<PAGE>
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 June 30, 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
REQUIRED 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 August 7, 1996: 135,609,772
<PAGE>
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
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REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
We have reviewed the accompanying consolidated balance sheet of Maxus
Energy Corporation (a Delaware corporation) as of June 30, 1996 and 1995, and
the related consolidated statements of operations and cash flows for the six-
month period ended June 30, 1996 and the three-month period ended June 30, 1995,
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
July 24, 1996
3
<PAGE>
MAXUS ENERGY CORPORATION
CONSOLIDATED STATEMENT OF OPERATIONS
(in millions, except per share)
<TABLE>
<CAPTION>
1996 1995
------------------------------ ------------------------------
THREE MONTHS SIX MONTHS THREE MONTHS THREE MONTHS
ENDED ENDED ENDED ENDED
JUNE 30, JUNE 30, JUNE 30, MARCH 31,
------------- ------------ ------------- ------------
(Unaudited) (Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
REVENUES
Sales and operating revenues $172.1 $346.1 $150.7 $142.5
Other revenues, net 5.4 11.6 6.2 9.6
----------- ----------- ----------- -----------
177.5 357.7 156.9 152.1
COSTS AND EXPENSES
Operating expenses 51.6 102.4 58.0 64.6
Gas purchase costs 18.5 36.5 13.2 12.7
Exploration, including exploratory 6.1 14.0 16.8 8.9
dry holes
Depreciation, depletion and 43.4 84.1 45.2 29.9
amortization
General and administrative expenses 2.5 5.3 4.4 4.2
Taxes other than income taxes 3.2 6.6 2.8 3.1
Interest and debt expenses 34.0 68.1 34.7 24.1
Pre-merger costs - - - 42.4
----------- ----------- ----------- -----------
159.3 317.0 175.1 189.9
----------- ----------- ----------- -----------
INCOME (LOSS) BEFORE INCOME TAXES 18.2 40.7 (18.2) (37.8)
INCOME TAXES 20.9 43.9 4.8 19.1
----------- ----------- ----------- -----------
NET LOSS $ (2.7) $ (3.2) $(23.0) (56.9)
=========== =========== ===========
DIVIDEND REQUIREMENT ON PREFERRED STOCK (9.6)
-----------
NET LOSS APPLICABLE TO COMMON SHARES $(66.5)
===========
NET LOSS PER COMMON SHARE $(0.49)
===========
AVERAGE COMMON SHARES OUTSTANDING 135.5
</TABLE>
See Notes to Consolidated Financial Statements.
4
<PAGE>
MAXUS ENERGY CORPORATION
CONSOLIDATED BALANCE SHEET
(in millions, except shares)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1996 1995
------------- ------------
ASSETS (Unaudited)
<S> <C> <C>
Current Assets
Cash and cash equivalents $ 45.0 $ 38.3
Receivables, less doubtful receivables 134.4 141.8
Inventories 29.6 40.8
Restricted cash - 19.0
Prepaids and other current assets 23.1 26.5
Net assets held for sale 265.2 -
------------- ------------
TOTAL CURRENT ASSETS 497.3 266.4
Properties and Equipment, less accumulated
depreciation, depletion and amortization 2,041.4 2,363.6
Investments and Long-Term Receivables 8.4 7.1
Restricted Cash 53.5 61.4
Deferred Charges 19.1 18.3
------------- ------------
$ 2,619.7 $ 2,716.8
============= ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Long-term debt $ 51.6 $ 34.3
Accounts payable 45.9 59.0
Taxes payable 37.8 39.7
Accrued liabilities 137.8 173.4
------------- ------------
TOTAL CURRENT LIABILITIES 273.1 306.4
Long-Term Debt 1,211.4 1,261.2
Cash Advance from Parent Against Purchase Price 101.0 -
Deferred Income Taxes 472.0 551.2
Other Liabilities and Deferred Credits 214.1 233.0
$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 62.2 66.5
$4.00 Preferred Stock, $1.00 par value
Authorized shares--5,915,017
Issued shares--4,356,658 4.4 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 100.2 105.8
Accumulated deficit (76.9) (73.7)
Minimum pension liability (3.9) (5.9)
------------- ------------
TOTAL STOCKHOLDERS' EQUITY 285.6 240.0
------------- ------------
$ 2,619.7 $ 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>
MAXUS ENERGY CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
(in millions)
<TABLE>
<CAPTION>
----------------- ----------------- -----------------
SIX MONTHS THREE MONTHS THREE MONTHS
ENDED JUNE 30, ENDED JUNE 30, ENDED MARCH 31,
1996 1995 1995
----------------- ----------------- -----------------
