UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
________________
FORM 10-Q
________________
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
________________
For the quarterly period ended March 31, 1997
Commission file number 1-13108
________________
VASTAR RESOURCES, INC.
(Exact name of registrant as specified in its charter)
________________
Delaware 95-4446177
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
15375 Memorial Drive
Houston, Texas 77079
(Address of principal executive offices) (Zip code)
__________________
(281) 584-6000
(Registrant's telephone number, including area code)
__________________
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
--- ---
Number of shares of Common Stock, $.01 par value, outstanding as of
March 31, 1997: 97,261,801.
<PAGE>
PART I. FINANCIAL INFORMATION
<TABLE>
<CAPTION>
VASTAR RESOURCES, INC.
CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
CONSOLIDATED STATEMENT OF INCOME
For the Three Months Ended
March 31,
------------------
(Millions of dollars 1997 1996
except per share amounts) ----- -----
<S>
<C> <C>
REVENUES
Net sales and other operating
revenues............................. $281.7 $223.3
Other revenues......................... 1.9 3.5
----- -----
Net revenues..................... 283.6 226.8
----- -----
EXPENSES
Operating expenses..................... 32.7 32.5
Exploration expenses................... 70.8 39.8
Selling, general and administrative
expenses............................. 14.7 12.2
Taxes other than income taxes.......... 14.6 10.0
Depreciation, depletion and
amortization......................... 70.6 63.3
Interest............................... 13.0 13.4
----- -----
Total expenses................... 216.4 171.2
----- -----
Income before income taxes............. 67.2 55.6
Income tax provision .................. 4.3 ---
----- -----
Net income....................... $ 62.9 $ 55.6
===== =====
Earned per share....................... $ 0.65 $ 0.57
===== =====
Cash dividends paid per share
of common stock....................... $0.075 $ 0.075
===== =====
</TABLE
The accompanying notes are an integral part of these statements.
- 1 -
<PAGE>
</TABLE>
<TABLE>
<CAPTION>
VASTAR RESOURCES, INC.
CONSOLIDATED BALANCE SHEET
(Unaudited)
March 31, December 31,
1997 1996
-------- --------
(Millions of dollars)
<S>
<C> <C>
ASSETS
Current assets:
Cash and cash equivalents........................ $ 22.8 $ 21.9
Accounts receivable:
Trade.......................................... 275.7 470.4
Related parties................................ 24.2 27.1
Inventories...................................... 10.3 12.5
Prepaid expenses and other assets................ 40.6 74.6
------- -------
Total current assets........................... 373.6 606.5
Oil and gas properties and equipment, net.......... 1,372.9 1,332.6
------- -------
Total assets................................. $ 1,746.5 $ 1,939.1
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable................................. $ 350.8 $ 469.6
Accrued liabilities.............................. 36.1 81.5
------- -------
Total current liabilities.................... 386.9 551.1
------- -------
Long-term debt..................................... 630.3 778.4
Deferred liabilities and credits................... 213.8 214.0
Deferred income taxes.............................. 166.5 102.2
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Common stock, $.01 par value; authorized, 110,000,000
shares; issued and outstanding, 97,261,801 shares
as of March 31, 1997 and 97,260,551 shares as of
December 31, 1996................................ 1.0 1.0
Capital in excess of par value of stock............ 454.1 454.1
Accumulated deficit................................ (106.1) (161.7)
------- -------
Total stockholders' equity...................... 349.0 293.4
------- -------
Total liabilities and stockholders' equity... $ 1,746.5 $ 1,939.1
======= =======
</TABLE>
The accompanying notes are an integral part of these statements.
- 2 -
<PAGE>
<TABLE>
<CAPTION>
VASTAR RESOURCES, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
For the Three Months Ended
March 31,
-------------------
1997 1996
(Millions of dollars) ----- -----
<S>
<C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income............................................... $ 62.9 $ 55.6
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation, depletion and amortization............... 70.6 63.3
Deferred income taxes.................................. 64.3 0.2
Dry hole expense and undeveloped leasehold amortization 33.2 15.0
Gain on asset sales.................................... --- (0.2)
Net change in accounts receivable, inventories
and accounts payable.................................. 81.0 1.5
Other.................................................. (13.2) (20.1)
----- -----
Net cash provided by operating activities................ 298.8 115.3
----- -----
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to oil and gas properties and equipment,
including dry hole costs................................ (142.7) (82.8)
Proceeds from oil and gas property and equipment sales... 0.1 0.3
Other.................................................... 0.1 (0.7)
----- -----
Net cash used by investing activities.................... (142.5) (83.2)
----- -----
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from long-term debt issuance.................... 75.0 ---
Repayments of long-term debt............................. (223.1) (20.0)
Dividends paid........................................... (7.3) (7.3)
----- -----
Net cash used by financing activities.................... (155.4) (27.3)
----- -----
Net change in cash and cash equivalents.................. 0.9 4.8
Cash and cash equivalents at beginning of period......... 21.9 5.3
----- -----
Cash and cash equivalents at end of period............... $ 22.8 $ 10.1
===== =====
</TABLE>
The accompanying notes are an integral part of these statements.
- 3 -
<PAGE>
VASTAR RESOURCES, INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1. INTRODUCTION.
