<PAGE>
United States
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
[X] Quarterly Report Pursuant to Section 13 or 15(d) of The Securities Exchange
Act of 1934
For Quarter 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 No. 0-8232
-------------
McFarland Energy, Inc.
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(Exact name of registrant as specified in its charter)
Delaware 95-2756635
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
10425 South Painter Avenue, Santa Fe Springs, California 90670
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (310) 944-0181
------------------
None
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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
--- ---
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
5,229,609 Shares
<PAGE>
McFarland Energy, Inc.
Consolidated Statements of Operations
(Unaudited)
<TABLE>
<CAPTION>
Three Months Six Months
Ended June 30, Ended June 30,
----------------- ------------------
1995 1994 1995 1994
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues:
Oil and gas $4,926,000 $3,345,000 $ 9,330,000 $6,250,000
Interest and other 126,000 42,000 242,000 84,000
Gain on sale of assets 119,000 4,000 119,000 12,000
---------- ---------- ------------ ----------
5,171,000 3,391,000 9,691,000 6,346,000
---------- ---------- ------------ ----------
Costs and expenses:
Crude oil and gas production 1,813,000 1,518,000 3,485,000 2,952,000
Exploration, including dry holes
and abandonments 470,000 214,000 683,000 473,000
Depletion and depreciation 1,138,000 769,000 2,334,000 1,468,000
General and administrative 624,000 464,000 1,164,000 1,184,000
Litigation settlement --- --- (17,158,000) ---
Property impairments --- --- 5,515,000 ---
Interest 115,000 164,000 343,000 237,000
Other 27,000 26,000 489,000 145,000
---------- ---------- ------------ ----------
4,187,000 3,155,000 (3,145,000) 6,459,000
---------- ---------- ------------ ----------
Income (loss) before income taxes 984,000 236,000 12,836,000 (113,000)
---------- ---------- ------------ ----------
Income taxes:
Current --- --- 212,000 ---
Deferred 144,000 --- 1,710,000 ---
---------- ---------- ------------ ----------
144,000 --- 1,922,000 ---
---------- ---------- ------------ ----------
Net income (loss) $ 840,000 $ 236,000 $ 10,914,000 $ (113,000)
========== ========== ============ ==========
Net income (loss) per common share $ 0.16 $ 0.05 $ 2.09 $ (0.02)
========== ========== ============ ==========
Weighted average number of shares
outstanding 5,228,276 5,199,359 5,224,630 5,199,359
========== ========== ============ ==========
</TABLE>
(See notes following)
2
<PAGE>
McFarland Energy, Inc.
Consolidated Balance Sheets
(Unaudited)
<TABLE>
<CAPTION>
June 30, December 31,
------------- ------------
1995 1994
---- ----
<S> <C> <C>
ASSETS
------
Current Assets:
Cash and short-term investments $ 4,209,000 $ 1,864,000
Accounts receivable 5,142,000 5,698,000
Crude oil inventory 338,000 280,000
Materials and supplies inventory 155,000 290,000
Prepaids and other current assets 165,000 638,000
----------- -----------
Total current assets 10,009,000 8,770,000
----------- -----------
Property and Equipment 89,742,000 84,829,000
Less accumulated depletion and
depreciation 57,998,000 51,090,000
----------- -----------
31,744,000 33,739,000
----------- -----------
Other Assets 286,000 1,036,000
----------- -----------
$42,039,000 $43,545,000
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current Liabilities:
Accounts payable $2,563,000 $2,359,000
Royalties and revenue payable 1,524,000 1,657,000
Other accrued liabilities 481,000 1,212,000
Current portion of long-term debt --- 750,000
----------- -----------
Total current liabilities 4,568,000 5,978,000
----------- -----------
Convertible Notes 2,600,000 2,600,000
----------- -----------
Production Payment Notes 3,330,000 3,481,000
----------- -----------
Long-term Debt --- 12,650,000
