<PAGE> 1
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 ending March 31, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES AND EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER 1-8567-2
MAXUS ENERGY CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 75-1891531
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
717 NORTH HARWOOD STREET, DALLAS, TEXAS 75201-6594
(Address of principal executive offices) (Zip Code)
(214) 953-2000
(Registrant's telephone number, including area code)
INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL
REPORTS REQURIED TO BE FILED BY SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934 DURING THE PRECEDING 12 MONTHS, AND (2) HAS BEEN SUBJECT TO THE
FILING REQUIREMENTS FOR THE PAST 90 DAYS.
YES [X] NO [ ]
Shares of Common Stock outstanding at May 10, 1996: 135,609,772
<PAGE> 2
PART 1. FINANCIAL INFORMATION
In the opinion of the management of Maxus Energy Corporation (together with
its subsidiaries, "Maxus" or the "Company"), all adjustments (consisting only
of normal accruals) necessary for a fair presentation of the consolidated
results of operations, consolidated balance sheet and consolidated cash flows
at the date and for the periods indicated have been included in the
accompanying consolidated financial statements. Effective April 1, 1995, the
Company used the purchase method of accounting to record the acquisition of the
Company by YPF Sociedad Anonima, an Argentine sociedad anonima ("YPF"), as
discussed in Note Two to the financial statements. Periods prior to April 1,
1995 are presented; however, financial statements for these periods are on a
pre-Merger basis and, therefore, not comparative.
2
<PAGE> 3
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
We have reviewed the accompanying consolidated balance sheet of Maxus Energy
Corporation (a Delaware corporation) as of March 31, 1996, and the related
consolidated statements of income and cash flows for the three-month period
then ended in accordance with standards established by the American Institute
of Certified Public Accountants.
A review of interim financial information consists principally of obtaining
an understanding of the system for the preparation of interim financial
information, applying analytical review procedures to the financial data and
making inquiries of persons responsible for financial and accounting matters.
It is substantially less in scope than an audit in accordance with generally
accepted auditing standards, the objective of which is the expression of an
opinion regarding the financial statements taken as a whole. Accordingly, we
do not express such an opinion.
Based on our review, we are not aware of any material modifications that
should be made to the financial statements referred to above for them to be in
conformity with generally accepted accounting principles.
We have previously audited, in accordance with generally accepted auditing
standards, the consolidated balance sheet of Maxus Energy Corporation as of
December 31, 1995, and the consolidated statements of operations and cash flows
for the three months ended March 31, 1995, and, in our report dated February 2,
1996, we expressed an unqualified opinion on those statements. In our opinion,
the information set forth in the accompanying consolidated balance sheet as of
December 31, 1995, and the accompanying consolidated statements of operations
and cash flows for the three months ended March 31, 1995, is fairly stated, in
all material respects, in relation to the financial statements from which it
has been derived.
/s/ ARTHUR ANDERSEN LLP
ARTHUR ANDERSEN LLP
Dallas, Texas
April 25, 1996
3
<PAGE> 4
MAXUS ENERGY CORPORATION
CONSOLIDATED STATEMENT OF OPERATIONS
(in millions, except per share)
<TABLE>
<CAPTION>
THREE MONTHS THREE MONTHS
ENDED MARCH 31, ENDED MARCH 31,
1996 1995
--------------- ---------------
(Unaudited)
<S> <C> <C>
REVENUES
Sales and operating revenues $ 174.0 $ 142.5
Other revenues, net 6.2 9.6
--------- ---------
180.2 152.1
COSTS AND EXPENSES
Operating expenses 50.8 64.6
Gas purchase costs 18.0 12.7
Exploration, including exploratory dry holes 7.9 8.9
Depreciation, depletion and amortization 40.7 29.9
General and administrative expenses 2.8 4.2
Taxes other than income taxes 3.4 3.1
Interest and debt expenses 34.1 24.1
Pre-merger costs -- 42.4
--------- ---------
157.7 189.9
--------- ---------
INCOME (LOSS) BEFORE INCOME TAXES 22.5 (37.8)
INCOME TAXES 23.0 19.1
--------- ---------
NET LOSS (0.5) (56.9)
DIVIDEND REQUIREMENT ON PREFERRED STOCK (9.1) (9.6)
--------- ---------
LOSS APPLICABLE TO COMMON SHARES $ (9.6) $ (66.5)
========= =========
NET LOSS PER COMMON SHARE $ (0.07) $ (0.49)
========= =========
AVERAGE COMMON SHARES OUTSTANDING 135.6 135.5
</TABLE>
See Notes to Consolidated Financial Statements.
4
<PAGE> 5
MAXUS ENERGY CORPORATION
CONSOLIDATED BALANCE SHEET
(in millions, except shares)
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1996 1995
---------- ------------
ASSETS (Unaudited)
<S> <C> <C>
Current Assets
Cash and cash equivalents $ 22.7 $ 38.3
Receivables, less doubtful receivables 147.9 141.8
Inventories 32.8 40.8
Restricted cash 3.3 19.0
Prepaids and other current assets 20.6 26.5
---------- ----------
TOTAL CURRENT ASSETS 227.3 266.4
Properties and Equipment, less accumulated
depreciation, depletion and amortization 2,355.8 2,363.6
Investments and Long-Term Receivables 8.0 7.1
Restricted Cash 61.8 61.4
Deferred Charges 20.6 18.3
---------- ----------
$ 2,673.5 $ 2,716.8
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Long-term debt $ 53.0 $ 34.3
Accounts payable 56.9 59.0
Taxes payable 36.3 39.7
Accrued liabilities 155.2 173.4
---------- ----------
TOTAL CURRENT LIABILITIES 301.4 306.4
Long-Term Debt 1,243.1 1,261.2
Deferred Income Taxes 546.1 551.2
Other Liabilities and Deferred Credits 226.2 233.0
$9.75 Redeemable Preferred Stock, $1.00 par value
Authorized and issued shares--625,000 and 1,250,000 62.5 125.0
Stockholders' Equity
$2.50 Preferred Stock, $1.00 par value
Authorized shares--5,000,000
Issued shares--3,500,000 64.4 66.5
$4.00 Preferred Stock, $1.00 par value
Authorized shares--5,915,017
Issued shares--4,356,658 7.3 11.7
Common Stock, $1.00 par value
Authorized shares--300,000,000
Issued Shares--135,609,772 135.6 135.6
Capital contributions from parent 64.0 --
Paid-in capital 103.2 105.8
Accumulated deficit (74.4) (73.7)
Minimum pension liability (5.9) (5.9)
---------- ----------
TOTAL STOCKHOLDERS' EQUITY 294.2 240.0
---------- ----------
$ 2,673.5 $ 2,716.8
========== ==========
</TABLE>
See Commitments and Contingencies.
See Notes to Consolidated Financial Statements.
The Company uses the successful efforts method to account for its
oil and gas producing activities.
5
<PAGE> 6
MAXUS ENERGY CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
(in millions)
<TABLE>
<CAPTION>
THREE MONTHS THREE MONTHS
ENDED MARCH 31, ENDED MARCH 31,
1996 1995
--------------- ---------------
(Unaudited)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (0.5) $ (56.9)
Adjustments to reconcile net loss to net cash provided
by operating activities:
Depreciation, depletion and amortization 40.7 29.9
Dry hole costs 0.5 1.0
Deferred income taxes (5.1) 0.4
Net gain on sale of assets and sale/maturity of investments -- (1.7)
Postretirement benefits 0.8 1.4
Pre-merger costs -- 42.4
Accretion of discount 2.1 --
Other (1.3) 1.3
Changes in components of working capital:
Receivables (6.3) 23.8
Inventories, prepaids and other current assets 4.4 (1.4)
Accounts payable (2.1) (15.1)
Accrued liabilities (4.0) 26.3
Taxes payable/receivable (3.4) 10.1
--------- --------
NET CASH PROVIDED BY OPERATING ACTIVITIES 25.8 61.5
--------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Expenditures for properties and equipment--including
dry hole costs (40.9) (53.6)
Proceeds from sale of assets 0.2 2.1
Proceeds from sale/maturity of short-term investments -- 63.4
Purchases of short-term investments -- (24.6)
Restricted cash 15.3 12.2
Other (4.6) 9.8
--------- --------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES (30.0) 9.3
--------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Interest rate swap -- 3.4
Repayment of short-term debt (0.1) --
Reypayment of loan from parent (1.5) --
Acquisition of common stock (2.2) --
Capital contribution from parent 64.0 --
Stock rights redemption -- (13.6)
Redemption of Preferred Stock (62.5) --
Dividends paid (9.1) (9.6)
--------- --------
NET CASH USED IN FINANCING ACTIVITIES (11.4) (19.8)
--------- --------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (15.6) 51.0
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 38.3 40.6
--------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 22.7 $ 91.6
========= ========
</TABLE>
See Notes to Consolidated Financial Statements.
