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 QUARTER ENDED JUNE 30, 1994
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER 1-7667
SANTA FE ENERGY RESOURCES, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 36-2722169
(State of Incorporation) (I.R.S. Employer Identification No.)
1616 SOUTH VOSS, SUITE 1000
HOUSTON, TEXAS 77057
(Address of principal executive offices, including zip code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (713) 783-2401
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 / /
Shares of Common Stock outstanding at August 1, 1994 -- 89,991,169
<PAGE>
PART I -- FINANCIAL STATEMENTS
PAGE
----
Consolidated Statement of Operations
Three Months and Six Months Ended
June 30, 1994 and 1993------------- 2
Consolidated Balance Sheet
June 30, 1994 and December 31,
1993------------------------------- 3
Consolidated Statement of Cash Flows
Three Months and Six Months Ended
June 30, 1994 and 1993------------- 4
Consolidated Statement of
Shareholders' Equity
Six Months Ended June 30, 1994 and
1993------------------------------- 5
Notes to Consolidated Financial
Statements------------------------- 6
Management's Discussion and Analysis
of Financial Condition
and Results of Operations---------- 11
1
<PAGE>
SANTA FE ENERGY RESOURCES, INC.
CONSOLIDATED STATEMENT OF OPERATIONS (UNAUDITED)
(IN MILLIONS OF DOLLARS, EXCEPT PER SHARE DATA)
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
----------------- ----------------
1994 1993 1994 1993
------- ------ ------ ------
Revenues
Crude oil and liquids------------ $ 74.8 $ 86.1 $133.4 $166.6
Natural gas---------------------- 21.2 24.3 49.3 52.9
Natural gas systems-------------- -- 2.4 -- 5.4
Crude oil marketing and
trading------------------------ 3.0 2.1 5.7 4.4
Other---------------------------- 0.7 1.4 1.6 2.3
------ ------ ------ ------
99.7 116.3 190.0 231.6
------ ------ ------ ------
Costs and Expenses
Production and operating--------- 37.7 41.6 78.3 84.3
Oil and gas systems and
pipelines---------------------- -- 1.1 -- 2.2
Exploration, including dry hole
costs-------------------------- 4.9 7.0 9.9 14.1
Depletion, depreciation and
amortization------------------- 30.5 37.0 62.6 74.6
General and administrative------- 6.9 7.1 14.5 14.1
Taxes (other than income)-------- 6.3 7.1 13.7 14.2
Restructuring charges------------ -- -- 7.0 --
Loss (gain) on disposition of
oil and gas properties---------- 0.6 -- (8.8) 0.7
------ ------ ------ ------
86.9 100.9 177.2 204.2
------ ------ ------ ------
Income from Operations--------------- 12.8 15.4 12.8 27.4
Interest income------------------ 0.7 0.5 0.9 1.7
Interest expense----------------- (10.1) (12.7) (20.4) (26.4)
Interest capitalized------------- 0.9 1.0 1.8 2.1
Other income (expense)----------- 3.2 (0.3) 4.1 (0.5)
------ ------ ------ ------
Income (Loss) Before Income Taxes---- 7.5 3.9 (0.8) 4.3
Income tax benefit (expense)----- (3.4) 0.1 2.4 (0.7)
------ ------ ------ ------
Net Income--------------------------- 4.1 4.0 1.6 3.6
Preferred dividend
requirement-------------------- (2.5) (1.7) (4.3) (3.5)
------ ------ ------ ------
Earnings (Loss) Attributable to
Common Shares---------------------- $ 1.6 $ 2.3 $ (2.7) $ 0.1
====== ====== ====== ======
Earnings (Loss) Attributable to
Common Shares Per Share------------ $ 0.02 $ 0.02 $(0.03) $ --
====== ====== ====== ======
Weighted Average Number of Shares
Outstanding (in millions)---------- 90.0 89.7 89.9 89.7
====== ====== ====== ======
The accompanying notes are an integral part of these financial statements.
2
<PAGE>
SANTA FE ENERGY RESOURCES, INC.
CONSOLIDATED BALANCE SHEET
(IN MILLIONS OF DOLLARS)
JUNE 30, DECEMBER 31,
1994 1993
----------- -----------
(UNAUDITED)
ASSETS
Current Assets
Cash and cash equivalents-------- $ 63.4 $ 4.8
Accounts receivable-------------- 79.9 87.4
Inventories---------------------- 8.6 8.7
Assets held for sale------------- 0.9 59.5
Other current assets------------- 9.0 12.2
--------- ---------
161.8 172.6
--------- ---------
Investment in Hadson Corporation----- 58.3 56.2
--------- ---------
Properties and Equipment, at cost
Oil and gas (on the basis of
successful efforts
accounting)-------------------- 2,091.2 2,064.3
Other---------------------------- 28.0 27.3
--------- ---------
2,119.2 2,091.6
Accumulated depletion,
depreciation, amortization and
impairment--------------------- (1,300.3) (1,258.9)
--------- ---------
818.9 832.7
--------- ---------
Other Assets
Receivable under gas balancing
arrangements------------------- 3.8 3.9
Other---------------------------- 11.5 11.5
--------- ---------
15.3 15.4
--------- ---------
$ 1,054.3 $ 1,076.9
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Accounts payable----------------- $ 73.5 $ 93.5
Interest payable----------------- 8.4 10.2
Current portion of long-term
debt--------------------------- 3.8 44.3
Other current liabilities-------- 24.1 18.1
--------- ---------
109.8 166.1
--------- ---------
Long-Term Debt----------------------- 355.6 405.4
--------- ---------
Deferred Revenues-------------------- 7.2 8.6
--------- ---------
Other Long-Term Obligations---------- 44.7 48.8
--------- ---------
Deferred Income Taxes---------------- 42.9 44.4
--------- ---------
Commitments and Contingencies
(Note 6)---------------------------- -- --
--------- ---------
7% Convertible Preferred Stock------- 80.0 80.0
--------- ---------
Shareholders' Equity
Preferred stock------------------ -- --
$.732 Series A convertible
preferred stock---------------- 91.4 --
Common stock--------------------- 0.9 0.9
Paid-in capital------------------ 498.6 496.9
Unamortized restricted stock
awards------------------------- -- (0.1)
Accumulated deficit-------------- (176.5) (173.8)
Foreign currency translation
adjustment--------------------- (0.3) (0.3)
--------- ---------
414.1 323.6
--------- ---------
$ 1,054.3 $ 1,076.9
========= =========
The accompanying notes are an integral part of these financial statements.