----------- -----------
Deferred Income Taxes 1,915,000 205,000
----------- -----------
Stockholders' Equity:
Common stock, $1.00 par value 5,230,000 5,212,000
Additional paid-in capital 18,899,000 18,836,000
Retained earnings (deficit) 5,497,000 (5,417,000)
----------- -----------
29,626,000 18,631,000
----------- -----------
$42,039,000 $43,545,000
=========== ===========
</TABLE>
(See notes following)
3
<PAGE>
McFarland Energy, Inc
Consolidated Statements of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended June 30,
--------------------------
1995 1994
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 10,914,000 $ (113,000)
Adjustments to reconcile net income (loss) to
net cash provided by operating activities:
Depletion and depreciation 2,334,000 1,468,000
Dry holes, abandonments and impairments 6,155,000 379,000
Deferred income taxes 1,710,000 ---
(Gain) on sale of assets (119,000) (12,000)
Other 428,000 145,000
Change in assets and liabilities:
Decrease (increase) in:
Receivables 556,000 (547,000)
Inventory (100,000) (90,000)
Prepaids and other current assets 473,000 323,000
Increase (decrease) in:
Accounts payable (46,000) 806,000
Royalties and revenue payable (133,000) 299,000
Other accrued expenses (731,000) (340,000)
------------ -----------
NET CASH PROVIDED BY OPERATING ACTIVITIES 21,441,000 2,318,000
------------ -----------
CASH FLOWS (USED IN) FROM INVESTING ACTIVITIES:
Purchase of property and equipment, including
dry holes (5,758,000) (13,079,000)
Proceeds from sales of property and equipment 132,000 12,000
------------ -----------
NET CASH USED IN INVESTING ACTIVITIES (5,626,000) (13,067,000)
------------ -----------
CASH FLOWS (USED IN) FROM FINANCING ACTIVITIES:
Payments on debt (13,551,000) ---
Exercise of stock options 81,000 ---
Issuance of production payment notes --- 3,852,000
Proceeds from long-term borrowings --- 6,000,000
------------ -----------
NET CASH (USED IN) FROM FINANCING ACTIVITIES (13,470,000) 9,852,000
------------ -----------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS 2,345,000 (897,000)
Cash and cash equivalents at the beginning of
the year 1,864,000 2,557,000
------------ -----------
CASH AND CASH EQUIVALENTS AT JUNE 30,
1995 AND 1994 $ 4,209,000 $ 1,660,000
============ ===========
</TABLE>
(See notes following)
4
<PAGE>
McFarland Energy, Inc.
Notes to Unaudited Financial Statements
June 30, 1995
Note 1. Statement from Management
------- -------------------------
The information furnished in this report reflects all adjustments which, in
the opinion of management, are necessary to present fairly the financial
position at June 30, 1995 and December 31, 1994 and the results of operations
for the three and six months ended June 30, 1995 and 1994.
Note 2. Principles of Consolidation
------- ---------------------------
The consolidated financial statements include the accounts of McFarland
Energy, Inc. and its wholly-owned subsidiary, Carl Oil & Gas Co. ("Company").
All intercompany accounts and transactions have been eliminated in
consolidation.
Note 3. Settlement of Chevron Lawsuit
------- -----------------------------
On January 16, 1995, the Company announced that it had settled with Chevron
the lawsuit of McFarland Energy, Inc. v. Chevron U.S.A., Inc. (Case No.
----------------------------------------------
BC023747) for the sum of $25,673,000. In September 1994, a Los Angeles Superior
Court jury trial awarded the Company compensatory and punitive damages totalling
$47,300,000. On January 13, 1995, the Company and Chevron entered into a final
settlement agreement and funds in the amount of $25,673,000 were wired to the
Company on January 17, 1995. Of the total settlement amount, $8,292,000 was
paid to the Company's outside attorneys and the Company incurred various other
costs totalling $223,000. The net settlement amount of $17,158,000 was
recognized as a gain in the first quarter of 1995.
