<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MARCH 11, 1994
REGISTRATION STATEMENT NO. 033-
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
------------------------
FORM S-3
REGISTRATION STATEMENT
UNDER THE SECURITIES ACT OF 1933
------------------------
MESA INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
TEXAS 75-2394500
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
WILLIAM D. BALLEW
2001 ROSS AVENUE, SUITE 2600 301 SOUTH POLK
DALLAS, TEXAS 75201 AMARILLO, TEXAS 79101
(214) 969-2200 (806) 378-1000
(Address, including zip code, and telephone (Name, address, including zip code, and
number, including area code, of registrant's telephone number, including area code, of
principal executive offices) agent for service)
</TABLE>
------------------------
Copy to:
<TABLE>
<S> <C>
STEPHEN A. MASSAD C. MICHAEL HARRINGTON
BAKER & BOTTS, L.L.P. VINSON & ELKINS L.L.P.
ONE SHELL PLAZA, 910 LOUISIANA 2500 FIRST CITY TOWER, 1001 FANNIN
HOUSTON, TEXAS 77002 HOUSTON, TEXAS 77002
(713) 229-1475 (713) 758-2148
</TABLE>
------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the effective date of this Registration Statement.
------------------------
IF THE ONLY SECURITIES BEING REGISTERED ON THIS FORM ARE BEING OFFERED
PURSUANT TO DIVIDEND OR INTEREST REINVESTMENT PLANS, PLEASE CHECK THE FOLLOWING
BOX. / /
IF ANY OF THE SECURITIES BEING REGISTERED ON THIS FORM ARE TO BE OFFERED ON
A DELAYED OR CONTINUOUS BASIS PURSUANT TO RULE 415 UNDER THE SECURITIES ACT OF
1933, OTHER THAN SECURITIES OFFERED ONLY IN CONNECTION WITH DIVIDEND OR INTEREST
REINVESTMENT PLANS, CHECK THE FOLLOWING BOX. / /
REGISTRATION FEE
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------
PROPOSED PROPOSED
MAXIMUM MAXIMUM AMOUNT OF
TITLE OF EACH CLASS OF AMOUNT TO OFFERING PRICE AGGREGATE REGISTRATION
SECURITIES TO BE REGISTERED BE REGISTERED PER SHARE(1) OFFERING PRICE(1) FEE
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock, par value $.01
per share.................. 26,450,000 shares(2) $6.3125 $166,965,625 $57,574
- -------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------
</TABLE>
(1) Estimated pursuant to Rule 457(c) solely for the purpose of calculating the
amount of the registration fee, based on the average of the high and low
sales prices of the Common Stock, as reported on the New York Stock
Exchange on March 10, 1994.
(2) Includes 3,450,000 shares subject to the Underwriters' over-allotment
option.
------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THE REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID
SECTION 8(A), MAY DETERMINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE> 2
Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may
not be sold nor may offers to buy be accepted prior to the time the
registration statement becomes effective. This prospectus shall not
constitute an offer to sell or the solicitation of an offer
to buy nor shall there be any sale of these securities in any State in
which such offer, solicitation or sale would be unlawful prior to
registration or qualification under the securities laws of any such State.
SUBJECT TO COMPLETION
PRELIMINARY PROSPECTUS DATED MARCH 11, 1994
PROSPECTUS
23,000,000 SHARES
{MESA LOGO}
COMMON STOCK
---------------------
All of the shares of Common Stock offered hereby will be sold by MESA Inc.
(the "Company").
The Company's Common Stock is listed on the New York Stock Exchange under
the symbol "MXP." On March 10, 1994, the last reported sale price of the Common
Stock on the New York Stock Exchange was $6 1/4 per share. See "Price Range of
Common Stock and Dividend Policy."
The Underwriters are reserving an aggregate of 3,000,000 shares of Common
Stock (the "Reserved Shares") at the Price to Public set forth below for sale to
Boone Pickens, the chief executive officer of the Company, Fayez Sarofim, a
director of the Company, and another individual unaffiliated with the Company,
subject, in the case of Mr. Sarofim, to certain conditions. See "Underwriting."
SEE "RISK FACTORS" FOR A DISCUSSION OF CERTAIN FACTORS THAT SHOULD BE
CONSIDERED IN CONNECTION WITH AN INVESTMENT IN THE COMMON STOCK OFFERED HEREBY.
---------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------
PRICE TO UNDERWRITING PROCEEDS TO
PUBLIC DISCOUNT(1)(2) COMPANY(2)(3)
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Per Share......................... $ $ $
- -----------------------------------------------------------------------------------------------
Total(4).......................... $ $ $
- -----------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------
</TABLE>
(1) The Company has agreed to indemnify the several Underwriters against
certain liabilities, including liabilities under the Securities Act of
1933. See "Underwriting."
(2) No Underwriting Discount will be payable with respect to any Reserved
Shares sold to the three individuals named above. The total Underwriting
Discount and Proceeds to Company assume that all Reserved Shares will be
sold to such individuals.
(3) Before deducting expenses payable by the Company estimated at $ .
(4) The Company has granted to the Underwriters a 30-day option to purchase up
to 3,450,000 additional shares of Common Stock at the Price to Public, less
Underwriting Discount, solely to cover over-allotments, if any. If such
option is exercised in full, the total Price to Public, Underwriting
Discount and Proceeds to Company will be $ , $ and
$ , respectively. See "Underwriting."
---------------------
The shares of Common Stock are offered by the several Underwriters, subject
to prior sale, when, as and if issued to and accepted by them, and certain other
conditions. The Underwriters reserve the right to withdraw, cancel or modify
such offer and to reject orders in whole or in part. It is expected that
delivery of the shares of Common Stock will be made in New York, New York on or
about , 1994.
---------------------
MERRILL LYNCH & CO.
BEAR, STEARNS & CO. INC.
PAINEWEBBER INCORPORATED
SALOMON BROTHERS INC
---------------------
The date of this Prospectus is , 1994.
<PAGE> 3
[MAP OF PORTIONS OF KANSAS, OKLAHOMA AND TEXAS, SHOWING HUGOTON AND WEST
PANHANDLE FIELDS AND MESA'S INTERESTS THEREIN.]
------------------------
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK OF
THE COMPANY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN
MARKET. SUCH TRANSACTIONS MAY BE EFFECTED ON THE NEW YORK STOCK EXCHANGE OR
OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
2
<PAGE> 4
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and financial statements (including the notes thereto) appearing
elsewhere in this Prospectus or incorporated by reference in this Prospectus.
Unless otherwise indicated, the information in this Prospectus assumes that the
Underwriters' overallotment option will not be exercised. Unless the context
otherwise requires, the term "Mesa" means MESA Inc. (the "Company") and its
subsidiaries taken as a whole and includes the Company's predecessors.
Capitalized terms used but not defined in the summary have the meanings assigned
to them elsewhere in this Prospectus.
THE COMPANY
Mesa is one of the largest independent oil and gas companies in the United
States and considers itself one of the most efficient domestic operators of
natural gas properties. As of December 31, 1993, Mesa owned approximately 1.7
trillion cubic feet of equivalent proved natural gas reserves ("Tcfe"). Over 70%
of Mesa's total equivalent proved reserves are natural gas and the balance are
principally natural gas liquids ("NGLs"), which are extracted from natural gas
through processing plants. Substantially all of Mesa's reserves are proved
developed reserves. The estimated future net cash flows before income taxes from
Mesa's proved reserves, as of December 31, 1993, as determined in accordance
with the regulations of the Securities and Exchange Commission (the "SEC") were
approximately $2.3 billion and had a net present value (discounted at 10%)
before income taxes of approximately $1.1 billion.
Over 96% of Mesa's reserves are concentrated in the Hugoton field of
southwest Kansas and the West Panhandle field of north Texas. The two fields are
each part of a reservoir that extends from southwest Kansas, through the
Oklahoma panhandle, and into the Texas panhandle. These fields, which produce
gas from depths of 3,500 feet or less, are known for their stable, long-life
production profiles. Although the two fields are part of the same reservoir,
Mesa's interests in these fields are operated separately and are subject to
different contractual and marketing arrangements. Due to the long-life nature of
the Hugoton and West Panhandle properties, Mesa expects to be able to maintain a
relatively stable production profile from its existing properties for the
remainder of the decade, regardless of acquisitions or exploration or
development success in other areas.
The Hugoton field in southwest Kansas began producing in 1922, and is the
largest producing gas field in the continental United States. Mesa's Hugoton
properties, which represent approximately 13% of the total field, are
concentrated in the center of the field on over 230,000 net acres, covering
approximately 400 square miles. Gas from these properties is produced from over
1,000 wells, approximately 950 of which are operated by Mesa, and in which Mesa
has an average working interest of 95%. Mesa owns substantially all of the
gathering and processing facilities which service its production from the
Hugoton field, allowing Mesa to control the production stream from the well bore
to the various interconnects it has with major intrastate and interstate
pipelines. Natural gas from the West Panhandle properties, located in the
northern panhandle region of Texas, is produced from 586 wells which Mesa
operates on 191,000 net acres. All of Mesa's West Panhandle production is
processed through Mesa's recently expanded Fain natural gas processing plant.
Mesa's other properties, which account for less than 4% of 1993 year-end
reserves, are located in the Gulf of Mexico and Rocky Mountain area.
Over the past several years, Mesa has concentrated its efforts on fully
developing its existing long-life reserve base and improving its marketing
flexibility. In the Hugoton field, these efforts have included infill drilling,
adding compression and gathering facilities, and construction of a new natural
gas processing plant. In the West Panhandle field, development activities have
included well workovers and deepenings, adding compression facilities, and
expanding and upgrading natural gas processing facilities. Mesa has renegotiated
its contractual arrangements in the West Panhandle field to more clearly define
its rights to production and to create greater marketing flexibility. Mesa has
negotiated new natural gas sales contracts to provide market based pricing on
most of its production. Two significant gas sales contracts will expire in 1995,
giving Mesa a substantial amount of uncommitted deliverability available for
sale after that date.
Mesa's principal business strategy includes (i) maximizing the value of its
existing high-quality, long-life reserves through efficient operating and
marketing practices, (ii) processing natural gas in Mesa-owned
3
<PAGE> 5
processing facilities to extract premium products such as natural gas liquids
and helium, (iii) conducting selective exploratory and development activities,
primarily through the development of additional reserves in certain deeper
portions of the West Panhandle field reservoir and development and exploratory
drilling in the Gulf of Mexico based on evaluation of three dimensional ("3-D")
seismic surveys, (iv) making acquisitions of producing properties with
exploration and development potential in areas where Mesa has operating
experience and expertise, and (v) promoting the use of natural gas as a
transportation fuel and developing and marketing natural gas fuel equipment for
the transportation market.
For additional discussion of Mesa and its business, see "Business."
RECENT EVENTS
In the first quarter of 1994, Mesa settled a lawsuit brought by Unocal
Corporation ("Unocal") against Mesa and certain other parties in which Unocal
had sought to recover more than $150 million. Under the settlement, Mesa paid
Unocal $42.75 million and certain unaffiliated entities paid an additional $4.75
million. Mesa's payment was funded through the issuance and sale of an
additional amount of its 12 3/4% Secured Discount Notes due 1998 (the "Secured
Discount Notes").
In March 1994, Mesa filed a registration statement with respect to a shelf
offering of debt securities, in one or more series, at an initial aggregate
offering price not to exceed $300 million. If and when any such debt securities
are issued, the net proceeds from such issuance will be used to retire existing
debt of Mesa. The terms of any such debt securities, including the principal
amount, interest requirements, ranking and maturity, will be determined at the
time such securities are offered and sold. There can be no assurance that Mesa
will offer any such securities for sale or, if offered, as to the amount or
terms of such securities.
RISK FACTORS
See "Risk Factors" for a discussion of certain factors that should be
considered by prospective purchasers of the Common Stock, including information
regarding the Company's highly leveraged capital structure and continuing losses
and the uncertainty of natural gas and NGL prices.
THE OFFERING
<TABLE>
<S> <C>
Common Stock offered by the Company................. 23,000,000 shares (1)
Common Stock to be outstanding after the Offering... 70,762,109 shares (2)
Use of proceeds..................................... To repay debt, substantially all of
which matures in 1996. See "Use of
Proceeds."
NYSE symbol......................................... MXP
</TABLE>
- ---------------
(1) Of the shares offered, the Underwriters are reserving an aggregate of
3,000,000 shares of Common Stock at the Price to Public in the Offering for
sale to Boone Pickens, Mesa's chief executive officer, Fayez Sarofim, a
director of the Company, and one other individual not affiliated with the
Company. The ability of Mr. Sarofim, who controls an NASD member firm, to
purchase shares in the Offering is subject to satisfaction of certain NASD
rules. See "Underwriting."
(2) Based on shares outstanding as of March 1, 1994. Excludes 1,893,050 shares
of Common Stock issuable upon exercise of outstanding employee stock
options.
4
<PAGE> 6
SUMMARY FINANCIAL, OPERATING AND RESERVE INFORMATION
The following tables sets forth summary financial, operating and reserve
information of Mesa as of the dates and for the periods indicated. Such
financial information should be read in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
the Consolidated Financial Statements of the Company and the related notes
thereto included elsewhere in this Prospectus (dollar amounts in thousands,
except per share data).
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31
----------------------------------------
1993 1992 1991
----------- ----------- ------------
<S> <C> <C> <C>
RESULTS OF OPERATIONS:
Revenues.............................................. $ 222,204 $ 237,112 $ 249,546
Operating and administrative costs.................... (100,093) (96,958) (98,342)
----------- ----------- ------------
EBITDA(a)............................................. 122,111 140,154 151,204
Depreciation, depletion and amortization.............. (100,099) (113,933) (117,076)
----------- ----------- ------------
Operating income...................................... 22,012 26,221 34,128
Interest expense, net of interest income.............. (131,298) (129,888) (134,258)
Other, net............................................ 6,838 14,435 20,967
----------- ----------- ------------
Net loss.............................................. $ (102,448) $ (89,232) $ (79,163)
----------- ----------- ------------
----------- ----------- ------------
Net loss per common share............................. $ (2.61) $ (2.31) $ (2.05)
----------- ----------- ------------
----------- ----------- ------------
PRODUCTION:
Natural gas (MMcf).................................... 79,820 89,527 108,522
Natural gas liquids (MBbl)............................ 5,050 4,840 4,725
Oil and condensate (MBbl)............................. 738 984 767
Equivalent natural gas (MMcfe)(b)..................... 114,548 124,471 141,474
ESTIMATED PROVED RESERVES (AT END OF PERIOD)(C):
Natural gas (MMcf).................................... 1,202,444 1,276,049 1,367,968
Natural gas liquids (MBbl)............................ 79,150 80,124 79,269
Oil and condensate (MBbl)............................. 3,296 7,268 3,956
Equivalent natural gas (MMcfe)........................ 1,697,120 1,800,401 1,867,318
Present value of estimated future net cash flows from
proved reserves before income taxes (discounted at
10%)............................................... $1,068,740 $1,167,694 $1,181,013
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1993
--------------------------
ACTUAL AS ADJUSTED(D)
---------- -----------
<S> <C> <C>
BALANCE SHEET DATA:
Working capital................................................... $ 76,158 $ 76,158
Property, plant and equipment, net................................ 1,191,846 1,191,846
Total assets...................................................... 1,533,382 1,531,323
Long-term debt, including current maturities...................... 1,241,294 1,141,685
Stockholders' equity (including subsequently acquired minority
interest)...................................................... 114,861 252,428
</TABLE>
- ---------------
(a) EBITDA represents operating income plus depreciation, depletion and
amortization expense. EBITDA is not presented as an indicator of Mesa's
operating performance or as a measure of liquidity.
(b) Approximately 1,500 MMcfe, 4,400 MMcfe and 11,200 MMcfe of production in
1993, 1992 and 1991, respectively, is attributable to oil and gas
properties sold during the three-year period ended December 31, 1993.
(c) In addition to the proved reserves disclosed above, Mesa owned proved
helium and carbon dioxide (CO2) reserves at December 31 as follows: 1993,
5,198 MMcf of helium and 46,376 MMcf of CO2; 1992, 5,634 MMcf of helium and
46,457 MMcf of CO2; 1991, 5,705 MMcf of helium and 44,837 MMcf of CO2. See
"Business -- Reserves."
(d) Adjusted to give effect to the Offering and the use of proceeds therefrom
(assuming net proceeds of $140 million). Also adjusted to give effect to
the issuance of additional Secured Discount Notes to fund the Unocal
settlement on March 2, 1994. See "Use of Proceeds" and "Capitalization."
5
<PAGE> 7
RISK FACTORS
Prospective investors should consider carefully the following factors
relating to the business of the Company and the Offering, together with the
information and financial data set forth elsewhere in this Prospectus, prior to
making an investment decision.
HIGH LEVERAGE AND CONTINUING LOSSES
Mesa is highly leveraged and will remain so after completion of this
Offering. After giving effect to (i) this Offering and the application of the
estimated net proceeds therefrom as described in "Use of Proceeds," (ii) the
March 1994 issuance of additional Secured Discount Notes to fund the settlement
of the Unocal litigation and (iii) the early 1994 conversion of the general
partner interests in Mesa's subsidiaries into Common Stock, Mesa would have had
total pro forma long-term indebtedness (assuming net proceeds of $140 million
from this Offering) of approximately $1.1 billion and stockholders' equity of
approximately $252 million at December 31, 1993. At December 31, 1993, Mesa had
approximately $150 million of cash and securities and $76 million of working
capital. See "Capitalization" and Consolidated Financial Statements. Whether or
not this Offering is completed, Mesa expects to be able to service its debt and
make planned capital expenditures with cash generated by operating activities
and with existing cash and securities balances through the end of 1995, in part
because a substantial portion of Mesa's debt does not require cash interest
payments during that period. However, the accreted value of such debt increases
at 12 3/4% per year, and such accretion is recorded as interest expense for
financial statement purposes. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
On December 31, 1995, Mesa will begin making cash interest payments on its
Discount Notes. Assuming the Offering is completed but no other changes in
Mesa's capital structure are made, such interest requirements will total
approximately $42 million on December 31, 1995 and approximately $81 million
during 1996. In addition, approximately $34 million would be required to repay
the principal of the remaining Unsecured Discount Notes when they mature in
mid-1996. Assuming average annual natural gas prices realized by Mesa do not
increase beyond 1993 levels and that Mesa effects no other changes in its
capital structure other than completion of this Offering, Mesa expects it would
not have available cash sufficient to meet all such debt service obligations in
1996. Mesa's independent public accountants' report on its 1993 Consolidated
Financial Statements contains an "emphasis-of-a-matter" paragraph which calls
attention to Mesa's potential inability to fund certain principal and interest
payments on its debt in 1996 with cash flows from operating activities and
available cash and securities balances.
However, assuming the Offering is completed but no other changes in Mesa's
capital structure are made, and based on its current financial forecasts which
assume that natural gas price realizations escalate at an average of 6.5% per
year through 1996 from 1993 levels, Mesa expects it would have available cash
sufficient to meet its debt service and capital requirements until the Secured
Discount Notes mature in mid-1998. Assuming all of the Secured Discount Notes
remain outstanding through their maturity in mid-1998, approximately $617
million would be required to repay or refinance such Notes. Subject to market
conditions, Mesa intends to repay or refinance all or part of such Notes prior
to that time with further equity issuances or with debt having longer maturities
and/or lower interest rates. There is no assurance that Mesa will be able to
complete any such transaction.
Notwithstanding the improvements in Mesa's capital structure and financial
flexibility from this Offering and from any additional equity issuance or debt
refinancing that may be accomplished, unless there is a material and sustained
increase in average prices for natural gas beyond 1993 levels, the Company will
continue to incur substantial net losses.
Mesa's bank credit agreement (the "Credit Agreement") and the indentures
governing its secured debt impose operating and financial restrictions on Mesa.
Such restrictions limit or prohibit, among other things, the ability of Mesa to
incur additional indebtedness, create liens, sell assets, engage in certain
merger and acquisition transactions and make dividend and other payments. The
leveraged position of Mesa and the restrictive covenants contained in the Credit
Agreement and these indentures could significantly limit the ability of Mesa to
respond to changing business or economic conditions or to respond to substantial
declines in operating results. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Capital Resources and
Liquidity."
6
<PAGE> 8
UNCERTAINTY OF NATURAL GAS AND NGL PRICES
Revenues generated from Mesa's operations are highly dependent upon the
sales price of, and demand for, natural gas and NGLs. As of December 31, 1993,
over 70% of Mesa's proved reserves, calculated on an energy-equivalent basis,
were natural gas and substantially all of its other reserves were NGLs. Market
prices for natural gas and NGLs are volatile and are the result of a number of
factors outside of Mesa's control, including changing economic conditions,
governmental regulations, seasonal weather conditions, natural gas storage
levels and markets for alternative energy sources, among other things. Mesa
cannot predict how developments in these or related areas will affect the
markets for natural gas or NGLs or how such effects will impact Mesa's
operations. Furthermore, Mesa cannot predict whether the recent increase in
natural gas prices is likely to continue or whether such prices will remain at
current levels for the remainder of the year or in future years. NGL prices,
which generally fluctuate with oil prices, have recently declined.
RESERVES AND FUTURE NET CASH FLOWS
Petroleum engineering is not an exact science. Information relating to
Mesa's proved oil and gas reserves is based upon engineering estimates.
Estimates of economically recoverable oil and gas reserves and of future net
cash flows necessarily depend upon a number of variable factors and assumptions,
such as historical production from the area compared with production from other
producing areas, the assumed effects of regulations by governmental agencies and
assumptions concerning future oil and gas prices, future operating costs,
severance and excise taxes, development costs and workover and remedial costs,
all of which may in fact vary considerably from actual results. For these
reasons, estimates of the economically recoverable quantities of oil and gas
attributable to any particular group of properties, classifications of such
reserves based on risk of recovery, and estimates of the future net cash flows
expected therefrom prepared by different engineers or by the same engineers at
different times may vary substantially. Actual production, revenues and
expenditures with respect to Mesa's reserves will likely vary from estimates,
and such variances may be material.
The present values of estimated future net cash flows referred to in this
Prospectus should not be construed as the current market value of the estimated
oil and gas reserves attributable to Mesa's properties. In accordance with
applicable requirements of the SEC, the estimated discounted future net cash
flows from proved reserves are generally based on prices and costs as of the
date of the estimate, whereas actual future prices and costs may be materially
higher or lower. Actual future net cash flows also will be affected by factors
such as the amount and timing of actual production, supply and demand for oil
and gas, curtailments or increases in consumption by gas purchasers and changes
in governmental regulations or taxation. Mesa's producing properties in the
Hugoton field and the West Panhandle field are subject to production limitations
imposed by state regulatory authorities, by contracts or both, and any future
limitation on production would affect estimates of future net cash flows. See
"Business -- Reserves." The timing of actual future net cash flows from proved
reserves, and thus their actual present value, will be affected by the timing of
both the production and the incurrence of expenses in connection with
development and production of oil and gas properties. In addition, the 10%
discount factor, which is required by the SEC to be used to calculate discounted
future net cash flows for reporting purposes, is not necessarily the most
appropriate discount factor based on interest rates in effect from time to time
and risks associated with Mesa or the oil and gas industry in general.
In recent years, the majority of Mesa's capital expenditures have been
dedicated to developing and upgrading its existing long-life reserve base
through infill drilling of its Hugoton reserves, additions to its compression
and gathering system and pipeline interconnects, and the construction and
expansion of gas processing plants. Relatively modest expenditures have been
made to explore for or develop new reserve additions. Absent successful efforts
to add new reserves or substantial positive revisions to its estimated reserves,
Mesa expects that its annual production will exceed reserve additions in future
years, and that Mesa's reserves will decline accordingly.
OPERATING HAZARDS; LIMITED INSURANCE COVERAGE
Mesa is subject to all of the operating hazards and risks normally incident
to drilling for or producing oil and natural gas and processing and transporting
gas, including blowouts, cratering, explosions, pollution and fires, each of
which could result in damage to or destruction of oil and gas wells, producing
formations or
7
<PAGE> 9
production, pipeline or processing facilities or damage to persons or other
property. As is common in the industry, Mesa is not fully insured against all of
these risks.
GOVERNMENTAL REGULATION AND ENVIRONMENTAL MATTERS
Mesa is subject to various local, state and federal laws and regulations
including environmental laws and regulations. Mesa believes that it is in
substantial compliance with such laws and regulations. However, significant
liability could be imposed on Mesa for damages, clean up costs and penalties in
the event of certain discharges into the environment.
ABSENCE OF DIVIDENDS
The Company currently does not expect to pay dividends on the Common Stock
in the future unless and until there is a material and sustained increase in
natural gas prices and adequate provision has been made for further reduction of
debt. In addition, the Credit Agreement prohibits the Company from making any
distributions or paying any dividends to equity holders, other than those paid
in the form of its equity securities. The indentures governing the Secured
Discount Notes and Unsecured Discount Notes also prohibit the payment of
dividends (with certain exceptions) on the Common Stock through December 31,
1995, and restrict such payment thereafter.
THE COMPANY
The Company is a holding company and conducts its operations through its
subsidiaries. The Company's direct corporate subsidiaries are Mesa Operating Co.
("MOC") and Mesa Holding Co. ("MHC"), and its other significant subsidiaries,
owned indirectly, are Hugoton Capital Limited Partnership ("HCLP") and Mesa
Environmental Ventures Co. ("Mesa Environmental"). Mesa maintains its principal
executive offices at 2001 Ross Avenue, Suite 2600, Dallas, Texas 75201, where
its telephone number is (214) 969-2200. For additional discussion of Mesa's
business and its subsidiaries, see "Business."
RECENT EVENTS
In the first quarter of 1994, Mesa settled a lawsuit brought by Unocal and
a purported stockholder of Unocal against Mesa and certain other defendants. The
Unocal lawsuit was originally filed in 1986 against Mesa Petroleum Co.
("Original Mesa"), a predecessor of the Company, certain subsidiaries of
Original Mesa and certain other parties. Pursuant to the settlement, Mesa paid
Unocal $42.75 million and certain other defendants not affiliated with Mesa paid
Unocal $4.75 million. Mesa's payment was funded through the issuance and sale on
March 2, 1994 of $48.2 million aggregate principal amount at maturity of
additional Secured Discount Notes, for proceeds of $42.75 million. The Secured
Discount Notes issued to fund Mesa's portion of the Unocal settlement were
issued under the same indenture pursuant to which Secured Discount Notes were
issued in Mesa's debt exchange offer completed in August 1993.
Also in the first quarter of 1994, in order to simplify Mesa's
organizational and capital structure, Mesa effected a series of mergers which
resulted in the conversion of each of Mesa's subsidiary partnerships, other than
HCLP, into corporate form. Pursuant to these mergers, all of the general partner
interests in the Company's subsidiary partnerships held directly or indirectly
by Boone Pickens (constituting a 2.6% equity interest in the subsidiaries) were
converted into 2.6% of the then outstanding shares of Common Stock, as
contemplated by an agreement approved by stockholders in 1991 when Mesa was
converted to corporate form. As a result, all of Mesa's subsidiaries are now
wholly owned by the Company.
In March 1994, Mesa filed a registration statement with respect to a shelf
offering of debt securities, in one or more series, at an initial aggregate
offering price not to exceed $300 million. If and when any such debt securities
are issued, the net proceeds from such issuance will be used to retire existing
debt of Mesa. Mesa plans to offer and sell debt securities pursuant to the shelf
offering from time to time, depending on market conditions. The terms of any
such debt securities, including the principal amount, interest requirements,
ranking and maturity, will be determined at the time such securities are offered
and sold. There can be no assurance that Mesa will offer any such securities for
sale or, if offered, as to the amount or terms of such securities.
8
<PAGE> 10
USE OF PROCEEDS
The net proceeds from the Offering are estimated to be approximately $
million (approximately $ million if the Underwriters' over-allotment option
is exercised in full), after deducting underwriting discounts and commissions
and estimated expenses of the Offering. Mesa intends to apply the net proceeds
from the Offering to redeem (i) approximately $6.3 million aggregate principal
amount of Mesa's 12% Subordinated Notes due 1996 (the "12% Subordinated Notes")
at a redemption price equal to 100% of the principal amount thereof, plus
accrued interest to the redemption date; (ii) approximately $7.4 million
aggregate principal amount of Mesa's 13 1/2% Subordinated Notes due 1999 (the
"13 1/2% Subordinated Notes") at a redemption price equal to 105.063% of the
principal amount thereof, plus accrued interest to the redemption date; and
(iii) approximately $ million aggregate face amount at maturity of Mesa's
12 3/4% Discount Notes due 1996 (the "Unsecured Discount Notes") at a redemption
price equal to the accreted value thereof as of the redemption date (which
accreted value will be approximately $155 million at April 30, 1994). The
Unsecured Discount Notes, together with Secured Discount Notes, were issued in
August 1993 in connection with Mesa's debt exchange offer for its 12%
Subordinated Notes and 13 1/2% Subordinated Notes.
9
<PAGE> 11
CAPITALIZATION
The following table sets forth the historical consolidated capitalization
of the Company as of December 31, 1993 as adjusted to give effect to (i) the
Offering and the application of the proceeds thereof (assuming net proceeds of
$140 million) to redeem debt securities, including accrued interest thereon, as
described under "Use of Proceeds," (ii) the issuance of additional Secured
Discount Notes in connection with the settlement of litigation with Unocal on
March 2, 1994, and (iii) the early 1994 subsidiary restructuring transactions
that resulted in the conversion of the general partner interests in Mesa's
subsidiaries into Common Stock as if all such transactions had been consummated
on December 31, 1993. This table should be read in conjunction with the
Consolidated Financial Statements and the related notes thereto included
elsewhere in this Prospectus.
<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1993
--------------------------
HISTORICAL AS ADJUSTED
---------- -----------
<S> <C> <C>
(IN THOUSANDS)
Current maturities of long-term debt................................ $ 67,657 $ 67,657
---------- -----------
Long-term debt:
Credit Agreement.................................................. 39,646 39,646
HCLP Secured Notes................................................ 498,750 498,750
Secured Discount Notes(a)......................................... 472,939 512,956
Unsecured Discount Notes(b)....................................... 148,576 22,676
12% Subordinated Notes............................................ 6,336 --
13 1/2% Subordinated Notes........................................ 7,390 --
---------- -----------
1,173,637 1,074,028
---------- -----------
Minority interest................................................... 2,732 --
Stockholders' equity:
Preferred stock, $.01 par value, authorized 10,000,000 shares; no
shares issued and outstanding.................................. -- --
Common stock, $.01 par value, authorized 100,000,000 shares;
46,511,439 issued and outstanding and 70,762,109 shares issued
and outstanding as adjusted, respectively...................... 465 708
Additional paid-in capital........................................ 303,344 445,833
Accumulated deficit(c)............................................ (191,680) (194,113)
---------- -----------
Total stockholders' equity and minority interest.......... 114,861 252,428
---------- -----------
$1,356,155 $ 1,394,113
---------- -----------
---------- -----------
</TABLE>
- ---------------
(a) Gives effect to the issuance of $48.2 million face amount of Secured
Discount Notes which would have had an accreted value of $40.0 million at
December 31, 1993.
(b) The accreted value of the Unsecured Discount Notes that will be outstanding
immediately after application of the proceeds of the Offering would be, as
of April 30, 1994, approximately $6 million more than shown in the table,
by virtue of the accretion of discount from December 31, 1993 to the date
of consummation of the Offering.
(c) Reflects the write-off of remaining deferred debt issue costs associated
with the Subordinated Notes and the proportionate amount of Unsecured
Discount Notes redeemed and the call premium totaling 5% of the 13 1/2%
Subordinated Notes outstanding on December 31, 1993.
10
<PAGE> 12
PRICE RANGE OF COMMON STOCK AND DIVIDEND POLICY
The Common Stock currently trades on the New York Stock Exchange under the
symbol MXP. The following table reflects the range of high and low selling
prices of the Common Stock by quarter for 1994, 1993 and 1992.
<TABLE>
<CAPTION>
HIGH LOW
---- ---
<S> <C> <C>
1994
First Quarter (through March 10)......................... $ 8 1/2 $ 5 1/4
1993
First Quarter............................................ $ 6 1/4 $ 4
Second Quarter........................................... 7 3 1/2
Third Quarter............................................ 8 1/8 6
Fourth Quarter........................................... 7 7/8 4 7/8
1992
First Quarter............................................ $ 7 1/2 $ 2 1/2
Second Quarter........................................... 7 1/4 2 5/8
Third Quarter............................................ 13 3/8 6 1/4
Fourth Quarter........................................... 12 3 5/8
</TABLE>
The closing sale price of the Company's Common Stock on the New York Stock
Exchange as of a recent date is set forth on the cover page of this Prospectus.
DIVIDEND POLICY
The Company has not paid any dividends or distributions with respect to its
equity securities, including the Common Stock, since 1990. The Company currently
does not expect to pay dividends on the Common Stock in the future unless and
until there is a material and sustained increase in natural gas prices and
adequate provision has been made for further reduction of debt.
