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FORM 10-Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549-1004
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission file number 1-13916
UNION PACIFIC RESOURCES GROUP INC.
(Exact name of registrant as specified in its charter)
UTAH 13-2647483
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
801 CHERRY STREET, FORT WORTH, TEXAS
(Address of principal executive offices)
76102
(Zip Code)
(817) 877-6000
(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 [ ]
As of July 31, 1997, there were 253,771,945 shares of the registrant's
common stock outstanding.
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UNION PACIFIC RESOURCES GROUP INC.
INDEX
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION
Page Number
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ITEM 1: CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
CONDENSED STATEMENTS OF CONSOLIDATED INCOME - For the
Three Months and Six Months Ended June 30, 1996 and 1997............. 1
CONDENSED STATEMENTS OF CONSOLIDATED FINANCIAL POSITION -
At December 31, 1996 and June 30, 1997............................... 2 - 3
CONDENSED STATEMENTS OF CONSOLIDATED CASH FLOWS - For the
Six Months Ended June 30, 1996 and 1997.............................. 4
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS....................... 5 - 9
INDEPENDENT ACCOUNTANTS' REPORT............................................ 10
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS ..................................................... 11 - 21
PART II. OTHER INFORMATION
ITEM 1: LEGAL PROCEEDINGS ......................................................... 22 - 24
ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K .......................................... 24
SIGNATURE .......................................................................... 25
</TABLE>
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PART I. FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
UNION PACIFIC RESOURCES GROUP INC.
CONDENSED STATEMENTS OF CONSOLIDATED INCOME
For the Three Months and Six Months Ended June 30, 1996 and 1997
(Millions, except per share amounts)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
------------------------ ------------------------
1996 1997 1996 1997
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Operating revenues: (Note 4)
Oil and gas operations:
Producing properties .................... $ 267.8 $ 304.6 $ 499.8 $ 674.6
Plants, pipelines and marketing ......... 125.6 89.7 239.8 214.4
Other oil and gas revenues .............. 4.4 18.6 16.7 23.2
---------- ---------- ---------- ----------
Minerals ................................ 30.1 31.7 61.3 64.1
Total oil and gas operations ............ 397.8 412.9 756.3 912.2
---------- ---------- ---------- ----------
Total operating revenues ........... 427.9 444.6 817.6 976.3
---------- ---------- ---------- ----------
Operating expenses:
Production ................................. 63.6 71.8 126.4 144.9
Exploration, including exploratory
dry holes ................................ 32.2 49.2 61.9 92.0
Plants, pipelines and marketing ............ 65.8 52.7 126.4 129.3
Minerals ................................... 2.2 1.2 3.8 2.5
Depreciation, depletion and amortization ... 127.5 134.8 251.2 267.8
General and administrative ................. 16.5 19.9 30.5 38.4
---------- ---------- ---------- ----------
Total operating expenses ........... 307.8 329.6 600.2 674.9
---------- ---------- ---------- ----------
Operating income .............................. 120.1 115.0 217.4 301.4
Other income (expense) - net .................. (1.5) 3.9 0.5 0.9
Interest expense .............................. (12.5) (11.0) (25.5) (21.7)
---------- ---------- ---------- ----------
Income before income taxes .................... 106.1 107.9 192.4 280.6
Income taxes .................................. (35.7) (33.5) (62.8) (89.0)
---------- ---------- ---------- ----------
Net income .................................... $ 70.4 $ 74.4 $ 129.6 $ 191.6
========== ========== ========== ==========
Earnings per share ............................ $ 0.28 $ 0.30 $ 0.52 $ 0.76
========== ========== ========== ==========
Weighted average shares outstanding ........... 249.8 251.0 249.8 251.0
Cash dividends per share ...................... $ 0.05 $ 0.05 $ 0.10 $ 0.10
</TABLE>
See the notes to the condensed consolidated financial statements (unaudited).
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UNION PACIFIC RESOURCES GROUP INC.
CONDENSED STATEMENTS OF CONSOLIDATED FINANCIAL POSITION
At December 31, 1996 and June 30, 1997
(Millions of Dollars)
<TABLE>
<CAPTION>
December 31, June 30,
1996 1997
------------ ------------
(Unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and temporary investments ......... $ 118.9 $ 42.7
Accounts receivable - net .............. 351.6 282.8
Inventories ............................ 29.4 41.6
Other current assets ................... 86.4 30.8
------------ ------------
Total current assets ............ 586.3 397.9
------------ ------------
Properties (successful efforts method):
Cost ................................... 6,190.0 6,795.4
Accumulated depreciation, depletion
and amortization ................... (3,217.6) (3,521.7)
------------ ------------
Total properties - net .......... 2,972.4 3,273.7
Intangible and other assets ............... 90.2 95.9
------------ ------------
Total assets .................... $ 3,648.9 $ 3,767.5
============ ============
</TABLE>
See the notes to the condensed consolidated financial statements (unaudited).
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UNION PACIFIC RESOURCES GROUP INC.
CONDENSED STATEMENTS OF CONSOLIDATED FINANCIAL POSITION
At December 31, 1996 and June 30, 1997
(Millions of Dollars)
<TABLE>
<CAPTION>
December 31, June 30,
1996 1997
------------ ------------
(Unaudited)
<S> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable ......................... $ 407.4 $ 347.2
Accrued taxes payable .................... 134.1 114.2
Other current liabilities ................ 71.3 63.3
------------ ------------
Total current liabilities .......... 612.8 524.7
------------ ------------
Long-term debt ............................... 670.9 672.7
Deferred income taxes ........................ 434.7 481.3
Retiree benefits obligations ................. 151.4 152.4
Deferred revenues ............................ 4.9 8.5
Other long-term liabilities (Note 5) ......... 259.9 235.9
Shareholders' equity:
Common stock, no par value;
Authorized shares--400,000,000
Issued shares--250,058,019
and 253,768,277........................ -- --
Paid-in surplus .......................... 872.9 983.5
Unearned Employee Stock Ownership Plan ... -- (104.8)
Retained earnings ........................ 674.4 841.0
Unrealized gain on investment ............ -- 1.0
Unearned compensation .................... (17.5) (11.7)
Deferred foreign exchange adjustment ..... (12.0) (12.8)
Treasury stock, at cost;
Shares--154,417 and 167,177 .......... (3.5) (4.2)
------------ ------------
Total shareholders' equity ......... 1,514.3 1,692.0
------------ ------------
Total liabilities and shareholders' equity ... $ 3,648.9 $ 3,767.5
============ ============
</TABLE>
See the notes to the condensed consolidated financial statements (unaudited).
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UNION PACIFIC RESOURCES GROUP INC.
CONDENSED STATEMENTS OF CONSOLIDATED CASH FLOWS
For the Six Months Ended June 30, 1996 and 1997
(Millions of Dollars)
(Unaudited)
<TABLE>
<CAPTION>
1996 1997
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<S> <C> <C>
Cash flows provided by operations:
Net income ................................... $ 129.6 $ 191.6
Non-cash charges to income:
Depreciation, depletion and amortization .. 251.2 267.8
Deferred income taxes ..................... 16.2 45.9
Other non-cash charges - net .............. 11.1 42.8
Changes in current assets and liabilities .... 0.9 24.0
------------ ------------
Cash provided by operations ........... 409.0 572.1
------------ ------------
Investing activities:
Capital and exploratory expenditures ......... (367.9) (643.1)
Proceeds from sales of assets ................ 24.9 4.9
Other investing activities - net ............. -- (6.4)
------------ ------------
Cash used by investing activities ..... (343.0) (644.6)
------------ ------------
Financing activities:
Dividends paid ............................... (24.9) (25.0)
Advances to Union Pacific Corporation ........ (82.9) --
Debt financing ............................... -- 1.9
Other financing - net ........................... 34.4 19.4
------------ ------------
Cash used by financing activities ..... (73.4) (3.7)
------------ ------------
Net change in cash and temporary investments .... (7.4) (76.2)
Cash at beginning of period ..................... 27.6 118.9
------------ ------------
Cash at end of period ........................... $ 20.2 $ 42.7
============ ============
</TABLE>
See the notes to the condensed consolidated financial statements (unaudited).