Note 4. Property Impairments
------- --------------------
In March 1995, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 121, "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed
Of." This statement requires that long-lived assets be reviewed for impairment
whenever events or changes in circumstances indicate that the carrying amount of
an asset may not be recoverable. It establishes guidelines for determining
recoverability based on future net cash flows from the use of the asset and for
the measurement of the impairment loss. Impairment loss under SFAS No. 121 is
calculated as the difference between the carrying amount of the asset and its
fair value. Any impairment loss is recorded in the current period in which the
recognition criteria are first applied and met.
Under the successful efforts method of accounting for oil and gas
operations, the Company periodically assessed its proved properties for
impairments by comparing the aggregate net book carrying
5
<PAGE>
McFarland Energy, Inc.
Notes to Unaudited Financial Statements
June 30, 1995
(Continued)
amount of all proved properties with their aggregate future net cash flows. At
December 31, 1994, the future net cash flows of these proved properties was
$65,000,000 as compared to the net book carrying amount of $33,000,000. The new
statement requires that the impairment review be performed on the lowest level
of asset groupings for which there are identifiable cash flows. In the case of
the Company, this results in a property by property impairment review.
The Company adopted SFAS No. 121 in the first quarter of 1995, and
primarily as a result of significantly lower natural gas prices, recorded an
impairment loss on certain oil and gas properties totalling $4,765,000. In
addition, the Company wrote-off its investment in a natural gas marketing and
gas gathering company in the amount of $750,000. The impairment loss on the oil
and gas properties was calculated as the difference between the asset book
carrying amounts and future net cash flow projections, giving consideration to
recent prices, pricing trends and discount rates. These projections represent
the Company's best estimate of fair value based on the information available.
Note 5. Credit Agreement
------- ----------------
On April 20, 1994, the Company entered into a new credit agreement with its
bank ("Credit Agreement") which consisted of a $5,000,000 unsecured revolving
line of credit facility and a $6,000,000 seven-year term loan facility.
On September 20, 1994, the Company amended the Credit Agreement in order to
finance its acquisition of the Oak Hill Field, Rusk County, Texas properties.
The amendment increased the revolving line of credit facility to $10,000,000 and
replaced the bank's offshore interest rate option with a LIBOR plus 1.5%
optional rate. Under the amended agreement, the revolving credit facility is to
be used for working capital, capital expenditures and oil and gas property
acquisitions. At the option of the Company, the interest rate on borrowed funds
is either the reference rate, a rate of interest publicly announced by the bank;
the fixed rate, the rate agreed upon between the Company and the bank; or LIBOR
plus 1.5%. In January 1995, the Company repaid all of the outstanding borrowing
on the revolving line of credit. At June 30, 1995, there was no outstanding
borrowing under this facility.
The term loan credit facility consisted of a seven-year term loan up to
$6,000,000 and repayable over twenty-four successive quarterly equal
installments commencing on June 1, 1995. The interest rate on borrowed funds
was either the bank's reference rate plus .5%, a negotiated fixed rate or LIBOR
plus 2%. In conjunction with the acquisition of the Star Fee property, the
Company borrowed $6,000,000 under the term loan facility. The term loan was
collateralized by two of the Company's principal crude oil producing properties.
In March 1995, the Company repaid all the outstanding borrowing under the term
loan facility. At June 30, 1995, there was no outstanding borrowing under this
facility.
The Credit Agreement contains certain covenants which require maintenance
of minimum levels of net worth and working capital, maintenance of minimum or
maximum financial ratios, and certain limitations on the incurrence of liens or
encumbrances on the Company's assets. The Company is
6
<PAGE>
McFarland Energy, Inc.
Notes to Unaudited Financial Statements
June 30, 1995
(Continued)
required to pay a quarterly commitment fee of .375% per annum on the unused
portion of the revolving credit facility. There were no compensating balance
requirements.
Note 6. Production Payment Notes
------- ------------------------
On April 22, 1994, the Company issued $3,624,000 of 5% seven-year
production payment notes ("Notes") in conjunction with the Star Fee property
acquisition. Interest payments are due quarterly, while monthly principal
payments occur when the average monthly crude oil selling price of the
property's production exceeds $12.00 per barrel. When the monthly average
selling price is between $12.00 and $15.01 per barrel, the sum of the principal
payments will be equal to $1.00 per each net revenue barrel produced from the
property in that month. When the monthly average selling price exceeds $15.00
per barrel, the sum of the principal payments will be equal to $2.00 per each
net revenue barrel produced from the property in that month.