6
<PAGE> 7
1. SIGNIFICANT ACCOUNTING POLICIES
The Consolidated Financial Statements have been prepared in conformity
with generally accepted accounting principles, the most significant of which
are described below. Effective April 1, 1995, the Company used the purchase
method of accounting to record the acquisition of the Company by YPF as
discussed in Note Two. Financial statements presented for periods after
April 1, 1995 reflect the effects of the Merger-related transactions.
Periods prior to April 1, 1995 are presented; however, financial statements
for these periods are on a pre-Merger basis and, therefore, not comparative.
Consolidation Accounting
The Consolidated Financial Statements include the accounts of the
Company and all domestic and foreign subsidiaries. All significant
intercompany accounts and transactions have been eliminated.
Management's Estimates
The preparation of financial statements in accordance with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
period. Actual results could differ from these estimates.
Statement of Cash Flows
Investments with original maturities of three months or less at the
time of original purchase are considered cash equivalents for purposes of
the accompanying Consolidated Statement of Cash Flows. Short-term
investments include investments with maturities over three months but less
than one year.
Inventory Valuation
Inventories are valued at the lower of historical cost or market value
and are primarily comprised of well equipment and supplies. Historical cost
is determined primarily by using the weighted average cost method.
Properties and Equipment
Properties and equipment are carried at cost. Major additions are
capitalized; expenditures for repairs and maintenance are charged against
earnings.
The Company follows the provisions of Statement of Financial
Accounting Standards No. 121 ("SFAS 121"), "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed of," which
requires a review of long-lived assets for impairment whenever events or
changes in circumstance indicate that the carrying amount of the asset may
not be recoverable. Under SFAS 121, if the expected future cash flow of a
long-lived asset is less than the carrying amount of the asset, an
impairment loss shall be recognized to value the asset at its fair value.
The Company uses the successful efforts method to account for costs
incurred in the acquisition, exploration, development and production of oil
and gas reserves. Under this method, all geological and geophysical costs
are expensed; all development costs, whether or not successful, are
capitalized as costs of proved properties; exploratory drilling costs are
initially
7
<PAGE> 8
capitalized, but if the effort is determined to be unsuccessful, the costs
are then charged against earnings; depletion is computed based on an
aggregation of properties with common geologic structural features or
stratigraphic conditions, such as reservoirs or fields.
For investment in unproved properties in the United States, a
valuation allowance (included as an element of depletion) is provided by a
charge against earnings to reflect the impairment of unproven acreage.
Investment in international non-producing leasehold costs are reviewed
periodically by management to insure the carrying value is recoverable based
upon the geological and engineering estimates prepared by independent
petroleum engineers of total possible and probable reserves expected to be
added over the remaining life of each concession. Based upon increases to
proved reserves determined by reserve reports, a portion of the investment
in international non-producing leasehold costs will be periodically
transferred to investment in proved properties.
Depreciation and depletion related to the costs of all development
drilling, successful exploratory drilling and related production equipment
is calculated using the unit of production ("UOP") method based upon
estimated proved developed reserves. Leasehold costs are amortized using
the UOP method based on estimated proved reserves. Other properties and
equipment are depreciated generally on the straight-line method over their
estimated useful lives. Estimated future dismantlement, restoration and
abandonment costs for major facilities, net of salvage value, are taken into
account in determining depreciation, depletion and amortization.
The Company capitalizes the interest cost associated with major
property additions and mineral development projects while in progress, such
amounts being amortized over the useful lives, and applying the same
depreciation method as that used for the related assets.
When complete units of depreciable property are retired or sold, the
asset cost and related accumulated depreciation are eliminated with any gain
or loss reflected in other revenues, net. When less than complete units of
depreciable property are disposed of or retired, the difference between
asset cost and salvage or sales value is charged or credited to accumulated
depreciation and depletion.
Deferred Charges
Deferred charges are primarily comprised of debt issuance costs and
are amortized over the terms of the related debt agreements.
Revenue Recognition
Oil and gas sales are recorded on the entitlements method.
Differences between the Company's actual production and entitlements result
in a receivable when underproduction occurs and a payable when
overproduction occurs. These underproduced or overproduced volumes are
valued based on the weighted average sales price for each respective
property.
Pensions
The Company has a number of trusteed noncontributory pension plans
covering substantially all full-time employees. The Company's funding
policy is to contribute amounts to the plans sufficient to meet the minimum
funding requirements under governmental regulations, plus such additional
amounts as management may determine to be appropriate. The benefits related
to the plans are based on years of service and compensation earned during
years of employment. The Company also has a noncontributory supplemental
retirement plan for executive officers and selected key employees.
8
<PAGE> 9
Other Postretirement and Postemployment Benefits
The Company provides certain health care and life insurance benefits
for retired employees and certain insurance and other postemployment
benefits for individuals whose employment is terminated by the Company prior
to their normal retirement. The Company accrues the estimated cost of
retiree benefit payments, other than pensions, during employees' active
service periods. Employees become eligible for these benefits if they meet
minimum age and service requirements. The Company accounts for benefits
provided after employment but before retirement by accruing the estimated
cost of postemployment benefits when the minimum service period is met,
payment of the benefit is probable and the amount of the benefit can be
reasonably estimated. The Company's policy is to fund other postretirement
and postemployment benefits as claims are incurred.
Environmental Expenditures
Environmental liabilities are recorded when environmental assessments
and/or remediation are probable and material and such costs to the Company
can be reasonably estimated. The Company's estimate of environmental
assessment and/or remediation costs to be incurred are based on either 1)
detailed feasibility studies of remediation approach and cost for individual
sites or 2) the Company's estimate of costs to be incurred based on
historical experience and publicly available information based on the stage
of assessment and/or remediation of each site. As additional information
becomes available regarding each site or as environmental remediation
standards change, the Company revises its estimate of costs to be incurred
in environmental assessment and/or remediation.
Litigation Contingencies
The Company records liabilities for litigation when such amounts are
probable, material and can be reasonably estimated.
Income Taxes
The Company reports income taxes in accordance with Statement of
Financial Accounting Standards No. 109 ("SFAS 109"), "Accounting for Income
Taxes." SFAS 109 requires the use of an asset and liability approach to
measure deferred tax assets and liabilities resulting from all expected
future tax consequences of events that have been recognized in the Company's
financial statements or tax returns.
Earnings per Share
Primary earnings per share are based on the weighted average number of
shares of common stock and common stock equivalents outstanding, unless the
inclusion of common stock equivalents has an antidilutive effect on earnings
per share. Fully diluted earnings per share are not presented due to the
antidilutive effect of including all potentially dilutive common stock
equivalents.
Financial Instruments with Off-Balance-Sheet Risk and Concentrations of
Credit Risk
The Company's financial instruments that are exposed to concentrations
of credit risk consist primarily of cash equivalents, short-term
investments, restricted cash and trade receivables.
9
<PAGE> 10
The Company's cash equivalents and short-term investments and
restricted cash represent high-quality securities placed with various high
investment grade institutions. This investment practice limits the
Company's exposure to concentrations of credit risk.
The Company's trade receivables are dispersed among a broad domestic
and international customer base; therefore, concentrations of credit risk
are limited. The Company carefully assesses the financial strength of its
customers. Letters of credit are the primary security obtained to support
lines of credit.
The Company has minimal exposure to credit losses in the event of
nonperformance by the counterparties to natural gas price swap agreements
and nonderivative financial assets. The Company does not obtain collateral
or other security to support financial instruments subject to credit risk
but restricts such arrangements to investment-grade counterparties.
