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 SEPTEMBER 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 November 1, 1994 -- 89,995,266
PART I FINANCIAL STATEMENTS
PAGE
-----
Consolidated Statement of Operations Three Months and Nine
Months Ended September 30, 1994 and 1993-------------------------- 2
Consolidated Balance Sheet September 30, 1994 and
December 31, 1993------------------------------------------------- 3
Consolidated Statement of Cash Flows Three Months and Nine
Months Ended September 30, 1994 and 1993-------------------------- 4
Consolidated Statement of Shareholders' Equity Nine Months
Ended September 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 NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------- ------------------
1994 1993 1994 1993
--------- --------- --------- -------
Revenues
Crude oil and liquids------------ $ 82.4 $ 73.2 $ 215.8 $ 239.8
Natural gas---------------------- 17.9 23.4 67.2 76.3
Natural gas systems-------------- -- 2.5 -- 7.9
Crude oil marketing and
trading------------------------ 3.0 2.9 8.7 7.3
Other---------------------------- 0.3 0.7 1.9 3.0
--------- --------- --------- ---------
103.6 102.7 293.6 334.3
--------- --------- --------- ---------
Costs and Expenses
Production and operating--------- 35.6 40.1 113.9 124.4
Oil and gas systems and
pipelines---------------------- -- 1.1 -- 3.3
Exploration, including dry hole
costs-------------------------- 5.6 9.2 15.5 23.3
Depletion, depreciation and
amortization------------------- 30.1 37.5 92.7 112.1
General and administrative------- 6.5 7.3 21.0 21.4
Taxes (other than income)-------- 6.4 6.3 20.1 20.5
Restructuring charges------------ -- -- 7.0 --
Loss (gain) on disposition of oil
and gas properties------------- 0.3 -- (8.5) 0.7
--------- --------- --------- ---------
84.5 101.5 261.7 305.7
--------- --------- --------- ---------
Income from Operations------------- 19.1 1.2 31.9 28.6
Interest income------------------ 0.9 7.1 1.8 8.8
Interest expense----------------- 1.2 (6.7) (19.2) (33.1)
Interest capitalized------------- 1.0 1.2 2.8 3.3
Other income (expense)----------- (4.0) (0.6) 0.1 (1.1)
--------- --------- --------- ---------
Income (Loss) Before Income Taxes-- 18.2 2.2 17.4 6.5
Income tax benefit (expense)----- (7.2) 0.2 (4.8) (0.5)
--------- --------- --------- ---------
Net Income------------------------- 11.0 2.4 12.6 6.0
Preferred dividend
requirement-------------------- (3.7) (1.8) (8.0) (5.3)
--------- --------- --------- ---------
Earnings (Loss) Attributable to
Common Shares-------------------- $ 7.3 $ 0.6 $ 4.6 $ 0.7
========= ========= ========= =========
Earnings (Loss) Attributable to
Common Shares Per Share---------- $ 0.08 $ 0.01 $ 0.05 $ 0.01
========= ========= ========= =========
Weighted Average Number of Shares
Outstanding (in millions)-------- 90.0 89.8 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)
SEPTEMBER 30, DECEMBER 31,
1994 1993
------------- ------------
(UNAUDITED)
ASSETS
Current Assets
Cash and cash equivalents-------- $ 69.4 $ 4.8
Accounts receivable-------------- 59.4 87.4
Inventories---------------------- 9.8 8.7
Assets held for sale------------- -- 59.5
Other current assets------------- 13.0 12.2
------------- ------------
151.6 172.6
------------- ------------
Investment in Hadson Corporation----- 58.9 56.2
------------- ------------
Properties and Equipment, at cost
Oil and gas (on the basis of
successful efforts
accounting)-------------------- 2,115.0 2,064.3
Other---------------------------- 30.1 27.3
------------- ------------
2,145.1 2,091.6
Accumulated depletion,
depreciation, amortization and
impairment--------------------- (1,321.3) (1,258.9)
------------- ------------
823.8 832.7
------------- ------------
Other Assets
Receivable under gas balancing
arrangements------------------- 4.3 3.9
Other---------------------------- 10.6 11.5
------------- ------------
14.9 15.4
------------- ------------
$ 1,049.2 $ 1,076.9
============= ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Accounts payable----------------- $ 76.9 $ 93.5
Interest payable----------------- 4.1 10.2
Current portion of long-term
debt--------------------------- 3.9 44.3
Other current liabilities-------- 24.9 18.1
------------- ------------
109.8 166.1
------------- ------------
Long-Term Debt----------------------- 350.4 405.4
------------- ------------
Deferred Revenues-------------------- 5.8 8.6
------------- ------------
Other Long-Term Obligations---------- 29.6 48.8
------------- ------------
Deferred Income Taxes---------------- 52.1 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-------------- (169.2) (173.8)
Foreign currency translation
adjustment--------------------- (0.2) (0.3)
------------- ------------
421.5 323.6
------------- ------------
$ 1,049.2 $ 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)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------------- ---------------------
1994 1993 1994 1993
---------- ---------- --------- ----------
<S> <C> <C> <C> <C>
Operating Activities:
Net income----------------------- $ 11.0 $ 2.4 $ 12.6 $ 6.0
Adjustments to reconcile net
income (loss) to net cash
provided by operating
activities:
Depletion, depreciation and
amortization--------------- 30.1 37.5 92.7 112.1
Restructuring charges-------- -- -- 1.0 --
Deferred income taxes-------- 9.1 3.1 7.7 0.6
Net loss (gain) on
disposition of properties-- 0.3 -- (8.5) 0.7
Exploratory dry hole
costs---------------------- 2.8 2.7 5.1 5.2
Other------------------------ 0.3 1.5 0.6 3.5
Changes in operating assets and
liabilities:
Decrease (increase) in
accounts receivable-------- 20.5 2.4 18.2 6.1
Decrease (increase) in income
tax refund receivable------ -- -- -- 16.2
Decrease (increase) in
inventories---------------- (1.2) (0.1) (1.1) (7.0)
Increase (decrease) in
accounts payable----------- 3.7 2.5 (6.2) (10.2)
Increase (decrease) in
interest payable----------- (4.3) (9.4) (6.1) (10.0)
Increase (decrease) in income
taxes payable-------------- (0.2) 0.8 1.0 1.3
Net change in other assets
and liabilities------------ (19.2) (7.0) (16.6) (5.4)
---------- ---------- --------- ----------
Net Cash Provided by Operating
Activities------------------------- 52.9 36.4 100.4 119.1
---------- ---------- --------- ----------
Investing Activities:
Capital expenditures, including
exploratory dry hole costs----- (39.2) (32.8) (98.8) (87.5)
Acquisitions of producing
properties, net of related
debt--------------------------- (0.2) (0.4) (1.4) (5.2)
Acquisition of Santa Fe Energy
Partners, L.P.----------------- -- (28.3) -- (28.3)
Net proceeds from sales of
properties--------------------- 1.1 0.2 78.6 7.8
Increase in partnership interest
due to reinvestment------------ -- (0.6) -- (1.6)
---------- ---------- --------- ----------
Net Cash Used in Investing
Activities------------------------- (38.3) (61.9) (21.6) (114.8)
---------- ---------- --------- ----------
Financing Activities:
Net proceeds from issuance of 11%
senior subordinated debentures
due 2004----------------------- -- -- 96.1 --
Net proceeds from issuance of
$.732 Series A convertible
preferred stock---------------- -- -- 91.4 --
Net change in revolving credit
agreement---------------------- -- 32.0 (50.0) (30.0)
Principal payments on long-term
borrowings--------------------- (5.1) (3.0) (144.7) (38.2)
Cash dividends paid-------------- (3.5) (5.3) (7.0) (16.0)
---------- ---------- --------- ----------
Net Cash (Used in) Provided by
Financing Activities--------------- (8.6) 23.7 (14.2) (84.2)
---------- ---------- --------- ----------
Net Increase (Decrease) in Cash and
Cash Equivalents------------------- 6.0 (1.8) 64.6 (79.9)
Cash and Cash Equivalents at
Beginning of Period---------------- 63.4 5.7 4.8 83.8
---------- ---------- --------- ----------
Cash and Cash Equivalents at End of
Period----------------------------- $ 69.4 $ 3.9 $ 69.4 $ 3.9
========== ========== ========= ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
4
<PAGE>
SANTA FE ENERGY RESOURCES, INC.
