $ 509
========== ==========
Supplemental cash flow information -
Interest paid in cash . . . . . . . . . . . . . . . . . . . . $ 1,185 $ 376
========== ==========
7
<PAGE>
See accompanying notes.
</TABLE>
8
<PAGE>
CAIRN ENERGY USA, INC.
Notes to Financial Statements
1. Basis of Presentation
In the opinion of management, the accompanying unaudited financial
statements reflect all adjustments (consisting only of normal
recurring adjustments) which are necessary for a fair presentation of
the financial position of the Company at June 30, 1995, the results of
its operations for the three and six months ended June 30, 1995 and
1994 and the results of its cash flows for the six months ended June
30, 1995 and 1994. Certain reclassifications have been made to prior
years' amounts to conform to current presentation. These financial
statements should be read in conjunction with the notes to the
Company's annual financial statements, which were included in the
Company's Annual Report on Form 10-K for the year ended December 31,
1994, filed with the Securities and Exchange Commission (the
"Commission") on March 15, 1995.
The consolidated financial statements include the accounts of the
Company and its wholly-owned subsidiary. All intercompany accounts
and transactions have been eliminated in consolidation.
2. Long-term debt.
Long-term debt at June 30, 1995 and December 31, 1994, consisted of
the following:
<TABLE>
June 30, December 31,
1995 1994
------------- ------------
<CAPTION>
<S> <C> <C>
Revolving credit agreement . . . . . . $33,500,000 $23,500,000
Less: Current maturities of
long-term debt . . . . . . . . . 4,188,000 -
------------- ------------
Long-term debt less current maturities $29,312,000 $23,500,000
============= ============
</TABLE>
On June 11, 1993, the Company entered into a credit agreement (the ING
Credit Agreement) with Internationale Nederlanden Bank N.V. (ING) for
the establishment of two credit facilities totaling $25 million, which
together replaced the Company's previous credit agreement. On
September 8, 1993, ING assigned, with the consent of the Company, its
rights, interests and obligations under the ING Credit Agreement to
Internationale Nederlanden (U.S.) Capital Corporation (INCC). As a
result of the assignment, the ING Credit Agreement became the INCC
Credit Agreement. The INCC Credit Agreement was subsequently amended,
first on October 15, 1993, to reflect lower interest rates and more
9
<PAGE>
favorable terms for the Company and second on May 10, 1994, which
combined the two credit facilities into one facility, increased the
maximum loan amount from $25 million to $30 million, and extended the
term of the note. On December 20, 1994, the INCC Credit Agreement was
amended and restated (the INCC Restated Credit Agreement) to reflect
an increase in the maximum loan amount to $50 million, to reflect
lower interest rates, to extend the term of the loan, and to include
MeesPierson, N.V. (Mees Pierson) as a participant in the loan. On
April 19, 1995, the current borrowing base was established at $45
million. The INCC Restated Credit Agreement is a revolving line of
credit secured by substantially all of the Company's assets. It
contains financial covenants which require the Company to maintain a
ratio of current assets to current liabilities (excluding the current
portion of related debt) of no less than 1.0 to 1.0 and a tangible net
worth of not less than $40 million. The Company is currently in
compliance with all such financial covenants. At June 30, 1995, the
Company had outstanding borrowings of $33.5 million under this
facility. Outstanding borrowings accrue interest at either INCC's
fluctuating base rate or INCC's reserve adjusted Eurodollar rate plus
1.50%, at the Company's option. On March 31, 1996, the borrowings
outstanding under this facility will be converted to a term loan that
requires various quarterly principal payments through December 31,
1998. Interest is payable quarterly on any base rate borrowings and
payable on maturity of any Eurodollar borrowings.
The INCC Restated Credit Agreement does not permit the Company to pay
or declare any cash or property dividends or otherwise make any
distribution of capital. The Company is obligated to pay a quarterly
fee equal to one-half of 1% per annum of the unused portion of the
borrowing base under the facility.