The foregoing information is unaudited and has been prepared from the
records of Vastar Resources, Inc. ("Vastar" or the "Company"). In the opinion
of management, the financial information reflects all adjustments (consisting
only of items of a normal recurring nature) necessary for a fair presentation
of financial position, results of operations and cash flows in conformity with
generally accepted accounting principles. Such statements are presented in
accordance with the requirements of Regulation S-X which does not require all
disclosures normally required by generally accepted accounting principles or
those normally on Form 10-K. These interim financial statements should be
read in conjunction with the annual financial statements for the year ended
December 31, 1996, and the Notes thereto, contained in the Company's report on
Form 10-K for the year ended December 31, 1996. Certain previously reported
amounts have been restated to conform with classifications adopted in 1997.
NOTE 2. NET SALES AND OTHER OPERATING REVENUES.
<TABLE>
<CAPTION>
For the Three Months Ended
March 31,
------------------
(Millions of dollars) 1997 1996
------ ------
<S>
<C> <C>
Sales and other operating revenues:
Unrelated parties.................... $1,035.7 $ 686.5
Related parties (1).................. 68.8 72.2
-------- -------
Total............................. 1,104.5 758.7
Less:
Purchases (2)........................ (799.1) (523.1)
Delivery expense..................... (23.7) (12.3)
-------- -------
Net sales and
other operating revenues............. $ 281.7 $ 223.3
======== =======
- -----------------
(1) The weighted average lifting and purchase cost per Mcfe associated with
proprietary production and third party purchased volumes multiplied by the
related party sales volumes results in average costs of $41.8 million and
$61.1 million for the three months ended March 31, 1997 and 1996,
respectively.
(2) Includes purchases from related parties at a cost of $5.2 million and
$6.6 million for the three months ended March 31, 1997 and 1996, respectively.
</TABLE>
- 4 -
<PAGE>
VASTAR RESOURCES, INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Unaudited)
NOTE 3. EXPLORATION EXPENSES.
<TABLE>
<CAPTION>
Three Months Ended
March 31,
-------------------
(Millions of dollars) 1997 1996
------ ------
<S>
<C> <C>
Dry hole costs...................... $ 26.4 $ 8.7
Geological and geophysical.......... 27.0 17.1
Undeveloped leasehold amortization.. 6.8 6.3
Staff............................... 8.5 7.0
Lease rentals....................... 2.1 0.7
----- -----
Total.......................... $ 70.8 $ 39.8
===== =====
</TABLE>
NOTE 4. PER SHARE DATA.
Earned per share is computed based upon the weighted average number of
common shares outstanding during the period. The dilutive effect of common
stock equivalents was not significant. The following table reflects the
weighted average number of common shares outstanding for the specified
periods.
<TABLE>
<CAPTION>
1997 1996
---------- ----------
<S>
<C> <C>
Three months ended March 31, 97,260,759 97,250,001
</TABLE>
- 5 -
<PAGE>
VASTAR RESOURCES, INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Unaudited)
NOTE 5. COMMITMENTS AND CONTINGENCIES.
The Company and its subsidiaries are involved in a number of lawsuits,
all of which have arisen in the ordinary course of the Company's business.
The Company believes that any ultimate liability resulting from any of these
suits will not have a material adverse effect on the financial position, cash
flows or results of operations of the Company.
The operations, financial position and cash flows of Vastar continue to
be affected from time to time in varying degrees by domestic and foreign
political developments, as well as legislation and regulations pertaining to
restrictions on oil and gas production, imports and exports, natural gas
regulations, tax increases, environmental regulations and cancellation of
contract rights. Both the likelihood of such occurrences and their overall
effect on the Company vary greatly and are not predictable. These
uncertainties are part of a number of items that Vastar has taken and will
continue to take into account in periodically establishing accounting
reserves.
Vastar and Atlantic Richfield Company ("ARCO") have agreements whereby
Vastar will indemnify ARCO against certain claims or liabilities which ARCO
may incur relating to ARCO's historical ownership and operation of Vastar's
properties, including liabilities under law relating to the protection of the
environment and the workplace and liabilities arising out of certain
litigation. Under such agreements, ARCO will indemnify Vastar with respect to
other claims or liabilities and other matters of litigation not related to
Vastar's business or properties reflected in the consolidated financial
statements.
The Company has long-term contracts with certain cogeneration facilities
which have an average remaining life of 13 years. These contracts cover an
average of 75 MMcfd of the Company's natural gas production for the remainder
of the year at an average price of $2.50 per Mcf.
In September 1996, the Company entered into a contract for the major
upgrade and operation of a semisubmersible drilling rig for a three-year deep
water drilling program in the Gulf of Mexico, commencing late 1997. This
contract along with other contracts for support equipment are anticipated to
cost approximately $160 million over the term of the contract.
- 6 -
<PAGE>
VASTAR RESOURCES, INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Unaudited)
NOTE 6. TAXES.
The provision (benefit) for taxes on income is comprised of the
following:
<TABLE>
<CAPTION>
For the Three Months Ended
March 31,
------------------
(Millions of dollars) 1997 1996
------ ------
<S>
<C> <C>
Federal:
Current.......................... $ (60.8) $ (0.9)
Deferred......................... 63.7 (0.5)
------ ------
Total federal.................. 2.9 (1.4)
------ ------
State:
Current.......................... 0.8 0.7
Deferred......................... 0.6 0.7
------ ------
Total state.................... 1.4 1.4
------ ------
Total income tax provision.......... $ 4.3 $ ---
====== ======
</TABLE>
- 7 -
<PAGE>
VASTAR RESOURCES, INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Unaudited)
NOTE 6. TAXES - (continued).
