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FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES AND EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1996.
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from .............. to ...............
Commission file number 1-8581
FREEPORT-MCMORAN OIL AND GAS ROYALTY TRUST
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
TEXAS 72-6108468
(State or other jurisdiction of incorporation (I.R.S. Employer
or organization) Identification No.)
TEXAS COMMERCE BANK NATIONAL ASSOCIATION 77002
CORPORATE TRUST DIVISION (Zip Code)
712 MAIN STREET
HOUSTON, TEXAS
(Address of principal executive offices)
</TABLE>
Registrant's telephone number, including area code: (713) 216-5447
....................................
(Former name, former address and former fiscal year, if changed since last
report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
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FREEPORT-MCMORAN OIL AND GAS ROYALTY TRUST
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Part I. Financial Information
Item 1. Financial Statements:
Statements of Royalty Proceeds and Distributable Cash........................... 3
Statements of Assets, Liabilities and Trust Corpus.............................. 3
Statements of Changes in Trust Corpus........................................... 3
Notes to Financial Statements................................................... 4
Report of Independent Public Accountants........................................ 7
Item 2. Management's Discussion and Analysis of Financial Condition and Results of
Operations...................................................................... 8
Part II. Other Information
Item 6. Exhibits and Reports on Form 8-K.......................................... 12
Signature............................................................................ 13
</TABLE>
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
FREEPORT-MCMORAN OIL AND GAS ROYALTY TRUST
STATEMENTS OF ROYALTY PROCEEDS AND DISTRIBUTABLE CASH
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
---------------------------
1996 1995
----------- -----------
<S> <C> <C>
Royalty proceeds................................................ $ -- $ 292,366
Trust administrative expenses................................... (62,666) (61,117)
Interest income................................................. 19,336 17,413
Reserve for future Trust expenses............................... 43,330 (248,662)
----------- -----------
Distributable cash.............................................. $ -- $ --
=========== ===========
Distributable cash per Unit..................................... $ -- $ --
=========== ===========
Units outstanding............................................... 14,975,390 14,975,390
=========== ===========
</TABLE>
STATEMENTS OF ASSETS, LIABILITIES AND TRUST CORPUS
<TABLE>
<CAPTION>
ASSETS
MARCH 31, DECEMBER 31,
1996 1995
------------ ------------
(UNAUDITED)
<S> <C> <C>
Cash and short-term investments................................ $ 2,257,649 $ 2,300,979
Net overriding royalty interest in oil and gas properties...... 189,875,741 189,875,741
Less, adjustment to recorded cost of net overriding royalty
interest in oil and gas properties........................... (25,431,543) (25,431,543)
Less, accumulated amortization of net overriding royalty
interest..................................................... (164,260,985) (164,260,985)
------------ -------------
Total assets......................................... $ 2,440,862 $ 2,484,192
============ =============
LIABILITIES AND TRUST CORPUS
Distributions payable to Unit holders.......................... $ -- $ --
Reserve for future Trust expenses.............................. 2,257,649 2,300,979
Trust corpus (14,975,390 Units of Beneficial Interest
authorized,
issued and outstanding)...................................... 183,213 183,213
------------ -------------
Total liabilities and trust corpus................... $ 2,440,862 $ 2,484,192
============ =============
</TABLE>
STATEMENTS OF CHANGES IN TRUST CORPUS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
---------------------
1996 1995
-------- --------
<S> <C> <C>
Trust corpus, beginning of year........................................ $183,213 $212,918
Royalty proceeds and interest income, net of trust administrative
expenses and reserve for future Trust expenses....................... -- --
Distributions payable to Unit holders.................................. -- --
Amortization of net overriding royalty interest........................ -- (18,071)
-------- --------
Trust corpus, end of period............................................ $183,213 $194,847
======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
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FREEPORT-MCMORAN OIL AND GAS ROYALTY TRUST
NOTES TO FINANCIAL STATEMENTS
1. THE TRUST
Freeport-McMoRan Oil and Gas Royalty Trust (the Trust) was created
effective September 30, 1983. On that date, Freeport-McMoRan Inc. (FTX)
transferred a net overriding royalty interest in certain offshore oil and gas
properties to a Partnership (Partnership) equal to 90 percent of the Net
Proceeds (as defined in the Conveyance referred to below) from FTX's working
interests in such properties and conveyed a 99.9 percent general partnership
interest in the Partnership to the Trust. Such net overriding royalty interest
is referred to herein as the "Royalty". The Overriding Royalty Conveyance which
created the Royalty is referred to herein as the "Conveyance". The Trust is
passive, with Texas Commerce Bank National Association as Trustee. The Trustee
has only such powers as are necessary for the collection and distribution of
revenues attributable to the Royalty, the payment of Trust liabilities and the
protection of Trust assets.