The Company's ability to borrow under the INCC Credit Agreement is
dependent upon the reserve value of its oil and gas properties. If
the reserve value of the Company's borrowing base declines, the amount
available to the Company under the INCC Restated Credit Agreement will
be reduced and, to the extent that the borrowing base is less than the
amount then outstanding under the INCC Restated Credit Agreement , the
Company will be obligated to repay such excess amount on thirty-day's
notice from INCC or to provide additional collateral. INCC and
MeesPierson have substantial discretion in determining the reserve
value of the borrowing base.
3. Acquisition of Oil and Gas Assets of Smith Offshore Exploration
Company II.
On October 10, 1994, pursuant to an agreement (the "Smith Acquisition
Agreement") with Smith Offshore Exploration Company II ("Smith") and
Phemus Corporation ("Phemus"), a subsidiary of the President and
Fellows of Harvard College (a Massachusetts non-profit educational
corporation) and the sole stockholder of Smith, the Company acquired
("the Smith Acquisition") all of the oil and gas assets of Smith (the
10
<PAGE>
"Smith properties") in exchange for 4,500,000 shares of the Company's
common stock and the assumption of certain liabilities related to the
Smith properties. The number of shares of common stock issued in the
Smith Acquisition was subject to adjustment pursuant to the valuation
provisions of the Smith Acquisition Agreement. Of the 4,500,000
shares, 3,500,000 shares were issued at the closing of the Smith
Acquisition and 1,000,000 shares were placed in escrow (the "Escrow
Shares").
The Escrow Shares were to be released to Phemus or returned to the
Company dependent on the valuation (the "Valuation") of Smith
properties as of June 30, 1995 (the "Valuation Date"). The Company,
Smith and Phemus agreed in the Smith Acquisition Agreement to adjust
the purchase price if the Valuation was less than $31,500,000 or more
than $36,000,000. If the Valuation was between $31,500,000 and
$36,000,000 no adjustments were to be made to the purchase price, and
the 1,000,000 Escrow Shares were to be released to Phemus. If the
Valuation was less than $31,500,000, 100,000 of the Escrow Shares were
to be returned to the Company for each $750,000 of value below
$33,750,000 (rounded to the nearest $750,000), and the balance of the
Escrow Shares was to be released to Phemus. If the Valuation was less
than $26,250,000, all of the Escrow Shares were to be returned to the
Company, and Phemus would be obligated to pay to the Company the
amount by which $26,250,000 exceeds the Valuation, up to a maximum of
$3,900,000. Accordingly, Phemus was not obligated to pay the Company
any additional amounts for any deficiency below a $22,350,000
Valuation (the "Minimum Valuation").
On the basis of a preliminary valuation of the Smith properties as of
June 30, 1995 by independent petroleum engineers reflecting a range of
values below the Minimum Valuation, Phemus and the Company have
entered into an agreement regarding the purchase price adjustment
under the Smith Acquisition Agreement pursuant to which Phemus has
agreed to return the Escrow Shares to the Company and to pay $3.9
million to the Company. Phemus' obligation to pay $3.9 million to the
Company is reflected as a receivable and a reduction of the cost of
the Smith properties in the Company's June 30, 1995 balance sheet.
Such payment is expected in August 1995. There was no adjustment in
the Company's financial statements for the return of the Escrow Shares
because for financial accounting purposes, the Escrow Shares were
never recorded as having been issued.
11
<PAGE>
The rate of drilling activity on the Smith properties lagged
significantly behind expectations at the time of the acquisition. A
total of 7 wells were drilled on the Smith properties from the
acquisition date up to June 30, 1995 including one well which was
drilling at June 30, 1995 and was suspended in early July. Of these,
6 wells are successful and further wells remain to be drilled on the
Smith properties. Although the consideration paid for the Smith
properties has been fixed, the Company will continue to participate in
any further reserve additions that may be achieved in the future on
the properties acquired from Smith.