A reconciliation of the income tax provision with tax at the federal
statutory rate for the specified period is as follows:
<TABLE>
<CAPTION>
For the Three Months Ended
March 31,
------------------
(Millions of dollars) 1997 1996
------ ------
<S>
<C> <C>
Income before taxes.................. $ 67.2 $ 55.6
====== ======
Tax at the statutory rate............ $ 23.5 $ 19.5
Increase (reduction) in taxes
resulting from:
State income taxes (net
of federal effect).......... 0.9 0.9
Tax credits and other.......... (20.1) (20.4)
------ ------
Income tax provision.............. $ 4.3 $ ---
====== ======
</TABLE>
During the first quarter of 1997, ARCO and Vastar agreed to a second
amendment to the Tax Sharing Agreement, effective January 1, 1997 (the "Second
Amendment"). The Second Amendment removes certain limitations under the
original agreement and generally allows Vastar to receive payment for all
Section 29 Tax Credits in the year generated. In return, the Company agreed to
a 3.25 percent reduction in the value of the Section 29 Tax Credits generated
from properties acquired by the Company before June 1, 1995. ARCO and Vastar
also agreed to apply the same 3.25 percent reduction to the $61.4 million of
Section 29 Tax Credits carried forward as of December 31, 1996, in exchange for
immediate payment upon execution of the Second Amendment. Accordingly, Vastar
received a payment from ARCO of $59.4 million on March 20, 1997. Tax credits,
that are not used in the current year pursuant to the Tax Sharing Agreement, as
amended, will generally be carried forward and used in subsequent tax years.
For further information on the Tax Sharing Agreement, refer to the Company's
report on Form 10-K for the year ended December 31, 1996.
- 8 -
<PAGE>
VASTAR RESOURCES, INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Unaudited)
NOTE 7. LONG-TERM DEBT.
Long-term debt is comprised of the following:
<TABLE>
<CAPTION>
March 31, December 31,
(Millions of dollars) 1997 1996
------- -------
<S>
<C> <C>
8.75% Notes, due in 2005................ $ 149.4 $ 149.4
6.95% Notes, due in 2006................ 75.0 75.0
6.96% Notes, due in 2007................ 75.0 ---
Commercial Paper........................ 330.9 554.0
------- -------
Total................................... $ 630.3 $ 778.4
======= =======
</TABLE>
In February 1997, the Company issued $75.0 million of 6.96 percent
unsecured Notes, due February 2007 pursuant to its $250 million Medium-Term
Note Program. To date $150 million of Notes have been issued under the
Medium-Term Note Program. The net proceeds from the February 1997 issuance
were used to pay down debt incurred under the Company's Commercial Paper
Program.
NOTE 8. SUBSEQUENT EVENT.
On April 17, 1997, the Company declared a quarterly dividend of $0.075 per
share of common stock, payable on June 2, 1997 to stockholders of record
on May 9, 1997.
- 9 -
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Sales and production volumes and average price statistics for the
specified periods are as follows:
<TABLE>
<CAPTION>
Three Months Ended
March 31,
------------------
1997 1996
------ ------
<S>
<C> <C>
Natural gas
Sales (MMcfd)*....................... 3,667 2,516
Production (MMcfd)................... 874 887
Average sales price (per Mcf)*....... $ 2.64 $ 2.52
Average wellhead price (per Mcf)..... $ 2.31 $ 1.57
Crude oil
Sales (MBbld)*....................... 98.2 98.7
Production (MBbld)................... 33.8 34.9
Average realized price (per Bbl)*.... $24.14 $19.36
Natural gas liquids ("NGLs")
Production (MBbld)................... 17.3 10.6
Average realized price (per Bbl)..... $15.51 $14.25
Total Production (MMcfed/net)......... 1,181 1,160
- ---------------------
* As used herein, the terms "Bcf," "MMcf" and "Mcf" mean billion,
million and thousand cubic feet, respectively; the terms "Bcfd," "MMcfd" and
"Mcfd" mean billion, million and thousand cubic feet per day, respectively;
the terms "MMBbl" and "MBbl" mean million and thousand barrels, respectively;
the term "Bbl" means barrel; the terms "MMBbld" and "MBbld" mean million and
thousand barrels per day, respectively. In calculating Mcf and Bbl
equivalents, one Bbl is equal to six Mcf.
</TABLE>
- 10 -
<PAGE>
The following table sets forth the statement of income for the specified
periods:
<TABLE>
<CAPTION>
Three Months Ended
March 31,
------------------
(Millions of dollars) 1997 1996
------ ------
<S>
<C> <C>
REVENUES
Natural gas
Sales............................. $ 872.7 $ 575.9
Purchases......................... (666.8) (416.6)
Delivery expense.................. (21.5) (11.2)
------ ------
Net sales - natural gas........ 184.4 148.1
------ ------
Crude oil
Sales............................. 200.3 170.6
Purchases......................... (125.2) (108.0)
Delivery expense.................. (1.6) (1.1)
------ ------
Net sales - crude oil.......... 73.5 61.5
------ ------
NGLs and other
Sales............................. 31.5 12.2
Purchases and other costs......... (7.7) 1.5
------ ------
Net sales - NGLs and other..... 23.8 13.7
------ ------
Net sales and other operating
revenues........................ 281.7 223.3
Other revenues...................... 1.9 3.5
------ ------
Net revenues................... 283.6 226.8
------ ------
EXPENSES
Operating expenses................. 32.7 32.5
Exploration expenses............... 70.8 39.8
Selling, general and administrative
expenses......................... 14.7 12.2
Taxes other than income taxes...... 14.6 10.0
Depreciation, depletion and
amortization..................... 70.6 63.3
Interest........................... 13.0 13.4
------ ------
Total expenses................... 216.4 171.2
------ ------
Income before income taxes......... 67.2 55.6
Income tax provision................. 4.3 ---
------ ------
Net income......................... $ 62.9 $ 55.6
====== ======
</TABLE>
- 11 -
<PAGE>
FIRST QUARTER 1997 vs. FIRST QUARTER 1996.