The Notes are due February 1, 2001. The Company has the option to make the
final payment of the outstanding balance in either cash, Company common stock,
or a combination of both. The market value per share of common stock delivered
will be based on the average quoted closing price on the National Association of
Securities Dealers Stock Market System for the twenty trading days prior to
January 20, 2001. The Notes are collateralized by one of the Company's
principal crude oil properties.
Note 7. Convertible Notes
------- -----------------
On January 4, 1993, the Company refinanced its previously issued
convertible notes with the issuance of a single $2,600,000 convertible note to
its largest institutional shareholder. The note bears interest at 8% per annum
and is due January 4, 2003. The terms of the new note call for quarterly
interest payments through January 4, 2003, or up to the date of conversion. The
Company has the option to convert the note to its common stock at any time after
January 4, 1996 provided that the Company's common stock has been quoted by the
National Association of Securities Dealers at a weighted average price of $6.50
per share, or higher, for at least nineteen out of twenty consecutive business
days. This note may also be converted at the option of the note holder at any
time after January 4, 1994 at the rate of one share of the Company's common
stock for each $6.50 principal amount.
The note is subordinate to any senior indebtedness incurred by the Company
and restricts payment of dividends on common stock if there exists any unpaid
accrued interest.
Note 8. Commitments and Contingencies
------- -----------------------------
The Company has certain contingent liabilities with respect to litigation,
claims, taxes, government regulations, and contractual agreements arising from
the ordinary course of business. While there are always risks inherent in the
resolution of any contingency, it is the opinion of management that such
contingent liabilities will not result in any loss which would have an adverse
material effect on the Company's financial position.
7
<PAGE>
McFarland Energy, Inc.
Management's Discussion and Analysis
of Financial Condition and Results of Operations
Liquidity and Capital Resources
-------------------------------
Liquidity
---------
Net cash provided by operating activities before changes in assets and
liabilities in the first half of 1995 totalled $21,422,000. The 1995 cash flow
included the net proceeds from the Company's settlement of its lawsuit with
Chevron U.S.A., Inc. ("Chevron") in January 1995. See Note 3. of Notes to
Unaudited Financial Statements. Proceeds from the settlement, net of attorney
fees and other third-party costs, totalled $17,158,000. First half operating
cash flow, excluding the lawsuit settlement proceeds and related estimated
taxes, totalled $4,542,000, or an increase of 132% over the prior year period.
Sharply higher crude oil and natural gas production and lower operating costs,
combined with higher crude prices were the principal reasons for the increased
operating cash flow. The Company's operating fundamentals continue to strengthen
as second quarter cash flow increased 22% over the first quarter to $2,500,000.
Crude oil production in the first half of 1995 increased 45% from a year
ago to 577,000 barrels, or nearly 3,200 barrels per day. This significant
increase in current year production reflects the continued success of the
Company's development drilling and steam injection programs at its two core
California Midway Sunset Field properties, the McDonald and Star Fee. In the
first half of 1995, the Company drilled a total of twenty-one wells and
recompleted five wells on these two properties. As a result of these development
activities, the Company expects its total daily oil production to increase by
approximately 15%. The full effects of this program will not be realized until
the third quarter of this year.
Natural gas production in the first half of 1995 averaged 5,900 MCF per
day, an increase of 84% over the same period in 1994. The significant increase
in natural gas production was attributable to the Company's East Texas and
California Northern San Joaquin Valley operations. In the second quarter of
1995, the Company drilled and completed the final two wells of its four in-fill
well development drilling program at the Oak Hill Field in East Texas. These
two wells were put on production in June, and therefore, the full effects will
not be felt until the third quarter. Third quarter gas production from the Oak
Hill Field should approach 4,000 MCF per day. In the Northern San Joaquin
Valley, eight wells were on production during the first half of 1995, while one
well remained shut-in. The Company's net production from these wells averaged
1,800 MCF per day in the first half of the year. Presently, approximately 30%
of the Northern San Joaquin Valley production is curtailed as a result of the
prevailing low gas prices.