(Unaudited)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (3.2) $(23.0) $(56.9)
Adjustments to reconcile net loss to net cash provided by (used in)
operating activities:
Depreciation, depletion and amortization 84.1 45.2 29.9
Dry hole costs 1.1 6.8 1.0
Deferred income taxes (6.2) (15.2) 0.4
Net gain on sale of assets and sale/maturity of investments - (0.3) (1.7)
Postretirement benefits 1.7 1.0 1.4
Pre-merger costs - - 42.4
Accretion of discount 4.3 1.7 -
Other (2.0) - 1.3
Changes in components of working capital:
Receivables (8.9) 6.7 23.8
Inventories, prepaids and other current assets 0.9 (6.7) (1.4)
Accounts payable (9.4) (7.4) (15.1)
Accrued liabilities (17.7) (37.7) 26.3
Taxes payable/receivable (2.1) 24.4 10.1
----------------- ----------------- -----------------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES 42.6 (4.5) 61.5
----------------- ----------------- -----------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Expenditures for properties and
equipment--including dry hole costs (91.5) (39.3) (53.6)
Cash advance from parent against purchase price 101.0 - -
Proceeds from sale of assets 0.2 0.6 2.1
Proceeds from sale/maturity of short-term investments - 55.9 63.4
Purchases of short-term investments - - (24.6)
Restricted cash 26.9 10.6 12.2
Other (16.7) (10.8) 9.8
----------------- ----------------- -----------------
NET CASH PROVIDED BY INVESTING ACTIVITIES 19.9 17.0 9.3
----------------- ----------------- -----------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Interest rate swap - 4.5 3.4
Proceeds from issuance of short-term debt 17.2 -
Repayment of short-term debt (34.4) (17.7) -
Net proceeds from issuance of long-term debt - 833.9 -
Repayment of long-term debt - (425.1) -
Cash advance from parent - 1.9 -
Repayment of loan from parent (2.5) - -
Acquisition of common stock (3.2) (726.1) -
Capital contribution from parent 64.0 250.5 -
Stock rights redemption - - (13.6)
Redemption of Preferred Stock (62.5) - -
Dividends paid (17.2) (9.6) (9.6)
----------------- ----------------- -----------------
NET CASH USED IN FINANCING ACTIVITIES (55.8) (70.5) (19.8)
----------------- ----------------- -----------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 6.7 (58.0) 51.0
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 38.3 91.6 40.6
----------------- ----------------- -----------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 45.0 $ 33.6 $ 91.6
================= ================= =================
</TABLE>
See Notes to Consolidated Financial Statements.
6
<PAGE>
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>
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 are amortized applying the same depreciation method over the same
useful lives 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>
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
Earnings per share are presented for pre-Merger periods only as
subsequent to the Merger such amounts are not meaningful. Primary earnings
per share were based on the weighted average number of shares of common
stock and common stock equivalents outstanding, unless the inclusion of
common stock equivalents had an antidilutive effect on earnings per share.
Fully diluted earnings per share were 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>
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 June 30, 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
Purchaser 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
10
<PAGE>
$5.50 per 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, currently 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; however, the Company has called for the August 13, 1996
redemption of all of its outstanding shares of $4.00 Preferred Stock and
following such redemption, if none of such shares are converted into shares
of Common Stock prior to the redemption, YPF will own all of the Company's
voting stock.
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
11
<PAGE>
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 six months of 1996, YPF made capital contributions
to the 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 July 1996, the Company, together with its
partners, paid $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.
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 June 30,
(in millions) 1996
-------------
<S> <C>
ASSETS
A) RECEIVABLES:
Trade accounts receivables $102.3
Notes and other receivables 32.6
Allowance for doubtful trade receivables (0.5)
--------------
$134.4
==============
B) PROPERTIES AND EQUIPMENT:
Proved properties $1,588.8
Unproved properties 480.7
Other 174.6
--------------
Total Oil and Gas 2,244.1
Corporate 12.2
--------------
2,256.3
Less--Accumulated depreciation,
depletion and amortization (214.9)
--------------
$2,041.4
==============
C) INVENTORIES:
Warehouse/field yard inventory $ 29.6
==============
</TABLE>
12
<PAGE>
D) DEFERRED CHARGES:
<TABLE>
<S> <C>
Unamortized debt issuance costs $14.5
Other 4.6
--------------
$19.1
==============
</TABLE>
LIABILITIES
E) ACCRUED LIABILITIES:
<TABLE>
<S> <C>
Environmental remediation $ 27.1
Accrued interest 21.9
Overlift liability 12.2
Merger accrual 15.4
Misc. accrued liabilities for international
operations 32.3
Other 28.9
--------------
$137.8
==============
</TABLE>
<TABLE>
<CAPTION>
Interest
F) LONG-TERM DEBT: --------
Rates (%) Maturity Current Noncurrent
--------- -------- ------- ----------
<S> <C> <C> <C> <C>
8.5% Debentures 8.50 1997-2008 $ 76.9
9.375% Notes 9.37 2003 226.9
9.5% Notes 9.50 2003 87.9
9.875% Notes 9.87 2002 222.4
11.25% Debentures 11.25 2013 14.4
11.5% Debentures 11.50 2001-2015 94.8
Medium-term notes 7.57-11.08 1996-2004 $14.1 96.4
Holdings Facility 8.3125 1997-2002 17.5 157.5
Midgard Facility 7.8125 1997-2003 20.0 230.0
Advances from parent 4.1
Other 0.1
----------- -------------
$51.6 $1,211.4
=========== =============
G) OTHER LIABILITIES AND DEFERRED CREDITS:
Environmental remediation $ 82.2
Long-term employee benefit costs 59.1
Litigation contingencies 12.6
Reserve for insurance losses 18.8
Take-or-pay payment 12.5
Other 28.9
------------
$214.1
============
</TABLE>
13
<PAGE>
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>
Six Months Ended
June 30, 1996 (in millions)
-----------------------------
<S> <C>
Current
Foreign................................................................. $50.1
State and local......................................................... --
-----
50.1
Deferred
Federal................................................................. (7.1)
Foreign................................................................. .9
-----
(6.2)
-----
Provision for income taxes............................................... $43.9
=====
</TABLE>
7. RESTRICTED CASH
At June 30, 1996, the Company had $53.5 million in restricted cash of
which $10.3 million represented collateral for outstanding letters of
credit. Assets held in trust as required by certain insurance policies
totaled $43.2 million.
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 June 30, 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 June 30, 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
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.
14
<PAGE>
B) $4.00 CUMULATIVE CONVERTIBLE PREFERRED STOCK
As part of the Company's proposed reorganization (see Note Ten), the
Company has called for redemption and will redeem on August 13, 1996, all
of its outstanding shares of $4.00 Preferred Stock at a price of $50 per
share plus accrued and unpaid dividends (approximately $220.6 million in
the aggregate). At any time prior to the redemption date, each outstanding
share of $4.00 Preferred Stock is convertible into shares of the Company's
Common Stock (2.29751 shares at June 30, 1996).
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 June 30, 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.
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
15
<PAGE>
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 June 30, 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 June 30, 1996, DSI's remaining responsibility
is approximately $4 million and is included in accounts receivable in the
accompanying balance sheet.
For the six months ended June 30, 1996, the Company's total
expenditures for environmental compliance for disposed of businesses,
including Chemicals, were approximately $9 million, $4 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 June 30, 1996, reserves for the environmental contingencies
discussed herein totaled $109 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 Company has announced its intention to transfer certain
liabilities related to environmental matters to its subsidiary, Chemical
Land Holdings, Inc. ("CLH"), and to transfer CLH to a subsidiary of YPF
(see Note Ten). In connection with these transfers, which are expected to
be effective as of August 1, 1996, CLH will assume (the "Assumption") the
liabilities so transferred and YPF is expected to commit to contribute
capital to CLH up to an amount that
16
<PAGE>
will enable CLH to satisfy its obligations under the Assumption based on the
Company's reserves established in respect of the assumed liabilities as of July
31, 1996. YPF will not be obligated to, but may in its sole discretion, commit
to contribute additional capital to CLH, and YPF is expected to contribute
capital to CLH to enable CLH to meet its operating expenses. However, there is
no assurance that YPF will commit to contribute any additional capital to CLH.
