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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended JUNE 30, 1996
-------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File Number: 1-10662
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CROSS TIMBERS OIL COMPANY
(Exact name of registrant as specified in its charter)
Delaware 75-2347769
------------------------------- ------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
810 Houston Street, Suite 2000, Fort Worth, Texas 76102
------------------------------------------------- --------
(Address of principal executive offices) (Zip Code)
(817) 870-2800
-------------------------------------------------
(Registrant's telephone number, including area code)
NONE
---------------------------------------------------
(Former name, former address and former fiscal year,
if change since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
----- -----
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date:
Class Outstanding as of August 1, 1996
---------------------------- --------------------------------
Common stock, $.01 par value 17,810,730
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<PAGE>
CROSS TIMBERS OIL COMPANY
FORM 10-Q FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1996
INDEX
Page
----
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets
at June 30, 1996 and December 31, 1995.................... 3
Consolidated Statements of Operations
for the Three and Six Months Ended June 30, 1996
and 1995.................................................. 4
Consolidated Statements of Cash Flows
for the Six Months Ended June 30, 1996 and 1995........... 5
Notes to Consolidated Financial Statements.................. 6-8
Report of Independent Public Accountants.................... 9
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations............. 10-14
PART II. OTHER INFORMATION
Item 1. Legal Proceedings........................................... 15
Item 4. Submission of Matters to a Vote of Security Holders......... 15
Item 5. Other Information........................................... 16
Item 6. Exhibits and Reports on Form 8-K............................ 16
Signatures.................................................. 17
2
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P A R T I. F I N A N C I A L I N F O R M A T I O N
CROSS TIMBERS OIL COMPANY
CONSOLIDATED BALANCE SHEETS
- -------------------------------------------------------------------------------
(in thousands)
<TABLE>
<CAPTION>
JUNE 30,
1996 DECEMBER 31,
(Unaudited) 1995
----------- ------------
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents....................................... $ 1,849 $ 2,212
Accounts receivable, net........................................ 25,700 27,582
Inventory....................................................... 664 -
Deferred income tax benefit..................................... 478 1,661
Other current assets............................................ 1,471 1,282
-------- --------
Total Current Assets.......................................... 30,162 32,737
-------- --------
Property and Equipment, at cost - successful efforts method:
Producing properties............................................ 520,007 493,800
Undeveloped properties.......................................... 1,973 1,939
Gas gathering and other......................................... 21,339 48,064
-------- --------
Total Property and Equipment.................................. 543,319 543,803
Accumulated depreciation, depletion and amortization............ (193,657) (179,329)
-------- --------
Net Property and Equipment................................... 349,662 364,474
-------- --------
Investment in Equity Securities, at market value...................... 17,145 -
-------- --------
Other Assets.......................................................... 4,807 5,464
-------- --------
TOTAL ASSETS.......................................................... $401,776 $402,675
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable and accrued liabilities........................ $ 35,869 $ 25,314
Payable to Royalty Trust........................................ 2,198 1,890
Accrued stock incentive compensation............................ 491 3,881
-------- --------
Total Current Liabilities..................................... 38,558 31,085
-------- --------
Long-term Debt (Note 2)............................................... 236,721 238,475
-------- --------
Deferred Income Tax................................................... 3,691 2,382
-------- --------
Other Long-term Liabilities........................................... - 33
-------- --------
Commitments and Contingencies (Note 3)
Stockholders' Equity:
Preferred stock ($.01 par value, 25,000,000 shares authorized,
none issued)................................................... - -
Common stock ($.01 par value, 100,000,000 shares authorized,
18,767,811 and 18,415,257 shares issued)....................... 188 184
Additional paid-in capital...................................... 162,940 156,670
Treasury stock (863,653 and 30,516 shares)...................... (19,144) (528)
Unrealized gain on investment in equity securities.............. 694 -
Retained earnings (deficit)..................................... (21,872) (25,626)
-------- --------
Total Stockholders' Equity.................................... 122,806 130,700
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $401,776 $402,675
======== ========
See Accompanying Notes to Consolidated Financial Statements.