The Trust Indenture provides generally that the Trust shall terminate upon
the first to occur of (i) the sale of all the Trust's interest in the
Partnership, or the sale by the Partnership of all the assets of the Partnership
including the Royalty, or (ii) a decision to terminate the Trust by the
affirmative vote of Unit holders representing a majority of the Units. The
Trustee is required to sell the Trust's interest in the Partnership, or cause
the Partnership to sell the Royalty, if the Trust's cash receipts for each of
three successive years are less than $3 million, thereby terminating the Trust
pursuant to (i) above. Upon the termination of the Trust under (ii) above, the
Trustee will sell the Trust's interest in the Partnership (or will cause the
Partnership to sell all of the assets of the Partnership). The Trustee will as
promptly as possible distribute the proceeds of any such sales according to the
respective interests and rights of the Unit holders after discharging all of the
liabilities of the Trust and, if necessary, setting up reserves in such amounts
as the Trustee in its discretion deems appropriate for contingent liabilities.
2. THE ROYALTY
Freeport-McMoRan Oil & Gas Company, a division of FTX (the Working Interest
Owner), presently owns the oil and gas interests burdened by the Royalty. The
Conveyance provides that the owner of the interests burdened by the Royalty will
calculate and pay monthly to the Partnership an amount equal to 90 percent of
the net proceeds for the preceding month. Net proceeds generally consist of the
excess of gross revenues received from the Royalty Properties (Gross Proceeds),
on a cash basis, over operating costs, capital expenditures and other charges,
on an accrual basis (Net Proceeds).
3. DISTRIBUTIONS TO UNIT HOLDERS
A cumulative excess Class A cost carry-forward of $1,875,852 existed as of
December 31, 1995. As a result of the capital costs associated with the drilling
and evaluation of wells during the first three months of 1996, the excess Class
A cost carry-forward net to the Trust had increased to $3,071,897 as of March
31, 1996. This carry-forward is subject to interest due the Working Interest
Owner at the prime rate, which totaled
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NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
$37,096 net to the Trust during the quarter. The excess Class A cost
carry-forward must be recouped out of future Net Proceeds before distributions
to the Unit holders can be resumed.
4. GAS BALANCING ARRANGEMENTS
As a result of past curtailments in gas takes by the principal purchaser of
production from the Royalty Properties, certain quantities of gas have been sold
by other parties with interests in the Royalty Properties pursuant to gas
balancing arrangements. Proceeds from gas produced from the Royalty Properties
but sold by other parties pursuant to such balancing arrangements
(underproduction) are not included in Gross Proceeds for purposes of calculating
the Royalty. In the future, the Working Interest Owner will be entitled to sell
volumes equal to such underproduction or receive cash settlements. On certain of
the Royalty Properties, a cash settlement may be required, depending on future
results, because of the lack of sufficient remaining reserves from which to
makeup any underproduction. As of March 31, 1996, the unrecovered quantity of
gas sold by third parties pursuant to such gas balancing arrangements since
inception of the Trust through December 31, 1995 was approximately 1.7 billion
cubic feet (bcf), net to the Trust. Gross Proceeds will be increased in future
periods when the Working Interest Owner is compensated either through the sale
of gas or through cash settlements, the amount and timing of which is uncertain.
5. ESTABLISHMENT OF AN EXPENSE RESERVE
Because of the decline in Royalty income, at certain times since late 1993
the Trust has been unable to pay its ongoing administrative expenses. To permit
the Trust to pay its routine administrative expenses during the time the Trust
incurs a Class A cost deficit, the Trustee, in accordance with the Trust
Indenture, established an expense reserve of $2.4 million, of which $2,300,979
remained as of December 31, 1995. Because of the cumulative excess Class A cost
carry-forward (Note 3), $43,330 was withdrawn from the expense reserve to pay
Trust administrative expenses during the first quarter of 1996. There will be
tax consequences to the Unit holders for such reserve as described in Note 6
below.
