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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
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[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934 (No Fee Required)
For the fiscal year ended December 31, 1996
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934 (No Fee Required)
Commission File Number 1-10874
MESA Inc.
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(Exact Name of Registrant as Specified In Its Charter)
Texas 75-2394500
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(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification Number)
1400 Williams Square West
5205 North O'Connor Boulevard
Irving, Texas (972) 444-9001 75039-3746
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(Address of Principal (Registrant's (Zip Code)
Executive Offices) Telephone Number)
Securities registered pursuant to Section 12(b) of the Act:
Name of Each Exchange
Title of Each Class on Which Registered
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Common Stock, $.01 par value........................ New York Stock Exchange
Series A 8% Cumulative Convertible Preferred Stock.. New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. YES X NO
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Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form
10-K or any amendment to this Form 10-K. [ ]
Number of common shares outstanding as of the close of business on March
24, 1997: 64,279,568
Aggregate market value of 62,686,137 common shares held by
non-affiliates of Registrant at the closing price on March 24, 1997, of
$6.00: approximately $376.1 million.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Proxy Statement for the 1997 Annual Meeting
of Stockholders are incorporated by reference into Part III hereof.
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TABLE OF CONTENTS
PART I
Item 1. Business
Item 2. Properties
Item 3. Legal Proceedings
Item 4. Submission of Matters to a Vote of Security Holders
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder
Matters
Item 6. Selected Financial Data
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Item 8. Consolidated Financial Statements and Supplementary Data
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
PART III
Item 10. Directors and Executive Officers of the Registrant
Item 11. Executive Compensation
Item 12. Security Ownership of Certain Beneficial Owners and Management
Item 13. Certain Relationships and Related Transactions
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
Signatures
<PAGE>
PART I
Item 1. Business
=================
MESA
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MESA Inc. ("MESA" or the "Company"), is one of the largest independent
oil and gas companies in the United States and has undergone a
transformation over the last twelve months that positions it for renewed
growth. From 1991 through 1996, significant leverage and weak commodity
prices forced MESA to focus on servicing and restructuring its debt rather
than expanding its business. In mid-1996, MESA completed a recapitalization
(the "Recapitalization") led by Richard E. Rainwater who, along with
existing shareholders, injected $265 million of equity into MESA. This
equity infusion enabled MESA to substantially reduce its overall debt level
and debt service requirements. The Recapitalization has enhanced MESA's
ability to compete in the oil and gas industry by substantially increasing
its cash flow available for investment, as well as improving its ability to
attract capital.
Having completed a successful financial turnaround, MESA's Board of
Directors elected a new management team led by Jon Brumley, MESA's Chairman
and Chief Executive Officer. MESA is now positioned to increase its reserve
base, production and cash flows by pursuing strategic acquisitions,
increasing exploration activities, exploiting its existing and acquired
properties, and expanding its processing facilities to accommodate increased
third party processing arrangements. MESA's highly developed, long lived
reserve base provides it with a long-term stable source of cash flow to fund
this strategy. As a first step, MESA has entered into an agreement to
purchase all of the outstanding capital stock of Greenhill Petroleum
Corporation ("Greenhill") for $270 million (the "Greenhill Acquisition") and
has acquired additional condensate and natural gas liquid ("NGL") interests
in the West Panhandle field of Texas from MAPCO, Inc. and affiliates
("MAPCO") for $66 million (the "Liquids Acquisition").
MESA had approximately 1.6 Tcfe of proved reserves as of December 31,
1996 with a net present value before income taxes, discounted at 10%, of
approximately $1.8 billion. Approximately 95% of MESA's estimated proved
reserves are proved developed producing with an estimated reserve life in
excess of 12 years. MESA operates the wells attributable to 90% of its
reserves. Currently, about 95% of MESA's reserves are concentrated in the
Hugoton field in southwest Kansas and the West Panhandle field in Texas.
These fields are considered to be among the premier natural gas properties
in the United States and are characterized by long lived reserves and
stable, high margin production. MESA owns and operates all of the gas
processing facilities that service its reserves in the two fields and
substantially all of the gathering assets related to its Hugoton reserves.
MESA also has a significant and growing presence offshore in the Gulf of
Mexico where it has operated since the early 1970's. MESA currently has
interests in 56 blocks in the Gulf of Mexico, covering an aggregate of
approximately 141,000 net acres, much of which is covered by 3-D seismic
data. The Greenhill and Liquids Acquisitions further strengthen MESA's asset
base as well as provide MESA with a new core area in the inland waters of
Louisiana. After giving effect to the Greenhill and Liquids Acquisitions,
approximately 60% of MESA's total equivalent proved reserves will be natural
gas, 30% will be NGLs and 10% will be oil and condensate. See
"Business Properties" and "Management's Discussion and Analysis - Capital
Resources and Liquidity."
MESA is a holding company and conducts its operations through its
subsidiaries; primarily though its direct subsidiary, Mesa Operating Co.
("MOC"). Unless the context otherwise requires, the term "MESA" means MESA
Inc. and its subsidiaries taken as a whole and includes MESA's predecessors.
MESA was formed as a public corporation in 1964. MESA reorganized its
business as a publicly traded limited partnership in 1985 and subsequently
converted back to corporate form in 1991. MESA maintains its principal
offices at 1400 Williams Square West, 5205 North O'Connor Boulevard, Irving,
Texas 75039-3746, where its telephone number is (972) 444-9001. At December
31, 1996 MESA employed 321 employees.
Business Strategy
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MESA's goal is to increase shareholder value by expanding its reserve
base and increasing its production and cash flow. To achieve this goal,
MESA has adopted a strategy which includes the following key elements:
Pursue Strategic Acquisitions - MESA seeks to acquire producing
properties which provide one or more of the following characteristics: (i)
opportunities to increase production and reserves through both exploitation
and exploration activities, (ii) geographic diversity, (iii) a greater
percentage of oil reserves in order to diversify MESA's current reserve and
production mix and commodity price exposure and (iv) a high degree of
operational control. The Greenhill Acquisition will provide MESA with 30
million barrels of oil equivalents ("MMBOE") of proved reserves and has each
of these characteristics.
Increase Exploration Efforts - MESA is increasing its exploration
program to provide exposure to selected higher risk projects with higher
potential rates of return such as those in the Gulf of Mexico. MESA's
exploratory drilling program provides for the drilling of eight exploratory
wells on its existing properties and two wells on the Greenhill properties.
The 1997 exploratory drilling budget of $24 million represents a four-fold
increase over 1996's $6 million expenditures.
Exploit Assets - MESA will seek to maximize the value of its existing
and acquired properties by increasing production and recoverable reserves
through active exploitation activities. MESA contemplates spending
approximately $86 million on exploitation activities in 1997 on
approximately 100 development wells (including 22 on the Greenhill
properties) and 30 recompletions (including 22 on the Greenhill properties).
Expand Gas Processing Business - In 1997, MESA intends to spend
approximately $12 million to expand and enhance the processing capabilities
of its state of the art gas processing facilities in the Hugoton and West
Panhandle fields. By owning and operating these processing facilities, MESA
is able to retain the processing margin on the gas it produces as well as
capture fees for processing gas produced by third-parties.
Maintain Financial Flexibility - MESA intends to continue to improve
its financial flexibility in order to avail itself of the optimal forms of
capital required to meet the Company's growth objectives.
<PAGE>
Subsequent Events
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Greenhill Acquisition
---------------------
On February 7, 1997, MESA entered into a stock purchase agreement with
Western Mining Corporation (USA) for the acquisition of all of the
outstanding capital stock of Greenhill for $270 million. The Greenhill
properties, which are concentrated in four producing areas, had estimated
proved reserves of 30 MMBOE as of December 31, 1996, with a net present
value of estimated future net cash flows before income taxes, discounted at
10%, of approximately $300 million. These properties have had cumulative
historical production of over 930 MMBOE.
MESA believes that the Greenhill Acquisition satisfies each of the four
characteristics MESA seeks in making strategic acquisitions.
Reserve and Production Growth Opportunities - To date, MESA has
identified 45 development wells and over 130 recompletion projects it plans
to undertake on the Greenhill properties, including 44 projects MESA plans
to initiate in 1997 and at least 25 more it expects to initiate in 1998.
The Greenhill properties also have significant exploration potential,
including a number of subsalt and deeper zone prospects, for which MESA
plans to use the extensive 3-D seismic data that it will obtain as part of
the Greenhill Acquisition.
Geographic Diversity - The Greenhill reserves are located in the
inland waters of the Louisiana Gulf Coast, the Texas Gulf Coast, offshore in
the Gulf of Mexico and in the Permian Basin. As a result of the Greenhill
Acquisition, the onshore Gulf Coast will become a new core area of operation
for MESA.
Oil Reserves - Greenhill's December 31, 1996, estimated proved reserves
include approximately 23 million barrels ("MMBbls") of oil and condensate
and 42 billion cubic feet ("Bcf") of gas. Following the Greenhill
Acquisition, MESA's percentage of total reserves consisting of oil and
condensate will increase from approximately 3% to approximately 10%.
Operational Control - MESA will operate over 90% of the Greenhill
properties, which include 522 producing wells, allowing MESA to control the
amount and timing of capital expenditures and production.
The closing of the Greenhill Acquisition is expected to occur on April
15, 1997, and will be financed by borrowings under the Company's bank credit
facility (the "Credit Facility").
Liquids Acquisition
-------------------
On February 6, 1997 MESA purchased all of MAPCO's condensate and NGL
production interests in the West Panhandle field for $66 million. The
Liquids Acquisition, effective as of January 1, 1997, increases MESA's
interest in NGLs produced from the West Panhandle field properties that MESA
operates to approximately 96%. MESA has been recovering such NGLs at its
Fain plant since December 1996 and MESA believes that the Liquids
Acquisition is an important step in MESA's strategic objective of expanding
its NGL and gas processing business. The transaction is expected to result
in 850,000 barrels ("Bbls") of additional production in 1997 and the
addition of an estimated 11 MMBbls of proved reserves in 1997.
Recent Lease Sale
-----------------
At the March 5, 1997 Central Gulf of Mexico lease sale, MESA was the
high bidder on 4 of the 10 blocks on which it bid. MESA exposed $2.3
million and will spend $0.7 million if the Minerals Management Service
("MMS") awards all four leases to MESA. These blocks are: Eugene Island
207, South Marsh Island 120, Vermilion 206 and West Cameron 627. If the
bids are approved by the MMS, MESA's offshore lease inventory, which now
covers 56 blocks on nearly 141,000 net acres, would increase to 60 blocks
and 158,000 net acres.
Properties
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Approximately 95% of MESA's estimated proved reserves as of December
31, 1996, were concentrated in the Hugoton field of southwest Kansas and the
West Panhandle field of Texas. These fields, which produce gas from depths
of 3,500 feet or less, are characterized by stable, long lived, low cost
production. MESA's Gulf of Mexico properties have significant exploitation
and exploration potential.
Reserves
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The following table summarizes the estimated proved reserves and
estimated future cash flows associated with MESA's oil and gas properties,
by major areas of operations, as of December 31, 1996, as estimated in
accordance with Securities and Exchange Commission ("Commission")
guidelines:
MESA Properties
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West Gulf of
Hugoton Panhandle Mexico Other Total
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Proved reserves:
Natural gas (MMcf)...... 691,412 288,444 27,332 30,534 1,037,723
Natural gas liquids
(MBbls)................ 45,418 42,498 120 15 88,051
Oil and condensate
(MBbls)................ -- 3,971 2,188 704 6,863
Natural gas
equivalents (MMcfe).... 963,920 567,258 41,180 34,848 1,607,206
% Developed............ 99.9% 91.8% 82.1% 34.2% 95.2%
% Natural gas.......... 71.7% 50.8% 66.4% 87.6% 64.6%
Present value of future
net cash flows, before
income taxes,
discounted at 10%...... $1,129.7 $611.4 $67.6 $26.9 $1,835.6
Present value of future
net cash flows, after
income taxes,
discounted at 10%...... $857.8 $464.2 $51.3 $20.4 $1,393.7
The estimates of MESA's proved reserves as of December 31, 1996 are
based upon (i) the report of Williamson Petroleum Consultants, Inc.
("Williamson"), independent reserve engineers, with respect to MESA's
reserves in the Hugoton and West Panhandle fields, which represents
approximately 95% of MESA's total proved reserves, and (ii) the report of
MESA's internal reserve engineers with respect to MESA's Gulf of Mexico and
other properties. The Hugoton and West Panhandle field reserve estimates as
of December 31, 1996, are qualified in their entirety by the summary reserve
report of Williamson, which is filed as an exhibit to this Form 10-K.
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 depend upon a number of 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 costs, all of which may in fact vary
considerably from actual future conditions. The accuracy of any reserve
estimate is a function of the quality of the available data, of engineering
and geological interpretation and of subjective judgment. For these
reasons, estimates of the economically recoverable quantities of oil and gas
reserves attributable to any particular group of properties, classifications
of such reserves based on risk of recovery and estimates of future net
revenues expected therefrom prepared by different engineers or by the same
engineers at different times may vary materially. Actual production,
revenues, and expenditures with respect to MESA's reserves will likely vary
from estimates, and such variances may be material.
Each year MESA files reserve estimates as of the end of the preceding
fiscal year with the Energy Information Administration of the Department of
Energy (the "EIA"). During 1996, MESA filed Form EIA-23, which included
reserve estimates as of December 31, 1995, with the EIA. Such reserve
estimates did not vary from MESA's reserve estimates at December 31, 1995,
contained herein by more than 5%.
The estimated quantities of proved oil and gas reserves, the
standardized measure of future net cash flows from proved oil and gas
reserves (the "Standardized Measure") and the changes in the Standardized
Measure for each of the three years in the period ended December 31, 1996,
are included under "Supplemental Financial Data" in the notes to the
consolidated financial statements of MESA located elsewhere in this Form
10-K.
Hugoton Field
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The Hugoton field in southwest Kansas is one of the largest producing
gas fields in the continental United States. MESA's Hugoton properties
represent approximately 13% of the proved reserves in the field and are
located on over 237,000 net acres, covering approximately 400 square miles.
MESA's properties are concentrated in the central fairway of the field and
benefit from better reservoir characteristics, including thicker productive
zones, higher porosity and higher permeability than properties on the edges
of the field. Management believes that, as a result, MESA's Hugoton
properties will have a longer productive life and higher natural gas
recoveries than properties located near the edge of the Hugoton field. MESA
has working interests in approximately 1,100 wells in the Hugoton field, 950
of which it operates, and royalty interests in approximately 800 wells.
MESA owns substantially all of the gathering and processing facilities which
service its production from the Hugoton field, which allows MESA to control
the production, gathering, processing and sale of its gas and associated
natural gas liquids to various major intrastate and interstate pipelines
through its direct interconnects.
MESA's Hugoton properties are capable of producing approximately 200
MMcf of wet gas per day (i.e., gas production at the wellhead before
processing and before reduction for royalties). Substantially all of MESA's
Hugoton production is processed through its Satanta plant. Production in
the Hugoton field is subject to allowables set by state regulators. MESA
estimates that it and other major producers in the Hugoton field produced at
or near full capacity in 1996 and expects such practice to continue.
MESA's Hugoton properties accounted for approximately 60% of its
equivalent proved reserves and 62% of the present value of estimated future
net cash flows determined as of December 31, 1996, in accordance with
Commission guidelines. The Hugoton properties accounted for approximately
49%, 47%, and 53% of MESA's oil and gas revenues for the years ended
December 31, 1996, 1995, and 1994, 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.
MESA has invested over $78 million in capital expenditures in its
Hugoton properties since 1992 to construct the Satanta Plant and related
facilities, and to upgrade gathering and compression facilities, production
equipment and pipeline interconnects in order to maintain production
capacity and marketing flexibility. See "Production--Hugoton Field."
West Panhandle Field
--------------------
The West Panhandle properties are located in the Texas panhandle.
Natural gas from these properties is produced from approximately 600 wells,
all of which MESA operates, on over 185,000 net acres. All of MESA's West
Panhandle production is processed through MESA's Fain natural gas processing
plant.
MESA's West Panhandle reserves are owned and produced pursuant to
contracts with Colorado Interstate Gas Company ("CIG"), the first of which
was executed in 1928 by predecessors of both companies. An amendment to
these contracts, the Production Allocation Agreement ("PAA"), 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 associated agreements,
MESA operates the wells and production equipment and CIG owns and operates
the gathering system by which MESA and CIG's production is delivered 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.
As of December 31, 1996, MESA's West Panhandle properties represented
approximately 35% of MESA's equivalent proved reserves, and approximately
33% of the present value of estimated future net cash flows, determined in
accordance with Commission guidelines. Production from the West Panhandle
properties accounted for approximately 31%, 33%, and 36% of MESA's oil and
gas revenues for the years ended December 31, 1996, 1995, and 1994,
respectively. MESA has identified over 100 locations that have additional
production potential in new areas or deeper zones, of which MESA plans to
redrill 58 in 1997 and the balance in 1998. See "Production--West Panhandle
Production."
Gulf of Mexico
--------------
MESA's Gulf of Mexico properties are located offshore Texas and
Louisiana and represent approximately 3% of MESA's equivalent proved
reserves and approximately 4% of the present value of estimated future net
cash flows as determined in accordance with Commission guidelines at
December 31, 1996. The Gulf of Mexico properties accounted for
approximately 9%, 13% and 20% of MESA's oil and gas revenues for the years
ended December 31, 1994, 1995 and 1996, respectively.
MESA has owned and operated properties in the Gulf of Mexico since
1970. Beginning in late 1994, MESA began to direct a greater portion of its
capital spending towards exploration and development in the Gulf of Mexico.
Since that time, MESA has successfully completed 21 out of 24 wells adding
63 Bcfe to proved reserves. As a result, MESA's offshore production
increased by approximately 50% on an thousand cubic feet of natural gas
equivalent ("Mcfe") basis from 1994 to 1995, and by an additional 58% on an
Mcfe basis from 1995 to 1996. MESA currently plans to drill up to seven
exploratory wells on its existing properties in the remainder of 1997.
Because MESA has existing production facilities offshore, it has been able
to bring new wells on production quickly and at a lower cost than could be
achieved otherwise. MESA currently owns interests in 56 blocks in the Gulf
of Mexico, which cover an aggregate of approximately 141,000 net acres.
The Company owns approximately 600 square miles of 3-D seismic data in
and around its existing Gulf of Mexico properties. MESA plans to acquire an
additional 100 square miles of 3-D seismic data covering these properties in
1997. After the procurement of additional 3-D seismic data, MESA will have
3-D seismic data covering approximately 90% of its existing Gulf of Mexico
properties. Application of 3-D seismic technology to MESA's Gulf of Mexico
acreage represents a significant future opportunity to increase reserves and
cash flow through exploratory and development drilling.
MESA currently anticipates spending approximately $53 million on
currently identified development and exploration projects on its existing
Gulf of Mexico properties during 1997. In 1996, MESA purchased 11 blocks
covering 57,340 gross (39,685 net) acres in the Gulf of Mexico. MESA paid
$1.7 million for its share of the 11 blocks, 6 of which are located in areas
where MESA has producing interests. MESA was apparent high bidder on four
blocks covering 17,500 acres in the March 1997 federal lease sale in the
Gulf of Mexico, but there can be no assurance that MESA will be awarded
these blocks by the MMS. MESA will spend approximately $0.7 million if the
MMS awards all four leases to MESA.
See "Drilling Prospects" for a discussion of MESA's drilling activities
since year end.
Other
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MESA's other producing properties are located in the Rocky Mountain
area of the United States, which accounted for less than 1% of MESA's total
production in 1996.
Production
- ----------
MESA's Hugoton and West Panhandle fields are both mature reservoirs
that are substantially developed and have long life production profiles.
Natural gas production is subject to numerous state and federal laws and
Federal Energy Regulatory Commission (the "FERC") regulations. See
"Regulation and Prices" below. Certain other factors affecting production
in MESA's various fields are discussed in greater detail below.
Hugoton Field
-------------
The Kansas Corporation Commission (the "KCC") is the state regulatory
agency that regulates oil and gas production in Kansas. The KCC is
responsible for the determination of market demand (allowables) for the
Hugoton field and the allocation of allowables among the more than 9,000
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 determined by 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 Hugoton field allowable in 1996 was 600 Bcf of wellhead gas. MESA's
share of the field allowable averaged 13% in 1996.
MESA's net Hugoton field production decreased to approximately 67 Bcfe in
1996 compared with 70 Bcfe in 1995 as a result of equipment maintenance in
1996. MESA expects its Hugoton field production will decline slightly from
1996 levels each year through 1998. Beginning in 1999, MESA expects annual
production declines due to normal depletion.
West Panhandle Field
--------------------
MESA's production of wellhead gas from the West Panhandle field is
governed by the PAA and other contracts with CIG. MESA was contractually
limited to take wellhead gas production up to a maximum of 32 Bcf in 1996,
but actually took only 27 Bcf primarily due to a weather-related decrease in
demand in 1996. Beginning in 1997, MESA is not subject to annual
contractual production limitations and will have the right to take and
market as much gas as it can produce, subject to specific CIG seasonal and
daily entitlements as provided for under the contracts. Assuming
continuation of existing economic and operating conditions, MESA expects
production from its existing West Panhandle properties will be 37 Bcf of
wellhead gas in 1997.
See "-- Production Allocation Agreement" in "Management's Discussion
and Analysis of Financial Condition and Results of Operations" located
elsewhere in this Form 10-K.
Natural Gas Processing
- ----------------------
Through its natural gas processing plants, MESA extracts raw NGLs and
crude helium from the wellhead natural gas stream. The NGLs are then
transported and fractionated into their constituent hydrocarbons such as
ethane, propane, normal butane, isobutane, and natural gasolines. The NGLs
and helium are then sold pursuant to contracts providing for market-based
prices.
MESA processes its natural gas production for the extraction of NGLs
and helium to enhance the market value of the gas stream. In recent years
MESA has 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 processing facilities, which
allows MESA to (i) capture the processing margin, 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, (ii)
control the quality of the residue gas stream, permitting it to deliver gas
directly to pipelines for sales to local distribution companies, marketing
companies, and end users, and (iii) realize value from premium products such
as crude helium. 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.
Satanta Natural Gas Processing Plant
------------------------------------
The Satanta Plant was built in 1993 and has the capacity to process 250
MMcf of natural gas per day, enabling MESA to extract NGLs from
substantially all of the gas produced from its Hugoton field properties as
well as third party producers' gas. The Satanta Plant also has the ability
to extract helium from the gas stream. In 1996 the Satanta Plant averaged
193 MMcf per day of inlet gas and produced a daily average of 10.6 MBbls of
NGLs, 1,027 Mcf of crude helium, and 144 MMcf of residue natural gas.
In November 1996 MESA commenced a natural gas processing alliance with
Anadarko Petroleum Corporation ("Anardarko") and Western Resources
Mid-Continent Market Center which provides for MESA to process up to 55 MMcf
per day of Anadarko's gas at MESA's Satanta Plant. Such agreement filled
excess capacity at the Satanta Plant. MESA is also focusing its efforts on
obtaining additional dedications of third-party natural gas to the Satanta
plant and, if successful, plans to expand the plant's processing capacity.