The Company will be responsible for any obligations assumed by CLH in the event
CLH does not perform or fulfill such obligations. Further, these transfers, the
Assumption and YPF's agreement to contribute capital to CLH are subject to the
satisfaction of certain conditions, and thus, there can be no assurance that
such transactions will be effectuated. Assuming the transactions are
effectuated, CLH will assume responsibility for, among other things, the
environmental contingencies discussed herein and said declaratory judgment
action filed by OxyChem and Henkel, and the Company intends to transfer to CLH
its remaining rights to recover costs under said arrangement with DSI. The
Assumption will be reflected on the Company's financial statements as a long-
term account receivable due from YPF in the amount of the liabilities assumed by
CLH with a corresponding increase to paid-in capital in such amount.
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 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. The Company has entered into settlement agreements with
certain of the insurers in this second suit, the terms of which are required to
be held confidential. The Company also is engaged in settlement discussions
with other defendant insurers; however, there can be no assurance that such
discussions will result in settlements with such other insurers.
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. These studies suggest that the older and
more contaminated sediments located adjacent to the Newark plant are buried
under several feet of more recent sediment deposits. 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 stability of
the sediments in the entire six-mile portion of the Passaic River study area is
also being examined as a part of the Company's studies. The Company currently
expects its 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
17
<PAGE>
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. However, it is
possible that additional work, including interim remedial measures, may be
ordered with respect to the Passaic River.
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 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
18
<PAGE>
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 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
19
<PAGE>
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
Closing Date, irrespective of when OxyChem or Henkel incurs and gives notice of
such costs, subject to an aggregate $75 million cap. 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 has
appealed.
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 June 30, 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 $5 million reserved. The Company cannot predict
with any certainty what portion of the approximately $30 million unreserved
portion of the $35 million amount remaining at June 30, 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 its
appeal, it could be required to pay up to approximately $30 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 80% 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.
20
<PAGE>
However, the Company intends to reduce program spending in Ecuador in 1996 to
approximately $20 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 and Ecuador.
10. SUBSEQUENT EVENTS - GENERAL REORGANIZATION
On June 18, 1996, the Company announced a reorganization which includes the
sale of three Maxus subsidiaries holding certain Bolivian and Venezuelan assets
to YPF, the redemption of the outstanding shares of $4.00 Preferred Stock and
the transfer to a YPF subsidiary of a Maxus subsidiary that will assume certain
liabilities related to environmental matters.
On July 1, 1996, Maxus International Energy Company ("Seller"), a wholly
owned subsidiary of Maxus, sold all of the issued and outstanding shares of
capital stock of its wholly owned subsidiary, YPF International Ltd.
("International"), a Cayman Islands corporation, to YPF ("Purchaser"), the owner
of all the issued and outstanding shares of Common Stock of Maxus, pursuant to a
Stock Purchase and Sale Agreement by and between Purchaser and Seller dated as
of July 1, 1996. The sole assets of International are all of the issued and
outstanding shares of capital stock of Maxus Bolivia, Inc. ("Maxus Bolivia"),
Maxus Venezuela (C.I.) Ltd. ("Venezuela C.I.") and Maxus Venezuela S.A.
("Venezuela S.A."). The assets of Maxus Bolivia consist of all of the former
assets and operations of Maxus in Bolivia, including the interests of Maxus in
the Surubi Field and Secure and Caipipendi Blocks. The assets of Venezuela C.I.
and Venezuela S.A. consist of all of the former assets and operations of Maxus
in Venezuela, except those held through Maxus Guarapiche Ltd. ("Maxus
Guarapiche"), including the interests of Maxus in the Quiriquire Unit. The net
assets sold effective July 1, 1996 are included in net assets held for sale in
Maxus' consolidated balance sheet as of June 30, 1996.
The purchase price for the outstanding shares of capital stock of
International was approximately $266.2 million which represents the carrying
amount of International on the financial reporting books of Seller as of June
30, 1996. In the second quarter of 1996, Maxus had received a $101 million
advance (the "Advance") against the purchase price from Purchaser. At closing,
the remainder of the estimated purchase price, in the form of a promissory note
payable by Purchaser to Seller in the principal amount of $165.2 million, which
together with the Advance equalled Seller's estimate of such carrying amount,
was delivered to Seller. Maxus intends to use the proceeds from this transaction
for general corporate purposes, including the redemption of its $4.00 Preferred
Stock.