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY (UNAUDITED)
(SHARES AND DOLLARS IN MILLIONS)
<TABLE>
<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 -- --
Foreign currency translation
adjustment------------------------ -- -- -- -- -- -- -- 0.1
Net income------------------------- -- -- -- -- -- -- 12.6 --
Dividends declared----------------- -- -- -- -- -- -- (8.0) --
------ ------ ------ ------ ------- ----------- ----------- ----------
Balance at September 30, 1994---- 10.7 $91.4 90.0 $0.9 $ 498.6 $-- $ (169.2) $ (0.2)
====== ====== ====== ====== ======= =========== ========== ==========
Balance at December 31, 1992---- -- $-- 89.5 $0.9 $ 494.3 $ (0.4) $ (78.0) $ (0.2)
Issuance of common stock----------- -- -- 0.3 -- 2.3 (0.1) -- --
Amortization of restricted
stock awards---------------------- -- -- -- -- -- 0.3 -- --
Foreign currency translation
adjustment------------------------ -- -- -- -- -- -- -- (0.1)
Net income------------------------- -- -- -- -- -- -- 6.0 --
Dividends declared----------------- -- -- -- -- -- -- (16.0) --
------ ------ ------ ------ ------- ----------- ----------- ----------
Balance September 30, 1993----------- -- $-- 89.8 $0.9 $ 496.6 $ (0.2) $ (88.0) $ (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
Foreign currency translation
adjustment------------------------ 0.1
Net income------------------------- 12.6
Dividends declared----------------- (8.0)
-------------
Balance at September 30, 1994---- $ 421.5
=============
Balance at December 31, 1992---- $ 416.6
Issuance of common stock----------- 2.2
Amortization of restricted
stock awards---------------------- 0.3
Foreign currency translation
adjustment------------------------ (0.1)
Net income------------------------- 6.0
Dividends declared----------------- (16.0)
-------------
Balance September 30, 1993----------- $ 409.0
=============
The accompanying notes are an integral part of these financial statements.
5
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
September 30, 1994 and the Company's results of operations and cash flows for
the three-month and nine-month periods ended September 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 included (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 included 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 1993, 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.
(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.
6
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 are 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 following table reflects the Company's long-term debt at September 30,
1994, including amounts due within one year (in millions of dollars):
Senior Notes------------------------- 245.0
Debentures--------------------------- 99.3(a)
Note Payable to Bank----------------- 10.0
---------
354.3
=========
(a) Net of original issue discount, amount due upon maturity $100.0 million.
Aggregate total maturities of long-term debt are as follows: 1995 -- $3.9
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.
(4) STATEMENT OF CASH FLOWS
The Company made interest and income tax payments as follows (in millions of
dollars):
1994 1993
--------- ---------
Three Months Ended September 30
Interest payments---------------- 14.2 20.4
Income tax payments-------------- 0.7 0.9
Nine Months Ended September 30
Interest payments---------------- 42.7(a) 45.3
Income tax payments-------------- 1.6 4.3
(a) Includes $6.5 million in prepayment penalties and accrued interest
paid upon the retirement of certain long-term debt (see Note 3).
7
<PAGE>
(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 nine months
ended September 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---- 4.5 -- 4.5
Equity in loss attributable to common
shares----------------------------- -- (1.9) (1.9)
Other-------------------------------- -- 0.1 0.1
--- ------ -----
Investment at September 30, 1994----- 53.2 5.7 58.9
==== ====== =====
The following table summarizes Hadson's results of operations for the
three-month and nine-month periods ended September 30, 1994 (in millions of
dollars):
THREE MONTHS NINE MONTHS
ENDED SEPTEMBER ENDED SEPTEMBER
30, 1994 30, 1994
------------------- ----------------
Revenues----------------------------- 191.9 563.6
Expenses----------------------------- (193.3) (564.0)
------- -------
Loss before income taxes------------- (1.4) (0.4)
Income tax benefit------------------- 0.4 0.3
------- -------
Net loss----------------------------- (1.0) (0.1)
Preferred dividend requirement------- (1.5) (4.3)
------- -------
Loss attributable to common
shares----------------------------- (2.5) (4.4)
======= =======
In the fourth quarter of 1993 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. In the fourth
quarter of 1994 the Company agreed to pay Hadson an annual administrative fee of
approximately $100,000.
In November 1994 the Company and Hadson settled a lawsuit related to certain
of the assets sold to Hadson by the Company in December 1993. The settlement
totalled $5.7 million and the Company's share, approximately $3.4 million, is
included in Other Income (Expense) in the third quarter. The Company will pay
the full amount of the settlement and Hadson will give the Company a $2.3
million ten-year note for its share. The note will bear interest at 9%, payable
annually, and the principal amount will be due at maturity.