3
</TABLE>
<PAGE>
CROSS TIMBERS OIL COMPANY
CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
- -------------------------------------------------------------------------------
(in thousands, except per share data)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------ ------------------
1996 1995 1996 1995
-------- ------- -------- -------
<S> <C> <C> <C> <C>
REVENUES
Oil....................................... $18,544 $15,511 $34,847 $30,141
Gas....................................... 15,423 8,876 31,033 17,110
Gas gathering, processing and marketing... 2,387 1,054 6,240 2,206
Other..................................... 381 2,495 696 2,698
------- ------- ------- -------
Total Revenues............................ 36,735 27,936 72,816 52,155
------- ------- ------- -------
EXPENSES
Production................................ 9,503 8,745 19,169 16,453
Taxes on production and property.......... 2,710 2,385 5,463 4,600
Depreciation, depletion and amortization.. 8,746 8,246 17,847 16,241
General and administrative................ 7,100 3,859 9,660 5,004
Gas gathering and processing.............. 1,887 501 2,778 1,043
Interest expense, net..................... 3,590 2,711 7,541 4,952
Trust development costs................... 283 156 471 288
------- ------- ------- -------
Total Expenses............................ 33,819 26,603 62,929 48,581
------- ------- ------- -------
INCOME BEFORE INCOME TAX........................ 2,916 1,333 9,887 3,574
------- ------- ------- -------
INCOME TAX
Current................................... (340) - 79 -
Deferred.................................. 1,449 390 3,330 1,168
------- ------- ------- -------
Total Income Tax Expense (Benefit)........ 1,109 390 3,409 1,168
------- ------- ------- -------
NET INCOME...................................... $ 1,807 $ 943 $ 6,478 $ 2,406
======= ======= ======= =======
NET INCOME PER COMMON SHARE..................... $ 0.10 $ 0.06 $ 0.35 $ 0.15
======= ======= ======= =======
DIVIDENDS PER COMMON SHARE...................... $ 0.075 $ 0.075 $ 0.15 $ 0.15
======= ======= ======= =======
WEIGHTED AVERAGE COMMON
SHARES OUTSTANDING............................. 18,298 15,931 18,349 15,928
======= ======= ======= =======
See Accompanying Notes to Consolidated Financial Statements.
4
</TABLE>
<PAGE>
CROSS TIMBERS OIL COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
- -------------------------------------------------------------------------------
(in thousands)
(Note 4)
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
-------------------------
1996 1995
----------- -----------
<S> <C> <C>
OPERATING ACTIVITIES
Net income............................................................ $ 6,478 $ 2,406
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation, depletion and amortization............................ 17,847 16,241
Stock appreciation right compensation............................... (3,390) 427
Performance share compensation...................................... 712 -
Deferred income tax................................................. 3,330 1,168
Gain from sale of property and equity securities.................... (91) (2,392)
Other non-cash items................................................ 453 147
Changes in working capital (a)........................................ 4,164 (3,446)
-------- --------
CASH PROVIDED BY OPERATING ACTIVITIES................................. 29,503 14,551
-------- --------
INVESTING ACTIVITIES
Sale of equity securities............................................. - 16,920
Sale of property and equipment........................................ 28,327 3,011
Property acquisitions................................................. (9,656) (38,930)
Development costs..................................................... (11,073) (10,407)
Investment in equity securities....................................... (16,093) (123)
Gas gathering and other additions..................................... (2,676) (2,129)
-------- --------
CASH USED BY INVESTING ACTIVITIES..................................... (11,171) (31,658)
-------- --------
FINANCING ACTIVITIES
Proceeds from long-term debt.......................................... 46,000 49,000
Payments on long-term debt............................................ (47,700) (32,000)
Dividends............................................................. (2,759) (2,389)
Proceeds from exercise of stock options............................... 818 388
Purchase of treasury stock............................................ (15,054) (164)
-------- --------
CASH PROVIDED (USED) BY FINANCING ACTIVITIES.......................... (18,695) 14,835
-------- --------
DECREASE IN CASH AND CASH EQUIVALENTS.................................. (363) (2,272)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD......................... 2,212 7,838
-------- --------
CASH AND CASH EQUIVALENTS, END OF PERIOD............................... $ 1,849 $ 5,566
======== ========
(a)CHANGES IN WORKING CAPITAL
Accounts receivable................................................. $ 1,832 $ (1,449)
Inventory........................................................... (664) 1,494
Other current assets................................................ (189) (207)
Accounts payable, accrued liabilities and payable to Royalty Trust.. 3,185 (3,284)
-------- --------
(INCREASE) DECREASE IN WORKING CAPITAL............................... $ 4,164 $ (3,446)
======== ========
See Accompanying Notes to Consolidated Financial Statements.
5
</TABLE>
<PAGE>
CROSS TIMBERS OIL COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
1. INTERIM FINANCIAL STATEMENTS
The accompanying consolidated financial statements of Cross Timbers Oil
Company ("the Company"), with the exception of the consolidated balance sheet at
December 31, 1995, have not been audited by independent accountants. In the
opinion of the Company's management, the accompanying financial statements
reflect all adjustments necessary to present fairly the financial position at
June 30, 1996, the results of operations for the three and six-month periods
ended June 30, 1996 and 1995 and the cash flows for the six-month periods ended
June 30, 1996 and 1995. All such adjustments are of a normal recurring nature.
