-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, TIxn+HrnurI7nNPt6fFSX3xv5xh44RXKSE/R3LTzdb3EgfA/XKuM/tF+E01MOPHW m+up0xDqYZkaZnczNdhyJg== 0000890566-97-001816.txt : 19970814 0000890566-97-001816.hdr.sgml : 19970814 ACCESSION NUMBER: 0000890566-97-001816 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19970630 FILED AS OF DATE: 19970813 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: SANTA FE ENERGY RESOURCES INC CENTRAL INDEX KEY: 0000086772 STANDARD INDUSTRIAL CLASSIFICATION: CRUDE PETROLEUM & NATURAL GAS [1311] IRS NUMBER: 362722169 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-07667 FILM NUMBER: 97658021 BUSINESS ADDRESS: STREET 1: 1616 S VOSS RD STE 1000 CITY: HOUSTON STATE: TX ZIP: 77057 BUSINESS PHONE: 7137832401 MAIL ADDRESS: STREET 1: 1616 S VOSS ROAD STE 1000 CITY: HOUSTON STATE: TX ZIP: 77057 FORMER COMPANY: FORMER CONFORMED NAME: SANTA FE NATURAL RESOURCES INC DATE OF NAME CHANGE: 19900111 10-Q 1 ================================================================================ SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------ FORM 10-Q (MARK ONE) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTER ENDED JUNE 30, 1997 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 COMMISSION FILE NUMBER 1-7667 ------------------------ SANTA FE ENERGY RESOURCES, INC. (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) DELAWARE 36-2722169 (STATE OF INCORPORATION) (I.R.S. EMPLOYER IDENTIFICATION NO.) 1616 SOUTH VOSS, SUITE 1000 HOUSTON, TEXAS 77057 (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES, INCLUDING ZIP CODE) REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (713) 507-5000 ------------------------ 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 [ ] Shares of Common Stock outstanding at July 31, 1997 -- 102,817,240 ================================================================================ PART I FINANCIAL STATEMENTS PAGE ---- Consolidated Statement of Operations Three Months and Six Months Ended June 30, 1997 and 1996............................ 2 Consolidated Balance Sheet June 30, 1997 and December 31, 1996.......... 3 Consolidated Statement of Cash Flows Three Months and Six Months Ended June 30, 1997 and 1996............................ 4 Consolidated Statement of Shareholders' Equity Three Months and Six Months Ended June 30, 1997 and 1996............................ 5 Notes to Consolidated Financial Statements................................... 6 Management's Discussion and Analysis of Financial Condition and Results of Operations.................... 12 1 SANTA FE ENERGY RESOURCES, INC. CONSOLIDATED STATEMENT OF OPERATIONS (UNAUDITED) (IN MILLIONS OF DOLLARS, EXCEPT PER SHARE DATA)
THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, -------------------- -------------------- 1997 1996 1997 1996 --------- --------- --------- --------- Revenues Sales of crude oil produced..... $ 109.1 $ 110.9 $ 236.4 $ 209.5 Sales of natural gas produced... 30.5 24.9 67.2 49.8 Sales of crude oil purchased.... 10.3 1.2 19.9 1.2 Other........................... (0.1) 0.5 0.2 0.7 --------- --------- --------- --------- 149.8 137.5 323.7 261.2 --------- --------- --------- --------- Costs and Expenses Production and operating........ 49.4 44.3 101.6 88.3 Cost of crude oil purchased..... 10.7 1.1 21.4 1.1 Exploration, including dry hole costs......................... 10.1 5.9 19.4 11.5 Depletion, depreciation and amortization.................. 35.5 35.1 69.1 67.4 Impairment of oil and gas properties.................... -- 10.4 -- 10.4 General and administrative...... 10.1 7.9 17.2 13.9 Taxes (other than income)....... 6.6 6.5 14.1 12.6 Loss (gain) on disposition of assets........................ 0.2 0.3 (2.1) 0.5 --------- --------- --------- --------- 122.6 111.5 240.7 205.7 --------- --------- --------- --------- Income from Operations............... 27.2 26.0 83.0 55.5 Interest income................. 0.9 0.5 1.8 1.0 Interest expense................ (7.8) (9.7) (15.5) (19.3) Interest capitalized............ 1.9 1.2 3.5 2.5 Other income (expense).......... (0.2) (0.2) (0.3) (0.5) --------- --------- --------- --------- Income Before Income Taxes and Minority Interest.................. 22.0 17.8 72.5 39.2 Income taxes Current.................... (0.6) (1.9) (5.1) (4.0) Deferred................... (7.3) 1.5 (22.7) (5.2) --------- --------- --------- --------- Income Before Minority Interest...... 14.1 17.4 44.7 30.0 Minority Interest in Monterey Resources, Inc................ (1.6) -- (4.3) -- --------- --------- --------- --------- Net Income........................... 12.5 17.4 40.4 30.0 Preferred dividend requirement................... (1.2) (3.7) (3.6) (7.4) Convertible preferred premium... (8.5) -- (8.5) -- --------- --------- --------- --------- Earnings Attributable to Common Shares............................. $ 2.8 $ 13.7 $ 28.3 $ 22.6 ========= ========= ========= ========= Earnings Attributable to Common Shares Per Share Primary......................... $ 0.03 $ 0.15 $ 0.30 $ 0.25 ========= ========= ========= ========= Weighted Average Number of Shares Outstanding (in millions).......... 97.0 90.6 94.1 90.5 ========= ========= ========= =========
The accompanying notes are an integral part of these financial statements. 2 SANTA FE ENERGY RESOURCES, INC. CONSOLIDATED BALANCE SHEET (IN MILLIONS OF DOLLARS) JUNE 30, DECEMBER 31, 1997 1996 ----------- ------------ (UNAUDITED) ASSETS Current Assets Cash and cash equivalents....... $ 41.9 $ 14.6 Accounts receivable............. 99.4 109.1 Inventories..................... 15.5 13.6 Other current assets............ 22.8 35.2 ----------- ------------ 179.6 172.5 ----------- ------------ Properties and Equipment, at cost Oil and gas (on the basis of successful efforts accounting).................... 2,665.8 2,539.8 Other........................... 36.9 34.4 ----------- ------------ 2,702.7 2,574.2 Accumulated depletion, depreciation, amortization and impairment..................... (1,724.3) (1,664.4) ----------- ------------ 978.4 909.8 ----------- ------------ Other Assets Receivable under gas balancing arrangements................... 2.9 4.5 Other........................... 6.3 33.2 ----------- ------------ 9.2 37.7 ----------- ------------ $ 1,167.2 $ 1,120.0 =========== ============ LIABILITIES AND SHAREHOLDERS' EQUITY Current Liabilities Accounts payable................ $ 101.4 $ 115.4 Income taxes payable............ 16.9 21.4 Interest payable................ 6.0 6.0 Other current liabilities....... 26.2 36.6 ----------- ------------ 150.5 179.4 ----------- ------------ Long-Term Debt....................... 284.5 278.5 ----------- ------------ Deferred Revenues.................... 7.4 4.0 ----------- ------------ Other Long-Term Obligations.......... 29.5 27.5 ----------- ------------ Deferred Income Taxes................ 76.5 53.8 ----------- ------------ Minority Interest in Monterey Resources, Inc..................... 31.3 30.3 ----------- ------------ Commitments and Contingencies (Note 5)................................. -- -- ----------- ------------ Convertible Preferred Stock.......... -- 19.7 ----------- ------------ Shareholders' Equity Preferred stock................. -- -- $.732 Series A preferred stock.......................... -- 91.4 Common stock.................... 1.0 0.9 Paid-in capital................. 727.3 601.3 Accumulated deficit............. (138.2) (166.5) Unamortized restricted stock awards......................... (2.3) -- Foreign currency translation adjustment..................... (0.3) (0.3) ----------- ------------ 587.5 526.8 ----------- ------------ $ 1,167.2 $ 1,120.0 =========== ============ The accompanying notes are an integral part of these financial statements. 3 SANTA FE ENERGY RESOURCES, INC. CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED) (IN MILLIONS OF DOLLARS)
THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, -------------------- -------------------- 1997 1996 1997 1996 --------- --------- --------- --------- Operating Activities: Net income...................... $ 12.5 $ 17.4 $ 40.4 $ 30.0 Adjustments to reconcile net income to net cash provided by operating activities: Depletion, depreciation and amortization............ 35.5 35.1 69.1 67.4 Impairment of oil and gas properties.............. -- 10.4 -- 10.4 Deferred income taxes...... 7.3 (1.5) 22.7 5.2 Net loss (gain) on disposition of assets... 0.2 0.3 (2.1) 0.5 Exploratory dry hole costs................... 3.2 1.1 8.3 1.4 Minority interest in Monterey Resources, Inc..................... 1.6 -- 4.3 -- Other...................... 1.4 0.9 2.4 1.4 Changes in operating assets and liabilities: Decrease (increase) in accounts receivable..... 17.0 (4.3) 9.7 (0.3) Decrease (increase) in inventories............. (2.1) (2.0) (1.9) (1.2) Increase (decrease) in accounts payable........ (7.6) (4.5) (1.3) 9.5 Increase (decrease) in interest payable........ 