(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 obligation which requires or allows for the future delivery of the
product. For the three months ended September 30, 1994 and 1993, hedges resulted
in a reduction in natural gas revenues of $0.1 million
8
and $3.4 million, respectively, and for the nine months ended September 30, 1994
and 1993, hedges resulted in a reduction in natural gas revenues of $1.0 million
and $8.2 million, respectively. At September 30, 1994 the Company had no
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 PRPs that includes the Company entered into a
consent decree covering the site monitoring and leachate control phases of
remediation. The Company is a member of the group Coalition Undertaking
Remediation Efforts ("CURE") which is responsible for constructing and operating
the leachate treatment plant. Treatment tests will begin shortly. Site
monitoring and maintenance will continue throughout the life of the facility.
The Company's share of costs with respect to this phase have totalled
approximately $2.4 million ($1.3 million after recoveries from working interest
participants in the unit in which the wastes were generated).
Another consent decree provides for the predesign, design and construction
of a gas plant to harness and market methane gas emissions. The Company is a
member of the New CURE group which is responsible for the gas plant construction
and operation and landfill cover. Currently, New CURE is in the design stage of
the gas plant. The liability with respect to this phase has not been capped but
is estimated to be approximately $130.0 million. The Company's share of costs of
this phase is expected to be of approximately the same magnitude as that of the
first phase and such costs have been provided for in the financial statements.
As previously discussed, the Company has provided for its share of costs
with respect to the site monitoring, leachate control and gas control phases;
however, it cannot currently estimate the cost of any subsequent phases of work
or final remediation which may be required by the EPA.
Another consent decree is currently being executed by the PRPs and will be
logged with the court for approval. This consent decree allows for the
settlement of the pending lawsuits against the municipalities and transporters
not named by the EPA. The settlement totals approximately $70.0 million and the
proceeds will be credited against future expenses.
The Company has entered into a Joint Defense Agreement with the other PRPs
to defend against a lawsuit filed September 7, 1994 by ninety-five homeowners
alleging, among other things, nuisance, trespass, strict liability and
infliction of emotional distress. There is no estimate of cost or potential
liability but the defendants intend to aggressively pursue the defense and
discovery once all defendants have been served and answers have been filed.
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, which has been provided for in the financial
statements, 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
9
agreement. The extent, if any, of any further necessary remedial activity at the
D. L. Mud Site has not been finally determined.
On December 27, 1993 the Company received a request from the EPA for
information pursuant to Section 104(a) of CERCLA regarding the Lee Acres
Landfill 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
has not heard further from the EPA and is not able to estimate costs, if any,
for the site at this time.
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 $9.0 million. The Company
filed its response to the Section 104(a) order setting forth its position and
defenses. However, the Company has also given its Notice of Intent to comply
with the EPA's order to prepare a remediation design plan. Six of the other PRPs
have also notified the EPA of their intent to comply. The cost of such a
remediation design plan is estimated to be approximately $0.5 million. To date
there has been no agreement on how to allocate costs among the PRPs, however,
the Company does not believe that its share of such costs will 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 a minimum of 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
The Company has certain long-term contracts, which are being administered by
Hadson, ranging up to twelve years for the supply and transportation of
approximately 20 million cubic feet per day of natural gas to the Company's
operations in Kern County, California. In the aggregate, these contracts involve
a minimum commitment on the part of the Company of approximately $7.7 million
per year (based on prices and transportation charges in effect for September
1994).
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
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
For the nine months ended September 30, 1994 the Company reported income to
common shares of $4.6 million, or $0.05 per share. The reported income is after
recognition of a $7.0 million restructuring charge related to a cost reduction
program implemented by the Company. At September 30, 1994 the Company's
long-term debt totalled $354.3 million, $95.4 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 nine months of 1994 of $11.80
per barrel, compared to $15.50 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. Since mid-1990 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. Based on operating results for the third quarter of 1994, the
Company estimates that on an annualized basis a $1.00 per barrel increase or
decrease in its average domestic crude oil sales prices would result in a
corresponding $20.8 million change in income from operations and a $15.6 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 prices.