In addition, the Credit Agreement prohibits the Company from making any
distributions or paying any dividends to equity holders, other than those paid
in the form of its equity securities. The indentures governing the Discount
Notes also prohibit the payment of dividends (with certain exceptions) on the
Common Stock through December 31, 1995, and restrict such payment thereafter.
11
<PAGE> 13
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This discussion should be read in conjunction with the Consolidated
Financial Statements of the Company and the related notes thereto included
elsewhere in this Prospectus.
RESULTS OF OPERATIONS
For the years ended December 31, 1993, 1992 and 1991, Mesa reported
consolidated net losses of $102.4 million, $89.2 million and $79.2 million,
respectively. The results of operations for each year have been influenced by
certain income and expenses which are either non-recurring or not directly
associated with Mesa's primary operations. See discussion of these items under
"-- Other Income (Expense)" below. The following table presents a summary of the
results of operations of Mesa for the years indicated.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31
-------------------------------------
1993 1992 1991
--------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
Revenues........................................ $ 222,204 $ 237,112 $ 249,546
Operating and administrative costs.............. (100,093) (96,958) (98,342)
Depreciation, depletion and amortization........ (100,099) (113,933) (117,076)
--------- --------- ---------
Operating income................................ 22,012 26,221 34,128
Interest expense, net of interest income........ (131,298) (129,888) (134,258)
Other, net...................................... 6,838 14,435 20,967
--------- --------- ---------
Net loss........................................ $(102,448) $ (89,232) $ (79,163)
--------- --------- ---------
--------- --------- ---------
</TABLE>
In 1993, Mesa sold primarily oil producing properties in the deep Hugoton
and Rocky Mountain areas. In 1992, Mesa sold oil and gas properties located in
Canada and in 1991 sold oil and gas properties located primarily in Oklahoma,
the Texas Panhandle and the San Juan Basin of New Mexico. Results from
operations related to sold properties are included in Mesa's results through the
closing dates of such sales. The following table presents the contribution made
to Mesa's operating results by the sold properties.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31
--------------------------------
1993 1992 1991
------- ------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Revenues............................................. $ 3,424 $11,477 $ 26,297
Production costs..................................... (1,088) (2,327) (9,496)
------- ------- --------
$ 2,336 $ 9,150 $ 16,801
------- ------- --------
------- ------- --------
Proceeds from sales.................................. $26,118 $11,424 $428,063
------- ------- --------
------- ------- --------
Production:
Natural gas (MMcf)................................. 289 1,336 7,857
Natural gas liquids (MBbls)........................ 30 25 177
Oil and condensate (MBbls)......................... 176 487 381
Proved reserves sold (MMcfe)......................... 24,481 19,435 414,063
</TABLE>
12
<PAGE> 14
REVENUES
The table below presents, for the years indicated, the revenues, production
and average prices received from sales of natural gas, natural gas liquids and
oil and condensate.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31
----------------------------------
1993 1992 1991
-------- -------- --------
<S> <C> <C> <C>
Revenues (in thousands):
Natural gas...................................... $141,798 $157,672 $169,907
Natural gas liquids.............................. 61,427 59,669 62,031
Oil and condensate............................... 12,428 18,701 16,111
-------- -------- --------
Total......................................... $215,653 $236,042 $248,049
-------- -------- --------
-------- -------- --------
Natural Gas Production (MMcf):
Hugoton.......................................... 47,476 48,592 63,367
West Panhandle................................... 23,786 26,380 23,591
Other............................................ 8,558 14,555 21,564
-------- -------- --------
Total......................................... 79,820 89,527 108,522
-------- -------- --------
-------- -------- --------
Natural Gas Liquids Production (MBbls):
Hugoton.......................................... 1,481 898 1,235
West Panhandle................................... 3,480 3,794 3,279
Other............................................ 89 148 211
-------- -------- --------
Total......................................... 5,050 4,840 4,725
-------- -------- --------
-------- -------- --------
Oil and Condensate Production (MBbls):
Hugoton.......................................... 104 249 226
West Panhandle................................... 153 -- --
Other............................................ 481 735 541
-------- -------- --------
Total......................................... 738 984 767
-------- -------- --------
-------- -------- --------
Average Prices:
Natural gas (per Mcf)*........................... $ 1.79 $ 1.72 $ 1.54
Natural gas liquids (per Bbl).................... 12.14 12.32 13.07
Oil and condensate (per Bbl)..................... 16.63 18.86 20.23
</TABLE>
- ---------------
* The average natural gas prices reported above for the years ended December
31, 1992 and 1991 reflect gains of $.06 per Mcf and $.08 per Mcf,
respectively, related to hedges of natural gas production in the natural
gas futures market.
Natural gas revenues decreased from 1991 to 1993 as a result of decreased
production partially offset by increased average prices for each year. Natural
gas liquids revenues did not fluctuate significantly as increases in natural gas
liquids production from 1991 to 1993 were offset by decreases in the average
prices received. Oil and condensate revenues increased in 1992 compared with
1991 as a result of increased production from Gulf Coast properties and from new
development in the Rocky Mountain area. The decrease in 1993 compared to 1992 is
a result of decreased production from the Gulf Coast properties and the sale of
a portion of the Rocky Mountain properties. Average oil prices received
decreased in each year from 1991 through 1993.
Natural gas production decreased by 18% from 1991 to 1992 and an additional
11% from 1992 to 1993. The decrease from 1991 to 1992 resulted primarily from
Mesa's reduced share of allowables in the Hugoton field. The decrease from 1992
to 1993 resulted primarily from a 5.4 Bcf decrease in Gulf Coast production and
a 6.1 Bcf decrease in West Panhandle field production recorded as gas balancing
sales. Gulf Coast natural gas production for 1993 declined, in part, because
1992 production included over 2.6 Bcf allocated to Mesa for the recovery of
capital costs paid by Mesa, as operator, on behalf of the Mesa Offshore Trust
(the "Trust"). Upon full recovery of costs (which occurred in late 1992), Mesa's
share of production from properties subject to the Trust's interest declined.
Hugoton field production in 1993 was relatively flat compared with 1992. Sales
from the West Panhandle field, excluding gas balancing, increased by 3.4 Bcf in
1993 due to increased sales to industrial customers. Effective January 1, 1991,
Mesa and Colorado Interstate Gas Company ("CIG")
13
<PAGE> 15
entered into a contract which entitles Mesa to 77% of the ultimate reserves and
production from the West Panhandle field. As a result of this contract, Mesa
records its share of the total field production as revenue, even though its
actual sales volumes are presently less than 77% of the total cumulative field
production. Entitlement production in excess of sales totaled 4.8 Bcf in 1991,
6.8 Bcf in 1992 and .7 Bcf in 1993. See additional discussion below under
"-- Production Allocation Agreement."
Mesa's production from the Hugoton field is affected by the allowables set
for the entire field and by the portion of allowables allocated to Mesa's wells.
Allowables are assigned to individual wells based on a series of calculations
which are influenced by the relative production, testing and drilling practices
of all producers in the field, as well as the relative pressure and
deliverability performance of each well. In October 1991, Mesa's share of
Hugoton field allowables was substantially reduced below historical levels. This
reduction resulted from Mesa's aggressive production and drilling practices
between 1989 and 1991, which caused the pressures and deliverability of Mesa's
wells to decline relative to those of other operators in the field. The Kansas
Corporation Commission ("KCC") has recently issued new regulations relating to
calculations of well deliverability, allocation of allowables, and makeup of
underages in the Hugoton field. Generally, Mesa expects the new regulations to
increase its allowable share and add 15 to 20 Bcf to production volumes over the
next three years.
Natural gas liquids production increased by approximately 7% from 1991 to
1993 as a result of increases in West Panhandle and Hugoton field liquids
production. In the fourth quarter of 1992, Mesa completed the expansion of its
Fain natural gas processing plant in the West Panhandle field, increasing its
natural gas inlet capacity from 90 MMcf per day to 120 MMcf per day. In the
third quarter of 1993, the Satanta plant in the Hugoton field was completed. The
new plant, which is capable of processing up to 250 MMcf of natural gas per day,
replaced Mesa's older Ulysses plant which could process up to 160 MMcf per day.
Natural gas prices increased from 1991 to 1992 and increased again in 1993.
According to the American Gas Association, aggregate domestic demand for natural
gas has increased in each of the last three years. Prices were positively
affected by colder-than-normal spring temperatures in 1993 and a hurricane in
the Gulf of Mexico in 1992.
Oil and condensate prices decreased in each year from 1991 through 1993
reflecting the continuing downturn in market prices since the end of the Persian
Gulf war in early 1991. Natural gas liquids prices generally fluctuate with oil
prices.
COSTS AND EXPENSES
Mesa's aggregate costs and expenses declined by approximately 5% from 1992
to 1993 due primarily to decreases in exploration and depreciation, depletion
and amortization expenses partially offset by an increase in lease operating
expenses. Lease operating expenses were $8.0 million greater in 1993 than in
1992 due to increased production costs in the West Panhandle field. Exploration
charges were $7.3 million lower in 1993 than in 1992 as a result of exploratory
dry hole expense in the Gulf Coast area in 1992. Depreciation, depletion and
amortization expense was $13.8 million lower in 1993 than in 1992 due primarily
to lower production in 1993.
Mesa's aggregate costs and expenses in 1992 were slightly lower than in
1991. Exploration charges were $5.3 million greater in 1992 than in 1991 as a
result of exploratory dry hole expense in the Gulf Coast area in 1992.
Depreciation, depletion and amortization expense was $3.1 million lower in 1992
than in 1991 primarily due to lower production in 1992. Certain components of
lease operating expenses and production and other taxes decreased in 1992 from
1991 as a result of the 1991 property sales. These decreases, however, were
substantially offset by an increase in ad valorem taxes in Kansas and the
increase in production and gathering costs associated with entitlement
production in the West Panhandle field. See additional discussion below under
"-- Production Allocation Agreement."
14
<PAGE> 16
The table below presents Mesa's lease operating costs by area of operation
(in thousands):
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31
-------------------------------
1993 1992 1991
------- ------- -------
<S> <C> <C> <C>
Hugoton............................................... $10,001 $ 9,251 $ 9,113
West Panhandle........................................ 29,897 23,230 21,224
Other................................................. 11,921 11,378 16,532
------- ------- -------
$51,819 $43,859 $46,869
------- ------- -------
------- ------- -------
</TABLE>
Hugoton field operating expenses have not increased substantially over the
last three years. The 1993 increase is a result of additional costs from added
compression facilities and from the new Satanta natural gas processing plant
(the "Satanta Plant"). West Panhandle field operating expenses increased
significantly in 1992 and in 1993. The increases are primarily a result of
increased gathering and administrative fees paid to CIG as operator of the
gathering system in the West Panhandle field. Operating expenses in Mesa's other
producing areas decreased in 1992 from 1991 due to property sales.
OTHER INCOME (EXPENSE)
Interest expense in 1993 was not materially different than 1992 as average
aggregate debt outstanding did not materially change. Interest expense decreased
by $7.4 million from 1991 to 1992 primarily due to a $49 million decrease in
weighted average debt outstanding.
Results of operations for the years 1993, 1992 and 1991 include certain
items which are either non-recurring or are not directly associated with Mesa's
oil and gas producing operations. The following table sets forth the amounts of
such items (in thousands):
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31
------------------------------------
1993 1992 1991
-------- ------- -------
<S> <C> <C> <C>
Securities gains (losses)........................ $ 3,954 $ 7,808 $(2,060)
Gains on dispositions of oil and gas
properties..................................... 9,600 12,250 33,749
Gain from collection of note receivable.......... 18,450 -- --
Litigation settlement............................ (42,750) -- --
Gain from adjustment of contingency reserve...... 24,000 -- --
Expense of debt exchange transaction............. (9,651) -- --
Expense of corporate conversion transaction...... -- (2,144) (6,500)
Other............................................ 3,235 (3,479) (4,222)
-------- ------- -------
$ 6,838 $14,435 $20,967
-------- ------- -------
-------- ------- -------
</TABLE>
The securities gains (losses) relate to Mesa's investments in marketable
securities and futures contracts that are not accounted for as hedges of
production. See discussion above under "Results of Operations" regarding oil and
gas property sales. The gain recorded from collection of a note receivable
relates to a note receivable from Bicoastal Corporation, which was in
bankruptcy. Mesa's claims in the bankruptcy exceeded its recorded receivable. As
of year-end 1993, Mesa had collected the full amount of its allowed claims plus
a portion of the interest due on such claims.
The litigation settlement charge relates to Mesa's early 1994 settlement of
a lawsuit with Unocal. The litigation related to a 1985 investment in Unocal by
Mesa's predecessor and certain other defendants. The plaintiffs had sought to
recover alleged "short-swing profits" plus interest totaling over $150 million
pursuant to Section 16(b) of the Securities Exchange Act of 1934. In early 1994,
Mesa and the other defendants reached a settlement with the plaintiffs and
agreed to pay $47.5 million to Unocal, of which Mesa's share was $42.8 million.
The Court approved the settlement on February 28, 1994 and Mesa issued
additional Secured Discount Notes with a face amount of $48.2 million. Mesa used
the proceeds from the issuance of notes of $42.8 million to pay its share of the
settlement.
In the fourth quarter of 1993, Mesa completed a settlement with the
Internal Revenue Service ("IRS") resolving all tax issues relating to the 1984
through 1987 tax returns of Mesa's predecessor. Mesa had previously established
contingency reserves for the IRS claims and certain other contingent liabilities
in excess
15
<PAGE> 17
of the actual and estimated liabilities. As a result of the settlement with the
IRS and the resolution and revaluation of certain other contingent liabilities,
Mesa recorded a net gain of $24 million in the fourth quarter of 1993.
The debt exchange expense relates to costs associated with Mesa's debt
exchange completed in 1993. See additional discussion under "-- Capital
Resources and Liquidity" below. The corporate conversion expense relates to
costs associated with the year-end 1991 conversion of Mesa Limited Partnership
(the "Partnership") to MESA Inc.
PRODUCTION ALLOCATION AGREEMENT
Effective January 1, 1991, Mesa entered into the Production Allocation
Agreement ("PAA") with CIG which allocates 77% of reserves and production from
the West Panhandle field to Mesa and 23% to CIG. During 1993, 1992 and 1991,
Mesa produced and sold 74%, 61% and 58%, respectively, of total production from
the field; the balance of field production was sold by CIG. Mesa records its 77%
ownership interest in natural gas production as revenue. The difference between
the net value of production sold by Mesa and the net value of its 77%
entitlement is accrued as a gas balancing receivable. The revenues and costs
associated with such accrued production are included in results of operations.
The following table presents the incremental effect on production and
results of operations from entitlement production recorded in excess of actual
sales as a result of the PAA.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31
------------------------------------
1993 1992 1991
------- -------- -------
<S> <C> <C> <C>
(DOLLARS IN THOUSANDS)
Revenues accrued................................. $ 5,145 $ 23,270 $17,378
Costs and expenses accrued....................... (1,059) (6,073) (4,362)
Depreciation, depletion and amortization......... (1,244) (10,764) (7,741)
------- -------- -------
$ 2,842 $ 6,433 $ 5,275
------- -------- -------
------- -------- -------
Production Accrued:
Natural gas (MMcf)............................. 740 6,772 4,834
Natural gas liquids (MBbls).................... 106 972 671
</TABLE>
At December 31, 1993, the long-term gas balancing receivable from CIG, net
of accrued costs, relating to the PAA was $34.3 million, which is included in
other assets in the consolidated balance sheet. The provisions of the PAA allow
for periodic and ultimate cash balancing to occur. The PAA also provides that
CIG may not take in excess of its 23% share of ultimate production.
Mesa entered into an amendment to the PAA in 1993 which allows Mesa, for
the first time, to market its residue natural gas production outside of
Amarillo, Texas, but which also limits Mesa's production to 35 Bcf of
unprocessed gas in 1993 and 32 Bcf annually in 1994 through 1996. Mesa produced
its entire 35 Bcf entitlement in 1993.
CAPITAL RESOURCES AND LIQUIDITY
Mesa is a highly leveraged company with total long-term debt of $1.2
billion. In recent years, Mesa has repaid or refinanced a substantial amount of
its debt, including pursuant to a debt exchange (the "Debt Exchange") completed
in August 1993 in which almost $600 million of the 12% Subordinated Notes and
the 13 1/2% Subordinated Notes (together, the "Subordinated Notes") and $100
million of bank debt were restructured. The Debt Exchange (more fully described
in Note 4 to the Consolidated Financial Statements of the Company) resulted in
the issuance of new debt securities, including the Secured Discount Notes and
the Unsecured Discount Notes (together, the "Discount Notes"), in exchange for
substantially all of the Subordinated Notes. The primary benefit to Mesa of the
Debt Exchange was to defer beyond June 30, 1995 the payment of $150 million of
interest payments which would have otherwise been required from mid-1993 through
mid-1995. The completion of the Debt Exchange and the settlement of the Unocal
litigation have afforded Mesa greater opportunity and flexibility to continue to
reduce or refinance its debt. Accordingly, Mesa is making an equity offering as
set forth in this Prospectus and, subject to market conditions, may also
16
<PAGE> 18
issue additional long-term debt pursuant to a shelf registration statement filed
with the SEC in March 1994. Mesa intends to use the proceeds from this Offering
or any debt offering to reduce or refinance debt.
Current Financial Condition
Mesa owns and operates its oil and gas properties through direct and
indirect subsidiaries. MOC owns all of Mesa's interest in the West Panhandle
field of Texas and the Gulf Coast and the Rocky Mountain area. At December 31,
1993, MOC owned an approximate 81% limited partnership interest in HCLP.
Subsequent to December 31, 1993, MOC received an additional 18% interest in HCLP
from another subsidiary as partial payment for intercompany debt. HCLP owns
substantially all of Mesa's Hugoton field natural gas properties. HCLP was
established in 1991 to own these properties and to issue $616.5 million initial
principal amount of secured notes (the "HCLP Secured Notes"). The assets of
HCLP, which is required to maintain separate existence from the Company and its
other subsidiaries, are generally not available to pay creditors of the Company
or such other subsidiaries. The HCLP agreements require proceeds from production
to be applied towards payment of HCLP's operating, administrative and capital
costs and to service HCLP's debt. To the extent cash flows exceed these
requirements, such excess cash is generally available for distribution to the
Mesa subsidiaries that own HCLP's equity.
The following table summarizes certain components of Mesa's financial
position and cash flows as of and for the year ended December 31, 1993 (in
thousands):
<TABLE>
<CAPTION>
OTHER
SUBSIDIARIES
MOLP(A) HCLP COMBINED TOTAL
-------- -------- ------------ ------------
<S> <C> <C> <C> <C>
Debt:
Credit Agreement and other............. $ 64,453 $ -- $ -- $ 64,453
HCLP Secured Notes..................... -- 541,600 -- 541,600
Secured Discount Notes(b).............. 472,939 -- -- 472,939
Unsecured Discount Notes............... 148,576 -- -- 148,576
12% Subordinated Notes................. 6,336 -- -- 6,336
13 1/2% Subordinated Notes............. 7,390 -- -- 7,390
-------- -------- ------------ ------------
$699,694 $541,600 $ -- $ 1,241,294
-------- -------- ------------ ------------
-------- -------- ------------ ------------
Cash and securities(c)................... $ 16,198 $ 40,446 $ 93,384 $ 150,028
-------- -------- ------------ ------------
-------- -------- ------------ ------------
Working capital (deficit)................ $ (8,494) $ (9,692) $ 94,344 $ 76,158
-------- -------- ------------ ------------
-------- -------- ------------ ------------
Restricted cash (in noncurrent assets)... $ -- $ 62,649 $ -- $ 62,649
-------- -------- ------------ ------------
-------- -------- ------------ ------------
Operating cash flows before interest..... $ 34,976 $ 72,154 $ (529) $ 106,601
Interest payments, net(d)................ (30,547) (50,185) 2,051 (78,681)
-------- -------- ------------ ------------
Cash flows from operating activities..... $ 4,429 $ 21,969 $ 1,522 $ 27,920
-------- -------- ------------ ------------
-------- -------- ------------ ------------
</TABLE>
- ---------------
(a) MOLP was merged into MOC on January 5, 1994.
(b) In March 1994, the Company issued additional Secured Discount Notes and
used the proceeds of $42.8 million to fund Mesa's portion of the Unocal
settlement. See "Other Income (Expense)."
(c) Included in working capital (deficit).
(d) Cash interest payments, net of interest income.
Mesa's Credit Agreement is a credit facility under which approximately $59
million of borrowings and $10 million of letter of credit obligations were
outstanding at December 31, 1993. Obligations under the Credit Agreement are
secured by a first lien on MOC's West Panhandle properties, Mesa's equity
interest in MOC and a 76% equity interest in HCLP. Borrowings under the Credit
Agreement are due in various installments through June 1995. The Company and MOC
are obligors under the Credit Agreement. The HCLP Secured Notes, for which HCLP
is the sole obligor, are secured by its Hugoton field properties and are due in
semiannual installments through August 2012, but may be repaid earlier depending
on the rate of production from the properties. The Secured Discount Notes are
due in June 1998 and are secured by second liens on
17
<PAGE> 19
MOC's West Panhandle properties and a 76% equity interest in HCLP. The Unsecured
Discount Notes are due in June 1996. The 12% Subordinated Notes are unsecured
and have a stated maturity of August 1996 and the 13 1/2% Subordinated Notes
(also unsecured) have a stated maturity of May 1999. The Discount Notes and both
issues of Subordinated Notes are obligations of the Company and MOC.
Equity Offering
Pursuant to this Offering, Mesa is selling an additional 23 million shares
of its Common Stock. Mesa intends to use the proceeds from this Offering to
redeem all of the $13.7 million principal amount of currently outstanding
Subordinated Notes and substantially all of the $178.8 million face amount at
maturity of outstanding Unsecured Discount Notes ($154.9 million accreted value
at April 30, 1994).
Cash Requirements
The following tables summarize MOC's and HCLP's 1994 through 1997 forecast
cash requirements for interest, debt principal and capital expenditures assuming
(i) no changes in Mesa's capital structure and (ii) completion of this Offering
with $140 million of net proceeds. The tables also summarize MOC's and HCLP's
actual 1993 cash payments for such items.
<TABLE>
<CAPTION>
ACTUAL FORECAST
------- --------------------------------------------
1993 1994 1995 1996 1997
------- -------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
MOC (assuming no changes
in capital structure):
Interest payments, net(a)....... $30,547 $ 1,900 $ 52,700 $103,300 $101,500
Principal repayments(c)......... 40,852 24,800 39,600 185,100 --
Capital expenditures(b)......... 20,622 17,800 19,200 20,400 8,700
------- -------- -------- -------- --------
$92,021 $ 44,500 $111,500 $308,800 $110,200
------- -------- -------- -------- --------
------- -------- -------- -------- --------
MOC (assuming completion
of the Offering and no other
changes in capital structure):
Interest payments, net(a)....... $30,547 $ 1,000 $ 41,400 $ 85,900 $ 88,000
Principal repayments............ 40,852 163,700 39,600 34,300 --
Capital expenditures(b)......... 20,622 17,800 19,200 20,400 8,700
------- -------- -------- -------- --------
$92,021 $182,500 $100,200 $140,600 $ 96,700
------- -------- -------- -------- --------
------- -------- -------- -------- --------
HCLP (same under both
assumptions):
Interest payments, net(a)....... $50,185 $ 48,100 $ 43,600 $ 38,500 $ 33,600
Principal repayments............ 39,250 42,900 39,300 45,400 46,700
Capital expenditures(b)......... 8,090 9,700 9,200 3,900 --
------- -------- -------- -------- --------
$97,525 $100,700 $ 92,100 $ 87,800 $ 80,300
------- -------- -------- -------- --------
------- -------- -------- -------- --------
</TABLE>
- ---------------
(a) Cash interest payments, net of interest income.
(b) Forecast capital expenditures represent Mesa's best estimate of drilling
and facilities expenditures required to attain projected levels of
production from its existing properties during the forecast period.
Contractual commitments with a major gas purchaser in the Hugoton field
require expenditures, primarily for compression, of a total of
approximately $7.1 million by HCLP during 1994 and 1995, which amounts are
included in amounts set forth in the table for such years. Mesa may incur
capital expenditures in addition to those reflected in the table.
(c) Does not consider potential acceleration if Mesa's tangible adjusted equity
falls below the requirement set forth in the Credit Agreement. See
discussion under "Debt Covenants."
Debt Covenants
The Credit Agreement contains restrictive covenants which require Mesa to
maintain tangible adjusted equity, as defined, of at least $50 million and a
ratio of cash flow and available cash to debt service, as each is defined, of at
least 1.50 to 1. At December 31, 1993, tangible adjusted equity was $114.9
million and the ratio was 2.32 to 1. Assuming no changes in its capital
structure or in existing business conditions, Mesa's financial
18
<PAGE> 20
forecasts indicate that it will continue to report net losses and that tangible
adjusted equity, as defined, is likely to fall below the $50 million requirement
in the second half of 1994. The financial forecasts also indicate that Mesa will
have adequate financial resources, including available cash and securities, to
satisfy any obligations which may become due under the Credit Agreement in the
event the tangible adjusted equity covenant is not satisfied and cannot be
renegotiated or compliance therewith waived. At December 31, 1993, Mesa had
approximately $110 million of cash and securities excluding cash held at HCLP.
In addition, payment of the settlement amount to Unocal did not cause the ratio
of cash flow and available cash to debt service to fall below the required
level. If this Offering is completed, Mesa anticipates that tangible adjusted
equity will not fall below the requirement before maturity of the amounts
outstanding under the Credit Agreement. The Credit Agreement and the indentures
governing the Discount Notes restrict, among other things, Mesa's ability to
incur additional indebtedness, create liens, pay dividends, acquire stock or
make investments, loans and advances.
Company Resources and Alternatives
Mesa's cash flows from operating activities are substantially dependent on
the amount of natural gas and NGLs produced and the prices received for such
production. Whether or not this Offering is completed, Mesa expects cash from
operating activities, together with available cash and securities balances, will
be sufficient to meet its debt principal and interest obligations and capital
expenditures through December 31, 1995. Production and prices received from
HCLP's properties, together with cash held within HCLP, are expected to generate
sufficient cash flow to meet HCLP's required principal, interest and capital
obligations through 1995 and beyond. However, HCLP's cash flows are not expected
to be sufficient to permit HCLP to distribute any cash to the Company's other
subsidiaries until 1995.
On December 31, 1995, Mesa will begin making interest payments on the
Discount Notes. Absent completion of this Offering or other changes in Mesa's
capital structure prior to such date, Mesa will be required to make cash
interest payments related to the Discount Notes totaling approximately $51
million on December 31, 1995 and cash interest payments totaling approximately
$90 million during 1996. In addition, the Unsecured Discount Notes in the amount
of $178.8 million and the 12% Subordinated Notes in the amount of $6.3 million
mature in mid-1996. Completion of this Offering and application of the net
proceeds therefrom (assuming net proceeds of $140 million) to reduce debt as set
forth under "Use of Proceeds" will result in the elimination of substantially
all 1996 principal repayment obligations on such Notes. Interest payment
obligations on December 31, 1995 and during 1996 will also decrease. Mesa's
financial forecasts, which assume that natural gas price realizations escalate
at an average of 6.5% per year through 1996 from 1993 levels, indicate that Mesa
will have available cash sufficient to meet its debt service and capital
requirements until the Secured Discount Notes mature in June 1998 even if no
changes are made in Mesa's capital structure other than completion of this
Offering. Mesa has also filed a shelf registration statement for the issuance
and sale of debt securities. Mesa intends to use the proceeds of any such
additional issuance of debt securities to retire existing debt.
There can be no assurance that Mesa will be able to complete the Offering
or that it will be able to issue any new debt securities.
Other
Mesa recognizes its ownership interest in natural gas production as
revenue. Actual production quantities sold may be different from Mesa's
ownership share of production in a given period. Mesa records these differences
as gas balancing receivables or as deferred revenue. Net gas balancing
underproduction represented approximately 3% of total equivalent production in
1993 compared with 12% during the same period in 1992. The gas balancing
receivable or deferred revenue component of natural gas and natural gas liquids
revenues in future periods is dependent on future rates of production, field
allowables and the amount of production taken by Mesa or by its joint interest
partners.
Mesa invests from time to time in marketable equity and other securities
and in commodity and futures contracts, primarily related to crude oil and
natural gas. Mesa also enters into natural gas futures contracts as a hedge
against natural gas price fluctuations.
Management does not anticipate that inflation will have a significant
effect on Mesa's operations.
19
<PAGE> 21
BUSINESS
GENERAL
Mesa is one of the largest independent oil and gas companies in the United
States and considers itself one of the most efficient operators of domestic
natural gas properties. As of December 31, 1993, Mesa owned approximately 1.7
trillion cubic feet of equivalent proved natural gas reserves.
Over 70% of Mesa's total equivalent proved reserves are natural gas and the
balance are principally NGLs, which are extracted from natural gas through
processing plants. Substantially all of Mesa's reserves are proved developed
reserves. The estimated future net cash flows before income taxes from Mesa's
proved reserves, as determined in accordance with the regulations of the SEC as
of December 31, 1993, were approximately $2.3 billion and had a net present
value (discounted at 10%) before income taxes of approximately $1.1 billion.
Estimates of reserves for approximately 96% of the quantities shown herein have
been prepared by DeGolyer and MacNaughton, independent consulting petroleum
engineers ("D&M"). Quantities stated as equivalent natural gas reserves are
based on a factor of 6 thousand cubic feet ("Mcf") of natural gas per barrel
("Bbl") of liquids. See "-- Reserves."
Mesa's principal business strategy includes (i) maximizing the value of its
existing high-quality, long-life reserves through efficient operating and
marketing practices, (ii) processing natural gas to extract premium products
such as NGLs and helium, (iii) conducting selective exploratory and development
activities, primarily through the development of additional reserves in certain
deeper portions of the West Panhandle field reservoir and development and
exploratory drilling in the Gulf of Mexico based on evaluation of 3-D seismic
surveys, (iv) making acquisitions of producing properties with exploration and
development potential in areas where Mesa has operating experience and
expertise, and (v) promoting the use of natural gas as a transportation fuel and
developing and marketing natural gas fuel equipment for the transportation
market.
At December 31, 1993, Mesa employed 383 persons.
PROPERTIES
Over 96% of Mesa's reserves are concentrated in the Hugoton field of
southwest Kansas and the West Panhandle field of north Texas. The two fields are
each part of a reservoir that extends from southwest Kansas, through the
Oklahoma panhandle, and into the Texas panhandle. These fields, which produce
gas from depths of 3500 feet or less, are known for their stable long-life
production profiles. Although the two fields are part of the same reservoir,
Mesa's interests in these fields are operated separately and are subject to
different contractual and marketing arrangements. Due to the long-life nature of
the Hugoton and West Panhandle properties, Mesa expects to be able to maintain a
relatively stable production profile from its existing properties for the
remainder of the decade, regardless of acquisitions or exploration or
development success in other areas. Mesa's other properties are primarily in the
Gulf of Mexico.
Over the past several years Mesa has concentrated its efforts on fully
developing its existing long-life reserve base and improving its marketing
flexibility. In the Hugoton field, these efforts have included infill drilling,
additional compression and gathering facilities, and construction of a new
natural gas processing plant. In the West Panhandle field, development
activities have included well workovers and deepenings, adding compression
facilities, and expanding and upgrading natural gas processing facilities. Mesa
has renegotiated its contractual arrangements in the West Panhandle field to
more clearly define its rights to production and to create greater marketing
flexibility. Mesa has also negotiated new natural gas sales contracts to provide
market based pricing on most of its production. Two significant gas sales
contracts will expire in 1995, giving Mesa a substantial amount of uncommitted
deliverability available for sale after that date.
Hugoton Field
The Hugoton field in southwest Kansas began producing in 1922, and is the
largest producing gas field in the continental United States. Mesa's Hugoton
properties, which represent approximately 13% of the total field, are
concentrated in the center of the field on over 230,000 net acres, covering
approximately 400 square miles. The gas from these properties is produced from
over 1,000 wells, approximately 950 of which are
20
<PAGE> 22
operated by Mesa, and in which Mesa has an average working interest of 95%. Mesa
owns substantially all of the gathering and processing facilities which service
its production from the Hugoton field and which allow Mesa to control the
production stream from the well bore to the various interconnects it has with
major intrastate and interstate pipelines.
Mesa's Hugoton properties are capable of producing over 260 MMcf of
wellhead natural gas per day. Substantially all of Mesa's Hugoton production is
processed through its newly constructed Satanta Plant. After processing, Mesa
has available to market over 175 MMcf of residue (processed) gas and 13,000 Bbls
of NGLs from the Satanta Plant on a peak production day. Mesa's production in
the Hugoton field is limited by allowables set by state regulators. Mesa
attempts to shift as much of its production as is practicable into the heating
season, when prices are generally higher. Mesa believes that its ability to
aggregate significant volumes of natural gas and NGLs at central delivery points
enhances its marketing opportunities and competitive position within the
industry.