3
<PAGE>
SANTA FE ENERGY RESOURCES, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED)
(IN MILLIONS OF DOLLARS)
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------ ----------------
1994 1993 1994 1993
-------- ------- ------ ------
Operating Activities:
Net income----------------------- $ 4.1 $ 4.0 $ 1.6 $ 3.6
Adjustments to reconcile net
income (loss) to net cash
provided by operating
activities:
Depletion, depreciation and
amortization--------------- 30.5 37.0 62.6 74.6
Restructuring charges-------- -- -- 1.0 --
Deferred income taxes-------- 2.0 (2.1) (1.4) (2.5)
Net loss (gain) on
disposition of properties-- 0.6 -- (8.8) 0.7
Exploratory dry hole
costs---------------------- 1.7 1.2 2.3 2.5
Other------------------------ 0.4 1.3 0.3 2.0
Changes in operating assets and
liabilities:
Decrease (increase) in
accounts receivable-------- (11.3) 1.4 (2.3) 3.7
Decrease (increase) in income
tax refund receivable------ -- -- -- 16.2
Decrease (increase) in
inventories---------------- 1.1 (2.2) 0.1 (6.9)
Increase (decrease) in
accounts payable----------- (12.7) (9.3) (9.9) (12.7)
Increase (decrease) in
interest payable----------- 7.6 8.3 (1.8) (0.6)
Increase (decrease) in income
taxes payable-------------- 1.3 (0.8) 1.2 0.5
Net change in other assets
and liabilities------------ 7.9 2.3 2.6 1.6
------ ----- ------ ------
Net Cash Provided by Operating
Activities------------------------- 33.2 41.1 47.5 82.7
------ ----- ------ ------
Investing Activities:
Capital expenditures, including
exploratory dry hole costs----- (29.1) (24.7) (59.6) (54.7)
Acquisitions of producing
properties, net of related
debt--------------------------- (0.6) (0.1) (1.2) (4.8)
Net proceeds from sales of
properties--------------------- 57.2 0.2 77.5 7.6
Increase in partnership interest
due to reinvestment------------ -- (0.5) -- (1.0)
------ ----- ------ ------
Net Cash (Used in) Provided by
Investing Activities--------------- 27.5 (25.1) 16.7 (52.9)
------ ----- ------ ------
Financing Activities:
Net proceeds from issuance of 11%
senior subordinated debentures
due 2004----------------------- 96.1 -- 96.1 --
Net proceeds from issuance of
$.732 Series A convertible
preferred stock---------------- 91.4 -- 91.4 --
Net change in revolving credit
agreement---------------------- (79.0) (62.0) (50.0) (62.0)
Principal payments on long-term
borrowings--------------------- (107.3) (5.1) (139.6) (35.2)
Cash dividends paid-------------- (1.7) (5.4) (3.5) (10.7)
------ ----- ------ ------
Net Cash Used in Financing
Activities------------------------- (0.5) (72.5) (5.6) (107.9)
------ ----- ------ ------
Net Increase (Decrease) in Cash and
Cash Equivalents------------------- 60.2 (56.5) 58.6 (78.1)
Cash and Cash Equivalents at
Beginning of Period---------------- 3.2 62.2 4.8 83.8
------ ----- ------ ------
Cash and Cash Equivalents at End of
Period----------------------------- $ 63.4 $ 5.7 $ 63.4 $ 5.7
====== ===== ====== ======
The accompanying notes are an integral part of these financial statements.
4
<PAGE>
<TABLE>
SANTA FE ENERGY RESOURCES, INC.
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY (UNAUDITED)
(SHARES AND DOLLARS IN MILLIONS)
<CAPTION>
$.732
SERIES A FOREIGN
CONVERTIBLE UNAMORTIZED CURRENCY
PREFERRED STOCK COMMON STOCK RESTRICTED TRANSLA-
--------------- --------------- PAID-IN STOCK ACCUMULATED TION
SHARES AMOUNT SHARES AMOUNT CAPITAL AWARDS DEFICIT ADJUSTMENT
------ ------ ------ ------ ------- ------ ------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1993--------- -- $ -- 89.8 $0.9 $496.9 $(0.1) $(173.8) $(0.3)
Issuance of common stock----------- -- -- 0.2 -- 1.7 -- -- --
Issuance of preferred stock-------- 10.7 91.4 -- -- -- -- -- --
Amortization of restricted stock
awards---------------------------- -- -- -- -- -- 0.1 -- --
Net income------------------------- -- -- -- -- -- -- 1.6 --
Dividends declared----------------- -- -- -- -- -- -- (4.3) --
---- ----- ---- ---- ------ --- ------- -----
Balance at June 30, 1994------------- 10.7 $91.4 90.0 $0.9 $498.6 $ -- $(176.5) $(0.3)
==== ===== ==== ==== ====== ===== ======= =====
Balance at December 31, 1992--------- -- -- 89.5 $0.9 $494.3 $(0.4) $ (78.0) $(0.2)
Issuance of common stock----------- -- -- 0.2 -- 2.1 -- -- --
Amortization of restricted
stock awards---------------------- -- -- -- -- -- 0.2 -- --
Foreign currency translation
adjustment------------------------ -- -- -- -- -- -- -- (0.1)
Net income------------------------- -- -- -- -- -- -- 3.6 --
Dividends declared----------------- -- -- -- -- -- -- (10.7) --
---- ----- ---- ---- ------ ----- ------- -----
Balance June 30, 1993---------------- -- $ -- 89.7 $0.9 $496.4 $(0.2) $ (85.1) $(0.3)
==== ===== ==== ==== ====== ===== ======= =====
</TABLE>
TOTAL
SHAREHOLDERS'
EQUITY
-------------
Balance at December 31, 1993--------- $323.6
Issuance of common stock----------- 1.7
Issuance of preferred stock-------- 91.4
Amortization of restricted stock
awards---------------------------- 0.1
Net income------------------------- 1.6
Dividends declared----------------- (4.3)
------
Balance at June 30, 1994------------- $414.1
======
Balance at December 31, 1992--------- $416.6
Issuance of common stock----------- 2.1
Amortization of restricted
stock awards---------------------- 0.2
Foreign currency translation
adjustment------------------------ (0.1)
Net income------------------------- 3.6
Dividends declared----------------- (10.7)
------
Balance June 30, 1993---------------- $411.7
======
The accompanying notes are an integral part of these financial statements.
