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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 MARCH 31, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER 1-7667
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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) 507-5000
------------------------
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 May 1, 1997 -- 91,538,905
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<PAGE>
PART I FINANCIAL STATEMENTS
PAGE
----
Consolidated Statement of Operations
Three Months Ended March 31, 1997 and
1996.................................. 2
Consolidated Balance Sheet
March 31, 1997 and December 31,
1996.................................. 3
Consolidated Statement of Cash Flows
Three Months Ended March 31, 1997 and
1996.................................. 4
Consolidated Statement of Shareholders'
Equity
Three Months Ended March 31, 1997 and
1996.................................. 5
Notes to Consolidated Financial
Statements............................ 6
Management's Discussion and Analysis of
Financial Condition
and Results of Operations............. 12
1
<PAGE>
SANTA FE ENERGY RESOURCES, INC.
CONSOLIDATED STATEMENT OF OPERATIONS (UNAUDITED)
(IN MILLIONS OF DOLLARS, EXCEPT PER SHARE DATA)
THREE MONTHS ENDED
MARCH 31,
--------------------
1997 1996
--------- ---------
Revenues
Sales of crude oil produced..... $ 127.3 $ 98.6
Sales of natural gas produced... 36.7 24.9
Sales of crude oil purchased.... 9.6 --
Other........................... 0.3 0.2
--------- ---------
173.9 123.7
--------- ---------
Costs and Expenses
Production and operating........ 52.2 44.0
Cost of crude oil purchased..... 10.7 --
Exploration, including dry hole
costs.......................... 9.3 5.6
Depletion, depreciation and
amortization................... 33.6 32.3
General and administrative...... 7.1 6.0
Taxes (other than income)....... 7.5 6.1
Loss (gain) on disposition of
assets......................... (2.3) 0.2
--------- ---------
118.1 94.2
--------- ---------
Income from Operations............... 55.8 29.5
Interest income................. 0.9 0.5
Interest expense................ (7.7) (9.6)
Interest capitalized............ 1.6 1.3
Other income (expense).......... (0.1) (0.3)
--------- ---------
Income Before Income Taxes and
Minority Interest.................. 50.5 21.4
Income taxes
Current.................... (4.5) (2.1)
Deferred................... (15.4) (6.7)
--------- ---------
Income Before Minority Interest...... 30.6 12.6
Minority Interest in Monterey
Resources, Inc................. (2.7) --
--------- ---------
Net Income........................... 27.9 12.6
Preferred dividend
requirement.................... (2.4) (3.7)
--------- ---------
Earnings Attributable to Common
Shares............................. $ 25.5 $ 8.9
========= =========
Earnings Attributable to Common
Shares Per Share
Primary......................... $ 0.28 $ 0.10
========= =========
Fully diluted................... $ 0.27 $ 0.10
========= =========
Weighted Average Number of Shares
Outstanding (in millions).......... 91.2 90.4
========= =========
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)
MARCH 31, DECEMBER 31,
1997 1996
---------- ------------
(UNAUDITED)
ASSETS
Current Assets
Cash and cash equivalents....... $ 43.6 $ 14.6
Accounts receivable............. 116.4 109.1
Inventories..................... 13.4 13.6
Other current assets............ 17.7 35.2
---------- ------------
191.1 172.5
---------- ------------
Properties and Equipment, at cost
Oil and gas (on the basis of
successful efforts
accounting).................... 2,604.3 2,539.8
Other........................... 35.6 34.4
---------- ------------
2,639.9 2,574.2
Accumulated depletion,
depreciation, amortization and
impairment..................... (1,691.1) (1,664.4)
---------- ------------
948.8 909.8
---------- ------------
Other Assets
Receivable under gas balancing
arrangements................... 4.5 4.5
Other........................... 6.5 33.2
---------- ------------
11.0 37.7
---------- ------------
$ 1,150.9 $ 1,120.0
========== ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Accounts payable................ $ 101.2 $ 115.4
Income taxes payable............ 25.3 21.4
Interest payable................ 4.1 6.0
Other current liabilities....... 37.0 36.6
---------- ------------
167.6 179.4
---------- ------------
Long-Term Debt....................... 274.5 278.5
---------- ------------
Deferred Revenues.................... 5.5 4.0
---------- ------------
Other Long-Term Obligations.......... 28.2 27.5
---------- ------------
Deferred Income Taxes................ 69.2 53.8
---------- ------------
Minority Interest in Monterey
Resources, Inc..................... 31.0 30.3
---------- ------------
Commitments and Contingencies (Note
4)................................. -- --
---------- ------------
Convertible Preferred Stock.......... 19.7 19.7
---------- ------------
Shareholders' Equity
Preferred stock................. -- --
$.732 Series A preferred
stock.......................... 91.4 91.4
Common stock.................... 0.9 0.9
Paid-in capital................. 607.0 601.3
Accumulated deficit............. (141.0) (166.5)
Unamortized restricted stock
awards......................... (2.8) --
Foreign currency translation
adjustment..................... (0.3) (0.3)
---------- ------------
555.2 526.8
---------- ------------
$ 1,150.9 $ 1,120.0
========== ============
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
MARCH 31,
--------------------
1997 1996
--------- ---------
Operating Activities:
Net income...................... $ 27.9 $ 12.6
Adjustments to reconcile net
income to net cash provided
by operating activities:
Depletion, depreciation and
amortization............. 33.6 32.3
Deferred income taxes...... 15.4 6.7
Net loss (gain) on
disposition of assets.... (2.3) 0.2
Exploratory dry hole
costs.................... 5.1 0.3
Minority interest in
Monterey Resources,
Inc...................... 2.7 --
Other...................... 1.0 0.5
Changes in operating assets and
liabilities:
Decrease (increase) in
accounts receivable...... (7.3) 4.0
Decrease (increase) in
inventories.............. 0.2 0.8
Increase (decrease) in
accounts payable......... 6.3 14.0
Increase (decrease) in
interest payable......... (1.9) 9.2
Increase (decrease) in
income taxes payable..... 3.9 0.1
Net change in other assets
and liabilities.......... 38.7 (13.4)
--------- ---------
Net Cash Provided by Operating
Activities......................... 123.3 67.3
--------- ---------
Investing Activities:
Capital expenditures, including
exploratory dry hole costs..... (60.1) (39.1)
Acquisitions of producing
properties..................... (31.5) (17.0)
Net proceeds from sales of
properties..................... 2.6 0.3
--------- ---------
Net Cash Used in Investing
Activities......................... (89.0) (55.8)
--------- ---------
Financing Activities:
Issuance of common stock........ 1.1 --
Net change in long-term debt.... (4.0) --
Cash dividends paid............. (2.4) (3.7)
--------- ---------
Net Cash Used in Financing
Activities......................... (5.3) (3.7)
--------- ---------
Net Cash Provided in the Period...... 29.0 7.8
Cash and Cash Equivalents at
Beginning of Period................ 14.6 42.6
--------- ---------
Cash and Cash Equivalents at End of
Period............................. $ 43.6 $ 50.4
