<PAGE>
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 quarterly period ended March 31, 1997
--------------------------------------------------
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.
- ------------------------------------------------------------------------------
(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
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (562) 944-0181
--------------
None
- --------------------------------------------------------------------------------
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.
5,727,422 Shares
<PAGE>
McFarland Energy, Inc.
Statements of Operations
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended March 31,
----------------------------
1997 1996
------------- ------------
<S> <C> <C>
Revenues:
Oil and gas $6,887,000 $5,647,000
Interest and other 144,000 106,000
Gain on sale of assets 85,000 69,000
----------- ----------
7,116,000 5,822,000
=========== ==========
Costs and expenses:
Crude oil and gas production 2,012,000 1,838,000
Exploration, including dry holes
and abandonments 313,000 417,000
Depletion and depreciation 1,070,000 1,086,000
General and administrative 758,000 701,000
Interest and other 37,000 104,000
---------- ---------
4,190,000 4,146,000
---------- ---------
Income before income taxes 2,926,000 1,676,000
---------- ---------
Income taxes:
Current 375,000 35,000
Deferred 561,000 461,000
---------- ---------
936,000 496,000
---------- ---------
Net income $1,990,000 $1,180,000
========== ==========
Net income per common share $0.35 $0.21
========== ==========
Weighted average number of shares outstanding 5,697,255 5,642,442
========== ==========
</TABLE>
(See notes following)
2
<PAGE>
McFarland Energy, Inc.
Balance Sheets
(Unaudited)
<TABLE>
<CAPTION>
March 31, December 31,
------------- -------------
1997 1996
------------- -------------
<S> <C> <C>
Assets
------
Current Assets:
Cash and cash equivalents $ 10,070,000 $ 9,289,000
Accounts receivable 4,037,000 4,208,000
Crude oil inventory 237,000 316,000
Materials and supplies inventory 243,000 176,000
Prepaid expenses and other current assets 456,000 669,000
---------- ----------
Total current assets 15,043,000 14,658,000
---------- ----------
Property and Equipment 90,517,000 88,911,000
Less accumulated depletion and depreciation (53,628,000) (53,274,000)
---------- ----------
36,889,000 35,637,000
---------- ----------
Other Assets 159,000 155,000
---------- ----------
Deferred Tax Assets --- 409,000
---------- ----------
$ 52,091,000 $ 50,859,000
========== ==========
Liabilities and Stockholders' Equity
------------------------------------
Current Liabilities:
Accounts payable $ 2,424,000 $ 2,497,000
Royalties and revenue payable 1,724,000 1,786,000
Cost advances from joint venture partners 159,000 163,000
Other taxes payable 379,000 504,000
Other accrued liabilities 374,000 950,000
---------- ----------
Total current liabilities 5,060,000 5,900,000
---------- ----------
Production Payment Notes 2,377,000 2,558,000
---------- ----------
Deferred Income Taxes 152,000 ---
---------- ----------
Stockholders' Equity:
Common stock, $1.00 par value 5,701,000 5,679,000
Additional paid-in capital 21,461,000 21,372,000
Retained earnings 17,340,000 15,350,000
---------- ----------
44,502,000 42,401,000
---------- ----------
$ 52,091,000 $ 50,859,000
========== ==========
</TABLE>
(See notes following)
3
<PAGE>
McFarland Energy, Inc.