Fain Natural Gas Processing Plant
---------------------------------
The Fain plant, which was built in the 1960s and had its most recent
substantial upgrade in 1993, currently has inlet capacity of 140 MMcf per
day. In 1996 the Fain plant averaged 77 MMcf per day of inlet gas and
produced a daily average of 8.2 MMbls of NGLs and condensate, 20 Mcf of
crude helium and 59 MMcf of residue natural gas.
In December 1996, MESA entered into a natural gas processing agreement
with CIG and MAPCO, which provides for MESA to initially process
approximately 8.5 Bcf of natural gas per year of third party gas at the Fain
Plant. The agreement has a primary term through December 2009. Effective
January 1, 1997, MESA purchased from MAPCO and its affiliates all of their
liquids attributable to the processing agreement above as well as the rights
to condensate from CIG's gathering system. It is expected that this
purchase will increase MESA's condensate and NGL production by approximately
850 MBbls in 1997. Such arrangements have filled excess capacity at the
Fain plant. MESA plans to install a nitrogen rejection unit at the Fain
plant in 1998 to improve the quality of the residue natural gas stream and
increase NGL and helium recoveries.
Other Properties
----------------
MESA's non-oil and gas tangible properties include buildings, leasehold
improvements, and office equipment, primarily in Amarillo and Irving, Texas,
and certain other assets. Non-oil and gas tangible properties represent
approximately 1% of the net book value of MESA's properties.
Sales and Marketing
- -------------------
Following the processing of wellhead gas, MESA sells the dry (or
residue) natural gas, helium, condensate, and NGLs pursuant to various
short-term and long-term sales contracts. Substantially all of MESA's gas
and NGL sales are made under short-term contracts at market prices, with the
exception of certain West Panhandle field volumes. Due to a number of
market forces, including the seasonal 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.
See "Revenues" in "Management's Discussion and Analysis of Financial
Condition and Results of Operations" located elsewhere in this Form 10-K for
a table showing production and prices by area for the past three years.
West Panhandle Gas Sales Contracts
----------------------------------
Most of MESA's West Panhandle field residue natural gas is sold
pursuant to gas purchase contracts with two major customers in the Texas
panhandle area.
Approximately 9 Bcf per year of residue natural gas is sold to a gas
utility that serves residential and commercial customers in Amarillo, Texas,
under the terms of a long-term agreement dated January 2, 1993, which
supersedes the original contract that was in effect since 1949. The
agreement contains a pricing formula for the five-year period from 1993
through 1997 whereby 70% of the volumes sold to the gas utility are sold at
fixed prices and the other 30% of volumes sold are priced at a regional
market index based on spot prices plus $.10 per Mcf. The fixed portion of
the price formula was $3.21 per Mcf in 1996 escalating to $3.45 per Mcf in
1997. Prices for 1998 and beyond will be determined by renegotiation. MESA
provides the gas utility with peaking service, granting it the right to
take, on a daily basis, residue gas attributable to 100 MMcf per day of
MESA's production under the PAA. The average price received by MESA for
natural gas sales to the gas utility in 1996 was $2.94 per Mcf.
Effective January 1, 1996, MESA entered into a four-year contract with
a marketing company which serves the local electric power-generation
facility and various other markets within and outside Amarillo, Texas. The
contract provides for the sale of MESA's West Panhandle field gas which is
in excess of the volumes sold to the gas utility and other existing
industrial customers. The price for gas sold under this contract is a
regional market index determined monthly based on spot prices plus $0.02 per
MMBtu. In 1996, MESA sold approximately 8 Bcf of residue natural gas to the
pipeline for an average of $1.95 per Mcf.
NGL and Helium Sales
--------------------
NGL production from both the Satanta and Fain plants are sold by
component pursuant to a contractual arrangement with MAPCO, a major
transporter and marketer of NGLs, through 2008 at the greater of
Midcontinent or Gulf of Mexico prices at the time of sale. Crude helium is
sold to an industrial gas company under a long-term agreement that provides
for annual price adjustments based on market prices.
Major Customers
---------------
See Note 10 to the consolidated financial statements of MESA located
elsewhere in this Form 10-K for information on sales to major customers.
<PAGE>
Production Costs
- ----------------
The table below presents MESA's total production costs (lease operating
expenses and production and other taxes) by area of operation for each of
the last three years ended December 31 (in thousands, except per Mcf of
natural gas equivalent data):
1996 1995 1994
---------------- ---------------- ----------------
Total Per Mcfe Total Per Mcfe Total Per Mcfe
------- -------- ------- -------- ------- --------
Lease Operating Expense:
Hugoton............... $13,545 $ .20 $12,703 $ .18 $12,549 $ .17
West Panhandle........ 28,896 .75 25,989 .67 26,910 .60
Gulf of Mexico........ 10,476 .46 9,848 .68 11,136 1.15
Other................. 1,530 3.79 907 2.57 623 2.00
------- ------- -------
54,447 .42 49,447 .40 51,218 .40
------- ------- -------
Production and Other
Taxes:
Hugoton............... 16,297 .24 15,004 .21 17,505 .24
West Panhandle........ 3,472 .09 3,216 .08 3,099 .07
Gulf of Mexico........ 19 .00 34 .00 68 .01
Other................. 283 .70 149 .42 634 2.04
------- ------- -------
20,071 .16 18,403 .15 21,306 .17
------- ------- -------
Total Production Costs... $74,518 $ .58 $67,850 $ .55 $72,524 $ .57
======= ======= =======
MESA's lease operating expenses consist of lease maintenance, gathering
and processing costs and have a significant fixed-cost component. As a
result, the production cost per Mcfe in the table above is affected by
changes in the volume of oil and gas produced. Production tax rates in
Kansas, where MESA's Hugoton field properties are located, are assessed on
wellhead value. These rates were reduced from 6% in 1994 to 5% in 1995 and
5% in the first half of 1996 and 4.33% in the last half of 1996.
See "Management's Discussion and Analysis of Financial Condition and
Results of Operations - Results of Operating."
<PAGE>
Net Margins
- -----------
The table below presents MESA's net margin (revenue less production
costs) by area of operation for each of the years ended December 31 (in
thousands, except per Mcf of natural gas equivalent data):
1996 1995 1994
---------------- ---------------- ----------------
Total Per Mcfe Total Per Mcfe Total Per Mcfe
------- -------- ------- -------- ------- --------
Hugoton................ $122,345 $1.83 $81,490 $1.16 $92,888 $1.28
West Panhandle......... 62,138 1.62 43,904 1.13 51,406 1.16
Gulf of Mexico......... 52,333 2.29 20,323 1.40 8,913 .92
Other.................. 160 .40 2,330 6.62 1,796 5.79
Drilling Activities
-------------------
The following table shows the results of MESA's drilling activities for
the last five years:
1996 1995 1994 1993 1992
----------- ----------- ----------- ----------- -----------
Gross Net Gross Net Gross Net Gross Net Gross Net
----- ----- ----- ----- ----- ----- ----- ----- ----- -----
Exploratory
Wells:
Productive.... 1 1.0 1 .3 -- -- -- -- 5 4.1
Dry........... -- -- 4 4.0 -- -- 1 1.0 1 .4
Development
Wells:
Productive.... 48 35.5 20 14.0 31 24.5 43 29.1 22 16.5
Dry........... -- -- -- -- 1 .8 -- -- -- --
----- ----- ----- ----- ----- ----- ----- ----- ----- -----
Total....... 49 36.5 25 18.3 32 25.3 44 30.1 28 21.0
===== ===== ===== ===== ===== ===== ===== ===== ===== =====
MESA's net interests in certain wells drilled in the Gulf of Mexico
blocks are subject to a net profits interest owned by the MESA Offshore
Trust.
At December 31, 1996, MESA was participating in the drilling of 2 gross
(.9 net) wells.
Drilling Prospects
- ------------------
Phase II drilling began at East Cameron 322/323 (MESA 100%) in late
January 1997 on the first of five development wells. Three wells have been
drilled and cased for completion after encountering multiple oil and gas
sands between 3,700 and 5,300 feet. Drilling operations are in progress on
the fourth well. East Cameron 322/323 is a mature field that began
production for MESA in 1975, and has benefited from application of new
exploration and drilling technology to identify and develop remaining
reserves. MESA successfully completed Phase I of East Cameron 322/323 in
1995. The completion phase of Phase II of the program should be concluded
by the end of the second quarter.
Drilling began at Vermilion 348 (MESA 75%) in early January 1997. This
well tested objectives to a depth of 14,900 feet on the northeast flank of a
salt dome. It logged 170 net feet of sand, but found an insufficient
accumulation of hydrocarbons to support commercial development. The well
was consequently plugged and abandoned. Findings are being incorporated
into MESA's 3-D seismic interpretation to evaluate remaining potential on
the lease.
At the March 5, 1997 Central Gulf of Mexico lease sale, MESA was high
bidder on 4 of 10 blocks. The company exposed $2.3 million and will spend
$0.7 million if the Minerals Management Service (MMS) awards all 4 leases to
MESA. These blocks are: Eugene Island 207, South Marsh Island 120,
Vermilion 206 and West Cameron 627. If the bids are approved by the MMS,
MESA's offshore lease inventory, which now covers 56 blocks on nearly
141,000 net acres, would increase to 60 blocks and 158,000 net acres.
Producing Acreage and Wells, Undeveloped Acreage
- ------------------------------------------------
MESA's interest in oil and gas acreage held by production, producing
wells and undeveloped oil and gas acreage as of December 31, 1996, is set
forth in the following table:
Producing Producing Undeveloped
Acreage Wells Acreage
---------------- ------------- ----------------
Gross Net Gross Net Gross Net
------- ------- ----- ------- ------- -------
Onshore U.S.:
Kansas.............. 258,801 231,312 1,432 990.0 5,880 5,880
Texas............... 241,218 185,550 616 463.9 480 156
Wyoming............. 11,477 4,365 2 -- 14,570 9,035
North Dakota........ 4,661 3,532 20 3.8 3,771 2,488
Other............... 2,564 2,142 13 1.3 16,123 6,518
------- ------- ----- ------- ------- -------
Total Onshore.... 518,721 426,901 2,083 1,459.0 40,824 24,077
------- ------- ----- ------- ------- -------
Offshore U.S.:
Louisiana........... 82,024 45,180 192 43.4 48,750 30,783
Texas............... 73,808 18,848 68 12.4 46,080 46,080
------- ------- ----- ------- ------- -------
Total Offshore... 155,832 64,028 260 55.8 94,830 76,863
------- ------- ----- ------- ------- -------
Grand Total.............. 674,553 490,929 2,343 1,514.8 135,654 100,940
======= ======= ===== ======= ======= =======
MESA has interests in 2,167 gross (1,492.7 net) producing gas wells and
176 gross (22.1 net) producing oil wells in the United States. MESA also owns
approximately 84,722 net acres of producing minerals and 43,568 net acres of
nonproducing minerals in the United States.
Organizational Structure
- ------------------------
MESA owns and operates its oil and gas properties and other assets
through its direct subsidiary and indirect subsidiaries. Its direct wholly
owned subsidiary is Mesa Operating Co. ("MOC").
MOC
---
At December 31, 1996, MOC owned all of MESA's oil and gas properties in
the Hugoton field of Kansas, West Panhandle field of Texas and MESA's
interests in the Gulf of Mexico and the Rocky Mountain area.
MOC is MESA's principal operating subsidiary. Most of MESA's employees
are employed by MOC, and MOC is generally responsible for all of MESA's
operations, administration, and marketing.
Competition
- -----------
The oil and gas business is highly competitive in the search for,
acquisition of, and sale of, oil and gas. MESA's competitors in these
endeavors include the major oil and gas companies, independent oil and gas
concerns, and individual producers and operators, as well as major pipeline
companies, many of which have financial resources greatly in excess of those
of MESA.
MESA is one of the largest owners of natural gas reserves in the United
States. Production from MESA's properties can be delivered to a substantial
portion of the major metropolitan markets in the United States through
numerous pipelines and other purchasers. MESA is not dependent upon any
single purchaser or small group of purchasers.
MESA believes that its competitive position is enhanced by its
substantial long-life reserve holdings and related deliverability, its
flexibility to sell such reserves in a diverse number of markets, and its
ability to produce its reserves at a low cost. MESA further believes that its
competitive position is affected by, among other things, price, contract terms
and quality of service.
Operating Hazards and Uninsured Risks
- -------------------------------------
MESA's oil and gas activities are subject to all of the risks normally
incident to exploration for and production of oil and gas, including blowouts,
cratering, and fires, each of which could result in damage to life and
property. Offshore operations are subject to a variety of operating risks,
such as hurricanes and other adverse weather conditions, and lack of access to
existing pipelines or other means of transporting production. Furthermore,
offshore oil and gas operations are subject to extensive governmental
regulations, including certain regulations that may, in certain circumstances,
impose absolute liability for pollution damages, and to interruption or
termination by governmental authorities based on environmental or other
considerations. In accordance with customary industry practices, MESA carries
insurance against some, but not all, of these risks. Losses and liabilities
resulting from such events would reduce revenues and increase costs to MESA to
the extent not covered by insurance.
Regulation and Prices
- ---------------------
MESA's operations are affected from time to time in varying degrees by
political developments and federal, state, and local laws and regulations. In
particular, oil and gas production operations and economics are affected by
taxes, conservation, safety, environmental, and other laws relating to the
petroleum industry, by changes in such laws and by constantly changing
administrative regulations.
FERC Regulation
---------------
The FERC has recently required interstate pipeline companies to
"unbundle" their services. To the extent a pipeline company or its sales
affiliate makes gas sales as a merchant in the future, it does so pursuant to
private contracts in direct competition with all other sellers, such as MESA.
In recent years the FERC also has pursued a number of other policy initiatives
which could significantly affect the marketing of natural gas. Several of
these initiatives are intended to enhance competition in natural gas markets,
although some, such as "spin-downs," may have the adverse effect of increasing
the cost of doing business on some in the industry. As to all of these recent
FERC initiatives, the on-going, or, in some instances, preliminary evolving
nature of these regulatory initiatives makes it impossible at this time to
predict their ultimate impact on MESA's business.
State and Other Regulation
--------------------------
All of the jurisdictions in which MESA owns producing oil and gas
properties have statutory provisions regulating the exploration for and
production of crude oil and natural gas. Such regulations require permits for
drilling wells, drilling and operating bonds, and reports concerning
operations and impose other requirements relating to the exploration and
production of oil and gas. Such states also have statutes addressing
conservation matters including provisions for the unitization or pooling of
oil and gas properties, the establishment of maximum rates of production from
wells, and the regulation of spacing, plugging and abandonment of such wells.
State regulation of gathering facilities generally includes various
safety, environmental, and in some circumstances, non-discriminatory take
requirements, but does not generally entail rate regulation. Natural gas
gathering has received greater regulatory scrutiny at both the state and
federal levels. For example, Oklahoma recently enacted a prohibition against
discriminatory gathering rates, and certain Texas and Kansas regulatory
officials have expressed interest in evaluating similar rules in their
respective states.
Federal Royalty Matters
-----------------------
By a letter dated May 3, 1993, directed to thousands of producers holding
interests in federal leases, the United States Department of the Interior (the
"DOI") announced its interpretation of existing federal leases to require the
payment of royalties on past natural gas contract settlements which were
entered into in the 1980s and 1990s to resolve, among other things,
take-or-pay and minimum take claims by producers against pipelines and other
buyers. The DOI's letter set forth various theories of liability, all founded
on the DOI's interpretation of the term "gross proceeds" as used in federal
leases and pertinent federal regulations. In an effort to ascertain the
amount of such potential royalties, the DOI sent a letter to producers on June
18, 1993, requiring producers to provide all data on all natural gas contract
settlements, regardless of whether gas produced from federal leases was
involved in the settlement. MESA received a copy of this information demand
letter. In response to the DOI's action, in July 1993 various industry
associations and others filed suit in the United States District Court for the
Northern District of West Virginia seeking an injunction to prevent the
collection of royalties on natural gas contract settlement amounts under the
DOI's theories. The lawsuit, styled "Independent Petroleum Association v.
Babbitt," was transferred to the United States District Court in Washington,
D.C. On June 14, 1995, the Court issued a ruling in this case holding that
royalties are payable to the United States on gas contract settlement proceeds
in accordance with the Minerals Management Service's May 3, 1993, letter to
producers. The D.C. Circuit Court of Appeals, on August 27, 1996, issued a
decision in favor of the producers. The DOI's claim in a bankruptcy
proceeding against a producer based upon an interstate pipeline's earlier
buy-out of the producer's gas sale contract was rejected by the Federal
Bankruptcy Court in Lexington, Kentucky, in a proceeding styled "Century
Offshore Management Corp.". While the facts of the Court's decision do not
involve all of the DOI's theories, the Court found on those at issue that
DOI's theories were without legal merit, and the Court's reasoning suggests
that the DOI's other claims are similarly deficient. This decision was upheld
in the District Court and is now on appeal in the Sixth Circuit Court of
Appeals. Because the "Independent Petroleum Association v. Babbitt" decision
has been appealed, and because of the complex nature of the calculations
necessary to determine potential additional royalty liability under the DOI's
theories, it is impossible to predict what, if any, additional or different
royalty obligation the DOI may assert or ultimately be entitled to recover
with respect to any of MESA's prior natural gas contract settlements.
Environmental Matters
---------------------
MESA's operations are subject to numerous federal, state, and local laws
and regulations controlling the discharge of materials into the environment or
otherwise relating to the protection of the environment, including the
Comprehensive Environmental Response, Compensation, and Liability Act
("CERCLA"), also known as the "Federal Superfund Law." Such laws and
regulations, among other things, impose absolute liability upon the lessee
under a lease for the cost of clean-up of pollution resulting from a lessee's
operations, subject the lessee to liability for pollution damages, may require
suspension or cessation of operations in affected areas, and impose
restrictions on the injection of liquids into subsurface aquifers that may
contaminate groundwater. MESA maintains insurance against costs of clean-up
operations, but it is not fully insured against all such risks. A serious
incident of pollution may, as it has in the past, also result in the DOI
requiring lessees under federal leases to suspend or cease operation in the
affected area. In addition, the recent trend toward stricter standards in
environmental legislation and regulation may continue. For instance,
legislation has been proposed in Congress from time to time that would
reclassify certain oil and gas production wastes as "hazardous wastes" which
would make the reclassified exploration and production wastes subject to much
more stringent handling, disposal, and clean-up requirements. If such
legislation were to be enacted, it could have a significant impact on MESA's
operating costs, as well as the oil and gas industry in general. State
initiatives to further regulate the disposal of oil and gas wastes are also
pending in certain states, and these various initiatives could have a similar
impact on MESA.
The Oil Pollution Act of 1990 ("OPA") and regulations thereunder impose a
variety of regulations on "responsible parties" (which include owners and
operators of offshore facilities) related to the prevention of oil spills and
liability for damages resulting from such spills in United States waters. In
addition, OPA imposes ongoing requirements on responsible parties, including
proof of financial responsibility to cover at least some costs in a potential
spill. On August 25, 1993, the Minerals Management Service (the "MMS")
published an advance notice of its intention to adopt a rule under OPA that
would require owners and operators of offshore oil and gas facilities to
establish $150 million in financial responsibility. On October 19, 1996,
President Clinton signed legislation that amended the OPA and lowered the
financial responsibility to $35 million.
Under current federal regulations concerning offshore operations, the MMS
is authorized to require lessees to post supplemental bonds to cover their
potential leasehold abandonment costs. By letter dated November 9, 1995, MESA
was advised by the MMS that it does not qualify for a waiver from supplemental
bond requirements and that MESA may be required to post supplemental bonds
covering its potential obligations with respect to offshore operations. MESA
Inc. executed a guaranty of abandonment liability (areawide) with the MMS on
April 26, 1996, in satisfaction of these obligations.
In 1993 a number of companies in New Mexico, including MESA, were named
in a preliminary information request from the Environmental Protection Agency
(the "EPA") as persons who may be potentially responsible for costs incurred
in connection with the Lee Acres Landfill site. Although MESA did not
directly dispose of any materials at the site, it may have contracted to
transport materials from its operations with certain trucking companies also
named in the information request. To the extent any materials produced by
MESA may have been transported to the site, MESA believes that such materials
were rainwater and/or water produced from natural gas wells, which MESA
believes are exempt or excluded from the definitions of "hazardous waste" or
"hazardous substance" under applicable Federal environmental laws, although
the EPA may assert a contrary position. Since submitting its response to the
information request in April 1994, MESA has not received any additional
inquiries or information from the EPA concerning the site, including whether
MESA is, in fact, asserted to be a responsible party for the site or what
potential liability, if any, MESA may face in connection with this matter.
MESA is not involved in any other administrative or judicial proceedings
arising under federal, state, or local environmental protection laws and
regulations which would have a material adverse effect on MESA's financial
position or results of operations.
Item 2. Properties
===================
Reference is made to Item 1 of this Form 10-K for a description of MESA's
properties.
Item 3. Legal Proceedings
==========================
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 had underpaid royalties
due under the Gas Lease. Under the agreements with CIG, MESA has an
entitlement to gas produced from the Gas Lease. In August 1992 CIG filed a
third-party complaint against MESA for any such royalty underpayments which
may be allocable to MESA. Plaintiffs alleged that the underpayment was the
result of CIG's use of an improper gas sales price upon which to calculate
royalties and that the proper price should have been determined pursuant to a
"favored-nations" clause in a July 1, 1967, amendment to the Gas Lease (the
"Gas Lease Amendment"). The plaintiffs also sought a declaration by the court
as to the proper price to be used for calculating future royalties.
The plaintiffs alleged royalty underpayments of approximately $500
million (including interest at 10%) covering the period from July 1, 1967, to
the present. In March 1995 the court made certain pretrial rulings that
eliminated approximately $400 million of the plaintiffs' claims (which related
to periods prior to October 1, 1989), but which also reduced a number of
MESA's defenses. MESA and CIG filed stipulations with the court whereby MESA
would have been liable for between 50% and 60%, depending on the time period
covered, of an adverse judgment against CIG for post-February 1988
underpayments of royalties.
On March 22, 1995, a jury trial began and on May 4, 1995, the jury
returned its verdict. Among its findings, the jury determined that CIG had
underpaid royalties for the period after September 30, 1989, in the amount of
approximately $140,000. Although the plaintiffs argued that the
"favored-nations" clause entitled them to be paid for all of their gas at the
highest price voluntarily paid by CIG to any other lessor, the jury determined
that the plaintiffs were estopped from claiming that the "favored-nations"
clause provides for other than a pricing-scheme to pricing-scheme comparison.
In light of this determination, and the plaintiffs' stipulation that a
pricing-scheme to pricing-scheme comparison would not result in any "trigger
prices" or damages, defendants asked the court for a judgment that plaintiffs
take nothing. The court, on June 7, 1995, entered final judgment that
plaintiffs recover no monetary damages. The plaintiffs have filed a motion
for new trial on which the court has not yet ruled. MESA cannot predict
whether the court will grant such motion or, if it does not, whether the
plaintiffs will appeal the court's final judgment.