Management's internal estimate of the discounted present value of the
proved reserves attributable to the Smith properties as of August 1,
1995 is approximately $17.4 million. The average price used in this
computation was $1.68 per Mcf for gas (based on $1.59 per MMBtu) and
$17.01 per Bbl for oil, and discounted present value was computed in
accordance with the Securities and Exchange Commission's definition
and guidelines and the same methodology as was set forth in the
Company's Form 10-K for the year ended December 31, 1994 under Items 1
and 2: "Business and Properties-Business-Oil and Gas Reserves."
At June 30, 1995 the carrying value of those of the Smith properties
which were held by the Company as "unevaluated properties" (i.e.
excluding the value of proven reserves) was $19.7 million. The
carrying value of the unevaluated properties will be considered again
in the future for any possible impairment in the light of further
drilling results on the properties. The cost of unevaluated
properties impaired by drilling results or other economic events is
transferred to the full cost pool and amortized.
4. Income Taxes.
At December 31, 1994, the Company had net operating loss carryforwards
for federal income tax purposes of approximately $38 million. The net
operating losses will expire principally in 2005 through 2009, if not
previously utilized. Utilization of approximately $2 million of net
operating losses is subject to an annual limitation of $114,000
because of a change of control, as defined in the Internal Revenue
Code, of the Company's predecessor company, Omni Exploration, Inc. As
a result of a change in control of the Company, as defined, which
occurred in 1993, due to certain changes in ownership of Cairn Energy
PLC and the Company, the Company estimates that utilization of $22
million of the net operating losses will be limited to approximately
$2 million per year. Utilization of approximately $10.3 million of
net operating losses is subject to an annual limitation of
approximately $1 million per year due to the change in control of
Smith. The transactions in connection with the acquisition of the
Smith properties and sales of Common Stock by Cairn Energy PLC in 1994
caused a further change in ownership of the Company as defined in the
Internal Revenue Code. The Company's annual limitation due to this
change in ownership exceeds $5 million per year. Additional net
12
<PAGE>
operating loss limitations may be imposed because of subsequent
changes in stock ownership of the Company.
5. Property and Equipment.
The Company capitalized approximately $670,000 and $430,000 of
internal costs during the six months ended June 30, 1995 and 1994,
respectively. Such capitalized costs include salaries and related
benefits of individuals directly involved in the Company's
acquisition, exploration, and development activities, based on a
percentage of their time devoted to such activities.
13
<PAGE>
CAIRN ENERGY USA, INC.
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
Results of Operations
The following table sets forth certain information regarding the
production volumes of, average sales prices received for, average
production costs associated with, and average depletion rate
associated with the Company's sales of oil and gas for the periods
indicated.
<TABLE>
Three months Six months
ended June 30, ended June 30,
----------------- -----------------
1995 1994 1995 1994
------ ------ ------ ------
<CAPTION>
Net Production:
<S> <C> <C> <C> <C>
Gas (MMcf) . . . . . . . . 3,000 928 5,257 2,070
Oil (MBbl) . . . . . . . . 146 26 220 54
Average Sales Price:
Gas (per Mcf) (1) . . . . $ 1.68 $ 2.14 $ 1.65 $ 2.20
Oil (per Bbl) . . . . . . . $18.58 $13.96 $18.28 $13.19
Average Production Costs:
(per MCFE) (2) . . . . . . $ 0.27 $ 0.54 $ 0.24 $ 0.53
Depletion rate: (per Mcfe) . $ 1.03 $ 0.94 $ 1.02 $ 0.95
------------------
</TABLE>
(1) Includes natural gas liquids.
(2) Includes direct lifting costs (labor, repairs and maintenance,
materials and supplies) and the administrative costs of
production offices, insurance and property and severance
taxes.
Three months ended June 30, 1995 and 1994
Revenues. Total revenues increased $5.4 million (227%) to $7.8
million for the three months ended June 30, 1995 from $2.4 million for
the three months ended June 30, 1994. The primary reason for the
increase was new production from the Company's interest in East
Cameron Blocks 331/332, Matagorda 710 and Ship Shoal 251. Production
from these three properties accounted for approximately 83% of the
Company's increased production for the quarter. Lower gas prices
partially offset the increased revenues from production.