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UNION PACIFIC RESOURCES GROUP INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. RESPONSIBILITIES FOR FINANCIAL STATEMENTS - The condensed consolidated
financial statements of Union Pacific Resources Group Inc. and
subsidiaries (the "Company") have been prepared by management and are
unaudited. Such unaudited interim financial statements reflect all
adjustments (including normal recurring adjustments) that are, in the
opinion of management, necessary for a fair presentation of the financial
position and operating results of the Company for the interim periods;
however, such condensed statements do not include all of the information
and footnotes required by generally accepted accounting principles to be
included in a full set of financial statements. The report of Deloitte &
Touche LLP commenting on their review accompanies the condensed
consolidated financial statements and is included in Part I, Item 1 in
this report. The Condensed Statement of Consolidated Financial Position at
December 31, 1996 is derived from the audited financial statements as of
December 31,1996. The condensed consolidated financial statements should
be read in conjunction with the consolidated financial statements and
notes thereto contained in the Company's Annual Report on Form 10-K for
the year ended December 31, 1996. The results of operations for the six
months ended June 30, 1997 are not necessarily indicative of the results
for the full year ending December 31, 1997.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of certain assets and
liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues and
expenses during each reporting period. Management believes its estimates
and assumptions are reasonable; however, such estimates and assumptions
are subject to a number of risks and uncertainties which may cause actual
results to differ materially from the Company's estimates.
2. NEW ACCOUNTING STANDARDS - In February 1997, the Financial Accounting
Standards Board ("FASB") issued Statement of Financial Accounting
Standards ("SFAS") No. 128, "Earnings Per Share" ("EPS") which establishes
new standards for computing and presenting EPS. SFAS No. 128 replaces the
presentation of primary EPS with a presentation of basic EPS. Basic EPS
excludes dilution and is computed by dividing income available to common
shareholders by the weighted-average number of common shares outstanding
for the period. Diluted EPS reflects the potential dilution that could
occur if securities or other contracts to issue common stock were
exercised or converted into common stock. The provisions of the statement
are effective for fiscal years ending after December 15, 1997. If the
provisions of SFAS No. 128 had been effective the first six months of 1997
and in 1996, basic and diluted earnings per share would not have been
materially different from primary and fully diluted earnings per share,
respectively, as calculated in accordance with Accounting Principles Board
Opinion No. 15.
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income", which establishes standards for reporting of comprehensive income
and its components (revenues, expenses, gains and losses) in a full set of
general-purpose statements. It requires (a) classification of items of
other comprehensive income by their nature in a financial statement and
(b) display of the accumulated balance of other comprehensive income
separate from retained earnings and additional paid-in capital in the
equity section of the statement of financial position. The Company plans
to adopt SFAS No. 130 for the quarter ended March 31, 1998.
Also in June 1997, the FASB issued SFAS No. 131, "Disclosures about
Segments of an Enterprise and Related Information", which establishes
standards for reporting information about operating segments in annual
financial statements and requires selected information about operating
segments in interim financial reports issued to shareholders.
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SFAS No. 131 also establishes standards for related disclosures about
products and services, geographic areas and major customers. The Company
plans to adopt SFAS No. 131 for the year ended December 31, 1998.
3. ACQUISITIONS - During the second quarter of 1997, the Company entered into
a purchase and sale agreement to acquire 100% of Highlands Gas Corporation
for an adjusted purchase price of approximately $180 million, including
the assumption of debt and other obligations. Highlands Gas Corporation is
in the business of gathering, purchasing, processing and transporting
natural gas and natural gas liquids. The acquisition, which includes three
natural gas processing plants, 700 miles of gas and natural gas liquids
gathering pipeline and 400 miles of transportation line, will be accounted
for using the purchase method of accounting. The Company anticipates
completing the purchase transaction in August 1997. Cash from operations
and the proceeds from issuance of commercial paper will be used to fund
this acquisition.
The Company also completed the purchase of certain producing properties and
gas pipeline assets of Castle Energy Corporation and certain Cotton Valley
Pinnacle Reef properties of Jordan Oil & Gas Company, L.P. in East Texas.
The acquisition from Castle Energy Corporation includes 8,150 net acres,
115 producing wells, approximately 95 drilling locations, and 74 miles of
gathering pipeline. The acquisition from Jordan Oil & Gas Company, L.P.
includes 312,000 net acres in the Cotton Valley Pinnacle Reef area in East
Texas, three producing wells, five wells which were being drilled, fourteen
drill sites and a large 3-D seismic shoot. Cash from operations was used as
the source of funds for these acquisitions.
4. RISK MANAGEMENT - The Company routinely uses derivative financial
instruments to manage and reduce risks associated with hydrocarbon price
volatility and other market variables. These instruments are generally put
in place to limit risk of adverse price movements, however, when this is
done, these same instruments usually limit future gains from favorable
price movements. Such risk management activities are generally
accomplished pursuant to exchange-traded futures contracts or master swap
agreements based on standard forms. Exchange-traded futures contracts
require the Company to maintain margin deposits. At June 30, 1997, the
Company had margin deposits of $7.4 million, $5.8 million from initial
contract requirements and $1.6 million for net unrealized losses. The
Company also utilizes options in its risk management program. These types
of contracts do not require the Company to maintain a margin deposit, but
do require the payment of premiums.
Unrealized gains/losses on derivative financial instruments are not
recorded. Recognition of realized gains/losses and option premium
payments/receipts are deferred until the underlying physical product
is sold. Margin deposits and deferred gains/losses are included in other
current assets in the Company's Condensed Statements of Consolidated
Financial Position.
The Company is exposed to risk of nonperformance by its counterparties due
to such counterparties' unwillingness or inability to pay in accordance
with the terms of the derivative financial instruments ("credit risk"). At
June 30, 1997, the Company's largest credit risk associated with any
single counterparty, represented by the net fair value of open contracts
with such counterparty was approximately $0.2 million.
At June 30, 1997, the Company had near-term futures contracts and price
swaps for August through December 1997 with respect to notional natural
gas volumes of 850 MMcfd at $1.95 per Mcf. The unrecognized mark-to-market
loss associated with such contracts, representing the price the Company
would
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pay to close such contracts, was $8.5 million, as of June 30, 1997. Also at
June 30, 1997, the Company had near-term crude oil price swap contracts for
July through September 1997 with respect to notional crude oil volumes of
15 MBbld at $20.03 per Bbl. These swaps had an unrecognized mark-to-market
gain of $0.1 million. Additionally, the Company has simultaneously
purchased crude oil put options (floor) and sold crude oil call options
(ceiling), the combination of the two having the effect of establishing
minimum and maximum prices the Company would receive for crude oil. At June
30, 1997, the Company's purchase and sale of such options had established a
minimum price of $19.17 per Bbl (including net premium paid) and a maximum
price of $24.67 per Bbl (including net premium received) with respect to
25.0 MBbld of crude oil for July through September 1997; and a minimum
price of $18.97 per Bbl and a maximum price of $24.47 per Bbl with respect
to 40 MBbld for October through December 1997. The value of these options
at June 30, 1997, was $5.0 million, representing the fair market value of
such options given current market prices using an option pricing model.
At June 30, 1997, the Company had near-term futures contracts and
price swaps for January through December 1998 with respect to notional
natural gas volumes of 100 MMcfd at $2.17 per Mcf. Additionally, the
Company had previously sold near-term futures contracts and price swaps for
January through December 1998 with respect to notional natural gas volumes
of 37 MMcfd at $2.21 per Mcf, then subsequently offset these positions by
purchasing corresponding volumes through futures contracts and price swaps
for the same delivery periods. The unrecognized mark-to-market gain
associated with such contracts and swaps for 1998 delivery periods,
representing the price the Company would receive to close such contracts at
the reporting date, was $1.1 million.
At June 30, 1997, the Company had outstanding long-term physical fixed
price sales contracts which obligates the Company to deliver 69.4 Bcf of
natural gas through June 30, 2008. The Company's marketing subsidiary,
Union Pacific Fuels, Inc., periodically enters into long-term financial
contracts that, in combination with these long-term fixed price sales
agreements, secure a margin on the corresponding volume positions. At June
30, 1997, long-term fixed price sales commitments for which corresponding
financial derivative instruments had not been entered into totaled 60.7 Bcf
of natural gas at an average price of $3.01 per Mcf. The mark-to-market
fair value of these contracts as of June 30, 1997 is $30.3 million. The
remaining commitments for 8.7 Bcf of natural gas had corresponding
financial derivative instruments for similar volumes. The unrecognized
mark-to-market present value related to such hedged commitments at June 30,
1997, was $0.6 million, consisting of a $0.2 million gain on the long-term
physical fixed price sales contacts and a $0.4 million gain on the
corresponding financial derivative investments.
At June 30, 1997, the Company had a total unrecognized mark-to-market
present value gain of $28.6 million related to the financial and fixed
price sales contracts described above. This gain consists of a $30.5
million net gain on long-term fixed price contracts and a $1.9 million net
loss on financial derivative instruments. Unrecognized mark-to-market gains
or losses were determined based upon current market prices, as quoted by
recognized dealers, assuming round lot transactions and using a mid-market
convention without regard to market liquidity.
5. COMMITMENTS AND CONTINGENCIES - The Company is subject to Federal, state,
provincial and local environmental laws and regulations and currently is
participating in the investigation and remediation of a number of sites.
Where the remediation costs reasonably can be determined, and where such
remediation is probable, the Company has recorded a liability. Management
does not expect future environmental obligations to have a material impact
on the results of operations or financial condition of the Company.