Net income for the first quarter 1997 was $62.9 million, compared to
$55.6 million for the first quarter of 1996. The 13 percent increase in
earnings was primarily the result of higher commodity prices.
Net sales and other operating revenues increased by $58.4 million to
$281.7 million for the first quarter of 1997, primarily as a result of higher
natural gas, crude oil and NGL prices.
Natural gas sales increased by $296.8 million to $872.7 million in the
first quarter 1997. The higher revenues were the result of a 46 percent
increase in sales volumes to an average of 3.7 Bcfd and a slightly higher
average natural gas sales price. Included in the natural gas revenues for
the first quarter of 1997 and 1996 was the unfavorable impact of $15.9
million and $22.7 million, respectively, related to the Company's hedging
activities.
First quarter 1997 natural gas purchases increased by $250.2 million
from the first quarter of 1996 to $666.8 million. This increase was primarily
a result of an increase in natural gas purchase volumes of over 65 percent,
resulting from increased marketing activities.
First quarter 1997 natural gas production declined slightly as compared
to the same period last year. This decrease was primarily a result of field
declines at Mustang Island 805, High Island 177 and Wilburton, almost entirely
offset by production growth in the San Juan basin, redevelopment efforts at
several offshore fields, and the year-end 1996 start-up of the Norphlet well
in Mobile 904.
Crude oil sales in the first quarter of 1997 increased from the same
period last year primarily as a result of a 19 percent increase in sales price.
First quarter 1997 crude oil production was down slightly from the first
quarter 1996 levels primarily as a result of natural field declines, partially
offset by the late first quarter 1997 resumption of production at the Company's
Bastian Bay discovery in the South Pass 60 field.
For the first quarter 1997, natural gas liquids ("NGLs") sales revenues
were 127 percent higher than the same period last year as a result of higher
production available for sale and higher NGL prices.
NGLs production averaged 17.3 MBbld, up 63 percent from the same period
last year. This increase primarily reflects increased processing of
Mid-continent wet gas. Also, during the first quarter of 1996, the Company
elected to bypass certain processing in favor of selling BTUs as natural gas
due to the economic advantage of natural gas prices at that time.
-12-
<PAGE>
First quarter 1997 exploration expenses were $70.8 million, up 78 percent
from the same period in 1996. This increase is primarily a result of increased
dry hole costs and seismic purchases. Dry hole costs for first quarter of 1997
were $26.4 million as compared to $8.7 million for the same period last year.
Of the $17.7 million increase in dry hole costs from period to period,
approximately $14.0 million is attributable to the previously announced
decision of Ship Shoal 357 sub-salt well as a dry hole. Also, primarily in
support of the Company's efforts in the most recent federal Gulf of Mexico
lease sale, geological and geophysical expenditures increased to $27.0 million,
up $9.9 million from the same period last year.
Taxes other than income taxes increased $4.6 million during the first
quarter 1997 as compared to the same period last year. The increase in
product prices resulted in higher taxable values on the Company's production.
Depreciation, depletion and amortization increased by $7.3 million to
$70.6 million in the first quarter of 1997. The increase is equally due to
depletion rate increases at certain fields, the start-up of production at the
Clay West field and recognition of an impairment loss associated with the
South Marsh Island 24 facilities.
The tax provision of $4.3 million in the first quarter of 1997 is higher
than the first quarter 1996 primarily due to higher pre-tax earnings as
compared to the same period in 1996. Also, in the first quarter of 1997, the
tax provision includes $2.0 million of tax expense related to monetizing the
Company's pre-1997 tax credits pursuant to the recently executed second
amendment of the Company's tax sharing agreement with ARCO. (See Note 6 of the
Notes to Interim Consolidated Financial Statements). The tax provision for
first quarter 1997 and 1996 included the net benefit of $20.2 million and $20.4
million, respectively, of Internal Revenue Code Section 29 tax credits for non-
conventional fuels.
-13-
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES.
In the first quarter of 1997, cash flow from operations was $298.8
million, compared to $115.3 million for the same period in 1996. This increase
was due to higher product prices, the receipt of $59.4 million from ARCO
related to the recently amended tax sharing agreement and lower working capital
requirements as compared to the first quarter of 1996.
Net cash used in investing activities in 1997 was $142.5 million, a 71
percent increase over first quarter 1996, primarily as a result of increased
property acquisitions. Property acquisitions included approximately $58.0
million for the purchase of 47 tracts in the March 5, 1997 Outer Continental
Shelf (OCS), Central Gulf of Mexico Oil and Gas Lease Sale 166. The Company
was apparent high bidder on each of these tracts and the prescribed award
review process of the Minerals Management Service of the U.S. Department of
Interior is still ongoing with respect to some of the tracts.
The following table summarizes the Company's capital investments for the
comparative periods.
<TABLE>
<CAPTION>
CAPITAL SPENDING SUMMARY
For the three months ended
March 31,
1997 1996
--------- ---------
<S>
<C> <C>
Exploratory drilling.................... $ 26.6 $ 15.5
Development drilling.................... 40.4 51.0
Property acquisitions................... 62.3 3.9
Other additions........................ 13.4 12.4
------- ------
Total additions to property,
plant and equipment.......... 142.7 82.8
Geological and geophysical............. 27.0 17.1
------- -------
Total capital program............... $ 169.7 $ 99.9
======= =======
</TABLE>
Cash flow used in financing activities was $155.4 million in the first
quarter of 1997, reflecting a $148.1 million pay down of long-term debt (net
of new borrowings).