Investments in Marketable Securities
Investments in debt and equity securities are reported at fair value
except for those investments in debt securities which management has the
intent and the ability to hold to maturity. Investments in debt securities
which are held-for-sale are classified based on the stated maturity and
management's intent to sell the securities. Unrealized gains and losses on
investments in marketable securities, except for debt securities classified
as "held-to-maturity", are reported as a separate component of
stockholders' equity.
Derivatives
The Company periodically hedges the effects of fluctuations in the
price of crude oil and natural gas through price swap agreements and futures
contracts. Gains and losses on these hedges are deferred until the related
sales are recognized and are recorded as a component of sales and operating
revenues. The Company periodically enters into interest rate swap
agreements to hedge interest on long-term debt. The gain or loss on interest
rate swaps is recognized monthly as an increase or decrease to interest
expense.
Take-or-Pay Obligations
The Company records payments received for take-or-pay obligations for
unpurchased contract volumes as deferred revenue, which is included in Other
Liabilities in the consolidated balance sheet. The deferred revenue is
recognized in the income statement as quantities are delivered which fulfill
the take-or-pay obligation. At March 31, 1996, the Company had $12.5
million in deferred revenue as a result of a take-or-pay payment received
related to its Indonesian operations.
2. MERGER
On June 8, 1995, a special meeting of the stockholders of the Company
was held to approve the Agreement of Merger ("Merger Agreement") dated
February 28, 1995, between the Company, YPF Acquisition Corp. (the
"Purchaser") and YPF. The holders of the Company's
common stock, $1.00 par value per share (the "Shares" or "Common Stock"), and
$4.00 Cumulative Convertible Preferred Stock (the "$4.00 Preferred Stock"
and, together with the Shares, the "Voting Shares"), approved the Merger
Agreement, and the Purchase was merged into the Company (the "Merger") on
June 8, 1995 (the "Merger Date").
The Merger was the consummation of transactions contemplated by a
tender offer (the "Offer") which was commenced on March 6, 1995 by the
Purchaser for all the outstanding Shares at $5.50 per
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<PAGE> 11
Share. Pursuant to the Offer, in April 1995 the Purchaser acquired
120,000,613 Shares representing approximately 88.5% of the then-outstanding
Shares of the Company. As a result of the Merger, each outstanding Share
(other than Shares held by the Purchaser, YPF or any of their subsidiaries or
in the treasury of the Company, all of which were canceled in the second
quarter of 1995, and Shares of holders who perfected their appraisal rights
under Section 262 of the Delaware General Corporation Law) was converted into
the right to receive $5.50 in cash, and YPF became the sole holder of all
outstanding Shares. The Company's preferred stock, consisting of the $4.00
Preferred Stock, $2.50 Cumulative Convertible Preferred Stock (the "$2.50
Preferred Stock") and $9.75 Cumulative Preferred Stock (the $9.75 Preferred
Stock), remains outstanding. YPF currently owns approximately 96.9% of
the outstanding Voting Shares.
The total amount of funds required by the Purchaser to acquire the
entire common equity interest in the Company, including the purchase of
Shares pursuant to the Offer and the payment for Shares converted into the
right to receive cash pursuant to the Merger, was approximately $762
million. In addition, the Purchaser assumed all outstanding obligations of
the Company. On April 5, 1995, the Purchaser entered into a credit
agreement (the "Credit Agreement") with lenders for which The Chase
Manhattan Bank (National Association) ("Chase") acted as agent, pursuant to
which the lenders extended to the Purchaser a credit facility for up to $550
million (the "Purchaser Facility"). On April 5, 1995, the Purchaser
borrowed $442 million under the Purchaser Facility and received a capital
contribution of $250 million from YPF. The Purchaser used borrowings under
the Purchaser Facility and the funds contributed to it by YPF to purchase
120,000,613 Shares pursuant to the Offer. Subsequent to the Merger, these
Shares and all other outstanding Shares vested in YPF.
Effective April 1, 1995, the Company used the purchase method to
record the acquisition of the Company by YPF. In a purchase method
combination, the purchase price is allocated to the acquired assets and
assumed liabilities based on their fair values at the date of acquisition.
As a result, the assets and liabilities of the Company were revalued to
reflect the approximate $762 million cash purchase price paid by YPF to
acquire the Company. The Company's oil and gas properties were assigned
carrying amounts based on their relative fair market values.
Following the Merger, Chase provided two additional credit facilities
aggregating $425 million: (i) a credit facility of $250 million (the
"Midgard Facility") extended to Midgard Energy Company, a wholly
owned subsidiary of the Company, and (ii) a credit facility of $175 million
(the "Holdings Facility") extended to Maxus Indonesia, Inc., a
wholly owned subsidiary of the Company. The proceeds of the loans made
pursuant to these facilities were used to repay, in part, the Purchaser
Facility, which was assumed by the Company pursuant to the Merger. In
addition, the Company applied $8 million of its available cash to repay the
Purchaser Facility and used approximately $86 million of its available cash
to pay holders of Shares converted into the right to receive cash in the
Merger.
3. KEEPWELL COVENANT
Pursuant to the Merger Agreement, in the event the Company is unable to
meet its obligations as they come due, whether at maturity or otherwise,
including, solely for the purposes of this undertaking, dividend and
redemption payments with respect to the $9.75 Preferred Stock, the $2.50
Preferred Stock and the $4.00 Preferred Stock, YPF has agreed to capitalize
the Company in an amount necessary to permit the Company to meet such
obligations; provided that YPF's aggregate obligation will be (i) limited to
the amount of debt service obligations under the Purchaser Facility, the
Midgard Facility and the Holdings Facility and (ii) reduced by the amount, if
any, of capital contributions by YPF to the Company after the Merger Date and
by the amount of the net proceeds of any sale by the Company of common stock
or nonredeemable preferred stock after the Merger Date. The foregoing
obligations of YPF (the "Keepwell Covenant") will survive until June 8,
2004. During the first quarter of 1996, YPF made capital contributions to the
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<PAGE> 12
Company in the aggregate amount of $64 million pursuant to the terms of the
Keepwell Covenant. This amount represents the cumulative contribution
received by Maxus from YPF pursuant to the terms of the Keepwell Covenant.
4. ASSET ACQUISITION
In January 1996, the Company and its partners were successful in
acquiring the highly prospective Guarapiche block in Venezuela's first
auction awards for equity production in over 20 years. Guarapiche is located
on the same trend as the five billion barrel El Furrial field in northeastern
Venezuela. In the second quarter of 1996, the Company, together with its
partners, will pay $109 million ($27 million net to Maxus) to the Venezuelan
government for rights to explore the Guarapiche block. BP Exploration
Orinoco Limited is the operator with a 37.5% working interest, while Amoco
Production Company and the Company hold the remaining 37.5% and 25%,
respectively. The Company's net exploration commitment for this block is
anticipated to total approximately $15 million over the next five years.