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In the last ten years, the Company has disposed of significant pipeline,
refining and producing property assets. In disposition agreements in
connection therewith, the Company has made certain representations and
warranties relating to the assets sold and provided certain indemnities
with respect to liabilities associated with such assets. The Company has
been advised of possible claims which may be asserted by the purchasers of
certain of the disposed assets for alleged breaches of such representations
and warranties and under certain indemnities. Certain claims related to
compliance with environmental laws remain pending. In addition, some of the
representations, warranties and indemnities related to some of the disposed
assets continue to survive under such disposition agreements. Further
claims may be made against the Company under such disposition agreements or
otherwise. While no assurance can be given as to the actual outcome of
these claims, the Company does not expect these matters to have a
materially adverse effect on its results of operations or financial
condition.
There are lawsuits pending against the Company and certain of its
subsidiaries which are described in Part II, Item 1 - Legal Proceedings in
this report. The outcome of such lawsuits can not be predicted. The Company
intends to defend vigorously against such lawsuits.
If the suits involving royalties are resolved ultimately against the Company
on a widespread basis, damage awards and a loss of future revenue, in the
aggregate, could have a materially adverse effect on the Company. The
Company is a defendant in a number of other lawsuits and is involved in
governmental proceedings arising in the ordinary course of business in
addition to those described above. The Company also has entered into
commitments and provided guarantees for specific financial and contractual
obligations of its subsidiaries and affiliates. The Company does not expect
that these lawsuits, commitments or guarantees will have a materially
adverse effect on its results of operations or financial condition.
6. PROPOSED ACQUISITION OF PENNZOIL COMPANY -- On June 23, 1997, the Company
and Resources Newco, Inc., a Delaware corporation and a wholly owned
subsidiary of the Company ("Bidder") offered to purchase up to 25,094,200
shares of common stock, par value $0.83 1/3 per share ("Pennzoil Shares") of
Pennzoil Company, a Delaware corporation ("Pennzoil") or such greater number
of Pennzoil Shares as equals 50.1% of the Pennzoil Shares outstanding on a
fully diluted basis as of the expiration date (initially July 21, 1997), in
each case together with the associated preferred stock purchase rights
("Rights") issued pursuant to the Rights Agreement, dated as of October 28,
1994 ("Rights Agreement") at a price of $84.00 per share (and associated
preferred stock purchase right), net to the seller in cash, without interest
thereon, upon the terms and subject to the conditions set forth in the
Offer to Purchase and in the related Letter of Transmittal (which, together
with any amendments or supplements thereto, collectively constitute the
"Offer").
The purpose of the Offer is to acquire a majority of the Pennzoil Shares as
the first step in a negotiated acquisition of the entire equity interest in
Pennzoil. The Company is seeking to negotiate with Pennzoil a definitive
acquisition agreement pursuant to which Pennzoil would, as soon as
practicable following consummation of the Offer, consummate a merger (the
"Proposed Merger") with Bidder or another direct or indirect wholly owned
subsidiary of the Company. At the effective time of the Proposed Merger,
each Pennzoil Share that is issued and outstanding immediately prior to the
effective time (other than shares held in the treasury of Pennzoil or owned
by the Company, Bidder or any direct or indirect wholly owned subsidiary of
the Company) would be converted into a number of shares of common stock, no
par value, of the Company ("Common Stock") determined, within a pricing
collar of $25.00 to
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$30.00, by dividing $84.00 by the average of the closing prices of a share
of the Common Stock for the twenty consecutive trading days ending five days
prior to the meeting of Pennzoil stockholders called for the purpose of
voting on the Proposed Merger. In the event that such average of the closing
prices during such twenty day period is less than $25.00 or greater than
$30.00, the exchange ratio will be fixed at 3.36 shares of the Common Stock
or 2.80 shares of the Common Stock, respectively. To date, Pennzoil has
refused to enter into negotiations with the Company regarding the Proposed
Merger. On July 21, 1997, the initial expiration date of the Offer, the
Company was informed by The Bank of New York, its Depository for the Offer,
that holders of 61.5% of the outstanding Pennzoil Shares had tendered into
the Offer. The Company did not consummate the Offer on such date because,
among other reasons, Pennzoil's Board refused to redeem the Rights or render
the Rights Agreement inapplicable and refused to remove other impediments
(including other anti-takeover measures that could be removed or made
inapplicable by Pennzoil Board action) that were conditions to the
Company's consummation of the Offer. On that same date, the Company
announced that it had extended the expiration date of the Offer until
September 24, 1997.
There can be no assurance that such negotiations will occur, or if such
negotiations occur, as to the outcome thereof. The Company and Bidder are
exploring ways to encourage the Board of Directors of Pennzoil to permit
Pennzoil's stockholders to participate in the Offer and the Proposed Merger.
These may include a solicitation of proxies at Pennzoil's 1998 and 1999
annual meeting of stockholders. The Offer is conditioned on, among other
things, Pennzoil's shareholder rights plan and other antitakeover measures
being invalidated or deemed inapplicable to the Offer and either the
Company's designees constituting a majority of the Pennzoil Board or
Pennzoil having entered into a mutually acceptable definitive merger
agreement with the Company and Bidder to provide for the acquisition of
Pennzoil pursuant to the Offer and the Proposed Merger.
The Company estimates that the total amount of funds required pursuant to
the Offer to purchase the Pennzoil Shares and to pay fees and expenses
related to the Offer will be approximately $2.2 billion. The Company and
Bidder plan to obtain such funds from the Company's available cash and
working capital, and commercial paper issuances or pursuant to one or more
loan facilities currently existing or to be obtained from one or more
commercial banks or other financial institutions on terms and conditions to
be determined hereafter. The Company and Bidder are currently in discussions
with a small group of financial institutions regarding the establishment
of a credit facility that would be used to pay all or a portion of the funds
required pursuant to the Offer. It is anticipated that the indebtedness
incurred by the Company under such loans will be repaid from funds generated
internally by the Company and its subsidiaries (including, after the
Proposed Merger, if consummated, dividends paid by Pennzoil and its
subsidiaries), through additional borrowings and security issuances or
through a combination of such sources. No final decisions have been made
concerning the method the Company will employ to repay such indebtedness.
Such decisions when made will be based on the Company's review from time to
time of the advisability of particular actions, as well as on prevailing
interest rates and financial and other economic conditions. The Offer is
not conditioned on financing.
For additional information, please see the Company's Schedule 14D-1, as
amended. Refer to Part II, Item I - Legal Proceedings in this report for
additional information regarding certain legal proceedings relating to the
Offer and Proposed Merger.
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INDEPENDENT ACCOUNTANTS' REPORT
To the Board of Directors and Shareholders of
Union Pacific Resources Group Inc.
Fort Worth, Texas
We have reviewed the accompanying condensed statement of consolidated financial
position of Union Pacific Resources Group Inc. (the "Company") as of June 30,
1997, and the related condensed statements of consolidated income and cash
flows for the three-month and six-month periods ended June 30, 1996 and 1997.
These financial statements are the responsibility of the Company's management.
We conducted our review in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical procedures to
financial data and of making inquiries of persons responsible for financial and
accounting matters. It is substantially less in scope than an audit conducted
in accordance with generally accepted auditing standards, the objective of
which is the expression of an opinion regarding the financial statements taken
as a whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should
be made to such condensed consolidated financial statements for them to be in
conformity with generally accepted accounting principles.
We have previously audited, in accordance with generally accepted auditing
standards, the consolidated statement of financial position of Union Pacific
Resources Group Inc. as of December 31, 1996, and the related consolidated
statements of income, changes in shareholders' equity and cash flows for the
year then ended (not presented herein); and in our report dated January 29,
1997, we expressed an unqualified opinion on those consolidated financial
statements. In our opinion, the information set forth in the accompanying
condensed statement of consolidated financial position as of December 31, 1996
is fairly stated, in all material respects, in relation to the statement of
consolidated financial position from which it has been derived.
DELOITTE & TOUCHE LLP
Fort Worth, Texas
July 16, 1997
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
UNION PACIFIC RESOURCES GROUP INC.
RESULTS OF OPERATIONS
QUARTER ENDED JUNE 30, 1996 COMPARED TO JUNE 30, 1997
OVERVIEW
<TABLE>
<CAPTION>
Three Months Ended June 30,
---------------------------
1996 1997
---------- ----------
(Millions of dollars)
<S> <C> <C>
Selected financial data:
Total operating revenues ........ $ 427.9 $ 444.6
Total operating expenses ........ 307.8 329.6
Operating income ................ 120.1 115.0
Net income ...................... 70.4 74.4
</TABLE>
NET INCOME for the quarter ended June 30, 1997 was $74.4 million, or $0.30 per
share, compared to $70.4 million, or $0.28 per share, for the same period in
1996. The 6% increase in earnings for the second quarter of 1997, compared to
the second quarter of 1996, was primarily due to lower interest expense and
improvements in other income, which helped to offset a slight decline in
operating income.
