<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 June 30, 1999.
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.)
CHASE BANK OF TEXAS, NATIONAL ASSOCIATION, TRUSTEE 77002
712 MAIN STREET (Zip Code)
HOUSTON, TEXAS
(Address of principal executive offices)
</TABLE>
Registrant's telephone number, including area code: (713) 216-5712
....................................
(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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<PAGE> 2
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............... 9
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.................... 10
Part II. Other Information
Item 6. Exhibits and Reports on Form 8-K................. 14
Signature................................................... 15
</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 SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------------- --------------------------
1999 1998 1999 1998
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Royalty proceeds.......................... $ -- $ -- $ -- $ --
Trust administrative expenses............. (213,221) (127,868) (342,115) (163,984)
Interest income........................... 12,674 18,865 27,118 38,229
Reserve for future Trust expenses......... 200,547 109,003 314,997 125,755
----------- ----------- ----------- -----------
Distributable cash........................ $ -- $ -- $ -- $ --
=========== =========== =========== ===========
Distributable cash per Unit............... $ -- $ -- $ -- $ --
=========== =========== =========== ===========
Units outstanding......................... 14,975,390 14,975,390 14,975,390 14,975,390
=========== =========== =========== ===========
</TABLE>
STATEMENTS OF ASSETS, LIABILITIES AND TRUST CORPUS
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1999 1998
------------- -------------
ASSETS (UNAUDITED)
<S> <C> <C>
Cash and short-term investments............................. $ 1,091,606 $ 1,406,603
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........................ (25,614,756) (25,614,756)
Less, accumulated amortization of net overriding royalty
interest.................................................. (164,260,985) (164,260,985)
------------- -------------
Total assets...................................... $ 1,091,606 $ 1,406,603
============= =============
LIABILITIES AND TRUST CORPUS
Reserve for future Trust expenses........................... 1,091,606 $ 1,406,603
Trust corpus (14,975,390 Units of Beneficial Interest
authorized,
issued and outstanding)................................... -- --
------------- -------------
Total liabilities and trust corpus................ $ 1,091,606 $ 1,406,603
============= =============
</TABLE>
STATEMENTS OF CHANGES IN TRUST CORPUS
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
-----------------------
1999 1998
-------- -----------
<S> <C> <C>
Trust corpus, beginning of year............................. $ -- $ --
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................................. $ -- $ --
======== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
--3--
<PAGE> 4
FREEPORT-MCMORAN OIL AND GAS ROYALTY TRUST
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
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 to a Partnership (the Partnership) a net overriding royalty interest
in certain offshore oil and gas properties 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 Chase Bank of Texas, 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 Trust
Indenture also provides that 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. There were no cash
receipts in 1996, 1997, and 1998 and, therefore, the terms of the Trust
Indenture dictate that the Trustee effect such a sale. In addition, the
Conveyance provides for a Class A cost carry-forward for any month in which the
Class A costs (including those carried forward from previous months) exceed the
gross proceeds realized from the subject properties. As of June 30, 1999, this
Class A cost carry-forward was $27.9 million. (See additional information in
note 4.) This cost carry-forward must be recouped by the Working Interest Owner
before any Royalty payment will be made to the Trust. There is no guarantee that
the sale of future production will result in proceeds in excess of the cost
carry-forward and other expenses. As a result, whether or not the Trust is
terminated, there may be no further Royalty payments to the Trust. Based on a
study of the proved oil and gas reserves attributable to the Royalty Properties
as of December 31, 1998 made by Ryder Scott Company Petroleum Engineers (Ryder
Scott), independent petroleum engineers, there were no estimated proved oil and
gas reserve quantities or related discounted future net cash flows attributable
to the Trust at December 31, 1998. The Ryder Scott estimates were prepared in
accordance with regulations of the Securities and Exchange Commission and were
limited to reserves classified as "proved" as of December 31, 1998. The Trust's
Annual Report on Form 10-K includes a letter of Ryder Scott relating to its
estimates and information regarding the assumptions used by Ryder Scott in
preparing its reserve study. It also includes cautionary paragraphs that should
be studied carefully together with the estimates in the letter. However, the
Unit holders of the Trust, at a special meeting of the Unit holders held on
March 12, 1999, approved a Unit holder proposal to amend the Trust Indenture to
extend the life of the Trust for at least another two years. Any such amendment
of the Trust Indenture requires the written approval of the Trustee as well as
approval of the Unit holders. IMC Global Inc. (IMC), the successor to FTX's
working interests burdened by the Royalty, has filed a declaratory judgment
action seeking to
--4--
<PAGE> 5
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
prevent the Trustee from approving the amendment. The Trustee has indicated that
it will take no action to approve the amendment until such time as the lawsuit
is resolved. The Trustee will vigorously defend against the lawsuit, but if IMC
prevails in its lawsuit, the amendment will not be effected and the Trustee will
endeavor to sell the Royalty as soon as practicable for cash to the highest
bidder and terminate the Trust in accordance with the terms of the Trust
Indenture. See "Termination of the Trust." The Trustee will as promptly as
possible distribute the proceeds of any such sale 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
IMC succeeded to FTX effective December 22, 1997, following the merger of
FTX into IMC. Accordingly, IMC is now the Working Interest Owner and 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,
including cost carry-forwards (Net Proceeds).