While not a part of the above-described sale transaction, Maxus has
authorized Seller to transfer to Purchaser, or a designated subsidiary of
Purchaser, all of the capital stock of Maxus Guarapiche for the higher of the
fair market value thereof or the carrying value thereof on the consolidated
books and accounts of Maxus. Maxus Guarapiche has a 25% interest in the
Guarapiche Block, an exploration block, in Venezuela. It is expected that such
transfer of Maxus Guarapiche will occur in the third quarter of 1996.
21
<PAGE>
Also as part of the general reorganization, on August 13, 1996 Maxus
will redeem all of its outstanding shares of $4.00 Preferred Stock at a
price of $50 per share plus accrued and unpaid dividends (approximately
$220.6 million in the aggregate). The excess of the redemption price over
the carrying value of the $4.00 Preferred Stock will result in an increase
in the Company's accumulated deficit.
As a further part of the reorganization, the Company will transfer
certain liabilities related to environmental matters to its subsidiary,
Chemical Land Holdings, Inc. ("CLH"), and will transfer CLH to a subsidiary
of YPF. In connection with these transfers, which are expected to be
effective as of August 1, 1996, CLH will assume (the "Assumption") the
liabilities so transferred and YPF is expected to commit to contribute
capital to CLH up to an amount that will enable CLH to satisfy its
obligations under the Assumption based on the Company's reserves
established in respect of the assumed liabilities as of July 31, 1996. YPF
will not be obligated to, but may in its sole discretion, commit to
contribute additional capital to CLH, and YPF is expected to contribute
capital to CLH to enable CLH to meet its operating expenses. However, there
is no assurance that YPF will commit to contribute any additional capital
to CLH. The Company will be responsible for any obligations assumed by CLH
in the event CLH does not perform or fulfill such obligations. Further,
these transfers, the Assumption and YPF's agreement to contribute capital
to CLH are subject to the satisfaction of certain conditions, and thus,
there can be no assurance that such transactions will be effectuated.
Assuming the transactions are effectuated, CLH will assume responsibility
for, among other things, the environmental contingencies discussed in Note
Nine and said declaratory judgment action filed by OxyChem and Henkel, and
the Company intends to transfer to CLH its remaining rights to recover
costs under said arrangement with DSI. The Assumption will be reflected on
the Company's financial statements as a long-term account receivable due
from YPF in the amount of the liabilities assumed by CLH with a
corresponding increase to paid-in capital in such amount.
22
<PAGE>
MAXUS ENERGY CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS SECOND 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 (the "$4.00 Preferred Stock"),
$2.50 Cumulative Preferred Stock and $9.75 Cumulative Convertible Preferred
Stock, remains outstanding. YPF, owner of all of the Common Stock, currently
owns approximately 96.9% of the Company's voting stock; however, the Company has
called for the August 13, 1996 redemption of all of its outstanding shares of
$4.00 Preferred Stock and following such redemption, if none of such shares are
converted into shares of Common Share prior to the redemption, YPF will own all
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 - SECOND QUARTER 1996 VS. SECOND QUARTER 1995 The Company
reported a second quarter 1996 net loss of $3 million. This compares to a second
quarter 1995 net loss of $23 million.
Sales and Operating Revenues. Sales and operating revenues of $172 million in
the second quarter of 1996 increased $21 million from such period in 1995. U.S.
(Midgard) sales and operating revenues were $15 million higher in the second
quarter of 1996 as compared to the second quarter of 1995 due primarily to
higher natural gas and natural gas liquids sales volumes and prices. In Ecuador,
second quarter 1996 sales and operating revenues were $7 million higher than the
same period a year ago due to the sale of crude oil production from the southern
Amo field. Crude oil sales from the southern Amo field were initially recorded
in the fourth quarter of 1995. Second quarter 1996 sales and operating revenues
in Bolivia were $5 million. Bolivia's sole crude oil sale in 1995 occurred in
the fourth quarter. In Northwest Java, higher natural gas sales volumes in
connection with new natural gas sales contracts favorably impacted sales $3
million in the second quarter of 1996 as compared to the same period in 1995. In
Southeast Sumatra, second quarter 1996 sales and operating revenues declined $8
million from second quarter 1995 due to lower crude oil sales volumes partially
offset by higher crude oil sales prices.