Expenses. Total expenses increased $4.1 million (185%) to $6.3
million for the three months ended June 30, 1995 from $2.2 million for
the three months ended June 30, 1994. An increase in depreciation,
14
<PAGE>
depletion and amortization ("DD&A") is the primary reason for the
increase in expenses. DD&A increased $3.0 million (289%) to $4.0
million for the three months ended June 30, 1995 from $1.0 million for
the same period in 1994 due to increased production coupled with an
increase in the depletion rate. Interest expense increased by
$496,000 (206%) to $737,000 for the quarter ended June 30, 1995 from
$241,000 for the three months ended June 30, 1994. Interest expense
increased because of an increase in outstanding debt coupled with
higher average interest rates for the quarter ended June 30, 1995 than
for the same period in 1994. Lease operating expenses and production
taxes increased $451,000 (77%) to $1.0 million for the three months
ended June 30, 1995 from $583,000 for the same period in 1994. Lease
operating expenses are up because of increased production. Reflected
in the 1994 lease operating expenses amount are expenses related to
the Texas Panhandle properties that were sold in August 1994 and also
the properties in Texas and Oklahoma which were sold with effect from
April 1, 1995. Production costs on a per unit basis decreased
significantly because East Cameron Blocks 331/332, Matagorda Block 710
and Ship Shoal 251 all have a low per unit operating cost, while the
Texas Panhandle properties sold in August 1994 and the properties in
Texas and Oklahoma which were sold with effect from April 1, 1995 had
a high per unit operating cost. Administrative expenses increased
$149,000 (43%) to $493,000 for the three months ended June 30, 1995
from $344,000 for the same period in 1994 due primarily to an increase
in legal, salary and printing expenses partially offset by increased
overhead capitalization relating to technical staff associated with
exploration activity.
Net Income. Net income increased $1.4 million (693%), or $0.08 per
share to $1.6 million, or $0.10 per share for the three months ended
June 30, 1995 from $202,000, or $0.02 per share for the same period in
1994. The primary reason for the increase was new production.
Six months ended June 30, 1995 and 1994
Revenues. Total revenues increased $7.5 million (139%) to $12.9
million for the six months ended June 30, 1995, from $5.4 million for
the six months ended June 30, 1994. The primary reason for the
increase was new production from the Company's interest in East
Cameron Blocks 331/332, Matagorda 710 and Ship Shoal 251 coupled with
higher oil prices. Production from these three properties accounted
for approximately 91% of the Company's increased production for the
six months ended June 30, 1995. Lower gas prices partially offset the
increased revenues from production.
Expenses. Total expenses increased $5.7 million (120%) to $10.5
million for the six months ended June 30, 1995 from $4.8 million for
the six months ended June 30, 1994. An increase in depreciation,
depletion and amortization ("DD&A") is the primary reason for the
increase in expenses. DD&A increased $4.5 million (192%) to $6.8
million for the six months ended June 30, 1995 from $2.3 million for
15
<PAGE>
the same period in 1994 due to increased production coupled with an
increase in the depletion rate. Interest expense increased by
$912,000 (205%) to $1.4 million for the six months ended June 30, 1995
from $445,000 for the six months ended June 30, 1994 due to increased
borrowing and higher average interest rates. Lease operating expenses
and production taxes increased $285,000 (22%) to $1.6 million for the
six months ended June 30, 1995 from $1.3 million for the same period
in 1994. Lease operating expenses increased because of increased
production. Reflected in the 1994 lease operating expenses amount are
expenses related to the Texas Panhandle properties that were sold in
August 1994. Production costs on a per unit basis decreased
significantly because East Cameron 331/332, Matagorda Block 710 and
Ship Shoal 251 all have a low per unit operating cost, while the Texas
Panhandle properties sold in August 1994 had a high per unit operating
cost. Administrative expenses increased $81,000 (11%) to $820,000 for
the six months ended June 30, 1995 from $739,000 for the same period
in 1994 due primarily to an increase in legal, salary and printing
expenses partially offset by increased overhead capitalization
relating to technical staff associated with exploration activity.