Substantially all of Mesa's Hugoton properties are owned by a wholly owned
subsidiary, HCLP. Mesa's Hugoton properties accounted for 64% of Mesa's
equivalent proved reserves and 71% of the present value of estimated future net
cash flows before income taxes, determined as of December 31, 1993 in accordance
with SEC guidelines. The Hugoton properties accounted for approximately 48%, 40%
and 44% of Mesa's oil and gas revenues for the years ended December 31, 1993,
1992 and 1991, respectively. The percentage of revenues from the Hugoton field
has been less than the percentage of equivalent proved reserves due primarily to
the longer life of the Hugoton properties compared to Mesa's other properties
and, in 1992 and 1993, to lower production levels caused by allowable
restrictions. See "Production -- Hugoton Field."
West Panhandle Field
The West Panhandle properties are located in the northern panhandle region
of Texas, and are geologically similar to Mesa's Hugoton properties. Natural gas
from these properties is produced from 586 wells which Mesa operates on 191,000
net acres. All of Mesa's West Panhandle production is processed through Mesa's
recently expanded Fain natural gas processing plant (the "Fain Plant").
Mesa's West Panhandle reserves are owned and produced pursuant to contracts
(collectively called the "B Contract") with CIG, originally executed in 1928 by
predecessors of both companies. The B Contract allocates 77% of the production
from the West Panhandle field properties to Mesa and 23% to CIG, effective as of
January 1, 1991. Under the B Contract and associated agreements, Mesa operates
the wells and production equipment and CIG owns and operates the gathering
system by which Mesa's production is transported to the Fain Plant. CIG also
performs certain administrative functions. Each party reimburses the other for
certain costs and expenses incurred for the joint account.
Mesa's West Panhandle properties are owned by MOC. As of December 31, 1993,
Mesa's West Panhandle properties represented approximately 32% of Mesa's
equivalent proved reserves, and approximately 29% of the present value of
estimated future net cash flows before income taxes, determined in accordance
with SEC guidelines. Production from the West Panhandle properties accounted for
approximately 40%, 39% and 36% of Mesa's oil and gas revenues for the years
ended December 31, 1993, 1992 and 1991, respectively. Although the West
Panhandle properties are long-life, the percentage of Mesa's revenues
represented by West Panhandle production has been greater than the percentage of
equivalent proved reserves represented by such properties. This is a result of
higher prices received under a sales contract for approximately 40% of Mesa's
West Panhandle residue gas production, as well as the higher yield of NGLs
extracted from West Panhandle natural gas as compared to Hugoton natural gas.
The Fain Plant is capable of processing up to 120 MMcf of natural gas per
day. West Panhandle Field natural gas contains a high quantity of NGLs. As a
result, processing this gas yields relatively greater liquid volumes than
recoveries realized in other natural gas fields. For example, on a peak day,
Mesa can extract over 11,000 Bbls of NGLs at its Fain Plant from an inlet gas
volume of 120 MMcf.
Gulf Coast and Other
Mesa's Gulf Coast properties are located offshore Texas and Louisiana. Mesa
has operated in the Gulf of Mexico since 1970 and currently owns interests in 37
blocks which have produced approximately 400 Bcfe (net to Mesa's interest) over
their productive lives. As of December 31, 1993, these properties had an
estimated 26 Bcfe of remaining proved reserves. In previous years, Mesa owned
interests in approximately
21
<PAGE> 23
200 blocks in the Gulf of Mexico. In addition, Mesa maintains a seismic database
covering over 100,000 miles in the Gulf of Mexico and an office in Lafayette,
Louisiana to oversee production from its properties. Mesa's working interests in
7 of its 37 blocks are subject to a net profits interest owned by the Mesa
Offshore Trust. Mesa's other producing properties are located in the Rocky
Mountain area in the United States. Together, Mesa's Gulf Coast and other
producing properties accounted for 4% of 1993 year-end reserves.
Mesa's non-oil and gas tangible properties include buildings, leasehold
improvements and office equipment, primarily in Amarillo, Dallas, and Fort
Worth, Texas, and certain other assets. Non-oil and gas tangible properties
comprise less than 5% of the net book value of Mesa's properties.
RESERVES
Proved reserve estimates for Mesa's Hugoton and West Panhandle properties
were prepared in accordance with SEC guidelines by D&M. The reserve estimates
for Mesa's Gulf Coast and Rocky Mountain properties were prepared by Mesa
engineers, also in accordance with SEC guidelines. The properties on which
reserves were estimated by D&M represent approximately 96% of Mesa's total
proved reserves.
The following table summarizes the estimated proved reserves and estimated
future cash flows associated with Mesa's oil and gas properties as of December
31, 1993 (dollar amounts in thousands):
<TABLE>
<S> <C>
Proved reserves:
Natural gas (MMcf)..................................................... 1,202,444
Natural gas liquids, oil and condensate (MBbls)........................ 82,446
Future cash flows:
Future cash inflows.................................................... $3,723,760
Operating costs........................................................ (897,244)
Production and ad valorem taxes........................................ (439,980)
Development and abandonment costs...................................... (80,310)
Future income taxes.................................................... (240,017)
----------
Future net cash flows.......................................... $2,066,209
----------
----------
Present value of future net cash flows
discounted at 10% ("Present Value") after income taxes................. $ 986,931
----------
----------
Present Value before income taxes........................................ $1,068,740
----------
----------
</TABLE>
In accordance with SEC guidelines, future prices for natural gas were based
on market prices as of December 31, 1993 without future escalation and, where
applicable, contract terms (including fixed and determinable price escalations
under existing contracts). Market prices as of December 31, 1993 were used for
future sales of oil, condensate and NGLs. Future operating costs, production and
ad valorem taxes and capital costs were based on current costs as of year-end
1993, with no escalation.
Natural gas prices in effect at December 31, 1993 (having a weighted
average of $2.14 per Mcf) may not be the most appropriate or representative
prices to use for estimating future cash flows from the reserves since such
prices are influenced by the seasonal demand for natural gas. The average price
received by Mesa for sales of natural gas in 1993 was $1.79 per Mcf. Assuming
all other variables used in the calculation of reserve data are held constant,
Mesa estimates that each $.10 change in the average sales price per Mcf for
natural gas would affect Mesa's estimated future net cash flows and the present
value thereof, both before income taxes, by $108 million and $48 million,
respectively.
The following table summarizes estimated proved reserves as of December 31,
1993 by major area of operation:
<TABLE>
<CAPTION>
NATURAL GAS
GAS NGLS OIL EQUIVALENTS
--------- ------- ------- -----------
(MMCF) (MBBLS) (MBBLS) (MMCFE)
<S> <C> <C> <C> <C>
Hugoton.................................. 869,229 36,663 -- 1,089,207
West Panhandle........................... 282,899 42,447 1,767 548,183
Other.................................... 50,316 40 1,529 59,730
--------- ------- ------- -----------
Total.......................... 1,202,444 79,150 3,296 1,697,120
--------- ------- ------- -----------
--------- ------- ------- -----------
</TABLE>
22
<PAGE> 24
Estimates of reserves for approximately 96% of the quantities shown above
have been prepared by D&M. Mesa's internal estimates of proved reserves as of
December 31, 1993 for the Hugoton and West Panhandle areas exceed those of D&M
by about 450 Bcfe, or approximately 27%. The higher reserve estimates are
primarily attributable to higher recoveries that Mesa expects to realize from
the 381 infill wells that have been drilled on its Hugoton properties, most of
which were drilled between 1987 and 1990.
Petroleum engineering is not an exact science. Information relating to
Mesa's proved oil and gas reserves is based upon engineering estimates.
Estimates of economically recoverable oil and gas reserves and of future net
revenues necessarily depend upon a number of variable factors and assumptions,
such as historical production performance, the assumed effects of regulations by
governmental agencies and assumptions concerning future oil and gas prices,
future operating costs, severance and excise taxes, development costs and
workover and remedial costs, all of which may in fact vary considerably from
actual results. For these reasons, estimates of the economically recoverable
quantities of oil and gas attributable to any particular group of properties,
classifications of such reserves based on risk of recovery, and estimates of the
future net revenues expected therefrom prepared by different engineers or by the
same engineers at different times may vary substantially. Actual production,
revenues and expenditures with respect to Mesa's reserves will likely vary from
estimates, and such variances may be material.
The present values of future net revenues referred to herein should not be
construed as the current market value of the estimated oil and gas reserves
attributable to Mesa's properties. In accordance with applicable requirements of
the SEC, the estimated discounted future net revenues from proved reserves are
generally based on prices and costs as of the date of the estimate, whereas
actual future prices and costs may be materially higher or lower. Actual future
net revenues also will be affected by factors such as the amount and timing of
actual production, supply and demand for oil and gas, curtailments or increases
in consumption by gas purchasers, changes in governmental regulations or
taxation and the impact of inflation on costs. Mesa's producing properties in
the Hugoton field and the West Panhandle field are subject to production
limitations imposed by state regulatory authorities, by contracts or both, and
any future limitation on production would affect the estimates of future net
cash flows. The timing of actual future net revenues from proved reserves, and
thus their actual present value, will be affected by the timing of both the
production and the incurrence of expenses in connection with development and
production of oil and gas properties. In addition, the 10% discount factor,
which is required by the SEC to be used to calculate discounted future net
revenues for reporting purposes, is not necessarily the most appropriate
discount factor based on interest rates in effect from time to time and risks
associated with the oil and gas industry.
During 1993, Mesa filed Form EIA-23, which includes reserve estimates
prepared by D&M, with the Energy Information Administration of the Department of
Energy ("EIA"). Such reserve estimates did not vary from those estimates
contained herein by more than five percent.
The estimated quantities of proved oil and gas reserves, the standardized
measure of future net cash flows from proved oil and gas reserves ("Standardized
Measure") and the changes in the Standardized Measure for each of the three
years in the period ended December 31, 1993 are included under "Supplemental
Financial Data" in the Consolidated Financial Statements of the Company.
PRODUCTION
The Hugoton and West Panhandle fields are both mature reservoirs that are
substantially developed and have long-life production profiles. Assuming
continuation of existing economic and operating conditions (including the
Hugoton field regulatory changes discussed below), Mesa expects to be able to
maintain annual productive capacity from its existing properties through the end
of this decade that approximates or exceeds such properties' 1993 equivalent
production of approximately 115 Bcfe. Certain factors affecting production in
Mesa's various fields are discussed in greater detail below.
Hugoton Field
Natural gas production from the Hugoton field is subject to numerous state
and federal laws and Federal Energy Regulatory Commission ("FERC") regulations.
The KCC is the state regulatory agency that regulates oil and gas production in
Kansas. One of the KCC's most important responsibilities is the
23
<PAGE> 25
determination of market demand (allowables) for the field and the allocation of
allowables among the more than 5,000 wells in the field.
Twice each year, the KCC sets the fieldwide allowable production at a level
estimated to be necessary to meet the Hugoton market demand for the summer and
winter production periods. The fieldwide allowable is then allocated among
individual wells based on a series of calculations that are principally based on
each well's pressure, deliverability and acreage. The allowables assigned to
individual wells are affected by the relative production, testing and drilling
practices of all producers in the field, as well as the relative pressure and
deliverability performance of each well.
Generally, fieldwide allowables are influenced by overall gas market supply
and demand in the United States, as well as specific nominations for gas from
the parties who produce or purchase gas from the field. Since 1987, fieldwide
allowables have increased in each year except 1991. The total field allowable in
1993 was 578 Bcf. Between 1989 and 1991, Mesa's percentage of actual field
production increased from a historical average of 13% to 16% because other
operators produced less than their assigned allowables, and because Mesa
produced its assigned allowable share and its underages (cumulative allowables
not produced in the periods assigned) from prior years. Mesa also increased its
productive capacity by substantially completing its infill well development
program before other producers. In 1992 and 1993, Mesa's share of allowables was
reduced, essentially presenting other producers with an opportunity to catch up
to Mesa's more aggressive production rate from 1989 through 1991. In 1992 and
1993, Mesa's net Hugoton production totaled 55.5 Bcfe and 57.0 Bcfe,
respectively, compared to 72.1 Bcfe in 1991.
The KCC held hearings from August 1992 to September 1993 to consider
changes to the manner in which fieldwide allowables are allocated among
individual wells within the Hugoton field. Specifically, the KCC considered
proposals from various producers to amend calculations of well deliverability,
the allocation of allowables for infilled units, and the makeup of underages
from prior periods. On February 2, 1994, the KCC issued an order, effective as
of April 1, 1994, establishing new field rules which modify the formulas and
calculations used to allocate allowables among wells in the field. For example,
the standard pressure against which each well's deliverability is measured will
be reduced by 35%, greatly benefitting Mesa's high deliverability wells. Also,
the new rules assign a 30% greater allowable to 640-acre units with infill wells
than similar units without infill wells. Substantially all of Mesa's Hugoton
infill wells have been drilled, resulting in an increase to Mesa in assigned
allowables for 1994. The new field rules also allow Hugoton producers to make up
underages over a 10-year period. The KCC reported underages for the entire field
of approximately 950 Bcf, of which Mesa's share is 27 Bcf. Mesa expects to
continue producing its underages during the make-up period.
Mesa anticipates that the implementation of the new Hugoton field rules,
the increased yield of NGLs from the Satanta Plant and certain other factors
will result in an approximate 25% increase in its Hugoton field production in
1994 to over 70 Bcfe, assuming continuation of existing economic and operating
conditions.
Excluding reserve acquisitions, Mesa has invested over $120 million in
capital expenditures in Hugoton since 1986, but expects future capital
expenditures to be substantially lower. The previous capital expenditures
included $54 million to drill 381 infill wells, $43 million to construct the new
Satanta Plant and related facilities, and $26 million to upgrade compression
facilities, production equipment and pipeline interconnects in order to increase
production capacity and marketing flexibility. During periods of peak demand,
Mesa's wells in the Hugoton field are capable of producing more than 260 MMcf of
wet gas per day on a sustained basis.
West Panhandle Field
Mesa's production of wet gas from the West Panhandle field (i.e., gas
production at the wellhead before processing and before reduction for royalties)
is governed by the B Contract. Mesa was entitled to wet gas production of 35 Bcf
for 1993 and will be entitled to 32 Bcf per year for 1994 through 1996. After
deductions for processing and royalties, Mesa expects that 32 Bcf of wet gas
production will result in annual net production volumes of approximately 21 Bcf
of residue gas and 3 million Bbls of NGLs. Beginning in 1997, Mesa will have the
right to market and sell as much gas as it can produce, subject to specific CIG
seasonal and daily entitlements as provided for under the B Contract. Assuming
continuation of existing economic and
24
<PAGE> 26
operating conditions, Mesa expects its existing West Panhandle properties will
be able to produce an average of 33 Bcf of wet gas per year for sale in the
years 1997 through 2000.
The PAA contains provisions which allocate 77% of ultimate production from
the B Contract properties after January 1, 1991 to Mesa and 23% to CIG. As a
result, Mesa records 77% of total annual B Contract production as sales,
regardless of whether Mesa's actual deliveries are greater or less than the 77%
share. The difference between Mesa's 77% entitlement and the amount of
production actually sold by Mesa to its customers is recorded monthly as
production revenue with corresponding accruals for operating costs, production
taxes, depreciation, depletion and amortization and gas balancing receivables.
At December 31, 1993, a long-term gas balancing receivable of $34.3 million
relating to the B Contract was recorded in Mesa's balance sheet in other assets.
In future years, as Mesa sells to customers more than its 77% entitlement share
of field production, this receivable will be realized.
NATURAL GAS PROCESSING
Mesa, like other producers, processes its natural gas production for the
extraction of NGLs because certain components of the gas stream have higher
market value in processed form than in non-processed, wet gas form. Mesa has
recently made substantial capital investments to enhance its natural gas
processing and helium extraction capabilities in the Hugoton and West Panhandle
fields. Mesa owns and operates its own processing facilities so that it can (i)
capture the processing margin for itself, as third party processing agreements
generally available in the industry result in retention of a significant portion
of the processing margin by the contract processor; and (ii) control the quality
of the residue gas stream, permitting it to market gas directly to pipelines for
delivery to end users. In addition, Mesa believes that the ability to control
its production stream from the wellhead through its processing facilities to
disposition at central delivery points enhances its marketing opportunities and
competitive position in the industry.
Through its natural gas processing plants, Mesa extracts raw NGLs and crude
helium from the wet natural gas stream. The NGLs are then transported and
fractionated into their constituent hydrocarbons such as propane, butane,
ethane, isobutane and natural gasolines. The NGLs and helium are then sold
pursuant to contracts providing for market based prices. Mesa produced 5 million
Bbls of NGLs in 1993.
Satanta Natural Gas Processing Plant
Historically, approximately one-half of Mesa's Hugoton production was
processed through the Ulysses natural gas processing plant for the extraction of
NGLs. In the third quarter of 1993, Mesa completed the Satanta Plant. The
Satanta Plant has the capacity to process 250 MMcf of natural gas per day, and
enables Mesa to extract natural gas liquids from substantially all of the gas
produced from its Hugoton field properties. The Satanta Plant also has the
ability to extract helium from the gas stream. In December 1993, the Satanta
Plant averaged 225 MMcf per day of inlet gas and produced a daily average of
11,000 Bbls of NGLs, 430 Mcf of crude helium and 175 MMcf of residue natural
gas.
Fain Natural Gas Processing Plant
Wet gas produced from the West Panhandle field contains a high quantity of
NGLs, yielding relatively greater NGL volumes than realized from other natural
gas fields. Mesa completed an expansion of the Fain Plant in late 1992 to
increase its inlet capacity from 90 MMcf per day to 120 MMcf per day. In
December 1993, the Fain Plant averaged 107 MMcf per day of inlet gas and
produced a daily average of 10,700 Bbls of NGLs, 280 Mcf of crude helium and 80
MMcf of residue natural gas.
25
<PAGE> 27
SALES AND MARKETING
Following the processing of the wet gas, Mesa sells the dry, or residue,
natural gas and the NGLs pursuant to various short-term and long-term sales
contracts. Substantially all of Mesa's gas and NGL sales are made at market
prices, with the exception of certain West Panhandle field volumes. Due to a
number of market forces, including the seasonal nature of demand for natural
gas, both sales volumes from Mesa's properties and sales prices received vary on
a seasonal basis. Sales volumes and price realizations for natural gas are
generally higher during the first and fourth quarters of each calendar year.
The following table shows Mesa's natural gas and NGL production and prices
by area for the past three years.
<TABLE>
<CAPTION>
PRODUCTION 1993 1992 1991
------------------------------------------------------------ ------- ------- --------
<S> <C> <C> <C>
Natural gas (MMcf)
Hugoton................................................... 47,476 48,592 63,367
West Panhandle............................................ 23,786 26,380 23,591
Other(1).................................................. 8,558 14,555 21,564
------- ------- --------
Total............................................. 79,820 89,527 108,522
------- ------- --------
------- ------- --------
Natural gas liquids (MBbls)
Hugoton................................................... 1,481 898 1,235
West Panhandle............................................ 3,480 3,794 3,279
Other(1).................................................. 89 148 211
------- ------- --------
Total............................................. 5,050 4,840 4,725
------- ------- --------
------- ------- --------
</TABLE>
- ---------------
(1) Includes production through the date of sale from properties that have been
sold. The most significant property sales occurred in 1991. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" for disclosure of production from sold properties.
<TABLE>
<CAPTION>
PRICES 1993 1992 1991
------------------------------------------------------------- ------ ------ ------
<S> <C> <C> <C>
Weighted average sales price:
Natural gas (per Mcf)
Hugoton................................................. $ 1.78 $ 1.56 $ 1.29
West Panhandle.......................................... 1.72 1.80 1.85
Other................................................... 2.04 1.74 1.94
------ ------ ------
Average(1)......................................... 1.79 1.72 1.54
Natural gas liquids (per Bbl)
Hugoton................................................. $12.35 $13.98 $14.65
West Panhandle.......................................... 12.04 11.92 12.58
Other................................................... 12.55 12.50 11.44
------ ------ ------
Average............................................ 12.14 12.32 13.07
</TABLE>
- ---------------
(1) The average natural gas price for all properties for the years 1992 and
1991 reflects $.06 per Mcf and $.08 per Mcf, respectively, related to
hedges of natural gas production in the natural gas futures market.
Hugoton Gas Sales Contracts
A substantial portion of Mesa's Hugoton field production is subject to gas
purchase contracts with Western Resources, Inc. ("WRI"). The WRI contracts,
which became effective January 1, 1990 and expire in May 1995, provide WRI the
right to annual purchases of 34.0 Bcf in 1993, 37.5 Bcf in 1994 and 19.9 Bcf
during the first five months of 1995. These volumes are subject to minimum
seasonal purchase volumes. The contracts also provide that any gas not nominated
for purchase by WRI is released to Mesa for sale to other parties. WRI pays
market prices for volumes purchased as determined monthly based on a price index
published by a third party. WRI purchased 29.5 Bcf in 1993 at an average price
of $1.85 per Mcf.
26
<PAGE> 28
Under a purchase contract with Williams Natural Gas Company ("Williams"),
effective as of December 1, 1989, Williams has the right, for the life of the
leases on the properties governed by the contract, to purchase certain volumes
of natural gas during each winter season from leases representing approximately
35% of Mesa's Hugoton production. Williams has not exercised its right to
purchase gas pursuant to this agreement in previous years, and Mesa has sold
such gas to other buyers at market prices.
Mesa's attempts to maximize its annual production and to direct natural gas
sales to the most favorable markets available, consistent with regulatory and
contractual requirements. Any Hugoton production not taken under the applicable
contracts by WRI or Williams is released for sale to other parties. Mesa markets
such production to marketers, pipelines, local distribution companies and end
users, generally under short-term contracts at market prices.
West Panhandle Gas Sales Contracts
Most of Mesa's West Panhandle field residue gas is sold pursuant to gas
purchase contracts with two major customers in the Texas panhandle area.
Approximately 10 Bcf per year of residue gas is sold to a gas utility that
serves residential, commercial and industrial customers in Amarillo, Texas under
the terms of a long-term agreement dated January 2, 1993, which supercedes the
original contract in effect since 1949. The contract contains a pricing formula
for the five-year period 1993 through 1997. Beginning in 1993, 70% of the
volumes sold to the gas utility under this contract are sold at fixed prices of
$2.71 per Mcf in 1993, and escalating 5% per annum in 1994 and 1995 and then at
7 1/2% per annum in 1996 and 1997. The other 30% of the volumes sold under this
contract are priced at a regional market index based on spot prices plus $.10
per Mcf. Prices for 1998 and beyond will be determined by renegotiation. Mesa
provides the gas utility significant volume flexibility, including a right to
the residue gas volumes required to meet the seasonal needs of its residential
and commercial customers. The average price received by Mesa for natural gas
sales to the gas utility in 1993 was $2.52 per Mcf.
Mesa's principal industrial customer for West Panhandle field gas is an
intrastate pipeline company which serves various markets including an electric
power generation facility near Amarillo. In 1990, Mesa entered into a five-year
contract with the pipeline company to supply gas to the power generation
facility. The contract provides for minimum annual volumes of 7 Bcf in 1993, 8.4
Bcf in 1994 and 8.4 Bcf in 1995 at fixed prices per MMBtu of $1.64, $1.71 and
$1.79 for the respective years. Mesa has periodically made sales to the pipeline
company in excess of the minimum volumes specified in the contract. In 1993,
Mesa sold approximately 11 Bcf to the pipeline for an average price of $1.59 per
Mcf.
Other industrial customers purchase natural gas from Mesa under short to
intermediate term contracts. These sales totaled approximately 4 Bcf in 1993 and
5 Bcf in 1992. Mesa intends to continue to seek new customers for additional
sales of West Panhandle field natural gas production.
Prior to 1993, Mesa's right to market natural gas produced from the West
Panhandle field was limited by the B Contract to Amarillo, Texas and its
environs. An amendment to the PAA in 1993 removed this restriction and Mesa now
has the right to market its production elsewhere. Through 1995, a substantial
portion of Mesa's West Panhandle production is under contract to customers in
Amarillo as described above. Mesa expects to continue to focus its marketing
efforts in the Amarillo area. Mesa believes that the right to market production
outside the Amarillo area will ensure that Mesa receives competitive terms for
its West Panhandle field production.
NGL and Helium Sales
NGL production from both the Satanta and the Fain Plants is sold by
component pursuant to a seven year contractual arrangement with Mapco Oil and
Gas Company ("Mapco"), a major transporter and marketer of NGLs, at the greater
of Midcontinent or Gulf Coast prices at the time of sale. Helium is sold to an
industrial gas company under a fifteen year agreement that provides for annual
price adjustments.
Major Customers
See Note 11 of Notes to Consolidated Financial Statements for information
on sales to major customers.
27
<PAGE> 29
RESERVE REPLACEMENT
In the last three years, Mesa's capital budget has been directed
principally toward the construction of NGL processing facilities and
improvements in its compression and gathering systems, rather than toward
reserve replacement. While Mesa expects to direct additional capital
expenditures (see "Management's Discussion and Analysis of Financial Condition
and Results of Operations") toward reserve replacement in 1994 and in future
years, Mesa does not expect that the presently budgeted amounts will be
sufficient to replace annual production with new reserve additions. However, as
Mesa progresses in its plan to deleverage its capital structure, it expects that
cash flows formerly devoted to debt service will be used to increase the level
of capital expenditures for reserve replacement.
Mesa's strategy for replacing its annual production with new reserve
additions is based on a multi-step approach, including (i) developing additional
reserves in certain deeper portions of the West Panhandle field reservoir; (ii)
development and exploratory drilling in the Gulf of Mexico based on evaluation
of 3-D seismic data, principally on existing properties; and (iii) acquisitions
of producing properties with development and exploration potential, particularly
in areas where Mesa presently or historically has operated. The extent to which
Mesa pursues these activities is largely dependent on the success and extent of
its capital raising and deleveraging activities.
West Panhandle Development
In the last three years, Mesa has deepened or redrilled 39 wells in the
West Panhandle field, adding reserves and increasing deliverability. Mesa has
also identified in excess of 100 drilling locations targeting reserves in deeper
portions of the reservoir not currently reached by existing wells. Mesa
anticipates development of the reserves over the next three to four years, in
anticipation of its contractual right to increase its share of B Contract
production in 1997 (see -- "Production -- West Panhandle Field").
Gulf Coast Development and Exploration
Mesa currently owns interests held by production on 37 offshore blocks
encompassing 22 producing fields. Mesa has operated in the Gulf of Mexico since
1970, and has an extensive data base, including over 100,000 miles of seismic
data. Over the last three years, Mesa has evaluated its offshore producing
properties utilizing conventional well information, seismic and production data,
combined with new 3-D seismic surveys to identify further development and
exploration potential. Mesa currently has six 3-D seismic surveys under analysis
and plans to obtain an additional nine surveys in 1994. Mesa has currently
identified three prospects it plans to drill in 1994 and expects to complete
evaluation of 10 other blocks in 1994. Mesa intends to continue its evaluation
and identify additional prospects for drilling in 1995, depending on the success
of its initial program and other factors. Because it has existing infrastructure
and production facilities on these properties, Mesa expects that it will be able
to bring its successful wells, if any, on line more quickly and at lower
development costs than have been typical for offshore production.
Acquisitions
Mesa has also maintained a large geological and geophysical data base
covering the Midcontinent and other areas where it has historically operated. As
capital becomes available and conditions permit, Mesa intends to exploit its
data base and make selective acquisitions of producing properties with
development and exploration potential in the Texas panhandle, the Hugoton field,
and other areas of the Midcontinent and Gulf Coast regions.
28
<PAGE> 30
DRILLING ACTIVITIES
The following table shows the results of Mesa's drilling activities for the
last five years.
<TABLE>
<CAPTION>
1993 1992 1991 1990 1989
------------ ------------ ------------ ------------- ------------
GROSS NET GROSS NET GROSS NET GROSS NET GROSS NET
----- ---- ----- ---- ----- ---- ----- ----- ----- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Exploratory wells:
Productive................. -- -- 5 4.1 6 4.7 -- -- 5 1.6
Dry........................ 1 1.0 1 .4 1 .2 5 3.1 5 2.6
Development wells:
Productive................. 43 29.1 22 16.5 26 10.9 146 120.8 151 88.6
Dry........................ -- -- -- -- -- -- -- -- 2 .2
----- ---- ----- ---- ----- ---- ----- ----- ----- ----
Total................... 44 30.1 28 21.0 33 15.8 151 123.9 163 93.0
----- ---- ----- ---- ----- ---- ----- ----- ----- ----
----- ---- ----- ---- ----- ---- ----- ----- ----- ----
</TABLE>
At December 31, 1993, the Company was not participating in the drilling of
any wells.
PRODUCING ACREAGE AND WELLS, UNDEVELOPED ACREAGE
Mesa's ownership of oil and gas acreage held by production, producing wells
and undeveloped oil and gas acreage as of December 31, 1993 is set forth in the
table below.
<TABLE>
<CAPTION>
UNDEVELOPED
PRODUCING ACREAGE PRODUCING WELLS ACREAGE
------------------- ---------------- -----------------
GROSS NET GROSS NET GROSS NET
------- ------- ----- ------ ------ ------
<S> <C> <C> <C> <C> <C> <C>
Onshore U.S.:
Kansas...................... 258,994 231,367 1,339 985.1 5,280 5,280
Texas....................... 241,353 191,044 589 451.6 5,164 4,592
Wyoming..................... 11,715 4,603 6 1.3 16,415 11,214
North Dakota................ 5,600 4,141 10 5.9 3,931 2,602
Other....................... 4,573 2,700 8 1.3 34,767 24,233
------- ------- ----- ------- ------ ------
Total Onshore............ 522,235 433,855 1,952 1,445.2 65,557 47,921
------- ------- ----- ------- ------ ------
Offshore U.S.:
Louisiana................... 88,274 46,022 77 34.5 -- --
Texas....................... 73,808 15,233 50 8.4 -- --
------- ------- ----- ------- ------ ------
Total Offshore........... 162,082 61,255 127 42.9 -- --
------- ------- ----- ------- ------ ------
Grand Total................... 684,317 495,110 2,079 1,488.1 65,557 47,921
------- ------- ----- ------- ------ ------
------- ------- ----- ------- ------ ------
</TABLE>
Mesa has interests in 2,015 gross (1,467.3 net) gas wells and 64 gross
(20.8 net) oil wells in the United States. Mesa also owns approximately 84,643
net acres of producing minerals and 40,732 net acres of nonproducing minerals in
the United States.
THE NGV BUSINESS
Mesa believes that the natural gas vehicle ("NGV") market will develop and
expand in the next decade, particularly in light of (i) the National Energy
Policy Act of 1992, (ii) the amendments to the 1990 Federal Clean Air Act which
require the use of alternative fuels by certain fleets, (iii) the requirements
of numerous state and municipal environmental regulations, (iv) generally
increased awareness of the adverse environmental and pollution effects of crude
oil based motor fuels and (v) the development of more efficient equipment to
convert gasoline and diesel burning vehicles to operate on natural gas.
Mesa's principal objectives are (i) to increase public awareness and
acceptance of natural gas as a premium fuel for use in the transportation
sector, thus creating a potentially large, high-value market for natural gas;
and (ii) to become a leading provider of NGV conversion equipment and fueling
services. Mesa's present strategies to accomplish these objectives are (i) the
development, manufacture and sale of engine-specific, conversion equipment which
meets the most stringent emissions standards; (ii) pursuing conversion equipment
sales, fleet conversions, fueling installations and administration of conversion
and fueling programs;
29
<PAGE> 31
and (iii) pursuing developing opportunities for related products such as fuel
tanks, compressors and dispenser systems.
As of December 31, 1993, Mesa had invested approximately $14 million in its
indirect, wholly owned subsidiary, Mesa Environmental, to fund its overhead and
business development. Mesa Environmental is a start-up business in a newly
developing industry and the ultimate capital investment required to insure its
viability is uncertain. In addition, Mesa cannot predict when, or if, Mesa
Environmental's operations will begin to earn a profit.
For additional information regarding Mesa's organizational structure,
history, competition, operating hazards and uninsured risks, regulation and
prices and legal proceedings, see Mesa's Annual Report on Form 10-K for the
fiscal year ended December 31, 1993.
30
<PAGE> 32
MANAGEMENT
Set forth below is certain information concerning the executive officers
and directors of the Company:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- ----------------------------------------
<S> <C> <C>
Boone Pickens.................. 65 Chairman of the Board and Chief
Executive Officer and Director
Paul W. Cain................... 55 President and Chief Operating Officer
and Director
John S. Herrington............. 54 Director
Wales H. Madden, Jr............ 66 Director
Fayez S. Sarofim............... 65 Director
Robert L. Stillwell............ 57 Director
J.R. Walsh, Jr................. 69 Director
Dennis E. Fagerstone........... 45 Vice President -- Exploration and
Production
Andrew J. Littlefair........... 33 Vice President -- Public Affairs
Charles L. Carpenter........... 55 General Counsel and Secretary
William D. Ballew.............. 35 Controller
</TABLE>
Boone Pickens became Chairman of the Board of Directors and Chief Executive
Officer of the Company in January 1992. From October 1985 to December 1991, he
was the General Partner of the Partnership. From 1964 to January 1987 he served
as Chairman of the Board of Directors, President and founder of Original Mesa.