On June 7, 1996, the plaintiffs filed a separate suit against CIG and
MESA in state court in Amarillo, Texas, similarly claiming underpayment of
royalties under the "favored-nations" clause, but based upon the
above-described pricing-scheme to pricing-scheme comparison on a well-by-well
monthly basis. The plaintiffs also claim underpayment of royalties since
June 7, 1995 under the "favored-nations" clause based upon either the
pricing-scheme to pricing-scheme method or their previously alleged higher
price method. MESA believes it has several defenses to this action and
intends to contest it vigorously. MESA has not yet determined the amount of
damages, if any, that would be payable if such action were determined
adversely to MESA.
The federal court in the above-referenced first suit issued an order on
July 29, 1996 which stayed the state suit pending a decision by the court on
plaintiff's motion for new trial.
Based on the jury verdict and final judgment, MESA does not expect the
ultimate resolution of either of these lawsuits to have a material adverse
effect on its financial position or results of operations.
Lease Termination
- -----------------
In 1991 MESA sold certain producing oil and gas properties to Seagull
Energy Company ("Seagull"). In 1994 two lawsuits were filed against Seagull
in the 100th District Court in Carson County, Texas, by certain land and
royalty owners claiming that certain of the oil and gas leases owned by
Seagull have terminated due to cessation in production and/or lack of
production in paying quantities occurring at various times from first
production through 1994. In the third quarter of 1995 Seagull filed
third-party complaints against MESA claiming breach of warranty and false
representation in connection with the sale of such properties to Seagull.
MESA believes it has several defenses to these lawsuits including a two-year
limitation on indemnification set forth in the purchase and sale agreement.
Seagull filed a similar third-party complaint June 29, 1995, against MESA
covering a different lease in the 69th District Court in Moore County, Texas.
MESA believes it has similar defenses in this case.
The plaintiffs in the cases against Seagull are seeking to terminate the
leases. Seagull, in its complaint against MESA, is seeking unspecified
damages relating to any leases which are terminated.
In February 1997, MESA entered a settlement agreement with Seagull whereby
MESA has been released from all claims associated with the third-party claims.
Shareholder Litigation
- ----------------------
On July 3, 1995, Robert Strougo filed a class action and derivative
action in the District Court of Dallas County, Texas, 160th Judicial District,
against T. Boone Pickens, Paul W. Cain, John L. Cox, John S. Herrington, Wales
H. Madden, Jr., Fayez S. Sarofim, Robert L. Stillwell, and J. R. Walsh, Jr.
(the "Director Defendants"), each of whom is a present or former director of
MESA. The class action is purportedly brought on behalf of a class of MESA
shareholders and alleges, inter alia, that the Board infringed upon the
suffrage rights of the class and impaired the ability of the class to receive
tender offers by adoptions of the shareholder rights plan. The lawsuit is
also brought derivatively on behalf of MESA and alleges, inter alia, that the
Board breached fiduciary duties to MESA by adopting the shareholder rights
plan and by failing to consider the sale of MESA. The lawsuit seeks
unspecified damages, attorneys' fees, and injunctive and other relief. Two
other lawsuits filed by Herman Krangel, Lilian Krangel, Jacquelyn A. Cady, and
William A. Montagne, Jr., in the District Court of Dallas County have been
consolidated into this lawsuit. A third lawsuit filed by Deborah M. Eigen and
Adele Brody as a derivative lawsuit in the U.S. District Court for the
Northern District of Texas, Dallas Division, intervened in this lawsuit.
On February 5, 1996, the Court denied Defendants' Motion to Dismiss. A
trial date has been set for September 15, 1997. The case has been stayed
pending a Special Litigation Committee investigation by MESA to decide whether
the case should be dismissed.
<PAGE>
Other
-----
MESA is also a defendant in other lawsuits and has assumed liabilities
relating to its predecessors. MESA does not expect the resolution of any of
these matters to have a material adverse effect on its financial position or
results of operations.
Contingencies
-------------
See Note 9 to the consolidated financial statements of MESA included
elsewhere in this Form 10-K for discussion of the above legal proceedings and
the estimated effect, if any, on MESA's results of operations and financial
position.
<PAGE>
Item 4. Submission of Matters to a Vote of Security Holders
============================================================
None.
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder
Matters
======================================================================
The following table sets forth, for the periods indicated, the high and
low closing prices for MESA's common stock as reported by the New York Stock
Exchange:
Common Stock
--------------
High Low
------ ------
1997:
First Quarter (through March 24, 1997)............... $6-1/2 $5
1996:
First Quarter........................................ $4 $2-5/8
Second Quarter....................................... 5-1/2 2-5/8
Third Quarter........................................ 5-1/2 2-7/8
Fourth Quarter....................................... 5-1/2 4
1995:
First Quarter........................................ $6-1/8 $4-5/8
Second Quarter....................................... 6-1/8 3-1/2
Third Quarter........................................ 5-1/2 3-7/8
Fourth Quarter....................................... 4-7/8 3
- ----------
* MESA's common stock is listed on the New York Stock Exchange under the
symbol MXP. At December 31, 1996, there were 64,279,568 common shares
outstanding.
* MESA has not paid any dividends with respect to its common stock and does
not expect to pay dividends 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. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations" and Note 4 to the consolidated financial statements of the
Company included elsewhere in this Form 10-K for a discussion of
restrictions on the payment of dividends.
At March 24, 1997, there were 20,006 record holders of MESA's common
shares.
Item 6. Selected Financial Data
================================
The following table sets forth selected financial information of MESA as
of the dates or for the periods indicated. This table should be read in
conjunction with the consolidated financial statements of MESA and related
notes thereto included elsewhere in this Form 10-K.
As of or for the Years Ended December 31
----------------------------------------------------------
1996 1995 1994 1993 1992
---------- ---------- ---------- ---------- ----------
(in thousands, except per share data)
Revenues........ $ 311,411 $ 234,959 $ 228,737 $ 222,204 $ 237,112
========== ========== ========== ========== ==========
Operating income $ 96,688 $ 47,965 $ 28,683 $ 22,012 $ 26,221
========== ========== ========== ========== ==========
Net loss from
continuing
operations
attributable
to common...... $ (1,183) $ (57,568) $ (83,353) $ (102,448) $ (89,232)
========== ========== ========== ========== ==========
Net loss from
continuing
operations per
common share... $ (.02) $ (.90) $ (1.42) $ (2.61) $ (2.31)
========== ========== ========== ========== ==========
Total assets.... $1,213,879 $1,486,824 $1,483,959 $1,533,382 $1,676,523
========== ========== ========== ========== ==========
Long-term debt,
including
current
maturities..... $ 808,077 $1,236,743 $1,223,293 $1,241,294 $1,286,155
========== ========== ========== ========== ==========
Net loss from continuing operations for 1996 excludes an extraordinary
loss on debt extinguishment of $59.4 million and includes dividends on
preferred stock of $9.5 million.
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
===========================================================================
Disclosure Regarding Forward-Looking Statements
- -----------------------------------------------
This Form 10-K includes "forward-looking statements" within the meaning
of Section 27A of the Securities Act of 1933, as amended ("Securities Act"),
and Section 21E of the Securities Exchange Act of 1934, as amended ("Exchange
Act"). All statements other than statements of historical facts included in
this Form 10-K, including without limitation, the statements under
"Business," "Management's Discussion and Analysis of Financial Condition and
Results of Operations - Capital Resources and Liquidity" and Notes 2 and 4 to
the consolidated financial statements of MESA regarding MESA's financial
position and liquidity, oil and gas production levels, acquisition,
exploitation, exploration and other growth plans, its ability to make debt
service payments and other matters are forward-looking statements. Although
MESA believes that the expectations reflected in such forward-looking
statements are reasonable, it can give no assurance that such expectations
will prove to have been correct. Important factors that could cause actual
results to differ materially from MESA's expectations ("Cautionary
Statements") are disclosed in this Form 10-K, including without limitation in
conjunction with the forward-looking statements included in this Form 10-K.
All subsequent written and oral forward-looking statements attributable to
MESA or persons acting on its behalf are expressly qualified in their entirety
by the Cautionary Statements.
Subsequent Events
- -----------------
On February 7, 1997, MESA entered into a stock purchase agreement to
purchase 100% of the outstanding capital stock of Greenhill for a total
purchase price of $270 million. The closing of the Greenhill Acquisition is
expected to occur on April 15, 1997. The Greenhill Acquisition will be
accounted for under the purchase method of accounting. However, because the
purchase agreement provides for an effective date of January 1, 1997, MESA
will receive the benefits of all Greenhill production and cash flow from the
effective date to the closing date as part of the assets acquired. Under the
purchase agreement, MESA will pay interest on the $270 million purchase price
(less the $15 million deposit) at an annual rate of 10% from the effective
date to the closing date. The purchase price is subject to adjustment for
certain title and environmental matters.
On February 6, 1997, MESA purchased all of MAPCO's condensate and natural
gas liquids production in the West Panhandle field for $66 million, effective
as of January 1, 1997. The Liquids Acquisition has been accounted for under
the purchase method of accounting.
For additional discussion of these acquisitions, see "Business -- Subsequent
Events."
Results of Operations
- ---------------------
The following table presents a summary of the results of operations of
MESA for the years indicated:
Years Ended December 31
-------------------------------
1996 1995 1994
--------- --------- ---------
(in thousands)
Revenues.............................. $ 311,411 $ 234,959 $ 228,737
Operating and administrative costs.... (111,422) (101,203) (106,330)
Depreciation, depletion and
amortization........................ (103,301) (85,791) (93,724)
--------- --------- ---------
Operating income...................... 96,688 47,965 28,683
Interest expense, net of
interest income..................... (113,386) (132,708) (131,300)
Other................................. 25,037 27,175 19,264
--------- --------- ---------
Net income(loss) before
extraordinary item.................. $ 8,339 $ (57,568) $ (83,353)
Extraordinary loss on debt
extinguishment...................... (59,386) -- --
--------- --------- ---------
Net loss............................ $ (51,047) $ (57,568) $ (83,353)
========= ========= =========
<PAGE>
Revenues, Production and Average Price Data
-------------------------------------------
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.
Years Ended December 31
----------------------------
1996 1995 1994
-------- -------- --------
Revenues (in thousands):
Natural gas......................... $184,595 $129,534 $139,580
Natural gas liquids................. 97,561 75,321 72,771
Oil and condensate.................. 18,180 19,594 7,877
Helium and other.................... 11,075 10,510 8,509
-------- -------- --------
Total.......................... $311,411 $234,959 $228,737
======== ======== ========
Natural Gas Production (MMcf):
Hugoton............................. 46,821 48,871 51,986
West Panhandle...................... 19,268 20,357 22,983
Gulf of Mexico...................... 17,909 8,073 7,359
Other............................... 3 11 11
-------- -------- --------
Total.......................... 84,001 77,312 82,339
======== ======== ========
Natural Gas Liquids Production (MBbls):
Hugoton............................. 3,315 3,524 3,430
West Panhandle...................... 2,978 2,994 3,423
Gulf of Mexico...................... 163 48 53
Other............................... 4 5 5
-------- -------- --------
Total.......................... 6,460 6,571 6,911
======== ======== ========
Oil and Condensate Production (MBbls):
Hugoton............................. -- -- --
West Panhandle...................... 211 118 164
Gulf of Mexico...................... 665 1,025 337
Other............................... 63 52 45
-------- -------- --------
Total.......................... 939 1,195 546
======== ======== ========
Year Ended December 31
----------------------
1996 1995 1994
------ ------ ------
Weighted average sales price:
Natural gas (per Mcf)
Hugoton............................... $ 2.06 $ 1.32 $ 1.57
West Panhandle........................ 2.23 1.83 1.80
Gulf of Mexico ....................... 2.58 1.59 1.81
Other................................. .77 .54 1.29
------ ------ ------
Average*......................... $ 2.19 $ 1.65 $ 1.67
====== ====== ======
Natural gas liquids (per Bbl)
Hugoton............................... $14.60 $10.76 $10.03
West Panhandle........................ 16.06 12.33 11.06
Gulf of Mexico........................ 15.51 11.37 11.52
Other................................. 13.96 8.77 8.58
------ ------ ------
Average.......................... $15.21 $11.48 $10.55
====== ====== ======
Oil and condensate (per Bbl)
Hugoton............................... $ -- $ -- $ --
West Panhandle........................ 18.74 14.13 13.38
Gulf of Mexico........................ 19.95 16.57 15.18
Other................................. 20.07 16.48 14.43
------ ------ ------
Average.......................... $19.39 $16.32 $14.58
====== ====== ======
* Includes the effects of hedging activities. See "Natural Gas Prices"
below.
Total revenues from sales of natural gas, NGLs and oil and condensate
increased from 1995 to 1996 primarily due to increased prices received in
1996. The increase in total revenues from sales of natural gas, NGL, and oil
and condensate from 1994 to 1995 is primarily attributable to increased oil
and condensate production in 1995, increased liquids prices in 1995 and
approximately $12.7 million of natural gas hedge gains recognized in 1995.
These factors offset the decrease in natural gas and natural gas liquids
production and the lower market prices for natural gas production in 1995.
Natural Gas Revenues
- --------------------
Natural gas revenues increased by 42% from 1995 to 1996. Average prices
were significantly higher in 1996 than in 1995. The average price received
for market price-based production was $.81 per Mcf, or 61%, higher in 1996
than in 1995. MESA's hedge losses decreased the reported prices for such
production by $.02 per Mcf in 1996. The higher market prices in 1996 were the
result of increased demand primarily due to a colder than normal 1995/1996
winter. Natural gas production from the Gulf of Mexico increased 122% from
1995 to 1996 due to the South Marsh Island drilling program. Natural gas
revenues decreased by 7% from 1994 to 1995. In 1995 production was lower in
both the Hugoton and West Panhandle fields due to timing and duration of
equipment maintenance and weather-related reduction in demand, respectively.
Average natural gas prices were slightly lower in 1995 than in 1994. The
average price received for market price-based production was $.22 per Mcf, or
14%, lower in 1995 than in 1994. MESA's hedge gains increased the reported
prices for such production by $.20 per Mcf in 1995. The lower market prices
in 1995 were a function of a surplus supply of natural gas. (See "Natural Gas
Prices" below.)
<PAGE>
NGL Revenues
- ------------
NGL revenues increased by 29% from 1995 to 1996. Average prices in 1996
were 32% higher than in 1995 due to improved market conditions. The increase
in prices was partially offset by a 2% decline in production. NGL revenues
increased by 4% in 1995 compared to 1994. Hugoton field NGL production was
slightly higher despite lower natural gas production reflecting improved
yields from the Satanta Plant. West Panhandle field NGL production decreased
in 1995 in proportion to the lower natural gas production. The lower
production was offset by higher average prices in 1995 due to improved market
conditions for NGLs.
Oil and Condensate Revenues
- ---------------------------
Oil and condensate revenues were slightly lower in 1996 than in 1995.
Oil production in the Gulf of Mexico was down 35% due to natural oil
production decline from the successful drilling in 1994. The production
decrease was offset by an increase of 19% in average prices received in 1996
than 1995 due to improved market conditions. Oil and condensate revenues
increased approximately 150% from 1994 to 1995. Gulf of Mexico production
increased in late 1994 due to successful drilling results. Average oil and
condensate prices were also higher in 1995 by $1.74 per Bbl.
Natural Gas Prices
------------------
Substantially all of MESA's natural gas production is sold under short or
long-term sales contracts. The following table shows MESA's natural gas
production sold under fixed price contracts and production sold at market
prices:
Years Ended December 31
--------------------------
1996 1995 1994
------ ------ ------
Natural Gas Production (MMcf):
Sold under fixed price contracts.......... 5,198 15,212 13,935
Sold at market prices..................... 78,803 62,100 68,404
------ ------ ------
Total production..................... 84,001 77,312 82,339
====== ====== ======
Percent sold at market prices............. 94% 80% 83%
====== ====== ======
In addition to its fixed price contracts, MESA will, when circumstances
warrant, hedge the price received for its market-sensitive production through
natural gas futures contracts, swaps and other financial instruments as well
as physical sales arrangements. The following table shows the effects of
MESA's fixed price contracts and hedging activities on its natural gas prices:
Years Ended December 31
--------------------------
1996 1995 1994
------ ------ ------
Average Natural Gas Prices (per Mcf):
Fixed price contracts..................... $ 3.21 $ 2.12 $ 2.16
Market prices received.................... 2.14 1.33 1.55
Hedge gains (losses)...................... (.02) .20 .01
------ ------ ------
Total market prices.................. 2.12 1.53 1.56
------ ------ ------
Total average prices...................... $ 2.19 $ 1.65 $ 1.67
====== ====== ======
The average natural gas prices under fixed price contracts increased in
1996 due to the expiration of certain lower priced contracts in 1995.
Gains and losses from hedging activities are included in natural gas
revenues when the applicable hedged natural gas is produced. MESA recognized
losses from hedging activities of $1.8 million in 1996, and gains of $12.7
million in 1995 and $895,000 in 1994.
Costs and Expenses
------------------
MESA's aggregate costs and expenses increased by approximately 15% from
1995 to 1996. Lease operating expenses increased 10% from 1995 to 1996 due to
higher production and fuel costs in the West Panhandle and Hugoton fields and
slightly higher overall production. Production and other taxes increased 9%
from 1995 to 1996 due to increased revenues partially offset by lower tax
rates for Hugoton field production. Exploration charges in 1996 were lower
than in 1995 due to a greater emphasis being placed on lower risk development
drilling throughout 1996. General and administrative ("G&A") expenses
increased in 1996 due to a $9.3 million charge relating to a reduction in
personnel associated with the Recapitalization, partially offset by lower
costs resulting from the personnel reduction and lower legal expenses.
Depreciation, depletion and amortization ("DD&A") expense, which is calculated
quarterly on a unit-of-production basis, was higher primarily due to a
decrease in estimated reserves and an impairment of long-lived assets of
approximately $6.8 million in connection with the adoption of a new accounting
standard (SFAS No. 121).
MESA's aggregate costs and expenses declined by approximately 7% from
1994 to 1995. Lease operating expenses declined marginally due to decreased
production. Production and other taxes decreased 14% from 1994 to 1995 due to
decreased production in the Hugoton and West Panhandle fields and lower tax
rates for Hugoton field production in 1995. Exploration charges in 1995 were
greater than in 1994 reflecting increased exploration activities in the Gulf
of Mexico and consist primarily of exploratory dry-hole expense. G&A expenses
were lower in 1995 than in 1994 primarily due to lower legal expenses and a
reduction in employee benefit expenses. DD&A expense was lower in 1995 than
in 1994 primarily due to lower equivalent production in 1995, oil and gas
reserve increases in the Hugoton and West Panhandle fields in the fourth
quarters of 1994 and 1995, and additional reserve discoveries in the Gulf of
Mexico in 1994 and 1995. (See "Supplemental Financial Data" in the notes to
the consolidated financial statements of MESA located elsewhere in this Form
10-K for discussion of oil and gas reserves.)
See "Production Costs" in the business section located elsewhere in this
Form 10-K.
The table below presents MESA's total production costs (lease operating
expenses and production and other taxes) by area of operation for each of the
years ended December 31 (in thousands, except per Mcf of natural gas
equivalent data):
<PAGE>
1996 1995 1994
---------------- ---------------- ----------------
Total Per Mcfe Total Per Mcfe Total Per Mcfe
------- -------- ------- -------- ------- --------
Lease Operating Expense:
Hugoton............... $13,545 $ .20 $12,703 $ .18 $12,549 $ .17
West Panhandle........ 28,896 .75 25,989 .67 26,910 .60
Gulf of Mexico........ 10,476 .46 9,848 .68 11,136 1.15
Other................. 1,530 3.79 907 2.57 623 2.00
------- ------- -------
54,447 .42 49,447 .40 51,218 .40
------- ------- -------
Production and Other
Taxes:
Hugoton............... 16,297 .24 15,004 .21 17,505 .24
West Panhandle........ 3,472 .09 3,216 .08 3,099 .07
Gulf of Mexico........ 19 .00 34 .00 68 .01
Other................. 283 .70 149 .42 634 2.04
------- ------- -------
20,071 .16 18,403 .15 21,306 .17
------- ------- -------
Total Production Costs... $74,518 $ .58 $67,850 $ .55 $72,524 $ .57
======= ======= =======
Other Income (Expense)
----------------------
Interest expense in 1996 was $27.5 million lower than in 1995 due to
lower average aggregate debt outstanding at lower average interest rates.
Average aggregate debt outstanding and average interest rates fell to $1,036.0
million and 11.34%, respectively, from $1,246.9 million and 11.64% in 1995.
Interest expense in 1995 was not materially different from 1994 as average
aggregate debt outstanding and average interest rates did not change
materially. Non-cash interest expense representing accretion of discount on
long-term debt totaled $8 million, $39 million and $79 million in 1996, 1995
and 1994, respectively.
Interest income decreased $8.2 million from 1995 to 1996 due to lower
average cash balances in 1996. Interest income increased from $13.5 million
in 1994 to $15.9 million in 1995 as a result of higher average cash balances
and higher average interest rates earned on these cash balances in 1995.
Results of operations for the years 1996, 1995, and 1994 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):
Years Ended December 31
-------------------------
1996 1995 1994
------- ------- -------
Gains from investments...................... $ 9,418 $18,420 $ 6,698
Gains from collections from Bicoastal
Corporation............................... 2,548 6,352 16,577
Gain from adjustment of contingency reserve. 15,000 -- --
Other....................................... (1,929) 2,403 (4,011)
------- ------- -------
Total other income..................... $25,037 $27,175 $19,264
======= ======= =======
The gains from investments relate primarily to energy futures contracts,
which include New York Mercantile Exchange ("NYMEX") futures contracts,
commodity price swaps and options that are not accounted for as hedges of
future production. MESA's investments in marketable securities and futures
contracts are valued at market prices at each reporting date with gains and
losses included in the statement of operations for such reporting period
whether or not such gains or losses have been realized. Gains from
collections from Bicoastal Corporation represent returns on MESA's investment
in Bicoastal subsequent to the confirmation of its bankruptcy plan. No
additional payments from Bicoastal are expected. In the second quarter of
1996, MESA revalued certain contingencies associated primarily with contracts
which were settled in the mid-to-late 1980s. As a result of the revaluation,
MESA recorded a gain of $15 million in the second quarter of 1996.
Production Allocation Agreement
-------------------------------
Effective January 1, 1991, MESA entered into the PAA with CIG which
allocates 77% of the production from the West Panhandle field to MESA and 23%
to CIG. During 1996, 1995, and 1994, MESA produced and sold 72%, 71%, and
69%, 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 (dollars in thousands):
Years Ended December 31
---------------------------
1996 1995 1994
------- ------- -------
Revenues accrued............... $ 8,112 $ 4,260 $ 8,662
Costs and expenses accrued..... (2,766) (1,576) (3,075)
------- ------- -------
Recorded to receivable......... 5,346 2,684 5,587
------- ------- -------
Depreciation, depletion
and amortization............. (2,546) (1,680) (3,713)
------- ------- -------
Total..................... $ 2,800 $ 1,004 $ 1,874
======= ======= =======
Production Accrued:
Natural gas (Mmcf)........ 1,734 1,155 2,386
Natural gas liquids
(Mbbls)................. 269 171 355
At December 31, 1996, the long-term gas balancing receivable under the
PAA due from CIG was $47.9 million net of accrued costs which is included in
other assets in the consolidated balance sheet. Approximately $18 million of
the long-term gas balancing receivable relating to the PAA is attributable to
MAPCO's interest in liquids purchased by MESA pursuant to the Liquids
Acquisition. 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.