The results for interim periods are not necessarily indicative of annual
results.
Certain disclosures have been condensed or omitted from these financial
statements. Accordingly, these financial statements should be read with the
Company's consolidated financial statements included in the Company's 1995
annual report on Form 10-K.
2. LONG-TERM DEBT
As of June 30, 1996, outstanding bank debt was $173 million, compared
with borrowing commitments under the bank loan agreement of $220 million and
unused capacity of $47 million. In July 1996, the Company borrowed an
additional $36 million to partially fund the Enserch Acquisition (Note 6).
Borrowing commitments under the bank loan agreement were increased to $240
million after the closing of this acquisition. As of December 31, 1996 and June
30, 1997, borrowing commitments will be reduced to $230 million and $215
million, respectively.
Outstanding subordinated note debt was $63.7 million at June 30, 1996.
During the first six months of 1996, the Company purchased $2.8 million
principal amount of the notes at a loss of $20,000. The Board of Directors has
authorized the purchase of an additional $4 million principal amount of these
notes.
The following are maturities of long-term debt after closing of the
Enserch Acquisition: no maturities in 1996, $17 million in 1997, $31 million in
1998, $34 million in 1999 and $38 million in 2000.
3. COMMITMENTS AND CONTINGENCIES
Leases
In March 1996, the Company sold the Tyrone gas processing plant and
related gathering system (acquired in August 1995) for $28 million and agreed to
lease the facility from the buyers for an initial term of eight years at annual
rentals of $4 million, and with fixed renewal options for an additional 13
years. If the lessor decides to sell the facility at the end of the initial
term or any renewal period, the lessor must first offer to sell it to the
Company. The Company has a right of first refusal of any third party offers to
buy the facility after the initial term. This transaction was recorded as a
sale and an operating lease, with no gain or loss on the sale. Proceeds of the
sale were used to reduce borrowings under the bank loan agreement (Note 2).
Other
In January 1996, the Company committed with a bank to enter into two
interest rate swap agreements if LIBOR rates declined to specified strike rates
on April 17, 1996. The Company received $500,000 as consideration for this
commitment that expired unexercised on April 17, resulting in recognition of
such proceeds as other income in the quarter ended June 30, 1996.
6
<PAGE>
In June 1996, Holshouser v. Cross Timbers Oil Company, a class action
lawsuit, was filed in the District Court of Major County, Oklahoma. The action
was filed on behalf of all parties who, at any time since June 1991, have
allegedly had production or other costs deducted by the Company from royalties
paid on gas produced in Oklahoma when the royalty is based upon a specified
percentage of the proceeds received from the gas sold. The plaintiff alleges
that such deductions are a breach of the Company's contractual obligations to
the class and is seeking to recover an unspecified amount of damages as a result
of the alleged breach. Management cannot determine at this time the potential
liability of this claim, but intends to vigorously defend the action.
4. SUPPLEMENTAL CASH FLOW INFORMATION
The following are total interest and income tax payments during each of
the periods (in thousands):
<TABLE>
<CAPTION>
Six Months Ended June 30,
-------------------------
1996 1995
------------ -----------
<S> <C> <C>
Interest.... $7,212 $5,028
Income tax.. 6 160
</TABLE>
5. STOCK INCENTIVE PLANS
During the six months ended June 30, 1996, 346,553 stock incentive units
granted under the 1991 Stock Incentive Plan ("Units") were exercised at a
weighted average exercise price of $12.22. As a result of these exercises, the
Company received proceeds of $4.2 million (including 149,191 shares of common
stock valued at $3.4 million), issued 346,553 shares of common stock, paid stock
appreciation right compensation of $7.1 million, purchased 21,950 treasury
shares for $400,000 and withheld 104,746 treasury shares valued at $2.5 million
for employee payroll taxes. Related stock appreciation right compensation
expense for the six months ended June 30, 1996 was $3.7 million, which is
included in general and administrative expense in the consolidated statement of
operations. As of June 30, 1996, 17,183 Units were exercisable at a weighted
average exercise price of $13.57.
In May and June 1996, 158,250 performance shares that were granted in
November 1995 under the 1994 Stock Incentive Plan ("1994 Plan") became fully
vested. The Company recognized compensation expense related to these
performance shares of $700,000 during the first six months of 1996 and $2.8
million in the fourth quarter of 1995. Upon vesting, 47,150 treasury shares
with a value of $1 million were withheld by the Company for employee payroll
taxes.
In May 1996, the stockholders approved an increase in the number of
shares available for grant under the 1994 Plan from 800,000 to 1,000,000.
During the first six months of 1996, 134,000 stock options were granted to
employees and 6,000 fully vested performance shares were granted to non-employee
directors under the 1994 Plan.