Statements of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
Three months ended March 31,
------------------------------
1997 1996
-------------- -------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 1,990,000 $ 1,180,000
Adjustments to reconcile net income to net cash
provided by operating activities:
Depletion and depreciation 1,070,000 1,086,000
Dry holes, abandonments and impairments 267,000 332,000
Deferred income taxes 561,000 461,000
Gain on sale of assets (85,000) (69,000)
Change in assets and liabilities:
Decrease/(increase) in:
Receivables 171,000 (753,000)
Inventory 12,000 (139,000)
Prepaid expenses and other current assets 213,000 166,000
Increase/(decrease) in:
Accounts payable (73,000) 283,000
Royalties and revenue payable (62,000) 279,000
Cost advances from joint venture partners (4,000) ---
Taxes payable (125,000) (248,000)
Other accrued expenses (576,000) (137,000)
--------- ---------
NET CASH PROVIDED BY OPERATING ACTIVITIES 3,359,000 2,441,000
--------- ---------
CASH FLOWS (USED IN)/FROM INVESTING ACTIVITIES:
Purchase of property and equipment, including dry holes (2,589,000) (965,000)
Amounts included in accrued liabilities --- (3,429,000)
Proceeds from sales of property and equipment 85,000 69,000
Other (4,000) 117,000
---------- ---------
NET CASH USED IN INVESTING ACTIVITIES (2,508,000) (4,208,000)
---------- ---------
CASH FLOWS (USED IN)/FROM FINANCING ACTIVITIES:
Payments on debt (181,000) (96,000)
Exercise of stock options 111,000 27,000
---------- ---------
NET CASH USED IN FINANCING ACTIVITIES (70,000) (69,000)
---------- ---------
NET INCREASE/(DECREASE) IN CASH AND
CASH EQUIVALENTS 781,000 (1,836,000)
Cash and cash equivalents at beginning of the year 9,289,000 6,974,000
---------- ---------
CASH AND CASH EQUIVALENTS AT MARCH 31, 1997 AND 1996 $10,070,000 $ 5,138,000
========== =========
</TABLE>
(See notes following)
4
<PAGE>
McFarland Energy, Inc.
Notes to Unaudited Financial Statements
March 31, 1997
- -------------------------------------------------------------------------------
Safe Harbor for Forward-Looking Statements: This Form 10-Q contains forward-
looking statements. Such forward-looking statements and the business prospects
of the Company are subject to many risks and uncertainties which may cause
actual future results of the Company to differ materially from those statements.
Factors that could cause or contribute to such differences include, but are not
limited to, those factors discussed in this report, as well as the following
factors: volatility of oil and gas prices, product supply and demand,
competition, government regulation or action, litigation, drilling and
operations performance, the company's ability to replace reserves or implement
its business plans, access to capital, uncertainties about estimates of reserves
and environmental risks.
- --------------------------------------------------------------------------------
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 March 31, 1997 and December 31, 1996 and the results of operations
for the three months ended March 31, 1997 and 1996.
Note 2. Earnings per Share
- ------- ------------------
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards ("SFAS") No. 128, "Earnings per Share." SFAS
No. 128 replaces the standards for computing earnings per share previously
established by APB No. 15, "Earnings per Share (EPS)" by replacing the primary
EPS with a presentation of "basic EPS" and requiring dual presentation of basic
and diluted EPS on the face of the income statement. SFAS No. 128 requires
companies to adopt its provisions for fiscal years ending after December 15,
1997 and requires restatement of all prior period EPS data, if necessary.
Earlier application is not permitted. However, SFAS No. 128 permits disclosure
of pro forma EPS in the notes to the financial statements. Under SFAS No. 128,
EPS for the three months ended March 31, 1997 and 1996 would be unchanged for
basic EPS and would be reduced by $0.01 for diluted EPS.
Note 3. Credit Agreement
- ------- ----------------
On April 20, 1994, the Company entered into a 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 which 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. 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%. 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 required to pay a quarterly commitment fee of
.25% per annum on the unused portion of the revolving credit facility.
5
<PAGE>
McFarland Energy, Inc.
Notes to Unaudited Financial Statements
March 31, 1997
(Continued)
There are no compensating balance requirements and the Credit Agreement expires
on June 1, 1997. As of March 31, 1997, there was no outstanding borrowing. The
Company plans to renew the facility at its expiration.
Note 4. 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 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 5. 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.