Capital Resources and Liquidity
- -------------------------------
In August of 1996, MESA completed a recapitalization of its balance sheet
by issuing new equity and repaying and refinancing substantially all of its
then existing long-term debt. The Recapitalization included (i) a sale by
private placement of approximately 58.8 million shares of a new class of
Series B Preferred Stock for $133 million to DNR-MESA Holdings L.P., a Texas
limited partnership ("DNR"), whose sole general partner is Rainwater, Inc., a
Texas corporation owned by Richard E. Rainwater, and (ii) the issuance to
MESA's then existing stockholders of rights (the "Rights Offering") to
purchase a new class of Series A Preferred Stock. The Rights Offering was
substantially over subscribed and resulted in such stockholders' purchase of
approximately 58.6 million shares of Series A Preferred Stock for $132
million. In addition, as part of the Recapitalization, MESA entered into the
new seven-year $525 million Credit Facility with a group of banks, issued and
sold $475 million of Senior Subordinated Notes consisting of $325 million of
10-5/8% Senior Subordinated Notes due in 2006 and $150 million initial
accreted value of 11-5/8% Senior Subordinated Discount Notes due 2006.
The Recapitalization enhances MESA's ability to compete in the oil and
gas industry by substantially increasing its cash flow available for
investment and improving its ability to attract capital. The ability to
redirect cash flow to acquisition, exploitation and exploration activities and
plant expansion rather than debt service allows MESA to pursue its aggressive
growth strategy. Specifically, MESA's financial condition improved
significantly as a result of the Recapitalization due to (i) a significant
reduction in total debt outstanding (see table below), (ii) a reduction in
annual cash interest expense through lower debt balances and lower interest
rates, and (iii) the extension of maturities on its long-term debt.
Mesa Operating Co., a Delaware corporation and a wholly-owned subsidiary
of MESA, is the borrower under the Credit Facility and the issuer under the
Senior Subordinated Notes and the Senior Discount Notes. MESA is the guarantor
on the Credit Facility and on both the Senior Subordinated Notes and the
Senior Discount Notes.
The Credit Facility is secured by liens on substantially all of MESA's
assets and matures on June 30, 2003. Borrowings under the Credit Facility
bear interest, at MESA's option, at Interbank Eurodollar rates plus 1-1/2%, CD
rates plus 1-1/2%, Fed Funds rates plus 1% or the prime rate plus 1/2%. MESA
has entered into a two-year interest rate swap ending on August 28, 1996, that
fixes the interest rate on $250 million of borrowings under the Credit
Facility at approximately 7-3/4%. The borrowing base for the Credit Facility
is determined based on the value of MESA's proved oil and gas reserves and was
initially set at $525 million. The borrowing base at December 31, 1996 was
$525 million and, as of such date, $319 million was outstanding under the
Credit Facility. MESA currently has a commitment letter from The Chase
Manhattan Bank, N.A. to amend and restate the Credit Facility to increase the
total amount of the Credit Facility to $650 million in connection with the
Greenhill Acquisition. Borrowings under the Credit Facility will be used to
fund the Greenhill Acquisition. The Credit Facility restricts, among other
things, MESA's ability to incur additional indebtedness, create liens, pay
dividends, acquire stock or make investments, loans or advances.
The amounts outstanding under the Senior Subordinated Notes and the
Senior Discount Notes at December 31, 1996 were approximately $325 million and
$159 million, respectively, and both the Senior Subordinated Notes and the
Senior Discount Notes are unsecured and mature in 2006. The Senior
Subordinated Notes bear interest at a rate of 10-5/8%, payable semiannually.
The Senior Discount Notes do not accrue interest until July 1, 2001, however,
the accreted value of such notes will increase at a rate of 11-5/8% compounded
semiannually until such date. Beginning July 1, 2001, the Senior Discount
Notes will bear interest at a rate of 11-5/8% compounded semiannually. Prior
to July 1, 1999, MESA may, at its option, on any one or more occasions, redeem
up to 33-1/3% of the aggregate principal amount of each of the Senior
Subordinated Notes and the Senior Discount Notes at a redemption price equal
to 110% of the principal amount or accreted value thereof with proceeds of
equity offerings.
The indentures governing the Senior Subordinated Notes and the Senior
Discount Notes contain certain covenants that, among other things, limit the
ability of MESA and its restricted subsidiaries to incur additional
indebtedness and issue redeemable stock, pay dividends, make investments, make
certain other restricted payments, enter into certain transactions with
affiliates, dispose of assets, incur liens and engage in mergers and
consolidations.
Summarized long-term debt (in thousands) and year-end interest rates are as
follows:
December 31, 1996 December 31, 1995
-------------------- -----------------------
Average Average
Interest Interest
Balance Rate Balance Rate
-------- -------- ---------- --------
Fixed Rate Debt..... $483,772 10.95% $1,170,307 11.7%
Variable Rate Debt.. 319,000 7% 61,131 8.25%
Other............... 5,305 N/A 5,305 N/A
-------- ----------
Total............... $808,077 $1,236,743
======== ==========
Business Strategy
-----------------
A primary component of MESA's strategy is to expand its development and
exploration activities. MESA has budgeted $130 million for development,
exploration and gas processing in 1997, an increase of 160% over 1996
expenditures of $50 million. Of the 1997 total, $86 million is planned for
development, $32 million for exploratory drilling, seismic and lease
acquisition, and $12 million for gas plant and facility expansions. The 1997
budget includes work planned for the Greenhill properties. The timing of most
of MESA's capital expenditures is discretionary with no material long-term
capital expenditure commitments. Consequently, MESA has a significant degree
of flexibility to adjust the level of such expenditures as circumstances
warrant.
In addition to developing its existing reserves, MESA will attempt to
increase its reserve base, production and operating cash flow by engaging in
strategic acquisitions of oil and natural gas properties. MESA does not have
a specific acquisition budget because of the unpredictability of the timing
and size of forthcoming acquisition activities. There is no assurance that
MESA will be able to identify suitable acquisition candidates in the future,
or that MESA will be successful in the acquisition of producing properties.
Further, there can be no assurances that any future acquisitions made by the
Company will be integrated successfully into the Company's operations or will
achieve desired profitability objectives.
Management believes that cash from operating activities, together with
the availability under the Credit Facility will be sufficient for MESA to meet
its debt service obligations and scheduled capital expenditures, to fund the
Greenhill Acquisition and to fund its working capital needs for the next
several years. In order to finance any possible future acquisitions, MESA
will either use borrowings available under the Credit Facility or MESA may
seek to obtain additional debt or equity financing in the public or private
capital markets. In February 1997, MESA filed a shelf registration statement
for $500 million of debt securities and/or common stock with the Commission.
In addition, MESA may seek to use its equity securities as an acquisition
currency. The availability and attractiveness of these sources of financing
will depend upon a number of factors, some of which will relate to the
financial condition and performance of MESA, and some of which will be beyond
MESA's control, such as prevailing interest rates, oil, natural gas and NGL
prices, the availability of properties for acquisition and other market
conditions. There can be no assurance that additional debt or equity
financing will be available or be available on terms attractive to MESA. In
addition, the ability of MESA to incur any additional indebtedness and grant
security interests with respect thereto will be subject to the terms of the
Credit Facility and the indentures governing its Senior Subordinated Notes and
Senior Discount Notes.
Other
- -----
See Note 8 to the consolidated financial statements of MESA included
elsewhere in this Form 10-K for information regarding the status of certain
pending litigation.
In order to mitigate the potential negative effects of volatile commodity
prices, MESA entered into over-the-counter commodity and natural gas basis
swap agreements with financial institutions and gas marketing companies. A
commodity swap has the effect of fixing the absolute price or setting a
trading range for a specific product. A natural gas basis swap "fixes" the
differential between MESA's physical gas delivery points and the NYMEX Henry
Hub.
Through financial swaps and fixed price sales contracts MESA fixed the
price on approximately 90% of the companies first quarter 1997 natural gas
production at $2.90 per MMBtu. Utilizing swaps and fixed price contracts,
MESA sold 18% of its projected natural gas production at approximately $2.50
per MMBtu for the remainder of 1997. MESA sold approximately 8% of its
projected natural gas liquids production at a net price of $16.68 per barrel
from February 1997 through December 1997.
Regarding the Greenhill acquisition, MESA hedged approximately 100% of
its 1997 expected natural gas production at close to $2.59 per MMBtu and
approximately 30% of Greenhill's projected crude oil production at
approximately $22.60 per barrel. Through the use of a collar, MESA created a
$19.25 floor and a $25.50 cap for approximately 20% of the 1997 expected
Greenhill crude oil production. For the year 1998, MESA fixed approximately
40% of the projected Greenhill natural gas production around $2.35. With
respect to the MAPCO acquisition, MESA sold approximately 100% of the crude
oil and natural gas liquids at a net price of $21.00 per barrel and $18.66 per
bbl, respectively, for the first three quarters of 1997.
In addition to these hedges, MESA entered into an eight year agreement
for 13,000 MMBtus of natural gas per day beginning January 1, 1997. Under
this agreement, MESA will receive NYMEX Henry Hub plus $0.52 per MMBtu for the
first two years and 10% of the NYMEX WTI crude oil for the remaining six
years.
In connection with acquisitions, MESA has and expects to continue to
enter into hedging arrangements for all or a portion of the production on the
acquired properties. For example, in connection with the Greenhill
Acquisition, MESA entered into hedging arrangements with respect to 30% of
1997 oil production, 100% of 1997 natural gas production and 40% of 1998
natural gas production attributable to the Greenhill Reserves. MESA also
entered into hedging arrangements with respect to the first nine months of
1997 relating to production from the MAPCO Acquisition.
MESA intends to continue to improve its financial flexibility generated
from the Recapitalization in order to avail itself of the optimal forms of
capital required to meet the Company's growth objectives. MESA may pursue the
exchange of its currently outstanding classes of Preferred Stock for Common
Stock. Before such an exchange can occur, certain terms must be met,
including, among others, the required approval of the holders of Common Stock
and each class of Preferred Stock. There is no assurance that such exchange
will take place or of the timing and terms of such exchange.
Management does not anticipate that inflation will have a significant
effect on MESA's operations.
Cash Flow from Operating Activities
- -----------------------------------
Net cash provided by operating activities increased 46% from 1995 to 1996
primarily as a result of sales of investments and a reduction in net loss as
compared to 1995 before extraordinary, non-operating, loss on debt
extinguishment. Net cash provided by operating activities increased 30% from
1994 to 1995 primarily as a result of the $43 million litigation settlement in
1994.
Item 8. Consolidated Financial Statements and Supplementary Data
=================================================================
The consolidated financial statements of MESA, and notes thereto,
together with the report of Arthur Andersen LLP, MESA's independent public
accountants, dated February 27, 1997, and supplementary data are included in
this Form 10-K under Item 14 on pages F-2 through F-8.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
========================================================================
None.
PART III
Item 10. Directors and Executive Officers of the Registrant
============================================================
Information regarding Directors and Executive Officers of MESA appears in
MESA's Proxy Statement for the 1997 Annual Meeting of Stockholders ("Proxy
Statement"), which is to be filed with the Commission, and such information is
incorporated by reference herein.
Item 11. Executive Compensation
===============================
The presentation of Executive Compensation of the Registrant appears in
the Proxy Statement, which is to be filed with the Commission, and such
information (other than information that is not required to be set forth in
this 10-K) is incorporated by reference herein.
Item 12. Security Ownership of Certain Beneficial Owners and Management
========================================================================
The presentation of the Security Ownership of Certain Beneficial Owners
and Management of the Registrant appears in the Proxy Statement, which is to
be filed with the Commission, and such information is incorporated by
reference herein.
Item 13. Certain Relationships and Related Transactions
========================================================
The information in Item 11, "Executive Compensation," and in the Proxy
Statement under "Election of Directors," which is to be filed with the
Commission, is incorporated by reference herein.
<PAGE>
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
==========================================================================
(a)(1) Consolidated Financial Statements and Supplementary Data
- ----------------------------------------------------------------
Page in Form 10-K
-----------------
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-8
(a)(2) Consolidated Financial Statement Schedules
- --------------------------------------------------
The consolidated financial statement schedules have been omitted because
they are not required, are not applicable or the information required has been
included elsewhere herein.
(a)(3) Exhibits
- ----------------
(Asterisk indicates exhibits are incorporated by reference herein).
*3.1 - Amended and Restated Articles of Incorporation of MESA Inc.
dated December 31, 1991 (Exhibit 3[a] to MESA's Form
10-K dated December 31, 1991).
*3.2 - Statement of Resolution establishing Series A 8% Cumulative
Convertible Preferred Stock and Series B 8% Cumulative
Convertible Preferred Stock. (Exhibit 4 to MESA's Form 8-K
dated April 29, 1996).
*3.3 - Amended and Restated Bylaws of MESA Inc. dated July 2,
1996 (Exhibit 3.3 to MESA's Form 10-Q dated August 13,
1996).
*4.1 - Credit Agreement dated as of July 2, 1996, among MESA
Operating Co., as Borrower, MESA Inc. and the Banks listed as
lenders in the Credit Agreement and The Chase Manhattan
Bank, N.A., as Administrative Agent, Bankers Trust Company,
as Syndication Agent, and Society Generale, Southwest Agency,
as Documentation Agent (Exhibit No. 4.16 to MESA's Form 10-Q
dated August 13, 1996).
*4.2 - Indenture dated July 2, 1996, among Mesa Operating Co., as
Issuer, MESA Inc., as a Guarantor, and Harris Trust and
Savings Bank as Trustee relating to 11-5/8% Senior
Subordinated Discount Notes Due 2006 (Exhibit No. 4.17 to
MESA's Form 10-Q dated August 13, 1996).
*4.3 - Indenture dated July 2, 1996, among Mesa Operating Co., as
Issuer, MESA Inc., as a Guarantor, and Harris Trust and
Savings Bank as Trustee relating to 10-5/8% Senior
Subordinated Notes Due 2006 (Exhibit No. 4.18 to MESA's Form
10-Q dated August 13, 1996).
The Registrant agrees to furnish to the Commission upon
request any instruments defining the right of holders of
long-term debt with respect to which the total amount
outstanding does not exceed 10% of the total assets of the
Registrant and its subsidiaries on a consolidated basis.
*10.1 - Stock Purchase Agreement, dated April 26, 1996, between MESA
and DNR-MESA Holdings, L.P. (Exhibit No. 10 to MESA's
Form 8-K filed on April 29, 1996).
*10.2 - Contract dated January 3, 1928, between Colorado Interstate
Gas Company and Amarillo Oil Company (the "B" Contract)
(Exhibit 10.1 to Pioneer Corporation's Form 10-K dated
December 31, 1985).
*10.3 - Amendments to the "B" Contract (Exhibit 10.2 to Pioneer
Corporation's Form 10-K dated December 31, 1985).
*10.4 - Gathering Charge Agreement dated January 20, 1984, as
amended, with respect to the "B" Contract (Exhibit 10.3 to
Pioneer Corporation's Form 10-K dated December 31, 1985).
*10.5 - Agreement of Compromise and Settlement dated May 29, 1987,
between the Partnership and Colorado Interstate Gas Company
(Confidential Treatment Requested) (Exhibit 10[s] to the
Partnership's Form 10-K dated December 31, 1987).
*10.6 - Agreement of Sale between Pioneer Corporation and Cabot
Corporation dated August 29, 1984 (Exhibit 10.5 to Pioneer
Corporation's Form 10-K dated December 31, 1985).
*10.7 - Settlement Agreement dated March 15, 1989, by and among MESA
Operating Limited Partnership and MESA Limited Partnership,
et al, Energas Company and the City of Amarillo (Exhibit
10[k] to the Partnership's Form 10-K dated December 31,
1990).
*10.8 - Gas Purchase Agreement dated December 1, 1989, between
Williams Natural Gas Company and MESA Operating Limited
Partnership acting on behalf of itself and as agent for MESA
Midcontinent Limited Partnership (Exhibit 10.1 to
Registration Statement of the Partnership on Form S-3,
Registration No. 33-32978).
*10.9 - "B" Contract Production Allocation Agreement dated July 29,
1991, and effective as of January 1, 1991, between Colorado
Interstate Gas Company and Mesa Operating Limited
Partnership (Exhibit 10[r] to MESA's Form 10-K dated
December 31, 1991).
*10.10 - Amendment to "B" Contract Production Allocation Agreement
effective as of January 1, 1993, between Colorado Interstate
Gas Company and Mesa Operating Limited Partnership (Exhibit
10.24 to MESA's Registration Statement on Form S-1,
Registration No. 033-51909).
*10.11 - Amended Supplemental Stipulation and Agreement between
Colorado Interstate Gas Company and Mesa Operating Limited
Partnership dated June 19, 1991 (Exhibit 10[w] to the
Partnership's Registration Statement on Form S-4,
Registration No. 33-42102).
*10.12 - Amended Peak Day Gas Purchase Agreement dated effective June
19, 1991, between Colorado Interstate Gas Company and Mesa
Operating Limited Partnership (Exhibit 10[t] to MESA's
Form 10-K dated December 31, 1991).
*10.13 - Omnibus Amendment to Collateral Instruments to Supplemental
Stipulation and Agreement dated June 19, 1991, between
Colorado Interstate Gas Company and Mesa Operating Limited
Partnership (Exhibit 10[u] to MESA's Form 10-K dated
December 31, 1991).
*10.14 - Amarillo Supply Agreement between Mesa Operating Limited
Partnership, Seller, and Energas Company, a division of Atmos
Energy Corporation, Buyer, dated effective January 2, 1993
(Exhibit 10.14 to MESA's Form 10-K dated December 31,
1995).
*10.15 - Gas Gathering Agreement-Interruptible between Colorado
Interstate Gas Company, Transporter, and Mesa Operating
Limited Partnership, Shipper, dated effective October 1,
1993, as amended by agreements dated January 1, 1994,
January 5, 1994, and June 1, 1994 (Exhibit 10.15 to MESA's
Form 10-K dated December 31, 1995).
*10.16 - Gas Supply Agreement dated May 11, 1994, between Mesa
Operating Co., as successor to Mesa Operating Limited
Partnership, acting on behalf of itself and as agent for
Hugoton Capital Limited Partnership, and Williams Gas
Marketing Company, and Gas Supply Guarantee dated May 11,
1994 (Exhibit 10.16 to MESA's Form 10-K dated December 31,
1995).
*10.17 - Gas Transportation Agreement dated June 14, 1994, between
Western Resources, Inc. and Mesa Operating Co., acting on
behalf of itself and as agent for Hugoton Capital Limited
Partnership (Exhibit 10.24 to MESA's Form 10-K dated
December 31, 1994).
*10.18 - Incentive Bonus Plan of Mesa Operating Limited Partnership,
as amended, dated effective January 1, 1986 (Exhibit 10[s]
to the Partnership's Form 10-K dated December 31, 1990).
*10.19 - Performance Bonus Plan of Mesa Operating Limited Partnership
dated effective January 1, 1990 (Exhibit 10[t] to the
Partnership's Form 10-K dated December 31, 1990).
*10.20 - 1991 Stock Option Plan of MESA (Exhibit 10[v] to MESA's
Form 10-K dated December 31, 1991).
*10.21 - Interruptible Gas Transportation and Sales Agreement dated
January 1, 1991, between Mesa Operating Limited Partnership
and Energas Company and Amendment dated January 1, 1995
(Exhibit 10.22 to MESA's Form 10-K dated December 31,
1995).
*10.22 - "B" Contract Operating Agreement dated January 1, 1988,
between Mesa Operating Limited Partnership and Colorado
Interstate Gas Company (Exhibit 10.23 to MESA's Form 10-K
dated December 31, 1995).
*10.23 - "B" Contract Agreement of Compromise and Settlement dated
May 29, 1987, between Mesa Operating Limited Partnership and
Colorado Interstate Gas Company, and Amendment to Gathering
Agreement dated July 15, 1990 (Exhibit 10.24 to MESA's
Form 10-K dated December 31, 1995).
*10.24 - Gas Purchase Agreement dated January 1, 1996, between Mesa
Operating Co., as Seller, and KN Marketing L.P., as Buyer,
and Amendment dated August 1, 1995 (Exhibit 10.25 to MESA's
Form 10-K dated December 31, 1995).
*10.25 - Change in Control Retention/Severance Plan adopted August
22, 1995, and Amendment dated October 20, 1995 (Exhibit 10.26
to MESA's Form 10-K dated December 31, 1995).
10.26 - Employment Agreement dated as of August 21, 1996, between
MESA Inc., a Texas corporation, and Ira Jon Brumley,
a Texas resident.
20 - Summary Report on MESA's Hugoton and West Panhandle field
properties relating to proved oil and gas reserves
at December 31, 1996, as prepared by Williamson Petroleum
Consultants, Inc.
21 - List of Subsidiaries of MESA.
27 - Article 5 of Regulation S-X Financial Data Schedule
for Year-End 1996 Form 10-K.
(b) Reports on Form 8-K
- ------------------------
None
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
MESA INC.
By: /s/ Jon Brumley
------------------------------------
Date: March 27, 1997 (Jon Brumley,
-------------- Chief Executive Officer)
----------
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Signature Title Date
--------- ----- ----
/s/ Jon Brumley
- ------------------------- Chief Executive Officer and March 27, 1997
(Jon Brumley) Chairman of the Board of
Directors
(Principal Executive Officer)
/s/ Dennis E. Fagerstone
- ------------------------- Executive Vice President and March 27, 1997
(Dennis E. Fagerstone) Chief Operating Officer
/s/ Stephen K. Gardner
- ------------------------- Senior Vice President and March 27, 1997
(Stephen K. Gardner) Chief Financial Officer
(Principal Financial Officer)
/s/ Wayne A. Stoerner
- ------------------------- Controller March 27, 1997
(Wayne A. Stoerner) (Principal Accounting Officer)
/s/ John S. Herrington
- ------------------------- Director March 27, 1997
(John S. Herrington)
/s/ Kenneth A. Hersh
- ------------------------- Director March 27, 1997
(Kenneth A. Hersh)
/s/ Boone Pickens
- ------------------------- Director March 27, 1997
(Boone Pickens)
/s/ Richard E. Rainwater
- ------------------------- Director March 27, 1997
(Richard E. Rainwater)
/s/ Philip B. Smith
- ------------------------- Director March 27, 1997
(Philip B. Smith)
/s/ Robert L. Stillwell
- ------------------------- Director March 27, 1997
(Robert L. Stillwell)
<PAGE>
CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
--------------------------------------------------------
Page in Form 10-K
-----------------
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-8
F-1
<PAGE>
<PAGE>
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, 1996, and 1995, 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, 1996. These financial statements are the responsibility of MESA'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.