Crude oil prices in the first half of 1995 were more than $3.00 per barrel
higher than in the same period in 1994. California crude prices have been
especially strong thus far in 1995. The Company's predominate Midway Sunset
Field crude averaged $13.91 per barrel in 1995 as compared to $10.32 per barrel
in the first half of 1994. Of particular importance during 1995, was the fact
that the price differential between the "heavy" Midway Sunset Field crude and
the benchmark West Texas Intermediate ("WTI") crude narrowed substantially and
remains at historically narrow levels. Prior to 1995, this price differential
typically ranged between $7.00 to $9.00 per barrel. In 1995, the differential
has been
8
<PAGE>
McFarland Energy, Inc.
Management's Discussion and Analysis
of Financial Condition and Results of Operations
Liquidity and Capital Resources
-------------------------------
(Continued)
between $3.00 to $4.00 per barrel. The Company believes that the reduced
differential is a result of the combination of declining West Coast oil
production, increased heavy oil refining capacity, and the pending repeal of the
ban on the export of Alaskan North Slope crude oil. Should this narrowed price
differential become permanent, the effect on the Company's operations would be
very favorable. The resulting relatively higher California crude prices would
increase the value of the Company's California oil reserves and also increase
its future operating cash flow.
The Company has a hedging agreement with a local refiner that covers 2,000
barrels per day and runs to November 1, 1996. The objective of the hedge is to
ensure the Company an acceptable level of cash flow from the sale of its crude
oil. Under the terms of the hedge agreement, when the prevailing posted price
for Midway Sunset Field crude is between $8.50-$11.24 per barrel, the Company
receives an amount equal to the difference between $11.25 and the prevailing
price, times 2,000 barrels per day. Conversely, when the Midway Sunset Field
posted price is between $13.01-$15.75, the Company pays to the refiner an amount
equal to the difference between the prevailing price and $13.00, up to a maximum
of $2.75 per barrel, times 2,000 barrels per day. The terms of the agreement
change slightly with respect to price during the period of November 1995 through
October 1996. During the first half of 1995, the Company paid the refiner
$348,000. Should posted prices remain at their present levels, the Company will
pay the refiner and its revenues will be reduced by $1,000 per day for the rest
of 1995.
Natural gas prices continued to be extremely weak throughout the first half
of 1995. The Company received an average price of $1.23 per MCF during this
period, which was 39% lower than the $2.03 per MCF received a year ago.
California gas prices have been especially weak, reflecting excess supply and
soft demand. For most of 1995, the Company's lower BTU gas produced in the
Northern San Joaquin Valley has been selling for less than $1.00 per MCF. In
response to these low gas prices, the Company has curtailed approximately 30% of
its production capacity in the Northern San Joaquin Valley. At this time, it is
uncertain how long the current domestic natural gas market conditions will
persist and what impact it will have on the Company's future cash flow and
financial results.
On January 13, 1995, the Company and Chevron entered into a final
settlement agreement on the lawsuit of McFarland Energy, Inc. v. Chevron U.S.A.,
Inc. (Case No. BC023747). Funds were wired to the Company on January 17, 1995
in the amount of $25,673,000, of which the Company realized $17,158,000 after
attorney fees and other costs. With the net proceeds, the Company paid-off all
of its outstanding bank debt in the first quarter of 1995 and invested the
remaining funds in top-rated commercial paper.
The Company presently maintains an unsecured $10,000,000 revolving line of
credit facility with a major bank which expires on March 31, 1996. The
revolving line of credit facility is to be used for producing property
acquisitions. At June 30, 1995, there was no outstanding borrowing. The
Company believes that it has substantially greater borrowing capacity should the
need arise in order to make one or more significant producing property
acquisitions.
9
<PAGE>
McFarland Energy, Inc.