The Company is subject to other possible loss contingencies pursuant to
federal, state and local environmental laws and regulations. These include
existing and potential obligations to investigate the effects of the release of
certain hydrocarbons or other substances at various sites, to remediate or
restore these sites, and to compensate others for damages and to make other
payments as required by law or regulation. These obligations relate to sites
owned by the Company or others, and are associated with past and present oil and
gas operations. The amount of such obligations is indeterminate and will depend
on such factors as the unknown nature and extent of contamination, the unknown
timing, extent and method of remedial actions which may be required, the
determination of the Company's liability in proportion to other responsible
parties, and the state of the law.
6
<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 the change in current
assets and liabilities in the first quarter of 1997 totaled $3,803,000, as
compared to $2,990,000 for the same period in 1996. The 1997 results reflected
sharply higher oil and gas prices and a moderate increase in barrel of oil
equivalent ("BOE") production.
California Midway Sunset field crude prices were at relatively high levels
throughout the first quarter of the year, averaging $16.74 per barrel. This
compares with $15.05 per barrel in the first quarter of 1996 and an average
price of $15.78 per barrel received for the year 1996. Higher California crude
prices reflect both an improved state economy and a narrowed "basis"
differential between California heavy crude and West Texas Intermediate crude.
This increase in relative value of California heavy crude appears to represent a
permanent fundamental change in the California crude oil market that will
continue to have long-term positive effects on the Company's future operating
results and cash flows.
The Company continues to hedge approximately one-half of its crude oil
production through a third-party hedging arrangement. The hedging arrangement
is based on a pre-established price range of Midway Sunset field posted prices.
The purpose of the hedge is to ensure the Company a minimum level of cash flow
to fund its capital commitments. When the monthly weighted average Midway
Sunset field posted price is above the top of this range, the Company pays the
refiner the difference up to a maximum dollar amount per barrel. When the
Midway Sunset field posted price is below the bottom of the range, the refiner
pays the Company the difference up to a maximum dollar amount per barrel. The
current agreement expires on November 1, 1997. In the first quarter of 1997,
the hedging arrangement reduced revenues by $224,000.
First quarter natural gas prices averaged $2.98 per mcf compared to $1.72
per mcf received a year ago. The sharp rise in natural gas prices that began at
the end of 1996 was short-lived, as prices declined throughout most of the first
quarter and closed the period near their prior year levels. The recent extreme
gas price volatility appears to reflect a fragile supply/demand equilibrium in
the natural gas markets. Consequently, it is likely that future gas prices will
continue to be seasonal and especially volatile during the peak demand winter
months.
Crude oil production in the first quarter of 1997 was down slightly from the
prior year. This decline was primarily attributable to reduced steam injection
at the Company's properties in the Midway Sunset field. As a result of the
sharp increase in natural gas prices at the end of 1996 and halfway through the
first quarter, the Company reduced its volume of steam injection by
approximately 10-15%. While this operational decision had the effect of
minimizing the impact of a 50% increase in steam costs, it correspondingly
resulted in lower first quarter crude production. In addition, the Company has
recently been advised by the third-party from whom it purchases its steam, that
the volumes available for sale will be temporarily curtailed by approximately
35% until the middle of May. This situation should have only
7
<PAGE>
McFarland Energy, Inc.
Management's Discussion and Analysis
of Financial Condition and Results of Operations
Liquidity and Capital Resources
-------------------------------
(Continued)
a minor short-term effect on the Company's operations. Once the curtailment
period is ended, the Company plans to return to its normal volumes of steam
injection at its Midway Sunset field properties.
The Company's twenty-five well development drilling program in the Midway
Sunset field is now underway and is expected to be completed in the second
quarter. The Company expects this drilling, along with anticipated development
drilling at some of its other California and Texas properties, to raise 1997 oil
production above the prior year levels.
Natural gas production increased 17% in 1997 to nearly 6,000 mcf per day.