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, 1996, and 1995, and the results of their
operations and their cash flows for each of the three years in the period
ended December 31, 1996, in conformity with generally accepted accounting
principles.
/s/ Arthur Andersen LLP
-----------------------
ARTHUR ANDERSEN LLP
Dallas, Texas
February 27, 1997
F-2
<PAGE>
<PAGE>
MESA Inc.
CONSOLIDATED STATEMENTS OF OPERATIONS
-------------------------------------
(in thousands, except per share data)
Years Ended December 31
-------------------------------
1996 1995 1994
Revenues: --------- --------- ---------
Natural gas........................... $ 184,595 $ 129,534 $ 139,580
Natural gas liquids................... 97,561 75,321 72,771
Oil and condensate.................... 18,180 19,594 7,877
Other................................. 11,075 10,510 8,509
--------- --------- ---------
311,411 234,959 228,737
--------- --------- ---------
Costs and Expenses:
Lease operating....................... 54,447 49,447 51,218
Production and other taxes............ 20,071 18,403 21,306
Exploration charges................... 5,431 6,604 5,157
General and administrative............ 31,473 26,749 28,649
Depreciation, depletion and
amortization........................ 103,301 85,791 93,724
--------- --------- ---------
214,723 186,994 200,054
--------- --------- ---------
Operating Income........................... 96,688 47,965 28,683
--------- --------- ---------
Other Income (Expense):
Interest income....................... 7,749 15,922 13,457
Interest expense...................... (121,135) (148,630) (144,757)
Gains from investments................ 9,418 18,420 6,698
Gains from collections from
Bicoastal Corporation............... 2,548 6,352 16,577
Gain from adjustment of contingency
reserve............................. 15,000 -- --
Other................................. (1,929) 2,403 (4,011)
--------- --------- ---------
(88,349) (105,533) (112,036)
--------- --------- ---------
Net income (loss) before extraordinary item 8,339 (57,568) (83,353)
Extraordinary loss on debt extinguishment.. (59,386) -- --
--------- --------- ---------
Net loss................................... $ (51,047) $ (57,568) $ (83,353)
========= ========= =========
Dividends on preferred stock............... (9,522) -- --
Net loss applicable to common stock........ $ (60,569) $ (57,568) $ (83,353)
========= ========= =========
Loss per common share before
extraordinary item.................... (.02) (.90) (1.42)
Loss per common share on
extraordinary item.................... (.92) -- --
--------- --------- ---------
Net loss per common share.................. $ (.94) $ (.90) $ (1.42)
========= ========= =========
Weighted Average Shares Outstanding:
Common................................ 64,164 64,050 58,860
Series A Preferred.................... 29,309 -- --
Series B Preferred.................... 29,720 -- --
(See accompanying notes to consolidated financial statements.)
F-3
<PAGE>
<PAGE>
MESA Inc.
CONSOLIDATED BALANCE SHEETS
---------------------------
(in thousands, except share data)
December 31
----------------------
ASSETS 1996 1995
---------- ----------
Current Assets:
Cash and cash investments..................... $ 16,681 $ 149,143
Investments................................... -- 38,280
Accounts and notes receivable................. 63,410 44,734
Other......................................... 4,186 4,590
---------- ----------
Total current assets..................... 84,277 236,747
---------- ----------
Property, Plant and Equipment:
Oil and gas properties, wells
and equipment, using the successful
efforts method of accounting................ 1,975,684 1,930,879
Office and other.............................. 36,740 41,603
Accumulated depreciation, depletion
and amortization............................ (966,040) (867,665)
---------- ----------
1,046,384 1,104,817
---------- ----------
Other Assets:
Restricted cash of subsidiary partnership..... -- 57,731
Gas balancing receivable...................... 61,204 56,020
Other......................................... 22,014 31,509
---------- ----------
83,218 145,260
---------- ----------
$1,213,879 $1,486,824
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Current maturities on long-term debt.......... $ 5,305 $ 101,413
Accounts payable and accrued liabilities...... 43,045 31,068
Interest payable.............................. 21,150 60,465
---------- ----------
Total current liabilities................ 69,500 192,946
---------- ----------
Long-Term Debt..................................... 802,772 1,135,330
---------- ----------
Deferred Revenue................................... 14,977 17,578
---------- ----------
Other Liabilities.................................. 61,136 73,966
---------- ----------
Contingencies
Stockholders' Equity:
8% Cumulative convertible preferred stock,
$.01 par value ($2.26 liquidation
preference), authorized 500,000,000
shares outstanding 121,643,686 shares
and 0 shares, respectively.................. 1,216 --
Common stock, $.01 par value, authorized
600,000,000 shares; outstanding 64,279,568
shares and 64,050,009 shares, respectively.. 643 640
Additional paid-in capital.................... 656,805 398,965
Accumulated deficit........................... (393,170) (332,601)
---------- ----------
265,494 67,004
---------- ----------
$1,213,879 $1,486,824
========== ==========
(See accompanying notes to consolidated financial statements.)
F-4
<PAGE>
MESA Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
(in thousands)
Years Ended December 31
------------------------------
1996 1995 1994
---------- -------- --------
Cash Flows From Operating Activities:
Net loss................................. $ (51,047) $(57,568) $(83,353)
Adjustments to reconcile net loss
to net cash provided by
operating activities:
Depreciation, depletion and
amortization...................... 103,301 85,791 93,724
Accreted interest on discount notes. 7,603 38,957 79,352
Litigation settlement............... -- -- (42,750)
Gain from adjustment of
contingency reserves.............. (15,000) -- --
Decrease (increase) in gas
balancing receivables............. (5,086) 1,516 (7,840)
Decrease in deferred natural gas
revenue........................... (2,686) (4,219) (785)
Natural gas hedging activities...... -- (9,715) 9,715
Sales of investments................ 47,698 48,555 18,771
Purchases of investments............ -- (49,003) (19,866)
Gains from investments.............. (9,418) (18,420) (6,698)
(Increase) decrease in
accounts receivable............... (18,209) (12,047) 5,934
Increase (decrease) in payables
and accrued liabilities........... (26,103) 45,243 (3,142)
Debt prepayment premium............. 51,612 -- --
Other............................... 18,648 151 5,535
---------- -------- --------
Net cash provided by
operating activities.............. 101,313 69,241 48,597
---------- -------- --------
Cash Flows From Investing Activities:
Capital expenditures..................... (50,223) (42,297) (32,590)
Other.................................... 5,188 860 (7,660)
---------- -------- --------
Net cash used in investing
activities........................ (45,035) (41,437) (40,250)
---------- -------- --------
Cash Flows From Financing Activities:
Issuance of stock........................ 248,431 -- 93,067
Repayments of long-term debt............. (1,406,366) (25,507) (175,107)
Long-term borrowings..................... 970,097 -- 77,754
Debt issuance costs...................... (19,109) -- --
Debt prepayment premium.................. (51,612) -- --
Restricted cash of subsidiary partnership 57,731 -- --
Other.................................... 12,088 3,424 652
---------- -------- --------
Net cash used in
financing activities.............. (188,740) (22,083) (3,634)
---------- -------- --------
Net Increase (Decrease) in Cash and
Cash Investments............................ (132,462) 5,721 4,713
Cash and Cash Investments
at Beginning of Year........................ 149,143 143,422 138,709
---------- -------- --------
Cash and Cash Investments at End of Year...... $ 16,681 $149,143 $143,422
========== ======== ========
(See accompanying notes to consolidated financial statements.)
F-5
<PAGE>
<PAGE>
MESA Inc.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
----------------------------------------------------------
(in thousands)
<TABLE>
<CAPTION>
8% Cumulative 8% Cumulative
Series A Series B
Common Stock Preferred Stock Preferred Stock Additional
-------------- --------------- --------------- Paid-in Accumulated
Shares Amount Shares Amount Shares Amount Capital Deficit
------ ------ ------ ------ ------ ------ ---------- -----------
<C> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1993..... 46,511 465 303,344 (191,680)
Net loss..................... -- -- -- -- -- -- -- (83,353)
Common stock issued for the
conversion of the remaining
General Partner minority
interest.................. 1,251 13 -- -- -- -- 2,716 --
Common stock issued in
secondary public offering.. 16,288 162 -- -- -- -- 92,905 --
------ ---- ------ ------ ------ ------ -------- ---------
Balance, December 31, 1994..... 64,050 640 -- -- -- -- 398,965 (275,033)
Net loss..................... -- -- -- -- -- -- -- (57,568)
------ ---- ------ ------ ------ ------ -------- ---------
Balance, December 31, 1995..... 64,050 640 -- -- -- -- 398,965 (332,601)
Net Loss..................... -- -- -- -- -- -- -- (51,047)
Stock Options Exercised...... 211 3 -- -- -- -- 1,103 --
8% Cumulative Convertible
Preferred Stock Issued.... -- -- 58,599 586 58,850 588 247,257 --
8% Cumulative Convertible
Preferred Stock Dividends. -- -- 1,863 18 2,351 24 9,480 (9,522)
8% Cumulative Convertible
Preferred Stock Converted
to Common Stock........... 19 -- (19) -- -- -- -- --
------ ---- ------ ------ ------ ------ -------- ---------
Balance, December 31, 1996...... 64,280 $643 60,443 $ 604 61,201 $ 612 $656,805 $(393,170)
====== ==== ====== ====== ====== ====== ======== =========
</TABLE>
(See accompanying notes to consolidated financial statements.)
F-6
<PAGE>
<PAGE>
MESA Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
(1) Organization and Summary of Significant Accounting Policies
===========================================================
MESA Inc., a Texas corporation, was formed in 1991 to reorganize the
business of Mesa Limited Partnership. Unless the context otherwise
requires, as used herein the term "MESA" refers to MESA Inc. and its
subsidiaries taken as a whole and includes its predecessor.
MESA is primarily in the business of acquiring, exploring for,
developing, producing, processing and selling natural gas and oil in the
United States. Over 65% of MESA's annual equivalent production is natural
gas and the balance is principally natural gas liquids. MESA's primary
producing areas are the Hugoton field of southwest Kansas, the West
Panhandle field of Texas and the Gulf of Mexico offshore Texas and
Louisiana. Production from MESA's properties has access to a substantial
portion of the major metropolitan markets in the United States, primarily in
the midwest and northeast, through numerous pipelines and other purchasers.
Principles of Consolidation
- ---------------------------
The accompanying consolidated financial statements reflect the
consolidated accounts of MESA and its subsidiaries after elimination of
intercompany transactions. Certain reclassifications have been made to
amounts reported in previous years to conform to 1996 presentation.
Statements of Cash Flows
- ------------------------
For purposes of the statements of cash flows, MESA classifies all
highly liquid investments with original maturities of three months or less
as cash and cash investments.
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 whereby the ratio of quarterly production to
beginning of period proved oil and gas reserves is applied to the remaining
net book value of such properties. Oil and gas reserve quantities represent
estimates only and there are numerous uncertainties inherent in the
estimation process. Actual future production may be materially different
from amounts estimated and such differences could materially affect future
amortization of proved properties. Geological and geophysical costs and
delay rentals are expensed as incurred.
In 1996 MESA adopted Statement of Financial Accounting Standards No.
121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of," ("SFAS No. 121") which establishes accounting
standards for the impairment of long-lived assets, certain identifiable
intangibles and goodwill. SFAS No. 121 requires a review for impairment
whenever circumstances indicate that the carrying amount of an asset may not
be recoverable. In performing the review for recoverability, MESA estimates
future cash flows (undiscounted and without interest charges) expected to
result from use of an asset and its eventual disposition. Impairment is
recognized only if the carrying amount of an asset is greater than the
expected future cash flows. The amount of impairment is based on the fair
value of the asset. Under SFAS No. 121, each property is individually
evaluated for impairment. Depreciation, depletion and amortization expense
for 1996 includes $6.8 million resulting from impairment of long-term assets
in accordance with SFAS No. 121. Such impairment relates primarily to a
Gulf of Mexico oil and gas property.
Income (Loss) Per Common Share
- ------------------------------
The computations of loss per common share are based on the weighted
average number of common shares outstanding during each period after
deducting amounts attributable to dividends on preferred stock.
Fair Value of Financial Instruments
- -----------------------------------
The carrying values of cash, marketable securities, notes receivable,
short-term trade receivables and payables, and restricted cash approximate
fair value. The carrying values of the commodity price and interest rate
swaps, futures and options represent their required cash deposits, if any,
plus or minus unrealized gains and losses, if acquired for trading purposes.
The fair value of commodity price and interest rate swaps, futures and
options is estimated based on the market value of the underlying instruments
(see Note 3). The fair value of long-term debt is estimated based on the
market prices for MESA's publicly traded debt and on current rates available
for similar debt with similar maturities and security for MESA's remaining
debt (see Note 4).
Gas Revenues
- ------------
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 for the year ended December 31, 1996, compared with 2% during the
same period in 1995 and 5% in 1994. 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 periodically utilizes financial and physical energy markets as a
hedge against natural gas price fluctuations. Gains or losses on hedges are
deferred and recognized as natural gas revenue when the hedged production
occurs. MESA recognized net losses of $1.8 million in 1996 and net gains of
$12.7 million and $895,000 in 1995 and 1994, respectively, related to
hedging activities.
Taxes
- -----
MESA 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.
Use of Estimates
- ----------------
The preparation of consolidated financial statements in conformity with
generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date
of the consolidated financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results could
differ from the estimates.
(2) Recapitalization
================
In August of 1996, MESA completed a recapitalization of its balance
sheet that entailed issuing $265 million in new preferred equity and
repaying and refinancing substantially all of its $1.2 billion of then
existing long-term debt (the "Recapitalization"). The structure and effects
of the Recapitalization are described below.
Series A & B Preferred Equity Sales
- -----------------------------------
On April 26, 1996, MESA entered into a stock purchase agreement with
DNR-MESA Holdings L.P., a Texas limited partnership ("DNR"), whose sole
general partner is Rainwater Inc., a Texas corporation owned by Richard E.
Rainwater. The sale of shares to DNR and certain other matters were
approved by MESA's stockholders at a special meeting on June 25, 1996. On
July 2, 1996, DNR purchased, in a private placement, approximately 58.8
million shares of a new class of Series B 8% Cumulative Convertible
Preferred Stock ("Series B Preferred"). On July 5, 1996, MESA commenced a
rights offering for approximately 58.6 million shares of a new class of
Series A 8% Cumulative Convertible Preferred Stock ("Series A Preferred") to
its existing stockholders (the "Rights Offering"). Stockholders received
.912 rights in respect of each share of common stock held. Each full right
was exercisable for one share of Series A Preferred at an exercise price of
$2.26 per share, the same per share price at which DNR purchased shares of
Series B Preferred. The Rights Offering was substantially oversubscribed
and on August 8, 1996, MESA issued approximately 58.6 million shares of
Series A Preferred to rights holders who exercised their rights.
As a result of the stock issuances and the subsequent pay-in-kind
quarterly dividends on the Series A and Series B Preferred, at December 31,
1996, DNR owned approximately 32.92% of MESA's fully diluted common shares
(excluding outstanding stock options). (See Note 6 for a more detailed
description of the preferred shares.)
New Debt
- --------
In conjunction with the issuance of Series A and B Preferred, MESA
entered into a new seven-year $525 million secured revolving credit facility
("the Credit Facility") with a group of banks. MESA also issued and sold
$475 million of senior subordinated notes consisting of $325 million of
10-5/8% senior subordinated notes due in 2006 (the "Senior Subordinated
Notes") and $150 million of 11-5/8% senior subordinated discount notes due
in 2006 (the "Senior Discount Notes"). (See Note 4 for a more detailed
description of the new debt.)
Use of Proceeds
- ---------------
The total proceeds from the issuance of the new equity and new
long-term debt, together with certain cash and investments on hand, were
used to repay and refinance then existing long-term debt and pay transaction
costs.
The fees associated with the Series A and B Preferred stock have been
offset against the proceeds of the issuance of the shares and reflected in
additional paid-in capital on the consolidated balance sheet. The fees
relating to the issuance of new debt have been capitalized and are being
amortized over the term of the associated debt.
An extraordinary loss totaling approximately $59.4 million on the
extinguishment of long-term debt was recognized in the third quarter of
1996. The loss consists primarily of the $51.6 million prepayment premium
on the $616 million of secured notes (the "Secured Notes") issued in 1991 by
a former subsidiary in a private placement with a group of institutional
lenders and approximately $11.2 million of unamortized debt issuance costs
and premiums associated with the debt that was repaid and refinanced,
partially offset by $3.4 million in gains from cash deposits associated with
the Secured Notes.
Effect of the Recapitalization
- ------------------------------
The Recapitalization enhances MESA's ability to compete in the oil and
gas industry by substantially increasing its cash flow available for
investment and improving its ability to attract capital. The ability to
redirect cash flow to reinvestment rather than debt service allows MESA to
pursue an aggressive growth strategy. Specifically, MESA's financial
condition improved significantly as a result of the Recapitalization due to
(i) a significant reduction in total debt outstanding, (ii) a reduction in
annual cash interest expense through lower debt balances and lower interest
rates, and (iii) the extension of maturities on its long-term debt.
In conjunction with the recapitalization of MESA on July 2, 1996, all
of MESA's principal subsidiaries were merged into Mesa Operating Co.
("MOC"). As a result, MOC now owns substantially all of MESA's assets and
liabilities, including all of MESA's oil and gas properties and all of its
long-term debt.
(3) Investments
===========
The value of investments are as follows (in thousands):
December 31
--------------------
1996 1995
------- -------
Equity securities:
Cost...................................... $ -- $10,719
Unrealized loss........................... -- (162)
NYMEX Futures Contracts:
Margin Cash............................... -- 17,498
Unrealized gain in trading contracts...... -- 7,558
Commodity Price Swaps:
Margin Cash............................... -- 2,434
Unrealized loss in price swaps............ -- (811)
Natural Gas Options:
Premiums.................................. -- 66
Unrealized gain in trading options........ -- 978
------- -------
Total market value........................ $ -- $38,280
======= =======
In 1996 MESA recognized net gains of approximately $9.4 million from
its investments compared with net gains in 1995 of $18.4 million and in 1994
of $6.7 million. These gains do not include gains or losses from natural
gas futures contracts accounted for as a hedge 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 following table sets forth the fair value of the financial
instruments accounted for as hedges(in thousands):
December 31, 1996 December 31, 1995
---------------------- ----------------------
Book Value Fair Value Book Value Fair Value
---------- ---------- ---------- ----------
Interest rate swaps....... $ (167) $ (1,200) $ -- $ --
Commodity price swaps..... -- 687 -- --
The net investment gains and losses recognized during a period include
both realized and unrealized gains and losses. MESA realized net gains from
investments of $16.9 million in 1996, $12.3 million in 1995, and $4.7
million in 1994. At December 31, 1995 MESA had recognized but not realized
approximately $7.6 million of gains associated primarily with natural gas
futures. In 1996 MESA realized $3.8 in gains on these investments. There
were no unrealized gains on investments at December 31, 1996.
Since April 10, 1996, MESA has made no investments in commodity futures
contracts. Speculative investments are expected to be limited in the
future.
(4) Long-term Debt
==============
Long-term debt and current maturities are as follows (in thousands):
December 31, December 31,
1996 1995
------------- ------------
10-5/8% Senior Subordinated Notes........... $ 325,000 $ --
11-5/8% Senior Discount Notes............... 158,772 --
Credit Facility............................. 319,000 --
Secured Notes............................... -- 504,674
Former Credit Agreement..................... -- 61,131
12-3/4% secured discount notes.............. -- 618,518
12-3/4% unsecured discount notes............ -- 39,725
13-1/2% subordinated notes.................. -- 7,390
Other....................................... 5,305 5,305
---------- ----------
808,077 1,236,743
Current maturities.......................... (5,305) (101,413)
---------- ----------
Long-term debt.............................. $ 802,772 $1,135,330
========== ==========
<PAGE>
Credit Facility
- ---------------
MOC is the borrower under the Credit Facility and all borrowings are
fully and unconditionally guaranteed by MESA Inc. The Credit Facility,
which is secured by liens on substantially all of MESA's assets, matures on
June 30, 2003. The borrowing base for the Credit Facility is determined
annually based on the value of MESA's proved oil and gas reserves. Initially
the borrowing base was set at $525 million. As of December 31, 1996, the
Credit Facility supports Letters of Credit totaling $11.0 million and MESA
has $195 million of unused borrowing capacity. Borrowings bear interest, at
MESA's option, at Interbank Eurodollar rates plus 1-1/2%, CD rates plus
1-1/2%, Fed Funds rates plus 1% or the prime rate plus 1/2%. MESA has
entered into an interest rate swap for two years that fixes the interest
rate on $250 million of borrowings at 7-3/4%.
The Credit Facility restricts, among other things, MESA's ability to
incur additional indebtedness, create liens, pay dividends, acquire stock or
make investments, loans and advances.
Senior Notes
- ------------
The 10-5/8% Senior Subordinated Notes are unsecured and mature in 2006.
MOC is the issuer of such notes and such notes are fully and unconditionally
guaranteed by MESA Inc. Interest is payable semiannually in cash.
The 11-5/8% Senior Discount Notes are unsecured and mature in 2006.
MOC is the issuer of such notes and such notes are fully and unconditionally
guaranteed by MESA Inc. Through June 30, 2001, interest will not accrue;
however, the accreted value, as defined, of such notes will increase at a
rate of 11-5/8% per year, compounded semiannually. Thereafter, through
maturity, interest will be payable semiannually in cash.
The indentures governing the Senior Subordinated Notes and the Senior
Discount Notes contain certain covenants that, among other things, limit the
ability of MESA and its restricted subsidiaries to incur additional
indebtedness and issue redeemable stock, pay dividends, make investments,
make certain other restricted payments, enter into certain transactions with
affiliates, dispose of assets, incur liens and engage in mergers and
consolidations.
Refinanced Debt
- ---------------
As part of the Recapitalization described in Note 2, substantially all
of MESA's then existing debt was repaid. Such debt included (i) the Secured
Notes; (ii) the $82.5 million bank credit facility, as amended (the "Former
Credit Agreement"); (iii) 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"), and (iv) the 13-1/2% subordinated notes due in 1999.
<PAGE>
Interest and Maturities
- -----------------------
The aggregate interest payments, net of amounts capitalized, made
during the years ended December 31, 1996, 1995 and 1994, were $149.7
million, $63.8 million and $62.1 million, respectively. The interest
payments in the year ended December 31, 1996, included a $42 million
interest payment made on January 2, 1996, paid pursuant to the terms of the
12-3/4% Discount Notes, in respect of the regular December 31, 1995 interest
payment. Payment of approximately $8.5 million, $39.0 million, and $70.6
million of interest expense incurred during 1996, 1995 and 1994,
respectively, was deferred under the terms of the Discount Notes until the
repayment dates of the Discount Notes. Such interest is included in
interest expense in the 1996, 1995 and 1994 consolidated statements of
operations.
There are no scheduled principal payments under the terms of the Credit
Facility, the Senior Subordinated Notes or the Senior Discount Notes in the
next five years. However, MESA may have to pay the $5.3 million of other
long-term debt within the next five years and therefore classifies such debt
in current maturities.