Net worldwide crude oil sales volumes of 60 thousand barrels per day ("mbpd") in
the second quarter of 1996 were relatively flat compared to the same period last
year. Crude oil sales volumes in Southeast Sumatra were down 7 mbpd from the
second quarter of 1995 due to lower crude oil entitlements primarily as a result
of lower crude oil equity barrels caused by lower gross crude oil liftings and
lower cost recovery. Offsetting this decline, crude oil sales volumes in Ecuador
were 4 mbpd higher in the second quarter of 1996 as compared to the second
quarter of 1995 due to the production from the southern Amo field. Bolivia's
crude oil sales volumes were 4 mbpd in the second quarter of 1996. Bolivia's
1995 sole crude oil lifting was recorded in the fourth quarter. Maxus' worldwide
average crude oil sales price rose from $17.35 per barrel in the second quarter
of 1995 to $18.29 per barrel in the second quarter of 1996.
23
<PAGE>
U.S. natural gas sales volumes of 184 million cubic feet per day ("mmcfpd")
in the second quarter of 1996 were 14 mmcfpd higher than the second quarter
of 1995 due to higher natural gas production. The average natural gas sales
price increased from $1.43 per thousand cubic feet ("mcf") in the second
quarter of 1995 to $1.91 per mcf in the second quarter of 1996.
Northwest Java natural gas sales volumes of 72 mmcfpd were 15 mmcfpd higher
than second quarter 1995, primarily due to higher natural gas production in
connection with new natural gas sales contracts. Natural gas prices rose
slightly, from $2.59 per mcf in the second quarter of 1995 to $2.64 per mcf
in the second quarter of 1996.
Natural gas liquids sales volumes in the United States were slightly higher
in the second quarter of 1996 as compared to the second quarter of 1995.
The average sales price for U.S. natural gas liquids in the second quarter
of 1996 was $12.31 per barrel, an increase of $1.70 per barrel from the
second quarter of 1995.
Costs and Expenses. Operating expenses of $52 million were $6 million lower
in the second quarter of 1996 as compared to such period in 1995 primarily
as a result of lower overall production and operating expenses. Gas
purchase costs rose from $13 million in the second quarter of 1995 to $19
million in the second quarter of 1996 due primarily to higher natural gas
prices; however, this cost increase was recovered through higher sales
volumes and prices.
Exploration expenses (including exploratory dry holes) of $6 million in the
second quarter of 1996 were $11 million lower than in the same quarter a
year ago. Second quarter 1996 geological and geophysical expenses and dry
hole costs were $6 million lower in various exploratory areas as compared
to the same period last year. Additionally, second quarter 1996 dry hole
costs were $3 million lower in Southeast Sumatra as compared to the second
quarter of 1995.
Income tax expense of $21 million in the second quarter of 1996 was $16
million higher as compared to such period in 1995. The second quarter of
1995 included a deferred tax benefit of $15 million due primarily to the
higher depreciation, depletion and amortization associated with the
increase in book value of the Company's oil and gas properties and
equipment as a result of the purchase price allocation.
GENERAL REORGANIZATION
On June 18, 1996, the Company announced a reorganization which includes the
sale of three Maxus subsidiaries holding certain Bolivian and Venezuelan
assets to YPF, the redemption of the outstanding shares of $4.00 Preferred
Stock and the transfer to a YPF subsidiary of a Maxus subsidiary that will
assume certain liabilities related to environmental matters.
On July 1, 1996, Maxus International Energy Company ("Seller"), a wholly
owned subsidiary of Maxus, sold all of the issued and outstanding shares of
capital stock of its wholly owned subsidiary, YPF International Ltd.
("International"), a Cayman Islands corporation, to YPF ("Purchaser"), the
owner of all the issued and outstanding shares of Common Stock of Maxus,
pursuant to a Stock Purchase and Sale Agreement by and between Purchaser
and Seller dated as of July 1, 1996. The sole assets of International are
all of the issued and outstanding shares of capital stock of Maxus Bolivia,
Inc. ("Maxus Bolivia"), Maxus Venezuela (C.I.) Ltd. ("Venezuela C.I.") and
Maxus Venezuela S.A. ("Venezuela S.A."). The assets of Maxus Bolivia
consist of all of the former assets and operations of Maxus in Bolivia,
including the interests of Maxus in the Surubi Field and Secure and
Caipipendi Blocks. The assets of Venezuela C.I. and Venezuela S.A. consist
of all of the former assets and operations of Maxus in Venezuela, except
those held through Maxus Guarapiche Ltd. ("Maxus Guarapiche"), including
the interests of Maxus in the Quiriquire Unit. The net assets sold
effective July 1, 1996 are included in net assets held for sale in Maxus'
consolidated balance sheet as of June 30, 1996.