The funding for this reserve is deposited with Texas Commerce Bank and
invested in Texas Commerce Bank collateralized certificates of deposit. The
average interest rate earned on these funds for the first quarter of 1996 was
3.3 percent.
6. FEDERAL INCOME TAX MATTERS
Unit holders are required to report taxable income for the Royalty income
received by the Trust and deposited to the expense reserve even if no
distributions were received by the Unit holders. The expense reserve established
for Trust administrative expenses described in Note 5 above will give rise to
future tax deductions as additional administrative expenses are incurred and
paid with funds deposited in the reserve.
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NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
7. RESERVE FOR FUTURE ESTIMATED ABANDONMENT COSTS
The operators of the Trust properties have provided estimates of future
costs to abandon the Trust properties upon their depletion. The December 1995
estimate, net of abandonment costs incurred, totaled $16.2 million net to the
Trust, of which $12.9 million has been withheld from distributions to Unit
holders as of March 31, 1996. The actual costs to abandon the Trust properties
may vary from these estimates. Any excess will reduce future distributions and,
to the extent that actual costs are less than amounts withheld, amounts will be
added to future distributable cash.
---------------------
THE INFORMATION FURNISHED HEREIN SHOULD BE READ IN CONJUNCTION WITH THE
FINANCIAL STATEMENTS OF FREEPORT-MCMORAN OIL AND GAS ROYALTY TRUST FOR THE YEAR
ENDED DECEMBER 31, 1995, WHICH ARE CONTAINED IN ITS ANNUAL REPORT ON FORM 10-K
FOR 1995.
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FREEPORT-MCMORAN OIL AND GAS ROYALTY TRUST
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Texas Commerce Bank National Association (Trustee)
and the Unit Holders of Freeport-McMoRan Oil and Gas Royalty Trust:
We have reviewed the accompanying statement of assets, liabilities and
trust corpus of Freeport-McMoRan Oil and Gas Royalty Trust as of March 31, 1996,
the related statements of royalty proceeds and distributable cash for the three
month periods ended March 31, 1996 and 1995 and the related statements of
changes in trust corpus for the three month periods then ended. These financial
statements are the responsibility of the Working Interest Owner.
We conducted our reviews in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical review
procedures to 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.
These financial statements were prepared on the cash basis of accounting,
which is a comprehensive basis of accounting other than generally accepted
accounting principles.
Based on our reviews, 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 the cash basis of accounting.
We have previously audited, in accordance with generally accepted auditing
standards, the statement of assets, liabilities and trust corpus of
Freeport-McMoRan Oil and Gas Royalty Trust as of December 31, 1995 and, in our
report dated February 28, 1996, we expressed an unqualified opinion on that
statement.
ARTHUR ANDERSEN LLP
New Orleans, Louisiana,
May 13, 1996
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
The information contained herein regarding operations and exploration and
development activities on the properties burdened by the Royalty has been
furnished by the Working Interest Owner. For convenience, references are made to
the Notes to Financial Statements.
RESULTS OF OPERATIONS
There were no cash distributions to the Unit holders in the first quarters
of 1996 and 1995. The 1996 period reflects reduced Gross Proceeds and higher
capital expenditures. These factors resulted in an increase in the excess Class
A cost carry-forward net to the Trust of $1.2 million during the period,
bringing the total to $3.1 million as of March 31, 1996 (Note 3). Additionally,
net Trust administrative expenses were paid from the expense reserve during the
1996 quarter. The calculation of distributable cash for each period follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
--------------------------
1996 1995
----------- ----------
<S> <C> <C>
Gross Proceeds(1).......................................... $ 841,594 $1,521,828
Total Costs(2)............................................. (2,171,862) (661,198)
Excess Class A cost (recovery) carry-forward, net(3)....... 1,330,268 (535,453)
----------- ----------
Net Proceeds............................................... -- 325,177
Percentage attributable to Royalty......................... 90.0% 90.0%
----------- ----------
Amounts payable attributable to Royalty.................... -- 292,659
Percentage attributable to the Trust....................... 99.9% 99.9%
----------- ----------
Royalty Proceeds........................................... -- 292,366
Trust administrative expenses.............................. (62,666) (61,117)
----------- ----------
(62,666) 231,249
Interest income............................................ 19,336 17,413
Reserve for future Trust expenses(4)....................... 43,330 (248,662)
----------- ----------
Distributable cash......................................... $ -- $ --
=========== ==========
</TABLE>
- ---------------
(1) Gross Proceeds for each period were calculated based on amounts received by
the Working Interest Owner during the three month period ended in February
of such year.