OPERATING INCOME for the second quarter of 1997 decreased by $5.1 million as
compared to the second quarter 1996. The decrease resulted from lower marketing
income due to lower product margins and cost increases associated with expanded
exploration activity despite higher producing property volumes and a partial
reduction in the reserve associated with the Columbia Gas Transmission Company
bankruptcy settlement.
<TABLE>
<CAPTION>
Three Months Ended June 30,
---------------------------
1996 1997
----------- ------------
(Millions of dollars)
<S> <C> <C>
Operating income:
Oil and gas operations .......... $ 109.7 $ 105.7
Minerals ........................ 27.8 30.0
General and administrative ...... (17.4) (20.7)
</TABLE>
- 11 -
<PAGE> 14
OIL AND GAS OPERATIONS
OPERATING REVENUES
<TABLE>
<CAPTION>
Three Months Ended June 30,
---------------------------
1996 1997
------------ ------------
(Millions of dollars)
<S> <C> <C>
Operating revenues:
Producing properties .............. $ 267.8 $ 304.6
Plants, pipelines and marketing ... 125.6 89.7
Other oil and gas revenues ........ 4.4 18.6
</TABLE>
PRODUCING PROPERTY REVENUES for the three months ended June 30, 1997 increased
by $36.8 million compared to the same period in 1996. Production volume
increases of 164.7 MMcfed (11%) added $25.3 million to revenues, while higher
product prices contributed another $11.5 million to revenues. During the second
quarter of 1997, net realized natural gas prices averaged $1.85 per Mcf, which
were up $0.17 per Mcf over the second quarter of 1996 prices. Impacted by
stronger natural gas liquids ("NGL") prices in the Rockies business unit,
overall NGL prices averaged $10.12 per Bbl, an 8% increase over second quarter
of 1996. Crude oil prices averaged $18.12 per Bbl during the second quarter of
1997, down $1.73 per Bbl from the same period last year.
<TABLE>
<CAPTION>
Three Months Ended June 30,
---------------------------
1996 1997
---------- -----------
<S> <C> <C>
Production volumes - producing properties:
Natural gas (MMcfd) ....................... 978.9 1,128.0
Natural gas liquids (MBbld) ............... 29.1 31.4
Crude oil (MBbld) ......................... 51.6 51.9
Total (MMcfed) ............................ 1,463.1 1,627.8
</TABLE>
<TABLE>
<CAPTION>
Three Months Ended June 30,
-----------------------------------------------
1996 1997 1996 1997
-------- -------- ------- -------
(without Hedging) (with Hedging)
<S> <C> <C> <C> <C>
Average product price realizations - producing properties:
Natural gas (per Mcf) ..................................... $ 1.73 $ 1.80 $ 1.68 $ 1.85
Natural gas liquids (per Bbl) ............................. 9.35 10.13 9.35 10.12
Crude oil (per Bbl) ....................................... 20.07 18.10 19.85 18.12
Average (per Mcfe) ........................................ 2.05 2.03 2.01 2.06
</TABLE>
Natural gas volumes from producing properties totaled 1,128.0 MMcfd during the
second quarter of 1997. This total represents an increase of 149.1 MMcfd or 15%
from the second quarter 1996. Drilling successes in the Austin Chalk, West
Texas, and Gulf Onshore/Offshore business units, and elimination of
preferential distribution of Section 29 partnership volumes contributed to the
volume gains. Austin Chalk's volume growth was attributed to the Washington
County area, where the Newman #2 was recently completed and is producing
approximately 37 MMcfd. The West Texas horizontal drilling program and Gulf
Onshore/Offshore's drilling program at Roleta helped boost production from
those business units for the second quarter of 1997.
- 12 -
<PAGE> 15
For the second quarter of 1997, natural gas liquids volumes from producing
properties increased by 2.3 MBbld (8%) over the same period in 1996. Higher NGL
recoveries resulting from richer gas and improved yields from plant processing
in the Rockies business unit contributed to the favorable quarterly comparison.
PLANTS, PIPELINES AND MARKETING REVENUES for the second quarter of 1997
decreased by $35.9 million to $89.7 million compared to the second quarter of
1996. Lower average plant product prices of $0.16 per Mcfe (9%) contributed
$3.7 million to the decrease, while lower volumes reduced revenues $3.9
million. Pipeline revenues decreased by $13.9 million primarily due to the
reclassification of certain sales from pipeline revenue. Marketing revenues
decreased by $14.2 million primarily due to lower gas margins for the second
quarter of 1997 as compared to the second quarter of 1996.
<TABLE>
<CAPTION>
Three Months Ended June 30,
---------------------------
1996 1997
------------ -----------
<S> <C> <C>
Sales volumes - plants:
Natural gas (MMcfd) ........................... 25.5 20.0
Natural gas liquids (MBbld) ................... 41.6 38.7
Total (MMcfed) ................................ 275.1 252.4
Average product price realizations - plants:
Natural gas (per Mcf) ......................... $ 2.05 $ 1.76
Natural gas liquids (per Bbl) ................. 11.14 10.26
Average (per Mcfe) ............................ 1.88 1.72
</TABLE>
Natural gas volumes decreased by 5.5 MMcfd (22%) from 25.5 MMcfd in the second
quarter of 1996 to 20.0 MMcfd in the second quarter of 1997 due to lower
throughput at an East Texas business unit plant, resulting from a maintenance
turn-around.
Natural gas liquids volumes decreased by 2.9 MBbld (7%) to 38.7 MBbld in the
second quarter of 1997, primarily as a result of a maintenance turn-around at
an East Texas business unit plant and leaner gas.
OTHER OIL AND GAS REVENUES in the second quarter of 1997 were higher by $14.2
million primarily due to a $12.0 million partial reduction of the Columbia Gas
Transmission Company bankruptcy settlement reserve and a $2.2 million gain on
sale of assets.
OPERATING EXPENSES
<TABLE>
<CAPTION>
Three Months Ended June 30,
---------------------------
1996 1997
----------- -------------
(Millions of dollars)
<S> <C> <C>
Operating expenses:
Production .................................... $ 63.6 $ 71.8
Exploration ................................... 32.2 49.2
Plants, pipelines and marketing ............... 65.8 52.7
Depreciation, depletion and amortization ...... 127.5 134.8
</TABLE>
PRODUCTION EXPENSES for the second quarter of 1997 increased by $8.2 million
(13%) over the same period in 1996, largely due to higher production taxes and
higher lease operating costs. An increase of $3.2 million in production taxes
in the second quarter of 1997 was incurred as a result of higher producing
property revenues.
- 13 -
<PAGE> 16
Lease operating costs were up $7.8 million primarily due to workover costs in
the Austin Chalk business unit. Production expenses on a per unit basis were up
$0.01 to $0.49 per Mcfe for the second quarter of 1997.
EXPLORATION EXPENSES during the three months ended June 30, 1997 increased
$17.0 million (53%) over the same period last year, primarily attributable to
increased dry hole and surrendered lease expense. For the second quarter of
1997, dry hole expense was up $2.4 million due to increased exploratory
drilling in the East Texas business unit as compared to the same period in
1996. Surrendered lease expense was up $14.0 million during the second quarter
of 1997, primarily a result of increased leasing activity in the East Texas,
Austin Chalk and Gulf Onshore/Offshore business units.
OPERATING EXPENSES FOR PLANTS, PIPELINES AND MARKETING decreased by $13.1
million from the second quarter of 1996 to $52.7 million for the same period in
1997, primarily due to lower gas purchase costs.
DEPRECIATION, DEPLETION AND AMORTIZATION ("DD&A") increased by $7.3 million to
$134.8 million for the second quarter of 1997, primarily as a result of higher
producing property volumes ($12.5 million), partially offset by a lower unit of
production rate ($6.1 million).
OIL AND GAS OPERATING INCOME
Total oil and gas operating income for the second quarter of 1997 decreased by
$4.0 million to $105.7 million as compared to the second quarter of 1996.
During the second quarter of 1997, higher producing property operating income
of $19.5 million was offset by a $23.5 million decrease in plants, pipelines
and marketing operating income.
GENERAL AND ADMINISTRATIVE EXPENSES - General and administrative expenses
increased by $3.3 million (19%) to $20.7 million for the second quarter of
1997, primarily due to compensation expense associated with employee stock
ownership programs. On a per unit basis, general and administrative expenses
increased by $0.02 to $0.12 per Mcfe.
INTEREST AND OTHER INCOME - NET - Interest expense decreased from the second
quarter of 1996 by $1.5 million to $11.0 million in the second quarter of 1997,
due to lower interest rates achieved through debt restructuring in October
1996. Other income increased by $5.4 million for the second quarter of 1997 due
to an insurance settlement and higher interest income.
