<PAGE> 1
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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, 1997.
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from .............. to ...............
Commission file 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
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<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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<PAGE> 3
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,
--------------------------
1997 1996
----------- -----------
<S> <C> <C>
Royalty proceeds............................................ $ -- $ --
Trust administrative expenses............................... (87,615) (62,666)
Interest income............................................. 18,811 19,336
Reserve for future Trust expenses........................... 68,804 43,330
----------- -----------
Distributable cash.......................................... $ -- $ --
=========== ===========
Distributable cash per Unit................................. $ -- $ --
=========== ===========
Units outstanding........................................... 14,975,390 14,975,390
=========== ===========
</TABLE>
STATEMENTS OF ASSETS, LIABILITIES AND TRUST CORPUS
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1997 1996
ASSETS ------------- -------------
(UNAUDITED)
<S> <C> <C>
Cash and short-term investments............................. $ 1,914,767 $ 1,983,571
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...................................... $ 2,097,980 $ 2,166,784
============= =============
LIABILITIES AND TRUST CORPUS
Reserve for future Trust expenses........................... $ 1,914,767 $ 1,983,571
Trust corpus (14,975,390 Units of Beneficial Interest
authorized,
issued and outstanding)................................... 183,213 183,213
------------- -------------
Total liabilities and trust corpus................ $ 2,097,980 $ 2,166,784
============= =============
</TABLE>
STATEMENTS OF CHANGES IN TRUST CORPUS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
-----------------------
1997 1996
-------- -----------
<S> <C> <C>
Trust corpus, beginning of year............................. $183,213 $ 183,213
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............. -- --
-------- -----------
Trust corpus, end of period................................. $183,213 $ 183,213
======== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
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<PAGE> 4
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 (the 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.
There were no cash receipts to the Trust in 1996. In light of the future
development costs related to West Cameron Block 498 and Breton Sound Block 55
and the unknown timing and extent of production from these fields, the remaining
abandonment costs to be withheld and the outstanding Class A cost carry-forward
which existed at March 31, 1997, Gross Proceeds generated by the Royalty
properties may be insufficient to generate Trust cash receipts over $3 million
during 1997 or 1998.
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).
--4--
<PAGE> 5
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
3. DISTRIBUTIONS TO UNIT HOLDERS
As a result of the capital costs incurred during the past two years, a
cumulative excess Class A cost carry-forward of $3,750,465 existed as of March
31, 1997. This carry-forward is subject to and includes interest due the Working
Interest Owner at the prime rate, which totaled $58,473 net to the Trust during
the three month period of 1997. This 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, 1997, the unrecovered quantity of
gas sold by third parties pursuant to such gas balancing arrangements since
inception of the Trust through December 31, 1996 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 $1,914,767
remained as of March 31, 1997. Because of the cumulative excess Class A cost
carry-forward (Note 3), $68,804 was withdrawn from the expense reserve to pay
Trust administrative expenses during the first three months of 1997. There will
be income 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 1997 was
3.9 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
--5--
<PAGE> 6
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
reserve established for Trust administrative expenses described in Note 5 above
will give rise to future income tax deductions as additional administrative
expenses are incurred and paid with funds deposited in the reserve.
7. RESERVE FOR FUTURE ESTIMATED ABANDONMENT COSTS
Estimated future abandonment costs, based on current laws and regulations,
are accrued over the life of the Trust's properties. As of March 31, 1997, the
estimated remaining aggregate abandonment costs to be incurred for all of the
Trust's properties totaled $11.6 million net to the Trust, of which $10.6
million has been withheld from distributions to Unit holders. Estimated future
abandonment costs are by their nature imprecise and can be expected to be
revised over time because of changes in general and specific cost levels,
government regulations, operations and technology. Any adjustments to estimated
abandonment costs or variances to actual costs will reduce or increase future
distributable cash accordingly.
---------------------
THE INFORMATION FURNISHED HEREIN SHOULD BE READ IN CONJUNCTION WITH THE
FREEPORT-McMoRan OIL AND GAS ROYALTY TRUST FINANCIAL STATEMENTS FOR THE YEAR
ENDED DECEMBER 31, 1996, WHICH ARE CONTAINED IN ITS ANNUAL REPORT ON FORM 10-K
FOR 1996.