The purchase price for the outstanding shares of capital stock of
International was approximately $266.2 million which represents the
carrying amount of International on the financial reporting books of Seller
as of June 30, 1996. In the second quarter of 1996, Maxus had received a
$101 million advance (the "Advance")
24
<PAGE>
against the purchase price from Purchaser. At closing, the remainder of the
estimated purchase price, in the form of a promissory note payable by Purchaser
to Seller in the principal amount of $165.2 million, which together with the
Advance equalled Seller's estimate of such carrying amount, was delivered to
Seller. Maxus intends to use the proceeds from this transaction for general
corporate purposes, including the redemption of its $4.00 Preferred Stock.
Also as part of the general reorganization, on August 13, 1996 Maxus will redeem
all of its outstanding shares of $4.00 Preferred Stock at a price of $50 per
share plus accrued and unpaid dividends (approximately $220.6 million in the
aggregate). The excess of the redemption price over the carrying value of the
$4.00 Preferred Stock will result in an increase in the Company's accumulated
deficit.
As a further part of the reorganization, the Company will transfer certain
liabilities related to environmental matters to its subsidiary, Chemical Land
Holdings, Inc. ("CLH"), and will transfer CLH to a subsidiary of YPF. In
connection with these transfers, which are expected to be effective as of August
1, 1996, CLH will assume (the "Assumption") the liabilities so transferred and
YPF is expected to commit to contribute capital to CLH up to an amount that will
enable CLH to satisfy its obligations under the Assumption based on the
Company's reserves established in respect of the assumed liabilities as of July
31, 1996. YPF will not be obligated to, but may in its sole discretion, commit
to contribute additional capital to CLH, and YPF is expected to contribute
capital to CLH to enable CLH to meet its operating expenses. However, there is
no assurance that YPF will commit to contribute any additional capital to CLH.
The Company will be responsible for any obligations assumed by CLH in the event
CLH does not perform or fulfill such obligations. Further, these transfers, the
Assumption and YPF's agreement to contribute capital to CLH are subject to the
satisfaction of certain conditions, and thus, there can be no assurance that
such transactions will be effectuated. Assuming the transactions are
effectuated, CLH will assume responsibility for, among other things, the
environmental contingencies discussed in Note Nine to the financial statements
and said declaratory judgment action filed by OxyChem and Henkel (see "Legal
Proceedings"), and the Company intends to transfer to CLH its remaining rights
to recover costs under a cost-sharing agreement with Diamond Shamrock, Inc.,
formerly known as Diamond Shamrock R&M, Inc. ("DSRM"), in connection with the
spin-off of DSRM in 1987. The Assumption will be reflected on the Company's
financial statements as a long-term account receivable due from YPF in the
amount of the liabilities assumed by CLH with a corresponding increase to paid-
in capital in such amount.
FINANCIAL CONDITION
The Company's net cash provided by operating activities was $43 million in the
first half of 1996. Net cash provided by operating activities of $80 million
before working capital changes was reduced by working capital requirements of
$37 million. Additional working capital was required due to higher crude oil and
natural gas trade receivables primarily as a result of higher oil and gas
prices, lower accounts payable in Bolivia and Venezuela and lower accrued
liabilities in Southeast Sumatra and Ecuador.
The Company began the year with $38 million of cash and cash equivalents. During
the first six months of 1996, Maxus received an aggregate $64 million capital
contribution from YPF pursuant to the terms of the Keepwell Covenant (as that
term is defined in Note Three to the financial statements), released $27 million
of restricted cash backing trade letters of credit as well as six months of
interest on outstanding borrowings as required by a certain credit facility and
generated $43 million from operating activities. Additionally, Maxus received a
$101 million advance from YPF against the purchase price for the outstanding
shares of capital stock of International, the sole assets of which are all of
the issued and outstanding shares of capital stock of Maxus Bolivia, Venezuela
C.I. and Venezuela S.A. The Company used $92 million of cash to fund capital
expenditures, $5 million to pay environmental compliance for disposed of
businesses, $4 million to fund contributions to certain pension plans, $17
million to pay preferred dividends and $3 million to make payments in respect of
shares of Common Stock converted into the right to receive $5.50 per share upon
the Merger. In addition, Maxus used $34 million to repay short-term debt and $63
million to fund the mandatory redemption of 625,000 shares of $9.75 Preferred
Stock in February 1996. At June 30, 1996, Company's cash and cash equivalents
balance was $45 million.