3. BASIS OF PRESENTATIONS
The Trust's financial statements, which reflect the Trust's 99.9 percent
interest in the Partnership as though the Partnership did not exist, are
prepared on the cash basis of accounting for reporting revenues and expenses.
Therefore, revenues and expenses are recognized only as cash is received or paid
and the associated receivables, payables and accrued expenses are not reflected
in the accompanying financial statements. Under generally accepted accounting
principles, revenues and expenses would be recognized on an accrual basis.
The initial carrying amount of the Royalty represented the Working Interest
Owner's net book value applicable to the interest in the properties conveyed to
the Trust on the date of creation of the Trust. Amortization of the Royalty has
been charged directly against trust corpus using the future net revenue method.
This method provides for calculating amortization by dividing the unamortized
portion of the Royalty by estimated future net revenues from proved reserves and
applying the resulting rate to the Trust's share of royalty proceeds.
The carrying value of the Royalty is limited to the discounted present
value (at 10 percent) of estimated future net cash flows. Any excess carrying
value is reduced and the adjustment is charged directly against trust corpus.
The carrying value of the Royalty was $0 at June 30, 1999. Neither the initial
nor the June 30, 1999 carrying value is necessarily indicative of the fair
market value of the Royalty held by the Trust.
Because the Trust is a grantor trust which is not a taxable entity, no
income taxes are reported in the Trust's financial statements. The tax
consequences of owning Units are included in the federal, state and local income
tax returns of the individual Unit holders.
--5--
<PAGE> 6
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
4. DISTRIBUTIONS TO UNIT HOLDERS
As a result of the capital cost incurred in recent years, a cumulative
excess Class A cost carry-forward of $27,915,663 existed as of June 30, 1999.
This carry-forward is subject to and includes an interest factor at the prime
rate, which totaled $1,032,771, net to the Trust during the six month period
ended June 30, 1999. This excess Class A cost carry-forward, including the
interest factor, must be recouped out of future Gross Proceeds before Royalty
payments to the Trust can be resumed.
5. 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. Instead, the Working Interest Owner is 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 June 30, 1999 (on a cash basis prior to the
settlement described below), the net unrecovered quantity of gas sold by third
parties pursuant to such gas balancing arrangements since inception of the Trust
was approximately 1.1 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 are uncertain.
During the month of June 1999, the Working Interest Owner received
approximately $1.7 million in settlement for the gas imbalances in West Cameron
Block 215, Breton Sound Block 55 and Vermilion Block 58 of approximately 1.2 bcf
incurred prior to January 1, 1999. Such amounts will be included for purposes of
computing the Class A cost carry-forward for July 1999.
6. 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 there is a
Class A cost deficit, the Trustee, in accordance with the Trust Indenture,
established an expense reserve of $2.4 million, of which $1,091,606 remained as
of June 30, 1999. Because of the cumulative excess Class A cost carry-forward
(Note 1), no Royalty payments were received, and $314,997, net of interest
income was withdrawn from the expense reserve to pay Trust administrative
expenses during the first six months of 1999.
The funding for this reserve is deposited with Chase Bank of Texas and
invested in Chase Bank of Texas collateralized certificates of deposit. The
average interest rate earned on these funds for the second quarter of 1999 was
4.21 percent.
--6--
<PAGE> 7
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
7. FEDERAL INCOME TAX MATTERS
Unit holders are required to report taxable income for any Royalty income
received by the Trust and interest on the Trust's cash reserves, even if no
distributions are received by the Unit holders. Unit holders will have future
income tax deductions as additional administrative expenses are incurred and
paid with funds deposited in the expense reserve established for Trust
administrative expenses described in Note 6 above.