6. ACQUISITIONS
At the end of March 1995, the Company acquired predominantly gas-
producing properties in Kansas, Oklahoma and Texas from Apache Corporation for
$20 million and in northwestern Oklahoma from Meridian Oil, Inc. and certain of
it affiliates for $4.1 million. During the second quarter of 1995, the Company
completed other acquisitions totaling approximately $7 million. These
acquisitions were primarily financed with bank debt under the Company's
revolving credit agreements.
On August 1, 1995, the Company acquired gas-producing properties and a
related gathering system and gas processing plant from Santa Fe Minerals, Inc.
("Santa Fe Acquisition"). The properties consist primarily of operated
interests in the Hugoton Field of Kansas and Oklahoma. Of the $123 million
adjusted purchase price,
7
<PAGE>
$94 million was allocated to producing properties and $29 million was allocated
to gas gathering and processing facilities. The Santa Fe Acquisition was
primarily financed by borrowings under the Company's loan agreement, proceeds
from the 1995 common stock offering, and asset sales.
On July 19, 1996, the Company acquired primarily gas-producing
properties in the Green River Basin of southwestern Wyoming from Enserch
Exploration ("Enserch Acquisition"). The Company's internal engineers estimate
the proved gas reserves for these properties to be 81 billion cubic feet. The
preliminary purchase price of $40 million will be reduced by an estimated $1.5
million for net revenues from the April 1, 1996 effective date of the
acquisition through the closing date of July 19. The Company funded the
acquisition with bank debt (Note 2) and cash flow from operations. A $3 million
deposit for this acquisition is included in producing properties in the
consolidated balance sheet at June 30, 1996.
Acquisitions are accounted for under the purchase method of accounting.
The following presents pro forma results of operations for the six months ended
June 30, 1995 and the year ended December 31, 1995 as if these acquisitions (net
of related dispositions) and the 1995 common stock offering had been consummated
as of January 1, 1995. Pro forma results of operations for the six months ended
June 30, 1996 are not currently available. These pro forma results are not
necessarily indicative of future results.
<TABLE>
<CAPTION>
Pro Forma (Unaudited)
----------------------------
Six Months Year Ended
(in thousands, except per share data) Ended June 30, December 31,
1995 1995
-------------- ------------
<S> <C> <C>
Revenues..................................... $66,163 $131,491
======= ========
Income (loss) before income tax
and extraordinary item.................. $ 18 $(21,085)
======= ========
Net income (loss) before extraordinary item.. $ 12 $(13,878)
======= ========
Net income (loss)............................ $ 12 $(13,222)
======= ========
Net income (loss) per common share:
Before extraordinary item............... $ 0.00 $ (0.76)
======= ========
After extraordinary item................ $ 0.00 $ (0.73)
======= ========
Weighted average common shares outstanding... 18,178 18,212
======= ========
8
</TABLE>
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
Cross Timbers Oil Company:
We have reviewed the accompanying consolidated balance sheet of Cross Timbers
Oil Company (a Delaware Corporation) as of June 30, 1996 and the related
consolidated statements of operations for the three and six-month periods ended
June 30, 1996 and 1995, and the consolidated statements of cash flows for the
six-month periods ended June 30, 1996 and 1995. These financial statements are
the responsibility of the Company's management.
We conducted our review in accordance with standards established by the American
Institute of Certified Public Accountants. A review of interim financial
information consists principally of applying analytical procedures to financial
data and making inquiries of persons responsible for financial and accounting
matters. It is substantially less in scope than an audit conducted in
accordance with generally accepted auditing standards, the objective of which is
the expression of an opinion regarding the financial statements taken as a
whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should
be made to the consolidated financial statements referred to above for them to
be in conformity with generally accepted accounting principles.
We have previously audited, in accordance with generally accepted auditing
standards, the consolidated balance sheet of Cross Timbers Oil Company as of
December 31, 1995 included in the Company's 1995 annual report on Form 10-K, and
in our report dated February 5, 1996, we expressed an unqualified opinion on
that statement. In our opinion, the information set forth in the accompanying
consolidated balance sheet as of December 31, 1995 is fairly stated, in all
material respects, in relation to the consolidated balance sheet included in the
Company's 1995 annual report on Form 10-K from which it has been derived.
ARTHUR ANDERSEN LLP
Fort Worth, Texas
July 26, 1996
9
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with management's
discussion and analysis contained in the Company's 1995 annual report on Form
10-K, as well as with the consolidated financial statements and notes thereto
included in this quarterly report on Form 10-Q.