Paul W. Cain has been a Director, President and Chief Operating Officer of
the Company since January 1992. From August 1986 to December 1991, he was the
President and Chief Operating Officer of the Partnership. He served as Executive
Vice President of the Partnership from January 1986 to August 1986. Mr. Cain is
also a Director of Bicoastal Corporation.
John S. Herrington has been a Director of the Company since January 1992.
Since December 1991 he has been engaged in personal investments and real estate
activities. From May 1990 to November 1991 he served as Chairman of the Board of
Harcourt Brace Jovanovich, Inc. From May 1989 to May 1990, Mr. Herrington was a
Director of Harcourt Brace Jovanovich, Inc. Mr. Herrington also served as
Secretary of Energy of the United States from February 1985 to January 1989.
Wales H. Madden, Jr. has been a Director of the Company since January 1992.
From December 1985 to December 1991 he served as a Member of the Advisory
Committee of the Partnership. From 1964 to January 1987 he served as a Director
of Original Mesa. For more than the last five years, Mr. Madden has been a self
employed attorney and businessman. Mr. Madden also is a Director of Boatmen's
First National Bank of Amarillo and Uniform Printing and Supply of Boston.
Fayez S. Sarofim has been a Director of the Company since January 1992. Mr.
Sarofim has also served as the Chairman of the Board and President of Fayez
Sarofim & Co. (investment advisor) for more than the last five years. He is also
a Director of Teledyne, Inc., Unitrin, Inc., Argonaut Group, Inc. and Imperial
Holly Corporation.
Robert L. Stillwell has been a Director of the Company since January 1992.
From December 1985 to December 1991 Mr. Stillwell served as a Member of the
Advisory Committee of the Partnership. From 1969 to January 1987 he served as a
Director of Original Mesa. Mr. Stillwell has been a Partner in the law firm of
Baker & Botts, L.L.P., Houston, Texas, for more than the last five years.
J.R. Walsh, Jr. has been a Director of the Company since January 1992. From
December 1985 to December 1991, Mr. Walsh served as a Member of the Advisory
Committee of the Partnership. From 1982 to January 1987 he was a Director of
Original Mesa. Mr. Walsh has been the President and Chairman of the Board of
United Mud Service Company (oil and gas service company) for more than the last
five years.
31
<PAGE> 33
UNDERWRITING
Subject to the terms and conditions set forth in the purchase agreement
(the "Purchase Agreement") between the Company and each of the Underwriters
named below (the "Underwriters"), the Company has agreed to sell to each of the
Underwriters, and each of the Underwriters, for whom Merrill Lynch, Pierce,
Fenner & Smith Incorporated ("Merrill Lynch"), Bear, Stearns & Co. Inc.,
PaineWebber Incorporated and Salomon Brothers Inc are acting as representatives
(the "Representatives"), has severally agreed to purchase, the number of shares
of Common Stock set forth below opposite its name. The Underwriters are
committed to purchase all of such shares if any are purchased. Under certain
circumstances, the commitments of non-defaulting Underwriters may be increased
as set forth in the Purchase Agreement.
<TABLE>
<CAPTION>
NUMBER
UNDERWRITERS OF SHARES
------------ -----------
<S> <C>
Merrill Lynch, Pierce, Fenner & Smith
Incorporated................................................
Bear, Stearns & Co. Inc..................................................
PaineWebber Incorporated.................................................
Salomon Brothers Inc ....................................................
-----------
Total 23,000,000
-----------
-----------
</TABLE>
The Representatives have advised the Company that the Underwriters propose
to offer the shares of Common Stock to the public initially at the public
offering price set forth on the cover page of this Prospectus, and to certain
dealers at such price less a concession not in excess of $ per share.
The Underwriters may allow, and such dealers may re-allow, a discount not in
excess of $ per share on sales to certain other dealers. After the
initial public offering, the public offering price, concession and discount may
be changed.
The Company has granted the Underwriters an option, exercisable by the
Representatives, to purchase up to 3,450,000 additional shares of Common Stock
at the initial public offering price, less the underwriting discount. Such
option, which expires 30 days after the date of this Prospectus, may be
exercised solely to cover over-allotments. To the extent the Representatives
exercise such option, each of the Underwriters will be obligated, subject to
certain conditions, to purchase approximately the same percentage of the option
shares that the number of shares to be purchased initially by that Underwriter
bears to the total number of shares to be purchased initially by the
Underwriters.
The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933, or to
contribute to payments the Underwriters may be required to make in respect
thereof.
PaineWebber Incorporated provided investment banking services to the
Company in connection with the Debt Exchange for which the Company paid
PaineWebber Incorporated fees of $2.5 million in 1993.
32
<PAGE> 34
Certain of the Underwriters engage in transactions with and perform
services for the Company in the ordinary course of business.
The Underwriters are reserving an aggregate of 3,000,000 shares of Common
Stock for sale at the initial public offering price to Boone Pickens, the
Chairman and Chief Executive Officer of the Company, Fayez Sarofim, a director
of the Company, and another individual unaffiliated with the Company. Each such
person will purchase 1,000,000 shares. Mr. Sarofim, who controls an NASD member
firm, will purchase such shares only if the purchase would comply with the rules
of the NASD respecting "hot issues." As of March 10, 1994, Mr. Pickens
beneficially owned 3,090,126 shares of Common Stock and Mr. Sarofim beneficially
owned 400,000 such shares.
The Company, its directors and executive officers and the persons referred
to in the immediately preceding paragraph have agreed that they will not,
without the prior written consent of Merrill Lynch, offer, sell or otherwise
dispose of any shares of Common Stock or securities convertible into, or
exercisable for, Common Stock, for a period of 120 days after the date of this
Prospectus, except that the Company may, without such consent, issue shares of
Common Stock upon the exercise of options under its stock option plan and may
grant stock options thereunder.
LEGAL MATTERS
Certain legal matters in connection with the Common Stock offered hereby
will be passed upon for the Company by Baker & Botts, L.L.P., and for the
Underwriters by Vinson & Elkins L.L.P. Robert L. Stillwell, a partner of Baker &
Botts, L.L.P., is a director of the Company.
EXPERTS
The consolidated financial statements of the Company included in this
Prospectus have been audited by Arthur Andersen & Co., independent public
accountants, as indicated in their report with respect thereto, and are included
herein in reliance upon the authority of said firm as experts in giving said
report.
The estimates of certain of Mesa's proved reserves of oil and natural gas
and discounted present values of estimated future net cash flows therefrom
incorporated herein by reference to the Company's report on Form 10-K for the
fiscal year ended December 31, 1993, are extracted from the report of DeGolyer
and MacNaughton, independent consulting petroleum engineers, attached as an
exhibit to such annual report. Such information is incorporated herein by
reference in reliance upon the authority of said firm as experts with respect to
the matters contained in such reports.
ADDITIONAL INFORMATION
The Company has filed with the SEC a Registration Statement on Form S-3
(the "Registration Statement") under the Securities Act of 1933 with respect to
the shares of Common Stock offered by this Prospectus. This Prospectus
constitutes a part of the Registration Statement and does not contain all of the
information set forth in the Registration Statement, certain parts of which are
omitted from this Prospectus as permitted by the rules and regulations of the
SEC. Statements made in this Prospectus regarding the contents of any contract,
agreement or other document are not necessarily complete. With respect to each
contract, agreement or other document filed with the SEC as an exhibit to the
Registration Statement, reference is made to the exhibit for further information
regarding the contents thereof, and each such statement is qualified in its
entirety by such reference. For further information regarding the Company and
the Common Stock offered hereby, reference is made to the Registration
Statement, including the exhibits and schedules thereto.
The Registration Statement, including the exhibits and schedules thereto,
are available for inspection at, and copies of such materials may be obtained at
prescribed rates from, the public reference facilities maintained by the SEC at
its principal offices located at Judiciary Plaza, 450 Fifth Street, N.W.,
Washington, D.C. 20549 and at its regional offices located at Citicorp Center,
500 West Madison Street, Suite 1400, Chicago, Illinois 60661 and Seven World
Trade Center, 13th Floor, New York, New York 10048.
33
<PAGE> 35
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934 (the "Exchange Act") and in accordance with the Exchange
Act files reports, proxy statements and other information with the SEC. Such
reports, proxy statements and other information can be inspected and copied at
the principal and regional offices of the SEC set forth above. Such reports,
proxy statements and other information concerning the Company can also be
inspected at the office of the New York Stock Exchange, 20 Broad Street, New
York, New York 10005, the exchange on which the Common Stock, the 12%
Subordinated Notes and the 13 1/2% Subordinated Notes are listed.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
Incorporated by reference in this Prospectus, and subject in each case to
information contained in this Prospectus, are the following documents filed by
the Company with the SEC pursuant to the Exchange Act: (1) the Company's Annual
Report on Form 10-K for the fiscal year ended December 31, 1993; (2) the
Company's Current Reports on Form 8-K dated January 11, 1994 and January 12,
1994; and (3) the description of the Common Stock contained in the Company's
Registration Statement on Form 8-A (File No. 1-10874), dated September 27, 1991.
Each document filed by the Company pursuant to Section 13(a), 13(c), 14 or
15(d) of the Exchange Act subsequent to the date of this Prospectus and prior to
the termination of the Offering shall be deemed to be incorporated by reference
in this Prospectus and to be a part of this Prospectus from the date of filing
of such document. Any statement contained in a document incorporated or deemed
to be incorporated by reference herein shall be deemed to be modified or
superseded for purposes of this Prospectus to the extent that a statement
contained herein or in any other subsequently filed document which also is or is
deemed to be incorporated by reference herein modifies or supersedes such
statement. Any such statements as modified or superseded shall not be deemed,
except as so modified or superseded, to constitute a part of this Prospectus.
The Company will provide without charge to each person, including any
beneficial owner, to whom this Prospectus is delivered, upon the written or oral
request of such person, a copy of any and all of the documents incorporated by
reference herein (other than exhibits to such documents unless such exhibits are
specifically incorporated by reference in such documents). Such request should
be directed to Investor Relations, MESA Inc., 2001 Ross Avenue, Suite 2600,
Dallas, Texas 75201 (telephone: (214) 969-2200).
34
<PAGE> 36
CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
<TABLE>
<CAPTION>
PAGE IN
S-3
-------
<S> <C>
Report of Independent Public Accountants.............................................. F-2
Consolidated Statements of Operations................................................. F-3
Consolidated Balance Sheets........................................................... F-4
Consolidated Statements of Cash Flows................................................. F-5
Consolidated Statements of Changes in Stockholders' Equity............................ F-6
Notes to Consolidated Financial Statements............................................ F-7
Supplemental Financial Data........................................................... F-28
</TABLE>
F-1
<PAGE> 37
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To MESA Inc.:
We have audited the accompanying consolidated balance sheets of MESA Inc. (a
Texas corporation) and subsidiaries as of December 31, 1993 and 1992, and the
related consolidated statements of operations, cash flows and changes in
stockholders' equity for each of the three years in the period ended December
31, 1993. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
As discussed further in Note 2 to the consolidated financial statements, the
Company's current financial forecasts indicate the Company will be unable to
fund certain principal and interest payments on its debt in 1996 with cash flows
from operating activities and available cash and securities balances. Depending
on industry and market conditions, the Company may generate cash by issuing new
equity or debt securities or selling assets. However, the Company has a limited
ability to sell assets and there can be no assurances that the Company will be
able to raise equity capital or otherwise refinance its debt.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of MESA Inc. and
subsidiaries as of December 31, 1993 and 1992, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1993, in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN & CO.
Houston, Texas
March 4, 1994
F-2
<PAGE> 38
MESA INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31
-------------------------------------
1993 1992 1991
--------- --------- ---------
<S> <C> <C> <C>
Revenues:
Natural gas........................................... $ 141,798 $ 157,672 $ 169,907
Natural gas liquids................................... 61,427 59,669 62,031
Oil and condensate.................................... 12,428 18,701 16,111
Other................................................. 6,551 1,070 1,497
--------- --------- ---------
222,204 237,112 249,546
--------- --------- ---------
Costs and Expenses:
Lease operating....................................... 51,819 43,859 46,869
Production and other taxes............................ 20,332 18,631 18,945
Exploration charges................................... 2,705 10,008 4,691
General and administrative............................ 25,237 24,460 27,837
Depreciation, depletion and amortization.............. 100,099 113,933 117,076
--------- --------- ---------
200,192 210,891 215,418
--------- --------- ---------
Operating Income........................................ 22,012 26,221 34,128
--------- --------- ---------
Other Income (Expense):
Interest income....................................... 10,704 13,504 16,512
Interest expense...................................... (142,002) (143,392) (150,770)
Gains on dispositions of oil and gas properties....... 9,600 12,250 33,749
Securities gains (losses)............................. 3,954 7,808 (2,060)
Litigation settlement................................. (42,750) -- --
Minority interest in loss............................. 4,318 3,854 3,419
Other................................................. 31,716 (9,477) (14,141)
--------- --------- ---------
(124,460) (115,453) (113,291)
--------- --------- ---------
Net Loss................................................ $(102,448) $ (89,232) $ (79,163)
--------- --------- ---------
--------- --------- ---------
Net Loss Per Common Share............................... $ (2.61) $ (2.31) $ (2.05)
--------- --------- ---------
--------- --------- ---------
Weighted Average Common Shares Outstanding.............. 39,272 38,571 38,571
--------- --------- ---------
--------- --------- ---------
</TABLE>
(See accompanying notes to consolidated financial statements.)
F-3
<PAGE> 39
MESA INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31
-----------------------
ASSETS 1993 1992
---------- ----------
<S> <C> <C>
Current Assets:
Cash and cash investments.......................................... $ 138,709 $ 157,197
Marketable securities.............................................. 11,319 11,918
Accounts receivable................................................ 43,442 44,637
Other.............................................................. 2,732 5,498
---------- ----------
Total current assets....................................... 196,202 219,250
---------- ----------
Property, Plant and Equipment:
Oil and gas properties, wells and equipment, using
the successful efforts method of accounting..................... 1,846,237 1,851,555
Office and other................................................... 41,064 40,601
Accumulated depreciation, depletion and amortization............... (695,455) (611,905)
---------- ----------
1,191,846 1,280,251
---------- ----------
Other Assets:
Restricted cash of subsidiary partnership.......................... 62,649 64,339
Notes receivable................................................... -- 30,315
Gas balancing receivable........................................... 47,101 42,089
Other.............................................................. 35,584 40,279
---------- ----------
145,334 177,022
---------- ----------
$1,533,382 $1,676,523
---------- ----------
---------- ----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Current maturities of long-term debt............................... $ 67,657 $ 44,555
Accounts payable and accrued liabilities........................... 33,375 39,397
Interest payable................................................... 19,012 32,445
---------- ----------
Total current liabilities.................................. 120,044 116,397
---------- ----------
Long-Term Debt....................................................... 1,173,637 1,241,600
---------- ----------
Deferred Revenue..................................................... 22,707 25,982
---------- ----------
Other Liabilities.................................................... 102,133 100,231
---------- ----------
Contingencies
Minority Interest.................................................... 2,732 7,961
---------- ----------
Stockholders' Equity:
Preferred stock, $.01 par value, authorized 10,000,000 shares;
no shares issued and outstanding................................ -- --
Common stock, $.01 par value, authorized 100,000,000 shares;
outstanding 46,511,439 and 38,570,544 shares, respectively...... 465 386
Additional paid-in capital......................................... 303,344 273,198
Accumulated deficit................................................ (191,680) (89,232)
---------- ----------
112,129 184,352
---------- ----------
$1,533,382 $1,676,523
---------- ----------
---------- ----------
</TABLE>
(See accompanying notes to consolidated financial statements.)
F-4
<PAGE> 40
MESA INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31
-------------------------------------
1993 1992 1991
--------- --------- ---------
<S> <C> <C> <C>
Cash Flows From Operating Activities:
Net loss.............................................. $(102,448) $ (89,232) $ (79,163)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation, depletion and amortization........... 100,099 113,933 117,076
Gains on dispositions of oil and gas properties.... (9,600) (12,250) (33,749)
Accreted interest on discount notes................ 49,160 -- --
Accrued interest exchanged for discount notes...... 15,395 -- --
Litigation settlement.............................. 42,750 -- --
Gain from adjustment of contingency reserves....... (24,000) -- --
Increase in gas balancing receivables.............. (4,942) (17,772) (15,520)
Decrease in deferred natural gas revenue........... (3,370) (10,287) (5,296)
Settlement of prior year federal income tax
claims........................................... (12,931) -- --
Natural gas hedging activities..................... 324 (8,357) 4,413
Securities (gains) losses.......................... (3,954) (7,808) 2,060
Minority interest in loss.......................... (4,318) (3,854) (3,419)
(Increase) decrease in accounts receivable......... 1,986 (585) 18,611
Increase (decrease) in payables and accrued
liabilities...................................... (15,887) (7,814) 11,909
Other.............................................. (344) 15,587 18,056
--------- --------- ---------
Net cash provided by (used in) operating
activities....................................... 27,920 (28,439) 34,978
--------- --------- ---------
Cash Flows From Investing Activities:
Capital expenditures.................................. (29,636) (69,201) (31,864)
Proceeds from dispositions of oil and gas
properties......................................... 26,118 11,424 428,063
Sales of marketable securities........................ 39,283 126,217 164,071
Purchases of marketable securities.................... (34,711) (102,161) (132,051)
Collection of notes receivable........................ 47,501 28,181 224
Other................................................. (6,461) (11,494) (28,764)
--------- --------- ---------
Net cash provided by (used in) investing
activities....................................... 42,094 (17,034) 399,679
--------- --------- ---------
Cash Flows From Financing Activities:
Repayments of long-term debt.......................... (80,102) (24,550) (927,585)
Long-term borrowings.................................. -- -- 716,550
Funding of restricted cash balance.................... -- -- (66,061)
Debt issuance costs................................... (9,651) -- (15,621)
Other................................................. 1,251 (4,935) (17,589)
--------- --------- ---------
Net cash used in financing activities.............. (88,502) (29,485) (310,306)
--------- --------- ---------
Net Increase (Decrease) in Cash and Cash Investments.... (18,488) (74,958) 124,351
Cash and Cash Investments at Beginning of Year.......... 157,197 232,155 107,804
--------- --------- ---------
Cash and Cash Investments at End of Year................ $ 138,709 $ 157,197 $ 232,155
--------- --------- ---------
--------- --------- ---------
</TABLE>
(See accompanying notes to consolidated financial statements.)
F-5
<PAGE> 41
MESA INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL
---------------- PAID-IN ACCUMULATED
SHARES AMOUNT CAPITAL DEFICIT
------ ------ ---------- -----------
<S> <C> <C> <C> <C>
Balance, December 31, 1990........................... 38,571 $386 $ 352,361 $ --
Net loss........................................... -- -- (79,163) --
------ ------ ---------- -----------
Balance, December 31, 1991........................... 38,571 386 273,198 --
Net loss........................................... -- -- -- (89,232)
------ ------ ---------- -----------
Balance, December 31, 1992........................... 38,571 386 273,198 (89,232)
Net loss........................................... -- -- -- (102,448)
Common stock issued for 0% convertible notes....... 7,523 75 29,239 --
Common stock issued for the partial conversion of
the General Partner minority interest........... 417 4 907 --
------ ------ ---------- -----------
Balance, December 31, 1993........................... 46,511 $465 $ 303,344 $(191,680)
------ ------ ---------- -----------
------ ------ ---------- -----------
</TABLE>
(See accompanying notes to consolidated financial statements.)
F-6
<PAGE> 42
MESA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
MESA Inc., a Texas corporation, was formed in 1991 in connection with a
transaction (the Corporate Conversion) which reorganized the business of Mesa
Limited Partnership (the Partnership). The Partnership was formed in 1985 to
succeed to the business of Mesa Petroleum Co. (Original Mesa). Unless the
context otherwise requires, as used herein the term "Company" refers to MESA
Inc. and its subsidiaries taken as a whole and includes its predecessors.
Pursuant to the Corporate Conversion, the Partnership transferred
substantially all its assets and liabilities to the Company on December 31, 1991
in exchange for all outstanding shares of the Company's common stock. The common
units and general partner interests in the Partnership that were held by Boone
Pickens (the General Partner) (which would otherwise have been converted into
4.14% of the Company's common stock) were converted into a 4.14% general partner
interest in each direct subsidiary partnership of the Company. The Partnership
allocated 1.0 share of the Company's common stock for each common unit and 1.35
shares of the Company's common stock for each preference unit to its unitholders
(other than the General Partner). Concurrently, the Company effected a
one-for-five reverse split of the common stock and the Partnership distributed
to its former unitholders (other than the General Partner) .2 shares of common
stock for each common unit and .27 shares of common stock for each preference
unit.
Principles of Consolidation
The Company owns and operates its oil and gas properties and other assets
through various direct and indirect subsidiaries. At the beginning of 1993, the
Company owned a 95.86% limited partnership interest and the General Partner
owned a 4.14% general partner interest in the direct subsidiary partnerships.
The debt exchange described in Notes 2, 4 and 7 included issuance of
approximately $29.3 million of 0% convertible notes which were converted into
approximately 7.5 million shares of common stock prior to December 31, 1993. In
addition, on December 31, 1993, the General Partner converted approximately
one-fourth of his general partner interests into 416,890 shares of common stock.
As a result of these issuances of common stock, the Company's interest in the
direct subsidiaries increased to 97.38% and the general partner interest
decreased to 2.62%. The accompanying consolidated financial statements reflect
the consolidated accounts of the Company and its subsidiaries after elimination
of intercompany transactions. The general partner interest is reflected as a
minority interest.
In January 1994, the Company effected a series of merger transactions which
resulted in the conversion of each of its direct subsidiary partnerships to
corporate form (see Note 13). Pursuant to these mergers, the remaining general
partner interests in the Company's subsidiary partnerships held directly or
indirectly by the General Partner were converted into 1,250,670 shares of common
stock, thereby eliminating the minority interest.
Certain reclassifications have been made to amounts reported in previous
years to conform to 1993 presentation.
Statements of Cash Flows
For purposes of the statements of cash flows, the Company classifies all
cash investments with original maturities of three months or less as cash and
cash investments.
Investments
Investments in marketable securities are stated at the lower of cost or
market value and are classified as current or noncurrent, depending on
management's intent at the balance sheet date. Periodic changes in the stated
value of the marketable securities portfolios are reflected in income in the
case of current investments and in stockholders' equity in the case of
noncurrent investments. The cost of securities sold is determined on
F-7
<PAGE> 43
MESA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
the first-in, first-out basis. The Company also enters into various futures
contracts which are not intended to be hedges of future natural gas or crude oil
production and are periodically adjusted to market prices. Gains and losses from
such contracts are included in securities gains (losses) in the consolidated
statements of operations.
In May 1993, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 115, "Accounting for Certain
Investments in Debt and Equity Securities," which is required to be adopted in
1994. SFAS No. 115 addresses the accounting and reporting for investments in
equity securities that have readily determinable fair values and for all
investments in debt securities. The Company's current portfolio of securities
would be classified as trading securities under the provisions of SFAS No. 115
and would be reported at fair value, with unrealized gains and losses included
in earnings. The Company's securities transactions are currently reported as
cash flows from investing activities in the consolidated statements of cash
flows. Under the provisions of SFAS No. 115, cash flows from transactions in
trading securities will be classified as cash flows from operating activities.
The Company does not expect the adoption of SFAS No. 115 to have a material
effect on its financial position or results of operations.
Oil and Gas Properties
Under the successful efforts method of accounting, all costs of acquiring
unproved oil and gas properties and drilling and equipping exploratory wells are
capitalized pending determination of whether the properties have proved
reserves. If an exploratory well is determined to be nonproductive, the drilling
and equipment costs of the well are expensed at that time. All development
drilling and equipment costs are capitalized. Capitalized costs of proved
properties and estimated future dismantlement and abandonment costs are
amortized on a property-by-property basis using the unit-of-production method.
Geological and geophysical costs and delay rentals are expensed as incurred.
Unproved properties are periodically assessed for impairment of value and a
loss is recognized at the time of impairment. The aggregate carrying value of
proved properties is periodically compared with the undiscounted future net cash
flows from proved reserves, determined in accordance with Securities and
Exchange Commission (SEC) regulations, and a loss is recognized if permanent
impairment of value is determined to exist. A loss is recognized on proved
properties expected to be sold in the event that carrying value exceeds expected
sales proceeds.
Net Loss Per Common Share
The computations of net loss per common share are based on the weighted
average number of common shares outstanding during each period.
Fair Value of Financial Instruments
The Company's financial instruments consist of cash, marketable securities,
short-term trade receivables and payables, restricted cash and long-term debt.
The carrying values of cash, marketable securities, short-term trade receivables
and payables and restricted cash approximate fair value. The fair value of
long-term debt is estimated based on the market prices for the Company's
publicly traded debt and on current rates available for similar debt with
similar maturities and security for the Company's remaining debt.
Gas Revenues
The Company recognizes its ownership interest in natural gas production as
revenue. Actual production quantities sold by the Company may be different than
its ownership share of production in a given period. If the Company's natural
gas sales exceed its ownership share of production, the excess is recorded as
deferred revenue. Gas balancing receivables are recorded when the Company's
ownership share of production exceeds
F-8
<PAGE> 44
MESA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
its natural gas sales. The Company also accrues production expenses based on its
ownership share of production. At December 31, 1993, the Company had produced
and sold a net 13.6 billion cubic feet (Bcf) of natural gas less than its
ownership share of production and had recorded gas balancing receivables, net of
deferred revenues, of approximately $27.5 million. Substantially all of the
Company's gas balancing receivables and deferred revenue is classified as
long-term.
The Company periodically enters into natural gas futures contracts as a
hedge against natural gas price fluctuations. Gains or losses on such futures
contracts are deferred and recognized as natural gas revenue when the hedged
production occurs. The Company recognized net gains of $8.3 million and $5.6
million in 1991 and 1992, respectively, and net losses of $.3 million in 1993
related to hedging activities. The Company did not enter into any new hedge
contracts in 1993. At December 31, 1993, the Company had no deferred gains or
losses related to hedging activities and did not own any natural gas futures
contracts accounted for as hedges.
Taxes
The Company provides for income taxes using the asset and liability method
under which deferred income taxes are recognized for the tax consequences of
"temporary differences" by applying enacted statutory tax rates applicable to
future years to differences between the financial statement carrying amounts and
the tax bases of existing assets and liabilities. The effect on deferred taxes
of a change in tax laws or tax rates is recognized in income in the period that
includes the enactment date.
(2) RESOURCES AND LIQUIDITY
The Company is highly leveraged but in recent years has repaid or
refinanced over $1.6 billion of long-term debt. The most recent transaction was
completed in 1993 when substantially all of the Company's $600 million of
subordinated notes and $100 million of bank debt was restructured in a debt
exchange transaction. In 1994, the Company intends to continue efforts to
reduce, refinance and restructure its debt, including through the issuance of
new equity securities.
At December 31, 1993, the Company's long-term debt, net of current
maturities, totaled approximately $1.2 billion (see Note 4). The Company also
had approximately $76 million of working capital; cash and securities totaled
approximately $150 million. Included in the $150 million of cash and securities
is $40 million of cash held by Hugoton Capital Limited Partnership (HCLP), an
indirect subsidiary partnership. The assets of HCLP (which include substantially
all of the Company's Hugoton field natural gas properties and approximately $63
million of restricted cash) are dedicated to service HCLP's $542 million of
secured debt (the HCLP Secured Notes) and are not available to pay creditors of
the Company or its other subsidiaries. See Note 4 for additional discussion. The
Company's cash flows from operating activities are substantially dependent on
the amount of oil and gas produced and the prices received for such production.
Production and prices received from HCLP properties, together with cash held by
HCLP, are expected, under the Company's current operating plan, to generate
sufficient cash flow to meet HCLP's required principal, interest and capital
obligations. However, HCLP's cash flows are not expected to be sufficient to
permit HCLP to distribute any excess cash to other Company subsidiaries until at
least 1995. The Company may advance as much as $10 million to HCLP in 1994 to
cover HCLP capital expenditures in excess of required scheduled capital
expenditures.
During the third quarter of 1993, the Company completed the debt exchange
(Debt Exchange) described in Note 4. The notes issued in the Debt Exchange
replaced substantially all of the Company's $600 million of previously
outstanding subordinated notes. The Debt Exchange resulted in the deferral of
cash interest requirements of approximately $75 million annually from mid-1993
through June 30, 1995. Completion of the Debt Exchange also resulted in an
amendment to the Company's bank credit agreement (Credit Agreement), which
advanced the maturity of $41 million of principal payments from 1994 to 1993 but
also extended the maturity of $40 million of principal and $10 million of letter
of credit obligations from 1994 to 1995. The
F-9
<PAGE> 45
MESA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Company believes that completion of the Debt Exchange and amendments to the
Credit Agreement have increased its ability to obtain traditional equity or debt
financing to repay or refinance its indebtedness.
As a result of the completion of the Debt Exchange and the amendments to
the Credit Agreement, the Company expects to service its debt obligations and
meet capital expenditure requirements through 1995 with cash flows from
operating activities and available cash and securities balances. On December 31,
1995, the Company will begin making interest payments on the 12 3/4% secured
discount notes due June 30, 1998 and the 12 3/4% unsecured discount notes due
June 30, 1996 (together, the Discount Notes) issued in the Debt Exchange.
Assuming no changes in the Company's capital structure prior to such date, the
Company will be required to make cash interest payments related to the Discount
Notes totaling approximately $51 million on December 31, 1995 and approximately
$90 million during 1996. In addition, 12 3/4% unsecured discount notes in the
amount of $178.8 million and 12% subordinated notes in the amount of $6.3
million become due in mid-1996. The Company's current financial forecasts
indicate that the Company will be unable to fund such payments in 1996 with cash
flows from operating activities and available cash and securities balances.
Depending on industry and market conditions, the Company may generate cash by
issuing new equity or debt securities or selling assets. However, the Company
has a limited ability to sell assets since its two largest assets, its interests
in the Hugoton and West Panhandle fields, are pledged under long-term debt
agreements. The Company intends to continue its efforts to strengthen its
financial condition by raising equity capital and applying the proceeds thereof
to retire debt, and to issue new lower-cost debt to refinance its existing
higher-cost debt securities. However, there can be no assurances that the
Company will be able to raise equity capital or otherwise refinance its debt.
(3) MARKETABLE SECURITIES
The value of marketable securities is as follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31
---------------------
1993 1992
------- -------
<S> <C> <C>
Cost........................................................... $11,788 $12,167
Unrealized loss................................................ (469) (249)
------- -------
Market value................................................. $11,319 $11,918
------- -------
------- -------
</TABLE>
For the year ended December 31, 1993, the Company recognized a net gain of
$4.0 million from its investments in securities and futures contracts compared
with a net gain of $7.8 million in 1992 and a net loss of $2.1 million in 1991.
The net securities gains and losses do not include gains or losses from natural
gas futures contracts accounted for as hedges of natural gas production. Hedge
gains or losses are included in natural gas revenue in the period in which the
hedged production occurs (see Note 1).
The net securities gains and losses recognized during a period include both
realized and unrealized gains and losses. During 1993, the Company realized net
gains of $2.3 million from securities transactions and futures contracts. The
Company realized a net gain from securities transactions and futures contracts
of $10.0 million in 1992 and a net loss of $7.8 million in 1991.
F-10
<PAGE> 46
MESA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(4) LONG-TERM DEBT
Long-term debt and current maturities are as follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31
------------------------
1993 1992
---------- ----------
<S> <C> <C>
HCLP Secured Notes.......................................... $ 541,600 $ 580,850
Credit Agreement............................................ 59,148 100,000
12 3/4% secured discount notes.............................. 472,939 --
12 3/4% unsecured discount notes............................ 148,576 --
12% subordinated notes...................................... 6,336 300,000
13 1/2% subordinated notes.................................. 7,390 300,000
Other....................................................... 5,305 5,305
---------- ----------
1,241,294 1,286,155
Current maturities.......................................... (67,657) (44,555)
---------- ----------
Long-term debt.............................................. $1,173,637 $1,241,600
---------- ----------
---------- ----------
</TABLE>
HCLP SECURED NOTES
HCLP holds substantially all of the Company's Hugoton field natural gas
properties. In 1991, HCLP issued $616 million of secured notes in a private
placement with a group of institutional lenders. The issuance replaced $550
million of bank debt and funded a $66 million restricted cash balance within
HCLP. The restricted cash balance is available to supplement cash flows from the
HCLP properties in the event such cash flows are not sufficient to fund
principal and interest payments on the HCLP Secured Notes when due. As the HCLP
Secured Notes are repaid, the restricted cash balance is reduced
proportionately.