In February 1997, the Company issued $75.0 million of 6.96 percent
unsecured Notes, due February 2007 pursuant to its $250 million Medium-Term
Note Program. To date $150 million of Notes have been issued under the
Medium-Term Note Program. The net proceeds from the February 1997 issuance
were used to pay down debt incurred under the Company's Commercial Paper
Program.
- 14 -
<PAGE>
The Company's ratio of earnings to fixed charges for the three months
ended March 31, 1997 and 1996 was 6.2 and 5.2, respectively. This ratio was
computed by dividing earnings by fixed charges. For this purpose, earnings
include income before income taxes and fixed charges. Fixed charges include
interest and amortization of debt expenses and the estimated interest component
of rental.
RISK MANAGEMENT.
From time to time, the Company uses various hedging arrangements,
predominantly natural gas and crude oil price swaps, to manage the Company's
exposure to price risk from its natural gas and petroleum liquids production.
These hedging arrangements have the effect of locking in for a specified
period (at predetermined prices or ranges of prices) the prices the Company
will receive for the volumes to which the hedge relates. As a result, while
these hedging arrangements are structured to reduce the Company's exposure to
decreases in price associated with the hedged commodity, they can also limit
the benefit the Company might otherwise have received from any price increases
associated with the hedged commodity.
As a result of the various hedging transactions for natural gas and
crude oil, the Company realized $15.9 million and $22.7 million of pre-tax
losses in the first quarter of 1997 and 1996, respectively. Since these
transactions were considered to be hedges on production, these losses were
included in sales and other operating revenues and were reflected in the
average sales price of the particular products.
The following table summarizes the Company's hedged positions as of March
31, 1997.
<TABLE>
<CAPTION>
Average Range of
Product/Location Time Period Volume Prices
- ---------------- --------------------------- ---------- ----------------
<S>
<C> <C> <C>
Per Mcf
----------------
Gas/Henry Hub April 1 to December 31, 1997 207 MMcfd $1.90 -- $2.17
Gas/Henry Hub January 1 to December 31, 1998 183 MMcfd $1.90 -- $2.21
Gas/San Juan April 1 to December 31, 1997 104 MMcfd $1.80 -- $1.82
Per Bbl
----------------
Oil/Cushing April 1 to June 30,1997 14.8 MBbld $20.00 -- $23.90
</TABLE>
- 15 -
<PAGE>
Based on forward price quotes from brokers and NYMEX forward prices as of
March 31, 1997, the deferred pre-tax loss to the Company for the hedged
transactions for 1997 and 1998 would be $2.4 million for natural gas and
minimal for crude oil. The actual gains or losses ultimately realized by the
Company from such hedges may vary significantly from the foregoing amounts due
to the volatility of the commodity markets.
The Company continues to evaluate its hedging positions in light of
current market conditions.
The Company has long-term contracts with certain cogeneration facilities
which have an average remaining life of 13 years. These contracts cover an
average of 75 MMcfd of the Company's natural gas production for the remainder
of the year at an average price of $2.50 per Mcf.
During the first quarter of 1997, the Company's long-term sales
commitments did not exceed the total of proprietary production and other
natural gas production controlled through call rights with third-party
producers and marketing agreements with the Company's royalty owners.
NEW ACCOUNTING STANDARDS.
In October 1996, the Accounting Standards Executive committee issued
Statement of Position 96-1, "Environmental Remediation Liabilities"
("SOP 96-1"). The provisions of SOP 96-1 include standards affecting the
measurement, recognition and disclosure of environmental remediation
liabilities. The adoption of the provisions of SOP 96-1 had no material
impact to the Company's financial position, results of operations and cash
flows.
In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 128, Earnings Per Share,
("SFAS 128"). This Statement specifies the computation, presentation and
disclosure for earnings per share. This statement is effective for financial
statements for both interim and annual periods ending after December 15, 1997.
The implementation of SFAS 128 is expected to be insignificant.
------------------------
Management cautions against projecting any future results based on
present earnings levels because of economic uncertainties, the extent and form
of existing or future governmental regulations and other possible actions by
governments.
The foregoing financial information is unaudited and has been prepared
from the books and records of the Company. In the opinion of Management, the
financial information reflects all adjustments, consisting only of normal
recurring adjustments, necessary for the fair presentation of the financial
position, results of operations and cash flows in conformity with generally
accepted accounting principles.
- 16 -
<PAGE>
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.
There have been no material developments with respect to the
Company's legal proceedings as previously reported in the Company's report on
Form 10-K for the period ended December 31, 1996.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits.
10 Second Amendment to Tax Sharing Agreement, dated as of
January 1, 1997, between Vastar Resources, Inc., its
subsidiaries that are signatories thereto and Atlantic
Richfield Company
12 Computation of Ratio of Earnings to Fixed Charges
27 Financial Data Schedule
(b) Reports on Form 8-K.
Date of Report Item No. Financial Statements
-------------- -------- --------------------
February 18, 1997 Items 5 and 7 None
- 17 -
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
VASTAR RESOURCES, INC.