Net Income. Net income increased $1.8 million (299%), or $0.10 per
share to $2.4 million, or $0.15 per share for the six months ended
June 30, 1995 from $601,000, or $0.05 per share for the same period in
1994. The primary reason for the increase was new production.
Capital Resources and Liquidity
At June 30, 1995, the Company had existing cash and cash investments
of $1.6 million. Net cash provided by operating activities was $4.7
million for the six months ended June 30, 1995 compared with $3.1
million for the same period in 1994. The primary reason for this
increase in cash provided by operating activities was higher results
of operations (or earnings before depreciation, depletion and
amortization) partially offset by increased working capital
requirements. Net cash used in investing activities for the six
months ended June 30, 1995 was $15.4 million compared with $6.2
million for the same period in 1994. This increase was principally
due to expenditures for exploration and development prospects.
Net cash provided by financing activities for the first six months of
1995 was $10.0 million compared with $3.3 million for the same period
in 1994. The cash provided by financing activities for the period
consisted of borrowings under the Company's revolving credit facility
and the exercise of stock options, partially reduced by financing
costs.
In general, because the Company's oil and gas reserves are depleted by
production, the success of its business strategy is dependent on a
continuous exploration and development program. Therefore, the
Company's capital requirements relate primarily to the acquisition of
16
<PAGE>
undeveloped leasehold acreage and exploration and development
activities. In addition to pursuing a number of existing exploration
prospects, the Company is currently engaged in an exploration venture
with UPRC, which allows for data sharing and drilling participation,
to generate exploratory drilling prospects in offshore Texas.
Management intends during the remainder of 1995 to continue to pursue
the acquisition of new prospects through lease sales in the Outer
Continental Shelf in the Gulf of Mexico.
The Company's average net production for the quarter ended June 30,
1995 rose to approximately 33.0 MMcf of gas per day and 1,604 Bbls of
oil and condensate per day compared with average per day production
during the same quarter in 1994 of 10.2 MMcf of gas and 290 Bbls of
oil and condensate. The average net production for the six months
ended June 30, 1995 was 29.0 MMcf of gas per day and 1,216 Bbls of oil
and condensate per day compared with average per day production during
the same period in 1994 of 11.4 MMcf of gas and 296 Bbls of oil and
condensate.
The Company, together with partners, bid on eighteen blocks at the
Gulf of Mexico Central Area lease sale which was held on May 10, 1995.
Of these bids, thirteen were high bids and to date twelve of the
blocks have been awarded to the Company and its partners. The
decisions by the MMS on the awarding of the remaining block is
expected to be made by mid-August 1995. If all of the leases in which
the Company or its bidding group was high bid are awarded, the
Company's net share of the lease bonuses will be $2.5 million. This
amount is consistent with the Company's expected expenditures for the
lease sale. The expenditures for the lease sale will be funded from
cash flow from operations and from amounts available under the
Company's existing credit facility.
In June of 1995 the Company sold most of the properties which it owned
in Texas and Oklahoma for $1.77 million. At January 1, 1995, the
properties had reserves of approximately 123 MBbl of oil and 2.1 Bcf
of gas and had a Discounted Present Value of $2.03 million. Proceeds
from this transaction were credited to the full-cost pool, resulting
in no recognition of gain or loss for accounting purposes.
The Company's operating needs and capital spending programs have been
funded by borrowings under its bank credit facilities, proceeds of a
public offering of its common stock and cash flow from operations.