========= =========
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
CONVERTIBLE FOREIGN
PREFERRED STOCK COMMON STOCK UNAMORTIZED CURRENCY
--------------- --------------- PAID-IN ACCUMULATED RESTRICTED TRANSLATION
SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT STOCK AWARDS ADJUSTMENT
------ ------ ------ ------ -------- ----------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1996............ 10.7 $91.4 91.0 $0.9 $ 601.3 $(166.5) $-- $(0.3)
Issuance of common stock.............. -- -- 0.4 -- 5.7 -- (2.9) --
Amortization of restricted stock
awards............................... -- -- -- -- -- -- 0.1 --
Net income............................ -- -- -- -- -- 27.9 -- --
Dividends declared.................... -- -- -- -- -- (2.4) -- --
------ ------ ------ ------ -------- ----------- ------------ -----------
Balance at March 31, 1997............... 10.7 $91.4 91.4 $0.9 $ 607.0 $(141.0) $ (2.8) $(0.3)
====== ====== ====== ====== ======== =========== ============ ===========
Balance at December 31, 1995............ 10.7 $91.4 90.3 $0.9 $ 501.4 $(155.7) $-- $(0.3)
Issuance of common stock.............. -- -- 0.2 -- 2.1 -- -- --
Net income............................ -- -- -- -- -- 12.6 -- --
Dividends declared.................... -- -- -- -- -- (3.7) -- --
------ ------ ------ ------ -------- ----------- ------------ -----------
Balance at March 31, 1996............... 10.7 $91.4 90.5 $0.9 $ 503.5 $(146.8) $-- $(0.3)
====== ====== ====== ====== ======== =========== ============ ===========
</TABLE>
TOTAL
SHAREHOLDERS'
EQUITY
--------------
Balance at December 31, 1996............ $526.8
Issuance of common stock.............. 2.8
Amortization of restricted stock
awards............................... 0.1
Net income............................ 27.9
Dividends declared.................... (2.4)
--------------
Balance at March 31, 1997............... $555.2
==============
Balance at December 31, 1995............ $437.7
Issuance of common stock.............. 2.1
Net income............................ 12.6
Dividends declared.................... (3.7)
--------------
Balance at March 31, 1996............... $448.7
==============
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. (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 March 31, 1997 and the
Company's results of operations and cash flows for the three-month periods ended
March 31, 1997 and 1996. Interim period results are not necessarily indicative
of results of operations or cash flows for a full-year period.
In February 1997 the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 128 "Earnings Per Share" ("FAS 128"),
which establishes new guidelines for computing and presenting earnings per share
("EPS") and is effective for financial statements issued for periods ending
after December 15, 1997. If the provisions of FAS 128 had been in effect in the
three-month periods ended March 31, 1997 and 1996 the Company's EPS would have
been unchanged.
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, 1996.
(2) STATEMENT OF CASH FLOWS
The Company made interest and income tax payments as follows during the
three months ended March 31, 1997 and 1996 (in millions of dollars):
1997 1996
---- ----
Interest payments.................... 9.4 --
Income tax payments.................. 0.8 0.2
(3) MONTEREY RESOURCES, INC.
In 1996 the Company formed Monterey Resources Inc. ("Monterey") to assume
the operations of the Company's Western Division (the "Western Division")
which conducted the Company's oil and gas operations in the State of California.
In November 1996, prior to the initial public offering (the "IPO") discussed
below, pursuant to a contribution and conveyance agreement (the "Contribution
Agreement"), among other things: (i) the Company contributed to Monterey
substantially all of the assets and properties of the Western Division, subject
to the retention by the Company of a production payment, as defined below, and
certain other assets; (ii) the Company retained a $30.0 million production
payment (the "Production Payment") with respect to certain properties in the
Midway-Sunset field; (iii) Monterey assumed all obligations and liabilities of
the Company associated with or allocated to the assets and properties of the
Western Division, including $245.0 million of indebtedness in respect of Santa
Fe's 10.23% Series E Notes due 1997, 10.27% Series F Notes due 1998 and 10.61%
Series G Notes due 2005 (the "Series E Notes", "Series F Notes" and "Series
G Notes", respectively) and (iv) Monterey agreed to purchase from the Company
an $8.3 million promissory note receivable related to the sale to a third party
of certain surface acreage located in Orange County, California. Also prior to
the IPO, Monterey and the Company entered into a $75.0 million revolving credit
facility with a group of banks (the "Monterey Credit Facility") and borrowed
$16.0 million which was retained by the Company.
In November 1996 Monterey sold 9,335,000 shares of its common stock for
total consideration of $123.6 million (after deducting underwriting discounts of
$9.1 million and other related costs of $2.6 million). The proceeds from the IPO
were used in part to (i) repay the Series E Notes and Series F Notes ($70.0
million) and pay a prepayment penalty thereon of $2.5 million; (ii) retire the
Production Payment ($30.0 million); (iii) repay the $16.0 million outstanding
under the Monterey Credit Facility; and (iv) pay a $2.0 million fee with respect
to a supplement to the indenture relating to the Company's 11% Senior
Subordinated Debentures due 2004. Subsequent to the IPO, Monterey issued $175.0
million in aggregate principal amount of 10.61% Senior Notes due 2005 (the
"Monterey Senior Notes") to holders of the
6
<PAGE>
SANTA FE ENERGY RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
Series G Notes in exchange for the cancellation of such notes and paid a $1.3
million consent fee in connection therewith.
The costs and expenses related to the retirement of the Company's
outstanding debt, as discussed above, and approximately $3.4 million of deferred
debt issue costs and related transaction costs were reflected in the Company's
1996 Statement of Operations as an extraordinary item, net of $3.2 million in
income taxes.
At March 31, 1997, the Company owned 82.8% of Monterey's outstanding common
stock. The Company has announced that it intends to distribute pro rata to its
common shareholders all of the shares of Monterey's common stock that it owns by
means of a tax-free distribution (the "Proposed Spin Off"). The Company's
final determination to proceed will require a declaration of the Proposed Spin
Off by the Company's Board of Directors. Such declaration is not expected to be
made until certain conditions, including: (i) approval of the Proposed Spin Off
by the Company's shareholders; and (ii) the absence of any future change in
market or economic conditions (including developments in the capital markets) or
the Company's or Monterey's business and financial condition that causes the
Company's Board to conclude that the Proposed Spin Off is not in the best
interests of the Company's shareholders. The Company has received a ruling from
the Internal Revenue Service that the Proposed Spin Off will be tax-free. The
Company does not expect the Proposed Spin Off to occur prior to July 1997.