INCOME TAXES - During the second quarter of 1997, income taxes decreased
slightly from the same period in 1996 to $33.5 million, principally the result
of the absence of a $3.0 million state tax settlement in 1996. The effective
tax rate, including 1997 Section 29 tax credits of $4.7 million, remained
fairly constant at 31%.
- 14 -
<PAGE> 17
SIX MONTHS ENDED JUNE 30, 1996 COMPARED TO JUNE 30, 1997
OVERVIEW
<TABLE>
<CAPTION>
Six Months Ended June 30,
-------------------------
1996 1997
------------ -----------
(Millions of dollars)
<S> <C> <C>
Selected financial data:
Total operating revenues .................... $ 817.6 $ 976.3
Total operating expenses .................... 600.2 674.9
Operating income ............................ 217.4 301.4
Net income .................................. 129.6 191.6
</TABLE>
NET INCOME for the six months ended June 30, 1997 was $191.6 million, or $0.76
per share, compared to $129.6 million, or $0.52 per share for the same period
in 1996. The 48% increase in earnings for the year was due to increased
revenues resulting from higher sales volumes from producing properties and
higher prices. Increased exploration, production taxes and depreciation expense
partially offset the higher revenues.
OPERATING INCOME for six months ended June 30, 1997 increased by $84.0 million
as compared to the same period in 1996. Increased revenue from higher producing
property sales volumes and product prices were partially offset by lower
marketing income related to lower product margins and cost increases associated
with expanded exploration activity.
<TABLE>
<CAPTION>
Six Months Ended June 30,
-------------------------
1996 1997
---------- ------------
(Millions of dollars)
<S> <C> <C>
Operating income:
Oil and gas operations ...................... $ 192.5 $ 280.9
Minerals .................................... 57.3 60.6
General and administrative .................. (32.4) (40.1)
</TABLE>
- 15 -
<PAGE> 18
OIL AND GAS OPERATIONS
OPERATING REVENUES
<TABLE>
<CAPTION>
Six Months Ended June 30,
-------------------------
1996 1997
---------- ------------
(Millions of dollars)
<S> <C> <C>
Operating revenues:
Producing properties ................ $ 499.8 $ 674.6
Plants, pipelines and marketing ..... 239.8 214.4
Other oil and gas revenues .......... 16.7 23.2
</TABLE>
PRODUCING PROPERTY REVENUES for the six months ended June 30, 1997 were $674.6
million compared to $499.8 million for the same period in 1996. Higher net
realized prices and volumes added $117.3 million and $57.5 million,
respectively, to revenues. Natural gas prices improved $0.49 per Mcf to $2.13
per Mcf. Impacted by stronger Rockies business unit natural gas liquids prices,
overall NGL prices averaged $11.64 per Bbl, a 23% increase over 1996 average
NGL prices. Crude oil prices averaged $18.81 per Bbl, up $0.50 per Bbl from the
same period last year.
<TABLE>
<CAPTION>
Six Months Ended June 30,
-------------------------
1996 1997
------- -------
<S> <C> <C>
Production volumes - producing properties:
Natural gas (MMcfd) ........................... 954.7 1,123.1
Natural gas liquids (MBbld) ................... 26.9 31.1
Crude oil (MBbld) ............................. 50.6 51.7
Total (MMcfed) ................................ 1,419.7 1,619.9
</TABLE>
<TABLE>
<CAPTION>
Six Months Ended June 30,
-------------------------------------------------
1996 1997 1996 1997
---------- ---------- ---------- ----------
(without Hedging) (with Hedging)
<S> <C> <C> <C> <C>
Average product price realizations - producing properties:
Natural gas (per Mcf) ................................... $ 1.73 $ 2.17 $ 1.64 $ 2.13
Natural gas liquids (per Bbl) ........................... 9.50 11.66 9.50 11.64
Crude oil (per Bbl) ..................................... 18.83 19.45 18.31 18.81
Average (per Mcfe) ...................................... 2.01 2.35 1.93 2.30
</TABLE>
Natural gas volumes from producing properties totaled 1,123.1 MMcfd during the
first six months of 1997, an increase of 168.4 MMcfd or 18% from the same
period in 1996. This increase was primarily due to drilling successes in the
Austin Chalk, West Texas, and Gulf Onshore/Offshore business units, and
elimination of preferential distribution of Section 29 partnership volumes. The
Austin Chalk's volume growth was primarily attributable to the Washington
County area, while West Texas' horizontal drilling program and Gulf
Onshore/Offshore's drilling program at Roleta helped boost production in those
business units.
Natural gas liquids volumes from producing properties increased by 4.2 MBbld
(16%) to 31.1 MBbld for the six months ended June 30, 1997 as compared to
volumes for the same period in 1996. This increase reflected higher NGL
recoveries resulting from richer gas and improved plant processing in the
Rockies business unit.
- 16 -
<PAGE> 19
PLANTS, PIPELINES AND MARKETING REVENUES for the six months ended June 30,
1997, were $214.4 million compared to $239.8 million for the same period in
1996. Marketing revenues, which decreased due primarily to lower product
margins, were partially offset by higher plant product prices for the first six
months of 1997.
<TABLE>
<CAPTION>
Six Months Ended June 30,
-------------------------
1996 1997
----------- -----------
<S> <C> <C>
Sales volumes - plants:
Natural gas (MMcfd) ........................... 25.3 20.7
Natural gas liquids (MBbld) ................... 39.8 40.1
Total (MMcfed) ................................ 264.1 261.6
Average product price realizations - plants:
Natural gas (per Mcf) ......................... $ 1.89 $ 2.30
Natural gas liquids (per Bbl) ................. 11.14 12.25
Average (per Mcfe) ............................ 1.86 2.06
</TABLE>
Natural gas volumes decreased by 4.6 MMcfd (18%) from 25.3 MMcfd in the second
quarter of 1996 to 20.7 MMcfd in the second quarter of 1997. This decrease is
primarily attributed to lower throughput at an East Texas plant resulting from
a maintenance turn-around.
OTHER OIL AND GAS REVENUES for 1997 were higher by $6.5 million primarily due
to a $12.0 million partial reduction of the Columbia Gas Transmission Company
bankruptcy settlement reserve, partially offset by lower gains on sale of
assets and lower Section 29 income.
OPERATING EXPENSES
<TABLE>
<CAPTION>
Six Months Ended June 30,
-------------------------
1996 1997
------------ -----------
(Millions of dollars)
<S> <C> <C>
Operating expenses:
Production .................................... $ 126.4 $ 144.9
Exploration ................................... 61.9 92.0
Plants, pipelines and marketing ............... 126.4 129.3
Depreciation, depletion and amortization ...... 251.2 267.8
</TABLE>
PRODUCTION EXPENSES for the first half of 1997 increased by $18.5 million (15%)
compared to 1996, largely due to higher production taxes and higher lease
operating costs. Additional production taxes in the first half of 1997 were a
direct result of higher producing property revenues. Lease operating costs were
up $12.2 million due to workover costs primarily in the Austin Chalk and
Rockies business units. Production expenses on a per unit basis were flat at
$0.49 per Mcfe for the first six months of 1997 and 1996.
EXPLORATION EXPENSES during the six months ended June 30, 1997 increased $30.1
million (49%) over the same period last year, primarily attributable to
increased dry hole and surrendered lease expense. Dry hole expense was up $6.6
million due to increased exploratory drilling in the East Texas Business Unit.
The surrendered lease expense was up $21.8 million, primarily a result of
increased leasing activity in the East Texas and Austin Chalk business units.
- 17 -
<PAGE> 20
OPERATING EXPENSES FOR PLANTS, PIPELINES AND MARKETING of $129.3 million
remained relatively flat for the first half of 1997 as compared to the same
period in 1996.
DEPRECIATION, DEPLETION AND AMORTIZATION (DD&A) increased by $16.6 million to
$267.8 million for the first six months of 1997 as compared to the same period
in 1996. This increase was attributed primarily to the impact of higher
producing property volumes ($30.9 million), partially offset by a lower unit of
production rate ($15.9 million).
OIL AND GAS OPERATING INCOME
Total oil and gas operating income for the first half of 1997 increased by
$88.4 million to $280.9 million as compared to the first half of 1996. Higher
producing property operating income of $117.8 million was partially offset by a
$29.4 million decrease in plants, pipelines and marketing operating income.
GENERAL AND ADMINISTRATIVE EXPENSES - General and administrative expenses
increased by $7.7 million (24%) to $40.1 million for the first half of 1997,
primarily due to compensation expense associated with employee stock ownership
programs which were implemented in the fourth quarter of 1996. On a per unit
basis, general and administrative expenses increased by $0.01 to $0.11 per
Mcfe.
INTEREST AND OTHER INCOME - NET - Interest expense decreased during 1997 by
$3.8 million to $21.7 million due to lower interest rates achieved through debt
restructuring in October 1996.