(Registrant)
Dated: May 1, 1997 /s/ Joseph P. McCoy
------------------------------
Joseph P. McCoy
Vice President and Controller
(Duly Authorized Officer and
Principal Accounting Officer)
- 18 -
<PAGE>
Exhibit Index
Exhibit No. Description
- ----------- ------------------------------------------------------
10 Second Amendment to Tax Sharing Agreement, dated as of
January 1, 1997, between Vastar Resources, Inc., its
subsidiaries that are signatories thereto and Atlantic
Richfield Company
12 Computation of Ratio of Earnings to Fixed Charges
27 Financial Data Schedule
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
Vastar Resources, Inc. Financial Data Schedule as of March 31, 1997.
This schedule contains summary financial information extracted from the
Consolidated Statement of Income and the Consolidated Balance Sheet and is
qualified in its entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> MAR-31-1997
<CASH> 22,800
<SECURITIES> 0
<RECEIVABLES> 299,900
<ALLOWANCES> 0
<INVENTORY> 10,300
<CURRENT-ASSETS> 373,600
<PP&E> 4,760,700
<DEPRECIATION> (3,387,800)
<TOTAL-ASSETS> 1,746,500
<CURRENT-LIABILITIES> 386,900
<BONDS> 630,300
0
0
<COMMON> 1,000
<OTHER-SE> 348,000
<TOTAL-LIABILITY-AND-EQUITY> 1,746,500
<SALES> 281,700
<TOTAL-REVENUES> 283,600
<CGS> 117,900
<TOTAL-COSTS> 188,700
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 13,000
<INCOME-PRETAX> 67,200
<INCOME-TAX> 4,300
<INCOME-CONTINUING> 62,900
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 62,900
<EPS-PRIMARY> 0.65
<EPS-DILUTED> 0.65
</TABLE>
<TABLE>
<CAPTION>
VASTAR RESOURCES, INC.
EXHIBIT 12
STATEMENT SETTING FORTH DETAIL OF COMPUTATION OF
RATIO OF EARNINGS TO FIXED CHARGES
(Unaudited)
For the Three
Months Ended
March 31,
-------------
(Millions of dollars) 1997 1996
except ratio amounts) ----- -----
<S>
<C> <C>
Income from continuing operations
before income taxes, minority
interest and cumulative effect of
change in accounting principle(1)..... $ 67.2 $ 55.6
Fixed Charges:
Interest expense charged to income,
and portion of rentals
representative of interest(2)......... 13.0 13.4
Capitalized Interest....................... --- ---
Total fixed charges...................... 13.0 13.4
------ ------
Earnings (1) + (2)........................ $ 80.2 $ 69.0
====== ======
Ratio of earnings to fixed charges........ 6.17 5.15
</TABLE>
The Company has no issuances of preferred stock.
SECOND AMENDMENT TO TAX SHARING AGREEMENT
EFFECTIVE JANUARY 1, 1997
This SECOND AMENDMENT TO THE TAX SHARING AGREEMENT (this
"Second Amendment") is made and entered into as of January
1, 1997 by and among ATLANTIC RICHFIELD COMPANY, a Delaware
corporation ("ARCO"), VASTAR RESOURCES, INC., a Delaware
corporation ("VRI"), and the Subsidiaries of VRI that are
signatories hereto.
WHEREAS, ARCO and VRI entered into a Tax Sharing
Agreement effective as of October 1, 1993 and to a First
Amendment effective as of June 1, 1995 to provide for the
sharing of income tax liability, including specifically
credits provided under section 29 of the Internal Revenue
Code of 1986 (the "Basic Agreement as Amended").
WHEREAS, the parties wish to enter into an agreement to
modify the Basic Agreement as Amended to allow Vastar to
realize more immediately benefits from section 29 credits
that it generates and that are utilized by the ARCO Group,
and to fairly compensate ARCO for earlier payment.
NOW THEREFORE, in consideration of the premises
and the mutual covenants and agreements contained herein,
the parties agree as follows:
1. DEFINITIONS. Any capitalized term not otherwise
defined herein shall have the meaning given to such term in
Section 1 of the Basic Agreement as Amended.
2. AMENDMENTS TO BASIC AGREEMENT AS AMENDED. The
Basic Agreement as Amended shall be further amended as
follows:
<PAGE>
a. Section 1(k) is deleted and a new Section 1(k) is
hereby added to read as follows:
(k) DESIGNATED CREDIT shall mean (i)
in the case of income tax credits described
in section 29 of the Code ("section 29
credits") that do not constitute Refundable
Designated Credits, as defined below, the
product of the amount of such credits
multiplied by 96.75%, (ii) Refundable
Designated Credits and (iii) income tax
credits described in section 43 of the Code
("section 43 credits"), provided that all of
such credits are generated by any member of
the VRI Group (1) in the ordinary course of
its trade or business of exploration,
development, production and marketing of
natural resources and (2) from interests in
properties that are acquired by any Member
of the VRI Group in the ordinary course of
its trade or business. All determinations
of whether a Designated Credit was generated
or whether a property was acquired by a
Member of the VRI Group in the ordinary
course of its trade or business shall be
made by ARCO in its sole and absolute
discretion. Upon request from ARCO, Vastar
shall provide certifications relating to the
facts associated with the generation or
acquisition of such credits and shall
furnish such additional data or information
as ARCO may require in order to make such
determinations.
b. The third sentence of Section 4(a) shall be
amended by deleting the phrase "prepared in
accordance with subsections (b) and (c) of this
Section 4" and by inserting the phrase "prepared
in accordance with subsections (b), (c) and (h) of
this Section 4".
c. The preamble to Section 4(h) and Section 4(h)(i)
shall be deleted. New Section 4(h)(i) is hereby
added to read and provide as follows:
(i) USE OF DESIGNATED CREDITS IN CURRENT
TAXABLE YEAR.