Pursuant to the terms of a letter agreement dated as of June 13, 1996, a
fee will be payable by Monterey to Chase Securities Inc. and Petrie Parkman &
Co., Inc. upon consummation of the Proposed Spin Off. The total amount of such
fee is equal to the product of (a) the sum of the market value of the shares of
Monterey distributed in the Proposed Spin Off (based upon the average closing
price of Monterey's common stock during the ten trading days after the Proposed
Spin Off) PLUS the aggregate principal amount of long-term indebtedness assumed
by Monterey in connection with the Proposed Spin Off (which totalled $175.0
million) TIMES (b) 0.5%, LESS $1.0 million. If the market value of the Monterey
common stock distributed is $16.00 per share (a recent trading price for
Monterey stock), the Company estimates the total fee payable would be
approximately $3.5 million, of which $1.75 million would be payable to each of
Chase Securities and Petrie Parkman. In addition, a fee of $400,000 will be
payable to GKH Partners, L.P., of which $200,000 will be payable by the Company
and $200,000 will be payable by Monterey. One of the Company's directors is
associated with Chase Securities and another is associated with GKH Partners.
Monterey has agreed to indemnify the Company if at any time during the
one-year period after the consummation of the Proposed Spin Off (or if certain
tax legislation is enacted and is applicable, such longer period as is required
for the Proposed Spin Off to be tax free to the Company) Monterey takes certain
actions, the effects of which result in the Proposed Spin Off being taxable to
the Company.
The Company provides various administrative and financial services to
Monterey, including administration of certain employee benefits plans, access to
telecommunications, corporate legal assistance and certain other corporate staff
and support services. The Company and Monterey have entered into a Services
Agreement, terminable by either party on thirty days' notice, under which
Monterey pays a fee of $120,000 per month for such services until such time as
Monterey assumes full responsibility during 1997 for each of the services
covered by the agreement.
(4) COMMITMENTS AND CONTINGENCIES
OIL AND GAS HEDGING
From time to time the Company hedges a portion of its oil and gas sales to
provide a certain minimum level of cash flow from its sales of oil and gas.
While the hedges are generally intended to reduce the Company's exposure to
declines in market price, the Company's gain from increases in market price may
7
<PAGE>
SANTA FE ENERGY RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
be limited. The Company uses various financial instruments whereby monthly
settlements are based on differences between the prices specified in the
instruments and the settlement prices of certain futures contracts quoted on the
New York Mercantile Exchange ("NYMEX") or certain other indices. Generally, 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
price, 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. Gains or losses on hedging activities are recognized in oil and gas
revenues in the period in which the hedged production is sold.
Crude oil sales hedges resulted in a $0.3 million increase in revenues in
the first quarter of 1997 and a $3.5 million decrease in revenues in the first
quarter of 1996. At March 31, 1997 the Company had open crude oil sales hedges
on 819,000 barrels during the period April to July 1997. The instruments used
have floors ranging from $21.00 to $23.00 per barrel and ceilings ranging from
$24.00 to $27.00 per barrel. Under the terms of the instruments, if the
aggregate average of the applicable daily settlement prices is below the floor,
the Company will receive a settlement based on the difference, and if the
aggregate average of the applicable daily settlement prices is above the
ceiling, the Company will be required to pay an amount based on the difference.
Based on the March 31, 1997 settlement prices of the applicable NYMEX futures
contracts, the Company would recognize a $0.9 million gain with respect to such
hedges. The actual gains or losses realized by the Company from these hedges may
vary significantly due to the volatility of the futures markets.
At March 31, 1997 the Company had no open natural gas sales hedges. Natural
gas sales hedges resulted in a decrease in revenues of $5.7 million in the first
quarter of 1996.
In addition to its oil and gas sales hedges, for the first six months of
1996 Monterey hedged 20 MMcf per day of the natural gas it purchases for use in
its steam generation operations in the San Joaquin Valley of California. Such
hedges resulted in a $1.7 million increase in production and operating costs in
the first quarter of 1996.
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
Comprehensive Environmental Response, Compensation and Liability Act
("CERCLA"), also known as the "Superfund" law, imposes liability, without
regard to fault or the legality of the original conduct, on certain classes of
persons that contributed to the release of a "hazardous substance" into the
environment. These persons include the owner or operator of a site and companies
that disposed or arranged for the disposal of the hazardous substance found at a
site. CERCLA also authorizes the Environmental Protection Agency (the "EPA")
and, in some cases, third parties to take actions in response to threats to the
public health or the environment and to seek to recover from the responsible
classes of persons the costs they incur. In the course of its operations, the
Company has generated and will generate wastes that may fall within CERCLA's
definition of "hazardous substances". The Company may be responsible under
CERCLA for all or part of the costs to clean up sites at which such wastes have
been disposed. Certain properties owned or used by the Company or its
predecessors have been investigated under state and Federal Superfund statutes,
and the Company has been and could be named a potentially responsible party
("PRP") for the cleanup of some of these sites.
The Company has been identified as one of over 250 PRPs at a Superfund site
in Los Angeles County, California (the "OII Site"). The OII Site was operated
by a third party as a waste disposal facility from 1948 until 1983. The 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 November 1988
8
<PAGE>
SANTA FE ENERGY RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
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 was a member of the group Coalition Undertaking Remediation Efforts
("CURE") which was responsible for constructing and operating the leachate
treatment plant. This phase is now complete and the Company's share of costs
with respect to this phase was $0.9 million. Another consent decree provides for
the predesign, design and construction of a landfill gas treatment system to
harness and market methane gas emissions. The Company is a member of the New
CURE group which is responsible for the gas treatment system construction and
operation and landfill cover. Currently, New CURE is in the design stage of the
gas treatment system. The Company's share of costs of this phase is expected to
be $1.6 million and such costs have been provided for in the financial
statements. Pursuant to consent decrees settling lawsuits against the
municipalities and transporters involved with the OII site but not named by the
EPA as PRPs, such parties are required to pay approximately $84 million, of
which approximately $76 million will be credited against future remediation
expenses. The EPA and the PRPs are currently negotiating the final closure
requirements. After taking into consideration the credits from the
municipalities and transporters, the Company estimates its share of final costs
of closure will be approximately $0.8 million, which amount has been provided
for by the Company in its financial statements. The Company has entered into a
Joint Defense Agreement with the other PRPs to defend against a lawsuit filed in
September 1994 by 95 homeowners alleging, among other things, nuisance,
trespass, strict liability and infliction of emotional distress. A second
lawsuit has been filed by 33 additional homeowners and the Company and the other
PRPs have entered into a Joint Defense Agreement. At this stage of the lawsuit
the Company is not able to estimate costs or potential liability.
In 1994 the Company received a request from the EPA for information
pursuant to Section 104(e) of CERCLA and a letter ordering the Company and other
PRPs to negotiate with the EPA regarding implementation of a remedial plan for a
site located in Santa Fe Springs, California (the "Santa Fe Springs Site").
The Company owned the property on which the Santa Fe Springs Site is located
from 1921 to 1932. During that time the property was leased to another company
and in 1932 the property was sold to that company. During the time the other
company leased or owned the property and for a period thereafter, hazardous
wastes were allegedly disposed at the Santa Fe Springs Site. The Company filed
its response to the Section 104(e) order setting forth its position and defenses
based on the fact that the other company was the lessee and operator of the site
during the time the Company was the owner of the property. However, the Company
has also given its Notice of Intent to comply with the EPA's order to prepare a
remediation design plan. In March 1997 the EPA issued an Amended Order for
Remedial Design to the original eight PRPs plus an additional thirteen PRPs. The
Amended Order directs the twenty-one PRPs to complete certain work required
under the original Order, plus additional remedial design and investigative
work. The total cost to complete this work and to complete the final remedy
(including ongoing operations and maintenance) is currently estimated to be $5
million. Past costs incurred by the EPA for this site for which the EPA is
seeking reimbursement totals approximately $6 million. The Company has provided
$250,000 in its financial statements for its share of future costs at the Santa
Fe Springs Site.