5
<PAGE>
SANTA FE ENERGY RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(1) ACCOUNTING POLICIES
The unaudited consolidated financial statements of Santa Fe Energy
Resources, Inc. ('Santa Fe' or the 'Company') reflect, in the opinion of
management, all adjustments, consisting only of normal and recurring
adjustments, necessary to present fairly the Company's financial position at
June 30, 1994 and the Company's results of operations and cash flows for the
three-month and six-month periods ended June 30, 1994 and 1993. Interim period
results are not necessarily indicative of results of operations or cash flows
for a full-year period.
These financial statements and the notes thereto should be read in
conjunction with the Company's annual report on Form 10-K for the year ended
December 31, 1993.
(2) CORPORATE RESTRUCTURING PROGRAM
In the fourth quarter of 1993 the Company adopted a corporate restructuring
program which includes (i) the concentration of capital spending in the
Company's core operating areas; (ii) the disposition of non-core assets; (iii)
the elimination of the $0.04 per share quarterly common stock dividend; and (iv)
an evaluation of the Company's capital and cost structures.
The Company's non-core asset disposition program includes the sale of its
natural gas gathering and processing assets to Hadson Corporation, the sale to
Vintage Petroleum, Inc. of certain southern California and Gulf Coast oil and
gas producing properties and the sale to Bridge Oil (U.S.A.) Inc. of certain
Mid-Continent and Rocky Mountain oil and gas producing properties and
undeveloped acreage. Based on the evaluation of its capital and cost structures,
the Company (i) implemented a cost reduction program which included the
reduction of its salaried work force by approximately 20%, an improvement in the
efficiency of its information systems and reductions in other general and
administrative and production and operating costs and (ii) issued $100 million
of 11% senior subordinated debentures and 10,700,000 shares of $.732 Series A
convertible preferred stock and used a portion of the proceeds to retire certain
of its long-term debt (see Note 3).
In implementing the corporate restructuring program, in 1993 the Company
recorded restructuring charges of $38.6 million comprised of (i) losses on
property dispositions of $27.8 million; (ii) long-term debt repayment penalties
of $8.6 million; and (iii) accruals for certain personnel benefits and related
costs of $2.2 million. In the first quarter of 1994 the Company recorded
additional restructuring charges of $7.0 million comprised of severance,
benefits and relocation expenses associated with the cost reduction program.
In the second quarter of 1994 the Company substantially completed the
restructuring program as it relates to the refinancing of long-term debt. The
actual costs incurred in the refinancing were approximately $3.2 million below
the $8.6 million accrued in the fourth quarter of 1994, primarily due to the
increase in interest rates and the passage of time from December 31, 1993 to the
date of the refinancing in May 1994 (see Note 3). The effect of the reversal of
the overaccrued costs has been offset by the accrual of prepayment penalties
associated with certain other long-term debt which is anticipated to be retired
prior to maturity.
6
(3) ISSUANCE OF DEBENTURES AND CONVERTIBLE PREFERRED STOCK
In May 1994, in concurrent public offerings, the Company issued $100.0
million of 11% Senior Subordinated Debentures due 2004 (the 'Debentures') and
10,700,000 shares of $.732 Series A Convertible Preferred Stock (the 'Series A
Preferred'). The net proceeds from the offerings, $187.5 million after deducting
related costs and expenses, were used to retire $132.3 million of existing long-
term debt and to pay $6.5 million in accrued interest and prepayment penalties
due upon the retirement of such debt and the remaining $48.7 million was used
for working capital purposes.
The Debentures were issued for 99.266% of face value and the Company
received total proceeds of $96.1 million after deducting related costs and
expenses of $3.2 million. The Debentures, which mature May 15, 2004, are not
redeemable prior to May 15, 1999 and may be redeemed after such date at the
option of the Company at prices set forth in the indenture for the Debentures.
Under certain circumstances the Company may be required to redeem the Debentures
for 101% of the principal amount. The Debentures will be general unsecured
subordinated obligations of the Company.
The Series A Preferred was issued at $8.875 per share and the Company
received total proceeds of $91.4 million after deducting related costs and
expenses of $3.6 million. Each share of Series A Preferred mandatorily converts
into one share of common stock on May 15, 1998 and the Company has the option to
redeem the shares, in whole or in part, on or after May 15, 1997 and prior to
May 15, 1998 at prices set forth in the certificate of designation for the
Series A Preferred, payable in common stock. Each share of Series A Preferred is
convertible at the option of the holder into 0.8474 shares of common stock at
any time prior to May 15, 1998.
The Series A Preferred ranks prior to common stock both as to payment of
dividends and distribution of assets upon liquidation. The holders of Series A
Preferred are entitled to receive cumulative preferential dividends, accruing at
the rate per share of $0.732 per annum ($0.183 per quarter) payable quarterly in
arrears. The first dividend payment will be for the period from the date of
issue to August 14, 1994, payable on August 15, 1994.
After the issuance of the Debentures and the Series A Preferred and the
subsequent debt retirement, the Company's long-term debt at June 30, 1994
(including amounts due within one year) consisted of (in millions of dollars):
Senior Notes----------------------------------- 245.0
Debentures------------------------------------- 99.3(a)
Note Payable to Bank--------------------------- 15.1
-----
359.4
=====
--------
(a) Net of original issue discount, amount due upon maturity $100.0
million.