Amounts of Designated Credits generated in a
Taxable Year may be applied to reduce the VRI
Group Consolidated Tax Liability for the Taxable
Year in the same manner as if the Pro Forma VRI
Return were an actual return. In addition,
Designated Credits may further reduce the VRI
Group Consolidated Tax Liability (including
2
<PAGE>
a reduction below zero which will result in a
negative amount that is refundable to VRI to the
extent provided herein), without regard to the
impact of any statutory or income limitations but
only if and to the extent that such Designated
Credits reduce the ARCO Group Consolidated Tax
Liability for such Taxable Year (or in the case of
carryover Designated Credits, a prior Taxable
Year). Notwithstanding the foregoing, (A) the
refund, if any, that VRI is permitted to receive
with respect to any Taxable Year that is
attributable to the utilization of Refundable
Designated Credits pursuant to this Section 4(h)
(including credits utilized pursuant to the
carryover provisions of Sections 4(h)(iv) and
4(h)(v) of this Agreement) may not exceed
$15 million, and (B) VRI will not be permitted to
receive a refund that is attributable to the use
of section 43 credits.
Refundable Designated Credits that are
utilized pursuant to the carryover provisions of
Sections 4(h)(iv) and 4(h)(v) shall be applied
against the $15 million limitation in the year
that they are utilized. In the event that the
amount of VRI's refund that is attributable to its
use of Refundable Designated Credits pursuant to
this Section 4(h) with respect to a Taxable Year
is less than $15 million, such shortfall shall not
increase the $15 million limitation in any
subsequent Taxable Year.
ARCO shall refund in cash to VRI the tax
benefit associated with the Designated Credits
that are permitted to be refunded pursuant to this
Section 4(h) within 60 days of the actual
reduction in the ARCO Group Consolidated Tax
Liability (or, in the case of Refundable
Designated Credits that are utilized pursuant to
Section 4(h)(v), within 60 days of Completion
date) for such Taxable Year. For purposes of this
Section 4(h)(i), the actual reduction in the ARCO
Group Consolidated Tax Liability occurs when
credits are either applied on the ARCO Group's
Consolidated Return for a Taxable Year or used to
reduce the ARCO Group's estimated income tax
payments for such year (as determined by ARCO).
To the extent that VRI has received a refund
pursuant to Section 4(h) with respect to
Designated Credits, the amount of carryovers on
the Pro Forma VRI Return shall be correspondingly
reduced (adjustments shall also be made to reflect
subsequent adjustments pursuant to this
Section 4(h) or Section 8).
If VRI has received a refund from ARCO
pursuant to this Section 4(h)(i) with respect to a
Taxable Year as a result of any Designated Credit
and (A) ARCO determines that such credits did not
reduce the ARCO Group Consolidated Tax Liability
for such year (or, if applicable, for a prior
Taxable Year) or (B) if the amount of Designated
Credits for which VRI has received a refund with
3
<PAGE>
respect to a Taxable Year exceeds the amount of
section 29 credits from Members of the VRI Group
that are eligible to be treated as Designated
Credits in such year and utilized under this
Section 4(h) in such year, then VRI shall
reimburse ARCO for any payment received within 60
days of receiving from ARCO a schedule setting
forth ARCO's calculation of VRI's reimbursement
obligations pursuant to this sentence. ARCO shall
make such calculation within 30 days of the
Completion date for such Taxable Year; HOWEVER,
any failure by ARCO to redetermine the amount of
credits that reduce the ARCO Group Consolidated
Tax Liability or to reconcile the amount of
Designated Credits utilized within the 30-day
period set forth in the preceding sentence shall
not prevent ARCO, in its sole and absolute
discretion, from making subsequent calculations of
VRI's refund obligations contemplated by the
preceding sentence, as circumstances warrant,
within the applicable statute of limitations
(determined as if the Pro Forma VRI Return were an
actual return that is subject to any extensions
that have been granted by ARCO with respect to the
Consolidated Return).
d. Section 4(h)(ii) shall be deleted. References to
Section 4(h)(ii) in the Basic Agreement As Amended
shall be deemed to be references to
Section 4(h)(i).
e. The first sentence of Section 4(h)(iii) is amended
by deleting the phrase "(z) cannot be utilized
under Section 4(h)(i) solely because of the
limitation contained therein that prevents
Designated Credits from reducing the VRI Group Tax
Liability below zero."
f. The first sentence of Section 4(h)(iv) is amended
by deleting the phrase ", in the case of
Refundable Designated Credits,".
g. Section 4(h)(v) shall be deleted, and new
Section 4(h)(v) is hereby added to read and
provide as follows:
(v) DESIGNATED CREDITS PREVIOUSLY
UTILIZED BY THE ARCO GROUP. Amounts of
Designated Credits that have been applied to
reduce the ARCO Group Consolidated Tax
4
<PAGE>
Liability in a prior Taxable Year, but which
have not been applied to reduce the VRI
Group Tax Liability under Section 4(h)(i)
solely because of (A) the limitation
contained in Section 4(h)(i) that prevents
Designated Credits described in section 43
of the Code from reducing the VRI Group Tax
Liability below zero or (B) the limitation
contained in Section 4(h)(i) that limits
refunds with respect to Refundable
Designated Credits, may be applied to reduce
the VRI Group Consolidated Tax Liability in
any subsequent Taxable Year, including a
reduction below zero, notwithstanding any
statutory or income limitations. For
purposes of the preceding sentence, the
provisions of Sections 4(h)(i) and 4(h)(iii)
shall apply to Refundable Designated Credits
carried over pursuant to this
Section 4(h)(v) as if such credits were
generated by sales of production from the
well in the Taxable Year to which they are
carried. The preceding sentence is not
intended to affect the application of the
ordering rule contained in the first
sentence of Section 4(h)(vi) of this
Agreement.