8. RESERVE FOR FUTURE ABANDONMENT COSTS
Estimated future abandonment costs are accrued over the life of the Trust's
properties based on current laws and regulations. Such 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 or
technology. As of December 31, 1998, the estimated remaining aggregate
abandonment costs to be incurred for all of the Trust's properties totaled $9.5
million net to the Trust, all of which has been withheld from distributions to
the Trust. Any further adjustments to estimated abandonment costs or variances
to actual costs will be taken into account in computing Net Proceeds.
9. SUBSEQUENT EVENTS
Transportation Agreement
- ------------------------
In December 1997 the Working Interest Owner entered into a crude oil
agreement with an oil pipeline company to deliver on a daily basis specified
quantities of crude oil from West Cameron 498. Under the terms of the agreement
the Working Interest Owner agreed to pay a transportation fee calculated at a
sliding monthly rate based upon the total average daily volumes delivered from
West Cameron 498 during the month. Should the annual minimum delivery volume not
be met a deficiency payment is assessed by the pipeline. During 1998 the Working
Interest Owner did not deliver the minimum volume under the agreement.
Therefore, in February 1999 the pipeline company billed the Working Interest
Owner approximately $687,000 for the 1998 deficiency. The Working Interest Owner
paid the amount due the pipeline company in July 1999.
New York Stock Exchange Notification
- -----------------
The New York Stock Exchange has notified the Trustee that the Trust has
fallen below the continued listing standards of the Exchange. The Trustee has
sent an inquiry letter to the Exchange to determine whether, in light of the
unique circumstances surrounding the Trust, the Exchange will grant the Trust an
extension with respect to the continued listing criteria. If the Exchange does
not grant the Trust such an extension, the Units will be subject to delisting
and will not therefore be eligible for trading on the New York Stock Exchange.
--7--
<PAGE> 8
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Assignment of Interest
On May 19, 1999 the Working Interest Owner assigned its ownership interest
in West Cameron Block 215, Breton Sound Block 55 and Vermillion Block 58 to the
operator of such properties in exchange for the operator's assuming all duties
and obligations with respect to the assigned interest and existing wells and
platforms. The assignment was effective January 1, 1999. A final settlement will
occur within 120 days after May 19, 1999, to allocate income and expenses,
including future abandonment costs attributable to the assigned interest after
the effective date. These transactions will be reflected in the appropriate
month's Statement of Computation of Net Proceeds Payable to the Trust. Such
amounts will be reflected in the Class A cost carry-forward.
The Working Interest Owner is reviewing all options relating to its
ownership interest in the remaining properties, including discussions with
several unitholders.
---------------------
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, 1998, WHICH ARE CONTAINED IN ITS ANNUAL REPORT ON FORM 10-K
FOR 1998.
--8--
<PAGE> 9
FREEPORT-MCMORAN OIL AND GAS ROYALTY TRUST
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Chase Bank of Texas 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 June 30, 1999,
the related statements of royalty proceeds and distributable cash and changes in
trust corpus for the three and six month periods ended June 30, 1999 and 1998.
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.
As discussed in Note 3, 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, 1998 and, in our
report dated April 5, 1999, we expressed an unqualified opinion on that
statement.
ARTHUR ANDERSEN LLP
New Orleans, Louisiana
August 13, 1999
--9--
<PAGE> 10
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 who obtained this information from the
relevant operators. For convenience, references are made to the Notes to
Financial Statements.
The following discussion includes forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934. Important factors could cause actual results to
differ materially from those in the forward-looking statements herein, including
the timing and extent of changes in commodity prices for oil and gas,
environmental risks, drilling and operating risks, risks related to exploration
and development, uncertainties about oil and gas reserves, government
regulations and other matters beyond the control of the Trustee and the Working
Interest Owner.
The Trust Indenture provides that the Trustee must sell the Trust's
interest in the Partnership, or cause the Partnership to sell the Royalty, if
the Trust receives less than $3 million in cash in each of three consecutive
years. The Trust received no cash in 1996, 1997 or 1998. Therefore, unless the
amendment of the Trust Indenture approved by the Unit holders is effected, the
Trustee will endeavor to effect such sale. At a special meeting of the Unit
holders held on March 12, 1999, the Unit holders of the Trust approved a Unit
holder proposal to amend the Trust Indenture to extend the life of the Trust for
at least another two years. Any such amendment of the Trust Indenture requires,
in addition to the requisite vote of the Unit holders, the written approval of
the Trustee. The Working Interest Owner has filed a declaratory judgment action
seeking to enjoin the Trustee from approving the amendment. The Trustee will
take no action to approve the amendment until such time as the lawsuit is
resolved. The Trustee will vigorously defend against the lawsuit, but if the
Working Interest Owner prevails in its lawsuit, the amendment will not be
effected and the Trustee will endeavor to sell the Royalty as soon as
practicable for cash to the highest bidder and terminate the Trust in accordance
with the terms of the Trust Indenture. Although the Trustee will endeavor to
offer the Royalty pursuant to procedures intended to maximize the proceeds to
the Trust, the Trustee can give no assurance regarding the amounts, if any, to
be realized as a result of such offer. It is the Trustee's intention to approve
the amendment if the lawsuit is resolved in a manner that permits the Trustee to
do so.