Fair Value of Long-term Debt
- ----------------------------
The following is a summary of estimated fair value of MESA's long-term
debt as of the years ended (in thousands):
1996 1995
------------------ ------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
-------- -------- -------- --------
10-5/8% Senior Subordinated Notes $325,000 $354,250 $ -- $ --
11-5/8% Senior Discount Notes.... 158,772 183,480 -- --
Credit Facility.................. 319,000 319,000 -- --
Secured Notes.................... -- -- 504,674 568,641
Former Credit Agreement.......... -- -- 61,131 61,131
12-3/4% secured discount notes... -- -- 618,518 541,905
12-3/4% unsecured discount notes. -- -- 39,725 35,262
13-1/2% subordinated notes....... -- -- 7,390 7,390
The fair value of long-term debt is estimated based on the market prices
for MESA's publicly traded debt and on current rates available for similar
debt with similar maturities and security for MESA's remaining debt.
(5) Income Taxes
============
MESA provides for income taxes using 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 tax basis of MESA'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 MESA's history of net operating
losses, a valuation allowance has been recorded which offsets the entire net
deferred tax asset. A summary of MESA's net deferred tax asset is as
follows (in millions):
December 31
---------------
1996 1995
------ ------
Deferred tax asset................................... $ 285 $ 261
Deferred tax liability............................... (12) --
Valuation allowance.................................. (273) (261)
------ ------
Net deferred tax asset.......................... $ -- $ --
====== ======
The principal components of MESA's net deferred tax asset (utilizing a
combined federal and state income tax rate of 38% and 39% as of December 31,
1996 and 1995, respectively) and the valuation allowance are as follows (in
millions):
December 31
---------------
1996 1995
------ ------
Tax basis of oil and gas properties in
excess of financial basis.......................... $ 71 $ 75
Regular tax net operating loss carryforward.......... 214 184
Other, net........................................... (12) 2
------ ------
Total................................................ 273 261
Valuation allowance.................................. (273) (261)
------ ------
Net deferred tax asset.......................... $ -- $ --
====== ======
At December 31, 1996, MESA had a regular tax net operating loss
carryforward of approximately $560 million. Additionally, MESA had an
alternative minimum tax loss carryforward available to offset future
alternative minimum taxable income of approximately $535 million. If not
used, these carryforwards will expire between 2007 and 2011.
The Internal Revenue Code of 1986 (the "Code") contains numerous
provisions which restrict or limit the use of corporate tax attributes in
conjunction with corporate acquisitions, dispositions, and reorganizations.
Included among these restrictive provisions is Code Section 382 which, in
general, limits the utilization of net operating loss ("NOL") carryforwards
subsequent to a substantial change (generally more than 50%) in corporate
stock ownership. The Section 382 ownership change (as defined for tax
purposes) is considered on a cumulative basis over a specified time period,
normally three years.
The issuance of Series B Preferred stock in the Recapitalization (see
Note 2) has caused the NOL carryforward limitations of Section 382 to apply
to MESA. As a result, MESA's ability to carry forward its NOLs existing at
the time of the Recapitalization ("Pre-change NOLs") to offset future
taxable income and gain will be limited to the sum of (i) an annual
allowance ("Annual NOL Allowance") determined, in part, by reference to
MESA's "value" immediately prior to the issuance of the Series B Preferred
stock ("Valuation Date") and (ii) the amount of any net unrealized gain
inherent in MESA's assets as of the Valuation Date ("Built In Gain")
recognized over a five year period. The imposition of the above restrictions
on MESA's Pre-change NOLs could result in a portion of those NOLs expiring
before MESA is able to utilize them. Any unused Annual NOL Allowance
amounts as well as any tax operating losses generated subsequent to the
Change Date will carryforward for use in future years without regard to the
Section 382 limitations described above.
(6) Stockholders' Equity
====================
Common Stock
- ------------
At December 31, 1996, MESA had outstanding 64,279,568 shares of common
stock. In late 1993 and 1994 MESA issued a total of approximately 1.7
million shares of common stock in exchange for the General Partner's 4.14%
interest in the subsidiary partnerships of MESA. In 1994 MESA completed an
equity offering which resulted in the issuance of an additional 16.3 million
shares of common stock. Proceeds from the Equity Offering increased
stockholders' equity by approximately $93 million and were used to reduce
long-term debt.
Preferred Stock
- ---------------
At December 31, 1996, MESA had authorized 600,000,000 shares of
preferred stock. The preferred stock issues outstanding at December 31,
1996, are as follows:
Shares Issued
and Outstanding
---------------
Series A 8% Cumulative Convertible Preferred....... 60,443,259
Series B 8% Cumulative Convertible Preferred....... 61,200,427
-----------
121,643,686
===========
The preferred stock was issued pursuant to the Recapitalization. (See
Note 2.)
Each share of Series A and B Preferred is convertible into one share of
MESA common stock at any time prior to mandatory redemption in 2008. After
2006, at the option of MESA's non-series B directors, MESA has the right to
redeem any outstanding Series A and Series B Preferred shares for common
stock or cash unless such shares were previously converted to common stock.
Similarly, at mandatory redemption in 2008, the remaining Series A and B
Preferred shares will be converted into common stock or cash at the option
of MESA's non-series B directors. An annual 8% pay-in-kind dividend will be
paid quarterly on the shares during the first four years following issuance.
Thereafter, the 8% dividend may, at the option of MESA, be paid in cash or
additional preferred shares, depending on whether certain financial tests
are met and subject to any limitations in MESA's debt agreements.
The Series A and B Preferred represented 64.6% of the fully diluted
common shares at the time of issuance and will represent 71.5% of such
shares after the mandatory four-year pay-in-kind period, excluding stock
options and assuming no other stock issuance by MESA. The Series A and B
Preferred have a liquidation preference per share equal to $2.26 plus
accrued and unpaid dividends. The terms of the Series A and Series B
Preferred are substantially identical except for certain voting rights and
certain provisions relating to transferability. The Series A and B
Preferred will vote with the common stock as a single class on all matters,
except as otherwise required by law and except for (i) the right of the
holders of the Series B Preferred to nominate and elect a majority of MESA's
Board of Directors for so long as DNR and its affiliates meet certain
minimum stock ownership requirements, and (ii) the right of the holders of
the Series A Preferred to elect two directors in the event of certain
dividend arrearages.
(7) Other Income
============
The gains from collection of interest from Bicoastal Corporation relate
to a note receivable from such company, which was in bankruptcy. MESA's
claims in the bankruptcy exceeded its recorded receivable. As of year-end
1996 MESA had collected the full amount of its allowed claim plus a portion
of the interest due on such claims.
In the second quarter of 1996, MESA revalued certain contingencies
associated primarily with contracts which were settled in the mid-to-late
1980's. As a result of the revaluation, MESA recorded a gain of $15 million
in the second quarter of 1996.
(8) Contingencies
=============
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 had underpaid royalties
due under the Gas Lease. Under the agreements with CIG, MESA has an
entitlement to gas produced from the Gas Lease. In August 1992 CIG filed a
third-party complaint against MESA for any such royalty underpayments which
may be allocable to MESA. Plaintiffs alleged that the underpayment was the
result of CIG's use of an improper gas sales price upon which to calculate
royalties and that the proper price should have been determined pursuant to
a "favored-nations" clause in a July 1, 1967, amendment to the Gas Lease
(the "Gas Lease Amendment"). The plaintiffs also sought a declaration by
the court as to the proper price to be used for calculating future
royalties.
The plaintiffs alleged royalty underpayments of approximately $500
million (including interest at 10%) covering the period from July 1, 1967,
to the present. In March 1995 the court made certain pretrial rulings that
eliminated approximately $400 million of the plaintiffs' claims (which
related to periods prior to October 1, 1989), but which also reduced a
number of MESA's defenses. MESA and CIG filed stipulations with the court
whereby MESA would have been liable for between 50% and 60%, depending on
the time period covered, of an adverse judgment against CIG for post-February
1988 underpayments of royalties.
On March 22, 1995, a jury trial began and on May 4, 1995, the jury
returned its verdict. Among its findings, the jury determined that CIG had
underpaid royalties for the period after September 30, 1989, in the amount
of approximately $140,000. Although the plaintiffs argued that the
"favored-nations" clause entitled them to be paid for all of their gas at
the highest price voluntarily paid by CIG to any other lessor, the jury
determined that the plaintiffs were estopped from claiming that the
"favored-nations" clause provides for other than a pricing-scheme to
pricing-scheme comparison. In light of this determination, and the
plaintiffs' stipulation that a pricing-scheme to pricing-scheme comparison
would not result in any "trigger prices" or damages, defendants asked the
court for a judgment that plaintiffs take nothing. The court, on June 7,
1995, entered final judgment that plaintiffs recover no monetary damages.
The plaintiffs have filed a motion for new trial on which the court has not
yet ruled. MESA cannot predict whether the court will grant such motion or,
if it does not, whether the plaintiffs will appeal the court's final
judgment.
On June 7, 1996, the plaintiffs filed a separate suit against CIG and
MESA in state court in Amarillo, Texas, similarly claiming underpayment of
royalties under the "favored-nations" clause, but based upon the
above-described pricing-scheme to pricing-scheme comparison on a
well-by-well monthly basis. The plaintiffs also claim underpayment of
royalties since June 7, 1995 under the "favored-nations" clause since 1967,
based upon either the pricing-scheme to pricing-scheme method or their
previously alleged higher price method. MESA believes it has several
defenses to this action and intends to contest it vigorously. MESA has not
yet determined the amount of damages, if any, that would be payable if such
action were determined adversely to MESA.
The federal court in the above-referenced first suit issued an order on
July 29, 1996, which stayed the second suit pending a decision by the court
on plaintiff's motion for new trial in the first suit.
However, based on the jury verdict and final judgment, MESA does not
expect the ultimate resolution of these lawsuits to have a material adverse
effect on its financial position or results of operations.
Lease Termination
- -----------------
In 1991 MESA sold certain producing oil and gas properties to Seagull
Energy Company ("Seagull"). In 1994, two lawsuits were filed against
Seagull in the 100th District Court in Carson County, Texas, by certain land
and royalty owners claiming that certain of the oil and gas leases owned by
Seagull have terminated due to cessation in production and/or lack of
production in paying quantities occurring at various times from first
production through 1994. In the third quarter of 1995, Seagull filed
third-party complaints against MESA claiming breach of warranty and false
representation in connection with the sale of such properties to Seagull.
Seagull filed a similar third-party complaint June 29, 1995, against MESA
covering a different lease in the 69th District Court in Moore County,
Texas. The plaintiffs in the cases against Seagull are seeking to terminate
the leases. Seagull, in its complaint against MESA, is seeking unspecified
damages relating to any leases which are terminated. MESA believes it has
several defenses to these lawsuits, including a two-year limitation on
indemnification set forth in the purchase and sale agreement pursuant to
which MESA sold the properties.
In February 1997, MESA entered a settlement agreement with Seagull
whereby MESA has been released from all claims associated with the third-
party claims.
Shareholder Litigation
- ----------------------
On July 3, 1995, Robert Strougo filed a class action and derivative
action in the District Court of Dallas County, Texas, 160th Judicial
District, against T. Boone Pickens, Paul W. Cain, John L. Cox, John S.
Herrington, Wales H. Madden, Jr., Fayez S. Sarofim, Robert L. Stillwell, and
J. R. Walsh, Jr. (the "Director Defendants"), each of whom is a present or
former director of MESA. The class action is purportedly brought on behalf
of a class of MESA shareholders and alleges, inter alia, that the Board
infringed upon the suffrage rights of the class and impaired the ability of
the class to receive tender offers by adoptions of the shareholder rights
plan. The lawsuit is also brought derivatively on behalf of MESA and
alleges, inter alia, that the Board breached fiduciary duties to MESA by
adopting the shareholder rights plan and by failing to consider the sale of
MESA. The lawsuit seeks unspecified damages, attorneys' fees, and
injunctive and other relief. Two other lawsuits filed by Herman Krangel,
Lilian Krangel, Jacquelyn A. Cady, and William A. Montagne, Jr., in the
District Court of Dallas County have been consolidated into this lawsuit.
A third lawsuit filed by Deborah M. Eigen and Adele Brody as a derivative
lawsuit in the U.S. District Court for the Northern District of Texas,
Dallas Division, intervened in this lawsuit.
On February 5, 1996, the Court denied Defendants' Motion to Dismiss. A
trial date has been set for September 15, 1997. The case has been stayed
pending a Special Litigation Committee investigation by MESA to decide
whether the case should be dismissed.
Other
- -----
MESA is also a defendant in other lawsuits and has assumed liabilities
relating to its predecessors. MESA does not expect the resolution of any of
these matters to have a material adverse effect on its financial position or
results of operations.
(9) Employee Benefit Plans
======================
Retirement Plans
- ----------------
MESA maintains two defined contribution retirement plans for the
benefit of its employees. MESA expensed $1.8 million in 1996, $.8 million
in 1995, and $3.3 million in 1994 in connection with these plans.
Option Plans
- ------------
In December 1991 the stockholders of MESA approved the 1991 Stock
Option Plan of MESA (the "Option Plan"), which authorized the grant of
options to purchase up to two million shares of common stock to officers and
key employees. In May 1994 the stockholders of MESA approved an amendment
to the Option Plan which increased the number of shares of common stock
authorized to four million from two million. The exercise price for 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, 1996, the following stock
options were outstanding under this plan:
Number of
Options
---------
Outstanding at December 31, 1995......................... 2,932,390
Granted............................................. 1,000,000
Exercised........................................... (1,000,000)
Forfeited........................................... (3,040)
---------
Outstanding at December 31, 1996......................... 2,929,350
=========
The outstanding options under this plan at December 31, 1996, are
detailed as follows:
Number of Date of Exercise Price
Options Grant Per Share Exercisable
--------- -------- -------------- -----------
1,126,000 .................. 01/10/92 $ 6.8125 1,126,000
132,500 .................. 10/02/92 11.6875 132,500
100,850 .................. 05/18/93 5.8125 100,850
475,000 .................. 11/10/93 7.3750 475,000
75,000 .................. 06/06/94 6.1875 75,000
20,000 .................. 05/12/95 5.6875 20,000
1,000,000 .................. 08/21/96 3.2500 --
--------- ---------
2,929,350 1,929,350
========= =========
On June 26, 1996, all existing options granted under this plan on this
date were 100% vested by MESA's board of directors. The options issued on
August 21, 1996, are exercisable as follows: after six months, 30%; after
one year, 55%; after two years, 80%; and after three years, 100%. At
December 31, 1996, options for 7,930 shares were available for grant under
this plan.
In August 1996 the 1996 Incentive Plan of MESA (the "Incentive Plan")
was created. This plan will be presented to MESA's stockholders for
approval at MESA's 1997 stockholders' meeting in the summer of 1997. If
approved, the Incentive Plan will authorize grants of options to purchase up
to 9 million shares of common stock to officers and key employees. The
exercise price for each share of common stock placed under option will be
determined by the type of option 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. If the
Incentive Plan is approved, the following options will be included in the
outstanding options of this plan:
Number of Date of Exercise Price
Options Grant Per Share Exercisable
--------- -------- -------------- -----------
1,000,000................... 08/21/96 $ 3.2500 --
2,150,000................... 09/30/96 4.0625 --
--------- --------
3,150,000 --
========= ========
These options are exercisable as follows: after six months, 30%; after
one year, 55%, and after two years, 100%.
In October 1995, the Financial Accounting Standards Board issued SFAS
No. 123, Accounting for Stock-Based Compensation, which is effective for
MESA's fiscal year beginning January 1, 1996. SFAS No. 123 establishes
financial accounting and reporting standards for stock-based employee
compensation plans. It defines a fair value based method of accounting for
an employee stock option or similar equity instrument and encourages all
entities to adopt that method of accounting for all of their employee stock
compensation plans and include the cost in the income statement as
compensation expense. However, it also allows an entity to continue to
measure compensation cost for those plans using the intrinsic value based
method of accounting prescribed by Accounting Principles Board ("APB")
Opinion No. 25, Accounting for Stock Issued to Employees. MESA accounts for
compensation cost for stock option plans in accordance with APB Opinion No.
25.
Pro forma information regarding net income and earnings per share is
required by SFAS No. 123 and has been determined as if MESA had accounted
for its employee stock options under the fair value method as provided
therein. The fair value for the options was estimated at the date of grant
using a Black-Scholes option pricing model with the following
weighted-average assumptions used for grants in 1996 and 1995, respectively:
risk-free interest rates of 6.58% and 6.80%; a volatility factor of the
expected market price of MESA's common stock of .6816 and .6326; no expected
dividends; and weighted-average expected option lives of five years. If the
fair value based method of accounting in SFAS 123 had been applied, MESA's
net income and earnings per share would have been reduced to the pro forma
amounts indicated below.
Year Ended Year Ended
December 31, December 31,
1996 1995
------------ ------------
(in thousands, except per share data)
Net Loss -- as reported.................... $(60,569) $(57,568)
Net Loss -- pro forma...................... (63,572) (57,600)
Net Loss per Common Share -- as reported... (.94) (.90)
Net Loss per Common Share -- pro forma..... (.99) (.90)
The fair value of stock options included in the pro forma amounts for
the years 1995 and 1996 is not necessarily indicative of future effects on
net income and earnings per share.
<PAGE>
A summary of the status of the Company's stock options as of December
31, 1996, 1995, and 1994, and changes during the years ending on those dates
is presented below:
<TABLE>
<CAPTION>
1994 1995 1996
-------------------- --------------------- --------------------
Weighted- Weighted- Weighted-
Average Average Average
Exercise Exercise Exercise
Fixed Options Shares Price Shares Price Shares Price
- -------------------------- -------------------- --------------------- --------------------
<C> <C> <C> <C> <C> <C> <C>
Outstanding at
beginning of year....... 1,933,050 $ 7.26 2,926,460 $ 6.21 2,932,390 $ 6.20
Granted................... 1,075,000 4.39 20,000 5.69 4,150,000 3.80
Exercised................. (41,720) 6.26 - - (1,000,000) 4.25
Forfeited................. (39,870) 8.00 (14,070) 8.39 (3,040) 9.68
--------- ------ --------- ------ --------- ------
Outstanding at
end of year.............. 2,926,460 $ 6.21 2,932,390 $ 6.20 6,079,350 $ 4.88
========= ========= =========
Options exercisable at
year-end................. 1,357,928 $ 7.28 2,319,262 $ 6.53 1,929,350 $ 7.20
========= ========= =========
Weighted-average fair
value of options
granted during the year.. N/A $ 3.42 $ 2.30
</TABLE>
The following table summarizes information regarding stock options
outstanding at December 31, 1996:
Weighted-
Number of Average Weighted- Weighted-
Options Remaining Average Number Average
Outstanding Exercise Contractual Exercise Exercisable Exercise
at 12/31/96 Price Life Price at 12/31/96 Price
- ------------ -------- ---------- --------- ----------- --------
1,126,000 $ 6.8125 5.0 years $ 6.8125 1,126,000 $ 6.8125
132,500 11.6875 5.8 years 11.6875 132,500 11.6875
100,850 5.8125 6.4 years 5.8125 100,850 5.8125
475,000 7.3750 6.9 years 7.3750 475,000 7.3750
75,000 6.1875 7.4 years 6.1875 75,000 6.1875
20,000 5.6875 8.4 years 5.6875 20,000 5.6875
1,000,000 3.2500 9.6 years 3.2500 -- --
1,000,000 3.2500 9.6 years 3.2500 -- --
2,150,000 4.0625 9.8 years 4.0625 -- --
--------- ---------
6,079,350 $ 4.8800 8.4 years $ 4.8800 1,929,350 $ 7.2000
========= =========
Postretirement Benefits
- -----------------------
Effective January 1, 1993, MESA 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 MESA, this standard primarily applies to
postretirement medical benefits for retired and current employees. The
liability for benefits existing at the date of adoption (the "Transition
Obligation") will be amortized over the remaining life of the retirees or 20
years, whichever is shorter.
MESA maintains two separate plans for providing postretirement medical
benefits. One plan covers MESA's retirees and current employees (the "MESA
Plan"). The other plan, which relates to the retirees of Pioneer, acquired
by MESA in 1986 (the "Pioneer Plan"). Under the MESA Plan, employees who
retire from MESA and who have had at least ten years of service with MESA
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 MESA 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. MESA does 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, 1996, (in thousands):
MESA Pioneer
Plan Plan(a) Total
------- ------- -------
Accumulated Postretirement Benefit
Obligation ("APBO"):
Retirees and dependents............ $ 1,449 $ 9,647 $11,096
Actives - fully eligible........... 599 -- 599
Other actives...................... 637 -- 637
------- ------- -------
Total APBO.................... 2,685 9,647 12,332
Unrecognized Transition Obligation....... (1,337) (2,117) (3,454)
Unrecognized Net Gain (Loss)............ (291) 1,732 1,441
------- ------- -------
Accrued Postretirement
Benefit Obligation.................... $ 1,057 $ 9,262 $10,319
======= ======= =======
- ----------
(a) MESA established an accrued liability associated with the
Pioneer Plan in conjunction with its acquisition of Pioneer in
1986.
For measurement purposes, the 1996 annual rate of increase in per
capita cost of covered health care benefits was assumed to be 10% for those
participants under age 65 and 9% 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, 1996, by approximately $1,018,000
and the net periodic postretirement benefit cost for the year ended December
31, 1996, by approximately $117,000. The net periodic postretirement
benefit cost for the year ended December 31, 1996, was approximately $1.5
million based on the assumptions used.
The discount rate used in determining the APBO as of December 31, 1996,
was 7.5%.
<PAGE>
The following table presents MESA's cost of postretirement benefits
other than pensions for the years ended December 31 (in thousands):
1996 1995 1994
------ ------ ------
Net periodic postretirement benefit cost:
Service cost............................ $ 142 $ 124 $ 110
Interest cost........................... 1,040 1,005 988
Amortization of Transition Obligation... 276 276 276
------ ------ ------
$1,458 $1,405 $1,374
====== ====== ======
Actual costs of providing benefits:
MESA Plan............................... $ 78 $ 4 $ 120
Pioneer Plan............................ 784 918 666
------ ------ ------
$ 862 $ 922 $ 786
====== ====== ======
(10) Major Customers
===============
In 1996 revenues include sales to MAPCO Natural Gas Liquids, Inc.
("MAPCO") of $95.1 million (30.8%) and Western Resources, Inc. ("WRI") of
$48.5 million (15.7%). In 1995 revenues included sales to MAPCO of $75.0
million (34.4%), and WRI of $21.9 million (10.0%). In 1994 revenues
included sales to MAPCO of $70.9 million (31.4%), WRI of $37.4 million
(16.6%) and Energas Company of $22.8 million (10.1%). MESA does not
anticipate that the loss of any of these customers would result in a
material adverse effect because the volumes could be sold to other
customers.
(11) Concentrations of Credit Risk
=============================
Substantially all of MESA's accounts receivable at December 31, 1996,
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 MESA'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, MESA analyzes
the entity's net worth, cash flows, earnings, and credit ratings.