5. ANALYSIS OF THE MAIN ACCOUNTS OF THE CONSOLIDATED FINANCIAL
STATEMENTS
Details regarding the significant accounts included in the accompanying
financial statements are as follows:
<TABLE>
<CAPTION>
Consolidated Balance Sheet Accounts March 31,
(in millions) 1996
----------
<S> <C>
ASSETS
a) RECEIVABLES:
Trade accounts receivables $ 109.8
Notes and other receivables 39.0
Allowance for doubtful trade receivables (0.9)
----------
$ 147.9
==========
b) PROPERTIES AND EQUIPMENT:
Proved properties $ 1,615.3
Unproved properties 737.0
Other 171.6
----------
Total Oil and Gas 2,523.9
Corporate 11.9
----------
2,535.8
Less--Accumulated depreciation, depletion and amortization 180.0
----------
$ 2,355.8
==========
c) INVENTORIES:
Warehouse/field yard inventory $ 32.8
==========
</TABLE>
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<PAGE> 13
<TABLE>
<S> <C>
d) DEFERRED CHARGES:
Unamortized debt issuance costs $ 15.1
Other 5.5
----------
$ 20.6
==========
LIABILITIES
e) ACCRUED LIABILITIES:
Environmental remediation $ 29.1
Accrued interest 36.8
Overlift liability 6.8
Merger accrual 18.5
Joint interest billings for international operations 40.0
Other 24.0
----------
$ 155.2
==========
</TABLE>
<TABLE>
<CAPTION>
Interest
f) LONG-TERM DEBT: Rates(%) Maturity Current Noncurrent
-------- -------- --------- ----------
<S> <C> <C> <C> <C>
8.5% Debentures 8.50 1997-2008 $ 76.5
9.375% Notes 9.37 2003 226.2
9.5% Notes 9.50 2003 87.6
9.875% Notes 9.87 2002 221.7
11.25% Debentures 11.25 2013 14.4
11.5% Debentures 11.50 2001-2015 94.7
Medium-term notes 7.57-11.08 1996-2004 $ 34.2 110.5
Holdings Facility 8.3125 1997-2002 8.7 166.3
Midgard Facility 7.81 1997-2003 10.0 240.0
Advances from parent 5.125 5.1
Other 0.1 0.1
--------- ---------
$ 53.0 $ 1,243.1
</TABLE> ========= =========
<TABLE>
<S> <C> <C>
g) OTHER LIABILITIES AND DEFERRED CREDITS:
Environmental remediation $ 87.9
Long-term employee benefit costs 63.9
Litigation contingencies 12.6
Reserve for insurance losses 20.0
Take-or-pay payment 12.5
Other 29.3
----------
$ 226.2
==========
</TABLE>
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<PAGE> 14
6. TAXES
The Company reports income taxes in accordance with SFAS 109. The
Company's provision for income taxes was comprised of the following:
<TABLE>
<CAPTION>
Three Months Ended
March 31, 1996
(in millions)
-----------------
<S> <C>
Current
Foreign ................................................ $ 28.1
State and local ........................................ --
-------
28.1
Deferred
Federal ................................................ (4.3)
Foreign ................................................ (.8)
-------
(5.1)
-------
Provision for income taxes ................................ $ 23.0
=======
</TABLE>
7. RESTRICTED CASH
At March 31, 1996, the Company had $65.1 million in restricted cash of
which $15.0 million represented collateral for outstanding letters of credit
and $7.0 million represented six months of interest on outstanding borrowings
as required by the Holdings Facility. Assets held in trust as required by
certain insurance policies totaled $43.1 million. Approximately $3.3 million
of collateral for outstanding letters of credit at March 31, 1996, which will
be released within twelve months, was classified as a current asset.
8. PREFERRED STOCK
The Company has the authority to issue 100,000,000 shares of preferred
stock, $1.00 par value. The rights and preferences of shares of authorized
but unissued preferred stock are established by the Company's Board of
Directors at the time of issuance.
a) $9.75 CUMULATIVE CONVERTIBLE PREFERRED STOCK
In 1987, the Company sold 3,000,000 shares of the $9.75 Preferred
Stock. Since such time, the Company has entered into various
agreements, most recently on June 8, 1995, with the sole holder of the
$9.75 Preferred Stock pursuant to which, among other things, the Company
has repurchased 500,000 shares and the parties have waived or amended
various covenants, agreements and restrictions relating to such stock.
At March 31, 1996, 625,000 shares of $9.75 Preferred Stock are
outstanding, each receiving an annual cash dividend of $9.75. In
addition, 187,500 of such shares (the "Conversion Waiver Shares") each
receive an additional quarterly cash payment of $.25 ($.50 in certain
circumstances). For the 12-month period commencing February 1, 1996,
each share of the $9.75 Preferred Stock has a liquidation value of $100
($62.5 million in the aggregate at March 31, 1996) plus accrued
dividends. Since February 1, 1994, the stock has been subject to
mandatory redemption at the rate of 625,000 shares per year. Effective
February 1, 1996 the Company redeemed 625,000 shares as required for
$62.5 million. The $9.75 Preferred Stock currently is neither
convertible by the holder nor redeemable at the Company's option and has
no associated registration rights. The $9.75 Preferred Stock entitles
the holder to vote only on certain matters separately affecting such
holder. In addition, pursuant to the June 8, 1995 agreement, the holder
of the $9.75 Preferred
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<PAGE> 15
Stock waived previously granted rights to approve certain "self-dealing"
transactions and certain financial covenants pertaining to the Company,
and the Company waived its right of first offer with respect to the
transfer of the $9.75 Preferred Stock and certain transfer restrictions
on such stock.
b) $4.00 CUMULATIVE CONVERTIBLE PREFERRED STOCK
Each outstanding share of $4.00 Preferred Stock is entitled to one
vote, is convertible at any time into shares of the Company's Common
Stock (2.29751 shares at March 31, 1996), is entitled to receive
annual cash dividends of $4.00 per share, is callable at and has a
liquidation value of $50.00 per share ($217.8 million in the aggregate
at March 31, 1996) plus accrued but unpaid dividends, if any.
c) $2.50 CUMULATIVE PREFERRED STOCK
Each outstanding share of the $2.50 Preferred Stock is entitled to
receive annual cash dividends of $2.50 per share, is redeemable after
December 1, 1998 at and has a liquidation value of $25.00 per share
($87.5 million in the aggregate at March 31, 1996), plus accrued but
unpaid dividends, if any.
The holders of the $2.50 Preferred Stock are entitled to limited
voting rights under certain conditions. In the event the Company is in
arrears in the payment of six quarterly dividends, the holders of the
$2.50 Preferred Stock have the right to elect two members to the Board
of Directors until such time as the dividends in arrears are current and
a provision is made for the current dividends due.
9. COMMITMENTS AND CONTINGENCIES
Federal, state and local laws and regulations relating to health and
environmental quality in the United States, as well as environmental laws and
regulations of other countries in which the Company operates, affect nearly
all of the operations of the Company. These laws and regulations set various
standards regulating certain aspects of health and environmental quality,
provide for penalties and other liabilities for the violation of such
standards and establish in certain circumstances remedial obligations. In
addition, especially stringent measures and special provisions may be
appropriate or required in environmentally sensitive foreign areas of
operation, such as those in Ecuador.
Many of the Company's United States operations are subject to
requirements of the Safe Drinking Water Act, the Clean Water Act, the Clean
Air Act (as amended in 1990), the Occupational Safety and Health Act, the
Comprehensive Environmental Response, Compensation and Liability Act of 1980,
as amended ("CERCLA"), and other federal, as well as state, laws. Such laws
address, among other things, limits on the discharge of wastes associated
with oil and gas operations, investigation and clean-up of hazardous
substances, and workplace safety and health. In addition, these laws
typically require compliance with associated regulations and permits and
provide for the imposition of penalties for noncompliance. The Clean Air Act
Amendments of 1990 may benefit the Company's business by increasing the
demand for natural gas as a clean fuel. CERCLA imposes retroactive liability
upon certain parties for the response costs associated with cleaning up old
hazardous substance sites. CERCLA liability to the government is joint and
several. CERCLA allows authorized trustees to seek recovery of natural
resource damages from potentially responsible parties. CERCLA also grants
the government the authority to require potentially responsible parties to
implement interim remedies to abate an imminent and substantial
endangerment to the environment.
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<PAGE> 16
The Company believes that its policies and procedures in the area of
pollution control, product safety and occupational health are adequate to
prevent unreasonable risk of environmental and other damage, and of resulting
financial liability, in connection with its business. Some risk of
environmental and other damage is, however, inherent in particular operations
of the Company and, as discussed below, the Company has certain potential
liabilities associated with former operations. The Company cannot predict what
environmental legislation or regulations will be enacted in the future or how
existing or future laws or regulations will be administered or enforced.
Compliance with more stringent laws or regulations, as well as more vigorous
enforcement policies of the regulatory agencies, could in the future require
material expenditures by the Company for the installation and operation of
systems and equipment for remedial measures and in certain other respects.
Such potential expenditures cannot be reasonably estimated.