Aggregate total maturities of long-term debt are as follows: 1994 -- $3.8
million; 1995 -- $5.2 million; 1996 -- $6.1 million; 1997 and 1998 -- $35.0
million per year; 1999 to 2003 -- $25.0 million per year; 2004 -- $125.0
million; and 2005 -- $25.0 million.
7
(4) STATEMENT OF CASH FLOWS
The Company made interest and income tax payments as follows (in millions of
dollars):
1994 1993
---- ----
Three Months Ended June 30
Interest payments---------------- 7.3(a) 3.4
Income tax payments-------------- 0.1 2.6
Six Months Ended June 30
Interest payments---------------- 28.5(a) 24.9
Income tax payments-------------- 0.9 3.4
--------
(a) Includes $6.5 million in prepayment penalties and accrued interest
paid upon the retirement of certain long-term debt (see Note 3).
(5) INVESTMENT IN HADSON CORPORATION
The following table summarizes the Company's investment in Hadson
Corporation ('Hadson') and the changes in such investment during the six months
ended June 30, 1994 (in millions of dollars):
INVESTMENT IN
-------------------
PREFERRED COMMON
STOCK STOCK TOTAL
--------- ------ -----
Investment at December 31, 1993------ 48.7 7.5 56.2
Preferred dividends, paid in-kind---- 3.0 -- 3.0
Equity in loss attributable to common
shares----------------------------- -- (0.9) (0.9)
------- ----- -----
Investment at June 30, 1994---------- 51.7 6.6 58.3
======= ===== =====
The following table summarizes Hadson's results of operations for the
three-month and six-month periods ended June 30, 1994 (in millions of dollars):
THREE MONTHS SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
1994 1994
-------------- --------------
Revenues----------------------------- 178.5 371.7
Expenses----------------------------- (177.9) (370.7)
------ ------
Income before income taxes----------- 0.6 1.0
Income taxes------------------------- (0.1) (0.1)
------ ------
Net income--------------------------- 0.5 0.9
Preferred dividend requirement------- (1.4) (2.8)
------ ------
Loss attributable to common
shares----------------------------- (0.9) (1.9)
====== =====
(6) COMMITMENTS AND CONTINGENCIES
NATURAL GAS HEDGING PROGRAM
In the third quarter of 1992 the Company initiated a hedging program with
respect to its sales of natural gas. The Company has used various instruments
whereby monthly settlements are based on the differences between the price or
range of prices specified in the instruments and the settlement price of certain
natural gas futures contracts quoted on the New York Mercantile Exchange. In
instances where the applicable settlement price is less than the price specified
in the contract, the Company receives a settlement based on the difference; in
instances where the applicable settlement price is higher than the specified
prices the Company pays an amount based on the difference. The instruments
utilized by the Company differ from futures contracts in that there is no
contractual
8
obligation which requires or allows for the future delivery of the product. For
the three months ended June 30, 1994 and 1993, hedges resulted in a reduction in
natural gas revenues of $0.6 million and $4.0 million, respectively, and for the
six months ended June 30, 1994 and 1993, hedges resulted in a reduction in
natural gas revenues of $0.9 million and $4.8 million, respectively.
The Company has open natural gas hedging contracts covering approximately
2.8 Bcf during the period July through September 1994. The 'approximate
break-even price' (the average of the monthly settlement prices of the
applicable futures contracts which would result in no settlement being due to or
from the Company) with respect to such contracts is approximately $1.83 per Mcf.
The Company has no other outstanding natural gas hedging instruments.
ENVIRONMENTAL REGULATION
Federal, state and local laws and regulations relating to environmental
quality control affect the Company in all of its oil and gas operations. The
Company has been identified as one of over 250 potentially responsible parties
('PRPs') at a superfund site in Los Angeles County, California. The site was
operated by a third party as a waste disposal facility from 1948 until 1983. The
Environmental Protection Agency ('EPA') is requiring the PRPs to undertake
remediation of the site in several phases, which include site monitoring and
leachate control, gas control and final remediation. In 1989, the EPA and a
group of the PRPs entered into a consent decree covering the site monitoring and
leachate control phases of remediation. The Company is a member of the group
that is responsible for carrying out this first phase of work, which is expected
to be completed in five to eight years. The maximum liability of the group,
which is joint and several for each member of the group, for the first phase is
$37.0 million, of which the Company's share is expected to be approximately $2.4
million ($1.3 million after recoveries from working interest participants in the
unit at which the wastes were generated) payable over the period that the phase
one work is performed. The EPA and a group of PRPs of which the Company is a
member have also entered into a subsequent consent decree with respect to the
second phase of work (gas control). The liability of this group has not been
capped, but is estimated to be $130.0 million. The Company's share of costs of
this phase, however, is expected to be approximately of the same magnitude as
that of the first phase because more parties are involved in the settlement. The
Company has provided for costs with respect to the first two phases, but it
cannot currently estimate the cost of any subsequent phases of work or final
remediation which may be required by the EPA.
In 1989, Adobe received requests from the EPA for information pursuant to
Section 104(e) of CERCLA with respect to the D. L. Mud and Gulf Coast Vacuum
Services superfund sites located in Abbeville, Louisiana. The EPA has issued its
record of decision at the Gulf Coast Site and on February 9, 1993 the EPA issued
to all PRP's at the site a settlement order pursuant to Section 122 of CERCLA.
Earlier, an emergency order pursuant to Section 106 of CERLA was issued on
December 11, 1992, for purposes of containment due to the Louisiana rainy
season. On December 15, 1993 the Company entered into a sharing agreement with
other PRP'S to participate in the final remediation of the Gulf Coast site. The
Company's share of the remediation is approximately $600,000 and includes its
proportionate share of those PRPs who do not have the financial resources to
provide their share of the work at the site. A former site owner has already
conducted remedial activities at the D. L. Mud Site under a state agency
agreement. The extent, if any, of any further necessary remedial activity at the
D. L. Mud Site has not been finally determined.
The Company has received a request for information from the EPA regarding
the Lee Acres Landfill CERCLA site in New Mexico. The Company advised the EPA
that it was not able to locate any information indicating that it had used that
facility. The Company is investigating its potential connection, if any, to this
facility and is not able to estimate its share of costs, if any, for the site at
this time.