Receivables are generally not collateralized. Historical credit losses
incurred by MESA on receivables have not been significant.
(12) Subsequent Events
-----------------
On February 7, 1997, MESA entered into a Stock Purchase Agreement to
purchase 100% of the outstanding capital stock of Greenhill for a total
purchase price of $270 million. As of December 31, 1996, Greenhill's
properties had estimated proved reserves of approximately 23.4 MMBbls
(unaudited) of oil, and 41.9 Bcf (unaudited) of gas, or an aggregate of
approximately 30.4 MMBOE (unaudited). The closing of the Greenhill
Acquisition is expected to occur on April 15, 1997. The Greenhill
Acquisition will be accounted for under the purchase method of accounting.
However, because the purchase agreement provides for an effective date of
January 1, 1997, MESA will receive the benefits of all Greenhill production
and cash flow from the effective date to the closing date as additional
assets acquired. Under the purchase agreement, MESA will pay interest on
the $270 million purchase price (less the $15 million deposit) at an annual
rate of 10% from the effective date to the closing date. The purchase price
is subject to adjustment for certain title and environmental matters.
On February 6, 1997, MESA purchased all of MAPCO's natural gas liquids
and condensate production in the West Panhandle field for $66 million,
effective as of January 1, 1997. The NGL Acquisition has been accounted for
under the purchase method of accounting.
F-7
<PAGE>
<PAGE>
SUPPLEMENTAL FINANCIAL DATA
===========================
Oil and Gas Reserves and Cost Information
- -----------------------------------------
(Unaudited)
Net proved oil and gas reserves as of December 31, 1996, associated
with MESA's two most significant natural gas producing fields were estimated
by independent petroleum engineering consultants. These two fields, the
Hugoton and West Panhandle fields, represented over 95% of MESA's net proved
equivalent natural gas reserves as of the date estimated by the independent
petroleum engineers. Net proved oil and gas reserves as of December 31, 1995
and 1994, were estimated by MESA engineers. All of MESA's reserves at
December 31, 1996, 1995, and 1994, were in the United States. In accordance
with regulations established by the Commission, 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 received 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.
Approximately 65% of MESA's equivalent proved reserves (based on a
factor of six thousand cubic feet ["Mcf"] of gas per barrel of liquids) at
December 31, 1996, were natural gas. The natural gas prices in effect at
December 31, 1996 (having a weighted average of $3.37 per Mcf), were used in
accordance with Commission regulations but may not be the most appropriate
or representative prices to use for estimating reserves since such prices
were influenced by the seasonal demand for natural gas and contractual
arrangements at that date. The average price received by MESA for sales of
natural gas in 1996 was $2.21 per Mcf. At December 31, 1996, MESA's
standardized measure of future net cash flows from proved reserves (the
"Standardized Measure") and the pretax Standardized Measure were greater
than the net book value of oil and gas properties by approximately $359
million and $801 million, respectively.
Oil and gas reserve quantities estimated as of December 31, 1996,
reflect a net decrease over 1995, after production, of approximately 279
Bcfe of natural gas. The proved reserves as of December 31, 1996, were
prepared by MESA's engineers and Williamson Petroleum Consultants, MESA's
independent petroleum engineering firm ("Williamson"). Williamson engineers
determined reserve quantities for the Hugoton and West Panhandle areas which
represent approximately 95% of MESA's net reserves. Reserves for the Gulf
Coast and other areas were determined by MESA engineers.
Reserve quantities for the Hugoton properties as determined by
Williamson engineers as of December 31, 1996, are approximately 8% lower
than reserves estimated by MESA engineers at December 31, 1995 after giving
effect to 1996 production. Substantially all of the reduction was
attributable to proved reserve estimate differences in the Hugoton field of
Kansas.
In the West Panhandle field, reserves were revised upward to reflect
the development drilling results over the past year and the restructuring of
its contractual arrangements in the field. In the Gulf of Mexico, reserve
additions resulted from exploratory and development drilling in 1994, 1995
and 1996.
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. Estimates prepared by other
engineers might be materially different from those set forth herein.
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, and 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.
Capitalized Costs and Costs Incurred
- ------------------------------------
(Unaudited)
Capitalized costs relating to oil and gas producing activities at
December 31, 1996, 1995, and 1994 and the costs incurred during the years
then ended are set forth below (in thousands):
1996 1995 1994
Capitalized Costs: ---------- ---------- ----------
Proved properties................ $1,971,026 $1,897,168 $1,865,004
Unproved properties.............. 4,658 2,995 2,838
Accumulated depreciation,
depletion and amortization..... (941,266) (834,304) (753,827)
---------- ---------- ----------
Net......................... $1,034,418 $1,065,859 $1,114,015
========== ========== ==========
Costs Incurred:
Exploration and development:
Proved properties........... $ 11 $ 269 $ 523
Unproved properties......... 1,863 157 2,425
Exploration costs........... 11,996 8,167 5,157
Development costs........... 27,624 14,572 14,043
---------- ---------- ----------
Total exploration and
development.......... 41,494 23,165 22,148
---------- ---------- ----------
Plants and facilities:
Processing plants........... 4,400 1,850 3,248
Field compression facilities 2,975 10,561 3,129
Other....................... 1,367 3,354 5,168
---------- ---------- ----------
Total plants and
facilities........... 8,742 15,765 11,545
---------- ---------- ----------
Total costs incurred............. $ 50,236 $ 38,930 $ 33,693
========== ========== ==========
Depreciation, depletion
and amortization............... $ 98,382 $ 80,513 $ 89,413
========== ========== ==========
<PAGE>
Estimated Quantities of Reserves
- --------------------------------
(Unaudited) Years Ended December 31
------------------------------------
Natural Gas (MMcf) 1996 1995 1994
- ----------- ---------- ---------- ----------
Proved Reserves:
Beginning of year................ 1,218,029 1,303,187 1,202,444
Extensions and discoveries.. 12,543 29,728 6,211
Purchases of producing
properties................ -- 1,000 822
Revisions of previous
estimates................. (108,901) (38,574) 176,049
Improved recovery........... 53 -- --
Production.................. (84,001) (77,312) (82,339)
---------- ---------- ----------
End of year...................... 1,037,723 1,218,029 1,303,187
========== ========== ==========
Proved Developed Reserves:
Beginning of year................ 1,160,751 1,257,883 1,159,453
========== ========== ==========
End of year...................... 992,523 1,160,751 1,257,883
========== ========== ==========
Years Ended December 31
Natural Gas Liquids, Oil ------------------------------------
and Condensate (MBbls) 1996 1995 1994
- ------------------------ ---------- ---------- ----------
Proved Reserves:
Beginning of year................ 111,418 89,428 82,446
Extensions and discoveries.. 2,034 3,121 491
Purchases of producing
properties................ -- 5 1
Revisions of previous
estimates................. (11,510) 26,630 13,947
Improved recovery........... 371 -- --
Production.................. (7,399) (7,766) (7,457)
---------- ---------- ----------
End of year...................... 94,914 111,418 89,428
========== ========== ==========
Proved Developed Reserves:
Beginning of year................ 105,197 85,656 79,294
========== ========== ==========
End of year...................... 89,499 105,197 85,656
========== ========== ==========
* Proved natural gas liquids, oil and condensate reserve quantities include
oil and condensate reserves at December 31 of the respective years as
follows: 1996, 6,863 MBbls; 1995, 9,521 MBbls; and 1994, 5,031 MBbls.
* In addition to the proved reserves disclosed above, MESA owned proved
helium reserves at December 31 of the respective years as follows:
1996, 4,771 MMcf; 1995, 3,670 MMcf; and 1994, 4,457 MMcf.
<PAGE>
Standardized Measure of Future Net Cash Flows from Proved Reserves
- ------------------------------------------------------------------
(Unaudited)
December 31
------------------------------------
1996 1995 1994
---------- ---------- ----------
(in thousands)
Future cash inflows................... $5,957,298 $3,804,371 $3,513,282
Future production and
development costs:
Operating costs and
production taxes............... (1,390,897) (1,257,957) (1,192,005)
Development and
abandonment costs.............. (139,015) (96,594) (95,441)
Future income taxes................... (1,095,353) (296,987) (211,076)
---------- ---------- ----------
Future net cash flows................. 3,332,033 2,152,833 2,014,760
Discount at 10% per annum........ (1,938,318) (1,186,644) (1,080,578)
---------- ---------- ----------
Standardized Measure.................. $1,393,715 $ 966,189 $ 934,182
========== ========== ==========
Future net cash flows
before income taxes................. $4,427,386 $2,449,820 $2,225,836
========== ========== ==========
Standardized Measure
before income taxes................. $1,835,608 $1,040,413 $ 988,325
========== ========== ==========
- ----------
* 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.
<PAGE>
Changes in Standardized Measure
- -------------------------------
(Unaudited)
Years Ended December 31
------------------------------------
1996 1995 1994
---------- ---------- ----------
(in thousands)
Standardized Measure at
beginning of year................... $ 966,189 $ 934,182 $ 986,931
---------- ---------- ----------
Revisions of reserves
proved in prior years:
Changes in prices and
production costs............... 1,132,709 52,724 (121,300)
Changes in quantity estimates.... (215,046) 71,673 151,538
Changes in estimates of
future development and
abandonment costs.............. (54,334) (18,424) (27,343)
Net change in income taxes....... (367,669) (20,081) 27,666
Accretion of discount............ 104,041 98,833 106,874
Other, primarily timing
of production.................. (32,784) (94,511) (80,650)
---------- ---------- ----------
Total revisions............. 566,917 90,214 56,785
Extensions, discoveries and
other additions, net of future
production and development costs.... 41,622 61,259 8,075
Purchases of proved properties........ -- 1,692 463
Sales of oil and gas produced,
net of production costs............. (225,818) (154,231) (146,267)
Sales of producing properties......... -- -- --
Previously estimated development
and abandonment costs incurred
during the period................... 44,805 33,073 28,195
---------- ---------- ----------
Net changes in Standardized Measure... 427,526 32,007 (52,749)
---------- ---------- ----------
Standardized Measure at end of year... $1,393,715 $ 966,189 $ 934,182
========== ========== ==========
<PAGE>
Quarterly Results
- -----------------
(Unaudited)
Quarters Ended
-------------------------------------------------
March 31 June 30 September 30 December 31
-------- -------- ------------ -----------
(in thousands, except per share data)
1996:
- ----
Revenues............ $ 80,643 $ 71,322 $ 66,752 $ 92,694
======== ======== ======== ========
Gross profit(1)..... $ 31,451 $ 32,284 $ 26,173 $ 43,684
======== ======== ======== ========
Net income (loss)... $ 1,057 $ 4,547 $(72,912) $ 16,261
======== ======== ======== ========
Net income (loss)
per common share
and common share
equivalent........ $ .02 $ .07 $ (1.20) $ .17
======== ======== ======== ========
Net income (loss)
per common share
assuming full
dilution.......... $ .02 $ .07 $ (1.20) $ .09
======== ======== ======== ========
1995:
- ----
Revenues............ $ 62,247 $ 59,174 $ 48,967 $ 64,571
======== ======== ======== ========
Gross profit(1)..... $ 23,922 $ 23,776 $ 10,253 $ 23,367
======== ======== ======== ========
Net loss............ $ (7,894) $(13,953) $(32,473) $ (3,248)
======== ======== ======== ========
Net loss per
common share...... $ (.12) $ (.22) $ (.51) $ (.05)
======== ======== ======== ========
- ----------
(1) Gross profit consists of total revenues less lease operating
expenses, production and other taxes and DD&A.
F-8
<PAGE>
<PAGE>
INDEX TO EXHIBITS
-----------------
Exhibit No. Description
----------- -----------
10.26 - Employment Agreement dated as of August 21, 1996, between
MESA Inc., a Texas corporation, and Ira Jon Brumley,
a Texas resident.
20 - Summary Report on MESA's Hugoton and West Panhandle field
properties relating to proved oil and gas reserves
at December 31, 1996, as prepared by Williamson Petroleum
Consultants, Inc.
21 - List of Subsidiaries of MESA.
27 - Article 5 of Regulation S-X Financial Data Schedule
for Year-End 1996 Form 10-K.
EMPLOYMENT AGREEMENT
dated as of August 21, 1996,
between
MESA INC., a Texas corporation (the "Company"),
and
IRA JON BRUMLEY (the "Employee"), a Texas resident.
WHEREAS, the Company has determined that the Employee's
services are important to it and it therefor wishes to provide for the
secure continued employment of the Employee and to formalize its agreements
with the Employee on the scope of his duties, his compensation and the
obligations of the Company and the Employee should the Company cease to
employ the Employee;
NOW, THEREFORE, the Company agrees to employ the Employee,
and the Employee agrees to be employed, upon the following terms and
conditions:
1. The Company shall employ the Employee as Chief Executive
Officer and Chairman of the Board for the Term (as hereinafter defined),
with such duties, commensurate with such offices, as shall be reasonably
assigned to him by the Board of Directors of the Company (the "Board").
During the Term, the Employee shall devote substantially all of his
attention, knowledge, skill and working time to the business of the Company
and to the promotion of its interests (with the exception of absences
because of vacations or illness). During the Term, the Employee will not
engage in, be employed by, be a director of (excluding service as a
director of North Central Oil) or otherwise directly or indirectly be
interested in (other than Employee's ownership of equity securities of Cross
Timbers Oil Company and Cross Timbers Royalty Trust, Employee's indirect
interest in DNR-MESA Holdings, L.P., and other than through ownership of not
more than one percent of any other entity's publicly traded equity interests),
any business or activity competing with or of a nature similar to the business
of the Company and will not take part in any activities materially
detrimental to the best interests of the Company. During the Term,
Employee's principal business office shall be located at the Company's
office at 1400 Williams Square West, 5205 N. O'Connor Boulevard, Irving,
Texas 75039, with appropriate secretarial and other support services, but
Employee, at his option, may also maintain an office in Fort Worth, Texas,
or work from his home, from time to time, it being understood that Employee
is not required to be at the Company's offices in Irving, Texas, each
working day.
2. During the first year of the Term, the Company shall pay the
Employee a base salary of $500,000 per year (payable periodically in
accordance with the Company's regular payroll practices), subject to any
required deductions or withholdings. During the second year of the Term,
Employee's base salary shall be increased, but not decreased, in the
discretion of the Board, but not less than the percentage increase in the
cost of living for the year 1996.
3. The Employee shall be entitled to such reasonable vacations
during each year of his employment hereunder as may be allowed by the Board
in accordance with its general practices applicable to the Company's senior
executives.
4. The Company shall reimburse the Employee for all reasonable
and necessary travel and other business expenses (properly documented) that
he incurs in the course of his duties during the Term. Such reimbursable
expenses shall include those incurred by Employee's spouse when she
accompanies him on business travel. The Company shall also provide a
suitable automobile and driver for Employee's commute to and from the
Company's offices and local business travel.
5. (a) The term of the Employee's employment pursuant to this
Agreement (the "Term") shall be from the date hereof to the earliest of (i)
the second anniversary of the date hereof, (ii) the Employee's voluntary
termination of employment, (iii) the death of the Employee or (iv) the
termination of his employment by the Company pursuant to Paragraph 6.
(b) In addition to the payment of Employee's salary
pursuant to Paragraph 2, if the Employee's employment is terminated by the
Company prior to the expiration of the Term, other than under circumstances
described in Paragraph 6, or if Employee terminates his employment for good
reason, as provided in Paragraph 7, Employee shall be entitled to a
severance payment in accordance with the following schedule:
Termination Occurring Amount of Payment
Within 1 year of date hereof $1,600,000
More than 1 year, but less than 18 months $1,200,000
At least 18 months $ 800,000
6. The Company may terminate the employment of the Employee at
any time for "cause," which shall mean (i) the willful and continued failure
by Employee to attempt to perform substantially his duties with the Company
(other than such failure resulting from Employee's incapacity due to
physical or mental illness), (ii) commission of a material willful breach of
the terms of this Agreement, (iii) gross negligence or willful misconduct in
the performance of assigned duties or (iv) conviction of a felony or other
crime involving fraud or moral turpitude. Any such termination shall occur
only after at least 90 days' written notice by the Board of Directors of the
Company to the Employee, which notice shall specifically identify the cause
for termination and shall include, in any instance other than under clause
(iv) above, a demand for cure by the Employee. If Employee fails to
eliminate the cause for termination within the 90-day period, his
termination shall then be effective.
7. At any time during the Term, Employee shall be entitled to
terminate his employment for "good reason" which for the purposes of this
Agreement shall mean (i) a reduction or diminution of his position, titles,
offices, duties, responsibilities or status with the Company without cause
and without the Employee's express written consent, (ii) a reduction by the
Company in the Employee's base salary in effect at the time in accordance
with Paragraph 2 hereof, (iii) relocation of the Company's executive offices
to a site outside Dallas County or Tarrant County, Texas or (iv) any other
breach by the Company of its obligations under this Agreement, which the
Company fails to cure within a reasonable period of time after receipt of
written notice of such breach, which period is not to exceed 90 days unless
agreed upon in writing by both parties. Any amount owing to Employee in
such case pursuant to Paragraph 5(b) shall be paid to Employee within 10
business days following his termination of employment.
8. The Employee shall be entitled to participate in such
insurance, pension, profit-sharing and other benefits as are or may become
available generally to executive officers and/or other employees of the
Company on a basis comparable to that of such other executive officers and
employees of the Company to the extent permitted by applicable laws or
governmental regulations. Employee shall be entitled to participate in the
Company's Stock Option Plan in accordance with the agreement entered into
between Employee and the Company under that Plan. Employee shall be
entitled to participate in the Company's retiree medical program without
regard to any length of service requirement.
9. The Employee shall be, and he represents that he is, free to
enter into this Agreement with the Company, and not under any contractual
restraint that would prohibit him from satisfactorily performing his duties
to the Company hereunder.
10. This Agreement shall inure to the benefit of and shall bind
all successors to the Company by merger, consolidation or sale of all or
substantially all of the Company's present principal business. This
Agreement is personal to both parties and may not be assigned by either of
them.
11. Notice shall be given to the Company in writing at the office
of the Company where the chief executive officer is located, with a copy of
such notice to be sent to:
MESA Inc.
1400 Williams Square West
5205 N. O'Connor Boulevard
Irving, Texas 75039
Attention: Associate General Counsel
Notice shall be given to Employee in writing at the office
of the Company where the chief executive officer is located, with a copy of
such notice to be sent to Employee at his residence and a second copy sent
to:
Mr. Don C. Plattsmier
Kelly, Hart & Hallman, P.C.
201 Main Street, Suite 2500
Fort Worth, Texas 76102
12. This Agreement shall be governed by and construed in
accordance with the laws of the State of Texas.
13. This Agreement constitutes the full and complete
understanding and agreement of the parties, supersedes all prior
understandings and agreements between the Company and the Employee as to the
employment of the Employee by the Company and cannot be amended, changed,
modified or terminated in any respect, without the written consent of the
parties hereto.
14. This Agreement may be signed on more than one counterpart and
by the different parties on separate counterparts and shall be binding as
though signed on a single counterpart.
IN WITNESS WHEREOF, the Company and the Employee have caused
this Agreement to be executed and delivered, all as of the date first above
written.
MESA INC.
By: \s\ Steve Gardner
----------------------------------
Name: Steve Gardner
Title: Senior Vice President and
Chief Financial Officer
\s\ I. Jon Brumley
----------------------------------
Employee
March 17, 1997
Mesa Inc.
1400 Williams Square West
5202 North O'Connor Blvd.
Irving, Texas 75039
Attention Mr. Dennis E. Fagerstone
Gentlemen:
Subject: Evaluation and Review
of Oil and Gas Reserves
to the Interests of Mesa Inc.
in the Hugoton Area, Various
Counties, Kansas and West Panhandle
Area, Various Counties, Texas
Effective December 31, 1996
for Disclosure to the
Securities and Exchange Commission
Williamson Project 6.8421
Williamson Petroleum Consultants, Inc. (Williamson) has performed an
engineering evaluation to estimate proved gross 8/8 gas reserves from
properties in the Kansas Hugoton (Chase) and Panoma Gas Area (Council
Grove) fields in various counties in Kansas (the Hugoton area) and the
Panhandle West (Brown Dolomite) and Panhandle West (Red Cave) fields in
various counties in Texas (the West Panhandle area). Williamson also
reviewed in detail the Mesa Inc. (Mesa) in-house programs and methodology
used to convert gross gas reserves to net gas residue and plant products
and to generate future net revenue to the interests of Mesa. This
evaluation and review (the evaluation) were authorized by Mr. Dennis E.
Fagerstone of Mesa.
Projections of the reserves and future net revenue to the evaluated
interests were based on economic parameters and operating conditions
considered applicable as of December 31, 1996. This evaluation, in
conjunction with other documents and data, is being used by Mesa for annual
corporate purposes. This evaluation may be used in disclosure to the
Securities and Exchange Commission (SEC). Data after December 31, 1996 were
utilized by Williamson in evaluating the properties in this report. These
data are described later in this letter report. Following is a summary of
the results of the evaluation effective December 31, 1996:
PROVED PROVED TOTAL
DEVELOPED UNDEVELOPED PROVED
----------- ----------- -----------
Net Reserves to the
Evaluated Interests:
Oil, BBL 20,088 0 20,088
Condensate, BBL 3,602,190 348,888 3,951,078
Plant Products, BBL 84,180,172 3,735,950 87,916,122
Gas, MCF 956,983,080 22,873,675 979,856,755
Helium, MCF 4,621,586 148,986 4,770,572
Future Net Revenue, $:
Undiscounted 4,114,727,295 154,027,679 4,268,754,974
Discounted Per Annum
at 10.00 Percent 1,693,922,051 47,203,819 1,741,125,880
Note: Totals are affected by the rounding utilized in the OGRE software.
Mesa Inc.
Mr. Dennis E. Fagerstone
March 17, 1997
Page 2
The work performed under the subject project is defined by the two phases
discussed below. All computer processing was performed by Mesa personnel to
utilize the Mesa in-house well reserve model and field/plant models.
Essentially all work by Williamson was accomplished in the Mesa offices in
Irving, Texas.
Under Phase 1, engineering personnel from Williamson worked directly with
the Mesa staff engineers and geologists to assign gross 8/8 gas reserves to
wells in the Hugoton and West Panhandle areas. Williamson also assigned or
reviewed and approved all forecast parameters to be used in the Mesa well
reserve model. Results of the well reserve model were then input into an
Ogre format and economic gross gas reserves were determined on a well level
considering only direct well costs.
Under Phase 2, the gross gas reserves were summarized on a group or field
basis and input into the field/plant models. These programs convert the
gross gas streams into net gas, net natural gas liquids (NGL), and net
helium to the interests of Mesa and calculate the associated future net
revenue. In the case of the West Panhandle area, there is also a relatively
minor volume of oil and condensate. The field/plant models consider
compression and gathering operating costs and fuel needs, plant shrinkage,
NGL and helium yields, and various sharing arrangements and costs. These
calculations are done on a total system basis. Williamson reviewed various
documents, agreements, and other data relative to these costs and sharing
arrangements and reviewed the outputs generated by Mesa for reasonableness
and consistency.