In 1995 the Company and eleven other companies received notice that they
have been identified as PRPs by the California Department of Toxic Substances
Control (the "DTSC") as having generated and/or transported hazardous waste to
the Environmental Protection Corporation ("EPC") Eastside Landfill (the
"Eastside Site") during its fourteen-year operation from 1971 to 1985. EPC has
since liquidated all of its assets and placed the proceeds in trust (the "EPC
Trust") for closure and post-closure activities. However, these monies may not
be sufficient to close the site. The PRPs have entered into an enforceable
agreement with the DTSC to characterize the contamination at the site and
prepare a focused remedial investigation and feasibility study. The DTSC
recently designated 27 new PRPs with respect to the Eastside Site. The cost of
the remedial investigation and feasibility study is estimated to be $1.0
million, the cost of which will be shared by the PRPs and the EPC Trust. The
ultimate costs of subsequent phases will not be known until
9
<PAGE>
SANTA FE ENERGY RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
the remedial investigation and feasibility study is completed and a remediation
plan is accepted by the DTSC. The Company currently estimates final remediation
could cost $2 million to $6 million and believes the monies in the EPC Trust
will be sufficient to fund the lower end of this range of costs. The Company has
provided $80,000 in its financial statements for its share of costs related to
this site.
Pursuant to the Contribution Agreement, Monterey agreed to indemnify and
hold harmless the Company from and against any costs incurred in the future
relating to environmental liabilities of the Western Division assets (other than
those retained by the Company), including any costs or expenses incurred at any
of the OII Site, the Santa Fe Springs Site and the Eastside Site, and any costs
or liabilities that may arise in the future that are attributable to laws, rules
or regulations in respect to any property or interest therein located in
California and formerly owned or operated by the Western Division or its
precedessors.
EMPLOYMENT AGREEMENTS
The Company has entered into employment agreements with eleven employees.
The initial term of ten of the agreements expire on December 31, 1998; however,
beginning January 1, 1998 and on each January 1 thereafter, the term is
automatically extended for one-year periods, unless by September 30 of the
preceding year the Company gives notice that the agreement will not be extended.
The term of the agreements is automatically extended for a period of two years
following a change of control. The initial term of the other agreement expires
December 31, 1999 and beginning January 1, 2000, is automatically extended for
one-year periods and is automatically extended for a three-year period following
a change of control.
In the event that following a change in control an employee is terminated
for reasons specified in the employment agreements, the employment agreements
provide for payment of certain amounts to the employee based on the employee's
salary and bonus under the Company's incentive compensation plan; payout of
non-vested restricted stock, phantom units, stock options, if any, and
continuation of certain insurance benefits on a tax neutral basis for a period
of up to 36 months. The payments and benefits are payable pursuant to the
employment agreements only to the extent they are not paid out under the terms
of any other plan of the Company. The payments and benefits provided by the
employment agreements may be limited, with the exception of those made to Mr.
Payne, by certain provisions of the Internal Revenue Code.
CONVERTIBLE PREFERRED STOCK
In March 1997 the Company called for redemption all outstanding shares of
its $.732 Series A Convertible Preferred Stock (the "DECS") effective May 15,
1997. The redemption price, which will be payable in shares of common stock,
other than cash in lieu of fractional shares, will be .6773 of a share of common
stock for each DECS share. However, holders of the DECS who exercise their right
of conversion prior to the close of business on May 15, 1997, will receive .8474
of a share of common stock for each DECS share. There are currently 10.7 million
shares of the DECS outstanding. The Company also announced that during the
period commencing April 7, 1997 and ending on July 15, 1997, the conversion rate
on the Company's 1.2 million outstanding shares of Convertible Preferred Stock,
Series 7% (the "7% Preferred") will be increased from the current rate of
1.3913 shares of common stock per share of 7% Preferred to a conversion rate of
1.8519 shares of common stock per share of 7% Preferred. The average closing
sales price of the Company's common stock was $13.50 per share or higher for the
20 consecutive days ended May 9, 1997 and in accordance with the Certificate of
Designations, Preferences and Rights of the 7% Preferred, the Company has
determined that the requirements for a Special Conversion Event will be met on
May 23, 1997. The Company intends to give formal notice on May 27, 1997 to the
holders of the 7% Preferred of its election to mandatorily convert each of the
outstanding shares into 1.8519 shares of common stock.
10
<PAGE>
SANTA FE ENERGY RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
The DECS and the 7% Preferred will be converted into approximately 9.1
million and 2.3 million shares of common stock, respectively, and the Company's
preferred dividend requirement will be eliminated. The conversion of the 7%
Preferred will result in a noncash reduction in earnings to common stock (which
will be reflected as a preferred dividend requirement in the statement of
operations) of approximately $7.6 million (assuming the market value of the
Company's common stock at the time of the conversion is $13.50 per share, a
recent trading price for the Company's common stock), representing the value of
the common shares issued in excess of the original conversion rate. The
conversion of the DECS will have no effect on the Company's earnings to common
stock. Following conversion of the DECS and 7% Preferred, the Company will have
approximately 102.9 million shares of common stock outstanding.
OTHER MATTERS
Monterey has certain long-term contracts 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 $15.2 million per year (based on prices and
transportation charges in effect for March 1997). In connection with the
development of a gas field in Argentina in which the Company has a 19.9% working
interest, a gas contract with "take-or-pay" and "delivery-or-pay"
obligations was executed in 1994 with a gas distribution company.
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.
11
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Santa Fe Energy Resources, Inc. (the "Company") owns approximately 83% of
the outstanding common stock of Monterey Resources, Inc. ("Monterey"), which
conducts all of the Company's oil and gas operations in the state of California.
The Company's other operations are conducted by (i) the Central Division, which
operates primarily in the Permian Basin of west Texas and in southeastern New
Mexico; (ii) the Gulf Division which operates in the Gulf of Mexico and adjacent
onshore areas; and (iii) the International Division, which operates in areas
outside the United States. References herein to the "Company" or
"Consolidated" relate to operations and the results thereof including Monterey
and references to "Santa Fe" relate to operations and the results thereof
excluding Monterey. The Company has announced that it intends to distribute pro
rata to its common shareholders all of its ownership in Monterey by means of a
tax-free distribution (the "Proposed Spin Off", see -- Initial Public Offering
and Proposed Spin Off).