The rise in current year gas production was primarily attributable to the
Company's interest in the Rio Vista gas unit, which is expected to account for
nearly 25% of the 1997 gas production. The balance of the 1997 gas production
is expected to come from the Company's properties in the Texas Oak Hill field
(32%), California Northern San Joaquin Valley (25%) and various other properties
located principally in Louisiana (18%). For 1997, the Company expects its
natural gas production to equal or slightly exceed the prior year level.
The Company presently maintains an unsecured $10,000,000 revolving line of
credit facility which expires on June 1, 1997. The credit facility is to be used
for producing property acquisitions. The Company plans to renew the facility at
its expiration. The Company believes that it has substantially greater borrowing
capacity should the need arise in order to make a significant producing property
acquisition.
Capital Resources
- -----------------
Net working capital at March 31, 1997 totaled $9,983,000, up 14% from the
beginning of the year. The increased net working capital reflects the Company's
strong first quarter operating fundamentals. At the end of the first quarter,
the Company had $10,070,000 of cash and cash equivalents.
In the first quarter of 1997, capital expenditures totaled $2,589,000,
consisting of development activities of $2,001,000, exploration activities of
$478,000 and other general expenditures of $110,000.
Development activities in the first quarter of 1997 consisted primarily of
the commencement of the 1997 Midway Sunset field drilling program, other
California development drilling, surface facility enhancements and various other
maintenance type projects. For 1997, the Company has budgeted up to $5,700,000
for development type activities.
Exploration activities in the first quarter consisted primarily of a dry
hole drilled in Nye County, Nevada and prospect generating costs related to the
Company's exploratory activities in the California Sacramento Valley. The
Company plans to drill at least two exploratory wells in the Sacramento Valley
8
<PAGE>
McFarland Energy, Inc.
Management's Discussion and Analysis
of Financial Condition and Results of Operations
Liquidity and Capital Resources
-------------------------------
(Continued)
later this year. For 1997, the Company has budgeted approximately $2,200,000
for exploration activities focused principally in California.
The Company believes that it will be able to fund its remaining 1997 capital
budget with its existing cash balances and internally generated cash flow.
Presently, the Company has a $10,000,000 unused line of credit facility and is
highly confident that it could increase the amount significantly if it desired.
In addition, the Company believes that it could obtain financing from other
financial institutions or access the equity markets if funds were needed to
consummate a significant producing property acquisition.
Impact of Inflation
- -------------------
The impact of inflation on the Company's capital costs and operations has
not been significant in recent years due to the relatively low rates of
inflation experienced in the United States.
NeW Accounting Standards
- ------------------------
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards ("SFAS") No. 128, "Earnings per Share." SFAS
No. 128 replaces the standards for computing earnings per share previously
established by APB No. 15, "Earnings per Share (EPS)" by replacing the primary
EPS with a presentation of "basic EPS" and requiring dual presentation of basic
and diluted EPS on the face of the income statement. SFAS No. 128 requires
companies to adopt its provisions for fiscal years ending after December 15,
1997 and requires restatement of all prior period EPS data, if necessary.
Earlier application is not permitted. However, SFAS No. 128 permits disclosure
of pro forma EPS in the notes to the financial statements. See Note 2. of Notes
to Unaudited Financial Statements.
9
<PAGE>
McFarland Energy, Inc.
Management's Discussion and Analysis
of Financial Condition and Results of Operations
Results of Operations
---------------------
Three Months Ended March 31, 1997 and 1996
------------------------------------------
In the first quarter of 1997, oil and gas revenues increased 22% to
$6,887,000, reflecting higher oil and gas prices and higher natural gas
production.
Crude oil production for 1997 totaled 320,000 barrels as compared to 329,000
barrels in 1996, or a 3% decline. Natural gas production increased 17% to
538,000 mcf in 1997, reflecting the additional interest acquired in the Rio
Vista gas unit in September 1996. Production from the Rio Vista gas unit
accounted for approximately 29% of the Company's total gas production in the
first quarter of 1997.