9
On April 4, 1994, the Company received a request from the EPA for
information pursuant to Section 104(a) of CERCLA and a letter ordering the
Company and seven other PRPs to negotiate with the EPA regarding implementation
of a remedial plan for a site located in Santa Fe Springs, California. The
Company owned the property on which the site is located from 1921 to 1932. After
the Company sold the property, hazardous wastes were allegedly disposed there by
a third party who operated a disposal site. The EPA estimates that the total
past and future costs for remediation will approximate $9 million. The Company
believes that it has valid defenses to liability. While it is still
investigating its exposure, if any, for the remedial costs, the Company does not
believe that any such costs would be material.
EMPLOYMENT AGREEMENTS
The Company has entered into employment agreements with certain key
employees. The initial term of each agreement expired on December 31, 1990 and,
on January 1, 1991 and beginning on each January 1 thereafter, is automatically
extended for one-year periods, unless by September 30 of any year the Company
gives notice that the agreement will not be extended. The term of the agreements
is automatically extended for 24 months following a change of control. The
consummation of the merger of Adobe Resources into the Company in 1992
constituted a change of control as defined in the agreements.
In the event that following a change of control employment is terminated for
reasons specified in the agreements, the employee would receive: (i) a lump sum
payment equal to two years' base salary; (ii) the maximum possible bonus under
the terms of the Company's incentive compensation plan; (iii) a lapse of
restrictions on any outstanding restricted stock grants and full payout of any
outstanding Phantom Units; (iv) cash payment for each outstanding stock option
equal to the amount by which the fair market value of the common stock exceeds
the exercise price of the option; and, (v) life, disability and health benefits
for a period of up to two years. In addition, payments and benefits under
certain employment agreements are subject to further limitations based on
certain provisions of the Internal Revenue Code.
OTHER MATTERS
In the fourth quarter of 1994 the Company signed a seven-year gas sales
contract with Hadson, under the terms of which Hadson will market substantially
all of the Company's domestic natural gas production at market prices as defined
by published monthly indices for relevant production locations.
The Company has certain long-term contracts, which are being administered by
Hadson, ranging up to fifteen years for the supply and transportation of
approximately 20 million cubic feet per day of natural gas. In the aggregate,
these contracts involve a minimum commitment on the part of the Company of
approximately $10 million per year.
There are other claims and actions, including certain other environmental
matters, pending against the Company. In the opinion of management, the amounts,
if any, which may be awarded in connection with any of these claims and actions
could be significant to the results of operations of any period but would not be
material to the Company's consolidated financial position.
10
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
For the six months ended June 30, 1994 the Company reported a loss to common
shares of $2.7 million, or $0.03 per share. The loss includes a $7.0 million
restructuring charge related to a cost reduction program implemented by the
Company. At June 30, 1994 the Company's long-term debt totalled $359.4 million,
$90.3 million lower than at December 31, 1993, after the refinancing in the
second quarter of 1994 which reduced required debt amortization in the near-term
and provided additional financial flexibility. See -- Liquidity and Capital
Resources.
GENERAL
As an independent oil and gas producer, the Company's results of operations
are dependent upon the difference between the prices received for oil and gas
and the costs of finding and producing such resources. A substantial portion of
the Company's crude oil production is from long-lived fields where EOR methods
are being utilized. The market price of the heavy (i.e., low gravity, high
viscosity) and sour (i.e., high sulfur content) crude oils produced in these
fields is lower than sweeter, light (i.e., low sulfur and low viscosity) crude
oils, reflecting higher transportation and refining costs. The lower price
received for the Company's domestic heavy and sour crude oil is reflected in the
average sales price of the Company's domestic crude oil and liquids (excluding
the effect of hedging transactions) for the first six months of 1994 of $10.96
per barrel, compared to $14.77 per barrel for West Texas Intermediate crude oil
(an industry posted price generally indicative of spot prices for sweeter light
crude oil). In addition, the lifting costs of heavy crude oils are generally
higher than the lifting costs of light crude oils. As a result of these narrower
margins, even relatively modest changes in crude oil prices may significantly
affect the Company's revenues, results of operations, cash flows and proved
reserves. In addition, prolonged periods of high or low oil prices may have a
material effect on the Company's financial position.
Crude oil prices are subject to significant changes in response to
fluctuations in the domestic and world supply and demand and other market
conditions as well as the world political situation as it affects OPEC, the
Middle East and other producing countries. The period since mid-1990 has
included some of the largest fluctuations in oil prices in recent times,
primarily due to the political unrest in the Middle East. The actual average
sales price (unhedged) received by the Company ranged from a high of $23.92 per
barrel in the fourth quarter of 1990 to a low of $10.00 per barrel for the first
quarter of 1994. The Company's average sales price for its 1993 oil production
was $12.93 per barrel. Based on operating results for the second quarter of
1994, the Company estimates that on an annualized basis a $1.00 per barrel
increase or decrease in average domestic crude oil sales prices would result in
a corresponding $20.5 million change in income from operations and a $15.4
million change in cash flow from operating activities. The Company also
estimates that on an annualized basis a $0.10 per Mcf increase or decrease in
average domestic natural gas sales prices would result in a corresponding $4.8
million change in income from operations and a $3.6 million change in cash flow
from operating activities. The foregoing estimates do not give effect to changes
in any other factors, such as the effect of the Company's hedging program or
depreciation and depletion, that would result from a change in oil and natural
gas prices.
In the third quarter of 1992 a hedging program was initiated with respect to
the Company's sales of natural gas. See Note 6 to the Consolidated Financial
Statements.