The HCLP Secured Notes were issued in 15 series and have final stated
maturities extending through 2012 but are expected to be retired earlier based
on the rate of production from the Hugoton properties. As of December 31, 1993,
approximately $75.0 million of principal has been repaid as scheduled. In
February 1994, an additional $21.4 million of principal was repaid as scheduled.
The HCLP Secured Notes outstanding at December 31, 1993 bear interest at fixed
rates ranging from 8.80% to 11.30% (weighted average 10.21%). Principal and
interest payments are made semiannually. Provisions in the HCLP Secured Note
agreements require interest rate premiums to be paid to the noteholders in the
event that the HCLP Secured Notes are repaid more rapidly or slowly than
scheduled in the agreements. Such premiums, if required, would increase the
effective interest rate of the HCLP Secured Notes.
The HCLP Secured Note agreements contain various covenants which, among
other things, limit HCLP's ability to sell or acquire oil and gas property
interests, incur additional indebtedness, make unscheduled capital expenditures,
make distributions of property or funds subject to the mortgage, or enter into
certain types of long-term contracts or forward sales of production. The
agreements also require HCLP to maintain separate existence from the Company and
its other subsidiaries. The assets of HCLP are dedicated to service HCLP's debt
and are not available to pay creditors of the Company or its subsidiaries other
than HCLP.
Revenues received for production from HCLP's Hugoton properties are
deposited in a collection account maintained by a collateral agent (Collateral
Agent). The Collateral Agent releases or reserves funds, as appropriate, for the
payment of royalties, taxes, operating costs, capital expenditures and principal
and interest on the HCLP Secured Notes. Only after all required payments have
been made may any remaining funds held by the Collateral Agent be released from
the mortgage. However, HCLP's cash flows are not expected to be sufficient to
permit HCLP to distribute any excess cash to other Company subsidiaries until at
least 1995.
F-11
<PAGE> 47
MESA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The restricted cash balance and cash held by the Collateral Agent for
payment of interest and principal on the HCLP Secured Notes are invested by the
Collateral Agent under the terms of a guaranteed investment contract (GIC) with
Morgan Guaranty Trust Co. of New York (Morgan). Morgan was paid $13.9 million at
the date of issuance of the HCLP Secured Notes to guarantee that funds invested
under the GIC would earn an interest rate equivalent to the weighted average
coupon rate on the outstanding principal balance of the HCLP Secured Notes
(10.21% at December 31, 1993). A portion of this amount may be refunded if the
HCLP Secured Notes are repaid earlier than if HCLP had produced according to its
scheduled production, depending primarily on prevailing interest rates at that
time.
In the first quarter of 1992, the Company contributed $32 million in cash
to HCLP, which funds were previously not subject to the mortgage. A portion of
such funds has been used to supplement HCLP's cash flows in order to make
scheduled principal payments on the HCLP Secured Notes. At December 31, 1993,
approximately $10.3 million of HCLP's cash was not subject to the mortgage. In
February 1994, the Company contributed an additional $5.8 million to HCLP which,
along with the $10.3 million of HCLP cash not subject to the mortgage, was used
to supplement HCLP's cash flows in order to make the February 1994 scheduled
principal payment. The Company may also advance to HCLP up to $10 million in
1994 to fund expected capital expenditures in excess of scheduled capital
expenditures.
HCLP cash balances were as follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31
-------------------
1993 1992
------- -------
<S> <C> <C>
Cash included in current assets.................................. $40,446 $64,141
------- -------
------- -------
Restricted cash included in noncurrent assets.................... $62,649 $64,339
------- -------
------- -------
</TABLE>
In connection with the formation of HCLP and the issuance of the HCLP
Secured Notes, Mesa Operating Co. (MOC), the successor to Mesa Operating Limited
Partnership, a Company subsidiary which owns substantially all of the limited
partnership interests of HCLP, entered into a services agreement with HCLP. MOC
provides services necessary to operate the Hugoton field properties and market
production therefrom, process remittances of production revenues and perform
certain other administrative functions in exchange for a services fee. The fee
totaled approximately $11.4 million in 1993 and $10.7 million in 1992.
CREDIT AGREEMENT
As of December 31, 1993, the Company had borrowed approximately $59.1
million under its Credit Agreement and had outstanding approximately $10.4
million in letter of credit obligations secured under the Credit Agreement. Upon
consummation of the Debt Exchange (see "Discount Notes" below and Note 2), the
Company and its bank lenders amended the Credit Agreement. Pursuant to the
amendment, the Credit Agreement was reduced from a $150 million revolving credit
facility to a credit facility providing for $80 million of initial borrowings
and $10 million in letter of credit obligations. The Company had borrowed $100
million under the Credit Agreement prior to completion of the Debt Exchange.
Accordingly, the Company made a $20 million principal payment under the Credit
Agreement on August 26, 1993 and agreed to make additional scheduled principal
payments of $10 million in the fourth quarter of 1993, $30 million in the first
half of 1994, and the remaining balance at final maturity in the second quarter
of 1995 (including an obligation to cash collateralize any remaining letter of
credit obligations outstanding at that time).
The terms of the amended Credit Agreement require prepayment of the next
scheduled principal payment in the amount of one-half of any proceeds from asset
sales or collections from Bicoastal Corporation (Bicoastal) (see Note 8). As a
result of proceeds from asset sales and collections from Bicoastal during 1993,
approximately $10.5 million of the $30 million due under the Credit Agreement in
the first half of 1994 was prepaid in 1993 and an additional $2.7 million was
prepaid in January 1994.
F-12
<PAGE> 48
MESA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The rate of interest payable on borrowings under the Credit Agreement is
the prime rate plus 1/2% or the Eurodollar rate plus 2 1/2% until borrowings
are reduced to $50 million, and thereafter reduced, subject to certain
conditions, to a rate equal to the Eurodollar rate plus 1 1/2% or the prime
rate. Obligations under the Credit Agreement are secured by a first lien on the
Company's West Panhandle field properties, by the Company's equity interest in
MOC and by 76% of MOC's equity interest in HCLP.
The amendments to the Credit Agreement reduced the Company's tangible
adjusted equity requirement, as defined, from $150 million to $50 million and
increased the Company's required ratio of cash flow and available cash to debt
service, as each is defined, from at least 1.25 to 1 to 1.50 to 1. At December
31, 1993, the Company's tangible adjusted equity, as defined, was $114.9 million
and the ratio of cash flow and available cash to debt service was 2.32 to 1.
Assuming no changes in its capital structure and in existing business
conditions, the Company's financial forecasts indicate that the Company will
continue to report net losses and that tangible adjusted equity, as defined, is
likely to fall below the $50 million requirement in the second half of 1994. The
financial forecasts also indicate that the Company will have adequate financial
resources, including available cash and securities balances, to satisfy any
obligations which may become due under the Credit Agreement in the event the
tangible adjusted equity covenant is not satisfied and cannot be renegotiated or
compliance therewith waived. At December 31, 1993, the Company had approximately
$110 million of cash and securities excluding cash held at HCLP. In addition,
payment of $42.8 million on March 3, 1994 to settle a lawsuit (see Note 9) did
not cause the ratio of cash flow and available cash to debt service to fall
below the required level.
The provisions of the Credit Agreement prohibit the Company from paying any
dividends to equity holders, other than those paid in the form of equity
securities.
DISCOUNT NOTES
The Debt Exchange was consummated on August 26, 1993. Under the terms of
the Debt Exchange, holders of approximately $293.7 million aggregate principal
amount of 12% subordinated notes and $292.6 million aggregate principal amount
of 13 1/2% subordinated notes (together with approximately $28.6 million of
accrued interest claims thereon) received approximately $435.5 million initial
accreted value, as defined, of 12 3/4% secured discount notes due June 30, 1998;
$136.9 million initial accreted value of 12 3/4% unsecured discount notes due
June 30, 1996; $29.3 million principal amount of 0% convertible notes due June
30, 1998; and, in the case of 13 1/2% subordinated noteholders, $13.2 million in
cash. The new notes, which rank pari passu with each other, are senior in right
of payment to the remaining 12% and 13 1/2% subordinated notes (together, the
Subordinated Notes) and subordinate to all permitted first lien debt, as
defined, including the Credit Agreement.
The Discount Notes will bear no interest through June 30, 1995; however,
the accreted value, as defined, of both series will increase from May 1, 1993
through June 30, 1995 at 12 3/4% per year, compounded semiannually, with the
first compounding date being June 30, 1993. After June 30, 1995, each series
will accrue interest at an annual rate of 12 3/4%, payable in cash semiannually
in arrears, with the first payment due December 31, 1995. The 0% convertible
notes earned no interest and were converted into approximately 7.5 million
shares of common stock in December 1993.
The 12 3/4% secured discount notes are secured by second liens on the
Company's West Panhandle field properties and on 76% of MOC's equity interest in
HCLP, both of which currently secure obligations under the Credit Agreement. The
Company's right to maintain first lien debt, as defined, is limited by the terms
of the Discount Notes to $82.5 million.
The indentures governing the Discount Notes restrict, among other things,
the Company's ability to incur additional indebtedness, pay dividends, acquire
stock or make investments, loans and advances.
F-13
<PAGE> 49
MESA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Company incurred approximately $9.6 million of costs associated with
completion of the Debt Exchange; such costs are included in the 1993
consolidated statement of operations as other income (expense).
On March 2, 1994, the Company issued $48.2 million face amount of
additional 12 3/4% secured discount notes due June 30, 1998. The proceeds of
$42.8 million were used to pay the settlement amount arising from the early 1994
settlement of a lawsuit with Unocal Corporation (Unocal). The additional
indebtedness incurred to settle the Unocal lawsuit is specifically permitted
under the terms of the indentures governing the Discount Notes and under the
Credit Agreement. See Note 9 for additional discussion of the Unocal litigation.
SUBORDINATED NOTES
The 12% subordinated notes are unsecured and mature in 1996. Interest on
these notes is payable quarterly and, at the option of the Company, may be paid
in common stock of the Company. The 13 1/2% subordinated notes are unsecured and
mature in 1999. Interest on these notes is payable semiannually in cash.
INTEREST AND MATURITIES
The aggregate interest payments made during 1993, 1992 and 1991 were
approximately $89.4 million, $142.7 million and $128.1 million, respectively.
Payment of approximately $64.6 million of interest incurred during 1993 has been
deferred under the terms of the Debt Exchange until the repayment dates of the
Discount Notes. Such interest is included in interest expense in the 1993
consolidated statement of operations.
The scheduled principal repayments of long-term debt for the next five
years are as follows (in millions):
<TABLE>
<CAPTION>
1994 1995 1996 1997 1998
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
HCLP Secured Notes............................... $ 42.9 $ 39.3 $ 45.4 $ 46.7 $ 47.5
Credit Agreement(a).............................. 19.5 39.6 -- -- --
12 3/4% secured discount notes(b)................ -- -- -- -- 617.4
12 3/4% unsecured discount notes................. -- -- 178.8 -- --
12% subordinated notes........................... -- -- 6.3 -- --
Other............................................ 5.3 -- -- -- --
------ ------ ------ ------ ------
Total......................................... $ 67.7 $ 78.9 $230.5 $ 46.7 $664.9
------ ------ ------ ------ ------
------ ------ ------ ------ ------
</TABLE>
- ---------------
(a) Excludes approximately $10 million in letter of credit obligations
currently outstanding and required to be cash collateralized in 1995.
(b) Includes $48.2 million of notes issued in March 1994 to settle the Unocal
lawsuit.
FAIR VALUE OF LONG-TERM DEBT
Based on borrowing rates currently available for secured debt with similar
maturities and credit rating, the fair value of the HCLP Secured Notes at
December 31, 1993 is estimated to be approximately $615 million.
Based on borrowing rates currently available for bank loans with similar
collateral, the fair value of the borrowings under the Credit Agreement at
December 31, 1993 is estimated to be their carrying value.
The Discount Notes are publicly traded but not listed on a national trading
exchange. Based on trading prices available at December 31, 1993, the fair value
of the 12 3/4% secured discount notes is estimated to be $487 million and the
fair value of the 12 3/4% unsecured discount notes is estimated to be $142
million.
F-14
<PAGE> 50
MESA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Subordinated Notes are publicly traded but have not experienced
significant activity since consummation of the Debt Exchange. Based on recent
trades, the fair values of the Subordinated Notes are not materially different
from their carrying value.
Based on the current financial condition of the Company, there is no
assurance that the Company could obtain borrowings under long-term debt
agreements with terms similar to those described above and receive proceeds
approximating the estimated fair values.
(5) INCOME TAXES
Effective January 1, 1993, the Company adopted SFAS No. 109, "Accounting
for Income Taxes." SFAS No. 109 requires the asset and liability method under
which deferred tax assets and liabilities are recognized by applying the enacted
statutory tax rates applicable to future years to temporary differences between
the financial statement and tax bases of existing assets and liabilities. The
primary difference to the Company between the standards is that SFAS No. 109
allows recognition of deferred tax assets under certain circumstances.
In accordance with the SFAS No. 109 transition rules, the Company elected
to adopt the change in method of accounting for income taxes prospectively in
1993. Any cumulative effect on prior years resulting from prospective adoption
is required to be recorded as an adjustment to the Company's net loss in 1993.
After consideration of offsetting valuation allowances, there was no cumulative
effect on prior years of adopting SFAS No. 109.
The tax basis of the Company's consolidated net assets is greater than the
financial basis of those net assets; therefore, a net deferred tax asset has
been recorded. However, due to the Company's history of net operating losses and
its current financial condition, a valuation allowance has been recorded which
offsets the entire net deferred tax asset. A summary of the Company's net
deferred tax asset is as follows (in millions):
<TABLE>
<CAPTION>
DECEMBER 31 JANUARY 1
1993 1993
----------- ---------
<S> <C> <C>
Deferred tax asset............................................. $ 208 $ 174
Deferred tax liability......................................... (1) (6)
Valuation allowance............................................ (207) (168)
----------- ---------
Net deferred tax asset....................................... $ -- $ --
----------- ---------
----------- ---------
</TABLE>
The principal components of the Company's net deferred tax asset (utilizing
a 39% combined federal and state income tax rate) and the valuation allowance
are as follows (in millions):
<TABLE>
<CAPTION>
DECEMBER 31 JANUARY 1
1993 1993
----------- ---------
<S> <C> <C>
Tax basis of oil and gas properties in excess of financial
basis....................................................... $ 91 $ 95
Regular tax net operating loss carryforward................... 114 51
Other, net.................................................... 2 22
Valuation allowance........................................... (207) (168)
----------- ---------
Net deferred tax asset...................................... $ -- $ --
----------- ---------
----------- ---------
</TABLE>
As of December 31, 1993, the Company had a regular tax net operating loss
carryforward of approximately $290 million. Additionally, the Company had an
alternative minimum tax loss carryforward available to offset future alternative
minimum taxable income of approximately $280 million. If not used, both of these
carryforwards will expire in 2007 and 2008.
On August 10, 1993, the Omnibus Budget Reconciliation Act of 1993 (the Act)
was signed into law resulting in, among other things, an increase in the top
Federal corporate income tax rate from 34% to 35%,
F-15
<PAGE> 51
MESA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
effective January 1, 1993. This and other tax law changes resulting from the Act
did not have a material effect on the Company's net deferred tax asset or
related valuation allowance.
The Company's income tax returns for 1991 through 1993, which include all
net operating loss carryforward amounts, and the tax returns of the Partnership
for 1990 and 1991 are subject to examination by the taxing authorities. If
examinations of the Partnership returns result in changes to taxable income or
loss, the taxable income or loss of the former partners and the tax basis of the
Company's assets will be changed accordingly.
The Company assumed from the Partnership any tax liabilities or refunds
which arise as a result of any changes to Original Mesa's taxable income or loss
for open tax years. During 1993, the Internal Revenue Service (IRS) completed
two field examinations of the tax returns filed by Original Mesa for the tax
years 1984 through 1987. In December 1993, the Company made a payment to the IRS
of approximately $13 million, which payment includes interest, in full
settlement of all claims for these years. The Company was fully reserved for the
additional tax assessment relating to the tax years 1984 through 1987. See Note
9 for discussion of a gain recognized in the fourth quarter of 1993 related to
the tax settlement and resolution and revaluation of other contingency amounts.
As of January 1, 1994, there are no remaining open tax years for Original Mesa
for federal income tax purposes.
(6) PROPERTY SALES
In April 1993, the Company sold a portion of its Rocky Mountain area
properties for approximately $7.1 million, after adjustments, and recorded a
gain on the sale of approximately $4.1 million. The Company also retained a
reversionary interest in the properties under which the Company will receive a
50% net profits interest in the properties after the purchaser has recovered its
investment and certain other costs and expenses.
In June 1993, the Company sold its interest in the deep portion of the
Hugoton field not owned by HCLP for approximately $19.0 million, after
adjustments, and recorded a gain on the sale of approximately $5.5 million.
In June 1992, the Company sold all of its Canadian interests (consisting of
overriding royalty interests in producing and nonproducing acreage) for
approximately $12 million in cash and recognized an approximate $12 million
gain.
In April 1991, the Company sold its producing gas properties in the San
Juan Basin of New Mexico and Colorado for approximately $161 million in cash and
the assumption by the purchaser of approximately $2 million in liabilities
resulting in a gain of approximately $34 million.
In March 1991, the Company sold certain of its producing oil and gas
properties and undeveloped leasehold acreage in the Texas Panhandle and in
Oklahoma for an aggregate of approximately $267 million in cash and the
assumption by the purchasers of approximately $7 million in liabilities. The
Company recognized a loss of $75 million in 1990 as a result of these
transactions.
(7) STOCKHOLDERS' EQUITY
At December 31, 1993, the Company had outstanding 46.5 million shares of
common stock and owned a 97.38% interest in its direct subsidiaries; the General
Partner owned a 2.62% interest. Subsequent to year end, the remaining 2.62%
general partner interest was converted into approximately 1.25 million shares of
common stock. See Note 1 for further discussion of the conversion in 1994 of the
remaining general partner interest into common stock of the Company.
Pursuant to the Debt Exchange (see Note 4), the Company issued
approximately $29.3 million of 0% convertible notes which were converted into
approximately 7.5 million shares of common stock of the Company in the fourth
quarter of 1993.
F-16
<PAGE> 52
MESA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Company has authorized 10 million shares of preferred stock. No shares
of preferred stock have been issued as of December 31, 1993.
(8) NOTES RECEIVABLE
As of December 31, 1992, notes receivable consisted primarily of claims
against Bicoastal. A plan of reorganization for Bicoastal was approved by the
Bankruptcy Court in September 1992. At such time, the Company held allowed
claims of $68 million, exclusive of interest. During 1992 and 1993, the Company
collected approximately $28 million and $46 million, respectively, from
Bicoastal, representing all of the Company's principal amount of allowed claims
in the bankruptcy reorganization plan plus an amount representing a portion of
its interest claims. As a result, the Company recorded gains in the third and
fourth quarters of 1993 of approximately $13.8 million and $4.7 million,
respectively, relating to collections in excess of the recorded receivable.
(9) CONTINGENCIES
UNOCAL
The Company was subject to a lawsuit relating to a 1985 investment in
Unocal which asserted that certain profits allegedly realized by Original Mesa
and other defendants upon the disposition of Unocal common stock in 1985 were
recoverable by Unocal pursuant to Section 16(b) of the Securities Exchange Act
of 1934. On January 11, 1994, the Company and the other defendants entered into
a settlement agreement (the Settlement Agreement) whereby they agreed to pay
Unocal an aggregate of $47.5 million, of which $42.75 million was to be paid by
the Company and $4.75 million by the other defendants. The Settlement Agreement
was approved by the court on February 28, 1994. The Company funded its share of
the settlement amount with proceeds from issuance of additional long-term debt.
See Note 4 for discussion of the issuance of the additional long-term debt.
As a result of the settlement, the Company recognized a $42.8 million loss
in the fourth quarter of 1993. The loss is included as other income (expense) in
the 1993 consolidated statement of operations and the obligation is included in
other liabilities in the December 31, 1993 consolidated balance sheet.
MASTERSON
In February 1992, the current lessors of an oil and gas lease (the Gas
Lease) dated April 30, 1955, between R. B. Masterson, et al., as lessor, and
Colorado Interstate Gas Company (CIG), as lessee, sued CIG in Federal District
Court in Amarillo, Texas, claiming that CIG has underpaid royalties due under
the Gas Lease. The Company owns an interest in the Gas Lease. The plaintiffs, in
their Second Amended Complaint, included the Company as a defendant. The
plaintiffs allege that the underpayment is the result of CIG's use of an
improper gas sales price upon which to calculate royalties and that the proper
price should be determined pursuant to a pricing clause in a July 1, 1967
amendment to the Gas Lease. The plaintiffs also sought a declaration by the
court as to the proper price to be used for calculating future royalties.
In August 1992, CIG filed a third-party complaint against the Company for
any such royalty underpayments which may be allocable to the Company's interest
in the Gas Lease.
The plaintiffs subsequently dismissed their claims against the Company for
reasons relating to the jurisdiction of the federal court; however, the
third-party complaint by CIG against the Company is not affected by the
dismissal.
The plaintiffs allege royalty underpayments of approximately $450 million
(including interest at 10%) covering the period July 1, 1967 to the present. In
addition, the plaintiffs seek exemplary damages. Management believes that the
Company has several defenses to the plaintiffs' claims, including (i) that the
F-17
<PAGE> 53
MESA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
royalties for all periods were properly computed and paid and (ii) that
plaintiffs' claims with respect to all periods prior to October 1, 1988 (which
appear to account for the substantial portion of the claims) were explicitly
released by a 1988 written agreement among plaintiffs, CIG and the Company and
are further barred by the statute of limitations. If the plaintiffs were to
prevail, the manner in which any resulting liability would be shared between the
Company and CIG would depend on the resolution of issues relating to the
contractual agreements and the relationship between the Company, CIG and the
lessors during the period in question.
No determination can be made at this time as to the ultimate outcome of the
litigation and no trial date has been set.
PREFERENCE UNITHOLDERS
The Company is a defendant in lawsuits related to the Corporate Conversion
pending in the U.S. District Court for the Northern District of Texas -- Dallas
Division. Plaintiffs allege, among other things, that (i) the proxy materials
delivered to unitholders of the Partnership in connection with the Corporate
Conversion contained material misstatements and omissions, (ii) the general
partner of the Partnership breached fiduciary duties to the preference
unitholders in structuring the transaction and allocating the common stock of
the Company and (iii) the Corporate Conversion was implemented in breach of the
partnership agreement of the Partnership because defendants allegedly did not
obtain the requisite opinion of independent counsel regarding certain tax
effects of the transaction. The Company and the other defendants have denied the
allegations and believe they are without merit. Plaintiffs seek a declaration
declaring the Corporate Conversion void and rescinding it, an order requiring
payment of $164 million to the former preference unitholders in respect of the
preferential distribution rights of their units, unspecified compensatory and
punitive damages and other relief. Discovery has commenced and is proceeding in
the litigation for which the Court has set an August 1, 1994 trial date.
OTHER
The Company is also a defendant in other lawsuits and has assumed
liabilities relating to Original Mesa and the Partnership. The Company does not
expect the resolution of the Masterson lawsuit, preference unitholder lawsuits
or any of these other matters to have a material adverse effect on its financial
position or results of operations.
The Company assumed certain litigation and tax-related obligations from
Original Mesa and the Partnership and also recorded certain contingent
liabilities relating to various matters, including litigation, office space
leases and retirement benefit obligations, in conjunction with the 1986
acquisition of Pioneer Corporation (Pioneer) and the 1988 acquisition of Tenneco
Inc.'s midcontinent division. During the fourth quarter of 1993, the Company
settled certain claims with the IRS (see Note 5) and resolved or revalued
certain other contingent liabilities to reflect actual or estimated liabilities.
The Company had previously reserved for the IRS claims and certain other
contingencies in excess of the actual or estimated liabilities. As a result, the
Company recorded a net gain of $24 million in the fourth quarter of 1993.
(10) EMPLOYEE BENEFIT PLANS
RETIREMENT PLANS
The Company maintains two defined contribution retirement plans for the
benefit of its employees. The Company expensed $3.2 million in 1993, $3.3
million in 1992, and $3.1 million in 1991 in connection with these plans.
F-18
<PAGE> 54
MESA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
OPTION PLAN
In December 1991, the stockholders of the Company approved the 1991 Stock
Option Plan of the Company (the Option Plan), which authorized the grant of
options to purchase up to two million shares of common stock to officers and key
employees. The exercise price of each share of common stock placed under option
cannot be less than 100% of the fair market value of the common stock on the
date the option is granted. Upon exercise, the grantee may elect to receive
either shares of common stock or, at the discretion of the Option Committee of
the Board of Directors, cash or certain combinations of stock and cash in an
amount equal to the excess of the fair market value of the common stock at the
time of exercise over the exercise price. At December 31, 1993, the following
stock options were outstanding:
<TABLE>
<CAPTION>
NUMBER OF
OPTIONS
----------
<S> <C>
Outstanding at December 31, 1992.......................................... 1,352,000
Granted................................................................. 605,950
Exercised............................................................... (11,000)
Forfeited............................................................... (13,900)
----------
Outstanding at December 31, 1993.......................................... 1,933,050
----------
----------
</TABLE>
The outstanding options at December 31, 1993 are detailed as follows:
<TABLE>
<CAPTION>
NUMBER OF DATE OF EXERCISE PRICE
OPTIONS GRANT PER SHARE EXERCISABLE
------------ -------- -------------- -----------
<S> <C> <C> <C>
1,166,000....................................... 01/10/92 $ 6.8125 641,300
10,000....................................... 05/19/92 4.1250 5,500
153,000....................................... 10/02/92 11.6875 84,150
119,050....................................... 05/18/93 5.8125 35,715
485,000....................................... 11/10/93 7.3750 --
--------- -----------
1,933,050....................................... 766,665
--------- -----------
--------- -----------
</TABLE>
Options are exercisable from date of grant as follows: after six months,
30%; after one year, 55%; after two years, 80%; and after three years, 100%. At
December 31, 1993, options for 45,950 shares were available for grant.
POSTRETIREMENT BENEFITS
Effective January 1, 1993, the Company adopted SFAS No. 106, "Employers'
Accounting for Postretirement Benefits Other Than Pensions," which requires that
the costs of such benefits be recorded over the periods of employee service to
which they relate. For the Company, this standard primarily applies to
postretirement medical benefits for retired and current employees. The liability
for benefits existing at the date of adoption (Transition Obligation) will be
amortized over the remaining life of the retirees or 20 years, whichever is
shorter.
The Company maintains two separate plans for providing postretirement
medical benefits. One plan covers the Company's retirees and current employees
(the Mesa Plan). The other plan relates to the retirees of Pioneer, which was
acquired by the Company in 1986 (the Pioneer Plan). Under the Mesa Plan,
employees who retire from the Company and who have had at least 10 years of
service with the Company after attaining age 45 are eligible for postretirement
health care benefits. These benefits may be subject to deductibles, copayment
provisions, retiree contributions and other limitations and the Company has
reserved the right to change the provisions of the plan. The Pioneer Plan is
maintained for Pioneer retirees and dependents only and is subject to
deductibles, copayment provisions and certain maximum payment provisions. The
Company does
F-19
<PAGE> 55
MESA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
not have the right to change the Pioneer Plan or to require retiree
contributions. Both plans are self-insured indemnity plans and both coordinate
benefits with Medicare as the primary payer. Neither plan is funded.
The following table reconciles the status of the two plans with the amount
included under other liabilities in the consolidated balance sheet at December
31, 1993 (in thousands):
<TABLE>
<CAPTION>
MESA PIONEER
PLAN PLAN TOTAL
------- ------- -------
<S> <C> <C> <C>
Accumulated postretirement benefit obligation (APBO):
Retirees and dependents................................... $ 956 $11,162 $12,118
Active employees -- fully eligible........................ 330 -- 330
Other active employees.................................... 486 -- 486
------- ------- -------
Total APBO............................................. 1,772 11,162 12,934
Unrecognized Transition Obligation.......................... (1,587) (2,695) (4,282)
------- ------- -------
Accrued postretirement benefit obligation................... $ 185 $ 8,467(a) $ 8,652
------- ------- -------
------- ------- -------
</TABLE>
- ---------------
(a) The Company established an accrued liability associated with the Pioneer
Plan in conjunction with its acquisition of Pioneer in 1986.
For measurement purposes, the 1993 annual rate of increase in per capita
cost of covered health care benefits was assumed to be 12.5% for those
participants under age 65 and 11.0% for those participants over age 65. The
rates were assumed to decrease gradually to 5.0% by the year 2000 and to remain
at that level thereafter. The health care cost trend rate assumption affects the
amount of the Transition Obligation and periodic cost reported. An increase in
the assumed health care cost trend rates by 1% in each year would increase the
APBO as of December 31, 1993 by approximately $735,000 and the aggregate of the
service and the interest cost components of net periodic postretirement benefit
cost for the year ended December 31, 1993 by approximately $77,000. The net
periodic postretirement benefit cost for the year ended December 31, 1993 was
approximately $1.4 million based on these assumptions.
The discount rate used in determining the APBO as of December 31, 1993 was
8.0%.
The following table presents the Company's cost of postretirement benefits
other than pensions for the years ended December 31 (in thousands):
<TABLE>
<CAPTION>
1993 1992 1991
------ ------ ------
<S> <C> <C> <C>
Net periodic postretirement benefit cost:
Service cost.............................................. $ 96 $ -- $ --
Interest cost............................................. 988 -- --
Amortization of Transition Obligation..................... 276 -- --
------ ------ ------
$1,360 $ --(a) $ --(a)
------ ------ ------
------ ------ ------
Actual cost of providing benefits:
Mesa Plan(b).............................................. $ 123 $ 205 $ 131
Pioneer Plan(c)........................................... 909 1,356 952
------ ------ ------
$1,032 $1,561 $1,083
------ ------ ------
------ ------ ------
</TABLE>
F-20
<PAGE> 56
MESA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
- ---------------
(a) SFAS No. 106 was adopted effective January 1, 1993.
(b) Actual costs of providing benefits in 1992 and 1991 under the Mesa Plan
were recorded to expense in the consolidated statements of operations in
those years. Actual cost of providing benefits in 1993 under the Mesa Plan
were applied as incurred against the accrued postretirement benefit
obligation.
(c) Actual costs of providing benefits in 1992 and 1991 under the Pioneer Plan
were applied as incurred against the previously accrued liability. Actual
cost of providing benefits in 1993 under the Pioneer Plan were applied as
incurred against the accrued postretirement benefit obligation.
DEFERRED COMPENSATION
The Company had agreements with two officers to provide postretirement
deferred compensation at a rate of one-half of the participant's final rate of
compensation (subject to minimum amounts specified in the agreements) for a
period of 10 years following the date of retirement or death. In 1992, in order
to terminate the deferred compensation agreements, the Company established life
insurance plans, executed agreements with the two officers and purchased
insurance policies at an aggregate cost of $4.9 million. At the time they were
terminated, approximately $3.9 million had been accrued under the deferred
compensation agreements. The Company has fully funded the life insurance
policies and has no further obligations under such policies or under the
deferred compensation agreements.
(11) MAJOR CUSTOMERS
Revenues include sales to Mapco Oil and Gas Company (Mapco) of $60.2
million (27.5%), Western Resources, Inc. (WRI) of $51.8 million (23.6%), and
Natural Gas Clearinghouse of $23.1 million (10.5%) in 1993. In 1992, revenues
included sales to Mapco of $45.7 million (19.4%), WRI of $39.7 million (16.8%)
and Energas Company of $23.7 million (10.0%). In 1991, revenues included sales
to Mapco of $51.9 million (20.9%) and WRI of $27.9 million (11.2%).
(12) CONCENTRATIONS OF CREDIT RISK
Substantially all of the Company's accounts receivable at December 31, 1993
result from oil and gas sales and joint interest billings to third party
companies in the oil and gas industry. This concentration of customers and joint
interest owners may impact the Company's overall credit risk, either positively
or negatively, in that these entities may be similarly affected by changes in
economic or other conditions. In determining whether or not to require
collateral from a customer or joint interest owner, the Company analyzes the
entity's net worth, cash flows, earnings, and credit ratings. Receivables are
generally not collateralized. Historical credit losses incurred by the Company
on receivables have not been significant.
(13) CONDENSED CONSOLIDATING FINANCIAL STATEMENTS
The Company conducts its operations through various direct and indirect
subsidiaries. On December 31, 1993, the Company's direct subsidiary partnerships
were Mesa Operating Limited Partnership (MOLP), Mesa Midcontinent Limited
Partnership (MMLP), and Mesa Holding Limited Partnership (MHLP). At December 31,
1993, MOLP owned all of the Company's interest in the West Panhandle field of
Texas, the Gulf Coast and the Rocky Mountain areas, as well as an approximate
81% limited partnership interest in HCLP. At December 31, 1993, MMLP owned an
approximate 19% limited partnership interest in HCLP. See discussion below for
1994 changes in subsidiaries and HCLP ownership. HCLP owns substantially all of
the Company's Hugoton field natural gas properties and is liable for the HCLP
Secured Notes (see Note 4). The assets and cash flows of HCLP are dedicated to
service the HCLP Secured Notes and are not available to pay creditors of the
Company or its subsidiaries other than HCLP. MOLP and the Company are liable for
the Credit Agreement, the Subordinated Notes and the Discount Notes. Mesa
Capital Corp. (Mesa Capital), a
F-21
<PAGE> 57
MESA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
wholly owned financing subsidiary of MOLP, is also an obligor under the
Subordinated Notes and the Discount Notes. Mesa Capital has insignificant assets
and results of operations. Mesa Capital is included with MOLP in the condensed
consolidating financial statements.