In connection with the sale of the Company's former chemical
subsidiary, Diamond Shamrock Chemicals Company ("Chemicals"), to Occidental
Petroleum Corporation ("Occidental") in 1986, the Company agreed to indemnify
Chemicals and Occidental from and against certain liabilities relating to the
business or activities of Chemicals prior to the September 4, 1986 closing date
(the "Closing Date"), including certain environmental liabilities relating to
certain chemical plants and waste disposal sites used by Chemicals prior to the
Closing Date.
In addition, the Company agreed to indemnify Chemicals and Occidental
for 50% of certain environmental costs incurred by Chemicals for which notice
is given to the Company within 10 years after the Closing Date on projects
involving remedial activities relating to chemical plant sites or other
property used in the conduct of the business of Chemicals as of the Closing
Date and for any period of time following the Closing Date, with the Company's
aggregate exposure for this cost sharing being limited to $75 million. The
total expended by the Company under this cost sharing arrangement was about $40
million as of March 31, 1996. Occidental Chemical Corporation ("OxyChem"), a
subsidiary of Occidental, and Henkel Corporation ("Henkel"), an assignee of
certain of Occidental's rights and obligations, have filed a declaratory
judgment action in Texas state court with respect to the Company's agreement in
this regard (see "Legal Proceedings" below).
In connection with the spin-off of Diamond Shamrock R&M, Inc., now
known as Diamond Shamrock, Inc. ("DSI"), in 1987, the Company and DSI agreed to
share the costs of losses (other than product liability) relating to businesses
disposed of prior to the spin-off, including Chemicals. Pursuant to this
cost-sharing agreement, the Company bore the first $75 million of such costs
and DSI bore the next $37.5 million. Under the arrangement, such ongoing costs
are now borne one-third by DSI and two-thirds by the Company. This arrangement
will continue until DSI has borne an additional $47.5 million, following which
such costs will be borne solely by the Company. As of March 31, 1996, DSI's
remaining responsibility is approximately $6 million and is included in
accounts receivable in the accompanying balance sheet.
For the three months ended March 31, 1996, the Company's total
expenditures for environmental compliance for disposed of businesses, including
Chemicals, were approximately $2 million, $1 million of which was recovered
from DSI under the above described cost-sharing agreement. Those expenditures
are projected to be approximately $23 million for the full year 1996 after
recovery from DSI under such agreement.
At March 31, 1996, reserves for the environmental contingencies
discussed herein totaled $117 million. Management believes it has adequately
reserved for all environmental contingencies which are probable and can be
reasonably estimated; however, changes in circumstances could result in
changes, including additions, to such reserves in the future.
The insurance companies that wrote Chemicals' and the Company's
primary and excess insurance during the relevant periods have to date refused
to provide coverage for most of
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<PAGE> 17
Chemicals' or the Company's cost of the personal injury and property damage
claims related to environmental claims, including remedial activities at
chemical plant sites and disposal sites. In two actions filed in New Jersey
state court, the Company has been conducting litigation against all of these
insurers for declaratory judgments that it is entitled to coverage for certain
of these claims. In 1989, the trial judge in one of the New Jersey actions
ruled that there is no insurance coverage with respect to the claims related to
the Newark plant (discussed below). The trial court's decision was upheld on
appeal and that action is now ended. The other suit, which is pending, covers
disputes with respect to insurance coverage related to certain other
environmental matters.
Newark, New Jersey. A consent decree, previously agreed upon by the
U.S. Environmental Protection Agency (the "EPA"), the New Jersey Department of
Environmental Protection and Energy (the "DEP") and Occidental, as successor to
Chemicals, was entered in 1990 by the United States District Court of New
Jersey and requires implementation of a remedial action plan at Chemicals'
former Newark, New Jersey agricultural chemicals plant. Engineering for such
plan, which will include an engineering estimate of the cost of construction,
is progressing. Construction is expected to begin in 1997, cost approximately
$22 million and take three to four years to complete. The work is being
supervised and paid for by the Company pursuant to its above described
indemnification obligation to Occidental. The Company has fully reserved the
estimated costs of performing the remedial action plan and required ongoing
maintenance costs.
Studies have indicated that sediments of the Newark Bay watershed,
including the Passaic River adjacent to the plant, are contaminated with
hazardous chemicals from many sources. Studies performed by the Company and
others suggest that contaminants historically discharged by the Newark plant
are buried under several feet of more recent sediment deposits and are not
moving. The Company, on behalf of Occidental, negotiated an agreement with the
EPA under which the Company is conducting further testing and studies to
characterize contaminated sediment in a six-mile portion of the Passaic River
near the plant site. The Company currently expects such testing and studies to
be completed in 1999 and cost from $4 million to $6 million after December 31,
1995. The Company has reserved its estimate of the remaining costs to be
incurred in performing these studies. The Company has been conducting similar
studies under its own auspices for several years. Until these studies are
completed and evaluated, the Company cannot reasonably forecast what regulatory
program, if any, will be proposed for the Passaic River or the Newark Bay
watershed and therefore cannot estimate what additional costs, if any, will be
required to be incurred.
Hudson County, New Jersey. Until 1972, Chemicals operated a chromium
ore processing plant at Kearny, New Jersey. According to the DEP, wastes from
these ore processing operations were used as fill material at a number of sites
in Hudson County.
As a result of negotiations between the Company (on behalf of
Occidental) and the DEP, Occidental signed an administrative consent order with
the DEP in 1990 for investigation and remediation work at certain chromite ore
residue sites in Kearny and Secaucus, New Jersey. The work is being performed
by the Company on behalf of Occidental, and the Company is funding Occidental's
share of the cost of investigation and remediation of these sites and is
currently providing financial assurance for performance of the work in the form
of a self-guarantee in the amount of $20 million subject to the Company's
continuing ability to satisfy certain financial tests specified by the State.
This financial assurance may be reduced with the approval of the DEP following
any annual cost review. While the Company has participated in the cost of
studies and is implementing interim remedial actions and conducting remedial
investigations and feasibility studies, the ultimate cost of remediation is
uncertain. The Company anticipates submitting its investigation and
feasibility reports to the DEP in late 1996 or 1997. The results of the DEP's
review of these reports could impact the cost of any further remediation that
may be required. The Company has reserved its best estimate of the remaining
cost to perform the investigations and remedial work as being $50 million. In
addition, the DEP has indicated that it expects Occidental
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<PAGE> 18
and the Company to participate with the other chromium manufacturers in the
funding of certain remedial activities with respect to a number of so-called
"orphan" chrome sites located in Hudson County, New Jersey. Occidental and the
Company have declined participation as to those sites for which there is no
evidence of the presence of residue generated by Chemicals. The Governor of New
Jersey issued an Executive Order requiring state agencies to provide specific
justification for any state requirements more stringent than federal
requirements. The DEP has indicated that it may be revising its soil action
level upwards towards the higher soil screening levels proposed by the EPA in
1994.
Painesville, Ohio. From about 1912 through 1976, Chemicals operated
manufacturing facilities in Painesville, Ohio. The operations over the years
involved several discrete but contiguous plant sites over an area of about
1,300 acres. The primary area of concern historically has been Chemicals'
former chromite ore processing plant (the "Chrome Plant"). For many years, the
site of the Chrome Plant has been under the administrative control of the EPA
pursuant to an administrative consent order under which Chemicals is required
to maintain a clay cap over the site and to conduct certain ground water and
surface water monitoring. Many other sites have previously been clay-capped and
one specific site, which was a waste disposal site from the mid-1960s until the
1970s, has been encapsulated and is being controlled and monitored. In
September 1995, the Ohio Environmental Protection Agency (the "OEPA") issued
its Directors' Final Findings and Order (the "Director's Order") by consent
ordering that a remedial investigation and feasibility study (the "RIFS") be
conducted at the former Painesville plant area. The Company has agreed to
participate in the RIFS as required by the Director's Order. It is estimated
that the total cost of performing the RIFS will be $3 million to $5 million
over the next three years. In spite of the many remedial, maintenance and
monitoring activities performed, the former Painesville plant site has been
proposed for listing on the National Priority List under CERCLA; however, the
EPA has stated that the site will not be listed so long as it is satisfactorily
addressed pursuant to the Director's Order and OEPA's programs. The Company
has accrued the estimate of its share of the cost to perform the RIFS. The
scope and nature of any further investigation or remediation that may be
required cannot be determined at this time; however, as the RIFS progresses,
the Company will continuously assess the condition of the Painesville plant
site and make any changes, including additions, to its reserve as may be
required.