In November 1992, 5,725,000 Depository Units consisting of interests in
Santa Fe Energy Trust (the 'Trust') were sold in a public offering. For any
calendar quarter ending on or prior to December 21, 2002, the Trust will receive
additional royalty payments ('Support Payments') to the extent necessary to
distribute $0.40 per Depository Unit per quarter. The source of the Support
Payments, if needed, will be limited to the Company's remaining royalty interest
in certain of the properties conveyed to the Trust. The aggregate amount of the
Support Payments will be limited to $20.0 million on a revolving basis. The
Company was required to make Support Payments of $362,000 and $506,000 with
respect to the distributions made by the Trust for operations during the
quarters ended December 31, 1993 and March 31, 1994, respectively. Due to the
high level of drilling and development expenditures forecast for the remainder
of 1994 on properties included in the Trust and
11
dependent on other factors, such as sales volumes and prices and the level of
operating costs incurred, proceeds payable to the Trust with respect to
operations during such period may not be sufficient to make distributions of
$0.40 per Depository Unit per quarter. In such instances, the Company would be
required to make additional Support Payments, the amount of which cannot be
estimated at this time.
RESULTS OF OPERATIONS
REVENUES
The following table reflects the components of the Company's crude oil and
liquids and natural gas revenues:
THREE MONTHS SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
-------------- --------------
1994 1993 1994 1993
----- ----- ----- -----
Crude Oil and Liquids
Revenues ($/Millions)
Sales
Domestic
California Heavy------------- 39.6 43.1 68.8 82.1
Other------------------------ 24.4 35.2 45.5 70.2
----- ----- ----- -----
64.0 78.3 114.3 152.3
Argentina---------------------- 3.1 4.3 5.4 7.0
Indonesia---------------------- 8.7 6.4 15.5 12.8
Net Profits Payments------------- (1.0) (2.9) (1.8) (5.5)
----- ----- ----- -----
74.8 86.1 133.4 166.6
===== ===== ===== =====
Volumes (MBbls/day)
Domestic
California Heavy--------------- 38.7 36.8 38.2 36.9
Other-------------------------- 18.6 23.4 19.4 23.7
----- ----- ----- -----
57.3 60.2 57.6 60.6
Argentina------------------------ 2.5 3.0 2.5 2.5
Indonesia------------------------ 6.2 4.1 5.9 4.2
----- ----- ----- -----
66.0 67.3 66.0 67.3
===== ===== ===== =====
Sales Prices ($/Bbl)
Domestic
California Heavy--------------- 11.26 12.88 9.95 12.31
Other-------------------------- 14.39 16.57 12.94 16.40
Total-------------------------- 12.28 14.32 10.96 13.90
Argentina------------------------ 13.80 15.58 12.02 15.53
Indonesia------------------------ 15.42 16.77 14.64 16.51
Total---------------------------- 12.63 14.52 11.33 14.12
Natural Gas
Revenues ($/Millions)
Sales---------------------------- 22.9 30.2 52.2 61.5
Hedging-------------------------- (0.6) (4.0) (0.9) (4.8)
Net Profits Payments------------- (1.1) (1.9) (2.0) (3.8)
----- ----- ----- -----
21.2 24.3 49.3 52.9
===== ===== ===== =====
Volumes (MMcf/day)----------------- 138.4 161.0 146.9 169.4
Sales Prices ($/Mcf)
Unhedged------------------------- 1.82 2.06 1.96 2.01
Hedged--------------------------- 1.77 1.79 1.93 1.85
12
Total revenues declined 18% from $231.6 million in the first half of 1993 to
$190.0 million in the first half of 1994 with lower oil prices accounting for
approximately $31.2 million of the $41.6 million decrease. The average price
realized per barrel of oil in the first half of 1994 was $11.33, a 20% decrease
from the $14.12 realized in the first half of 1993. The sale of certain domestic
properties to Vintage Petroleum, Inc. ('Vintage') in the fourth quarter of 1993
and to Bridge Oil (U.S.A.) Inc. ('Bridge') in the second quarter of 1994
resulted in a decrease in oil revenues of approximately $11.0 million. Daily
average oil production in the first half of 1994 decreased approximately 1,300
barrels per day from the first half of 1993. The 3,800 barrel per day decrease
in oil production resulting from the sale of properties to Vintage and Bridge
was partially offset by an increase in production of California heavy crude of
1,300 barrels per day and an increase in Indonesian production of 1,700 barrels
per day. Natural gas production declined from 169.4 MMcf per day in the first
half of 1993 to 146.9 MMcf per day in the first half of 1993. Production for the
1993 period included a positive adjustment of approximately 8.1 MMcf per day
($3.2 million in revenues) related to production in prior periods from certain
nonoperated properties and the previously mentioned property sales resulted in a
reduction of approximately 17.1 MMcf per day ($6.2 million in revenues).
Total revenues declined 14% from $116.3 million in the second quarter of
1993 to $99.7 million in the second quarter of 1994 with lower oil prices
accounting for approximately $10.5 million of the $16.6 million decrease. The
average price realized per barrel of oil in the second quarter of 1994 was
$12.63, a 13% decrease from the $14.52 realized in the second quarter of 1993.
The sale of properties to Vintage and Bridge resulted in a decrease in oil
revenues of approximately $6.1 million. Daily average oil production in the
second quarter of 1994 decreased approximately 1,300 barrels per day from the
second quarter of 1993. The 4,300 barrel per day decrease in oil production
resulting from the sale of properties to Vintage and Bridge was essentially
offset by an increase in production of California heavy crude of 1,900 barrels
per day and an increase in Indonesian production of 2,100 barrels per day.
Natural gas production declined from 161.0 MMcf per day in the second quarter of
1993 to 138.4 MMcf per day in the second quarter of 1993 with the previously
mentioned property sales accounting for a reduction of approximately 25.6 MMcf
per day ($5.0 million in revenues) of the decrease.
COSTS AND EXPENSES
The following table sets forth, on the basis of the barrel of oil equivalent
('BOE') produced by the Company during the applicable period, certain of the
Company's costs and expenses (in dollars):
THREE MONTHS SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
-------------- --------------
1994 1993 1994 1993
---- ---- ---- ----
Production and operating costs per
BOE (a)----------------------------- 4.65 4.85 4.78 4.87
Exploration, including dry hole costs
per BOE---------------------------- 0.60 0.81 0.61 0.81
Depletion, depreciation and
amortization per BOE--------------- 3.76 4.32 3.82 4.32
General and administrative costs per
BOE-------------------------------- 0.86 0.84 0.89 0.82
Taxes other than income per BOE
(b)-------------------------------- 0.78 0.83 0.84 0.82
Interest, net, per BOE (c)----------- 1.06 1.31 1.08 1.31
- - --------
(a) Excluding related production, severance and ad valorem taxes.