(2) Total costs for each period represent amounts accrued by the Working
Interest Owner during the three month period ended in February of such
year.
(3) Recoveries represent Class A costs incurred in prior periods and recovered
in the current period; carry-forwards represent Class A costs incurred in
the applicable period that remained outstanding as of the end of such
period. Includes accrued interest of $37,096 for the 1996 period.
(4) Represents the amount withdrawn from (added to) the Trust administrative
expense reserve during the period.
--8--
<PAGE> 9
Gas revenues included in the first-quarter 1996 Gross Proceeds totaled $0.6
million compared with $1.1 million in the 1995 period. Gas volumes decreased 45
percent to 0.3 billion cubic feet (bcf) for the first quarter of 1996 from 0.5
bcf in the 1995 quarter primarily because of depletion of the Vermilion Block
310 and Eugene Island Block 10 fields in 1995, depletion of wells at West Delta
Block 34 and East Cameron Block 336 and normal production declines. Gas
realizations averaged $2.06 per thousand cubic feet (mcf) in the first quarter
of 1996 compared with $2.07 per mcf in the 1995 quarter, as higher prices
received on the spot market sales were offset by the decrease in sales volumes
from properties having higher priced long-term contracts.
Oil revenues included in Gross Proceeds declined to $0.2 million on 15,100
barrels during the first quarter of 1996, primarily reflecting production
declines at West Cameron Block 215 which began in late 1995, compared with $0.4
million on 27,300 barrels for the 1995 period. Oil realizations averaged $16.02
per barrel in the current quarter compared with $16.01 per barrel in the 1995
quarter.
Costs primarily consist of lease operating expenses, exploration and
development costs and accruals for estimated abandonment costs. Lease operating
expenses were $0.8 million for the 1996 period compared with $0.6 million for
the 1995 quarter. First-quarter 1996 exploration and development costs totaled
$1.1 million, consisting of exploration and development costs at Vermilion Block
58 and West Cameron Block 498, compared with a negative $0.2 million for the
1995 period. The Vermilion Block 58 No. 10 well reached its objective depth
during the quarter; and, based on an evaluation of the results, the Working
Interest Owner concluded that it would not pursue any further development of
this well. Accruals for future estimated abandonment costs totaled $0.1 million
and $0.2 million in the 1996 and 1995 quarters, respectively.
CAPITAL RESOURCES AND LIQUIDITY
All revenues received by the Trust, net of Trust administrative expenses
and liabilities, are distributed to the Unit holders in accordance with
provisions of the Trust Indenture. As a result of the cumulative excess Class A
cost carry-forward of $3.1 million net to the Trust at March 31, 1996, the
additional development activities anticipated at West Cameron Block 498 and
exploratory drilling anticipated on other Royalty Properties, the amount and
timing of any future distributions to Unit holders are presently indeterminable.
Drilling operations continue on an exploratory well on Breton Sound Block
55, which began in February 1996. The Working Interest Owner owns an 18.75%
working interest in Breton Sound Block 55 and a 9.375% working interest in this
well pursuant to a codevelopment agreement with the owner of the adjacent block.
Costs and ownership of production resulting from this activity will be
retroactively adjusted based upon the location of any reserves discovered
following development of the area if commercial hydrocarbons are discovered. The
estimated drilling cost for the well is $0.8 million, net to the Trust.
Additional costs may be required if a decision is made to complete the well and
develop it for production. Additional exploration may be proposed for certain
other Royalty Properties where geologic features have been identified. After
analyzing each proposal, the Working Interest Owner will determine whether or
not to participate in additional exploratory operations.
Total exploration and development costs for the remainder of 1996 are
presently budgeted at approximately $6.5 million net to the Trust by the Working
Interest Owner, including West Cameron Block 498 development and exploratory
drilling at Breton Sound Block 55. This budget is derived from cost
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<PAGE> 10
estimates provided by the operators of the Royalty Properties and may vary from
actual costs depending on the success of drilling, particular circumstances
encountered during drilling and many other factors outside the control of the
operator. These expenditures can be expected to reduce and could further delay
resumption of distributions to Unit holders.