The price of natural gas fluctuates due to weather conditions, the level of
natural gas in storage, the relative balance between supply and demand and other
economic factors. The actual average sales price (unhedged) received by the
Company for its natural gas was $1.58 per Mcf in the third quarter of 1994 and
was as low as $1.45 per Mcf in the month of September. In response to the low
prices the Company curtailed its natural gas production by approximately 27.5
MMcf per day in September 1994 and 23.0 MMcf per day in October 1994. Based on
operating results for the third quarter of 1994, the Company estimates that on a
annualized basis a $0.10 per Mcf increase or decrease in its average domestic
natural gas sales price would result in a corresponding $4.5 million change in
income from operations and a $3.4 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 depletion and
depreciation, that would result from a change in natural gas prices.
11
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 to the Trust during the quarters ended March
31, and June 30, 1994, respectively. Due to the high level of drilling and
development expenditures forecast for the remainder of 1994 and the first
quarter of 1995 on properties included in the Trust and 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 $0.40 per Depository Unit
per quarter. In such instances, the Company would be required to make additional
Support Payments.
12
<PAGE>
RESULTS OF OPERATIONS
REVENUES
The following table reflects the components of the Company's crude oil and
liquids and natural gas revenues:
THREE MONTHS NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
-------------------- ------------------
1994 1993 1994 1993
--------- --------- --------- ------
Crude Oil and Liquids
Revenues ($/Millions)
Sales
Domestic
California Heavy------------- 45.4 36.6 114.2 118.7
Other------------------------ 25.9 29.6 71.4 99.8
-------- -------- -------- --------
71.3 66.2 185.6 218.5
Argentina---------------------- 3.3 3.0 8.7 10.0
Indonesia---------------------- 8.9 5.1 24.4 17.9
Net Profits Payments------------- (1.1) (1.1) (2.9) (6.6)
-------- -------- -------- --------
82.4 73.2 215.8 239.8
-------- -------- -------- --------
-------- -------- -------- --------
Volumes (MBbls/day)
Domestic
California Heavy--------------- 38.5 36.9 38.3 36.9
Other-------------------------- 19.1 22.5 19.3 23.3
-------- -------- -------- --------
57.6 59.4 57.6 60.2
Argentina------------------------ 2.4 2.5 2.4 2.5
Indonesia------------------------ 6.0 3.9 6.0 4.1
-------- -------- -------- --------
66.0 65.8 66.0 66.8
-------- -------- -------- --------
-------- -------- -------- --------
Sales Prices ($/Bbl)
Domestic
California Heavy--------------- 12.80 10.78 10.92 11.79
Other-------------------------- 14.77 14.31 13.55 15.68
Total-------------------------- 13.45 12.12 11.80 13.30
Argentina------------------------ 15.38 13.42 13.13 14.82
Indonesia------------------------ 16.00 14.50 15.10 15.87
Total---------------------------- 13.75 12.31 12.14 13.52
Natural Gas
Revenues ($/Millions)
Sales---------------------------- 18.6 28.7 70.8 90.2
Hedging-------------------------- (0.1) (3.4) (1.0) (8.2)
Net Profits Payments------------- (0.6) (1.9) (2.6) (5.7)
-------- -------- -------- --------
17.9 23.4 67.2 76.3
-------- -------- -------- --------
-------- -------- -------- --------
Volumes (MMcf/day)----------------- 128.0 157.2 140.0 165.3
Sales Prices ($/Mcf)
Unhedged------------------------- 1.58 1.98 1.84 2.00
Hedged--------------------------- 1.57 1.74 1.82 1.82
Total revenues declined 12% from $334.3 million in the first nine months of
1993 to $293.6 million in the first nine months of 1994. Crude oil and liquids
revenues declined $24.0 million with lower prices accounting for a reduction of
$22.9 million. 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 $16.7 million. The effect of increased volumes of California
heavy and Indonesian crude, approximately $11.6 million, and lower net profits
payments were partially offset the effect of lower sales
13
<PAGE>
prices and the property sales. The reduction in net profits payments results
from the payout in 1993 of a net profits agreement with respect to certain of
the Company's domestic properties. Daily average oil production in the first
nine months of 1994 decreased approximately 800 barrels per day from the first
nine months of 1993. The 4,100 barrel per day decrease in oil production
resulting from the sale of properties to Vintage and Bridge was partially offset
by a 1,400 barrel per day increase in California heavy crude and a 1,900 barrel
per day increase in Indonesian production. Natural gas production declined from
165.3 MMcf per day in the first nine months of 1993 to 140.0 MMcf per day in the
first nine months of 1994. Production for the 1993 period included positive
adjustment of approximately 5.3 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
18.5 MMcf per day ($9.6 million in revenues).
Total revenues increased from $102.7 million in the third quarter of 1993 to
$103.6 million in the third quarter of 1994. Oil and liquids revenues were up
$9.2 million primarily reflecting higher prices for California heavy crude and
increased Indonesian production, partially offset by the effect of the property
sales to Vintage and Bridge. The 4,500 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 1,600 barrels
per day and an increase in Indonesian production of 2,100 barrels per day.