(b) Includes production, severance and ad valorem taxes.
(c) Reflects interest expense less amounts capitalized and interest income.
Total costs and expenses for the first half of 1994 of $177.2 million were
13% lower than the $204.2 million reported for the first half of 1993. The
property sales to Vintage and Bridge resulted in reductions in production and
operating costs and depletion, depreciation and amortization ('DD&A') of $6.7
million and $4.7 million, respectively. The remainder of the decrease in DD&A is
primarily attributable to the effect of the property impairments taken in the
fourth quarter of 1993. Exploration expenses were down $4.2 million primarily
reflecting lower geological and geophysical
13
costs with respect to foreign operations and lower overhead. Costs and expenses
also included $7.0 million in restructuring charges (see -- Liquidity and
Capital Resources) and an $8.8 million gain on the sale of certain oil and gas
properties.
Total costs and expenses for the second quarter of 1994 of $86.9 million
were 14% lower than the $100.9 million reported for the second quarter of 1993.
The property sales to Vintage and Bridge resulted in reductions in production
and operating costs and DD&A of $3.6 million and $2.3 million, respectively. The
remainder of the decrease in DD&A is primarily attributable to the effect of the
property impairments taken in the fourth quarter of 1993. Exploration expenses
were down $2.1 million primarily reflecting lower geological and geophysical
costs with respect to foreign operations and lower overhead.
Interest expense for the first half of 1994 includes a first quarter credit
of $2.4 million reflecting adjustments to provisions made in prior periods with
respect to interest on certain federal income tax audit adjustments.
Other income (expense) for the first half of 1994 includes a $2.1 million
second quarter gain on the sale of the Company's interest in a publishing
company which was acquired in the Adobe merger in 1992, $3.0 million in dividend
income on Hadson Corporation ('Hadson') preferred stock (paid in-kind, $1.6
million of which relates to the second quarter) and a $0.9 million loss on the
Company's equity in Hadson common stock ($0.3 million of which relates to the
second quarter). Income taxes for the first half of 1994 includes a $3.0 million
first quarter credit reflecting the benefit of adjustments to provisions made in
prior periods with respect to certain federal income tax audit adjustments.
LIQUIDITY AND CAPITAL RESOURCES
Historically, the Company has generally funded capital and exploration
expenditures and working capital requirements from cash provided by operating
activities. Depending upon the future levels of operating cash flows, which are
significantly affected by oil and gas prices, the restrictions on additional
borrowings included in certain of the Company's debt agreements, together with
debt service requirements and dividends, may limit the cash available for future
exploration, development and acquisition activities. Net cash provided by
operating activities totaled $33.2 million in the second quarter of 1994 and
$47.5 million in the first half of 1994; net cash used in investing activities
(excluding proceeds from the sales of properties) in such periods totaled $29.7
million and $60.8 million, respectively.
The Company's cash flow from operating activities is a function of the
volumes of oil and gas produced from the Company's properties and the sales
prices realized therefor. Crude oil and natural gas are depleting assets. Unless
the Company replaces over the long term the oil and natural gas produced from
the Company's properties, the Company's assets will be depleted over time and
its ability to service and incur debt at constant or declining prices will be
reduced. The Company's cash flow from operating activities for the first half of
1993 reflected an average sales price for the Company's oil production of $14.12
per barrel and the Company's average sales price for oil production for the full
year 1993 was $12.93 per barrel. In the first half of 1994, the average sales
price for the Company's oil production was $11.33 per barrel. Although the
Company's average sales price for oil production improved from $10.00 per barrel
in the first quarter of 1994 to $12.63 in the second quarter of 1994, unless
additional improvement is seen during the remainder of 1994, the Company's cash
flow from operating activities for 1994 will be significantly lower than that
for 1993.
In the fourth quarter of 1993 the Company adopted a corporate restructuring
program which includes (i) the concentration of capital spending in the
Company's core operating areas, (ii) the disposition of non-core assets, (iii)
the elimination of the $0.04 per share quarterly Common Stock dividend and (iv)
an evaluation of the Company's capital and cost structures to examine ways to
increase flexibility and strengthen the Company's financial performance.
14
The Company's capital program will be concentrated in three domestic core
areas -- the Permian Basin in Texas and New Mexico, the offshore Gulf of Mexico
and the San Joaquin Valley of California -- as well as its productive areas in
Argentina and Indonesia. The domestic program includes exploration and
development activities in the Delaware and Cisco-Canyon formations in west Texas
and southeast New Mexico, a drilling program for the offshore Gulf of Mexico
natural gas properties and an infill drilling in the San Joaquin Valley of
California. Internationally, the program includes development of the Company's
Sierra Chata discovery in Argentina with gas sales expected to commence in early
1995 and the Salawati Basin Joint Venture in Indonesia.
Based on current market conditions, the Company has authorized up to $130
million of capital expenditures in 1994, a level which should allow the Company
to replace its estimated 1994 production, although no assurance can be given
regarding such replacement. The Company intends to continue to monitor its
capital expenditure program throughout the balance of 1994 and may, in response
to industry conditions, including, without limitation, prevailing oil and
natural gas prices and the outlook therefor, revise such program.
The Company's non-core asset disposition program includes the sale of its
natural gas gathering and processing assets to Hadson (completed in December
1993), the sale to Vintage of certain southern California and Gulf Coast oil and
gas producing properties (completed in November 1993) and the sale to Bridge of
certain Mid-Continent and Rocky Mountain oil and gas producing properties and
undeveloped acreage (completed in April 1994). In the first quarter of 1994, the
Company sold the remaining 575,000 Depositary Units which it held in the Trust
for $11.3 million and its interest in certain other oil and gas properties for
$8.3 million. As a result of the Vintage and Bridge dispositions, the Company
has sold properties having combined production during 1993 of 4.1 MBbls per day
of oil and 21.7 MMcf per day of natural gas and estimated proved reserves of
approximately 16.7 MMBOE.