The operators of the Trust properties have provided estimates of future
costs to abandon the Trust properties upon their depletion (Note 7). In December
1995, such estimates, net of abandonment cost incurred, totaled $16.2 million
net to the Trust, of which $12.9 million has been withheld from distributions to
Unit holders as of March 31, 1996. Based on these amounts, future distributions
to Unit holders would be reduced by approximately $0.22 per Unit over the
remaining productive lives of the properties, subject to future revisions of
such costs.
Exploratory drilling on West Cameron Block 498 began in June 1994 and
resulted in 4 successful wells to date which have been saved for future
development. Activity for this property, as approved by the MMS, currently
estimates that construction of the platform and facilities will commence in June
1996, and that production will commence by the end of March 1997.
At certain times since late 1993, the Trust has been unable to pay its
ongoing administrative expenses. To permit the Trust to pay its administrative
expenses during the time the Trust incurs a Class A cost deficit, the Trustee,
in accordance with the Trust Indenture, established a $2.4 million Trust
administrative expense reserve to pay such expenses (Note 5), of which $2.3
million remained at March 31, 1996.
The Trustee may sell or dispose of its interest in the Partnership, or
permit the Partnership to sell or dispose of all or any part of the Royalty,
only as authorized by a vote of holders of the Units, upon termination of the
Trust and in certain other limited circumstances. However, the Trustee is
directed to effect such a sale (without any such vote) if the Trust's cash
receipts for each of three successive years commencing after December 31, 1990
are less than $3 million. The Trustee must distribute the net proceeds of such
sale (after satisfaction of any outstanding liabilities) to the Unit holders.
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<PAGE> 11
[PRODUCTIVE PROPERTY MAP]
[The map shows the fields offshore Louisiana and Texas identifying the location
of the Trust's productive properties by block number, including gross and net
acreage and working interest percentage for each block, as of March 31,
1996.]
<TABLE>
<CAPTION>
Working
Property Interest%* Gross Acres Net Acres
-------- ---------- ----------- ---------
<S> <C> <C> <C>
Royalty Properties --
Offshore Louisiana:
Breton Sound Blk. 54/55 . . . . . . 18.75 6,946 1,302
East Cameron Blk. 336 . . . . . . . 28.00 5,000 1,400
Vermilion Blk. 21 . . . . . . . . . 4.17 4,139 172
Vermilion Blk. 22 . . . . . . . . . 4.17 5,000 208
Vermilion Blk. 58 . . . . . . . . . 22.50 5,000 1,125
West Cameron Blk. 65. . . . . . . . 4.17 5,000 208
West Cameron Blk. 215 . . . . . . . 31.28 5,000 1,564
West Cameron Blk. 498 . . . . . . . 23.08 5,000 1,154
West Delta Blk. 34 . . . . . . . . 30.00 2,500 750
Offshore Texas:
High Island Blk. A-552(2) . . . . . 35.00 3,600 1,260
</TABLE>
* The Royalty Trust owns 99.9% of a 90% net profits interest in the Working
Interest for each block.
--11--
<PAGE> 12
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Not applicable.
(b) Reports on Form 8-K:
No reports on Form 8-K were filed by the registrant during the first
quarter of 1996.
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<PAGE> 13
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.
<TABLE>
<S> <C>
FREEPORT-McMoRan OIL AND GAS
ROYALTY TRUST
By: Texas Commerce Bank National Association,
Trustee
By: /s/ MICHAEL J. ULRICH
-----------------------------------------
MICHAEL J. ULRICH
SENIOR VICE PRESIDENT AND TRUST OFFICER
</TABLE>
Date: May 15, 1996
--13--
<PAGE> 14
EXHIBIT INDEX
27 -- Financial Data Schedule
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1
<CURRENCY> U.S. DOLLAR
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> MAR-31-1996
<EXCHANGE-RATE> 1
<CASH> 2,257,649
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 2,257,649
<PP&E> 189,875,741
<DEPRECIATION> 189,692,528
<TOTAL-ASSETS> 2,440,862
<CURRENT-LIABILITIES> 2,257,649
<BONDS> 0
<COMMON> 0
0
0
<OTHER-SE> 183,213
<TOTAL-LIABILITY-AND-EQUITY> 2,440,862
<SALES> 0
<TOTAL-REVENUES> 19,336
<CGS> 0
<TOTAL-COSTS> 62,666
<OTHER-EXPENSES> (43,330)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 0
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 0
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