25
<PAGE>
In management's opinion, cash on hand at June 30, 1996 and cash provided by
operations during the remainder of the year will be inadequate to fund the
remaining 1996 program spending budget, service debt and pay preferred stock
dividends and trade obligations. In connection with the sale of all outstanding
shares of capital stock of International to YPF, in the second quarter of 1996
Maxus received a $101.0 million advance from YPF against the purchase price of
approximately $266.2 million (see "General Reorganization" above). Maxus
intends to use the proceeds from this transaction for general corporate
purposes, including the redemption of all of its outstanding shares of $4.00
Preferred Stock; however, it is anticipated that YPF could be required to make
additional cash advances to Maxus in the second half of 1996 totaling
approximately $20 million to $50 million to fund the Company's obligations.
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 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. 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 has
appealed.
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 June 30, 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 $5 million reserved. The Company cannot predict
with any certainty what portion of the approximately $30 million unreserved
portion of the $35 million amount remaining at June 30, 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 $30 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 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 July
26
<PAGE>
1996, the Company, together with its partners, paid $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. While not part of the
general reorganization discussed above, Maxus has authorized one of its
subsidiaries to transfer to YPF, or a designated subsidiary of YPF, all of the
capital stock of Maxus Guarapiche Ltd. ("Maxus Guarapiche") for the higher of
the fair market value thereof or the carrying value thereof on the consolidated
books and accounts of Maxus. It is expected that such transfer of Maxus
Guarapiche will occur in the third quarter of 1996.
Maxus currently projects total program spending (capital expenditures plus
exploration expenses) for 1996 to be approximately $228 million, compared to
$231 million in 1995. This 1996 program spending projection includes actual
program spending for Maxus' Bolivian and Venezuelan interests for the first half
of 1996 of $2 million and $9 million, respectively. In addition, Indonesia will
receive $80 million, Midgard (U.S.) $72 million, Ecuador $20 million and
domestic and overseas new ventures $42 million, which includes $27 million paid
to the Venezuelan government in July 1996 for Maxus' net interest in the
Guarapiche Block. 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, cash proceeds received in connection with the sale of all
outstanding shares of capital stock of International to YPF and cash advances
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.
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 establish a joint venture or other alliance
will be successful. In addition to the general reorganization discussed above,
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 and Ecuador.
In Ecuador, pipeline capacity available to the Company is sufficient to
transport only about 80% 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
$20 million from $32 million in 1995.
27
<PAGE>
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.
Current Report on Form 8-K for Event of July 1, 1996
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
August 8, 1996
28
<PAGE>
Exhibit Index
<TABLE>
<CAPTION>
Exhibit Title Exhibit No.
- -------------- -----------
<S> <C>
Letter of Arthur Andersen LLP regarding unaudited interim
financial statements 15.1
Financial Data Schedule 27.1
</TABLE>
29
<PAGE>
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 June 30, 1996, which includes our report dated July 24, 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
August 7, 1996
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> JUN-30-1996
<CASH> 45
<SECURITIES> 0
<RECEIVABLES> 134
<ALLOWANCES> 1
<INVENTORY> 30
<CURRENT-ASSETS> 497
<PP&E> 2,041
<DEPRECIATION> 215
<TOTAL-ASSETS> 2,620
<CURRENT-LIABILITIES> 273
<BONDS> 1,211
63
67
<COMMON> 136
<OTHER-SE> 83
<TOTAL-LIABILITY-AND-EQUITY> 2,620
<SALES> 346
<TOTAL-REVENUES> 358
<CGS> 139
<TOTAL-COSTS> 244
<OTHER-EXPENSES> 5
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<INTEREST-EXPENSE> 68
<INCOME-PRETAX> 41
<INCOME-TAX> 44
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<DISCONTINUED> 0
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<EPS-PRIMARY> 0.00
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