Management's Discussion and Analysis
of Financial Condition and Results of Operations
Liquidity and Capital Resources
-------------------------------
(Continued)
Capital Resources
-----------------
At June 30, 1995, the Company had net working capital of $5,441,000, an
increase of 95% from the beginning of the year. This sharp increase in net
working capital reflected the settlement proceeds resulting from the Chevron
lawsuit and the strong first half operating results.
In the first half of 1995, capital expenditures totalled $5,758,000.
Development activities accounted for 89% or $5,133,000, while exploration
activities totalled $625,000 or 11% of the total.
In the Oak Hill Field, the Company completed its four in-fill development
well drilling program and had all four wells on production by the end of the
second quarter. In the Midway Sunset Field, the Company completed the drilling
of twenty-one development wells and five well recompletions on the McDonald and
Star Fee properties. Total cost of these development drilling activities was
$4,485,000.
Exploration expenditures in the first half of 1995 consisted of the
drilling of two wells in the Northern San Joaquin Valley and two wells in the
Sacramento Valley of California. One well was successfully completed and is
currently shut-in. Other exploration expenditures were incurred for prospect
development costs. In light of the prevailing low California natural gas
prices, the Company has slowed its budgeted exploratory activities and is now in
the process of evaluating its exploration budget for the remainder of the year.
The Company believes that it will be able to fund its remaining 1995
capital expenditure projects with its internally generated cash flow and
existing cash balances. However, should the need arise, it could utilize its
available revolving line of credit facility to fund its commitments.
New Accounting Pronouncement
----------------------------
In March 1995, the Financial Accounting Standards Board ("FASB") issued
Statement of Accounting Standards ("SFAS") No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of."
The Company adopted this new statement in the first quarter of 1995. The effect
of the adoption of SFAS No.121 was to result in the recognition of an impairment
write-down of certain oil and gas properties and other assets totalling
$5,515,000. See Note 4. of Notes to Unaudited Financial Statements for further
details.
10
<PAGE>
McFarland Energy, Inc.
Management's Discussion and Analysis
of Financial Condition and Results of Operations
Results of Operations
---------------------
Six Months Ended June 30, 1995 and 1994
---------------------------------------
For the six months ended June 30, 1995, oil and gas revenues increased 49%
to $9.3 million. This significant increase was primarily due to higher crude oil
and natural gas production combined with higher crude oil prices in the first
half of 1995.
Crude oil production in 1995 increased 45% to 577,000 barrels as compared
to 397,000 barrels in the prior year. This increase was attributable to the
Company's two core properties in the Midway Sunset Field. Natural gas
production totalled 1,070,000 MCF, an 84% increase over the prior year. This
significant increase was attributable to production from the Northern San
Joaquin Valley exploration wells in California and from the Oak Hill Field wells
in East Texas. In 1995, there were eight wells producing in the Northern San
Joaquin Valley, as compared to one well on production a year ago.
The average crude oil price received in 1995, excluding the effects of the
hedge, was $14.33 per barrel, a 28% increase over the $11.23 per barrel price
received in 1994. In 1995, the hedge program decreased revenues by $348,000 or
$0.60 per barrel. Natural gas prices averaged $1.23 per MCF in 1995, which was
39% lower than the $2.03 per MCF received in 1994.
Oil and gas production costs for the first half of 1995 increased 18% to
$3,485,000. On a barrel of oil equivalent basis ("BOE"), the average lifting
cost was $4.62 per BOE as compared to $5.98 per BOE in 1994, or a 23% decline.
This significant decrease in BOE lifting costs reflects higher oil and gas
production volume in 1995.
Depletion and depreciation expense increased 59% to $2,334,000 as a result
of the addition of the Star Fee and Oak Hill Field properties.
In the first quarter of 1995, the Company adopted the Statement of
Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-
Lived Assets and for Long-Lived Assets to be Disposed Of," which requires that
long-lived assets be reviewed for impairment on a property by property basis.
See Note 4. of Notes to Unaudited Financial Statements. As a result, the
Company recorded an impairment loss of $4,765,000 on certain oil and gas
properties and a write-down of $750,000 on its investment in a natural gas
marketing and gas gathering company.