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<PAGE> 7
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, 1997,
the related statements of royalty proceeds and distributable cash and changes in
trust corpus for the three month periods ended March 31, 1997 and 1996. 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, 1996 and, in our
report dated March 7, 1997, we expressed an unqualified opinion on that
statement.
ARTHUR ANDERSEN LLP
New Orleans, Louisiana,
April 30, 1997
--7--
<PAGE> 8
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 during the first three
months of 1997 or 1996, primarily because of significant capital expenditures.
During the first quarter of 1997, Total Costs exceeded Gross Proceeds by
approximately $1.4 million, because of the capital costs incurred to develop
Breton Sound Block 55 and West Cameron Block 498. As a result, the Class A cost
carry-forward increased to $3.8 million net to the Trust as of March 31, 1997
(Note 3). Because of the Class A cost carry-forward, the Trust administrative
expenses were paid from the expense reserve during 1997. The calculation of
distributable cash for each period follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
--------------------------
1997 1996
----------- -----------
<S> <C> <C>
Gross Proceeds(1)........................................... $ 815,212 $ 841,594
Total Costs(2).............................................. (2,221,790) (2,171,862)
Excess Class A cost carry-forward, net(3)................... 1,406,578 1,330,268
----------- -----------
Net Proceeds................................................ -- --
Percentage attributable to Royalty.......................... 90.0% 90.0%
----------- -----------
Amounts payable attributable to Royalty..................... -- --
Percentage attributable to the Trust........................ 99.9% 99.9%
----------- -----------
Royalty Proceeds............................................ -- --
Trust administrative expenses............................... (87,615) (62,666)
----------- -----------
(87,615) (62,666)
Interest income............................................. 18,811 19,336
Reserve for future Trust expenses(4)........................ 68,804 43,330
----------- -----------
Distributable cash.......................................... $ -- $ --
=========== ===========
</TABLE>
- ---------------
(1) Represents amounts received by the Working Interest Owner during the three
month period ended in February of such year.
(2) Represents amounts accrued by the Working Interest Owner during the three
month period ended in February of such year. Includes accrued interest of
$58,473 in 1997 and $37,096 in 1996.
(3) Represents Class A costs incurred in the applicable period that remained
outstanding as of the end of such period.
(4) Represents withdrawals from the Trust administrative expense reserve during
the respective periods.
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<PAGE> 9
Gross Proceeds, which includes gas and oil revenues, are calculated based
on amounts received by the Working Interest Owner. Operating information
follows:
<TABLE>
<CAPTION>
FIRST QUARTER
---------------------
1997 1996
-------- --------
<S> <C> <C>
Natural Gas
Revenues (in millions).................................... $ 0.4 $ 0.6
Sales volumes (in million cubic feet)..................... 137 291
Average realization (per thousand cubic feet)............. $ 2.82 $ 2.06
Oil
Revenues (in millions).................................... $ 0.4 $ 0.2
Sales volumes (in thousands of barrels)................... 18.2 15.1
Average realization (per barrel).......................... $23.50 $16.02
</TABLE>
Gas volumes for the 1997 period decreased from 1996 levels because of the
depletion of the High Island 552 field during late 1996 and normal production
declines. Oil volumes for the 1997 period benefited from the successful
recompletion at West Cameron Block 215 during 1996 which increased oil
production. Revenues for the 1997 period benefited from an increase in average
realizations reflecting the rise in natural gas and oil market prices during
those periods.
Costs consist of the following (in millions):
<TABLE>
<CAPTION>
FIRST QUARTER
---------------------
1997 1996
-------- --------
<S> <C> <C>
Lease operating expenses.................................... $(0.1) $0.8
Exploration and development costs........................... 2.2 1.1
Abandonment costs withheld and other........................ 0.1 0.3
----- ----
$ 2.2 $2.2
===== ====
</TABLE>
Lease operating expenses for the first quarter of 1997 benefited from a
downward adjustment to the insurance accrual of approximately $0.4 million. In
addition, there were several properties from 1996 which are no longer producing,
resulting in lower lease operating expenses in the 1997 period. First-quarter
1997 exploration and development costs relate to development at West Cameron
Block 498 and Breton Sound Block 55. First-quarter 1996 costs consisted
primarily of exploration and development costs at Vermilion Block 58 and West
Cameron Block 498. Abandonment costs are accrued each period based on the
estimate of costs required to abandon the Trust's properties.