In early 1994, the Company effected a series of merger transactions which
resulted in the conversion of each of its subsidiary partnerships, other than
HCLP, to corporate form. Pursuant to these mergers, MOLP was merged into MOC,
and MMLP and MHLP were merged into Mesa Holding Co. (MHC).
As of December 31, 1993, MHC had intercompany payables to MOC of
approximately $123 million. In January 1994, MHC repaid approximately $5 million
of its intercompany payable to MOC. On February 28, 1994, MHC assigned an 18%
limited partnership interest in HCLP (out of its total interest of approximately
19%) to MOC as consideration for $90 million of intercompany payables.
Provisions of the Discount Note indentures required the repayment of
intercompany indebtedness to specified levels and provided that any HCLP limited
partnership interests transferred in satisfaction of intercompany debt would be
valued at $5 million for each percent of interest assigned. MHC also repaid an
additional $24 million of intercompany debt to MOC in cash. As a result of these
transactions, MOC now owns 99% of the limited partnership interest in HCLP, and
substantially all of the Company's intercompany debt has been eliminated.
The following are condensed consolidating financial statements of MESA
Inc., HCLP, MOLP and the Company's other direct and indirect subsidiaries
combined (in millions):
CONDENSED CONSOLIDATING BALANCE SHEETS
<TABLE>
<CAPTION>
OTHER CONSOL. THE
MESA COMPANY AND COMPANY
DECEMBER 31, 1993 INC. HCLP MOLP SUBS. ELIMIN. CONSOL'D.
- ------------------------------------------ ----- ----- ----- ------- ------- --------
<S> <C> <C> <C> <C> <C> <C>
Assets:
Cash and cash investments............... $ -- $ 40 $ 16 $ 83 $ -- $ 139
Other current assets.................... -- 23 22 12 -- 57
----- ----- ----- ------- ------- --------
Total current assets............ -- 63 38 95 -- 196
----- ----- ----- ------- ------- --------
Property, plant and equipment, net...... -- 656 535 1 -- 1,192
Investment in subsidiaries.............. 121 -- 44 189 (354) --
Intercompany receivables................ -- -- 113 -- (113) --
Other noncurrent assets................. -- 87 55 3 -- 145
----- ----- ----- ------- ------- --------
$ 121 $ 806 $ 785 $ 288 $(467) $1,533
----- ----- ----- ------- ------- --------
----- ----- ----- ------- ------- --------
Liabilities and Equity:
Current liabilities..................... $ -- $ 73 $ 46 $ 1 $ -- $ 120
Long-term debt.......................... -- 499 675 -- -- 1,174
Intercompany payables................... 9 -- -- 123 (132) --
Other noncurrent liabilities............ -- -- 120 4 -- 124
Minority interest....................... -- -- -- -- 3 3
Partners'/Stockholders' equity
(deficit)............................ 112 234 (56) 160 (338) 112
----- ----- ----- ------- ------- --------
$ 121 $ 806 $ 785 $ 288 $(467) $1,533
----- ----- ----- ------- ------- --------
----- ----- ----- ------- ------- --------
</TABLE>
F-22
<PAGE> 58
MESA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
OTHER CONSOL. THE
MESA COMPANY AND COMPANY
DECEMBER 31, 1992 INC. HCLP MOLP SUBS. ELIMIN. CONSOL'D.
- ------------------------------------------ ----- ----- ----- ------- ------- --------
<S> <C> <C> <C> <C> <C> <C>
Assets:
Cash and cash investments............... $ -- $ 64 $ 16 $ 77 $ -- $ 157
Other current assets.................... -- 22 31 9 -- 62
----- ----- ----- ------- ------- --------
Total current assets............ -- 86 47 86 -- 219
----- ----- ----- ------- ------- --------
Property, plant and equipment, net...... -- 682 598 -- -- 1,280
Investment in subsidiaries.............. 193 -- 51 191 (435) --
Intercompany receivables................ -- -- 138 -- (138) --
Other noncurrent assets................. -- 91 56 30 -- 177
----- ----- ----- ------- ------- --------
$ 193 $ 859 $ 890 $ 307 $(573) $1,676
----- ----- ----- ------- ------- --------
----- ----- ----- ------- ------- --------
Liabilities and Equity:
Current liabilities..................... $ -- $ 74 $ 40 $ 2 $ -- $ 116
Long-term debt.......................... -- 542 700 -- -- 1,242
Intercompany payables................... 9 -- -- 142 (151) --
Other noncurrent liabilities............ -- -- 113 13 -- 126
Minority interest....................... -- -- -- -- 8 8
Partners'/Stockholders' equity.......... 184 243 37 150 (430) 184
----- ----- ----- ------- ------- --------
$ 193 $ 859 $ 890 $ 307 $(573) $1,676
----- ----- ----- ------- ------- --------
----- ----- ----- ------- ------- --------
</TABLE>
CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS
YEARS ENDED:
<TABLE>
<CAPTION>
OTHER CONSOL. THE
MESA COMPANY AND COMPANY
DECEMBER 31, 1993 INC. HCLP MOLP SUBS. ELIMIN. CONSOL'D.
- ----------------------------------------- ----- ----- ----- ------- ------- --------
<S> <C> <C> <C> <C> <C> <C>
Revenues................................. $ -- $ 103 $ 120 $ (1) $ -- $ 222
----- ----- ----- ------- ------- --------
Costs and Expenses:
Operating, exploration and taxes....... -- 27 48 -- -- 75
General and administrative............. -- -- 23 2 -- 25
Depreciation, depletion and
amortization........................ -- 35 65 -- -- 100
----- ----- ----- ------- ------- --------
-- 62 136 2 -- 200
----- ----- ----- ------- ------- --------
Operating Income (Loss).................. -- 41 (16) (3) -- 22
----- ----- ----- ------- ------- --------
Interest expense, net of interest
income................................. -- (50) (83) 2 -- (131)
Intercompany interest income (expense)... -- -- 16 (16) -- --
Securities gains (losses)................ -- -- 6 (2) -- 4
Gains on dispositions of oil and gas
properties............................. -- -- 10 -- -- 10
Equity in loss of subsidiaries........... (102) -- (7) (2) 111 --
Minority interest........................ -- -- -- -- 4 4
Other.................................... -- -- (48) 31 6 (11)
----- ----- ----- ------- ------- --------
Net Income (Loss)........................ $(102) $ (9) $(122) $ 10 $ 121 $ (102)
----- ----- ----- ------- ------- --------
----- ----- ----- ------- ------- --------
</TABLE>
F-23
<PAGE> 59
MESA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
OTHER CONSOL. THE
MESA COMPANY AND COMPANY
DECEMBER 31, 1992 INC. HCLP MOLP SUBS. ELIMIN. CONSOL'D.
- ----------------------------------------- ----- ----- ----- ------- ------- --------
<S> <C> <C> <C> <C> <C> <C>
Revenues................................. $ -- $ 88 $ 149 $ -- $ -- $ 237
----- ----- ----- ------- ------- --------
Costs and Expenses:
Operating, exploration and taxes....... -- 22 51 -- -- 73
General and administrative............. -- -- 24 -- -- 24
Depreciation, depletion and
amortization........................ -- 34 80 -- -- 114
----- ----- ----- ------- ------- --------
-- 56 155 -- -- 211
----- ----- ----- ------- ------- --------
Operating Income (Loss).................. -- 32 (6) -- -- 26
----- ----- ----- ------- ------- --------
Interest expense, net of interest
income................................. -- (52) (80) 2 -- (130)
Intercompany interest income (expense)... -- -- 18 (18) -- --
Securities gains (losses)................ -- -- (3) 11 -- 8
Gains on dispositions of oil and gas
properties............................. -- -- 12 -- -- 12
Equity in loss of subsidiaries........... (87) -- (16) (4) 107 --
Minority interest........................ -- -- -- -- 4 4
Other.................................... (2) -- (18) (2) 13 (9)
----- ----- ----- ------- ------- --------
Net Loss................................. $ (89) $ (20) $ (93) $ (11) $ 124 $ (89)
----- ----- ----- ------- ------- --------
----- ----- ----- ------- ------- --------
</TABLE>
<TABLE>
<CAPTION>
OTHER CONSOL. THE
MESA COMPANY AND COMPANY
DECEMBER 31, 1991 INC. HCLP MOLP SUBS. ELIMIN. CONSOL'D.
- ----------------------------------------- ----- ----- ----- ------- ------- --------
<S> <C> <C> <C> <C> <C> <C>
Revenues................................. $ -- $ 57 $ 178 $ 15 $ -- $ 250
----- ----- ----- ------- ------- --------
Costs and Expenses:
Operating, exploration and taxes....... -- 13 53 5 -- 71
General and administrative............. -- -- 27 1 -- 28
Depreciation, depletion and
amortization........................ -- 25 81 11 -- 117
----- ----- ----- ------- ------- --------
-- 38 161 17 -- 216
----- ----- ----- ------- ------- --------
Operating Income (Loss).................. -- 19 17 (2) -- 34
----- ----- ----- ------- ------- --------
Interest expense, net of interest
income................................. -- (30) (100) (4) -- (134)
Intercompany interest income (expense)... -- -- 8 (8) -- --
Securities gains (losses)................ -- -- 8 (10) -- (2)
Gains on dispositions of oil and gas
properties............................. -- -- 34 -- -- 34
Equity in loss of subsidiaries........... (73) -- (9) (2) 84 --
Minority interest........................ -- -- -- -- 3 3
Other.................................... (6) -- (23) 15 -- (14)
----- ----- ----- ------- ------- --------
Net Loss................................. $ (79) $ (11) $ (65) $ (11) $ 87 $ (79)
----- ----- ----- ------- ------- --------
----- ----- ----- ------- ------- --------
</TABLE>
F-24
<PAGE> 60
MESA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS
YEARS ENDED:
<TABLE>
<CAPTION>
OTHER CONSOL. THE
MESA COMPANY AND COMPANY
DECEMBER 31, 1993 INC. HCLP MOLP SUBS. ELIMIN. CONSOL'D.
- ----------------------------------------- ----- ----- ----- ------- ------- --------
<S> <C> <C> <C> <C> <C> <C>
Cash Flows from Operating Activities..... $ -- $ 21 $ 5 $ 2 $ -- $ 28
----- ----- ----- ------- ------- --------
Cash Flows from Investing Activities:
Capital expenditures................... -- (8) (21) (1) -- (30)
Proceeds from dispositions of oil and
gas properties...................... -- -- 26 -- -- 26
Securities transactions, net........... -- -- 11 (6) -- 5
Other.................................. -- -- 30 46 (35) 41
----- ----- ----- ------- ------- --------
-- (8) 46 39 (35) 42
----- ----- ----- ------- ------- --------
Cash Flows from Financing Activities:
Repayments of long-term debt........... -- (39) (41) -- -- (80)
Other.................................. -- 2 (10) (35) 35 (8)
----- ----- ----- ------- ------- --------
-- (37) (51) (35) 35 (88)
----- ----- ----- ------- ------- --------
Net Increase (Decrease) in Cash and Cash
Investments............................ $ -- $ (24) $ -- $ 6 $ -- $ (18)
----- ----- ----- ------- ------- --------
----- ----- ----- ------- ------- --------
</TABLE>
<TABLE>
<CAPTION>
OTHER CONSOL. THE
MESA COMPANY AND COMPANY
DECEMBER 31, 1992 INC. HCLP MOLP SUBS. ELIMIN. CONSOL'D.
- ----------------------------------------- ----- ----- ----- ------- ------- --------
<S> <C> <C> <C> <C> <C> <C>
Cash Flows from Operating Activities..... $ -- $ 16 $ (44) $ -- $ -- $ (28)
----- ----- ----- ------- ------- --------
Cash Flows from Investing Activities:
Capital expenditures................... -- (3) (66) -- -- (69)
Proceeds from dispositions of oil and
gas properties...................... -- -- 11 -- -- 11
Securities transactions, net........... -- -- (8) 32 -- 24
Contributions to subsidiaries.......... -- -- (25) (7) 32 --
Other.................................. -- -- 23 25 (31) 17
----- ----- ----- ------- ------- --------
-- (3) (65) 50 1 (17)
----- ----- ----- ------- ------- --------
Cash Flows from Financing Activities:
Repayments of long-term debt........... -- (25) -- -- -- (25)
Contributions from equity holders...... -- 32 -- -- (32) --
Other.................................. -- (1) (1) (34) 31 (5)
----- ----- ----- ------- ------- --------
-- 6 (1) (34) (1) (30)
----- ----- ----- ------- ------- --------
Net Increase (Decrease) in Cash and Cash
Investments............................ $ -- $ 19 $(110) $ 16 $ -- $ (75)
----- ----- ----- ------- ------- --------
----- ----- ----- ------- ------- --------
</TABLE>
F-25
<PAGE> 61
MESA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
OTHER CONSOL. THE
MESA COMPANY AND COMPANY
DECEMBER 31, 1991 INC. HCLP MOLP SUBS. ELIMIN. CONSOL'D.
- ----------------------------------------- ----- ----- ----- ------- ------- --------
<S> <C> <C> <C> <C> <C> <C>
Cash Flows from Operating Activities..... $ -- $ 28 $ 8 $ (1) $ -- $ 35
----- ----- ----- ------- ------- --------
Cash Flows from Investing Activities:
Capital expenditures................... -- (2) (29) (1) -- (32)
Proceeds from dispositions of oil and
gas properties...................... -- -- 313 115 -- 428
Securities transactions, net........... -- -- 6 26 -- 32
Contributions to subsidiaries.......... -- -- (28) -- 28 --
Other.................................. -- -- (17) (13) 1 (29)
----- ----- ----- ------- ------- --------
-- (2) 245 127 29 399
----- ----- ----- ------- ------- --------
Cash Flows from Financing Activities:
Long-term borrowings................... -- 617 100 -- -- 717
Repayments of long-term debt........... -- (562) (246) (120) -- (928)
Contributions from equity holders...... -- 28 -- -- (28) --
Other.................................. -- (64) (29) (5) (1) (99)
----- ----- ----- ------- ------- --------
-- 19 (175) (125) (29) (310)
----- ----- ----- ------- ------- --------
Net Increase in Cash and Cash
Investments............................ $ -- $ 45 $ 78 $ 1 $ -- $ 124
----- ----- ----- ------- ------- --------
----- ----- ----- ------- ------- --------
</TABLE>
NOTES TO CONDENSED CONSOLIDATING FINANCIAL STATEMENTS
(a) These condensed consolidating financial statements should be read in
conjunction with the consolidated financial statements and notes thereto of
the Company of which this note is an integral part.
(b) As of December 31, 1993, MESA Inc. owned a 97.38% limited partnership
interest in each of MOLP, MMLP and MHLP. The General Partner owned a 2.62%
general partner interest in each of these subsidiary partnerships. These
condensed consolidating financial statements present MESA Inc.'s investment
in its subsidiaries and MOLP's and MMLP's investments in HCLP using the
equity method. Under this method, investments are recorded at cost and
adjusted for the parent company's ownership share of the subsidiary's
cumulative results of operations. In addition, investments increase in the
amount of contributions to subsidiaries and decrease in the amount of
distributions from subsidiaries.
(c) In connection with the formation of HCLP, MOLP and MMLP contributed
producing natural gas properties in the Hugoton field and long-term debt to
HCLP in return for limited partnership interests. These transactions did
not require cash and are not reflected in the statements of cash flows of
HCLP, MOLP or MMLP. Non-cash contributions by MOLP and MMLP from inception
(June 12, 1991) to December 31, 1993 are summarized below (in thousands):
<TABLE>
<CAPTION>
MOLP MMLP
--------- --------
<S> <C> <C>
Oil and gas properties........................................ $ 447,037 $288,819
Long-term debt................................................ (451,283) (99,206)
Other assets, net of liabilities.............................. 26,822 1,365
General Partner............................................... (114) (964)
--------- --------
$ 22,462 $190,014
--------- --------
--------- --------
</TABLE>
(d) The consolidation and elimination entries (i) eliminate the equity method
investment in subsidiaries and equity in loss of subsidiaries, (ii)
eliminate the intercompany payables and receivables, (iii) eliminate other
transactions between subsidiaries including contributions and distributions
and (iv) establish the
F-26
<PAGE> 62
MESA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
General Partner's minority interest in the consolidated results of
operations and financial position of the Company.
(e) MOLP was merged into MOC and MMLP and MHLP were merged into MHC in a series
of merger transactions effected in early 1994. In conjunction with these
transactions, the General Partner converted all of his remaining general
partner interests in the Company's subsidiaries into common stock of the
Company, thereby eliminating the minority interest. On February 28, 1994,
MHC repaid substantially all of its intercompany debt to MOC.
F-27
<PAGE> 63
MESA INC.
SUPPLEMENTAL FINANCIAL DATA
OIL AND GAS RESERVES AND COST INFORMATION (UNAUDITED)
Net proved oil and gas reserves as of December 31, 1993 and 1992 associated
with the Company's two most significant natural gas producing fields were
estimated by DeGolyer and MacNaughton, independent petroleum engineering
consultants (D&M). These two fields, the Hugoton and West Panhandle fields,
represent over 96% of the Company's net proved equivalent natural gas reserves
at December 31, 1993. The Company's remaining reserves, substantially all of
which are in the Rocky Mountain and Gulf Coast regions, were estimated by
Company engineers. A portion of the Rocky Mountain properties and all of the
Hugoton field deep reserves were sold in 1993. All of the Company's reserves at
December 31, 1993 and 1992 were in the United States. Net proved oil and gas
reserves in the United States and Canada as of December 31, 1991 were estimated
by D&M. The reserves in Canada were less than 2% of the total equivalent
reserves of the Company and are not presented separately in this report. The
Company's interests in Canada were sold in 1992. In accordance with regulations
established by the SEC, the reserve estimates were based on economic and
operating conditions existing at the end of the respective years.
Future prices for natural gas were based on market prices as of each year
end and contract terms, including fixed and determinable price escalations.
Market prices as of each year end were used for future sales of oil, condensate
and natural gas liquids. Future operating costs, production and ad valorem taxes
and capital costs were based on current costs as of each year end, with no
escalation.
Over 70% of the Company's equivalent proved reserves (based on a factor of
6 thousand cubic feet [Mcf] of gas per barrel of liquids) at December 31, 1993
are natural gas. The natural gas prices in effect at December 31, 1993 (having a
weighted average of $2.14 per Mcf) were used in accordance with SEC regulations
but may not be the most appropriate or representative prices to use for
estimating future cash flows from reserves since such prices were influenced by
the seasonal demand for natural gas and contractual arrangements at that date.
The average price received by the Company for sales of natural gas in 1993 was
$1.79 per Mcf. Assuming all other variables used in the calculation of reserve
data are held constant, the Company estimates that each $.10 change in the price
per Mcf for natural gas production would affect the Company's estimated future
net cash flows and present value thereof, both before income taxes, by $108
million and $48 million, respectively. At December 31, 1993, the Company's
standardized measure of future net cash flows from proved reserves (Standardized
Measure) and the pre-tax Standardized Measure were less than the net book value
of proved oil and gas properties by approximately $188 million and $106 million,
respectively. The Company believes that the ultimate value to be received for
production from its oil and gas properties will be greater than the current net
book value of its oil and gas properties.
There are numerous uncertainties inherent in estimating quantities of
proved reserves and in projecting the future rates of production and timing of
development expenditures. Reserve data represent estimates only and should not
be construed as being exact. Moreover, the Standardized Measure should not be
construed as the current market value of the proved oil and gas reserves or the
costs that would be incurred to obtain equivalent reserves. A market value
determination would include many additional factors including (i) anticipated
future changes in oil and gas prices, production and development costs; (ii) an
allowance for return on investment; (iii) the value of additional reserves, not
considered proved at present, which may be recovered as a result of further
exploration and development activities; and (iv) other business risks.
F-28
<PAGE> 64
MESA INC.
SUPPLEMENTAL FINANCIAL DATA
CAPITALIZED COSTS AND COSTS INCURRED (UNAUDITED)
Capitalized costs relating to oil and gas producing activities at December
31, 1993, 1992 and 1991 and the costs incurred during the years then ended are
set forth below (in thousands):
<TABLE>
<CAPTION>
1993 1992 1991
---------- --------- ---------
<S> <C> <C> <C>
Capitalized Costs:
Proved properties...................................... $1,845,483 $1,850,793 $1,785,244
Unproved properties.................................... 754 762 4,980
Accumulated depreciation, depletion and amortization... (670,706) (589,720) (481,218)
---------- ---------- ----------
Net............................................ $1,175,531 $1,261,835 $1,309,006
---------- ---------- ----------
---------- ---------- ----------
Costs Incurred:
Exploration and development:
Proved properties................................... $ 73 $ 64 $ 545
Unproved properties................................. 17 63 4,779
Exploration costs................................... 2,705 15,157 7,924
Development costs................................... 2,381 6,911 12,446
---------- ---------- ----------
Total exploration and development.............. 5,176 22,195 25,694
---------- ---------- ----------
Plant and facilities:
Processing plants................................... 17,501 44,716 5,839
Field compression facilities........................ 4,387 1,509 853
Other............................................... 2,257 3,301 3,599
---------- ---------- ----------
Total plant and facilities..................... 24,145 49,526 10,291
---------- ---------- ----------
Total costs incurred................................... $ 29,321 $ 71,721 $ 35,985
---------- ---------- ----------
---------- ---------- ----------
Depreciation, depletion and amortization............... $ 96,774 $ 110,340 $ 112,860
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
F-29
<PAGE> 65
MESA INC.
SUPPLEMENTAL FINANCIAL DATA
ESTIMATED QUANTITIES OF RESERVES (UNAUDITED)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31
---------------------------------
NATURAL GAS (MMCF) 1993 1992 1991
- ------------------------------------------------------------ --------- -------- --------
<S> <C> <C> <C>
Proved Reserves:
Beginning of year......................................... 1,276,049 1,367,968 1,920,797
Extensions and discoveries............................. 5,132 37,100 2,643
Purchases of producing properties...................... 166 583 1,267
Revisions of previous estimates........................ 7,284 (24,462) (95,228)
Sales of producing properties.......................... (6,367) (15,613) (352,989)
Production............................................. (79,820) (89,527) (108,522)
--------- --------- ---------
End of year............................................... 1,202,444 1,276,049 1,367,968
--------- --------- ---------
--------- --------- ---------
Proved Developed Reserves:
Beginning of year......................................... 1,223,672 1,338,856 1,853,523
--------- --------- ---------
--------- --------- ---------
End of year............................................... 1,159,453 1,223,672 1,338,856
--------- --------- ---------
--------- --------- ---------
</TABLE>
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31
NATURAL GAS LIQUIDS, --------------------------------
OIL AND CONDENSATE (MBBLS) 1993 1992 1991
- ------------------------------------------------------------ -------- -------- --------
<S> <C> <C> <C>
Proved Reserves:
Beginning of year......................................... 87,392 83,225 101,667
Extensions and discoveries............................. 778 7,591 1,250
Purchases of producing properties...................... -- 9 46
Revisions of previous estimates........................ 3,083 3,028 (4,067)
Sales of producing properties.......................... (3,019) (637) (10,179)
Production............................................. (5,788) (5,824) (5,492)
-------- -------- --------
End of year............................................... 82,446 87,392 83,225
-------- -------- --------
-------- -------- --------
Proved Developed Reserves:
Beginning of year......................................... 82,439 82,406 99,494
-------- -------- --------
-------- -------- --------
End of year............................................... 79,294 82,439 82,406
-------- -------- --------
-------- -------- --------
</TABLE>
- ---------------
* Proved natural gas liquids, oil and condensate reserve quantities
include oil and condensate reserves at December 31 of the respective
years as follows: 1993, 3,296 MBbls; 1992, 7,268 MBbls; and 1991, 3,956
MBbls.
* In addition to the proved reserves disclosed above, the Company owned
proved helium and carbon dioxide (CO2) reserves at December 31 of the
respective years as follows: 1993, 5,198 MMcf of helium and 46,376 MMcf
of CO2; 1992, 5,634 MMcf of helium and 46,457 MMcf of CO2; and 1991,
5,705 MMcf of helium and 44,837 MMcf of CO2.
* The General Partner's minority interest in the proved natural gas and
natural gas liquids, oil and condensate reserves of the Company at
December 31 of the respective years was as follows: 1993, 31,504 MMcf
and 2,160 MBbls, respectively; 1992, 52,828 MMcf and 3,618 MBbls,
respectively; and 1991, 56,634 MMcf and 3,446 MBbls, respectively. The
General Partner converted all of his general partner interests in the
direct subsidiary partnerships of the Company into common stock of the
Company on January 5, 1994, thereby eliminating the minority interest.
F-30
<PAGE> 66
MESA INC.
SUPPLEMENTAL FINANCIAL DATA
STANDARDIZED MEASURE OF FUTURE NET CASH FLOWS FROM PROVED RESERVES (UNAUDITED)
<TABLE>
<CAPTION>
DECEMBER 31
--------------------------------------
1993 1992 1991
---------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C>
Future cash inflows................................... $3,723,760 $3,802,614 $4,078,322
Future production and development costs:
Operating costs and production taxes................ (1,337,224) (1,271,799) (1,297,999)
Development and abandonment costs................... (80,310) (122,860) (181,350)
Future income taxes................................... (240,017) (302,492) (394,743)
---------- ---------- ----------
Future net cash flows................................. 2,066,209 2,105,463 2,204,230
Discount at 10% per annum........................... (1,079,278) (1,068,282) (1,209,016)
---------- ---------- ----------
Standardized Measure.................................. $ 986,931 $1,037,181 $ 995,214
---------- ---------- ----------
---------- ---------- ----------
Future net cash flows before income taxes............. $2,306,226 $2,407,955 $2,598,973
---------- ---------- ----------
---------- ---------- ----------
Standardized Measure before income taxes.............. $1,068,740 $1,167,694 $1,181,013
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
- ---------------
* The estimate of future income taxes is based on the future net cash
flows from proved reserves adjusted for the tax basis of the oil and gas
properties but without consideration of general and administrative and
interest expenses.
* The General Partner's minority interest in the Standardized Measure at
December 31 of the respective years was as follows: 1993, $25.9 million;
1992, $42.9 million; and 1991, $41.2 million. The General Partner
converted all of his general partner interests in the direct subsidiary
partnerships of the Company into common stock of the Company on January
5, 1994, thereby eliminating the minority interest.
F-31
<PAGE> 67
MESA INC.
SUPPLEMENTAL FINANCIAL DATA
CHANGES IN STANDARDIZED MEASURE (UNAUDITED)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31
------------------------------------
1993 1992 1991
---------- --------- ----------
(IN THOUSANDS)
<S> <C> <C> <C>
Standardized Measure at beginning of year................ $1,037,181 $ 995,214 $1,667,148
---------- --------- ----------
Revisions of reserves proved in prior years:
Changes in prices and production costs................. 6,178 (77,527) (365,430)
Changes in quantity estimates.......................... 17,616 (3,995) (83,342)
Changes in estimates of future development and
abandonment costs................................... 8,054 (2,468) (30,088)
Net change in income taxes............................. 48,703 55,287 201,170
Accretion of discount.................................. 116,769 118,101 205,412
Other, primarily timing of production.................. (108,371) 12,687 (86,815)
---------- --------- ----------
Total revisions................................ 88,949 102,085 (159,093)
Extensions, discoveries and other additions, net of
future production and development costs................ 4,456 65,737 12,013
Purchases of proved properties........................... 138 457 1,952
Sales of oil and gas produced, net of production costs... (143,502) (173,552) (182,235)
Sales of producing properties............................ (26,907) (14,473) (367,308)
Previously estimated development and abandonment costs
incurred during the period............................. 26,616 61,713 22,737
---------- --------- ----------
Net changes in Standardized Measure...................... (50,250) 41,967 (671,934)
---------- --------- ----------
Standardized Measure at end of year...................... $ 986,931 $1,037,181 $ 995,214
---------- --------- ----------
---------- --------- ----------
</TABLE>
QUARTERLY RESULTS (UNAUDITED)
<TABLE>
<CAPTION>
QUARTERS ENDED(2)
---------------------------------------------------
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
-------- -------- ------------ -----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
1993
- ----
Revenues....................................... $ 63,826 $ 50,826 $ 42,377 $ 65,175
-------- -------- ------------ -----------
-------- -------- ------------ -----------
Gross profit(1)................................ $ 44,644 $ 32,009 $ 26,782 $ 46,618
-------- -------- ------------ -----------
-------- -------- ------------ -----------
Operating income (loss)........................ $ 10,032 $ 4,904 $ (510) $ 7,586
-------- -------- ------------ -----------
-------- -------- ------------ -----------
Net loss....................................... $(17,088) $(14,445) $(27,480) $ (43,435)
-------- -------- ------------ -----------
-------- -------- ------------ -----------
Net loss per common share...................... $ (.44) $ (.37) $ (.71) $ (1.06)
-------- -------- ------------ -----------
-------- -------- ------------ -----------
1992
- ----
Revenues....................................... $ 58,919 $ 51,556 $ 48,171 $ 78,466
-------- -------- ------------ -----------
-------- -------- ------------ -----------
Gross profit(1)................................ $ 44,181 $ 36,733 $ 33,608 $ 60,100
-------- -------- ------------ -----------
-------- -------- ------------ -----------
Operating income (loss)........................ $ 9,173 $ (2,479) $ 172 $ 19,355
-------- -------- ------------ -----------
-------- -------- ------------ -----------
Net loss....................................... $(21,973) $(20,622) $(29,128) $ (17,509)
-------- -------- ------------ -----------
-------- -------- ------------ -----------
Net loss per common share...................... $ (.57) $ (.53) $ (.76) $ (.45)
-------- -------- ------------ -----------
-------- -------- ------------ -----------
</TABLE>
- ---------------
(1) Gross profit consists of total revenues less lease operating expenses and
production and other taxes.
(2) See Notes 8 and 9 to the Company's consolidated financial statements for
information on items affecting fourth quarter 1993 results.
F-32
<PAGE> 68
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
NO DEALER, SALESPERSON OR OTHER INDIVIDUAL HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS, IN CONNECTION WITH THIS OFFERING COVERED BY THIS PROSPECTUS. IF
GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS
HAVING BEEN AUTHORIZED BY THE COMPANY OR ANY AGENT OR UNDERWRITER. THIS
PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER
TO BUY, THE COMMON STOCK IN ANY JURISDICTION WHERE, OR TO ANY PERSON TO WHOM, IT
IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS
PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE
ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE FACTS SET FORTH IN THIS
PROSPECTUS OR IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF.
---------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Summary................................ 3
Risk Factors........................... 6
The Company............................ 8
Use of Proceeds........................ 9
Capitalization......................... 10
Price Range of Common Stock and
Dividend Policy...................... 11
Management's Discussion and Analysis of
Financial Condition and Results of
Operations........................... 12
Business............................... 20
Management............................. 31
Underwriting........................... 32
Legal Matters.......................... 33
Experts................................ 33
Additional Information................. 33
Incorporation of Certain Documents by
Reference............................ 34
Index to Consolidated Financial
Statements........................... F-1
</TABLE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
23,000,000 SHARES
{MESA LOGO}
COMMON STOCK
------------------------
PROSPECTUS
------------------------
MERRILL LYNCH & CO.
BEAR, STEARNS & CO. INC.
PAINEWEBBER INCORPORATED
SALOMON BROTHERS INC
, 1994
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE> 69
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following are the estimated expenses (other than underwriting discounts
and commissions) of the issuance and distribution of the securities being
registered payable by the Company.
<TABLE>
<S> <C>
Securities and Exchange Commission registration fee................ $ 57,574
NASD filing fee.................................................... 17,197
Printing and engraving expenses.................................... *
Accounting fees and expenses....................................... *
Blue Sky fees and expenses......................................... *
Listing fees....................................................... *
Counsel fees....................................................... *
Miscellaneous...................................................... *
--------
Total.................................................... *
--------
--------
</TABLE>
- ---------------
* To be provided by amendment
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Article 2.02-1 of the Texas Business Corporation Act provides that a
corporation may indemnify any director or officer who was, is or is threatened
to be made a named defendant or respondent in a proceeding because he is or was
a director or officer, provided that the director or officer (i) conducted
himself in good faith, (ii) reasonably believed (a) in the case of conduct in
his official capacity, that his conduct was in the corporation's best interests,
(b) in all other cases, that his conduct was at least not opposed to the
corporation's best interests and (iii) in the case of any criminal proceeding,
had no reasonable cause to believe his conduct was unlawful. Subject to certain
exceptions, a director or officer may not be indemnified if the person is found
liable to the corporation or if the person is found liable on the basis that he
improperly received a personal benefit. Under Texas law, reasonable expenses
incurred by a director or officer may be paid or reimbursed by the corporation
in advance of a final disposition of the proceeding after the corporation
receives a written affirmation by the director of his good faith belief that he
has met the standard of conduct necessary for indemnification and a written
undertaking by or on behalf of the director to repay the amount if it is
ultimately determined that the director or officer is not entitled to
indemnification by the corporation. Texas law requires a corporation to
indemnify an officer or director against reasonable expenses incurred in
connection with the proceeding in which he is named defendant or respondent
because he is or was a director or officer if he is wholly successful in defense
of the proceeding.