<TABLE>
<CAPTION>
OIL AND GAS PRODUCTION AND PRICES
- -----------------------------------
QUARTER ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
------------------------------------ ------------------------------------
Increase Increase
1996 1995 (Decrease) 1996 1995 (Decrease)
---------- ---------- --------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
TOTAL PRODUCTION
Oil (Bbls) 852,047 875,527 (3%) 1,725,051 1,743,326 (1%)
Gas (Mcf) 8,472,441 6,231,277 36% 16,955,184 11,695,061 45%
NEBs 2,264,120 1,914,073 18% 4,550,915 3,692,503 23%
AVERAGE DAILY PRODUCTION
Oil (Bbls) 9,363 9,621 (3%) 9,478 9,632 (2%)
Gas (Mcf) 93,104 68,476 36% 93,160 64,614 44%
NEBs 24,880 21,034 18% 25,005 20,401 23%
AVERAGE SALES PRICE
Oil per Bbl $ 21.76 $ 17.72 23% $ 20.20 $ 17.29 17%
Gas per Mcf $ 1.82 $ 1.42 28% $ 1.83 $ 1.46 25%
</TABLE>
--------------------------
Bbl - Barrel
Mcf - Thousand cubic feet
NEB - Net equivalent barrel (six Mcf equal one Bbl)
Total oil production decreased slightly from comparable 1995 periods
primarily because of property dispositions, partially offset by new drilling and
acquisitions.
Gas production increases from the 1995 to 1996 periods are primarily
attributable to the 1995 acquisitions and significant new drills, partially
offset by property dispositions and natural decline.
Crude oil prices continued to improve during the second quarter of 1996.
The average posted price for West Texas Intermediate ("WTI"), a benchmark crude,
was $19.52 for second quarter 1996, compared to $17.40 for second quarter 1995.
The Company's average oil price includes oil marketing margins which are
partially offset by lower priced sour crude sales and transportation charges.
Natural gas prices were relatively weak the first half of 1995. Cold
weather and low storage levels caused gas prices to strengthen in November 1995,
and prices have remained relatively strong through June 1996. The Company
generally expects gas prices for the remainder of 1996 to be higher than
comparable 1995 periods.
10
<PAGE>
RESULTS OF OPERATIONS
- ---------------------
QUARTER ENDED JUNE 30, 1996 COMPARED WITH QUARTER ENDED JUNE 30, 1995
Second quarter 1996 net income was $1.8 million compared to $900,000 for
the second quarter of 1995. Improved earnings are primarily the result of
higher oil and gas prices and increased gas production, partially offset by
increased stock incentive compensation resulting from the increase in the
Company's common stock price.
Total revenues for the 1996 quarter were $36.7 million, a 32% increase
over second quarter 1995 revenues of $27.9 million. Oil revenue increased $3
million (20%) primarily because of the 23% increase in oil prices. Gas revenue
increased $6.5 million (74%) as a result of the 36% increase in gas production
and the 28% price increase.
Gas gathering, processing and marketing revenues increased $1.3 million
primarily because of the gross profit from gas processing at the Tyrone plant
that was acquired as part of the Santa Fe Acquisition in August 1995. Other
revenues of $400,000 for second quarter 1996 include recognition of interest
rate swap commitment income (see Note 3 to Consolidated Financial Statements).
Other revenues of $2.5 million in second quarter 1995 include a $1.6 million
gain realized on sale of equity securities and an $800,000 gain on sale of
producing properties.
Expenses for the second quarter of 1996 totaled $33.8 million as
compared to $26.6 million for second quarter 1995. Production expense increased
$800,000 (9%) and depreciation, depletion and amortization ("DD&A") increased
$500,000 (6%) primarily as a result of acquisitions after June 1995.
General and administrative expense increased $3.2 million primarily
because of second quarter 1996 stock incentive compensation of $4.6 million,
compared to second quarter 1995 stock incentive compensation of $1.7 million.
Stock incentive compensation for second quarter 1996 includes stock appreciation
right ("SAR") compensation of $3.9 million and performance share compensation of
$700,000. Increases in stock incentive compensation are the result of increases
in the Company's common stock price during the quarter. Virtually all stock
options with SARs were exercised as of June 30, 1996; therefore the impact of
SAR compensation on future periods should not be significant. The remaining
increase in general and administrative expense is due to Company growth.
Net interest expense increased $900,000 (32%) primarily because of a 28%
increase in weighted average borrowings to fund producing property acquisitions,
investment in equity securities and treasury stock purchases. Taxes on
production and property increased $300,000 (14%) over the second quarter of 1995
primarily because of increased oil and gas revenues. Gas gathering expense
increased $1.4 million primarily related to operating expenses of the Tyrone
plant that was acquired in August 1995.
SIX MONTHS ENDED JUNE 30, 1996 COMPARED WITH SIX MONTHS ENDED JUNE 30, 1995
Net income for the six months ended June 30, 1996 was $6.5 million,
compared to $2.4 million for the same 1995 period. Improved earnings were
primarily the result of higher oil and gas prices, increased gas production and
improved gas marketing margins.