h. Section 4(h)(viii) shall be deleted and new
Section 4(h)(viii) is hereby added to read and
provide as follows:
(viii) DISPLACED CREDITS. If VRI has
reduced the VRI Group Consolidated Tax
Liability or received a refund pursuant to
this Section 4(h) for any Taxable Year
pursuant to this Section 4(h) as a result of
any Designated Credit of any Member of the
VRI Group, and such Designated Credit is
subsequently displaced by another attribute
of the ARCO Group in a situation where
Section 4(h)(vii) does not apply, VRI shall
reimburse ARCO for any amount by which VRI's
liability to ARCO was reduced as a result of
the use of the displaced Designated Credit
or repay to ARCO the amount of the refund
from ARCO that was attributable to the use
of the displaced Designated Credit. For
purposes of this Section 4(h)(viii),
Refundable Designated Credits shall be
deemed to be displaced prior to Designated
Credits. A Designated Credit that is
displaced may be carried forward pursuant to
Section 4(h)(iv) thereafter, or, with the
consent of ARCO, carried back if ARCO
determines that the circumstances giving
rise to such displacement will allow it
5
<PAGE>
to utilize a greater amount of Designated
Credits in a prior Taxable Year than it
would have utilized absent such
circumstances.
i. Section 7(b) of the Basic Agreement As Amended is
amended by deleting the following phrase "(other
than Designated Credits (including carryovers)
that reduced the VRI Group Tax Liability for any
Taxable Year pursuant to Section 4(h) of this
Agreement or Refundable Designated Credits
(including carryovers) with respect to which VRI
has received a refund from ARCO pursuant to
Section 4(h) of this Agreement)" in the 10th and
19th lines of that section and by substituting in
its place the following phrase "(other than
Designated Credits (including carryovers) that
reduced the VRI Group Consolidated Tax Liability
or with respect to which VRI has received a refund
from ARCO for any Taxable Year pursuant to
Section 4(h) of this Agreement)".
3. EFFECTIVE DATE AND PAYMENT FOR CARRY FORWARD
DESIGNATED CREDITS.
The effective date for this Second Amendment shall be
January 1, 1997. ARCO shall pay $59,382,000 to VRI within 2
days after the execution date of this Second Amendment to
compensate VRI for all Designated Credits that were (i)
generated by the VRI Group prior to January 1, 1997 and (ii)
with respect to which VRI is not entitled to compensation
under the Basic Agreement as Amended in any Taxable Year
ending prior to the effective date of this
6
<PAGE>
Second Amendment. The amount of the carryovers on the Pro
Forma VRI Return shall be reduced by the full amount of the
Designated Credits for which VRI received compensation,
notwithstanding the fact that the payment was calculated by
reference to 96.75% of the statutory credit amount for
certain of such credits. The amount of, and payment for,
such credits shall continue to be subject to adjustments as
provided in the Basic Agreement as Amended, including
without limitation, Sections 4(h)(vii), 4(h)(viii) and 8;
PROVIDED HOWEVER, that to the extent that the adjustment
affects the calculation of credits described in the first
sentence of this Section 3, the amount of such adjustment
shall be calculated at 96.75% of the statutory credit
amount.
4. GOVERNING LAW. THIS SECOND AMENDMENT SHALL BE
CONSTRUED AND ENFORCED IN ACCORDANCE WITH THE LAWS OF THE
STATE OF TEXAS, WITHOUT GIVING EFFECT TO THE PRINCIPLES OF
CONFLICT OF LAWS.
5. CONTINUATION OF BASIC AGREEMENT AS AMENDED. The
Basic Agreement as Amended continues in full force and
effect, except as expressly amended herein.
IN WITNESS WHEREOF, the parties hereto have caused
their names to be subscribed and executed by their
respective authorized officers on the dates indicated,
effective as of January 1, 1997.
ATLANTIC RICHFIELD COMPANY
By:/s/ PATRICK J. ELLINGSWORTH Date: 3/20/97
--------------------------- -------
Patrick J. Ellingsworth
Associate General Tax Officer
7
<PAGE>
VASTAR RESOURCES, INC.
By: /s/ A. SHAWN NOONAN Date: 3/18/97
------------------- -------
A. Shawn Noonan
General Tax Officer
F&H PIPELINE COMPANY
By: /s/ A. SHAWN NOONAN Date: 3/18/97
------------------- -------
A. Shawn Noonan
Assistant Secretary
GRANT GATHERING COMPANY
By: /s/ A. SHAWN NOONAN Date: 3/18/97
------------------- -------
A. Shawn Noonan
Assistant Secretary
WILBURTON HUB, INC.
By: /s/ A. SHAWN NOONAN Date: 3/18/97
------------------- -------
A. Shawn Noonan
Assistant Secretary
VASTAR GAS MARKETING, INC.
By: /s/ A. SHAWN NOONAN Date: 3/18/97
------------------- -------
A. Shawn Noonan
Assistant Secretary
VASTAR HOLDINGS, INC.
By: /s/ A. SHAWN NOONAN Date: 3/18/97
------------------- -------
A. Shawn Noonan
Assistant Secretary
VASTAR POWER MARKETING, INC.
By: /s/ A. SHAWN NOONAN Date: 3/18/97
------------------- -------
A. Shawn Noonan
Assistant Secretary
8