The Smith Acquisition is expected to result in significant additional
capital expenditures for exploration and development activities for
the remainder of 1995. The Company expects to continue with an active
exploration program and to drill up to a further 8 exploration wells
including 2 wells on the Smith properties in the year. The Company
expects capital expenditures during 1995 to total approximately $40
million. At June 30, 1995, the Company's capital resources consisted
primarily of available borrowing capacity under the INCC Restated
Credit Agreement and cash flow from operations. Management believes
that cash flow from operations along with the amount available under
17
<PAGE>
the INCC Restated Credit Agreement and the amount of $3.9 million
receivable from Phemus will be sufficient to finance the currently
planned exploration and development expenditures.
18
<PAGE>
If the Company is successful in substantially all of its currently
scheduled exploration prospects, additional funds may be required in
order to conduct the necessary development activities. If necessary,
the Company may seek to raise additional capital in public or private
equity or debt markets. No assurance can be given that the Company
will be able to raise such capital if needed or on terms that are
favorable to the Company. Any resulting lack of sufficient capital
may require the Company to reduce its interest in such properties or
to forego developing such reserves. In addition, the Company does not
act as operator with respect to any of its properties. The Company
may not be able to control the development activities or the
associated costs with respect to properties operated by other parties.
In connection with the Smith Acquisition, the Company granted to
Phemus certain demand and piggyback registration rights that generally
are at the Company's expense.
The Company's revenues and the value of its oil and gas properties
have been and will continue to be affected by changes in oil and gas
prices. The Company's ability to maintain current borrowing capacity
and to obtain additional capital on attractive terms is also
substantially dependent on oil and gas prices (Note 2). Oil and gas
prices are subject to significant seasonal and other fluctuations that
are beyond the Company's ability to control or predict. Although
certain of the Company's costs and expenses are affected by the level
of inflation, inflation has not had a significant effect on the
Company's results of operations during 1994 or the first six months of
1995.
In an effort to reduce the effects of the volatility of the price of
oil and gas on the Company's operations, management has adopted a
policy of hedging oil and gas prices, usually when such prices are at
or in excess of the prices anticipated in the Company's operating
budget, through the use of commodity futures, options, forward
contracts and swap agreements. Hedging transactions are limited by
the Board of Directors to 50% of budgeted production for the
succeeding 12 months and no more than 75% of Budgeted production in
any one month. The Company has entered into three commodity swap
transactions governed by the terms of a Master Agreement with INCC
(the "Master Agreement"). Under one swap transaction the Company
will receive a fixed price of $1.75 per MMBtu and pay a floating price
of Natural Gas - NYMEX for the first nearby contract month for 5,000
MMBtu per day for the contract months July to September 1995. Under a
second commodity swap transaction the Company will receive a fixed
price of $1.7525 per MMBtu and pay a floating price of Natural Gas-
NYMEX for the first nearby contract month for 5,000 MMBtu per day for
the contract months August 1995 to January 1996. Under a third
commodity swap transaction governed by the terms of the Master
Agreement the Company will receive a fixed price of $19.50 per barrel
and pay a floating price of WTI-NYMEX for the first nearby month for
500 barrels per day for the period June 1 to September 30, 1995.
19
<PAGE>
The Company has also contracted to sell 5,000 MMBtu per day to Coastal
Gas Marketing Company at a price of $1.70 per MMBtu for the period
June 1, 1995 to August 31, 1995.
20
<PAGE>
CAIRN ENERGY USA, INC.
PART II - OTHER INFORMATION
ITEM 1 - LEGAL PROCEEDINGS
No new material developments.
ITEM 2 - CHANGES IN SECURITIES
None
ITEM 3 - DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) The registrant held its Annual Meeting of Stockholders on May 24,
1995 ("the Annual Meeting").
(b) Proxies for the Annual Meeting were solicited pursuant to
Regulation 14; there was no solicitation in opposition to
management's nominees for directors as listed in the Proxy
Statement for the Annual Meeting and all such nominees were
elected.
Directors elected were Messrs. Michael R. Gilbert, J. Munro M.
Sutherland, Jack O. Nutter, II, R. Daniel Robins, John C.