Texas law also permits a corporation to purchase and maintain insurance or
another arrangement on behalf of any person who is or was a director or officer
against any liability asserted against him and incurred by him in such a
capacity or arising out of his status as such a person, whether or not the
corporation would have the power to indemnify him against that liability under
Article 2.02-1.
The Company's Bylaws provide for the indemnification of its officers and
directors, and the advancement to them of expenses in connection with
proceedings and claims, to the fullest extent permitted by the Texas Business
Corporation Act. The Company has also entered into indemnification agreements
with its executive officers and directors that contractually provide for
indemnification and expense advancement. Both the Bylaws and the agreements
include related provisions meant to facilitate the indemnitees' receipt of such
benefits. These provisions cover, among other things: (i) specification of the
method of determining entitlement to indemnification and the selection of
independent counsel that will in some cases make such determination, (ii)
specification of certain time periods by which certain payments or
determinations must be made and actions must be taken and (iii) the
establishment of certain presumptions in favor of an indemnitee. The benefits of
certain of these provisions are available to an indemnitee only if there has
been a change in
II-1
<PAGE> 70
control (as defined). In addition, the Company carries customary directors' and
officers' liability insurance policies for its directors and officers.
Furthermore, the Bylaws and agreements with directors and officers provide for
indemnification for amounts (i) in respect of the deductibles for such insurance
policies, (ii) that exceed the liability limits of such insurance policies and
(iii) that would have been covered by prior insurance policies of the Company or
its predecessors. Such indemnification may be made even though directors and
officers would not otherwise be entitled to indemnification under other
provisions of the Bylaws or such agreements.
The above discussion of the Company's Bylaws and of Article 2.01-1 of the
Texas Business Corporation Act is not intended to be exhaustive and is
respectively qualified in its entirety by such statute and the Bylaws.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) Exhibits
<TABLE>
<S> <C>
1 -- Form of Purchase Agreement.
4 -- Form of Certificate of Common Stock (Exhibit 4(a) to MESA Inc.'s Registration
Statement on Form S-4, Registration No. 33-42104).
+ 5 -- Opinion of Baker & Botts, L.L.P.
23.1 -- Consent of Arthur Andersen & Co., independent accountants.
23.2 -- Consent of DeGolyer and MacNaughton.
+23.3 -- Consent of Baker & Botts, L.L.P. (included in Exhibit 5 to this Registration
Statement).
24 -- Powers of Attorney of directors and officers of MESA Inc. (included on
signature pages to this Registration Statement).
</TABLE>
- ---------------
+ To be filed by amendment.
ITEM 17. UNDERTAKINGS.
The undersigned registrant hereby undertakes:
Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers and
controlling persons of the registrant pursuant to the foregoing provisions,
or otherwise, the registrant has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public
policy as expressed in the Securities Act of 1933 and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by the registrant of expenses incurred
or paid by a director, officer or controlling person of the registrant in
the successful defense of any action, suit or proceeding) is asserted by
such director, officer or controlling person in connection with the
securities being registered, the registrant will, unless in the opinion of
its counsel the matter has been settled by controlling precedent, submit to
a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the
Securities Act of 1933 and will be governed by the final adjudication of
such issue.
For purposes of determining any liability under the Securities Act of
1933, each filing of the registrant's annual report pursuant to section
13(a) or section 15(d) of the Exchange Act (and, where applicable, each
filing of an employee benefit plan's annual report pursuant to section
15(d) of the Exchange Act) that is incorporated by reference in the
registration statement shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such
securities at that time shall be deemed to be the initial bona fide
offering thereof.
For purposes of determining any liability under the Securities Act of
1933, the information omitted from the form of prospectus filed as a part
of this registration statement in reliance upon Rule 430A and contained in
a form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or
(4) or 497(h) under the Securities Act shall be deemed to be part of the
registration statement as of the time it was declared effective. For the
purpose of determining any liability under the Securities Act of 1933, each
post-effective amendment that contains a form of prospectus shall be deemed
to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed
to be the initial bona fide offering thereof.
II-2
<PAGE> 71
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form S-3 and has duly caused this Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized in the City of Dallas, State of Texas, on the 10th day of March,
1994.
MESA Inc.
By: /s/ WILLIAM D. BALLEW
William D. Ballew,
Controller
POWER OF ATTORNEY
The undersigned directors and executive officers of MESA Inc. hereby
constitute and appoint William D. Ballew and Charles L. Carpenter, and each of
them, with full power to act without the other and with full power of
substitution and resubstitution, our true and lawful attorneys-in-fact with full
power to execute in our name and behalf in the capacities indicated below any
and all amendments (including post-effective amendments and amendments thereto)
to this Registration Statement and to file the same, with all exhibits thereto
and other documents in connection therewith with the Securities and Exchange
Commission and hereby ratify and confirm all that such attorneys-in-fact, or
either of them, or their substitutes shall lawfully do or cause to be done by
virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
registration statement or amendment has been signed by the following persons in
the capacities and on the date indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- --------------------------------------------- ---------------------------- ---------------
<S> <C> <C>
/s/ BOONE PICKENS Director and Chief Executive March 10, 1994
Boone Pickens Officer
/s/ PAUL W. CAIN Director, President and March 10, 1994
Paul W. Cain Chief Operating Officer
/s/ WILLIAM D. BALLEW Controller (Chief Accounting March 10, 1994
William D. Ballew Officer and acting Chief
Financial Officer)
/s/ JOHN S. HERRINGTON Director March 10, 1994
John S. Herrington
/s/ WALES H. MADDEN, JR. Director March 10, 1994
Wales H. Madden, Jr.
/s/ FAYEZ S. SAROFIM Director March 10, 1994
Fayez S. Sarofim
/s/ ROBERT L. STILLWELL Director March 10, 1994
Robert L. Stillwell
/s/ J.R. WALSH, JR. Director March 10, 1994
J.R. Walsh, Jr.
</TABLE>
II-3
<PAGE> 1
EXHIBIT 1
================================================================================
MESA INC.
23,000,000 SHARES OF COMMON STOCK
PURCHASE AGREEMENT
Dated: __________ ___, 1994
================================================================================
<PAGE> 2
23,000,000 SHARES
MESA INC.
(a Texas corporation)
COMMON STOCK
(Par Value $.01 Per Share)
PURCHASE AGREEMENT
_______, 1994
MERRILL LYNCH & CO.
MERRILL LYNCH, PIERCE, FENNER & SMITH
INCORPORATED
BEAR, STEARNS & CO. INC.
PAINEWEBBER INCORPORATED
SALOMON BROTHERS INC
as Representatives of the several Underwriters
c/o Merrill Lynch & Co.
Merrill Lynch World Headquarters
North Tower
World Financial Center
New York, New York 10281-1201
Dear Sirs:
MESA Inc., Texas corporation (the "Company"), confirms its agreement
with Merrill Lynch & Co., Merrill Lynch, Pierce, Fenner & Smith Incorporated
("Merrill Lynch"), Bear, Stearns & Co. Inc. ("Bear Stearns"), PaineWebber
Incorporated ("PaineWebber"), Salomon Brothers Inc ("Salomon") and each of the
other Underwriters named in Schedule A hereto (collectively, the
"Underwriters," which term shall also include any underwriter substituted as
hereinafter provided in Section 10 hereof), for whom Merrill Lynch, Bear
Stearns, PaineWebber and Salomon are acting as representatives (in such
capacity, Merrill Lynch, Bear Stearns, PaineWebber and Salomon shall
hereinafter be called the "Representatives"), with respect to the sale by the
Company and the purchase by the Underwriters, acting severally and not jointly,
of the respective numbers of shares of Common Stock, par value $.01 per share,
of the Company ("Common Stock") set forth in said Schedule A and with respect
to the grant by the Company to the Underwriters, acting severally and not
jointly, of the option described in Section 2(b) hereof to purchase up to
3,450,000 additional shares of Common Stock to cover over-allotments, in each
case except as may otherwise be provided in the Pricing Agreement, as
hereinafter defined. The 23,000,000 shares of Common Stock (the "Initial
Securities") to be purchased by the Underwriters and all or any of the
3,450,000 shares of Common Stock subject to the option described in Section
2(b) hereof (the "Option Securities") are collectively hereinafter called the
"Securities."
<PAGE> 3
Prior to the purchase and public offering of the Securities by the
several Underwriters, the Company and the Representatives, acting on behalf of
the several Underwriters, shall enter into an agreement substantially in the
form of Exhibit A hereto (the "Pricing Agreement"). The Pricing Agreement may
take the form of an exchange of any standard form of written telecommunication
between the Company and the Representatives and shall specify such applicable
information as is indicated in Exhibit A hereto. The offering of the
Securities will be governed by this Agreement, as supplemented by the Pricing
Agreement. From and after the date of the execution and delivery of the
Pricing Agreement, this Agreement shall be deemed to incorporate the Pricing
Agreement.
The Company has filed with the Securities and Exchange Commission (the
"Commission") a registration statement on Form S-3 (No. 33- _______) and a
related preliminary prospectus for the registration of the Securities under the
Securities Act of 1933, as amended (the "1933 Act"), has filed each such
amendment thereto, if any, and each such amended prospectus as may have been
required to the date hereof, and will file such additional amendments thereto
and such amended prospectuses as may hereafter be required. Such registration
statement (as amended, if applicable) and the prospectus constituting a part
thereof (including in each case all documents filed by the Company pursuant to
the Securities Exchange Act of 1934, as amended (the "1934 Act"), that are
incorporated by reference therein and the information, if any, deemed to be a
part thereof pursuant to Rule 430A(b) of the rules and regulations of the
Commission under the 1933 Act (the "1933 Act Regulations")), as from time to
time amended or supplemented pursuant to the 1933 Act or otherwise, are
hereinafter referred to as the "Registration Statement" and the "Prospectus",
respectively, except that if any revised prospectus shall be provided to the
Underwriters by the Company in connection with the offering of the Securities
which differs from the Prospectus on file at the Commission at the time the
Registration Statement becomes effective (whether or not such revised
prospectus is required to be filed by the Company pursuant to Rule 424(b) of
the 1933 Act Regulations), the term "Prospectus" shall refer to such revised
prospectus from and after the time it is first provided to the Underwriters for
such use. All references in this Agreement to financial statements and
schedules and other information which are "contained," "included" or "stated"
in the Registration Statement or the Prospectus (and all other references of
like import) shall be deemed to mean and include all such financial statements
and schedules and other information which are or are deemed to be incorporated
by reference in the Registration Statement or the Prospectus, as the case may
be; and all references in this Agreement to amendments or supplements to the
Registration Statement or the Prospectus shall be deemed to mean and include
the filing of any document under the 1934 Act which is or is deemed to be
incorporated by reference in the Registration Statement or the Prospectus, as
the case may be.
The Company understands that the Underwriters propose to make a public
offering of the Securities as soon as the Representatives deem advisable after
the Pricing Agreement has been executed and delivered.
SECTION 1. REPRESENTATIONS AND WARRANTIES.
(a) The Company represents and warrants to each Underwriter as of
the date hereof and, if later than the date hereof, as of the date of the
Pricing Agreement (such latter date being hereinafter referred to as the
"Representation Date") as follows:
(1) At the time the Registration Statement becomes
effective and at the Representation Date, the Registration Statement
will comply in all material respects with the requirements of the 1933
Act and the 1933 Act Regulations and will not contain an untrue
statement of a material fact or omit to state a material fact required
to be stated therein or
-2-
<PAGE> 4
necessary to make the statements therein not misleading. The
Prospectus, at the Representation Date and at each Closing Time
referred to in Section 2 hereof, will not include an untrue statement
of a material fact or omit to state a material fact necessary in order
to make the statements therein, in the light of the circumstances
under which they were made, not misleading; provided, however, that
the representations and warranties in this subsection shall not apply
to statements in or omissions from the Registration Statement or
Prospectus made in reliance upon and in conformity with information
furnished to the Company in writing by any Underwriter through the
Representatives expressly for use in the Registration Statement or
Prospectus.
(2) The accountants who certified the financial
statements and financial statement schedules included in the
Registration Statement are independent public accountants as required
by the 1933 Act and the 1933 Act Regulations.
(3) The consolidated financial statements, including the
notes thereto, and financial statement schedules included in the
Registration Statement and the Prospectus present fairly the
consolidated financial position of the Company and its subsidiaries as
of the dates indicated and the results of their operations and cash
flows for the periods specified in conformity with generally accepted
accounting principles applied, except as otherwise stated in the
Registration Statement, on a consistent basis; and the financial
statement schedules included in the Registration Statement present
fairly the information required to be stated therein. The selected
financial data included in the Registration Statement and the
Prospectus present fairly the information shown therein and have been
compiled on a basis consistent with that of the audited consolidated
financial statements included therein.
(4) Since the respective dates as of which information is
given in the Prospectus, except as otherwise stated or contemplated
therein, (i) there has been no material adverse change in the
condition, financial or otherwise, or on the earnings, business
affairs or business prospects of the Company and its subsidiaries
considered as one enterprise, whether or not arising in the ordinary
course of business, (ii) there have been no transactions entered into
by the Company or any of its subsidiaries, other than those in the
ordinary course of business, required to be disclosed therein, and
(iii) there has been no dividend or distribution of any kind declared,
paid or made by the Company on any class of its capital stock.
(5) The Company is a corporation duly organized, validly
existing and in good standing under the laws of the State of Texas,
with corporate power and authority to own, lease and operate its
properties and to conduct its business as described in the Prospectus
and to enter into and perform its obligations under this Agreement and
the Pricing Agreement; and the Company is duly qualified as a foreign
corporation to transact business and is in good standing in each
jurisdiction, if any, in which such qualification is required, whether
by reason of the ownership or leasing of property or the conduct of
its business, except where the failure to so qualify or be in good
standing would not have a material adverse effect on the condition,
financial or otherwise, or the earnings, business affairs or business
prospects of the Company and its subsidiaries considered as one
enterprise.
(6) Each corporate subsidiary of the Company which is a
significant subsidiary (each a "Significant Corporate Subsidiary") as
defined in Rule 405 of Regulation C of the 1933 Act Regulations is a
corporation duly organized, validly existing and in good standing
under the laws of the jurisdiction of its incorporation, has corporate
power and authority to own, lease and
-3-
<PAGE> 5
operate its properties and to conduct its business as described in the
Prospectus and is duly qualified as a foreign corporation to transact
business and is in good standing in each jurisdiction in which such
qualification is required, whether by reason of the ownership or
leasing of property or the conduct of its business, except where the
failure to so qualify or be in good standing would not have a material
adverse effect on the condition, financial or otherwise, or the
earnings, business affairs or business prospects of the Company and
its subsidiaries considered as one enterprise; and all of the
outstanding shares of capital stock of each such Significant Corporate
Subsidiary have been duly authorized and validly issued, are fully
paid and nonassessable and are owned by the Company, directly or
through one or more subsidiaries, free and clear (except as otherwise
stated in the Prospectus) of any security interest, pledge or other
restriction on transferability or voting.
(7) Hugoton Capital Limited Partnership ("HCLP" and,
together with the Significant Corporate Subsidiaries, the "Significant
Subsidiaries"), is a limited partnership duly organized pursuant to
the Delaware Revised Uniform Limited Partnership Act, validly existing
as a limited partnership in good standing under the laws of the State
of Delaware, has partnership power and authority to own, lease and
operate its properties and to conduct its business as described in the
Prospectus and is duly qualified as a foreign partnership to transact
business and is in good standing in each jurisdiction in which such
qualification is required, whether by reason of the ownership or
leasing of property or the conduct of its business, except where the
failure to so qualify would not have a material adverse effect on the
condition, financial or otherwise, or the earnings, business affairs
or business prospects of the Company and its subsidiaries considered
as one enterprise; and the entire partnership interest in HCLP is
owned by the Company, through subsidiaries, free and clear (except as
otherwise stated in the Prospectus) of any security interest, pledge
or other restriction on transferability or voting.
(8) Each of the subsidiaries of the Company has (i)
generally satisfactory title to all its interests in its oil and gas
properties, title investigations having been carried out by or on
behalf of such subsidiary in accordance with good practice in the oil
and gas industry in the areas in which such subsidiary operates, (ii)
good and marketable title to all other real property to the extent
necessary to carry on its business, and (iii) good and marketable
title to all personal property owned by such subsidiary, in each case
free and clear of all liens, encumbrances and defects except such as
are described in the Prospectus or such as do not materially affect
the value of such property and do not interfere with the use made and
proposed to be made of such property by the Company and its
subsidiaries considered as one enterprise.
(9) The authorized, issued and outstanding capital stock
of the Company is as set forth on the face of the Consolidated Balance
Sheet as of December 31, 1993 contained in the Prospectus (except for
subsequent issuances of Common Stock upon conversion of the remaining
general partner interests as described in Notes 1 and 7 to such
Consolidated Balance Sheet, or pursuant to employee stock options or
this Agreement); all shares of issued Common Stock have been duly
authorized and validly issued and are fully paid and nonassessable;
the Securities have been duly authorized for issuance and sale to the
Underwriters pursuant to this Agreement and, when issued and delivered
by the Company pursuant to this Agreement against payment of the
consideration set forth in the Pricing Agreement, will be validly
issued and fully paid and nonassessable; the Common Stock conforms in
all material respects to all statements relating thereto contained in
the Prospectus (including the Company's Registration Statement on Form
8-A incorporated by reference therein); and the issuance of the
Securities is not subject to
-4-
<PAGE> 6
preemptive or other similar rights. The outstanding shares of Common
Stock are listed on the New York Stock Exchange.
(10) Neither the Company nor any of its subsidiaries is in
violation of its charter or partnership agreement, as the case may be,
or in default in the performance or observance of any obligation,
agreement, covenant or condition contained in any contract, indenture,
mortgage, loan agreement, note, lease or other instrument to which the
Company or any of its subsidiaries is a party or by which it or any of
them may be bound, or to which any of the property or assets of the
Company or any of its subsidiaries is subject, which violation or
default would have a material adverse effect on the condition,
financial or otherwise, or on the earnings, business affairs or
business prospects of the Company and its subsidiaries considered as
one enterprise; and the execution, delivery and performance of this
Agreement and the Pricing Agreement, and the consummation of the
transactions contemplated herein, have been duly authorized by all
necessary corporate action on the part of the Company and do not and
will not conflict with or constitute a breach of, or default under, or
result in the creation or imposition of any lien, charge or
encumbrance upon any property or assets of the Company or any of its
subsidiaries pursuant to, any contract, indenture, mortgage, loan
agreement, note, lease or other instrument to which the Company or any
of its subsidiaries is a party or by which it or any of them may be
bound, or to which any of the property or assets of the Company or any
of its subsidiaries is subject, nor will such action result in any
violation of the provisions of the charter or bylaws of the Company or
any applicable law, administrative regulation or administrative or
court judgment, order or decree.
(11) Except as disclosed in the Prospectus, there is no
action, suit or proceeding before or by any court or governmental
authority or agency now pending, or, to the knowledge of the Company,
threatened, against the Company or any of its subsidiaries, which is
required to be disclosed in the Prospectus or which might materially
and adversely affect the consummation by the Company of the
transactions contemplated by this Agreement; and there are no
contracts or documents of the Company or any of its subsidiaries which
are required to be filed as exhibits to the Registration Statement by
the 1933 Act or by the 1933 Act Regulations which have not been so
filed.
(12) No authorization, approval or consent of any court or
governmental authority or agency is necessary in connection with the
sale of the Securities hereunder, except such as may be required under
the 1933 Act or the 1933 Act Regulations or state or foreign
securities laws.
(13) This Agreement has been, and, at the Representation
Date, the Pricing Agreement will have been, duly executed and
delivered by the Company.
(14) The Company and the Significant Subsidiaries possess
such valid franchises, certificates of convenience and necessity,
easements, rights-of-way, operating rights, licenses, permits,
consents, authorizations and orders of governmental authorities or
agencies as are necessary to carry on the respective business of each
as presently being conducted as described in the Prospectus.
(15) There are no persons with registration or other
similar rights to have any securities registered pursuant to the
Registration Statement or otherwise registered by the Company under
the 1933 Act as a result of the offering and sale of the Securities.
-5-
<PAGE> 7
(16) No forward looking statement (as defined in Rule 175
under the 1933 Act) contained in the Registration Statement has been
made or reaffirmed without a reasonable basis or has been disclosed
other than in good faith.
(17) The documents incorporated or deemed to be
incorporated by reference in the Prospectus, at the time they were or
hereafter are filed with the Commission, or became effective under the
1934 Act, as the case may be, complied and will comply in all material
respects with the requirements of the 1934 Act and the rules and
regulations of the Commission under the 1934 Act (the "1934 Act
Regulations"), and, when read together with the other information in
the Prospectus, at the time the Registration Statement becomes
effective and at all times subsequent thereto to and including each
Closing Time, will not contain an untrue statement of a material fact
or omit to state a material fact necessary in order to make the
statements therein, in the light of the circumstances under which they
were made, not misleading.
(18) Neither the Company nor any of its subsidiaries is a
"holding company" or a "subsidiary company" of a "holding company" or
an "affiliate" of a "holding company," within the meaning of the
Public Utility Holding Company Act of 1935, as amended.
(19) Each of the Company and its subsidiaries (i) is in
compliance with any and all applicable federal, state and local laws
and regulations relating to the protection of human health and safety,
the environment or hazardous or toxic substances or waste, pollutants
or contaminants ("Environmental Laws"), (ii) has received all permits,
licenses or other approvals required of it under applicable
Environmental Laws to conduct its business and (iii) is in compliance
with all terms and conditions of any such permit, license or approval,
except for such noncompliance with Environmental Laws, failure to
receive required permits, licenses or other approvals or failure to
comply with the terms and conditions of such permits, licenses or
approvals that would not, singly or in the aggregate, have a material
adverse effect on the condition, financial or otherwise, or on the
earnings, business affairs or business prospects of the Company and
its subsidiaries considered as one enterprise.
(20) Neither the Company nor any affiliate thereof does
business with the government of Cuba or with any person located in
Cuba.
(21) The Company has obtained and delivered to the
Representatives the agreements of its directors and executive officers
and the purchasers of directed shares to the effect that each such
person will not, for a period of 120 days from the Representation
Date, without the prior written consent of Merrill Lynch, directly or
indirectly, voluntarily offer, sell or otherwise voluntarily dispose
of, any shares of Common Stock or any securities convertible into or
exercisable for Common Stock owned by such person or with respect to
which such person has the power of disposition.
(b) Any certificate signed by any officer of the Company
and delivered to the Representatives or to counsel for the
Underwriters in connection with the offering of the Securities shall
be deemed a representation and warranty by the Company to each
Underwriter as to the matters covered thereby.
-6-
<PAGE> 8
SECTION 2. SALE AND DELIVERY TO UNDERWRITERS; CLOSING.
(a) On the basis of the representations and warranties
herein contained and subject to the terms and conditions herein set
forth, the Company agrees to sell to each Underwriter, severally and
not jointly, and each Underwriter, severally and not jointly, agrees
to purchase from the Company, at the price per share set forth in the
Pricing Agreement, the number of Initial Securities set forth in
Schedule A opposite the name of such Underwriter (except as otherwise
provided in the Pricing Agreement), plus any additional number of
Initial Securities which such Underwriter may become obligated to
purchase pursuant to the provisions of Section 10 hereof. The
purchase price per share to be paid by the several Underwriters for
the Securities shall be an amount equal to the initial public offering
price, less an amount per share to be determined by agreement between
the Representatives and the Company. The initial public offering
price per share of the Securities shall be a fixed price to be
determined by agreement between the Representatives and the Company.
The initial public offering price and the purchase price, when so
determined, shall be set forth in the Pricing Agreement and the
Prospectus. In the event that such prices have not been agreed upon
and the Pricing Agreement has not been executed and delivered by all
parties thereto by the close of business on the fourth business day
following the date of this Agreement, this Agreement shall terminate
forthwith, without liability of any party to any other party, unless
otherwise agreed to by the Company and the Representatives.
(b) In addition, on the basis of the representations and
warranties herein contained and subject to the terms and conditions
herein set forth, the Company hereby grants an option to the
Underwriters, severally and not jointly, to purchase up to an
additional 3,450,000 shares of Common Stock at the price per share set
forth in the Pricing Agreement. The option hereby granted will expire
30 days after the Representation Date, and may be exercised in whole
or in part at any time only for the purpose of covering
over-allotments which may be made in connection with the offering and
distribution of the Initial Securities upon notice by the
Representatives to the Company setting forth the number of Option
Securities as to which the Underwriters are exercising the option and
the time and date of payment and delivery for such Option Securities.
Such time and date of delivery for the Option Securities (the "Second
Closing Time") shall be determined by the Representatives, but shall
not be later than seven full business days after the exercise of said
option, and in no event prior to the First Closing Time, as
hereinafter defined, unless otherwise agreed by the Representatives
and the Company. If the option is exercised as to all or any portion
of the Option Securities, each of the Underwriters, acting severally
and not jointly, will purchase that proportion of the total number of
Option Securities then being purchased which the number of Initial
Securities set forth in Schedule A opposite the name of such
Underwriter bears to the total number of Initial Securities (except as
otherwise provided in the Pricing Agreement), subject in each case to
such adjustments as the Representatives in their discretion shall make
to eliminate any sales or purchases of fractional shares.
(c) Payment of the purchase price for, and delivery of
certificates for, the Initial Securities shall be made at the office
of Merrill Lynch & Co., Merrill Lynch World Headquarters, North Tower,
World Financial Center, New York, New York 10281, or at such other
place as shall be agreed upon by the Representatives and the Company,
at 10:00 A.M. on the fifth business day after execution of the Pricing
Agreement, or such other time not later than ten business days after
such date as shall be agreed upon by the Representatives and the
Company (such time and date of payment and delivery being herein
called the "First Closing
-7-
<PAGE> 9
Time"). In addition, in the event that any or all of the Option
Securities are purchased by the Underwriters, payment of the purchase
price for, and delivery of certificates for, such Option Securities
shall be made at the above-mentioned offices of Merrill Lynch & Co.,
or at such other place as shall be agreed upon by the Representatives
and the Company, at the Second Closing Time as specified in the notice
from the Representatives to the Company. Each of the First Closing
Time and the Second Closing Time is herein called a "Closing Time."
Payment shall be made to the Company by certified or official bank
check or checks drawn in New York Clearing House funds, or by wire
transfer into one or more accounts designated by the Company or
similar next day funds payable to the order of the Company against
delivery to the Representatives for the respective accounts of the
Underwriters of certificates for the Securities to be purchased by
them. Certificates for the Initial Securities and the Option
Securities, if any, shall be in such denominations and registered in
such names as the Representatives may request in writing at least two
business days before the Closing Time at which such certificates are
to be delivered. It is understood that each Underwriter has
authorized the Representatives, for their account, to accept delivery
of, receipt for and make payment of the purchase price for, the
Initial Securities and the Option Securities, if any, which it has
agreed to purchase. The Representatives, individually and not as
representatives of the Underwriters, may (but shall not be obligated
to) make payment of the purchase price for the Initial Securities or
the Option Securities, if any, to be purchased by any Underwriter
whose check has not been received by the First Closing Time or the
Second Closing Time, as the case may be, but such payment shall not
relieve such Underwriter from its obligations hereunder. The
certificates for the Initial Securities and the Option Securities, if
any, will be made available for examination and packaging by the
Representatives not later than 10:00 A.M. on the last business day
prior to the Closing Time at which such certificates are to be
delivered.
SECTION 3. COVENANTS OF THE COMPANY. The Company covenants with each
Underwriter as follows:
(a) The Company will notify the Representatives
immediately, and confirm the notice in writing, (i) of the
effectiveness of the Registration Statement and any amendment thereto,
(ii) of the receipt of any comments from the Commission, (iii) of any
request by the Commission for any amendment to the Registration
Statement or any amendment or supplement to the Prospectus or for
additional information, and (iv) of the issuance by the Commission of
any stop order suspending the effectiveness of the Registration
Statement or the initiation of any proceedings for that purpose. The
Company will make every reasonable effort to prevent the issuance of
any stop order and, if any stop order is issued, to obtain the lifting
thereof at the earliest possible moment.
(b) The Company will give the Representatives notice of
its intention to file or prepare any amendment to the Registration
Statement (including any document incorporated by reference therein
and any post-effective amendment) or any amendment or supplement to
the Prospectus (including any document incorporated by reference
therein and any revised prospectus that the Company proposes for use
by the Underwriters in connection with the offering of the Securities
which differs from the prospectus on file at the Commission at the
time the Registration Statement becomes effective, whether or not such
revised prospectus is required to be filed pursuant to Rule 424(b) of
the 1933 Act Regulations), will furnish the Representatives copies of
any such amendment or supplement a reasonable amount of time prior to
such proposed filing or use, as the case may be, and will not file any
such amendment or supplement,
-8-
<PAGE> 10
except as required by Section 3(e), or use any such prospectus to
which the Representatives or counsel for the Underwriters shall
object.
(c) The Company will deliver to the Representatives five
signed copies of the Registration Statement as originally filed and of
each amendment thereto (including exhibits filed therewith or
incorporated by reference therein and documents incorporated or deemed
to be incorporated by reference therein) and will also deliver to the
Representatives one conformed copy of the Registration Statement as
originally filed and of each amendment thereto (without exhibits) for
each of the Underwriters.
(d) The Company will furnish to each Underwriter, from
time to time during the period when the Prospectus is required to be
delivered under the 1933 Act or the 1934 Act, such number of copies of
the Prospectus (as amended or supplemented) as such Underwriter may
reasonably request for the purposes contemplated by the 1933 Act or
the 1934 Act or the respective applicable rules and regulations of the
Commission thereunder.
(e) If any event shall occur as a result of which it is
necessary, in the opinion of counsel for the Company or counsel for
the Underwriters, to amend or supplement the Prospectus in order to
make the Prospectus not misleading in the light of the circumstances
existing at the time it is delivered to a purchaser, the Company will
forthwith amend or supplement the Prospectus so that, as so amended or
supplemented, the Prospectus will not include any untrue statement of
a material fact or omit to state a material fact necessary in order to
make the statements therein, in the light of the circumstances
existing at the time it is delivered to a purchaser, not misleading,
and the Company will furnish to the Underwriters a reasonable number
of copies of such amendment or supplement.
(f) The Company will endeavor, in cooperation with the
Underwriters and their counsel, to qualify the Securities for offering
and sale under the applicable securities laws of such states and other
jurisdictions of the United States as the Representatives may
designate; provided, however, that the Company shall not be obligated
to qualify as a foreign corporation in any jurisdiction in which it is
not so qualified. In each jurisdiction in which the Securities have
been so qualified, the Company will file such statements and reports
as may be required by the laws of such jurisdiction to continue such
qualification in effect for a period of not less than one year from
the effective date of the Registration Statement.
(g) The Company will make generally available to its
security holders as soon as practicable, but not later than 50 days
after the close of the period covered thereby, an earnings statement
(in form complying with the provisions of Rule 158 of the 1933 Act
Regulations) covering a period of at least twelve months beginning not
later than the first day of the Company's fiscal quarter next
following the effective date (as defined in said Rule 158) of the
Registration Statement.
(h) The Company will use the net proceeds received by it
from the sale of the Securities in the manner specified in the
Prospectus under "Use of Proceeds."
(i) If, at the time that the Registration Statement
becomes effective, any information shall have been omitted therefrom
in reliance upon Rule 430A of the 1933 Act Regulations, then,
immediately following the execution of the Pricing Agreement, the
Company will prepare, and file or transmit for filing with the
Commission, in accordance with such Rule 430A and
-9-
<PAGE> 11
Rule 424(b) of the 1933 Act Regulations, copies of an amended
Prospectus or, if required by such Rule 430A, a post-effective
amendment to the Registration Statement (including an amended
Prospectus), containing all information so omitted.
(j) The Company will use its best efforts to cause the
Securities to be duly authorized for listing on the New York Stock
Exchange, subject to official notice of issuance, on or before the
Closing Time at which such Securities are to be delivered hereunder.
(k) For a period of five years from the Representation
Date, the Company will furnish to the Representatives as soon as they
are publicly available copies of all annual, quarterly and current
reports that it shall file with the Commission on Forms 10-K, 10-Q and
8-K or such other similar forms as may be designated by the
Commission, and such other documents, reports and information as shall
be furnished by the Company to its public stockholders generally.