Other Former Plant Sites. Environmental remediation programs are in
place at all other former plant sites where material remediation is required in
the opinion of the Company. Former plant sites where remediation has been
completed are being maintained and monitored to insure continued compliance
with applicable laws and regulatory programs. The Company has reserved for its
estimated costs related to these sites, none of which are individually
material.
Third Party Sites. Chemicals has also been designated as a potentially
responsible party ("PRP") by the EPA under CERCLA with respect to a number of
third party sites, primarily off of Chemicals' properties, where hazardous
substances from Chemicals' plant operations allegedly were disposed of or have
come to be located. Numerous PRPs have been named at substantially all of these
sites. At several of these, Chemicals has no known exposure. Although PRPs are
almost always jointly and severally liable for the cost of investigations,
cleanups and other response costs, each has the right of contribution from
other PRPs and, as a practical matter, cost sharing by PRPs is usually effected
by agreement among them. Accordingly, the ultimate cost of these sites and
Chemicals' share of the costs thereof cannot be estimated at this time, but are
not expected to be material except possibly as a result of the matters
described below.
1. Fields Brook; Ashtabula, Ohio. At the time that Chemicals was sold
to Occidental, Chemicals operated a chemical plant at Ashtabula, Ohio which is
adjacent to Fields Brook. Occidental has continued to operate the Ashtabula
plant. In 1986, Chemicals was formally notified by the EPA that it was a PRP
for the Fields Brook site. The site is defined as Fields Brook, its tributaries
and surrounding areas within the Fields Brook watershed. At least 15 other
parties are
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presently considered to be financially responsible PRPs. In 1986, the EPA
estimated the cost of sediment remediation at the site would be $48 million.
The PRPs, including Occidental, have developed an allocation agreement for
sharing the costs of the work in Fields Brook ordered by the EPA. Under the
allocation, the Occidental share for Chemicals' ownership of the Ashtabula
plant would be about five percent of the total, assuming all viable PRPs were
to participate.
In 1990, the OEPA, as state trustee for natural resources under
CERCLA, advised previously identified PRPs, including Chemicals, that the OEPA
intended to conduct a Natural Resource Damage Assessment of the Fields Brook
site to calculate a monetary value for injury to surface water, groundwater,
air, and biological and geological resources at the site. Also, although Fields
Brook empties into the Ashtabula River which flows into Lake Erie, it is not
known to what extent, if any, the EPA will propose remedial action beyond
Fields Brook for which the Fields Brook PRPs might be asked to bear some share
of the costs. Until all preliminary studies and necessary governmental actions
have been completed and negotiated or judicial allocations have been made, it
is not possible for the Company to estimate what the response costs, response
activities or natural resource damages, if any, may be for Fields Brook or
related areas, the parties responsible therefore or their respective shares.
It is the Company's position that costs attributable to the Ashtabula
plant fall under the Company's above- described cost sharing arrangement with
Occidental under which the Company bears one-half of certain costs up to an
aggregate dollar cap. Occidental, however, has contended that it is entitled to
full indemnification from the Company for such costs, and the outcome of this
dispute cannot be predicted. The Company has reserved its estimate of its
share of potential cleanup costs based on the assumption that this site falls
under the Occidental cost sharing arrangement.
2. French Limited Disposal Site; Crosby, Texas. The PRPs, including
Chemicals (represented by the Company), entered into a consent decree and a
related trust agreement with the EPA with respect to this disposal site. The
consent decree was entered by the federal court as a settlement of the EPA's
claim for remedial action. Chemical's share of the cost to complete remediation
at this site is expected to be approximately $500,000 and such amount is fully
accrued.
3. SCP/Carlstadt Site; Carlstadt, New Jersey. Chemicals' share of
remediation costs at this CERCLA site would be approximately one percent, based
on relative volume of waste shipped to the site. An interim remedy has now been
implemented at the site by the PRPs but no estimate can be made at this time of
ultimate costs of remediation which may extend to certain off-site locations.
4. Chemical Control Site; Elizabeth, New Jersey. The DEP has demanded
of PRPs (including Chemicals) reimbursement of the DEP's alleged $34 million
(including interest through December 31, 1995) in past costs for its partial
cleanup of this site. The PRPs and the EPA have settled the federal claims for
cost recovery and site remediation, and remediation is now complete. Based on
the previous allocation formula, it is expected that Chemicals' share of any
money paid to the DEP for its claim would be approximately two percent. The
Company has fully reserved its estimated liability for this site.
Legal Proceedings. In November 1995, OxyChem filed suit in Texas state
court seeking a declaration of certain of the parties' rights and obligations
under the sales agreement pursuant to which the Company sold Chemicals to
Occidental. Henkel joined in said lawsuit as a plaintiff in January 1996.
Specifically, OxyChem and Henkel are seeking a declaration that the Company is
required to indemnify them for 50% of certain environmental costs incurred on
projects involving remedial activities relating to chemical plant sites or
other property used in connection with the business of Chemicals on the Closing
Date which relate to, result from or arise out of conditions, events or
circumstances discovered by OxyChem or Henkel and as to which the Company is
provided written notice by OxyChem or Henkel prior to the expiration of ten
years following the
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<PAGE> 20
Closing Date, irrespective of when OxyChem or Henkel incurs and gives notice of
such costs, subject to an aggregate $75 million cap. On April 17, 1996, the
court denied the Company's motion for summary judgment and granted OxyChem's
and Henkel's joint motion for summary judgment, thereby granting OxyChem and
Henkel the declaration they sought. The Company believes the court's orders
are erroneous and intends to appeal.
The Company has established reserves based on its 50% share of
remaining costs expected to be paid or incurred by OxyChem and Henkel prior to
September 4, 1996, the tenth anniversary of the Closing Date. As of March 31,
1996, the Company had paid OxyChem and Henkel a total of approximately $40
million against the $75 million cap and, based on OxyChem's and Henkel's
historical annual expenditures, had approximately $6 million reserved. The
Company cannot predict with any certainty what portion of the approximately $29
million unreserved portion of the $35 million amount remaining at March 31,
1996, OxyChem and Henkel may incur; however, OxyChem and Henkel have asserted
in court that the entire amount will be spent. In the event that the Company
does not prevail in an appeal, it could be required to pay up to approximately
$29 million in additional costs which have not been reserved related to this
indemnification.
The Company has established reserves for legal contingencies in
situations where a loss is probable and can be reasonably estimated.
In Ecuador, pipeline capacity available to the Company is sufficient
to transport only about 60% of the oil the Company expects to be able to
produce daily, and none of the various projects to increase transportation
capacity that have been considered has been approved by the government of
Ecuador. In addition, the Company is involved in a number of contract,
auditing and certification disputes with various government entities.
Together, the lack of pipeline capacity and the various disputes with
government entities are retarding the Company's ability to proceed with the
economic development of Block 16. Although the Company can give no assurances
concerning the outcome of these discussions, progress has recently been made on
several important issues. However, the Company intends to reduce program
spending in Ecuador in 1996 to $19 million from $32 million in 1995.
The Company has entered into various operating agreements and capital
commitments associated with the exploration and development of its oil and gas
properties. Such contractual, financial and/or performance commitments are not
material.
The Company's foreign petroleum exploration, development and
production activities are subject to political and economic uncertainties,
expropriation of property and cancellation or modification of contract rights,
foreign exchange restrictions and other risks arising out of foreign
governmental sovereignty over the areas in which the Company's operations are
conducted, as well as risks of loss in some countries due to civil strife, acts
of war, guerrilla activities and insurrection. Areas in which the Company has
significant operations include the United States, Indonesia, Ecuador, Bolivia
and Venezuela.