Litigation settlement reflects the net proceeds received from the
settlement of the Company,s lawsuit with Chevron U.S.A., Inc. in January 1995.
See Note 3. of Notes to Unaudited Financial Statements.
Other expense of $489,000 represented the write-down of tubular inventories
and accruals for estimated future environmental costs.
11
<PAGE>
McFarland Energy, Inc.
Management's Discussion and Analysis
of Financial Condition and Results of Operations
Results of Operations
---------------------
Three Months Ended June 30, 1995 and 1994
-----------------------------------------
For the three months ended June 30, 1995, oil and gas revenues increased
47% to $4.9 million, reflecting higher crude oil and natural gas production and
higher crude oil prices in 1995.
Crude oil production in the second quarter of 1995 was 42% higher than a
year ago at 304,000 barrels, reflecting increased production from the Company's
Midway Sunset Field operations. Natural gas production was 531,000 MCF in the
second quarter of 1995, which was 98% higher than the same period in 1994.
Production from the Northern San Joaquin Valley and Oak Hill Field operations
accounted for the current quarter increase.
The average crude oil price received in the current quarter, excluding the
effects of the hedge, increased 20% to $15.00 per barrel as compared to $12.51
per barrel received in the same period in 1994. The effect of the hedge program
in the current quarter decreased revenues by $304,000 or $1.00 per barrel.
Natural gas prices averaged $1.19 per MCF in 1995 as compared to $2.01 per MCF
in the second quarter of 1994, or a 41% decline.
Oil and gas production costs in the second quarter of 1995 increased to
$1,813,000, or a 19% increase from 1994. On a BOE basis, the average lifting
cost for the current quarter was $4.62 per BOE as compared to $5.87 per BOE in
1994. Sharply higher crude oil and natural gas production were the primary
reasons for the significant decline in the current year BOE lifting costs.
Exploration costs of $470,000 represented three dry holes drilled in the
Sacramento and Northern San Joaquin Valleys, leasehold write-offs and a property
abandonment.
Depletion and depreciation expense increased 48% to $1,138,000 due to the
acquisition of the Star Fee and Oak Hill Field properties.
General and administrative expenses in the second quarter of 1995 increased
34% over the same period in 1994, reflecting higher general corporate expenses
and lower billed operator's overhead.
12
<PAGE>
McFarland Energy, Inc.
Form 10-Q
June 30, 1995
Part II
Item 6. Exhibits and Reports on Form 8-K
----------------------------------------
(a) Exhibits:
(27) Financial Data Schedule
(b) Reports on Form 8-K: none
13
<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 hereunto duly authorized.
McFARLAND ENERGY, INC.
Date: August 11, 1995 Ronald T Yoshihara
--------------------------------
Ronald T Yoshihara
Treasurer
(Chief Financial Officer)
J. C. McFarland
-------------------------------
J. C. McFarland
Chief Executive Officer
14
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION ENTRACTED FROM CONSOLIDATED
STATEMENTS OF OPERATIONS AND CONSOLIDATED BALANCE SHEET AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> JUN-30-1995
<CASH> 4,209,000
<SECURITIES> 0
<RECEIVABLES> 5,142,000
<ALLOWANCES> 0
<INVENTORY> 493,000
<CURRENT-ASSETS> 10,009,000
<PP&E> 89,742,000
<DEPRECIATION> (57,998,000)
<TOTAL-ASSETS> 42,039,000
<CURRENT-LIABILITIES> 4,568,000
<BONDS> 5,930,000
<COMMON> 5,230,000
0
0
<OTHER-SE> 24,396,000
<TOTAL-LIABILITY-AND-EQUITY> 42,039,000
<SALES> 9,330,000
<TOTAL-REVENUES> 9,691,000
<CGS> 3,485,000
<TOTAL-COSTS> 3,485,000
<OTHER-EXPENSES> (6,973,000)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 343,000
<INCOME-PRETAX> 12,836,000
<INCOME-TAX> (1,922,000)
<INCOME-CONTINUING> 10,914,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 10,914,000
<EPS-PRIMARY> 2.09
<EPS-DILUTED> 2.09
</TABLE>