Total revenues for the first half of 1996 were $72.8 million, or 40%
higher than revenues for the first half of 1995. Oil revenue increased $4.7
million (16%) primarily as the result of the 17% increase in prices. Gas
revenue increased $13.9 million (81%) due to the 25% price increase combined
with the 45% increase in production.
Gas gathering, processing and marketing revenues increased $4 million
because of improved gas marketing margins and the gross profit from gas
processing at the Tyrone plant that was acquired as part of the Santa Fe
Acquisition in August 1995. Other revenues of $700,000 for the first half of
1996 include recognition of interest rate swap commitment income (see Note 3 to
Consolidated Financial Statements). Other revenues of $2.7 million in 1995
include a $1.6 million gain realized on sale of equity securities and an
$800,000 gain on sale of producing properties.
11
<PAGE>
Expenses for the six months ended June 30, 1996 totaled $62.9 million,
or 30% above total expenses for the first half of 1995. Production expense
increased $2.7 million (17%) primarily as a result of the 1995 acquisitions.
DD&A expense increased $1.6 million as a result of the 1995 acquisitions,
partially offset by the effects of increased estimated proved reserves at
January 1, 1996.
General and administrative expense increased $4.7 million primarily
because of $4.4 million in stock incentive compensation incurred for the first
half of 1996 compared to $900,000 for the first half of 1995. Stock incentive
compensation for the first six months of 1996 includes SAR compensation of $3.7
million and performance share compensation of $700,000. Increases in stock
incentive compensation are the result of increases in the Company's common stock
price during the quarter. Virtually all stock options with SARs were exercised
as of June 30, 1996; therefore the impact of SAR compensation on future periods
should not be significant. The remaining increase in general and administrative
expense is attributable to Company growth.
Taxes on production and property increased $900,000 primarily because of
increased oil and gas revenues. Net interest expense increased $2.6 million
(52%) primarily as a result of a 46% increase in weighted average borrowings
that were used to fund capital expenditures and treasury stock purchases. Gas
gathering expense increased $1.7 million related to operations of the Tyrone
plant that was acquired in August 1995.
COMPARATIVE EXPENSES PER NET EQUIVALENT BARREL OF PRODUCTION
The following are expenses on a net equivalent barrel (NEB) basis:
<TABLE>
<CAPTION>
QUARTER ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
------------------------------------ ------------------------------------
Increase Increase
1996 1995 (Decrease) 1996 1995 (Decrease)
---------- ---------- --------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Production ................... $4.20 $4.57 (8%) $4.21 $4.46 (6%)
Taxes on production and
property..................... 1.20 1.25 (4%) 1.20 1.25 (4%)
Depreciation, depletion and
amortization (DD&A) (a) 3.74 4.09 (9%) 3.60 4.18 (14%)
General and administrative
(G&A)........................ 3.14 2.02 55% 2.12 1.36 56%
Interest ..................... 1.59 1.42 12% 1.66 1.34 24%
</TABLE>
--------------------------
(a) Includes only DD&A directly related to oil and gas production.
Although expenses have increased from 1995 to 1996, expenses per NEB (as
shown above) have generally remained stable over these periods. The following
are explanations of the more significant variances:
Production- Decreased production expense per NEB is primarily because
of lower operating costs of gas-producing properties acquired in 1995.
DD&A- Decreased DD&A per NEB is attributable to increased proved
reserve estimates at January 1, 1996 and reduced depletable costs resulting from
the $20.3 million impairment provision recorded in fourth quarter 1995 upon
adoption of Statement of Financial Accounting Standards No. 121.
G&A- Increased G&A per NEB is primarily because of stock incentive
compensation. Excluding stock incentive compensation, G&A per NEB was $1.41 and
$1.12 for the quarters ended June 30, 1996 and 1995, respectively, and was $1.31
and $1.12 per NEB for the first six months of 1996 and 1995, respectively.
Interest- Increased interest per NEB is primarily the result of
financing expenditures for other than oil and gas producing properties
(investment in equity securities, treasury stock purchases, and the Tyrone gas
processing plant and gathering system) with borrowings under the Company's bank
credit facilities.
12
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
CASH FLOW AND WORKING CAPITAL
Cash provided by operating activities was $29.5 million for the first
half of 1996 as compared to $14.6 million for the comparable 1995 period.
Operating cash flow (defined as cash provided by operating activities before
changes in working capital) increased 41% from $18 million for the first six
months of 1995 to $25.3 million for the same 1996 period. SAR payments,
resulting from stock option exercises, decreased operating cash flow for the
first half of 1996 by approximately $7 million.