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MAXUS ENERGY CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
FIRST QUARTER 1996
MERGER
On June 8, 1995, YPF Sociedad Anonima ("YPF"), an Argentine sociedad anonima,
completed its acquisition of all of the shares of common stock ("Common Stock")
of Maxus Energy Corporation (the "Company" or "Maxus") through a merger (the
"Merger") of Maxus with a YPF subsidiary. The Merger was the consummation of
transactions contemplated by a tender offer which was commenced by YPF on March
6, 1995 for all outstanding shares of Common Stock of the Company at $5.50 per
share. As of the date hereof, the Company's preferred stock, consisting of the
$4.00 Cumulative Convertible Preferred Stock, $2.50 Cumulative Preferred Stock
and $9.75 Cumulative Convertible Preferred Stock, remains outstanding. YPF,
owner of all of the Common Stock, holds approximately 96.9% of the Company's
voting stock.
Effective April 1, 1995, the Company used the purchase method of accounting to
record the acquisition of the Company by YPF. In a purchase method
combination, the purchase price is allocated to the assets acquired and
liabilities assumed based on their fair values at the date of acquisition. As
a result, the assets and liabilities of the Company were revalued to reflect
the approximate $762 million cash purchase price paid by YPF to acquire the
Company. The Company's oil and gas properties were assigned carrying amounts
based on their relative fair market values. Because of these purchase
adjustments, the financial statements for periods subsequent to April 1, 1995
reflect the effects of Merger-related transactions. Periods prior to April 1,
1995 are on a pre-Merger basis and, therefore, not comparative.
RESULTS OF OPERATIONS - FIRST QUARTER 1996 VS. FOURTH QUARTER 1995
The following table presents the post-Merger first quarter 1996 and fourth
quarter 1995 operating results:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
FIRST FOURTH
QUARTER QUARTER
*AMOUNTS IN MILLIONS 1996 1995
- --------------------------------------------------------------------------------
<S> <C> <C>
Net Worldwide Crude Oil Sales (mbpd) 65 73
Average Worldwide Crude Oil Price (per bbl) $17.75 $15.97
U.S. Natural Gas Sales (mmcfpd) 179 173
Average U.S. Gas Price (per mcf) $1.82 $1.64
Northwest Java Gas Sales (mmcfpd) 63 69
Average Northwest Java Gas Price (per mcf) $2.64 $2.65
U.S. Natural Gas Liquids (mbpd) 19 19
Average U.S. Natural Gas Liquids Price (per bbl) $12.47 $10.74
*Sales Revenues $174 $171
*Costs and Expenses 158 189
*Net Loss (1) (23)
*Net Loss after Preferred Dividends (10) (32)
Net Loss per Common Share (.07) (.24)
- --------------------------------------------------------------------------------
</TABLE>
GUIDE TO ABBREVIATIONS
----------------------
mbpd-thousand barrels per day
bbl-barrel
mmcfpd-million cubic feet per day
mcf- thousand cubic feet
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The Company reported a first quarter 1996 net loss of $1 million or, after
dividends on preferred stock, a loss attributable to Common Stock of $10
million or 7 cents per share. This compares to a fourth quarter 1995 net loss
of $23 million or, after dividends on preferred stock, a loss attributable to
Common Stock of $32 million or 24 cents per share.
Sales and Operating Revenues. Sales and operating revenues of $174 million in
the first quarter of 1996 increased $3 million from the fourth quarter of 1995,
primarily due to higher crude oil sales volumes in Bolivia and higher average
U.S. natural gas sales prices partially offset by a decline in crude oil sales
volumes in Indonesia and Ecuador.
Net worldwide crude oil sales volumes declined to 65 mbpd in the first quarter
of 1996 from 73 mbpd in the fourth quarter 1995. Crude oil sales volumes in
Southeast Sumatra and Northwest Java were down 9 mbpd and 3 mbpd, respectively,
from the fourth quarter of 1995 due to lower entitlements, resulting from
higher prices and lower cost recovery. Additionally, Ecuador crude sales
volumes were 6 mbpd lower due to the recognition of cumulative year-to-date
production from the southern Amo field in the fourth quarter 1995. Partially
offsetting these declines, crude sales volumes for Bolivia increased 10 mbpd
from the previous quarter due primarily to the sale of approximately nine
months of inventory to the Bolivian government. Maxus' worldwide average crude
oil sales price rose significantly from $15.97 per barrel in the fourth quarter
of 1995 to $17.75 per barrel in the first quarter of 1996.
U.S. natural gas sales volumes of 179 mmcfpd were 6 mmcfpd higher than the
previous quarter due to increased volumes of purchased gas. The average
natural gas sales price increased from $1.64 per mcf in the fourth quarter of
1995 to $1.82 per mcf in the first quarter of 1996.
Northwest Java natural gas sales volumes of 63 mmcfpd were 6 mmcfpd lower than
fourth quarter 1995, primarily due to pipeline construction during the first
quarter 1996. Gas prices remained relatively flat compared to the fourth
quarter of 1995.
Natural gas liquids sales volumes in the United States were relatively flat in
the first quarter of 1996 compared to the fourth quarter of 1995. The average
sales price for U.S. natural gas liquids in the first quarter was $12.47 per
barrel, an increase of $1.73 per barrel from the fourth quarter of 1995.
Costs and Expenses. Exploration expenses (including exploratory dry holes) of
$8 million in the first quarter of 1996 were $16 million lower than in the
previous quarter. Geological and geophysical expenses were $3 million lower in
Southeast Sumatra due to performance of a significant 3-D seismic project in
fourth quarter 1995 and exploration expenses in other foreign areas were $4
million lower. Additionally, the fourth quarter 1995 included $6 million of
dry hole expense stemming from two exploratory wells in China which fulfilled
an exploration commitment.
Depreciation expense of $41 million in the first quarter of 1996 was $10
million lower than the fourth quarter of 1995 primarily due to lower production
volumes in Northwest Java and Ecuador.
Income tax expense increased $22 million in first quarter 1996 as compared to
fourth quarter 1995 due to increased revenues in Bolivia and higher deferred
taxes resulting from higher planned intangible spending in Northwest Java.
Additionally, the fourth quarter 1995 tax expense included the impact of a
favorable tax audit settlement.
RESULTS OF OPERATIONS - FIRST QUARTER 1995
Maxus reported a net loss of $57 million for the first quarter of 1995 or, after
preferred dividends, a loss of 49 cents per common share. The first quarter
1995 results reflect $42 million of pre-Merger costs associated with the YPF
Merger. Such costs included expenses associated with financial consulting and
legal services, severance payments pursuant to change of control agreements and
payments for surrender of stock options and restricted stock.
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<PAGE> 23
Sales and Operating Revenues. Sales and operating revenues for the first
quarter of 1995 were $143 million. Net worldwide crude oil production was 60
mbpd in the first quarter of 1995 and the average worldwide crude oil sales
price received was $16.94 per barrel.
U.S. natural gas sales for the first quarter of 1995 were 167 mmcfpd. The
average natural gas sales price received in the U.S. was $1.45 per mcf for the
first quarter. Northwest Java gas sales were 40 mmcfpd in the first quarter
1995 and the average natural gas sales price was $2.65 per mcf.
Natural gas liquids sales in the U.S. for the first quarter 1995 were 18 mbpd.
The average sales price received for U.S. natural gas liquids in the first
quarter of 1995 was $10.38 per barrel.
FINANCIAL CONDITION
The Company's net cash provided by operating activities was $26 million in the
first quarter of 1996. Net cash provided by operating activities of $37
million before working capital changes was reduced by working capital
requirements of $11 million. Additional working capital was required due to
increased receivables of $6 million, primarily in Bolivia and Ecuador, coupled
with declines in accounts payable, accrued liabilities and taxes payable.
Partially offsetting this increase in working capital requirements was a $4
million decrease in inventories.
The Company began the year with $38 million of cash and cash equivalents.
During the first three months, Maxus received an aggregate $64 million capital
contribution from YPF pursuant to the terms of the Keepwell Covenant, released
$15 million of restricted cash backing trade letters of credit and generated
$26 million from operating activities. The Company used $41 million of cash to
fund capital expenditures, $9 million to pay preferred dividends, $2 million to
redeem shares of Common Stock converted into the right to receive $5.50 per
share upon the Merger and $63 million to fund the mandatory redemption of
625,000 shares of $9.75 Preferred Stock in February 1996. At March 31, 1996,
Company's cash and cash equivalents balance was $23 million.