As a result of the review of its cost structure the Company implemented a
cost reduction program that includes the reduction of its salaried work force by
approximately 20%, an improvement in the efficiency of its information systems
and reductions in other general and administrative costs. These measures,
together with the Company's on-going efforts to reduce production costs and the
recent sale of its higher cost, non-core properties, are designed to reduce
costs and expenses by approximately $30.0 million from the 1993 level (which
reduction includes approximately $5.0 million of non-recurring costs).
Approximately $10.0 million of the estimated cost reduction is expected to be in
production and operating costs. Substantially all of this cost reduction program
is expected to be implemented by year end 1994.
As a result of the review of its capital structure, in May 1994, in
concurrent public offerings, the Company issued $100.0 million of 11% Senior
Subordinated Debentures due 2004 (the 'Debentures') and 10,700,000 shares of
$.732 Series A Convertible Preferred Stock (the 'Series A Preferred'). The net
proceeds from the offerings, $187.5 million after deducting related costs and
expenses, were used to retire $132.3 million of existing long-term debt and to
pay $6.5 million in accrued interest and prepayment penalties due upon the
retirement of such debt and the remaining $48.7 million was used for working
capital purposes. The refinancing reduced required debt amortization in the
near-term and provided additional financial flexibility. See Note 3 to the
Consolidated Financial Statements.
In implementing the corporate restructuring program, in 1993 the Company
recorded restructuring charges of $38.6 million comprised of (i) losses on
property dispositions of $27.8 million; (ii) long-term debt repayment penalties
of $8.6 million; and (iii) accruals for certain personnel benefits and related
costs of $2.2 million. In the first quarter of 1994 the Company recorded
additional restructuring charges of $7.0 million comprised of severance,
benefits and relocation expenses associated with the cost reduction program.
In the second quarter of 1994 the Company substantially completed the
restructuring program as it relates to the refinancing of long-term debt. The
actual costs incurred in the refinancing were
15
approximately $3.2 million below the $8.6 million accrued in the fourth quarter
of 1994, primarily due to the increase in interest rates from December 31, 1993
to the date of the refinancing in May 1994. The effect of the reversal of the
overaccrued costs has been offset by the accrual of prepayment penalties
associated with certain other long-term debt which is anticipated to be retired
prior to maturity.
Effective March 16, 1994 the Company entered into an Amended and Restated
Revolving Credit Agreement (the 'Bank Facility') which consists of a five year
secured revolving credit agreement maturing December 31, 1998 ('Facility A') and
a three year unsecured revolving credit facility maturing December 31, 1996
('Facility B'). The aggregate borrowing limits under the terms of the Bank
Facility are $125.0 million (up to $90.0 million under Facility A and up to
$35.0 million under Facility B). Interest rates under the Bank Facility are tied
to LIBOR or the bank's prime rate with the actual interest rate reflecting
certain ratios based upon the Company's ability to repay its outstanding debt
and the value and projected timing of production of the Company's oil and gas
reserves. These and other similar ratios will also affect the Company's ability
to borrow under the Bank Facility and the timing and amount of any required
repayments and corresponding commitment reductions. At June 30, 1994, no amounts
were outstanding under the terms of Facility A and $8.8 million in letters of
credit were outstanding under the terms of Facility B.
The Company has three short-term uncommitted lines of credit totalling $45.0
million which are used to meet short-term cash needs. Interest rates on
borrowings under these lines of credit are typically lower than rates paid under
the Bank Facility. At June 30, 1994 no amounts were outstanding under these
lines of credit.
Certain of the Company's credit agreements and the indenture for the
Debentures restrict the Company's ability to take certain actions, including
covenants that restrict the Company's ability to incur additional indebtedness
and to pay dividends on its capital stock. Under the most restrictive of these
covenants, at June 30, 1994 the Company could incur up to $149.7 million of
additional indebtedness and pay dividends of up to $108.3 million on its
aggregate capital stock (including its common stock, 7% Convertible Preferred
Stock and Series A Preferred) with the amount payable on its common stock
limited to $50.0 million.
ENVIRONMENTAL MATTERS
Almost all phases of the Company's oil and gas operations are subject to
stringent environmental regulation by governmental authorities. Such regulation
has increased the costs of planning, designing, drilling, installing, operating
and abandoning oil and gas wells and other facilities. The Company has expended
significant financial and managerial resources to comply with such regulations.
Although the Company believes its operations and facilities are in general
compliance with applicable environmental regulations, risks of substantial costs
and liabilities are inherent in oil and gas operations. It is possible that
other developments, such as increasingly strict environmental laws, regulations
and enforcement policies or claims for damages to property, employees, other
persons and the environment resulting from the Company's operations, could
result in significant costs and liabilities in the future. As it has done in the
past, the Company intends to fund its cost of environmental compliance from
operating cash flows. See Note 6 to the Consolidated Financial Statements.
DIVIDENDS
Dividends on the Company's 7% Convertible Preferred Stock and Series A
Preferred are cumulative at an annual rate of $1.40 per share and $0.732 per
share, respectively. No dividends may be declared or paid with respect to the
Company's common stock if any dividends with respect to the convertible
preferred stock or Series A Preferred are in arrears. As part of the 1993
restructuring program, the Company eliminated the payment of its $0.04 per share
quarterly dividend on its common stock. The determination of the amount of
future cash dividends, if any, to be declared and paid on the Company's common
stock is in the sole discretion of the Company's Board of Directors
16
and will depend on dividend requirements with respect to the convertible
preferred stock, the Company's financial condition, earnings and funds from
operations, the level of capital and exploration expenditures, dividend
restrictions in financing agreements, future business prospects and other
matters the Board of Directors deems relevant.
PART II
OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
None
(b) Reports on Form 8-K
None
17
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Company
has duly caused this report to be signed on its behalf by the undersigned
thereunto duly authorized.
SANTA FE ENERGY RESOURCES, INC.
(Registrant)
By /s/ Michael J. Rosinski
--------------------------------
Michael J. Rosinski
Vice President and Chief
Financial Officer
(Principal Financial and
Accounting Officer)
Houston, Texas
August 11, 1994
18