CONSOLIDATED
The Company reported earnings to common shares of $25.5 million, $0.28 per
share, in the first quarter of 1997, compared to earnings to common shares of
$8.9 million, $0.10 per share, in the first quarter of 1996. Income from
operations for the first quarter of 1997 totalled $55.8 million in the first
quarter of 1997 compared to $29.5 million in the first quarter of 1996. Sales of
crude oil and liquids produced averaged 79,100 barrels per day in the first
quarter of 1997, the highest in any quarter in the Company's history, compared
to 70,400 barrels per day in the first quarter of 1996. The Company's average
hedged sales price for crude oil and liquids produced of $18.06 per barrel in
the first quarter of 1997 was $2.49 per barrel higher than in the first quarter
of 1996. Natural gas sales averaged 170.7 MMcf per day in the first quarter of
1997 compared to 154.0 MMcf per day in the first quarter of 1996. The Company's
average hedged sales price for natural gas was $2.51 per Mcf in the first
quarter of 1997 compared to $1.83 per Mcf in the same period in 1996.
SANTA FE
Santa Fe's sales of crude oil and liquids produced averaged 28,900 barrels
per day in the first quarter of 1997, compared to 26,700 barrels per day in the
first quarter of 1996 and the average hedged sales price for crude oil and
liquids produced of $20.64 per barrel in the first quarter of 1997 was $3.95 per
barrel higher than in the first quarter of 1996. Natural gas sales averaged
167.7 MMcf per day in the first quarter of 1997 compared to 150.3 MMcf per day
in the first quarter of 1996 and the average hedged sales price for natural gas
was $2.53 per Mcf in the first quarter of 1997 compared to $1.84 per Mcf in the
same period in 1996.
INITIAL PUBLIC OFFERING AND PROPOSED SPINOFF
In the third quarter of 1996 the Company announced its intention to
separate its operations in the State of California from the rest of its domestic
and international operations. In November such operations were assumed by
Monterey which subsequently issued 9.3 million shares of its common stock in an
initial public offering. The proceeds from the offering were primarily used to
retire outstanding long-term debt.
The Company has announced that it intends to distribute pro rata to its
common shareholders all of its remaining ownership interest in Monterey by means
of a tax-free distribution. The Proposed Spin Off is subject to certain
conditions including the approval of such distribution by the Company's common
shareholders, the absence of any future change in the market or economic
conditions (including developments in the capital markets) or the Company's or
Monterey's business or financial condition that causes the Company's Board of
Directors to conclude that the Proposed Spin Off is not in its shareholders'
best interests and the final declaration of the Proposed Spin Off by the
Company's Board of Directors. The Company has received a ruling from the
Internal Revenue Service that the distribution will be tax-free. The Proposed
Spin Off is not expected to occur prior to July 1997.
The Company is taking these actions because of its belief that its oil and
gas operations have developed over time into separate businesses that operate
independently and have diverging capital requirements and risk profiles. In
addition, the Board of Directors believes that dividing the Company's operations
into two
12
<PAGE>
independent companies will allow each to more efficiently develop its distinct
resource base and pursue separate business opportunities while providing each
with improved access to capital markets. The Board of Directors also believes
that the IPO and the Proposed Spin Off will allow investors to better evaluate
each business, enhancing the likelihood that each would achieve appropriate
market recognition for its performance. If the Proposed Spin Off occurs, the
market price of the Company's common stock will decline to reflect the
distribution of the Monterey common stock.
GENERAL
CONSOLIDATED
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 material portion of the
Company's crude oil production is from Monterey's long-lived fields in the San
Joaquin Valley of California where enhanced oil recovery 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. In addition, the lifting costs of
heavy crude oils are generally higher than the lifting costs of light crude
oils.
The lower price received for Monterey'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 quarter of
1997 of $17.95 per barrel, compared to $21.05 per barrel for West Texas
Intermediate ("WTI") crude oil (an industry posted price generally indicative
of prices for sweeter light crude oil). In the first quarter of 1997 Monterey's
average sales price for California heavy crude oil was $16.17 per barrel,
approximately 77% of the annual average posted price for WTI.
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 the beginning of 1996 the
actual average sales price (unhedged) received by the Company ranged from a high
of $18.80 per barrel in the fourth quarter of 1996 to a low of $16.12 per barrel
for the first quarter of 1996. Based on operating results for the first quarter
of 1997, the Company estimates that on an annualized basis a $1.00 per barrel
increase or decrease in its average crude oil sales prices would result in a
corresponding $17.1 million change in net income and a $21.6 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 its debt levels and related interest expense, that might 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 since the beginning of 1996 for its natural gas ranged from a high of
$2.51 per Mcf in the first quarter of 1997 to a low of $1.88 per Mcf in the
third quarter of 1996. Based on operating results for the first quarter of 1997,
the Company estimates that on an annualized basis a $0.10 per Mcf increase or
decrease in its average natural gas sales price would result in a corresponding
$2.6 million change in net income (net of $1.0 million in costs associated with
natural gas purchased by Monterey for use in steam generation) and a $3.2
million change in cash flow from operating activities (net of $1.3 million in
costs associated with natural gas purchased by Monterey for steam generation).
The foregoing estimates do not give effect to changes in any other factors, such
as the effect of the Company's debt levels and related interest expense, that
might result from a change in natural gas prices.
All of the Company's open 1997 crude oil hedging contracts relate to Santa
Fe's operations. Crude oil hedges resulted in a $0.3 million increase in
revenues in the first quarter of 1997 and a $3.5 million decrease in revenues in
the first quarter of 1996. In the first quarter of 1996 natural gas hedges
resulted in a decrease in revenues of $5.7 million. In addition, for the first
six months of 1996, 20.0 MMcf per day of the natural gas Monterey purchased for
use in its steam generation operations in the San Joaquin Valley of California
was hedged. Such hedges resulted in a $1.7 million increase in consolidated
production and operating costs in the first quarter of 1996.
13
<PAGE>
SANTA FE
Since the beginning of 1996 the actual average crude oil sales price
(unhedged) received by Santa Fe ranged from a high of $21.47 per barrel in the
fourth quarter of 1996 to a low of $17.43 per barrel for the first quarter of
1996. Based on operating results for the first quarter of 1997, Santa Fe
estimates that on an annualized basis a $1.00 per barrel increase or decrease in
its average crude oil sales prices would result in a corresponding $6.3 million
change in net income and a $7.6 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 Santa Fe's hedging program or its debt levels and
related interest expense, that might result from a change in oil prices.
The actual average sales price (unhedged) received by Santa Fe since the
beginning of 1996 for its natural gas ranged from a high of $2.53 per Mcf in the
first quarter of 1997 to a low of $1.91 per Mcf in the third quarter of 1996.
Based on operating results for the first quarter of 1997, Santa Fe estimates
that on an annualized basis a $0.10 per Mcf increase or decrease in its average
natural gas sales price would result in a corresponding $3.8 million change in
net income and a $4.5 million change in cash flow from operating activities. The
foregoing estimates do not give effect to changes in any other factors, such as
the effect of Santa Fe's hedging program or its debt levels and related interest
expense, that might result from a change in natural gas prices.