In management's opinion, cash on hand and cash from operations will be
inadequate to fund the remaining 1996 program spending budget, service debt and
pay preferred stock dividends and trade obligations. As stated above, during
the first quarter of 1996, YPF made capital contributions to the Company in the
aggregate amount of $64 million pursuant to the terms of the Keepwell Covenant.
It is anticipated that YPF could be required to make capital contributions in
1996 totaling approximately $200 million to $250 million to fund the Company's
obligations. Actual capital contributions made by YPF could vary significantly
depending on, among other circumstances, oil and gas prices and program
spending commitments. All such capital contributions will be credited to YPF's
obligations under the Keepwell Covenant and will entitle YPF to shares of
Common Stock.
The Company's exposure to foreign currency fluctuations is minimal as
substantially all of the Company's material foreign contracts are denominated
in U.S. dollars.
The Company's only derivative financial instruments are crude oil and natural
gas price swap agreements and futures contracts, which are not used for trading
purposes.
See Note Nine to the Financial Statements for information regarding certain
environmental commitments and contingencies.
LEGAL PROCEEDINGS
In November 1995, Occidental Chemical Corporation ("OxyChem"), a subsidiary of
Occidental Petroleum Corporation ("Occidental"), filed suit in Texas state
court seeking a declaration of certain of the parties' rights and obligations
under a sales agreement pursuant to which the Company sold Diamond Shamrock
Chemicals Company ("Chemicals") to Occidental on September 4, 1986 (the
"Closing Date"). Henkel Corporation ("Henkel"), an assignee of certain of
Occidental's rights and obligations, joined in said lawsuit as a plaintiff in
January 1996. Specifically, OxyChem and Henkel are seeking a declaration that
the
23
<PAGE> 24
Company is required to indemnify them for 50% of certain environmental costs
incurred on projects involving remedial activities relating to chemical plant
sites or other property used in connection with the business of Chemicals on
the Closing Date which relate to, result from or arise out of conditions,
events or circumstances discovered by OxyChem or Henkel and as to which the
Company is provided written notice by OxyChem or Henkel prior to the expiration
of ten years following the Closing Date, irrespective of when OxyChem or Henkel
incurs and gives notice of such costs, subject to an aggregate $75 million cap.
On April 17, 1996, the court denied the Company's motion for summary judgment
and granted OxyChem's and Henkel's joint motion for summary judgment, thereby
granting OxyChem and Henkel the declaration they sought. The Company believes
the court's orders are erroneous and intends to appeal.
The Company has established reserves based on its 50% share of remaining costs
expected to be paid or incurred by OxyChem and Henkel prior to September 4,
1996, the tenth anniversary of the Closing Date. As of March 31, 1996, the
Company had paid OxyChem and Henkel a total of approximately $40 million
against the $75 million cap and, based on OxyChem's and Henkel's historical
annual expenditures, had approximately $6 million reserved. The Company cannot
predict with any certainty what portion of the approximately $29 million
unreserved portion of the $35 million amount remaining at March 31, 1996,
OxyChem and Henkel may incur; however, OxyChem and Henkel have asserted in
court that the entire amount will be spent. In the event that the Company does
not prevail in an appeal, it could be required to pay up to approximately $29
million in additional costs which have not been reserved related to this
indemnification.
The Company has established reserves for legal contingencies in situations
where a loss is probable and can be reasonably estimated.
FUTURE OUTLOOK
In addition to maintaining and developing its core and emerging areas, it is
expected that during 1996 the Company will acquire or assume responsibility for
certain YPF exploration interests in South America (outside Argentina) and the
United States Gulf of Mexico. The Company will continue to focus on maximizing
the value of its core producing assets and seek new investment opportunities in
associated ventures.
Maxus currently projects total program spending (capital expenditures plus
exploration expenses) for 1996 to be approximately $249 million, compared to
$231 million in 1995. Indonesia will receive $79 million, Midgard (U.S.) $72
million, South America $62 million and exploration interests outside Argentina
acquired or assumed from YPF $25 million. The remaining $11 million will be
allocated to domestic and overseas new ventures. Funding for the 1996 spending
program is expected to be provided through cash and cash equivalents on hand at
the beginning of the year, cash from operations and capital contributions from
YPF as necessary. In addition to the 1996 program, Maxus has financial and/or
performance commitments for exploration and development activities in 1997 and
beyond, none of which are material except for the recently acquired Guarapiche
block in Venezuela discussed below.
In January 1996, the Company and its partners were successful in acquiring the
highly prospective Guarapiche block in Venezuela's first auction awards for
equity production in over 20 years. Guarapiche is located on the same trend as
the five billion barrel El Furrial field in northeastern Venezuela. During the
second quarter of 1996, the Company, together with its partners, will pay $109
million (approximately $27 million net to the Company) to the Venezuelan
government for rights to explore the Guarapiche block. BP Exploration Orinoco
Limited is the operator with a 37.5% working interest while Amoco Production
Company and the Company hold 37.5% and 25% working interests, respectively.
The Company's net exploration commitment is anticipated to total approximately
$15 million over the next five years.
The Company has begun discussions with other companies concerning the
establishment of a joint venture or other alliance with regard to Midgard's
business and assets. The objectives of such a joint venture or alliance would
be lowering unit costs, creating economies of scale and improving marketing
leverage. No joint venture or other partner has been selected and no
assurances can be given that the attempts to
24
<PAGE> 25
establish a joint venture or other alliance will be successful. In addition,
Maxus is considering a number of possible capital and business restructuring
alternatives; however, no decisions have been made to take any specific action
nor can there be any assurance that any specific action will be taken.
The Company's foreign petroleum exploration, development and production
activities are subject to political and economic uncertainties, expropriation
of property and cancellation or modification of contract rights, foreign
exchange restrictions and other risks arising out of foreign governmental
sovereignty over the areas in which the Company's operations are conducted, as
well as risks of loss in some countries due to civil strife, guerrilla
activities and insurrection. Areas in which the Company has significant
operations include the United States, Indonesia, Ecuador, Bolivia and
Venezuela.
In Ecuador, pipeline capacity available to the Company is sufficient to
transport only about 60% of the oil the Company expects to be able to produce
daily, and none of the various projects to increase transportation capacity
that have been considered has been approved by the government of Ecuador. In
addition, the Company is involved in a number of contract, auditing and
certification disputes with various government entities. Together, the lack of
pipeline capacity and the various disputes with government entities are
retarding the Company's ability to proceed with the economic development of
Block 16. Although the Company can give no assurances concerning the outcome
of these discussions, progress has recently been made on several important
issues. However, the Company intends to reduce program spending in Ecuador in
1996 to $19 million from $32 million in 1995.
25
<PAGE> 26
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.
The information required by this Item is disclosed in Note 9.
"Commitments and Contingencies" contained in the financial information provided
in Part I of this report, and such information is incorporated herein by
reference.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits.
15.1 -- Letter of Arthur Andersen LLP regarding unaudited
interim financial statements
27.1 -- Financial Data Schedule
(b) Reports on Form 8-K During the Quarter.
None
SIGNATURE
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.
MAXUS ENERGY CORPORATION
By: /s/ W. Mark Miller
-----------------------------------
W. Mark Miller, Executive Vice
President, on behalf of the
registrant and as its principal
financial officer
May 10, 1996
26
<PAGE> 27
Exhibit Index
Exhibit Title Exhibit No.
- ------------- -----------
Letter of Arthur Andersen LLP regarding unaudited interim
financial Statements 15.1
Financial Data Schedule 27.1
<PAGE> 1
EXHIBIT 15.1
Maxus Energy Corporation:
We are aware that Maxus Energy Corporation has incorporated by reference in its
Registration Statement No. 33-28353 on Form S-8 its Form 10-Q for the quarter
ended March 31, 1996, which includes our report dated April 25, 1996, covering
the unaudited interim financial information contained therein. Pursuant to
Regulation C of the Securities Act of 1933, that report is not considered a
part of the registration statement prepared or certified by our firm or a
report prepared or certified by our firm within the meaning of Sections 7 and
11 of the Act.
/s/ ARTHUR ANDERSEN LLP
ARTHUR ANDERSEN LLP
Dallas, Texas
May 10, 1996
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