The average crude oil price received in 1997, without the effects of the
hedge, was $17.28 per barrel as compared to $15.36 per barrel in 1996. The
hedge decreased 1997 revenues by $224,000, or $0.70 per barrel. In 1996, the
hedge decreased revenues by $304,000, or $0.93 per barrel. Natural gas prices
averaged $2.98 per mcf in 1997 as compared to $1.72 per mcf received in 1996.
Production costs for 1997 totaled $2,012,000, or a 9% increase from 1996.
On a barrel of oil equivalent basis ("BOE"), lifting costs averaged $4.91 per
BOE in 1997, as compared to $4.53 per BOE in 1996. This increase was due to
higher steam costs at the Company's core properties in the Midway Sunset field.
Exploration, dry holes and abandonment costs in 1997 totaled $313,000,
reflecting a dry hole drilled in Nevada and related leasehold write-offs.
General and administrative expense increased 8% to $758,000 in 1997 primarily
due to higher legal fees and lower billed operators overhead in 1997. Higher
income tax expense in 1997 reflects higher pretax income and an effective rate
of 32% as compared to 30% used in the first quarter of 1996.
10
<PAGE>
McFarland Energy, Inc.
Form 10-Q
March 31, 1997
Part II
Item 1. Legal Proceedings
- --------------------------
(a) Operating Industries, Inc. ("OII") - "Unilateral Administrative Order"
--- ----------------------------------------------------------------------
from the United States Environmental Protection Agency ("EPA") dated March 7,
-----------------------------------------------------------------------------
1997
----
The Company has advised the EPA that it intends to comply with that
Unilateral Administrative Order ("Order") sent to the Company and six other
companies by letter dated March 7, 1997 regarding, among other things, the
operation of the leachate treatment plant at the Superfund site known as
Operating Industries, Inc. ("OII"). Without admitting any liability, the
Company intends to cooperate with the other parties involved and contribute
to the fund for the required work and other deliverables consistent with its
alleged allocable share. Certain members of the Steering Committee of other
Potentially Responsible Parties at OII have agreed to accept the Company's
contribution and undertake and be responsible for the Company's obligations
under the actual terms of the Order. The said Steering Committee members are
currently operating the leachate treatment plant at OII. The Company intends
to contribute the sum of approximately $368,000 to the fund for the Order.
Item 6. Exhibits and Reports on Form 8-K
- ------- --------------------------------
(a) Exhibits: Exhibit 27 - Financial Data
Schedule
(b) Reports on Form 8-K: none
11
<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: May 13, 1997 /s/Ronald T Yoshihara
---------------------- -------------------------------------------
Ronald T Yoshihara
Vice President and Treasurer
(Chief Financial Officer)
/s/Eileen C. Sugita
-------------------------------------------
Eileen C. Sugita
Controller
(Chief Accounting Officer)
12
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> MAR-31-1997
<CASH> 10,070,000
<SECURITIES> 0
<RECEIVABLES> 4,037,000
<ALLOWANCES> 0
<INVENTORY> 480,000
<CURRENT-ASSETS> 15,043,000
<PP&E> 90,517,000
<DEPRECIATION> (53,628,000)
<TOTAL-ASSETS> 52,091,000
<CURRENT-LIABILITIES> 5,060,000
<BONDS> 2,377,000
5,701,000
0
<COMMON> 0
<OTHER-SE> 38,801,000
<TOTAL-LIABILITY-AND-EQUITY> 52,091,000
<SALES> 6,887,000
<TOTAL-REVENUES> 7,116,000
<CGS> 2,012,000
<TOTAL-COSTS> 2,012,000
<OTHER-EXPENSES> 2,141,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 37,000
<INCOME-PRETAX> 2,926,000
<INCOME-TAX> 936,000
<INCOME-CONTINUING> 1,990,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,990,000
<EPS-PRIMARY> 0.35
<EPS-DILUTED> 0.35
</TABLE>