The properties evaluated are located in the Kansas Hugoton (Chase) and
Panoma Gas Area (Council Grove) fields in Grant, Hamilton, Haskell,
Kearney, Morton, Seward, Stanton, and Stevens Counties, Kansas and the West
Panhandle (Brown Dolomite) and West Panhandle (Red Cave) fields in Carson,
Hartley, Hutchinson, Moore, Oldham, and Potter Counties, Texas. A total of
2,483 properties are included in these fields. Lists of properties are
included for the Hugoton area and the West Panhandle area. Approximately
64.89 percent of the total future net revenue discounted at 10.00 percent
per annum (DFNR) is contributed by the Hugoton area with the remainder by
the West Panhandle area. Summary reserves and economics projections for
each area are attached.
Net income to the evaluated interests is the future net revenue after
consideration of royalty revenue payable to others, taxes, operating
expenses, investments, salvage values, abandonment costs, and net profit
interests, as applicable. The future net revenue is before federal income
tax and excludes consideration of any encumbrances against the properties
if such exist.
The future net revenue values presented in this report were based on
projections of oil and gas production. It was assumed there would be no
significant delay between the date of oil and gas production and the
receipt of the associated revenue for this production.
Unless specifically identified and documented by Mesa as having curtailment
problems, gas production trends have been assumed to be a function of well
productivity and not of market conditions.
Oil and gas reserves were evaluated for the proved developed producing,
proved developed nonproducing, and proved undeveloped categories. The
summary classification of proved developed reserves combines the proved
developed producing and proved developed nonproducing categories. No
Mesa Inc.
Mr. Dennis E. Fagerstone
March 17, 1997
Page 3
separate summary of proved developed nonproducing is included due to the
minor volumes of these reserves and in accordance with the request of Mesa.
In preparing this evaluation, no attempt has been made to quantify the
element of uncertainty associated with any category. Reserves were assigned
to each category as warranted. The attached Definitions describe all
categories of proved reserves.
Oil, condensate, and NGL reserves are expressed in United States (U.S.)
barrels of 42 U.S. gallons. Gas volumes are expressed in thousands of cubic
feet (MCF) at 60 degrees Fahrenheit and at the legal pressure base that
prevails in the state in which the reserves are located. No adjustment of
the individual gas volumes to a common pressure base has been made.
The future net revenue was discounted at an annual rate of 10.00 percent.
Future net revenue was also discounted at secondary rates of 8.00, 12.00,
15.00, 20.00, and 25.00 percent per annum. These additional discounted
amounts are displayed as totals only. The 10.00 percent rate was included
in accordance with the reporting requirements of the SEC. No opinion is
expressed by Williamson in this report as to a fair market value of the
evaluated properties.
This report includes only those costs and revenues which are considered by
Mesa to be directly attributable to individual leases and areas. There
could exist other revenues, overhead costs, or other costs associated with
Mesa which are not included in this report. Such additional costs and
revenues are outside the scope of this report. This report is not a
financial statement for Mesa and should not be used as the sole basis for
any transaction concerning Mesa or the evaluated properties.
The reserves projections in this evaluation are based on the use of the
available data and accepted industry engineering methods. Future changes in
any operational or economic parameters or production characteristics of the
evaluated properties could increase or decrease their reserves. Unforeseen
changes in market demand or allowables set by various regulatory agencies
could also cause actual production rates to vary from those projected. The
dates of first production for nonproducing properties were based on
estimates by Mesa or Williamson and the actual dates may vary from those
estimated. Williamson reserves the right to alter any of the reserves
projections and the associated economics included in this evaluation in any
future evaluations based on additional data that may be acquired.
Williamson is an independent consulting firm and does not own any interests
in the oil and gas properties covered by this report. No employee, officer,
or director of Williamson is an employee, officer, or director of Mesa.
Neither the employment of nor the compensation received by Williamson is
contingent upon the values assigned to the properties covered by this
report.
All data utilized in the preparation of this report with respect to
interests, reversionary status, oil and gas prices, gas categories, gas
contract terms, operating expenses, investments, salvage values,
abandonment costs, net profit interests, well information, and current
operating conditions, as applicable, were provided by Mesa. Data obtained
after the effective date of the report but prior to the completion of the
report were used and were applied consistently. These data consisted of
daily well gauges in January 1997 on wells which may have been recently
completed or acutest or had a pumping unit or compression installed. In
addition, inlet gas volumes and plant recoveries for the Fain plant, Potter
Mesa Inc.
Mr. Dennis E. Fagerstone
March 17, 1997
Page 4
County, Texas for January 1997 were reviewed to observe liquid and helium
recovery yields after all West Panhandle gas production was transferred to
the Fain plant in late December 1996. The reserves category assignments
reflect the status of the wells as of the effective date. Production data
were provided by Mesa from public record. If public records were not
available, Mesa provided internal estimates. The production data were
generally updated through November or December 1996 for operated properties
and October 1996 for outside operated properties. All data have been
reviewed for reasonableness and, unless obvious errors were detected, have
been accepted as correct. It should be emphasized that revisions to the
projections of reserves and economics included in this report may be
required if the provided data are revised for any reason. No inspection of
the properties was made as this was not considered within the scope of this
evaluation. No investigation was made of any environmental liabilities that
might apply to the evaluated properties. Mesa has included certain
operating costs designated for environmental purposes.
Mesa represented to Williamson that is has, or can generate, the financial
and operational capabilities to accomplish those projects evaluated by
Williamson which require capital expenditures.
The estimates of reserves contained in this report were determined by
accepted industry methods and in accordance with the attached Definitions
of Oil and Gas Reserves. Methods utilized in this report include
extrapolation of historical production trends, material balance
determinations, and analogy to similar properties.
Where sufficient production history and other data were available, reserves
for producing properties were determined through the use of material
balance determinations or by extrapolation of historical production trends.
Analogy to similar properties was used for nonproducing properties and
those producing properties which lacked sufficient production history and
other data to yield a definitive estimate of reserves. Reserves projections
based on analogy are subject to change due to subsequent changes in the
analogous properties or subsequent production from the evaluated
properties.
Prices for oil/condensate sold during December 1996 were provided by Mesa
and were used as effective date prices. After the effective date, prices
were held constant for the life of the properties. No attempt has been made
to account for oil price fluctuations which have occurred in the market
subsequent to the effective date of this report.
Prices for gas sold during December 1996 were provided by Mesa. Gas prices
were adjusted by Mesa as necessary for any transportation charges or other
fees and were used as effective date prices. Residue gas from the Fain
plant in the West Panhandle area is sold to several purchasers. The
December 1996 gas price was a weighted average price based on the percent
of volume taken by each purchaser and the December 1996 gas price paid by
each purchaser. After the effective date, prices were held constant for the
life of the properties.
Prices for NGL were based on prices for NGL products sold in December 1996.
After the effective date, prices were held constant for the life of the
properties. The price for helium is contractual for the year 1997 and was
set at $26.84 per MCF for both the Satanta plant in the Hugoton area and
the Fain plant in the West Panhandle area. On January 1, 1998, the Satanta
plant price was reduced to $19.72 per MCF and held constant thereafter. For
Mesa Inc.
Mr. Dennis E. Fagerstone
March 17, 1997
Page 5
the Fain plant, the price was set at $23.00 per MCF from January 1, 1998
through December 31, 2004. Beginning January 1, 2005, the price was set at
$19.72 per MCF and held constant thereafter.
It should be emphasized that with the current economic uncertainties,
fluctuation in market conditions could significantly change the economics
of the properties included in this report.
Operating expenses were provided by Mesa and represented, when possible,
the latest available 12-month average of all recurring expenses which are
billable to the working interest owners or other participants. Both the
Hugoton and West Panhandle area properties process gas through the Satanta
plant (Hugoton) or Fain plant (West Panhandle). Operating costs included
direct well expenses, wellhead compression costs, lateral or station
compression costs, gathering costs, plant operating costs, field or plant
overhead costs, and fuel volumes/costs for irrigation, compression, and
plant operations, as applicable. Any ad valorem taxes not deducted
separately were also included in the operating expenses. Where additional
compression was scheduled for installation in 1997 and 1998, adjustments
were made to increase compression costs and fuel requirements.
Base operating costs were held constant for the life of the properties.
Variable operating costs such as wellhead or lateral compression costs,
engine or compressor overhaul costs, and plant operating costs were
adjusted to take into account increasing or decreasing gas production and
the varying need for compressors, fuel, and maintenance. Mesa provided a
schedule of costs based on the projected total gas volumes.
For non-Mesa operated nonprocessed properties, operating costs were based
on expenses billed to Mesa.
Each well was projected to an economic lifetime using direct well costs.
Individual well projections were then combined into area or field groupings
and the overall economic lifetime was determined for each group considering
all costs from the wells through the plants discharge. In the Hugoton area,
wells were divided into four groups - MTR, WNG (or Satanta), CIG, and
Nonprocessed. In the West Panhandle area all wells were combined together.
State production taxes and ad valorem taxes have been deducted at rates
specified by Mesa, as applicable.
All capital costs for drilling and completion of wells, recurring well
workovers, and property abandonment costs in excess of any salvage value
have been deducted as applicable. Capital costs were also included for
pumping unit installations, lateral compression installations, Satanta
plant modifications, and other scheduled or anticipated well, field, and
plant needs. These costs were provided by Mesa. No adjustments were made to
account for the potential effect of inflation on these costs.
Property abandonment costs were provided by Mesa.
<PAGE>
Mesa Inc.
Mr. Dennis E. Fagerstone
March 17, 1997
Page 6
PROPERTY REVIEW
HUGOTON AREA
General
- -------
The Hugoton area includes a total of 1,461 wells producing from the Kansas
Hugoton (Chase) field and the Panoma Gas Area (Council Grove) field. Total
reserves for the area amount to 691,412,382 MCF net, 45,417,928 net barrels
of NGL, and 3,180,397 MCF of helium. Total DFNR for the area is
$1,129,731,081.
Reserves for the Chase wells were based primarily on area or group
composite shut-in tubing pressure versus cumulative gas production
(pressure-cumulative) curves. Projected estimates of remaining original gas
in place (OGIP) were allocated to each well in the group based on the
current pseudo-stabilized producing rate of a well to the total rate
for all wells in the group. Wells that were not in a contiguous area
were projected on the bases of the pressure cumulative-curve and rate
versus time performance curve analysis of the individual well.
Nonoperated-nonprocessed wells were forecast using the pressure-cumulative
curve extrapolation established on the original well prior to infill
drilling in the late 1980's, and the resulting remaining OGIP for the
proration unit for the original well was allocated to the original well and
its infill well based on current stabilized producing rates. Remaining
reserves for the proration unit considered cumulative gas from both the
original and infill wells.
Reserves for the Council Grove wells were based on individual well
pressure-cumulative curves. No infill drilling has been performed in the
Panoma Gas Area (Council Grove) field and wells are on 640-acre spacing.
HUGOTON
MTR
- ---
MTR includes 465 operated wells in the Chase or Council Grove formations.
These wells are in a contiguous area in the middle of the Kansas Hugoton
field trend. This is the most significant value group in the Hugoton area
with $587,339,207 DFNR. The MTR base royalty is determined in accordance
with what is termed the Larrabee Royalty Agreement which is governed by the
1975 Settlement Agreement between Mesa and the royalty owners. In essence
the royalty owners share in income from residue gas sales and plant
products. In return, the royalty owners pay certain costs and expenses
downstream of the wellhead. Hence, the royalty owners share is adjusted
downward from their base royalty interest to account for their share of
costs. This revised interest or Larrabee Factor is applied to the plant
output streams to determine the net interest for Mesa after royalty.
The MTR group is also subject to an overriding royalty conveyance
established in 1979 (the MTR Trust). Originally, Mesa established the Mesa
Royalty Trust Indenture. This indenture was subsequently converted to the
MTR Trust in which the royalty owners converted their overriding royalty
interest to a net profits interest. The net profits are determined on the
basis of the future net revenue for the aggregate of the combined Mesa and
MTR Trust interests in the MTR Trust properties less overhead charges, less
Mesa Inc.
Mr. Dennis E. Fagerstone
March 17, 1997
Page 7
100.0 percent plant and gathering expenses, and less 35.0 percent of NGL
revenue. The MTR Trust share is equal to 10.29282 percent of the adjusted
net revenue. The adjustment to Mesa net reserves for the MTR Trust is made
after the Larrabee adjustment.
HUGOTON
WNG
- ---
The WNG, or Satanta, group is the second most valuable with DFNR of
$425,365,103. This group includes 348 Mesa-operated wells and is in a
contiguous area to the east and northeast of the MTR area. Production is
from the Chase and Council Grove formations. Royalty deduction for this
group is based on the Larrabee Royalty Agreement. WNG is not subject to the
MTR Trust.
HUGOTON
CIG
- ---
The CIG group is the third most valuable with DFNR of $65,742,841. This
group includes 142 wells which are operated primarily by Mesa. Production
is from the Chase and Council Grove formations. The CIG wells are located
in two contiguous areas which are north of MTR and WNG. Royalty deduction
for this group is based on the Larrabee Royalty Agreement. CIG is not
subject to the MTR Trust.
HUGOTON
Nonprocessed
- ------------
The Nonprocessed group has DFNR of $51,283,939 and includes 203 working
interest wells and 303 royalty interest wells. Essentially all except
approximately 30 of these wells are outside operated. Production is from
the Chase and Council Grove formations and other stray formations. All gas
from these wells is processed through other facilities and, therefore, Mesa
receives income on the basis of wellhead gas sales only.
WEST PANHANDLE AREA
General
- -------
The West Panhandle area has a total of $611,394,799 DFNR. Included in this
area are the "B" Contract area wells consisting of 594 gas wells producing
from the Brown Dolomite and the Red Cave formations. The Brown Dolomite is
the primary producing formation. Gas wells are drilled on 640-acre spacing.
Reserves for established producing wells were based on individual
pressure-cumulative curves. Reserves for recently drilled wells with
limited history were based on available test or production data and analogy
decline trends. Reserves for undrilled locations were based on analogy to
offsetting wells or wells in close proximity.
Mesa also retains an interest in 419 oil wells and nine gas wells that are
Mesa Inc.
Mr. Dennis E. Fagerstone
March 17, 1997
Page 8
referred to as the "Texas Panhandle-Other". These are minor-value
properties that are not included in the "B" Contract area. Reserves for
these minor-value properties were determined by performance analysis.
The "B" Contract area wells are subject to an operating agreement with
Colorado Interstate Gas Company (CIG). All of the "B" Contract area gas is
processed through the Mesa Fain gasoline plant, and the Mesa share is
subject to special royalty payments. An agreement effective January 1, 1991
allocates 77.0 percent of the remaining production from the "B" Contract
properties to Mesa and the remaining 23.0 percent to CIG. CIG receives a
20.0 percent overriding royalty interest on the Mesa share of the helium
produced at the Fain plant.
As of December 31, 1996, CIG has produced 37.98 percent of the net "B"
Contract gas produced since 1991. The summary reserves and economics
projection for the West Panhandle area includes future recovery of this
excess gas produced by CIG. The imbalance as of December 31, 1996 is
approximately 42,986,000 MCF. Mesa has advised that, for accounting
purposes, this CIG gas imbalance is also treated as production income to
Mesa at the time CIG produced the gas; the revenue is then recorded as an
accounts receivable from CIG. Therefore, this should be considered when
using the attached reserves and economics projections with Mesa financial
data.
Agreements reached by Mesa and CIG, ending with the 1996 Fain Gas
Processing Agreement dated June 1, 1996, provide for CIG to take a maximum
of 8.5 billion cubic feet (BCF) per year for each of the years 1997, 1998,
and 1999 with Mesa being entitled to take the rest of the "B" Contract
production. The CIG maximum take in the year 2000 is 7.5 BCF, with a
maximum of 7.0 BCF in years thereafter, until such time that CIG has
produced 23.0 percent of the reserves remaining after January 1, 1991.
Included in these volumes is the CIG share of fuel gas. Until July 2000,
CIG has the right to take gas for use as fuel at 100.0 percent of fuel
usage. After July 2000, fuel volumes are shared proportionately by Mesa and
CIG. Also, CIG must take all their allowed gas during the seven month
period from April through October of each year at a rate not to exceed 40.0
million cubic feet per day (MMPD). Beginning on July 1, 2000 the CIG
maximum daily rate reduces to 35.0 MMPD. Under the current evaluation, it
is projected that CIG will have recovered their 23.0 percent of the
reserves to be recovered after January 1, 1991 in the year 2007.
Another aspect of the 1996 Fain Gas Processing Agreement is that Mesa will
retain 100.0 percent of the CIG share of ethane and 50.0 percent of the CIG
share of propane. In return, CIG will receive an equivalent volume on a
British Thermal Unit basis of residue gas from Mesa. These adjustments are
included in the West Panhandle area field/plant model.
Scheduled work in the field includes drilling of 57 proved undeveloped
locations, installation of additional wellhead compressors, and the
installation of a Nitrogen Recovery Unit at the Fain plant in mid-1998.
Results of these projects have been included in the reserve projections as
well as capital costs and additional operating expenses. In the year 2045,
the Fain plant is no longer economical and is projected to be shut in.
Beginning in 2046, all gas was projected to be sold directly to the
pipeline.
<PAGE>
Mesa Inc.
Mr. Dennis E. Fagerstone
March 17, 1997
Page 9
It has been a pleasure to serve you by preparing this engineering
evaluation. All related data will be retained in our files and are
available for your review.
Yours very truly,
/s/ Williamson Petroleum Consultants, Inc.
WILLIAMSON PETROLEUM CONSULTANTS, INC.
JJK/jlb
Attachments<PAGE>
DEFINITIONS OF OIL AND GAS RESERVES(1)
PROVED RESERVES(1)
Proved reserves are the estimated quantities of crude oil, natural gas, and
natural gas liquids which geological and engineering data demonstrate with
reasonable certainty to be recoverable in future years from known
reservoirs under the economic criteria employed and existing operating
conditions, i.e., prices and costs as of the date the estimate is made.
Prices and costs include consideration of changes provided only by
contractual arrangements but not on escalations based upon an estimate of
future conditions.
A. Reservoirs are considered proved if economic producibility is
supported by either actual production or conclusive formation test. The
area of a reservoir considered proved includes:
1. that portion delineated by drilling and defined by gas-oil and/or
oil-water contacts, if any; and
2. the immediately adjoining portions not yet drilled, but which can
be reasonably judged as economically productive on the basis of
available geological and engineering data. In the absence of
information on fluid contacts, the lowest known structural
occurrence of hydrocarbons controls the lower proved limit of the
reservoir.
B. Reserves which can be produced economically through application of
improved recovery techniques (such as fluid injection) are included in the
"proved" classification when successful testing by a pilot project, or the
operation of an installed program in the reservoir, provides support for
the engineering analysis on which the project or program was based.
C. Estimates of proved reserves do not include the following:
1. oil that may become available from known reservoirs but is
classified separately as "indicated additional reserves";
2. crude oil, natural gas, and natural gas liquids, the recovery of
which is subject to reasonable doubt because of uncertainty as to
geology, reservoir characteristics, or economic factors;
3. crude oil, natural gas, and natural gas liquids, that may occur in
undrilled prospects; and
4. crude oil, natural gas, and natural gas liquids, that may be
recovered from oil shales, coal(1), gilsonite, and other such
sources.
Proved Developed Reserves(4)
Proved developed reserves are reserves that can be expected to be recovered
through existing wells with existing equipment and operating methods.
Additional oil and gas expected to be obtained through the application of
fluid injection or other improved recovery techniques for supplementing the
natural forces and mechanisms of primary recovery should be included as
"proved developed reserves" only after testing by a pilot project or after
the operation of an installed program has confirmed through production
response that increased recovery will be achieved.
<PAGE>
Proved Undeveloped Reserves
Proved undeveloped reserves are reserves that are expected to be recovered
from new wells on undrilled acreage, or from existing wells where a
relatively major expenditure is required for recompletion. Reserves on
undrilled acreage shall be limited to those drilling units offsetting
productive units that are reasonably certain of production when drilled.
Proved reserves for other undrilled units can be claimed only where it can
be demonstrated with certainty that there is continuity of production from
the existing productive formation. Under no circumstances should estimates
for proved undeveloped reserves be attributable to any acreage for which an
application of fluid injection or other improved recovery technique is
contemplated, unless such techniques have been proved effective by actual
tests in the area and in the same reservoir.
..........
(1) For evaluations prepared for disclosure to the Securities and Exchange
Commission, see SEC Accounting Rules. Commerce Clearinghouse, Inc. October
1981, Paragraph 290, Regulation 210. 4-10, p. 3229.
(2) Any variation to these definitions will be clearly stated in the
report.
(3) According to Staff Accounting Bulletin 85, excluding certain coalbed
methane gas
(4) Williamson Petroleum Consultants, Inc. separates proved developed
reserves into proved developed producing and proved developed nonproducing
reserves. This is to identify proved developed producing reserves as those
to be recovered from actively producing wells; proved developed
nonproducing reserves as those to be recovered from wells or intervals
within wells, which are completed but shut in waiting on equipment or
pipeline connections, or wells where a relatively minor expenditure is
required for recompletion to another zone.
EXHIBIT 21
MESA INC.
Subsidiaries
As of December 31, 1996 Place of Incorporation
- ----------------------- ----------------------
Subsidiary Corporations:
Hugoton Capital Corporation Delaware
Mesa Capital Corporation Delaware
Mesa Environmental Ventures Co. Delaware
Mesa Operating Co. Delaware
Mesa Transmission Co. Delaware
Pioneer Natural Gas Company Texas
Pioneer Production Corporation International Texas
Pioneer Uravan, Inc. Texas
Subsidiary Partnership:
Mesa Offshore Royalty Partnership Texas
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND> THIS SCHEDULE CONTAINS SUMMARY FINANCIAL
INFORMATION EXTRACTED FROM THE MESA INC. AND
SUBSIDIARIES DECEMBER 31, 1996, FINANCIAL
STATEMENTS AND IS QUALIFIED IN ITS ENTIRETY
BY REFERENCE TO SUCH FINANCIAL STATEMENTS
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 16,681
<SECURITIES> 0
<RECEIVABLES> 67,008
<ALLOWANCES> 3,598
<INVENTORY> 2,159
<CURRENT-ASSETS> 84,277
<PP&E> 2,012,424
<DEPRECIATION> 966,040
<TOTAL-ASSETS> 1,213,879
<CURRENT-LIABILITIES> 69,500
<BONDS> 802,772
1,216
0
<COMMON> 643
<OTHER-SE> 263,635
<TOTAL-LIABILITY-AND-EQUITY> 1,213,879
<SALES> 311,411
<TOTAL-REVENUES> 311,411
<CGS> 0
<TOTAL-COSTS> 214,723
<OTHER-EXPENSES> 88,349
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 121,135
<INCOME-PRETAX> 8,339
<INCOME-TAX> 0
<INCOME-CONTINUING> 8,339
<DISCONTINUED> 0
<EXTRAORDINARY> (59,386)
<CHANGES> 0
<NET-INCOME> (51,047)
<EPS-PRIMARY> (.94)
<EPS-DILUTED> (.94)
</TABLE>