INCOME TAXES - For the first six months of 1997, income taxes increased $26.2
million when compared to the same period in 1996. The effective tax rate,
including 1997 Section 29 tax credits of $9.4 million, stayed fairly consistent
at 32%.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary source of cash during the first primarily six months of
1997 was its cash from operations. The Company's cash outflows primarily
included capital expenditures for oil and gas operations and acquisitions, and
payment of dividends.
Cash flows provided by operations increased 40% from $409.0 million in the
first six months of 1996 to $572.1 million the same period of 1997. The
increase reflects higher cash operating income from producing properties,
partially offset by lower cash operating income from plants, pipelines and
marketing and an increase in general and administrative and income tax
expenses. In addition, favorable changes in working capital reflects reductions
in futures margin deposits and accounts receivable.
Capital and exploratory expenditures for the first six months of 1997 were
$643.1 million, an increase of $275.2 million compared to the first six months
of 1996. Capital and exploratory expenditures are summarized as follows:
- 18 -
<PAGE> 21
<TABLE>
<CAPTION>
Six Months Ended June 30,
-------------------------
1996 1997
----------- -----------
(Millions of dollars)
<S> <C> <C>
Capital and exploratory expenditures:
Exploration and production .............. $297.3 $555.1
Plants, pipelines and marketing ......... 64.6 80.2
Minerals and other ...................... 6.0 7.8
------ -------
Total ................................... $367.9 $643.1
====== ======
</TABLE>
Exploration and production capital spending for the first six months of 1997
was up by $257.8 million (87%) when compared to the first six months of 1996,
as a result of increased exploratory drilling ($48.5 million), increased
development drilling ($76.8 million) and higher lease acquisitions. Higher
property acquisitions contributed to increased spending by approximately $49.6
million.
The Company's total debt at June 30, 1997 of $672.7 million is relatively flat
when compared to December 31, 1996 total debt of $670.9 million. The Company's
debt to book capital ratio at the end of the second quarter of 1997 is 28%. On
July 15, 1997 the Company announced its 1997 capital spending program would
increase from $1.0 billion to $1.5 billion. The increase in spending is due to
higher drilling activity and acquisitions including Highlands Gas Corporation
and the East Texas properties from Castle Energy Corporation and Jordan Oil &
Gas Company, L.P. The extent and timing of such expected spending, however, may
be affected by changes in business and operating conditions as well as by the
timing and availability of investment opportunities. It is anticipated, as a
result of the increased spending program, that long-term debt at the end of
1997 will increase to levels near $1.0 billion, excluding the proposed Pennzoil
acquisition.
The Company expects to remain one of the most active drillers in the United
States in 1997 based on the number of active drilling rigs and currently has
over 60 active rigs. Drilling is expected to concentrate in the Austin Chalk,
Gulf Onshore/Offshore, West Texas and East/South Texas business units. A deep
water Gulf of Mexico exploratory well in the Gomez prospect was spud in July
1997. The Company has a 100% working interest in the well that will cost
approximately $19.0 million to drill. The prospect has a potential reserve base
of 70 million barrel of oil equivalent. The Company also recently acquired
twelve additional blocks which are adjacent to this well from Broken Hill
Proprietary.
The Company will continue to aggressively pursue acquisition opportunities and
expansion of its plants, pipelines and marketing business. During August of
1997, the Company expects to complete its acquisition of Highlands Gas
Corporation. Highlands Gas Corporation includes three gas processing plants
with a capacity of 117 MMcfd, five gathering systems with over 700 miles of
pipe and over 400 miles of transportation pipeline. In Louisiana , the
Company's Master's Creek gas processing plant started operations during the
first part of August 1997. Currently the plant is processing 50 MMcfd. The
plant's throughput is expected to increase to 100 MMcfd in the fourth quarter
1997 and to 200 MMcfd in the first quarter 1998.
As a result of drilling, property purchases and plant expansions, the Company
expects to increase its total annual sales volumes in 1997 by approximately 10%
over 1996 levels while increasing its hydrocarbon reserves. This
- 19 -
<PAGE> 22
sales volume growth is anticipated primarily in the Austin Chalk, Gulf
Onshore/Offshore and West Texas business units.
The Company paid a $0.05 per share ($12.5 million) quarterly cash dividend on
its outstanding shares of common stock in April 1997. In addition, on April 3,
1997 and July 31, 1997, the Board of Directors declared a cash dividend of
$0.05 per share payable in the third and fourth quarter of 1997, respectively.
The Company also plans to continue to evaluate international venture
opportunities where its technological expertise and experience can be utilized.
Cash from operations and available debt financing should adequately enable the
Company to fund its future capital expenditures, dividends and working capital
requirements.
PROPOSED ACQUISITION OF PENNZOIL COMPANY
On June 23, 1997, the Company and Resources Newco, Inc., a Delaware corporation
and a wholly owned subsidiary of the Company ("Bidder"), offered to purchase up
to 25,094,200 shares of common stock, par value $0.83 1/3 per share ("Pennzoil
Shares") of Pennzoil Company, a Delaware corporation ("Pennzoil"), or such
greater number of Pennzoil Shares as equals 50.1% of the Pennzoil Shares
outstanding on a fully diluted basis as of the expiration date (initially July
21, 1997), in each case together with the associated preferred stock purchase
rights ("Rights") issued pursuant to the Rights Agreement, dated as of October
28, 1994 ("Rights Agreement") at a price of $84.00 per share (and associated
preferred stock purchase right), net to the seller in cash, without interest
thereon, upon the terms and subject to the conditions set forth in the Offer to
Purchase and in the related Letter of Transmittal (which, together with any
amendments or supplements thereto, collectively constitute the "Offer"). All
references herein to Rights shall include all benefits that may inure to
holders of the Rights pursuant to the Rights Agreement and, unless the context
otherwise requires, all references herein to the Pennzoil Shares shall include
the Rights.
The purpose of the Offer is to acquire a majority of the Pennzoil Shares as the
first step in a negotiated acquisition of the entire equity interest in
Pennzoil. The Company is seeking to negotiate with Pennzoil a definitive
acquisition agreement pursuant to which Pennzoil would, as soon as practicable
following consummation of the Offer, consummate a merger (the "Proposed Merger")
with Bidder or another direct or indirect wholly owned subsidiary of the
Company. At the effective time of the Proposed Merger, each Pennzoil Share that
is issued and outstanding immediately prior to the effective time (other than
shares held in the treasury of Pennzoil or owned by the Company, Bidder or any
direct or indirect wholly owned subsidiary of the Company) would be converted
into a number of shares of common stock, no par value, of the Company ("Common
Stock") determined, within a pricing collar of $25.00 to $30.00, by dividing
$84.00 by the average of the closing prices of a share of the Common Stock for
the twenty consecutive trading days ending five days prior to the meeting of
Pennzoil stockholders called for the purpose of voting on the Proposed Merger.
In the event that such average of the closing prices during such twenty day
period is less than $25.00 or greater than $30.00, the exchange ratio will be
fixed at 3.36 shares of the Common Stock or 2.80 shares of the Common Stock,
respectively. To date, Pennzoil has refused to enter into negotiations with the
Company regarding the Proposed Merger.
On July 21, 1997, the initial expiration date of the Offer, the Company was
informed by The Bank of New York, its Depository for the Offer, that holders of
61.5% of the outstanding Pennzoil Shares had tendered into the Offer. The
Company did not consummate the Offer on such date because, among other reasons,
Pennzoil's Board refused to redeem the Rights or render the Rights Agreement
inapplicable and refused to remove other impediments (including other
anti-takeover measures that could be removed or made inapplicable by Pennzoil
Board action) that were conditions to the Company's consummation of the Offer.
On that same date, the Company announced that it had extended the expiration
date of the Offer until September 24, 1997.
There can be no assurance that such negotiations will occur, or if such
negotiations occur, as to the outcome thereof. The Company and Bidder are
exploring ways to encourage the Board of Directors of Pennzoil to permit
Pennzoil's stockholders to participate in the Offer and the Proposed Merger.
These may include a solicitation of proxies at Pennzoil's 1998 and 1999 annual
meeting of stockholders. The Offer is conditioned on, among other things,
Pennzoil's shareholder rights plan and other antitakeover measures being
invalidated or deemed inapplicable to the Offer and either the Company's
designees constituting a majority of the Pennzoil Board or Pennzoil having
entered into a mutually acceptable definitive merger agreement with the Company
and Bidder to provide for the acquisition of Pennzoil pursuant to the Offer and
the Proposed Merger.