14
<PAGE>
RESULTS OF OPERATIONS
Revenues
The following table reflects the components of the Company's crude oil and
natural gas liquids and natural gas revenues:
CONSOLIDATED SANTA FE
-------------------- --------------------
THREE MONTHS ENDED THREE MONTHS ENDED
MARCH 31 MARCH 31,
-------------------- --------------------
1997 1996 1997 1996
--------- --------- --------- ---------
CRUDE OIL AND LIQUIDS PRODUCED
Sales Volumes (MBbls/day)
Domestic
California Heavy............. 45.4 41.1 -- --
Other........................ 25.4 22.0 20.6 19.4
--------- --------- --------- ---------
70.8 63.1 20.6 19.4
Argentina.................... 4.5 2.9 4.5 2.9
Indonesia.................... 3.8 4.4 3.8 4.4
--------- --------- --------- ---------
79.1 70.4 28.9 26.7
========= ========= ========= =========
Sales Prices ($/Bbl)
Unhedged
Domestic
California Heavy........... 16.17 15.22 -- --
Other...................... 21.13 17.47 21.29 17.54
Total...................... 17.95 16.00 21.29 17.54
Argentina.................... 18.72 16.13 18.72 16.13
Indonesia.................... 18.32 17.79 18.32 17.79
Total........................ 18.01 16.12 20.50 17.43
Hedged......................... 18.06 15.57 20.64 16.69
Revenues ($/millions)
Sales
Domestic
California Heavy........... 66.1 56.9 -- --
Other...................... 48.3 34.9 39.6 30.9
--------- --------- --------- ---------
114.4 91.8 39.6 30.9
Argentina.................... 7.6 4.3 7.6 4.3
Indonesia.................... 6.2 7.1 6.2 7.1
Hedging........................ 0.3 (3.5) 0.3 (1.8)
Net Profits Payments........... (1.2) (1.1) (1.0) (0.9)
--------- --------- --------- ---------
127.3 98.6 52.7 39.6
========= ========= ========= =========
NATURAL GAS PRODUCED
Sales Volumes (MMcf/day)
Domestic....................... 151.5 136.3 148.5 132.6
Foreign........................ 19.2 17.7 19.2 17.7
--------- --------- --------- ---------
170.7 154.0 167.7 150.3
========= ========= ========= =========
Sales Prices ($/Mcf)
Unhedged
Domestic..................... 2.67 2.37 2.70 2.40
Foreign...................... 1.23 1.18 1.23 1.18
Total........................ 2.51 2.23 2.53 2.26
Hedged......................... 2.51 1.83 2.53 1.84
Revenues ($/millions)
Sales
Domestic..................... 36.5 29.4 36.1 29.0
Foreign...................... 2.1 1.9 2.1 1.9
--------- --------- --------- ---------
38.6 31.3 38.2 30.9
Hedging........................ -- (5.7) -- (5.7)
Net Profits Payments........... (1.9) (0.7) (1.9) (0.7)
--------- --------- --------- ---------
36.7 24.9 36.3 24.5
========= ========= ========= =========
15
<PAGE>
CONSOLIDATED
Revenues from the sales of crude oil and liquids produced increased from
$98.6 million in the first quarter of 1996 to $127.3 million in the first
quarter of 1997 reflecting improved market conditions, which resulted in an
increase in the Company's unhedged average sales price from $16.12 per barrel in
1996 to $18.01 per barrel in 1997, and an increase in crude oil and liquids
production from 70,400 barrels per day in 1996 to 79,100 barrels per day in
1997. Monterey's crude oil production increased 6,500 barrels per day, primarily
reflecting the effect of capital spending in 1996 and reduced royalties on
Federal heavy oil leases. Production from the Company's Central Division
increased 1,500 barrels per day, primarily reflecting the effect of properties
acquired in 1996 and early 1997, and production from the El Tordillo field in
Argentina increased 1,600 barrels per day, reflecting the effect of new wells
and the workover of existing wells and the acquisition of an additional 4%
working interest. Indonesian production declined 600 barrels per day, primarily
reflecting lower cost recovery volumes due to the payout of the government oil
company's carried interest at the Salawati Island field. Revenues from the sales
of crude oil and liquids produced for 1997 include a $0.3 million gain on
hedging transactions compared to a $3.5 million loss on such transactions in
1996.
Revenues from the sales of natural gas produced increased from $24.9
million in the first quarter of 1996 to $36.7 million in the first quarter of
1997, reflecting a $0.28 per Mcf increase in the Company's average unhedged
sales prices and an increase in production from 154.0 MMcf per day in 1996 to
170.7 MMcf per day in 1997. Natural gas production increased 12.2 MMcf per day
in the Gulf Division and 3.7 MMcf per day in the Central Division, primarily
reflecting the results of exploration and development drilling, and 1.4 MMcf per
day in Argentina, primarily reflecting the expansion of the gas processing plant
at the Sierra Chata field. Monterey's natural gas production totalled 3.0 MMcf
per day in 1997 compared to 3.7 MMcf per day in 1996. Revenues from the sales of
natural gas produced in 1996 included a $5.7 million loss on hedging
transactions.
Revenues from the sales of crude oil purchased relate to the sale of crude
oil purchased and blended with certain of Monterey's heavy oil production to
facilitate pipeline production. The cost to purchase such crude oil is included
in Costs and Expenses.
SANTA FE
Revenues from the sales of crude oil and liquids produced increased from
$39.6 million in the first quarter of 1996 to $52.7 million in the first quarter
of 1997 reflecting improved market conditions, which resulted in an increase in
unhedged average sales prices from $17.43 per barrel in 1996 to $20.50 per
barrel in 1997, and an increase in crude oil and liquids production from 26,700
barrels per day in 1996 to 28,900 barrels per day in 1997. The increased
production reflects the previously discussed increases in Central Division and
Argentine production, partially offset by the decrease in Indonesian production.
Revenues from the sales of crude oil and liquids produced for 1997 include a
$0.3 million gain on hedging transactions compared to a $1.8 million loss on
such transactions in 1996.
From time to time Santa Fe hedges a portion of its oil and gas sales to
provide a certain minimum level of cash flow from its sales of oil and gas.
While the hedges are generally intended to reduce Santa Fe's exposure to
declines in market price, Santa Fe's gain from increases in market price may be
limited. Santa Fe uses various financial instruments whereby monthly settlements
are based on differences between the prices specified in the instruments and the
settlement prices of certain futures contracts quoted on the New York Mercantile
Exchange ("NYMEX") or certain other indices. Generally, in instances where the
applicable settlement price is less than the price specified in the contract,
Santa Fe receives a settlement based on the difference; in instances where the
applicable settlement price is higher than the specified price, Santa Fe pays an
amount based on the difference. The instruments utilized by Santa Fe differ from
futures contracts in that there is no contractual obligation which requires or
allows for the future delivery of the product. Gains or losses on hedging
activities are recognized in oil and gas revenues in the period in which the
hedged production is sold.