(l) The Company, during the period when the Prospectus is
required to be delivered under the 1933 Act or the 1934 Act, will file
all documents required to be filed with the Commission pursuant to
Section 13, 14 or 15 of the 1934 Act within the time periods required
by the 1934 Act and the 1934 Act Regulations.
(m) During a period of 120 days from the Representation
Date, the Company will not, without Merrill Lynch's prior written
consent, directly or indirectly, offer, sell or otherwise dispose of
any shares of Common Stock or securities convertible into or
exercisable for Common Stock, except that the Company may, without
such consent, issue shares of Common Stock upon the exercise of
options under its stock option plan and may grant stock options
thereunder.
SECTION 4. PAYMENT OF EXPENSES. The Company will pay all
expenses incident to the performance of its obligations under this Agreement,
including (i) the printing and filing of the Registration Statement as
originally filed and of each amendment thereto, (ii) the reproduction of this
Agreement and the Pricing Agreement, (iii) the preparation, issuance and
delivery of the certificates for the Securities to the Underwriters, (iv) the
fees and disbursements of the Company's counsel, engineers and accountants, (v)
the qualification of the Securities under securities laws in accordance with
the provisions of Section 3(f) hereof, including filing fees and the fees and
disbursements of counsel for the Underwriters in connection therewith and in
connection with the preparation of the Blue Sky Survey, (vi) the printing and
delivery to the Underwriters of copies of the Registration Statement as
originally filed and of each amendment thereto, of each preliminary prospectus,
and of the Prospectus and any amendments or supplements thereto, (vii) the
reproduction and delivery to the Underwriters of copies of the Blue Sky Survey,
(viii) the fees of the National Association of Securities Dealers, Inc., and
(ix) the listing fees of the New York Stock Exchange.
If this Agreement is terminated by the Representatives in accordance
with the provisions of Section 5 or Section 9(a)(i) hereof, the Company shall
reimburse the Underwriters for all of their out-of-pocket expenses, including
the reasonable fees and disbursements of counsel for the Underwriters.
SECTION 5. CONDITIONS OF UNDERWRITERS' OBLIGATIONS. The
obligations of the Underwriters hereunder to purchase and pay for the
Securities to be delivered at either Closing Time are subject to the accuracy
of the representations and warranties of the Company herein contained or in
certificates of any officer of the Company delivered pursuant to the provisions
hereof, to the performance by the Company of its obligations hereunder, and to
the following further conditions:
-10-
<PAGE> 12
(a) The Registration Statement shall have become
effective not later than 5:30 P.M. on the date hereof, or with the
consent of Merrill Lynch, at a later time and date, not later,
however, that 5:30 P.M. on the first business day following the date
hereof, or at such later time and date as may be approved by the
majority in interest of the Underwriters; and at such Closing Time no
stop order suspending the effectiveness of the Registration Statement
shall have been issued under the 1933 Act or proceedings therefor
initiated or threatened by the Commission. If the Company has elected
to rely upon Rule 430A of the 1933 Act Regulations, the price of the
Securities and any price-related information previously omitted from
the effective Registration Statement pursuant to such Rule 430A shall
have been transmitted to the Commission for filing pursuant to Rule
424(b) of the 1933 Act Regulations within the prescribed time period,
and prior to the First Closing Time the Company shall have provided
evidence satisfactory to the Underwriters of such timely filing, or a
post-effective amendment providing such information shall have been
promptly filed and declared effective in accordance with the
requirements of Rule 430A of the 1933 Act Regulations.
(b) All consents and approvals from any regulatory
authority having jurisdiction over the Company necessary for the
consummation of the transactions contemplated hereby shall have been
obtained by the Company and shall be in full force and effect at such
Closing Time.
(c) At such Closing Time, the Representatives shall have
received the favorable opinion of Baker & Botts, L.L.P., counsel to
the Company, dated as of such Closing Time, to the following effect:
(i) The Company is a corporation duly organized,
validly existing and in good standing under the laws of the
State of Texas, with corporate power and authority under such
laws to own, lease and operate its properties and to conduct
its business as described in the Prospectus and to enter into
and perform its obligations under the Purchase Agreement and
the Pricing Agreement.
(ii) Each Significant Corporate Subsidiary is a
corporation duly organized, validly existing and in good
standing under the laws of the jurisdiction of its
incorporation, with corporate power and authority under such
laws to own, lease and operate its properties and to conduct
its business as described in the Prospectus.
(iii) HCLP is a limited partnership duly organized
pursuant to the provisions of the Delaware Revised Uniform
Limited Partnership Act and is validly existing as a limited
partnership in good standing under the laws of the State of
Delaware, with the power and authority under its partnership
agreement and such Act to own, lease and operate its
properties and to conduct its business as described in the
Prospectus.
(iv) All of the outstanding shares of capital stock
of each Significant Corporate Subsidiary have been duly
authorized and validly issued, are fully paid and
nonassessable and are owned of record and, to such counsel's
knowledge, beneficially by the Company, directly or through
one or more subsidiaries, free and clear (except as otherwise
stated in the Prospectus) of any pledge, security interest or
other restriction on transferability or voting. The entire
partnership interest in HCLP is owned of record and, to such
counsel's knowledge, beneficially by the Company, through
subsidiaries, free and clear (except as otherwise stated in
the Prospectus) of any pledge, security interest or other
restriction on transferability or voting.
-11-
<PAGE> 13
(v) The execution and delivery by the Company of the
Purchase Agreement and the Pricing Agreement, the issuance and
delivery of the Securities being delivered at such Closing
Time, the application by the Company of the proceeds of the
sale of such Securities as contemplated by the Prospectus and
compliance by the Company with the terms of the Purchase
Agreement, (A) do not and will not result in any violation of
the charter or by-laws of the Company, and (B) do not and will
not result in a breach of any of the terms or provisions of,
or constitute a default under, or result in the creation or
imposition of any lien, charge or encumbrance upon any
property or assets of the Company or any Significant
Subsidiary under (1) any indenture, mortgage, loan agreement,
note or other similar agreement or instrument known to such
counsel and to which the Company or any Significant Subsidiary
is a party or by which it may be bound or to which any of its
properties may be subject or (2) any existing applicable law,
rule or regulation or, to the knowledge of such counsel, any
judgment, order or decree (other than federal and state
securities or blue sky laws and anti-fraud laws, as to which
such counsel need express no opinion in this paragraph) of any
government, governmental instrumentality or court having
jurisdiction over the Company or any Significant Subsidiary or
any of its properties.
(vi) To their knowledge, there are no legal or
governmental proceedings pending or threatened against the
Company or its subsidiaries which are required to be disclosed
in the Prospectus other than those disclosed therein.
(vii) All of the outstanding shares of Common Stock
have been duly authorized and validly issued, are fully paid
and nonassessable and conform as to legal matters in all
material respects to the description of the Common Stock
contained in the Prospectus (including the Company's
Registration Statement on Form 8-A incorporated by reference
therein).
(viii) The Company is not a "holding company" as
defined in Section 2(a)(7) of the Public Utility Holding
Company Act of 1935, as amended.
(ix) The documents incorporated by reference in the
Prospectus, as of the dates they were filed with the
Commission or became effective under the 1934 Act, as the case
may be, appeared on the face thereof to comply, as to form in
all material respects with the requirements of the 1934 Act
and the 1934 Act Regulations (except that such counsel need
express no opinion as to the exhibits, financial statements,
schedules and other financial, reserve or statistical
information included or incorporated by reference in any such
document).
(x) The Purchase Agreement and the Pricing Agreement
have been duly authorized, executed and delivered by the
Company.
(xi) The Securities to be issued and sold by the
Company under the Purchase Agreement at such Closing Time have
been duly authorized and will, upon payment therefor as
contemplated by this Agreement, be validly issued, fully paid
and nonassessable; and there are no preemptive or similar
rights with respect to such issuance of such Securities.
-12-
<PAGE> 14
(xii) The Registration Statement has become effective
under the 1933 Act and, to their knowledge, no stop order
suspending the effectiveness of the Registration Statement has
been issued under the 1933 Act or proceedings therefor
initiated or threatened by the Commission.
(xiii) At the time the Registration Statement became
effective, the Registration Statement appeared on its face to
comply as to form in all material respects with the
requirements of the 1933 Act and the 1933 Act Regulations
(except that such counsel need express no opinion in this
paragraph (xiii) as to any documents incorporated therein by
reference or as to the exhibits, financial statements,
schedules and other financial, reserve or statistical
information contained in the Registration Statement or the
Prospectus or incorporated by reference therein).
(xiv) No authorization, approval or consent of any
court or governmental authority or agency (other than pursuant
to the securities or blue sky laws of the various states) is
required to be obtained by the Company for the sale of the
Securities being delivered at such Closing Time under the
Purchase Agreement, except for the order of the Commission
declaring the Registration Statement effective under the 1933
Act, which order has been obtained.
(d) At such Closing Time, the Representatives shall have
received the favorable opinion of Vinson & Elkins L.L.P., counsel for
the Underwriters, dated as of such Closing Time, with respect to the
incorporation of the Company, the validity of the Securities being
delivered at such Closing Time, the Registration Statement, the
Prospectus and such other related matters as the Representatives may
require. In giving their opinions required by subsections (c) and
(d), respectively, of this Section 5, Baker & Botts, L.L.P. and Vinson
& Elkins L.L.P. may rely, as to all matters governed by laws other
than the law of the State of Texas, the federal law of the United
States or the General Corporation Law of the State of Delaware, upon
the opinions of other counsel satisfactory to the Representatives.
Such counsel may also state that, insofar as such counsel's opinion
involves factual matters, they have relied, to the extent they deem
proper, upon certificates of officers of the Company and certificates
of public officials. In giving such opinions, Baker & Botts, L.L.P.
and Vinson & Elkins L.L.P. shall each additionally state that they
have participated in conferences with officers and other
representatives of the Company, representatives of the independent
public accountants for the Company, representatives of the
Underwriters and other persons, at which conferences the contents of
the Registration Statement and the Prospectus and related matters were
discussed and, although such counsel are not passing upon, and do not
assume any responsibility for, the accuracy, completeness or fairness
of the statements contained in the Registration Statement or the
Prospectus (except, in the case of Baker & Botts, L.L.P., as set forth
in paragraph (vii) of subsection (c) above) and have not made any
independent check or verification thereof, on the basis of the
foregoing (relying as to materiality to a large extent upon officers
and other representatives of the Company and upon the
Representatives), no facts have come to such counsel's attention that
lead them to believe that (A) the Registration Statement (including
documents incorporated by reference therein), at the time it became
effective, contained an untrue statement of a material fact or omitted
to state a material fact required to be stated therein or necessary to
make the statements therein not misleading or (B) the Prospectus
(including documents incorporated by reference therein), at the time
it was issued or at such Closing Time, contained an untrue statement
of a material fact or omitted to state a material fact necessary to
make the statements therein, in light of the
-13-
<PAGE> 15
circumstances under which they were made, not misleading, except that
such counsel need not comment on the exhibits, financial statements,
schedules and other financial, reserve or statistical information
included in the Registration Statement or the Prospectus.
(e) At such Closing Time, there shall not have been,
since the date hereof or since the respective dates as of which
information is given in the Prospectus, any material adverse change in
the condition, financial or otherwise, or in the earnings, business
affairs or business prospects of the Company and its subsidiaries
considered as one enterprise, whether or not arising in the ordinary
course of business, and the Representatives shall have received a
certificate of the President or a Vice President of the Company and
the chief financial or chief accounting officer of the Company, dated
as of such Closing Time, to the effect that: (i) there has been no
such material adverse change, (ii) the representations and warranties
in Section 1 hereof are true and correct with the same force and
effect as though expressly made at and as of such Closing Time, (iii)
the Company has complied with all agreements and satisfied all
conditions on its part to be performed or satisfied at or prior to
such Closing Time, and (iv) no stop order suspending the effectiveness
of the Registration Statement has been issued and, to the best of each
such officer's knowledge, no proceedings for that purpose have been
initiated or threatened by the Commission. As used in this Section
5(e), the term "Prospectus" means the Prospectus in the form first
used to confirm sales of the Securities.
(f) At the time that this Agreement is executed by the
Company, the Representatives shall have received from Arthur Andersen
& Co. a letter, dated such date, in form and substance satisfactory to
the Representatives, confirming that they are independent public
accountants with respect to the Company and its subsidiaries within
the meaning of the 1933 Act and the 1933 Act Regulations, and stating
in effect that:
(i) in their opinion, the audited consolidated
financial statements and the related financial statement
schedules included in the Registration Statement comply as to
form in all material respects with the applicable accounting
requirements of the 1933 Act and the 1933 Act Regulations;
(ii) on the basis of procedures (but not an audit
in accordance with generally accepted auditing standards)
consisting of a reading of the latest available unaudited
interim consolidated financial statements of the Company, a
reading of the minutes of all meetings of the stockholders and
directors of the Company and its subsidiaries and the Audit
and Compensation Committees of the Company's Board of
Directors from the date of the latest audited financial
statements of the Company and its subsidiaries, inquiries of
certain officials of the Company responsible for financial and
accounting matters and such other inquiries and procedures as
may be specified in such letter, nothing came to their
attention that caused them to believe that:
(A) any unaudited financial statements
included in the Registration Statement do not comply
as to form in all material respects with the
applicable accounting requirements of the 1933 Act
and the 1933 Act Regulations or that such unaudited
financial statements are not presented in conformity
with generally accepted accounting principles applied
on a basis substantially consistent with that of
audited financial statements referred to above,
except as disclosed in the notes to such unaudited
financial statements or as otherwise described in the
Registration Statement,
-14-
<PAGE> 16
(B) at a specified date not more than
five days prior to the date of this Agreement, there
was any change (other than as a result of issuance of
Common Stock related to employee stock options) in
the consolidated capital stock or any increase in the
consolidated long-term debt of the Company and its
subsidiaries or any decrease in the consolidated net
assets or common shareholders' equity of the Company
and its subsidiaries, in each case as compared with
amounts shown in the December 31, 1993 balance sheet
included in the Registration Statement, except in
each case for changes or decreases that the
Registration Statement discloses have occurred or may
occur, or
(C) for the period from January 1, 1994
to a specified date not more than five days prior to
the date of this Agreement, there was any decrease in
consolidated revenues, consolidated net income or
consolidated net income per share, in each case as
compared with the comparable period in the preceding
year, except in each case for any decreases that the
Registration Statement discloses have occurred or may
occur; and
(iii) in addition to the procedures referred to in
clause (ii) above, they have performed other specified
procedures, not constituting an audit, with respect to certain
amounts, percentages, numerical data and financial information
appearing in the Registration Statement, which have previously
been specified by the Representatives and which shall be
specified in such letter, and have compared certain of such
items with, and have found such items to be in agreement with,
the accounting and financial records of the Company and its
subsidiaries identified in such letter.
(g) At such Closing Time, the Representatives shall have
received from Arthur Andersen & Co. a letter, in form and substance
satisfactory to them and dated as of such Closing Time, to the effect
that they reaffirm the statements made in the letter furnished
pursuant to Section 5(f), except that the specified date referred to
shall be a date not more than five days prior to such Closing Time.
(h) The Securities to be delivered hereunder at such
Closing Time shall have been duly authorized for listing by the New
York Stock Exchange, subject only to official notice of issuance.
(i) The Company shall have furnished to the
Representatives and counsel for the Underwriters, in form and
substance satisfactory to the Representatives and to such counsel,
such other documents, certificates and opinions as such counsel may
reasonably request for the purpose of enabling such counsel to pass
upon the matters referred to in Section 5(d) hereof and in order to
evidence the accuracy and completeness of any of the representations,
warranties or statements, the performance of any covenant by the
Company theretofore to be performed, or the compliance with any of the
conditions in this Agreement.
If any of the conditions specified in this Section 5 shall not have
been fulfilled when and as required by this Agreement to be fulfilled, this
Agreement may be terminated by you on notice to the Company at any time at or
prior to such Closing Time, and such termination shall be without liability of
any party to any other party, except as provided in Section 4 hereof .
Notwithstanding any such termination, the provisions of Sections 6, 7 and 8
hereof shall remain in effect.
-15-
<PAGE> 17
SECTION 6. Indemnification. (a) The Company agrees to indemnify and
hold harmless each Underwriter and each person, if any, who controls any
Underwriter within the meaning of Section 15 of the 1933 Act as follows:
(i) against any and all loss, liability, claim, damage
and expense whatsoever, as incurred, arising out of any untrue
statement or alleged untrue statement of a material fact contained in
the Registration Statement (or any amendment thereto), including the
information deemed to be a part of the Registration Statement pursuant
to Rule 430A(b) of the 1933 Act Regulations, if applicable, or the
omission or alleged omission therefrom of a material fact required to
be stated therein or necessary to make the statements therein not
misleading or arising out of any untrue statement or alleged untrue
statement of a material fact contained in any preliminary prospectus
or the Prospectus (or amendment or supplement thereto) or the omission
or alleged omission therefrom of a material fact necessary in order to
make the statements therein, in the light of the circumstances under
which they were made, not misleading;
(ii) against any and all loss, liability, claim, damage
and expense whatsoever, as incurred, to the extent of the aggregate
amount paid in settlement of any litigation, any investigation or
proceeding by any governmental agency or body, commenced or
threatened, or any claim whatsoever, insofar as such litigation,
investigation, proceeding or claim is based upon such untrue statement
or omission, or any such alleged untrue statement or omission, if such
settlement is effected with the written consent of the Company; and
(iii) against any and all expense whatsoever, as incurred
(including, subject to Section 6(c) hereof, the fees and disbursements
of counsel chosen by the Representatives), reasonably incurred in
investigating, preparing or defending against any litigation, any
investigation or proceeding by a governmental agency or body,
commenced or threatened, or any claim whatsoever, insofar as such
litigation, investigation, proceeding or claim is based upon any such
untrue statement or omission, or any such alleged untrue statement or
omission, to the extent that any such expense is not paid under (i) or
(ii) above;
provided, however, that (A) the foregoing indemnity agreement shall not apply
to any loss, liability, claim, damage or expense to the extent it arises out of
any untrue statement or omission or alleged untrue statement or omission made
in reliance upon and in conformity with written information furnished to the
Company by any Underwriter through the Representatives expressly for use in the
Registration Statement (or any amendment thereto) or any preliminary prospectus
or the Prospectus (or any amendment or supplement thereto) and (B) such
indemnity with respect to any preliminary prospectus shall not inure to the
benefit of any Underwriter (or any person controlling such Underwriter) from
whom the person asserting such loss, liability, claim, damage or expense
purchased the Securities which are the subject thereof if such person did not
receive a copy of the Prospectus at or prior to the confirmation of the sale of
such Securities to such person in any case where such delivery is required by
the 1933 Act and the untrue statement or omission of a material fact contained
in such preliminary prospectus was corrected in the Prospectus, provided the
Company has delivered the Prospectus to the Underwriters on a timely basis to
permit the Prospectus to be sent or given.
(b) Each Underwriter severally agrees to indemnify and hold
harmless the Company, its directors, each of its officers who signed the
Registration Statement, and each person, if any, who
-16-
<PAGE> 18
controls the Company within the meaning of Section 15 of the 1933 Act against
any and all loss, liability, claim, damage and expense described in the
indemnity contained in subsection (a) of this Section as incurred, but only
with respect to untrue statements or omissions, or alleged untrue statements or
omissions, made in the Registration Statement (or any amendment thereto) or any
preliminary prospectus or the Prospectus (or any amendment or supplement
thereto) in reliance upon and in conformity with written information furnished
to the Company by such Underwriter through the Representatives expressly for
use in the Registration Statement (or any amendment thereto) or such
preliminary prospectus or the Prospectus (or any amendment or supplement
thereto).
(c) Each indemnified party shall give notice as promptly as
reasonably practicable to each indemnifying party of any action commenced
against it in respect of which indemnity may be sought hereunder, but failure
so to notify an indemnifying party shall not relieve such indemnifying party
from any liability which it may have otherwise than on account of this
indemnity agreement. An indemnifying party may participate at its own expense
in the defense of any such action. If it so elects within a reasonable time
after receipt of such notice, an indemnifying party, jointly with any other
parties receiving such notice, may assume the defense of such action with
counsel chosen by it and approved by the indemnified parties defendant in such
action, unless such indemnified parties reasonably object to such assumption on
the ground that there may be legal defenses available to them which are
different from or in addition to those available to such indemnifying party. If
an indemnifying party assumes the defense of such action, the indemnifying
parties shall not be liable for any fees and expenses of counsel for the
indemnified parties incurred thereafter in connection with such action. In no
event shall any indemnifying party be liable for fees and expenses of more than
one counsel (in addition to any local counsel) separate from their own counsel
for all indemnified parties in connection with any one action, or separate but
similar or related actions in the same jurisdiction arising out of the same
general allegations or circumstances.
SECTION 7.Contribution. In order to provide for just and equitable
contribution in circumstances in which the indemnity agreement provided for in
Section 6 hereof is for any reason held to be unenforceable by the indemnified
parties although applicable in accordance with its terms, the Company and the
Underwriters shall contribute to the aggregate losses, liabilities, claims,
damages and expenses of the nature contemplated by said indemnity agreement
incurred by the Company and one or more Underwriters, as incurred, in such
proportions that the Underwriters are responsible for that portion represented
by the percentage that the underwriting discount appearing on the cover page of
the Prospectus bears to the initial public offering price appearing thereon and
the Company is responsible for the balance; provided, however, that no person
guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of
the 1933 Act) shall be entitled to contribution from any person who was not
guilty of such fraudulent misrepresentation. For purposes of this Section,
each person, if any, who controls an Underwriter within the meaning of Section
15 of the 1933 Act shall have the same rights to contribution as such
Underwriter, and each director of the Company, each officer of the Company who
signed the Registration Statement, and each person, if any, who controls the
Company within the meaning of Section 15 of the 1933 Act, shall have the same
rights to contribution as the Company.
SECTION 8. Representations, Warranties, Agreements to Survive
Delivery. The representations, warranties, indemnities, agreements and other
statements of the Company or its officers set forth in or made pursuant to this
Agreement will remain operative and in full force and effect regardless of any
investigation made by or on behalf of the Company or any Underwriter or
controlling person and will survive delivery of and payment for the Securities.
-17-
<PAGE> 19
Section 9. Termination of Agreement. (a) The Representatives may
terminate this Agreement, by notice to the Company at any time at or prior to a
Closing Time, (i) if there has been, since the date of this Agreement or the
respective dates as of which information is given in the Prospectus, any
material adverse change in the condition, financial or otherwise, or in the
earnings, business affairs or business prospects of the Company and its
subsidiaries considered as one enterprise, whether or not arising in the
ordinary course of business, or (ii) if there has occurred any material adverse
change in the financial markets, or any outbreak of hostilities or escalation
thereof or other calamity or crisis, the effect of which is such as to make it,
in the judgment of the Representatives, impracticable to market the Securities
or enforce contracts for the sale of the Securities or (iii) if trading in the
Common Stock has been suspended by the Commission or if trading generally on
the New York Stock Exchange has been suspended or materially limited, or
minimum or maximum prices for trading have been fixed, or maximum ranges for
prices for securities have been required, by such exchange or by order of the
Commission, or any other governmental authority or (iv) if a banking moratorium
has been declared by federal or New York authorities.
(b) If this Agreement is terminated pursuant to this Section, such
termination shall be without liability of any party to any other party, except
to the extent provided in Section 4 hereof. Notwithstanding any such
termination, the provisions of Sections 6, 7 and 8 hereof shall remain in
effect.
(c) This Agreement may also terminate pursuant to the provisions
of Section 5 hereof, with the effect stated in such Section.
SECTION 10. DEFAULT BY ONE OR MORE OF THE UNDERWRITERS. (a) If
one or more of the Underwriters shall fail at either Closing Time to purchase
the Securities which it or they are obligated to purchase under this Agreement
and the Pricing Agreement (the "Defaulted Securities"), the Representatives
shall have the right, within 24 hours thereafter, to make arrangements for one
or more of the non-defaulting Underwriters, or any other underwriters, to
purchase all, but not less than all, of the Defaulted Securities in such
amounts as may be agreed upon and upon the terms herein set forth; if, however,
the Representatives shall not have completed such arrangements within such
24-hour period, then:
(i) if the number of Defaulted Securities does
not exceed 10% of the number of such Securities, the non-
defaulting Underwriters shall be obligated to purchase the
full amount thereof in the proportions that their respective
underwriting obligations hereunder bear to the underwriting
obligations of all non-defaulting Underwriters, or
(ii) if the number of Defaulted Securities exceeds
10% of the number of such Securities, this Agreement shall
terminate without liability on the part of any non-defaulting
Underwriter.
(b) No action taken pursuant to this Section shall
relieve any defaulting Underwriter from liability in respect of its
default.
(c) In the event of any such default which does not
result in a termination of this Agreement, both the Representatives and the
Company shall have the right to postpone such Closing Time for a period not
exceeding seven days in order to effect any required changes in the
Registration Statement or Prospectus or in any other documents or arrangements.
-18-
<PAGE> 20
SECTION 11. NOTICES. All notices and other communications
hereunder shall be in writing and shall be deemed to have been duly given if
mailed or transmitted by any standard form of telecommunication. Notices to
the Underwriters shall be directed to the Representatives at Merrill Lynch
World Headquarters, North Tower, World Financial Center, New York, New York
10281-1201, attention of the Equity Syndicate Department; notices to the
Company shall be directed to it at 2600 Trammell Crow Center, 2001 Ross Avenue,
Dallas, Texas 75201, attention of ______________________ (telecopy no. (214)
969-2228).
SECTION 12. PARTIES. This Agreement and the Pricing Agreement
shall each inure to the benefit of and be binding upon the Underwriters and the
Company and their respective successors. Nothing expressed or mentioned in
this Agreement or the Pricing Agreement is intended or shall be construed to
give any person, firm or corporation, other than the Underwriters and the
Company and their respective successors and the controlling persons and
officers and directors referred to in Sections 6 and 7 hereof and their heirs
and legal representatives, any legal or equitable right, remedy or claim under
or in respect of this Agreement or the Pricing Agreement or any provision
herein or therein contained. This Agreement and the Pricing Agreement and all
conditions and provisions hereof and thereof are intended to be for the sole
and exclusive benefit of the Underwriters and the Company and their respective
successors, and said controlling persons and officers and directors and their
heirs and legal representatives, and for the benefit of no other person, firm
or corporation. No purchaser of Securities from any Underwriter shall be
deemed to be a successor by reason merely of such purchase.
SECTION 13. GOVERNING LAW. This Agreement and the Pricing
Agreement shall be governed by and construed in accordance with the laws of the
State of New York applicable to agreements made and to be performed in said
State, without giving effect to the principles of conflict of laws thereof.
SECTION 14. TIME. Specified times of day refer to New York City
time.
SECTION 15. COUNTERPARTS. This Agreement may be executed in one
or more counterparts and when a counterpart has been executed by each party,
all such counterparts taken together shall constitute one and the same
agreement.
SECTION 16. CONSENT AS TO COMPANY COUNSEL. The Underwriters
acknowledge that Baker & Botts, L.L.P., which will be acting as counsel to the
Company in connection with offer and sale of the Securities, also acts as
counsel from time to time to one or more of the Underwriters in connection with
unrelated matters. The Company and the Underwriters consent to such firm's so
acting as counsel to the Company.
-19-
<PAGE> 21
If the foregoing is in accordance with your understanding of our
agreement, please sign and return to the Company a counterpart hereof,
whereupon this instrument, along with all counterparts, will become a binding
agreement between the Underwriters and the Company in accordance with its
terms.
Very truly yours,
MESA INC.
By ___________________________________
Name:
Title:
CONFIRMED AND ACCEPTED,
AS OF THE DATE FIRST ABOVE WRITTEN:
MERRILL LYNCH & CO.
MERRILL LYNCH, PIERCE, FENNER &
SMITH INCORPORATED
BEAR, STEARNS & CO. INC.
PAINEWEBBER INCORPORATED
SALOMON BROTHERS INC
BY: MERRILL LYNCH, PIERCE, FENNER
& SMITH INCORPORATED
By _____________________________________
Authorized Signatory
For themselves and as Representatives of the
other Underwriters named in Schedule A hereto.
-20-
<PAGE> 22
EXHIBIT A
23,000,000 SHARES
MESA INC.
(a Texas corporation)
COMMON STOCK
(Par Value $.01 Per Share)
PRICING AGREEMENT
_____________ , 1994
MERRILL LYNCH & CO.
MERRILL LYNCH, PIERCE, FENNER & SMITH
INCORPORATED
BEAR, STEARNS & CO. INC.
PAINEWEBBER INCORPORATED
SALOMON BROTHERS INC
as Representatives of the several Underwriters
named in the within-mentioned Purchase
Agreement
c/o Merrill Lynch & Co.
Merrill Lynch World Headquarters
North Tower
World Financial Center
New York, New York 10281-1201
Dear Sirs:
Reference is made to the Purchase Agreement dated ____________, 1994
(the "Purchase Agreement") relating to the purchase by the several Underwriters
named in Schedule A thereto, for whom Merrill Lynch & Co., Merrill Lynch,
Pierce, Fenner & Smith Incorporated, Bear, Stearns & Co. Inc., PaineWebber
Incorporated and Salomon Brothers Inc are acting as representatives (the
"Representatives"), of the above shares of Common Stock (the "Securities"), of
MESA Inc., a Texas corporation (the "Company").
Pursuant to Section 2 of the Purchase Agreement, the Company agrees
with each Underwriter as follows:
1. The initial public offering price per share for the
Securities, determined as provided in said Section 2, shall be $_____.
2. The purchase price per share for the Securities to be
paid by the several Underwriters shall be $____, being an amount equal
to the initial public offering price set forth above less $____ per
share.
<PAGE> 23
; provided that the purchase price per share for any Option Securities
(as defined in the Purchase Agreement) purchased upon exercise of the
over-allotment option described in Section 2(b) of the Purchase
Agreement shall be reduced by an amount per share equal to any
dividends declared by the Company and payable on the Initial
Securities (as defined in the Purchase Agreement) but not payable on
the Option Securities.
If the foregoing is in accordance with your understanding of our
agreement, please sign and return to the Company a counterpart hereof,
whereupon this instrument, along with all counterparts, will become a binding
agreement between the Underwriters and the Company in accordance with its
terms.
Very truly yours,
MESA INC.
By __________________________________
Name:
Title:
CONFIRMED AND ACCEPTED,
AS OF THE DATE FIRST ABOVE WRITTEN:
MERRILL LYNCH & CO.
MERRILL LYNCH, PIERCE, FENNER &
SMITH INCORPORATED
BEAR, STEARNS & CO. INC.
PAINEWEBBER INCORPORATED
SALOMON BROTHERS INC
BY: MERRILL LYNCH, PIERCE, FENNER
& SMITH INCORPORATED
By __________________________________________
Authorized Signatory
For themselves and as Representatives of the
other Underwriters named in the Purchase
Agreement.
-2-
<PAGE> 24
SCHEDULE A
Number of
Initial Securities
Name of Underwriter to be Purchased
- ------------------- ------------------
Merrill Lynch, Pierce, Fenner & Smith Incorporated . . .
Bear, Stearns & Co. Inc. . . . . . . . . . . . . . . . .
PaineWebber Incorporated . . . . . . . . . . . . . . . .
Salomon Brothers Inc . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . 23,000,000
==========
Sch A - 1
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our
report and to all references to our firm included in or made a part of this
Registration Statement.
ARTHUR ANDERSEN & CO.
Houston, Texas
March 11, 1994
<PAGE> 1
EXHIBIT 23.2
DEGOLYER AND MACNAUGHTON
ONE ENERGY SQUARE
DALLAS, TEXAS 75206
March 11, 1994
MESA, Inc.
5205 North O'Connor Blvd.
Suite 1400
Irving, Texas 75039-3746
Gentlemen:
We hereby consent to (i) the references to our firm under the captions
"Business -- General," "Business -- Reserves" and "Experts" in MESA Inc.'s
Registration Statement on Form S-3 relating to common stock of MESA Inc. and
(ii) the incorporation by reference in MESA Inc.'s Registration Statement on
Form S-3 of (a) the references to our firm under the captions
"Business -- Properties" and "Business -- Reserves" in MESA Inc.'s Annual Report
on Form 10-K for the year ended December 31, 1993 (the "MESA Inc. 10-K") and (b)
our "Appraisal Report as of December 31, 1993 on Certain Properties owned by
MESA Inc. and Hugoton Capital Limited Partnership, including Satanta Plant";
provided, however, that such report pertains to values for only a selected
portion of the total properties included in the MESA Inc. Form 10-K.
Consequently, our estimates have been combined with estimates prepared by MESA
Inc.'s engineers and we are necessarily unable to verify the accuracy of the
aggregate reserves, revenue, and discounted present worth.
Very truly yours,
/s/ DEGOLYER AND MACNAUGHTON
DeGolyer and MacNaughton