The Company estimates that the total amount of funds required pursuant to the
offer to purchase the Pennzoil Shares and to pay fees and expenses related to
the Offer will be approximately $2.2 billion. The Company and Bidder plan to
obtain such funds from the Company's available cash and working capital, and
commercial paper issuances or pursuant to one or more loan facilities currently
existing or to be obtained from one or more commercial banks or other financial
institutions on terms and conditions to be determined hereafter. The Company and
Bidder are currently in discussions with a small group of financial institutions
regarding the establishment of a credit facility that would be used to pay all
or a portion of the funds required pursuant to the Offer. It is anticipated that
the indebtedness incurred by the Company under such loans will be repaid from
funds generated internally by the Company and its subsidiaries (including, after
the Proposed Merger, if consummated, dividends paid by Pennzoil and its
subsidiaries), through additional borrowings and security issuances, or
through a combination of such sources. No final decisions have been made
concerning the method the Company will employ to repay such indebtedness. Such
decisions when made will be based on the Company's review from time to time of
the advisability of particular actions, as well as on prevailing interest rates
and financial and other economic conditions. The Offer is not conditioned on
financing.
For additional information, please see the Company's Schedule 14D-1, as amended.
Refer to Part II, Item I - Legal Proceedings in this report for additional
information regarding certain legal proceedings relating to the Offer and
Proposed Merger.
FORWARD LOOKING INFORMATION
Certain information included in this report contains, and other materials filed
or to be filed by the Company with the Securities and Exchange Commission (as
well as information included in oral statements or other written statements
made or to be made by the Company) contain or will contain, or include, forward
looking statements within the meaning of Section 21E of the Securities Exchange
Act of 1934, as amended, and Section 27A of the Securities Act of 1933, as
amended. Such forward looking statements may be or may concern, among other
things, capital expenditures, drilling activity, acquisition plans and
proposals (including the proposed Pennzoil acquisition) and dispositions,
development activities, cost savings, production efforts and volumes,
hydrocarbon reserves, hydrocarbon prices, hedging activities and the results
thereof, liquidity, regulatory matters, competition and the Company's ability
to realize significant improvements with the change to a more adaptive
corporate culture. Such forward looking statements generally are accompanied by
words such as "plan," "estimate," "expect," "predict," "anticipate," "goal,"
"should," "assume," "believe" or other words that convey the uncertainty of
future events or outcomes.
Such forward looking information is based upon management's current plans,
expectations, estimates and assumptions and is subject to a number of risks and
uncertainties that could significantly affect current plans, anticipated
actions, the timing of such actions and the Company's financial condition and
results of operations. As a consequence, actual results may differ materially
from expectations, estimates or assumptions expressed in or implied by any
forward looking statements made by or on behalf of the Company. The risks and
uncertainties include generally the volatility of oil, gas prices and
hydrocarbon-based financial derivative prices; basis risk and counterparty
credit risk in executing hydrocarbon price risk management activities; the
consummation of acquisition plans and proposals (including the proposed
Pennzoil acquisition) and the ultimate terms thereof; economic, political,
judicial and regulatory developments; competition in the oil and gas industry as
well as competition from other sources of energy; the economics of producing
certain reserves; demand and supply of oil and gas; the ability to find or
acquire and develop reserves of natural gas and crude oil; and the actions of
customers and competitors. Additionally, unpredictable or unknown factors not
discussed herein could have material adverse effects on actual results related
to matters which are the subject of forward looking information. The Company
does not intend to update these cautionary statements.
With respect to expected capital expenditures and drilling activity, additional
factors such as the extent of the Company's success in acquiring oil and gas
properties and in identifying prospects for drilling, the availability of
acquisition opportunities which meet the Company's objectives as well as
competition for such opportunities,
- 20 -
<PAGE> 23
exploration and operating risks, the success of management's cost reduction
efforts and the availability of technology may affect the amount and timing of
such capital expenditures and drilling activity. With respect to expected growth
in production and sales volumes and estimated reserve quantities, factors such
as the extent of the Company's success in finding, developing and producing
reserves, the timing of capital spending and acquisition programs, uncertainties
inherent in estimating reserve quantities and the availability of technology may
affect such production volumes and reserve estimates. With respect to liquidity,
factors such as the state of domestic capital markets, credit availability from
banks or other lenders and the Company's results of acquisition activity,
operations may affect management's plans or ability to incur additional
indebtedness. With respect to cash flow, factors such as changes in oil and gas
prices, the Company's success in acquiring producing properties, environmental
matters and other contingencies, hedging activities, the Company's credit rating
and debt levels, and the state of domestic capital markets may affect the
Company's ability to generate expected cash flows. With respect to
contingencies, factors such as changes in environmental and other governmental
regulation, and uncertainties with respect to legal matters may affect the
Company's expectations regarding the potential impact of contingencies on the
operating results or financial condition of the Company. Certain factors, such
as changes in oil and gas prices and underlying demand and the extent of the
Company's success in exploiting its current reserves and acquiring or finding
additional reserves may have pervasive effects on many aspects of the Company's
business in addition to those outlined above.
- 21 -
<PAGE> 24
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Pennzoil Litigation
On June 23, 1997, the Company and Resources Newco, Inc., a Delaware corporation
and a wholly owned subsidiary ("Bidder"), filed lawsuits in three jurisdictions
in connection with its Offer: (1) the Company and Bidder filed suit against
Pennzoil and its directors on June 23, 1997 in the Court of Chancery of the
State of Delaware in New Castle (a) to declare that the Pennzoil's directors
breached their fiduciary duties, (b) to compel Pennzoil and its directors to
redeem the rights or render the Rights Agreement inapplicable, and (c) to remove
certain other impediments to the consummation of the Offer; (2) the Company and
Bidder filed suit against Pennzoil in the United States District Court for the
Northern Division of Texas (Fort Worth Division) to declare that the Company's
Schedule 14D-1 (which describes the Offer) complies with applicable law (the
"Fort Worth Case"); and (3) the Company and Bidder filed suit against Pennzoil
and the Attorney General of the State of Louisiana in the United States District
Court for the Middle District of Louisiana in Baton Rouge, to declare the
Louisiana Foreign Corporation Control Share Statute is unconstitutional thus
preventing any possibility of Pennzoil applying such anti-takeover provisions to
the Offer.
On June 25, 1997, Pennzoil filed suit against the Company and Bidder in the
United States District Court for the District of Delaware which alleges, among
other things, that the Schedule 14D-1 of the Company and Bidder contains
certain misstatements and omissions. Additionally, the complaint seeks (1) to
enjoin the Company and Bidder (a) from making false and misleading statements
and omissions in connection with the Offer and (b) to make corrective
disclosures that cure all of the alleged false and misleading statements and
omissions in the Schedule 14D-1 and (2) to enjoin the Company and Bidder from
acquiring shares of common stock of Pennzoil until at least 30 days after
dissemination of additional securities filings.
On July 18, 1997, the court in the Fort Worth Case enjoined Pennzoil from
proceeding further with its case in the United States District Court for the
District of Delaware. Since this order, Pennzoil has sought to file
counterclaims in the Fort Worth Case substantially the same as the claims
asserted by it in its Delaware action.
Mineral Reservation Litigation
In August 1994, the surface owners (McCormick, et al.) of portions of five
sections of Colorado land that are subject to mineral reservations made by the
Company's predecessor in title brought suit against the Company in the state
District Court, Weld County, Colorado, to quiet title to minerals, including
crude oil (in some of the lands) and natural gas. The state District Court
heard arguments on the Company's motion for summary judgment on May 23, 1997.
On June 23, 1997, the District Court granted the Company's motion holding as a
matter of law that the mineral reservations at issue were unambiguous and
included all valuable nonsurface substances, including oil and gas.
- 22 -
<PAGE> 25
Royalty Litigation
The Company is a defendant in three suits now pending in state district courts
in Fayette County (filed August 1995, 155th District Court), Lee County (filed
August 1995, 335th District Court), and Harris County (filed August 1995,
transferred from Calhoun County to 11th District Court), Texas, in which the
plaintiffs allege that the Company underpaid their royalties for crude oil
production in Texas. The plaintiffs seek certification as a class action in
each suit. The plaintiffs include the Texas General Land Office in the Fayette
County suit, Lee County in the Lee County suit, and Martin, et al. in the
Harris County suit. Generally, the allegations are premised upon plaintiffs'
theory that the defendants (including the Company) use "posted prices" to
determine the amounts payable as royalties for crude oil production. The
plaintiffs allege that the defendants "set" these posted prices, that posted
prices are consistently below "market value," and that this practice has
resulted in the underpayment of royalties to the plaintiffs. In addition to the
allegations couched in terms of breaches of contract and implied covenants, the
Lee County case also alleges that the Company has engaged (and conspired with
others) in discriminatory practices in the sales of crude oil in violation of
numerous state statutes. Further, the Harris County case: (i) adds claims with
respect to natural gas, including claims that the Company discriminated against
plaintiffs in the sale of natural gas and natural gas liquids, in the
deductions for transportation and other services and in the prices used to
account to the plaintiffs for their royalties; and (ii) adds claims (regarding
both crude and gas) for alleged breaches of alleged fiduciary duties and
intentional misrepresentation. A significant defendant in another case with
similar claims has announced a settlement agreement. A fairness hearing with
respect to such settlement has occurred and a decision currently is pending.