16
<PAGE>
Santa Fe has open crude hedges on an average of approximately 819,000
barrels for the period April to July 1997. The instruments used have floors
ranging from $21 to $23 per barrel and ceilings ranging from $24 to $27 per
barrel. Under the terms of the instruments, if the aggregate average of the
applicable daily settlement prices is below the floor, Santa Fe will receive a
settlement based on the difference, and if the aggregate average of the
applicable daily settlement prices is above the ceiling, Santa Fe will be
required to pay an amount based on the difference. The settlement price for
April 1997 was $19.70 per barrel. The following table reflects estimated amounts
due to or from Santa Fe assuming the stated settlement prices are in effect for
the entire period the aforementioned hedges are in effect.
SETTLEMENT PRICE DUE TO (FROM) COMPANY
(DOLLARS PER BARREL) (MILLIONS OF DOLLARS)
-------------------- ---------------------
26.00 (0.2)
25.00 (0.1)
23.00 - 24.00 --
22.00 0.1
21.00 0.5
20.00 1.2
19.00 2.1
Crude oil hedges resulted in a $0.3 million increase in revenues in the
first quarter of 1997 and a $1.8 million decrease in revenues in the first
quarter of 1996.
Santa Fe has no open natural gas hedges. In the first quarter of 1996
natural gas hedges resulted in a decrease in revenues of $5.7 million.
17
<PAGE>
Costs and Expenses
The following table sets forth certain costs and expenses, expressed in
millions of dollars and in dollars per barrel of oil equivalent ("BOE")
produced during the period:
<TABLE>
<CAPTION>
CONSOLIDATED SANTA FE
-------------------- --------------------
THREE MONTHS ENDED THREE MONTHS ENDED
MARCH 31, MARCH 31,
-------------------- --------------------
1997 1996 1997 1996
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
IN MILLIONS OF DOLLARS
Production and operating costs(a)....... 52.2 44.0 21.0 19.5
Exploration, including dry hole costs... 9.3 5.6 9.0 5.3
Depletion, depreciation and
amortization.......................... 33.6 32.3 24.3 23.8
General and administrative.............. 7.1 6.0 4.4 4.1
Taxes, other than income(b)............. 7.5 6.1 4.9 4.2
Interest income......................... 0.9 0.5 0.4 0.5
Interest expense........................ 7.7 9.6 3.0 3.2
Interest capitalized.................... 1.6 1.3 1.3 1.2
IN DOLLARS PER BOE
Production and operating costs(a)....... 5.39 5.03 4.11 4.13
Exploration, including dry hole costs... 0.96 0.64 1.76 1.12
Depletion, depreciation and
amortization.......................... 3.48 3.70 4.76 5.04
General and administrative.............. 0.73 0.69 0.86 0.87
Taxes, other than income(b)............. 0.77 0.70 0.96 0.89
Interest expense, net(c)................ 0.54 0.89 0.24 0.33
</TABLE>
- ------------
(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.
CONSOLIDATED
Consolidated costs and expenses totalled $118.1 million in the first
quarter of 1997 compared to $94.2 million in the first quarter of 1996.
Production and operating costs increased $8.2 million, primarily due to a $6.7
million increase in Monterey's costs. The increase in Monterey's costs primarily
reflects higher production volumes, prices and volumes for natural gas purchased
in connection with steam generation operations and costs related to properties
acquired in 1996. Costs associated with Central Division properties increased
$1.2 million, principally due to costs related to properties acquired in 1996
and early 1997. Exploration expense increased $3.7 million, primarily reflecting
higher dry hole costs ($4.7 million) partially offset by lower geological and
geophysical expenditures ($2.2 million). General and administrative expense
increased $1.1 million, primarily due to a $0.8 million increase in Monterey's
expenses, reflecting additional costs related to Monterey becoming a
publicly-traded company. The increase in taxes other than income primarily
reflects higher production and severance taxes due to higher prices and volumes
($0.7 million) and higher property taxes ($0.5 million).
Interest expense for the first quarter of 1997 is $1.9 million lower than
the first quarter of 1996 primarily reflecting the retirement of certain of
Monterey's long-term debt.
The decrease in the Company's preferred dividend requirement results from
the repurchase of 3.8 million shares of Convertible Preferred Stock, 7% Series
(the "7% Preferred") in the fourth quarter of 1996.
18
<PAGE>
SANTA FE
Costs and expenses totalled $61.3 million in the first quarter of 1997
compared to $57.1 million in the first quarter of 1996. Production and operating
costs increased $1.5 million, primarily due to costs associated with Central
Division properties acquired in 1996 and early 1997 ($1.2 million). Exploration
expense increased $3.7 million, primarily reflecting higher dry hole costs ($4.7
million) partially offset by lower geological and geophysical expenditures ($2.2
million). The increase in taxes other than income primarily reflects higher
production and severance taxes due to higher prices and volumes.
Earnings Per Share
CONSOLIDATED
In February 1997 the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 128 "Earnings Per Share" ("FAS 128"),
which establishes new guidelines for computing and presenting earnings per share
("EPS") and is effective for financial statements issued for periods ending
after December 15, 1997. If the provisions of FAS 128 had been in effect in the
three-month periods ended March 31, 1997 and 1996 the Company's EPS would have
been unchanged.
LIQUIDITY AND CAPITAL RESOURCES
CONSOLIDATED
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 incur debt at
constant or declining prices will be reduced. The Company increased its proved
reserves (net of production and sales) by approximately 33% over the five years
ended December 31, 1996; however, no assurances can be given that such increase
will occur in the future. Historically, the Company has generally funded
development 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. EBITDA (income from operations before depletion, depreciation and
amortization and gain or loss on disposition of assets) totalled $87.1 million
in the first quarter of 1997; net cash used for capital expenditures and
producing property acquisitions in such period totalled $91.6 million.
The $38.7 million net change in other assets and liabilities (a source of
funds provided by operating activities) in the first quarter of 1997 principally
reflects a decrease in other assets, primarily due to the release of $24.2
million escrowed in the fourth quarter of 1996 related to a producing property
acquisition which was completed in January 1997, and a decrease in other current
assets, primarily due to a decrease in cash advanced to the operators of joint
interest oil and gas properties.
In March 1997 the Company called for redemption all outstanding shares of
its $.732 Series A Convertible Preferred Stock (the "DECS") effective May 15,
1997. The redemption price, which will be payable in shares of common stock,
other than cash in lieu of fractional shares, will be .6773 of a share of common
stock for each DECS share. However, holders of the DECS who exercise their right
of conversion prior to the close of business on May 15, 1997, will receive .8474
of a share of common stock for each DECS share. There are currently 10.7 million
shares of the DECS outstanding. The Company also announced that during the
period commencing April 7, 1997 and ending on July 15, 1997, the conversion rate
on the Company's 1.2 million outstanding shares of 7% Preferred will be
increased from the current rate of 1.3913 shares of common stock per share of 7%
Preferred to a conversion rate of 1.8519 shares of common stock per share of 7%
Preferred. The average closing sales price of the Company's common stock was
$13.50 per share or higher for the 20 consecutive days ended May 9, 1997 and in
accordance with the Certificate of Designations, Preferences and Rights of the
7% Preferred, the Company has determined that the requirements for a Special
Conversion Event will be met on May 23, 1997. The Company intends to
19
<PAGE>
give formal notice on May 27, 1997 to the holders of the 7% Preferred of its
election to mandatorily convert each of the outstanding shares into 1.8519
shares of common stock.