Halsted, William B. B. Gammell and Michael E. McMahon.
(c) Briefly described below is other matter voted upon at the Annual
Meeting and the number of votes for, against and abstaining with
respect to such matters.
Proposal to amend the Company's 1993 Stock Option Plan to
increase the number of shares reserved for issuance upon exercise
of options granted pursuant to the 1993 Stock Option Plan from
400,000 shares to 650,000 shares:
For 10,414,966
Against 985,410
Abstain 72,350
No other business was brought before the Annual Meeting.
21
<PAGE>
ITEM 5 - OTHER INFORMATION
Management estimates that total reserve additions by the Company from
exploration in the first half of the year were 19.9 Bcf and 695 MBbls
of oil and condensate (24.1 Bcfe). These reserve additions are
equivalent to approximately 367% of the Company's production in the
same period. In the second half of the year the Company expects to
participate in up to eight exploration wells, including two wells on
the Smith properties.
22
<PAGE>
The Company's largest recent development project on East Cameron
Blocks 331/332 is currently producing from eight of nine wells. The
remaining well has been completed and is expected to be on production
prior to the end of August. It has taken longer than expected to put
all of the wells in the field on East Cameron Blocks 331/332 on
production. However, it is now expected that the field should reach
full production in August. The Company owns a 40% working interest in
the shallower zone of Block 331 and a 20% working interest in the
deeper zone of both blocks. Approximately 80% of the proved reserves
are located in the deeper zone.
In May 1995 the Company participated in a successful exploration well
on East Cameron Block 356. The well has been suspended after
encountering hydrocarbon-bearing sands based on wireline log analysis
and formation test information. Additional drilling is expected on
this block later in the year. The Company owns a 37.5% working
interest in this block.
An exploration well drilled on Eugene Island Block 59 (one of the
Smith properties) was unsuccessful and has been plugged and abandoned.
The Company will seek to clarify the prospectivity of the block with
the aid of a new 3-D survey. The Company owns a 25% working interest
in this block.
On Mustang Island Block 858 (one of the Smith properties), the second
well drilled by the Company, the A-3, has been suspended pending
completion operations. The original well drilled on the block, which
was drilled before the Company acquired its interest in this block,
the A-1, has been tied back. Testing operations on the A-2 well are
in progress. Test results in certain deeper horizons in the well were
disappointing and no reserves have been attributed to these deeper
horizons. Testing is now taking place in the upper horizons which
were successfully tested in the A-1 well. After testing is complete,
all three wells will be completed followed by installation of the deck
and facilities. A pipeline will then be laid with first production
expected by the late fourth quarter of 1995 or early first quarter of
1996. The Company owns a 17.5% working interest in this block.
Three exploration wells drilled by the Company to target certain
shallow formations on Vermilion Block 203 (one of the Smith
properties) have all encountered productive sand intervals as
indicated by wireline log analysis. The three wells (the A-2, A-3,
and A-4) have been suspended pending completion operations. The
Company expects completion operations to begin in August 1995 with
first production expected to begin late in the fourth quarter of
1995. It is expected that a well to target deeper formations on the
block will be spud prior to year-end 1995. The Company owns a 50%
working interest in this block.
Cairn Energy PLC completed a public sale of 2,623,260 shares of
Company common stock on June 19, 1995, at a price of $10.00 per share.
The sale was made pursuant to a registration statement filed on Form
23
<PAGE>
S-3 under the Securities Act of 1933, as amended. As a result of this
sale, Cairn Energy PLC is no longer a stockholder of the Company.
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
None
24
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf
by the undersigned thereunto duly authorized.
CAIRN ENERGY USA, INC.
(Registrant)
Date: August 3, 1995 /s/ Michael R. Gilbert
Michael R. Gilbert
President
/s/ J. Munro M. Sutherland
J. Munro M. Sutherland
Senior Vice President and Treasurer
(Principal Financial Officer)
25
<PAGE>
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