The impact of such settlement, if any, with respect to this case, has not been
ascertained.
The Company is also one of the defendants in an antitrust suit filed in
September 1996 in an Alabama state court (the Circuit Court of Escambia County)
against a number of crude oil producers alleging that the use of posted prices
by defendants to pay royalties on crude oil produced in the United States
arises from a combination, conspiracy or agreement designed to fix, depress and
maintain such crude prices at artificially low levels. The plaintiffs
(Lovelace, et al.) allege that such practices violate the Alabama antitrust
laws and the antitrust laws of every other state. The plaintiffs obtained, on
an ex parte basis, a "conditional" certification of a class consisting of all
working and royalty interest owners of crude oil produced in the United States
since 1986 who have been paid by defendants based on posted prices. The suit
was removed to Federal court in Alabama on October 17, 1996, but then was
remanded back to the state court on April 1, 1997. Defendants have filed a
motion to vacate the conditional class certification order and all parties
anticipate a full hearing on the class certification issue. The date of such
hearing, as well as the timing and scope of anticipated motions to dismiss and
discovery, are presently under consideration by the Court as part of a case
scheduling order. A significant defendant in this litigation has announced a
settlement agreement with the plaintiffs. A fairness hearing is scheduled for
August 25, 1997, with respect to such settlement. The impact of such
settlement, if any, with respect to the remaining defendants and similar suits,
has not been ascertained.
Union Pacific Corporation, the Company's former Corporate parent, is a named
defendant in a suit filed in the state district court, Salt Lake County, Utah
in March, 1996. Though not named in the suit, the Company believes that it may
ultimately be named as a defendant in place of Union Pacific Corporation.
Plaintiffs (Burton, et al.) allege that the defendants have underpaid royalty
or overriding royalty payments on crude oil and condensate. The claims are
similar to those in the Texas cases described above. Plaintiffs argue that
posted prices are less than the "best and highest prices reasonably available
and less than the full fair market value received by defendants" for the crude
oil upon which the royalties are paid to plaintiffs. Like the Texas cases, the
plaintiffs seek certification of a plaintiff class, which in this case is a
class defined as "all persons to whom Defendants
- 23 -
<PAGE> 26
have underpaid royalty or overriding royalty payments on crude oil during the
period January 1, 1986 to the present."
None of the royalty litigation suits described above articulate a theory of
recovery or a specific amount of damages. This litigation activity against the
Company and others in the oil and gas industry suggests that more suits of this
type may be filed against the Company including, perhaps, suits by other types
of interest owners and suits in jurisdictions other than those set forth above.
The Company intends to defend vigorously against the foregoing, as well as any
similar suits. If such suits are resolved ultimately against the Company on a
widespread basis, however, damage awards and a loss of future revenue, in the
aggregate, could have a materially adverse effect on the Company.
General
The Company is a defendant in a number of lawsuits and is involved in
governmental proceedings arising in the ordinary course of business in addition
to those described above, including contract claims, personal injury claims and
environmental claims. While the Company cannot predict the outcome of such
litigation and other proceedings, it does not expect those matters to have a
materially adverse effect on its results of operations or financial condition.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
11 Computation of earnings per share
12 Computation of ratio of earnings to fixed charges
15 Awareness letter of Deloitte & Touche LLP dated as of August 14, 1997
27 Financial data schedule (included only in the electronic filing of this
document)
(b) REPORTS ON FORM 8-K
On June 23, 1997, the Company filed a Current Report on Form 8-K
containing a copy of the press release issued by the Company on June
23, 1997. This press release announced that the Company and Resources
Newco, Inc., a wholly owned subsidiary of the Company, had commenced
the Offer.
.
- 24 -
<PAGE> 27
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.
Dated: August 14, 1997
UNION PACIFIC RESOURCES GROUP INC.
(Registrant)
/s/ Morris B. Smith
----------------------------------------
Morris B. Smith,
Vice President and Chief Financial
Officer
(Chief Financial Officer and
Duly Authorized Officer)
- 25 -
<PAGE> 28
UNION PACIFIC RESOURCES GROUP INC.
EXHIBIT INDEX
Exhibit No. Description
- ----------- -----------
11 Computation of earnings per share
12 Computation of ratio of earnings to fixed charges
15 Awareness letter of Deloitte & Touche LLP dated as of
August 14, 1997
27 Financial data schedule (included only in the electronic filing
of this document)
<PAGE> 1
EXHIBIT 11
UNION PACIFIC RESOURCES GROUP INC.
COMPUTATION OF EARNINGS PER SHARE
(Shares in Thousands)
(Unaudited)
<TABLE>
<CAPTION>
Six Months
Ended June 30,
-----------------------
1996 1997
---------- ----------
<S> <C> <C>
Average number of shares outstanding ....................... 248,928 250,128
Average shares issuable on exercise of stock
options less shares repurchasable from proceeds ....... 922 876
---------- ----------
Total average number of common and common
equivalent shares ..................................... 249,850 251,004
========== ==========
Net income (millions) ...................................... $ 129.6 $ 191.6
========== ==========
Earnings per share ......................................... $ 0.52 $ 0.76
========== ==========
</TABLE>
<PAGE> 1
EXHIBIT 12
UNION PACIFIC RESOURCES GROUP INC.
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
(Amounts in Thousands, Except Ratios)
(Unaudited)
<TABLE>
<CAPTION>
Six Months
Ended June 30,
------------------------
1996 1997
---------- ----------
<S> <C> <C>
Income before income taxes ................................. $ 192,350 $ 280,628
Add (deduct) distributions greater (less) than
income of unconsolidated affiliates ................... 2,398 (1,099)
Fixed charges from below ................................... 29,041 25,293
Capitalized interest included in fixed charges ............. (122) (662)
---------- ----------
Earnings available for fixed charges .............. $ 223,667 $ 304,160
========== ==========
Fixed charges:
Interest expense, including amortization of debt
expense/discount .................................. $ 25,567 $ 21,661
Portion of rentals representing an interest factor .... 3,352 2,970
Interest capitalized .................................. 122 662
---------- ----------
Total fixed charges ............................... $ 29,041 $ 25,293
========== ==========
Ratio of earnings to fixed charges ......................... 7.7 12.0
========== ==========
</TABLE>
<PAGE> 1
EXHIBIT 15
AWARENESS LETTER OF INDEPENDENT ACCOUNTANTS
August 14, 1997
Union Pacific Resources Group Inc.
801 Cherry Street
Fort Worth, Texas 76102
We have made a review, in accordance with standards established by the American
Institute of Certified Public Accountants, of the unaudited interim financial
information of Union Pacific Resources Group Inc. for the periods ended June
30, 1996 and 1997, as indicated in our report dated July 16, 1997; because we
did not perform an audit, we expressed no opinion on that information.
We are aware that our report referred to above, which is included in this
Quarterly Report on Form 10-Q for the quarter ended June 30, 1997, is
incorporated by reference in Registration Statements No. 333-22655 on Form S-3
and No. 333-22613 on Form S-8.
We are also aware that the aforementioned report, pursuant to Rule 436(c) under
the Securities Act of 1933, is not considered a part of the Registration
Statement prepared or certified by an accountant or a report prepared or
certified by an accountant within the meaning of Sections 7 and 11 of that Act.
DELOITTE & TOUCHE LLP
Fort Worth, Texas
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE UNION
PACIFIC RESOURCES GROUP, INC. CONDENSED STATEMENT OF CONSOLIDATED FINANCIAL
POSITION AT JUNE 30, 1997 AND THE RELATED CONDENSED STATEMENT OF CONSOLIDATED
INCOME FOR THE SIX MONTHS ENDED JUNE 30, 1997 AND IS QUALIFIED IN ITS ENTIRETY
BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> APR-01-1997
<PERIOD-END> JUN-30-1997
<CASH> 43
<SECURITIES> 0
<RECEIVABLES> 282
<ALLOWANCES> 0
<INVENTORY> 42
<CURRENT-ASSETS> 31
<PP&E> 6,795
<DEPRECIATION> 3,522
<TOTAL-ASSETS> 3,768
<CURRENT-LIABILITIES> 523
<BONDS> 673
0
0
<COMMON> 0
<OTHER-SE> 1,692
<TOTAL-LIABILITY-AND-EQUITY> 3,768
<SALES> 953
<TOTAL-REVENUES> 976
<CGS> 0
<TOTAL-COSTS> 675
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 22
<INCOME-PRETAX> 281
<INCOME-TAX> 89
<INCOME-CONTINUING> 192
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 192
<EPS-PRIMARY> 0.76
<EPS-DILUTED> 0
</TABLE>