The DECS and the 7% Preferred will be converted into approximately 9.1
million and 2.3 million shares of common stock, respectively, and the Company's
preferred dividend requirement will be eliminated. The conversion of the 7%
Preferred will result in a noncash reduction in earnings to common stock (which
will be reflected as a preferred dividend requirement in the statement of
operations) of approximately $7.6 million (assuming the market value of the
Company's common stock at the time of the conversion is $13.50 per share, a
recent trading price for the Company's common stock), representing the value of
the common shares issued in excess of the original conversion rate. The
conversion of the DECS will have no effect on the Company's earnings to common
stock. Following conversion of the DECS and 7% Preferred, the Company will have
approximately 102.9 million shares of common stock outstanding.
Monterey intends to pay its shareholders a quarterly dividend of $0.15 per
share. The first dividend, consisting of a prorated dividend of $0.22 per share
in respect of Monterey's first partial quarter which ended December 31, 1996 and
its first full quarter ending March 31, 1997, was paid in April 1997. Santa Fe
received a total of $10.0 million with respect to the 45.4 million shares that
it currently holds. To the extent Monterey continues to pay such dividends,
Santa Fe will receive dividends of approximately $6.8 million per quarter
(assuming a quarterly dividend of $0.15 per share) until the Proposed Spin Off
is consummated. Such amounts would be available to fund Santa Fe's operations.
Effective November 13, 1996 Monterey entered into the Monterey Credit
Agreement which matures November 13, 2000. The Monterey Credit Agreement permits
Monterey to obtain revolving credit loans and issue letters of credit up to an
aggregate amount of up to $75.0 million, with the aggregate amount of letters of
credit outstanding at any time limited to $15.0 million. Borrowings under the
Monterey Credit Agreement are unsecured and interest rates are tied to the
bank's prime rate or eurodollar offering rate, at the option of Monterey. At
March 31, 1997 no loans or letters of credit were outstanding under the terms of
the Monterey Credit Agreement.
In November 1996 Monterey issued the Monterey Senior Notes which were
exchanged for $175.0 million of senior notes previously issued by Santa Fe. The
Monterey Senior Notes bear interest at 10.61% per annum and are payable in full
in 2005. Monterey is required to repay, without premium, $25.0 million of the
principal amount each year from 1999 through 2005.
Certain of the credit agreements and the indenture for the Debentures
include covenants that restrict Santa Fe and Monterey's ability to take certain
actions, including the ability to incur additional indebtedness and to pay
dividends on capital stock. Under the most restrictive of these covenants, at
March 31, 1997 Santa Fe could incur up to $478.5 million of additional
indebtedness and pay dividends of up to $42.9 million on its aggregate capital
stock (including its common stock, 7% Preferred and DECS). At March 31, 1997,
under the most restrictive of these covenants, Monterey could incur up to $245.2
million of additional indebtedness and pay dividends of $65.5 million on its
common stock. Monterey is prohibited from paying more than $31.0 million in
dividends to Santa Fe in any fiscal year prior to the consummation of the
Proposed Spin Off.
At March 31, 1997 the Company had outstanding letters of credit totalling
$6.0 million, $2.3 million of which related to the operations of Monterey.
SANTA FE
Over the last five years proved reserves (net of production and sales) have
increased by approximately 76%; however, no assurances can be given that such
increase will occur in the future. EBITDA totalled $49.7 million in the first
quarter of 1997 and net cash used for capital expenditures and producing
property acquisitions in such period totalled $74.0 million.
Effective November 13, 1996 Santa Fe entered into a revolving credit
agreement (the "Santa Fe Credit Agreement") which matures November 13, 2001.
The Santa Fe Credit Agreement permits Santa Fe to obtain revolving credit loans
and issue letters of credit up to an aggregate amount of up to $150.0 million,
20
<PAGE>
with the aggregate amount of letters of credit outstanding at any time limited
to $30.0 million. Borrowings under the Santa Fe Credit Agreement are unsecured
and interest rates are tied to the bank's prime rate or eurodollar offering
rate, at the option of Santa Fe. At March 31, 1997, no loans or letters of
credit were outstanding under the terms of the Santa Fe Credit Agreement.
The Santa Fe Credit Agreement and the indenture for the Debentures include
covenants that restrict Santa Fe's ability to take certain actions, including
the ability to incur additional indebtedness and to pay dividends on capital
stock. Under the most restrictive of these covenants, at March 31, 1997 Santa Fe
could incur up to $478.5 million of additional indebtedness and pay dividends of
up to $42.9 million on its aggregate capital stock (including its common stock,
7% Preferred and DECS).
Santa Fe has three short-term uncommitted lines of credit totalling $60.0
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 March 31, 1997 no amounts were outstanding under these
lines of credit.
At March 31, 1997 Santa Fe had outstanding letters of credit totalling $3.7
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 4 to the Consolidated Financial Statements.
DIVIDENDS
Dividends on the Company's 7% Preferred and DECS 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 7% Preferred or DECS are in arrears. None of the
dividends with respect to the Company's 7% Preferred and DECS are in arrears.
The Company has called for the redemption of the DECS and increased the
conversion rate with respect to the 7% Preferred, see -- Liquidity and Capital
Resources. 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.
FORWARD LOOKING STATEMENTS
In its discussion and analysis of financial condition and results of
operations, the Company has included certain statements (other than statements
of historical fact) that constitute forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934. When used herein, the words "budget,"
"budgeted," "anticipate," "expects," "believes," "seeks," "goals,"
"intends" or "projects" and similar expressions are intended to identify
forward-looking statements. It is important to note that the Company's actual
results could differ materially from those projected by such forward-looking
statements. Although the Company believes that the expectations reflected in
such forward-looking statements are reasonable and such forward-looking
statements are based upon the best data available at the time this report is
filed with the Securities and
21
<PAGE>
Exchange Commission, no assurance can be given that such expectations will prove
correct. Factors that could cause the Company's results to differ materially
from the results discussed in such forward-looking statements include, but are
not limited to, the following: production variances from expectations,
volatility of oil and gas prices, the need to develop and replace its reserves,
the substantial capital expenditures required to fund its operations,
exploration risks, environmental risks, uncertainties about estimates of
reserves, competition, government regulation and political risks, and the
ability of the Company to implement its business strategy. All such
forward-looking statements in this document are expressly qualified in their
entirety by the cautionary statements in this paragraph.
22
<PAGE>
PART II
OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
None
(b) Reports on Form 8-K
Date Item
April 7, 1997 5
23
<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/ Janet F. Clark
Janet F. Clark
Vice President and Chief
Financial Officer
(Principal Financial and
Accounting Officer)
Houston, Texas
May 14, 1997
24
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<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE BALANCE
SHEET AS OF MARCH 31, 1997 AND THE INCOME STATEMENT FOR THE THREE MONTHS ENDED
MARCH 31, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
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<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> MAR-31-1997
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<SECURITIES> 0
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<PP&E> 2,639,900
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111,100
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