OPERATIONAL ACTIVITIES
There was no exploratory or development activity on the properties during
the first six months of 1999. Oil production on West Cameron 498 rapidly
declined during the first three months of 1999. This was due primarily to
mechanical problems and well performance on one well. During the second quarter
the operator conducted remedial action to attempt to return the field to
production expectations. This remedial action was unsuccessful and the operator
is evaluating various alternatives, including drilling a new well.
--10--
<PAGE> 11
RESULTS OF OPERATIONS
There were no cash distributions to the Unit holders during the first six
months of 1999 or 1998. During the three months and six months ended June 30,
1999, Total Costs exceeded Gross Proceeds by approximately $1.6 million and $2.6
million, respectively. As a result, the Class A cost carry-forward increased to
$27.9 million (Note 3) net to the Trust as of June 30, 1999. Because of the
Class A cost carry-forward, Trust administrative expenses were paid from the
expense reserve during the 1999 and 1998 periods. The calculation of
distributable cash for each period follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------------- -------------------------
1999 1998 1999 1998
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Gross Proceeds(1)....................... $ 1,305,195 $ 4,544,162 $ 2,556,330 $ 5,308,443
Total Costs(2).......................... (2,890,095) (5,872,103) (5,101,979) (9,983,170)
Excess Class A cost carry-forward,
net(3)................................ 1,584,900 1,327,941 2,545,649 4,674,727
----------- ----------- ----------- -----------
Net Proceeds............................ -- -- -- --
Percentage attributable to Royalty...... 90.0% 90.0% 90.0% 90.0%
----------- ----------- ----------- -----------
Amounts payable attributable to
Royalty............................... -- -- -- --
Percentage attributable to the Trust.... 99.9% 99.9% 99.9% 99.9%
----------- ----------- ----------- -----------
Royalty Proceeds........................ -- -- -- --
Trust administrative expenses........... (213,221) (127,868) (342,115) (163,984)
----------- ----------- ----------- -----------
(213,221) (127,868) (342,115) (163,984)
Interest income......................... 12,674 18,865 27,118 38,229
Reserve for future Trust expenses(4).... 200,547 109,003 314,997 125,755
----------- ----------- ----------- -----------
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
and six month periods ended in May of such year. Includes accrued interest
of $586,963 and $1,148,672 for the three and six months during 1999 and
$446,386 and $812,689 for the three and six months during 1998.
(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.
--11--
<PAGE> 12
Gross Proceeds, which include gas and oil revenues, are calculated based on
amounts received by the Working Interest Owner. Operating information follows:
<TABLE>
<CAPTION>
SECOND QUARTER SIX MONTHS
--------------------- ---------------------
1999 1998 1999 1998
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Natural Gas
Revenues (in millions)..................... $ 0.7 $ 2.0 $ 1.4 $ 2.7
Sales volumes (in million cubic feet)...... 336 891 742 1,140
Average realization (per thousand cubic
feet)................................... $ 2.08 $ 2.22 $ 1.87 $ 2.33
Oil
Revenues (in millions)..................... $ 0.6 $ 2.5 $ 1.1 $ 2.6
Sales volumes (in thousands of barrels).... 48.4 168.8 97.7 173.1
Average realization (per barrel)........... $12.40 $15.21 $11.25 $15.32
</TABLE>
Both oil and gas volumes for the first three months of 1999 period
decreased significantly over the 1998 periods because of mechanical problems and
well performance at West Cameron Block 498 and normal production declines on the
remaining properties.
Costs consist of the following (in millions):
<TABLE>
<CAPTION>
SECOND QUARTER SIX MONTHS
--------------------- ---------------------
1999 1998 1999 1998
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Lease operating expenses............................ $1.8 $0.9 $2.6 $ 1.3
Exploration and development costs................... 0.4 4.4 1.2 7.6
Interest, abandonment costs withheld and other...... 0.7 0.6 1.3 1.1
---- ---- ---- -----
$2.9 $5.9 $5.1 $10.0
==== ==== ==== =====
</TABLE>
Lease operating expenses for the 1999 periods increased over the 1998
periods because of increased lease operating expense for West Cameron Block 498
and High Island Block 552. The Working Interest Owner is currently discussing
with the operator of High Island Block 522 amounts billed of approximately
$400,000. The Working Interest Owner believes these costs to be excessive and
has not paid the operator. Development costs for 1999 relate primarily to the
payment during 1999 of invoices relating to 1998 in connection with the
development at West Cameron Block 498. 1998 costs also related to the
development of West Cameron Block 498.