During the six months ended June 30, 1996, $29.5 million cash provided
by operating activities, $28.3 million from the sale of assets and $800,000 from
the exercise of stock options were used to fund property acquisitions,
development costs and other capital additions of $39.5 million, dividends of
$2.8 million, purchases of treasury stock of $15 million and a net reduction of
long-term debt of $1.7 million. The resulting decrease in cash and cash
equivalents for the period was $400,000.
Total current liabilities increased $7.5 million from year-end primarily
because of an increase in accounts payable and accrued liabilities related to
drilling and development activity. Accrued stock incentive compensation
decreased $3.4 million as a result of significant stock option exercises in the
second quarter.
ACQUISITIONS AND DEVELOPMENT
In March 1996, the Company sold its gas processing plant and related
gathering system for $28 million and agreed to lease the facility from the
buyers for an initial term of eight years at annual rentals of $4 million, and
with fixed renewal options for an additional 13 years. Proceeds of the sale
were used to reduce bank debt.
Through June 30, the Company's 1996 cash expenditures for exploitation
and development were $11.1 million as compared to $10.4 million for the same
1995 period. Exploitation and development costs incurred for 1996 through June
30 totaled $18.6 million. Although actual exploitation and development
expenditures may vary significantly due to many factors, the Company anticipates
its 1996 expenditures for exploitation and development activities to approximate
its increased budget of $40 million as approved by the Board of Directors in May
1996. Such expenditures are expected to be funded by cash flow from operations.
During the first half of 1996, the Company's purchases of equity securities (for
non-trading purposes) totaled $16.1 million.
In May 1996, the Company also announced expected increases in its 1997
development expenditures to $60 to $80 million, and plans to make strategic
acquisitions totaling $120 million over the following 18 months, including
purchases of up to two million shares of the Company's common stock as treasury
stock purchases. As of June 30, 510,000 treasury shares had been purchased for
$11.3 million. In July 1996, the Company announced that it would also purchase
up to one million units of beneficial interest in Cross Timbers Royalty Trust as
part of its acquisition program.
On July 19, 1996, the Company acquired primarily gas-producing
properties in the Green River Basin of southwestern Wyoming from Enserch
Exploration. The Company's internal engineers estimate the proved gas reserves
for these properties to be 81 billion cubic feet. The preliminary purchase
price of $40 million will be reduced by an estimated $1.5 million for net
revenues from the April 1, 1996 effective date of the acquisition through the
closing date of July 19. The Company funded the acquisition with bank debt
(Note 2) and cash flow from operations.
As of the end of June, the Company had completed drilling 15 oil wells
and 16 gas wells in 1996. A total of 63 recompletions and workovers were also
completed in the first half of the year. Results of 1996 development and
exploitation activity to date have met management's expectations.
13
<PAGE>
Eight wells have been completed under the Prentice Northeast Unit 1996
infill drilling program. Daily production for each of these wells has averaged
100 barrels, outperforming initial estimates. Because of this success, drilling
plans for this Unit have been doubled to 20 wells in 1997.
DEBT AND EQUITY
During the first six months of 1996, long-term debt decreased $1.8
million, reflecting a reduction in convertible subordinated note borrowings of
$2.8 million and an increase in bank borrowings of $1 million. Increases in
bank debt to fund the investment in equity securities and treasury stock
purchases were offset by the reduction in bank debt from proceeds of the sale
and leaseback of the Company's gas gathering and processing facility in March
1996. Stockholders' equity at June 30, 1996 decreased $7.9 million from year-
end as a result of treasury stock additions of $18.6 million and dividends of
$2.7 million, partially offset by year-to-date net income of $6.5 million,
common stock increases of $6.2 million resulting from stock option exercises,
and an unrealized gain of $700,000 (net of deferred taxes of $400,000) in the
investment in equity securities.
In July 1996, following the closing of the Enserch Acquisition,
borrowing commitments under the bank loan agreement were increased to $240
million. See Note 2 to Consolidated Financial Statements.
DIVIDENDS
In May 1996, the Board of Directors of the Company declared a second
quarter dividend of $.075 per common share, or a total of $1.3 million, to be
paid in July 1996 to shareholders of record on June 30, 1996. This dividend is
at the same quarterly rate paid by the Company or its predecessors since
September 1992.
14
<PAGE>
P A R T II. O T H E R I N F O R M A T I O N
ITEM 1. LEGAL PROCEEDINGS
On June 21, 1996, Holshouser v. Cross Timbers Oil Company, a class
action lawsuit, was filed in the District Court of Major County, Oklahoma. The
action was filed on behalf of all parties who, at any time since June 1991, have
allegedly had production or other costs deducted by the Company from royalties
paid on gas produced in Oklahoma when the royalty is based upon a specified
percentage of the proceeds received from the gas sold. The plaintiff alleges
that such deductions are a breach of the Company's contractual obligations to
the class and is seeking to recover an unspecified amount of damages as a result
of the alleged breach. The plaintiff is also seeking a determination of the
Company's obligations to the plaintiff and the class regarding production or
other costs. Management cannot determine at this time the potential liability
of this claim, but intends to vigorously defend the action.