Natural gas production declined from 157.2 MMcf per day in the third quarter of
1993 to 128.0 MMcf per day in the third quarter of 1994 with the property sales
to Vintage and Bridge accounting for approximately 21.2 MMcf per day of the
decrease and the Company's curtailment program (see -- General) accounting for a
reduction of approximately 9.0 MMcf per day. Lower prices and the previously
mentioned property sales accounted for reductions in revenues of $5.2 million
and $3.3 million, respectively, which were partially offset by decreases in
hedging losses and net profits payments of $3.3 million and $1.1 million,
respectively.
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 ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------ --------------------
1994 1993 1994 1993
------- ------- ------- -------
Production and operating costs per
BOE (a)---------------------------- 4.44 4.74 4.67 4.83
Exploration, including dry hole costs
per BOE---------------------------- 0.70 1.09 0.64 0.90
Depletion, depreciation and
amortization per BOE--------------- 3.75 4.44 3.80 4.36
General and administrative costs per
BOE-------------------------------- 0.81 0.86 0.86 0.83
Taxes other than income per BOE
(b)-------------------------------- 0.79 0.75 0.82 0.80
Interest, net, per BOE (c)(d)-------- 1.04 1.28 1.17 1.30
(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.
(d) Excludes effects of (i) benefit of adjustments to provisions for potential
state income tax obligations of $1.43 per BOE in third quarter of 1994 and
$0.47 per BOE in first nine months of 1994; (ii) benefit of adjustment to
provisions made in prior periods with respect to interest on certain
federal income tax audit adjustments of $0.10 per BOE in the first nine
months of 1994; and (iii) benefit of Federal income tax audit refund and
revised tax sharing agreement with the Company's former parent of $1.47
per BOE in the third quarter of 1993 and $0.48 in first nine months of
1993.
Total costs and expenses for the first nine months of 1994 of $261.7 million
were 14% lower than the $305.7 million reported for the first nine months of
1993. The property sales to Vintage and Bridge resulted in reductions in
production and operating costs and depletion, depreciation and
14
amortization ("DD&A") of $10.3 million and $9.3 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 $7.8 million primarily reflecting lower geological and geophysical
costs with respect to foreign operations and lower overhead. Costs and expenses
in 1994 also included $7.0 million in restructuring charges (see -- Liquidity
and Capital Resources) and an $8.5 million gain on the sale of certain oil and
gas properties.
Total costs and expenses for the third quarter of 1994 of $84.5 million were
17% lower than the $101.5 million reported for the third 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 $4.5 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 $3.6 million primarily reflecting lower geological and geophysical
costs with respect to foreign operations and lower overhead.
Interest income for the third quarter of 1993 includes $6.8 million related
to a $10.0 million refund received as a result of the completion of the audit of
the Company's federal income tax returns for 1971 through 1980.
Interest expense for the first nine months 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 potential federal income tax audit
adjustments and a third quarter credit of $11.5 million reflecting adjustments
to provisions made in prior periods for potential state income tax obligations.
Interest expense for the first nine months of 1993 includes a third quarter
credit of $5.7 million related to a revision to a tax sharing agreement with the
Company's former parent.
Other income (expense) for the first nine months of 1994 includes: (i) a
$2.4 million gain on the sale of the Company's interest in a publishing company
which was acquired in the Adobe merger in 1992 ($0.3 million of which relates to
the third quarter); (ii) $4.5 million in dividend income on Hadson Corporation
("Hadson") preferred stock (paid in-kind, $1.5 million of which relates to the
third quarter); (iii) a $1.9 million loss on the Company's equity in common
stock ($1.0 million of which relates to the third quarter); and (iv) a $5.0
million charge with respect to the settlement of certain litigation.