In December 1997 the Working Interest Owner entered into a crude oil
agreement with an oil pipeline company to deliver on a daily basis specified
quantities of crude oil from West Cameron 498. Under the terms of the agreement
the Working Interest Owner agreed to pay a transportation fee calculated at a
sliding monthly rate based upon the total average daily volumes delivered from
West Cameron 498 during the month. Should the annual minimum delivery volume not
be met a deficiency payment is assessed by the pipeline. During 1998 the Working
Interest Owner did not deliver the minimum volume under the agreement.
Therefore, in February 1999 the pipeline company billed the Working Interest
Owner approximately $687,000 for the 1998 deficiency. The Working Interest Owner
paid the amount due the pipeline company in July 1999.
--12--
<PAGE> 13
On May 19, 1999 the Working Interest Owner assigned its ownership interest
in West Cameron Block 215, Breton Sound Block 55 and Vermilion Block 58 to the
operator in exchange for the operator's assuming all duties and obligations with
respect to the assigned interest and existing wells and platforms. The
assignment was effective January 1, 1999. A final settlement will occur within
120 days after May 19, 1999, to allocate income and expenses attributable to the
assigned interest after the effective date.
During the month of June 1999, in a separate transaction, the Working
Interest Owner received approximately $1.7 million from the operator of the
above listed properties in settlement for the gas imbalances incurred prior to
January 1, 1999. Such amounts will be included for purposes of computing the
Class A cost carry-forward for July 1999.
The Working Interest Owner is reviewing all options relating to its
ownership interest in the remaining properties, including discussions with
several unitholders.
CAPITAL RESOURCES AND LIQUIDITY
The Trustee may sell or dispose of the Trust's 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 the Unit holders, upon termination of the Trust
and in certain other limited circumstances. However, the Trust is directed to
effect such a sale (without 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. The Unit holders have approved an amendment to the Trust
Indenture to extend the life of the Trust for at least another two years, but
such amendment has not become effective because of pending litigation. See Note
1 to the Trust's financial statements included elsewhere in this report.
The Trust's cash receipts last reached $3 million during 1995, and there
were no cash receipts in 1996, 1997 or 1998. Additionally, the Class A cost
carry-forward has increased to $27.9 million at June 30, 1999, primarily from
the significant development costs incurred at West Cameron Blocks 498 (Note 3).
This cost carry-forward must be recouped by the Working Interest Owner before
any distribution may be made to the Trust. Since the Trust did not receive cash
receipts of at least $3 million during 1998, the Trust will be terminated by one
of the means described under "Termination of the Trust" above, unless the
amendment to the Trust Indenture approved by the Unitholders on March 12, 1999
is implemented.
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.
Estimated future abandonment costs, based on current laws and regulations,
are accrued over the life of the Trust's properties (Note 8). As of June 30,
1999, the estimated remaining aggregate abandonment costs to be incurred for all
of the Trust's properties totaled $9.5 million net to the Trust, of which all
has been withheld from distributions to Unit holders. Any adjustments to the
estimated abandonment costs or variances will be taken into account in computing
future Net Proceeds.
For the past several years, 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
--13--
<PAGE> 14
Trustee, in accordance with the Trust Indenture, established a $2.4 million
Trust administrative expense reserve to pay such expenses (Note 6), of which
$1.1 million remained at June 30, 1999.
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 with the Securities and Exchange
Commission during the second quarter of 1999.
--14--
<PAGE> 15
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: Chase Bank of Texas, National
Association,
Trustee
By:/s/ PETE FOSTER
---------------------------------------------
PETE FOSTER
SENIOR VICE PRESIDENT AND TRUST OFFICER
</TABLE>
Date: August 16, 1999
--15--
<PAGE> 16
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------ -----------
<C> <S>
27 Financial Data Schedule
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> JUN-30-1999
<CASH> 1,091,606
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 1,091,606
<PP&E> 189,875,741
<DEPRECIATION> (189,875,741)
<TOTAL-ASSETS> 1,091,606
<CURRENT-LIABILITIES> 1,091,606
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 1,091,606
<SALES> 0
<TOTAL-REVENUES> 0
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 0
<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-BASIC> 0
<EPS-DILUTED> 0
</TABLE>