The Company and its subsidiaries are named defendants in other lawsuits
and named parties in certain governmental proceedings arising in the ordinary
course of business. While the outcome of these lawsuits or other proceedings
against the Company cannot be predicted with certainty, management does not
expect these matters to have a material adverse effect on the Company's
financial position, liquidity or operations.
ITEMS 2. THROUGH 3.
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Stockholders at the Annual Meeting on May 21, 1996, and by proxy,
elected two incumbent directors, Jon Brumley and Charles B. Chitty. Of
15,236,004 shares represented at the meeting, 15,227,284 shares (99.9%) were
voted for Mr. Brumley and 15,226,434 shares (99.9%) were voted for Mr. Chitty.
Other directors continuing in office are Steffen E. Palko, J. Luther King, Jr.,
Scott G. Sherman, Bob R. Simpson and George U. Wyper. Effective upon Mr.
Brumley's retirement on July 1, 1996, J. Richard Seeds has been appointed to
serve as director until the Company's 1997 Annual Meeting.
One proposal by the Board of Directors was approved by stockholders at
the Annual Meeting, with the following vote tabulation:
<TABLE>
<CAPTION>
Approval of the amendment to the 1994 Stock Incentive Plan to increase the total
number of shares available for grant from 800,000 to 1,000,000
------------------------------------------------------------------------------------
Shares Broker
Shares For Shares Against Abstained Non-Votes
--------------------- ----------------- --------------- ---------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
14,520,072 95.3% 612,114 4.0% 52,410 0.4% 51,408 0.3%
15
</TABLE>
<PAGE>
ITEM 5. OTHER INFORMATION.
On July 12, 1996, Cross Timbers Oil Company, a Delaware corporation
("the Company"), announced that its Board of Directors authorized the purchase
of up to one million units of beneficial interest ("Units") in Cross Timbers
Royalty Trust (NYSE-CRT) from time to time in open market or privately
negotiated transactions. The purchase of units will depend on availability, oil
and gas prices and general market conditions, and will be funded by bank debt
and cash flow from operations. Cross Timbers Royalty Trust currently has six
million Units outstanding.
On July 19, 1996, the Company purchased predominantly gas-producing
properties from Enserch Exploration. The acquired interests consist of
primarily operated, working interests in the Fontenelle, Nitchie Gulch and Pine
Canyon fields of Lincoln and Sweetwater counties, in the Green River Basin of
southwestern Wyoming. The Company's internal engineers estimated proved
reserves as of April 1, 1996, the effective date of the acquisition, to be 81
billion cubic feet of gas. Current net production from the acquired interests
averages 12.6 million cubic feet of gas per day. The preliminary purchase price
of $40 million will be reduced by an estimated $1.5 million for net revenues
from April 1 through the July 19 closing date. The Company funded the
acquisition with bank debt and cash flow from operations.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit Number
and Description Page
--------------- ----
15 Letter re unaudited interim
financial information
15.1 Awareness letter of
Arthur Andersen LLP 18
(b) Reports on Form 8-K
On June 7, 1996, the Company filed a report on Form 8-K
dated May 21, 1996 regarding the increase in the Company's
1996 development budget to $40 million, further expected
increases in 1997 development expenditures to $60 to $80
million, and plans to make strategic acquisitions totaling
$120 million over the following 18 months.
16
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this Report to be signed on its behalf by the
undersigned thereunto duly authorized.
CROSS TIMBERS OIL COMPANY
Date: August 12, 1996 By BENNIE G. KNIFFEN
------------------------------------
Bennie G. Kniffen
Senior Vice President and Controller
(Principal Accounting Officer and
Duly Authorized Officer)
17
<PAGE>
EXHIBIT 15.1
Cross Timbers Oil Company:
We are aware that Cross Timbers Oil Company has incorporated by reference in its
Registration Statements No. 33-64274, No. 33-65238 and No. 33-81766 on Form S-8
its Form 10-Q for the quarter ended June 30, 1996, which includes our report
dated July 26, 1996, covering the unaudited interim financial information
contained therein. Pursuant to Regulation C of the Securities Act of 1933, that
report is not considered a part of the registration statement prepared or
certified by our firm or a report prepared or certified by our firm within the
meaning of Sections 7 and 11 of the Act.
ARTHUR ANDERSEN LLP
Fort Worth, Texas
August 12, 1996
18
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