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 $3.8 million net to the Trust at March 31, 1997, the
additional development activities scheduled at West Cameron Block 498 and Breton
Sound Block 55 and the potential for exploratory drilling on other Royalty
Properties, the amount and timing of any future distributions to Unit holders is
--9--
<PAGE> 10
presently indeterminable. The cost carry-forward, with interest at the prime
rate, must be recouped from future Net Proceeds before any distributions may be
made to Unit holders.
Drilling operations were completed on an exploratory well on Breton Sound
Block 55 during the second quarter of 1996. The well has been flow-tested at
10.3 million cubic feet of natural gas and 380 barrels of condensate per day and
is currently being completed in the 14,450 foot zone. This zone is credited with
15 feet of net gas and condensate pay and production is expected to commence
late in the second quarter of 1997. Production performance will determine if an
offset well will be drilled. There is an additional productive zone with an
estimated 39 feet of net gas pay in the well which is behind pipe but was not
flow-tested. The Working Interest Owner owns an 18.75% working interest in
Breton Sound Block 55 and a 9.375% working interest and a 6.25% revenue interest
in this well pursuant to a co-development agreement with the owner of the
adjacent block. Costs and ownership of production will be retroactively adjusted
based upon the location of the reserves discovered following development of the
area.
Exploratory drilling on West Cameron Block 498 began in June 1994 and
resulted in four successful wells to date which have been saved for future
development. Construction of the platforms and production facilities began in
January 1997 and drilling on the first development well is scheduled to commence
during the second quarter of 1997. Production is expected to commence during the
fourth quarter of 1997. The Working Interest Owner owns a 23.08% working
interest in the block.
Additional exploration may be proposed by the operators of certain other
Royalty Properties. 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 1997 are
presently estimated by the Working Interest Owner to be approximately $14.0
million net to the Trust, primarily for the development of West Cameron Block
498. This estimate is derived from cost 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.
Estimated future abandonment costs, based on current laws and regulations,
are accrued over the life of the Trust's properties (Note 7). As of March 31,
1997, the estimated remaining aggregate abandonment costs to be incurred for all
of the Trust's properties totaled $11.6 million net to the Trust, of which $10.6
million has been withheld from distributions to Unit holders. Based on these
amounts, future distributions to Unit holders would be reduced by approximately
$.07 per Unit over the remaining productive lives of the properties, subject to
future revisions of such costs because of changes in general and specific cost
levels, government regulations, operations and technology.
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 $1.9
million remained at March 31, 1997.
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<PAGE> 11
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 Unit holders, upon termination of the Trust and
in certain other limited circumstances. However, the Trust is directed to effect
such a sale (without any such vote) if the Trust's cash receipts for each of
three successive years 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. There were no cash receipts to the Trust in 1996. In light of
the future development costs related to West Cameron Block 498 and Breton Sound
Block 55 and the unknown timing and extent of production from these fields, the
remaining abandonment costs to be withheld and the outstanding Class A cost
carry-forward which existed at March 31, 1997, Gross Proceeds generated by the
Royalty properties may be insufficient to generate Trust cash receipts over $3
million during 1997 or 1998.
--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 1997.
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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/ PETE
FOSTER
--------------------------------------------
PETE FOSTER
SENIOR VICE PRESIDENT AND TRUST OFFICER
</TABLE>
Date: May 6, 1997
--13--
<PAGE> 14
EXHIBIT INDEX
27 -- Financial Data Schedule
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1997
<PERIOD-END> MAR-31-1997
<CASH> 1,914,767
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 1,914,767
<PP&E> 189,875,741
<DEPRECIATION> 189,692,528
<TOTAL-ASSETS> 2,097,980
<CURRENT-LIABILITIES> 1,914,767
<BONDS> 0
<COMMON> 0
0
0
<OTHER-SE> 183,213
<TOTAL-LIABILITY-AND-EQUITY> 2,097,980
<SALES> 0
<TOTAL-REVENUES> 0
<CGS> 0
<TOTAL-COSTS> 87,615
<OTHER-EXPENSES> (68,804)
<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>