Income taxes for the first nine months 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 potential federal income tax audit adjustments
and a $2.6 million third quarter credit reflecting the benefit of adjustments to
provisions made in prior periods for potential state income tax obligations.
Income taxes for the first nine months of 1993 include: (i) a $3.0 million third
quarter charge to reflect the increase in the Company's deferred income tax
liability as a result of the increase in the federal income tax rate; (ii) a
$3.2 million benefit related to the previously discussed federal tax audit
refund; (iii) a $1.8 million benefit related to the previously discussed
revision to a tax sharing agreement with the Company's former parent; and (iv) a
$1.0 million second quarter benefit relating to prior periods resulting from the
restructuring of certain of the Company's foreign operations which were
conducted through foreign incorporated subsidiaries.
The increase in the Company's preferred dividend requirement in the third
quarter reflects the issuance of 10.7 million shares of $0.732 Series A
Convertible Preferred Stock in the second quarter of 1994.
LIQUIDITY AND CAPITAL RESOURCES
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 received therefor. Since crude oil and natural gas are depleting assets,
unless the Company replaces the oil and gas produced from its 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. Historically, the Company
has generally funded capital
15
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 totalled $52.9 million in the third
quarter of 1994 and $100.4 million in the first nine months of 1994; net cash
used in investing activities (excluding proceeds from the sales of properties)
in such periods totalled $39.4 million and $100.2 million, respectively.
The decrease in accounts receivable from $87.4 million at December 31, 1993
to $59.4 million at September 30, 1994 primarily reflects lower receivables with
respect to natural gas sales due to lower prices and an acceleration of the
collection of such receivables resulting from the marketing arrangement with
Hadson and the collection of certain amounts with respect to the property sale
to Vintage which had been held in escrow, partially offset by an increase in
receivables for oil sales, primarily due to higher sales prices. The decrease in
accounts payable from $93.5 million at December 31, 1993 to $76.9 million at
September 30, 1994 primarily reflects lower accrued amounts with respect to
capital projects in progress and the payment in 1994 of certain restructuring
charges which were accrued in 1993. The decrease in other long-term obligations
from $48.8 million at December 31, 1993 to $29.6 million at September 30, 1994
primarily relates to the adjustments made to provisions for potential federal
income tax audit adjustments and potential state income tax obligations
discussed in Results of Operations.
In the fourth quarter of 1993 the Company adopted a corporate restructuring
program which included (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.
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 a drilling and workover program in the San Joaquin
Valley of California. Internationally, the program includes exploration and
development activities in Argentina and Indonesia, including development of the
Company's Sierra Chata discovery in Argentina, with gas sales expected to
commence in mid-1995
The Company expects its 1994 capital program to total approximately $130
million, a level which should allow the Company to replace its estimated 1994
production, although no assurance can be given regarding such replacement.
Through September the Company had expended approximately $85.3 million on its
1994 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
16
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.
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 September 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 $50.0
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 September 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 September 30, 1994 the Company could incur up to $164.4 million of
additional indebtedness and pay dividends of up to $111.9 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
17
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 and will
depend on dividend requirements with respect to the 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
18
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
November 10, 1994
<PAGE>
19
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE BALANCE
SHEET AS OF SEPTEMBER 30, 1994 AND THE INCOME STATEMENT FOR THE NINE MONTHS
ENDED SEPTEMBER 30, 1994 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS
</LEGEND>
<MULTIPLIER> 1,000
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1994
<PERIOD-START> JAN-01-1994
<PERIOD-END> SEP-30-1994
<CASH> 69,400
<SECURITIES> 0
<RECEIVABLES> 66,400
<ALLOWANCES> 7,000
<INVENTORY> 9,800
<CURRENT-ASSETS> 151,600
<PP&E> 2,145,100
<DEPRECIATION> 1,321,300
<TOTAL-ASSETS> 1,049,200
<CURRENT-LIABILITIES> 109,800
<BONDS> 0
<COMMON> 900
171,400
0
<OTHER-SE> 329,200
<TOTAL-LIABILITY-AND-EQUITY> 1,049,200
<SALES> 291,700
<TOTAL-REVENUES> 293,600
<CGS> 261,700
<TOTAL-COSTS> 261,700
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 16,400
<INCOME-PRETAX> 17,400
<INCOME-TAX> 4,800
<INCOME-CONTINUING> 12,600
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 12,600
<EPS-PRIMARY> 0.05
<EPS-DILUTED> 0.05
</TABLE>