1.9 (9.2) -- -- Increase (decrease) in income taxes payable.... (8.4) 1.3 (4.5) 1.4 Net change in other assets and liabilities......... (9.4) 14.2 29.3 0.8 --------- --------- --------- --------- Net Cash Provided by Operating Activities......................... 53.1 59.2 176.4 126.5 --------- --------- --------- --------- Investing Activities: Capital expenditures, including exploratory dry hole costs.... (57.6) (45.3) (117.7) (84.4) Acquisitions of producing properties.................... (3.2) (18.3) (34.7) (35.3) Net proceeds from sales of properties.................... 0.3 0.1 2.9 0.4 --------- --------- --------- --------- Net Cash Used in Investing Activities......................... (60.5) (63.5) (149.5) (119.3) --------- --------- --------- --------- Financing Activities: Issuance of common stock........ 0.5 0.9 1.6 0.9 Net change in long-term debt.... 10.0 -- 6.0 -- Cash dividends paid............. (4.8) (3.7) (7.2) (7.4) --------- --------- --------- --------- Net Cash Used in Financing Activities......................... 5.7 (2.8) 0.4 (6.5) --------- --------- --------- --------- Net Cash Provided in the Period...... (1.7) (7.1) 27.3 0.7 Cash and Cash Equivalents at Beginning of Period................ 43.6 50.4 14.6 42.6 --------- --------- --------- --------- Cash and Cash Equivalents at End of Period............................. $ 41.9 $ 43.3 $ 41.9 $ 43.3 ========= ========= ========= =========
The accompanying notes are an integral part of these financial statements. 4 SANTA FE ENERGY RESOURCES, INC. CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY (UNAUDITED) (SHARES AND DOLLARS IN MILLIONS)
$.732 SERIES A CONVERTIBLE FOREIGN PREFERRED STOCK COMMON STOCK UNAMORTIZED CURRENCY --------------- --------------- PAID-IN ACCUMULATED RESTRICTED TRANSLATION SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT STOCK AWARDS ADJUSTMENT ------ ------ ------ ------ -------- ----------- ------------ ----------- Balance at December 31, 1996............ 10.7 $91.4 91.0 $0.9 $ 601.3 $(166.5) $-- $(0.3) Issuance of common stock Employee stock compensation and savings plans.................... -- -- 0.4 -- 6.6 -- (2.9) -- Redemption of Convertible Preferred Stock, 7% Series................. -- -- 2.3 -- 28.1 (8.5) -- -- Redemption of $.732 Series A Preferred Stock......... (10.7) (91.4 ) 9.1 0.1 91.3 -- -- -- Amortization of restricted stock awards............................... -- -- -- -- -- -- 0.6 -- Net income............................ -- -- -- -- -- 40.4 -- -- Dividends declared.................... -- -- -- -- -- (3.6) -- -- ------ ------ ------ ------ -------- ----------- ------------ ----------- Balance at June 30, 1997................ -- $-- 102.8 $1.0 $ 727.3 $(138.2) $ (2.3) $(0.3) ====== ====== ====== ====== ======== =========== ============ =========== Balance at December 31, 1995............ 10.7 $91.4 90.3 $0.9 $ 501.4 $(155.7) $-- $(0.3) Issuance of common stock Employee stock compensation and savings plans.................... -- -- 0.3 -- 3.2 -- -- -- Net income............................ -- -- -- -- -- 30.0 -- -- Dividends declared.................... -- -- -- -- -- (7.4) -- -- ------ ------ ------ ------ -------- ----------- ------------ ----------- Balance at June 30, 1996................ 10.7 $91.4 90.6 $0.9 $ 504.6 $(133.1) $-- $(0.3) ====== ====== ====== ====== ======== =========== ============ ===========
TOTAL SHAREHOLDERS' EQUITY -------------- Balance at December 31, 1996............ $526.8 Issuance of common stock Employee stock compensation and savings plans.................... 3.7 Redemption of Convertible Preferred Stock, 7% Series................. 19.6 Redemption of $.732 Series A Preferred Stock......... -- Amortization of restricted stock awards............................... 0.6 Net income............................ 40.4 Dividends declared.................... (3.6) -------------- Balance at June 30, 1997................ $587.5 ============== Balance at December 31, 1995............ $437.7 Issuance of common stock Employee stock compensation and savings plans.................... 3.2 Net income............................ 30.0 Dividends declared.................... (7.4) -------------- Balance at June 30, 1996................ $463.5 ============== The accompanying notes are an integral part of these financial statements. 5 SANTA FE ENERGY RESOURCES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (1) ACCOUNTING POLICIES The unaudited consolidated financial statements of Santa Fe Energy Resources, Inc. (the "Company") reflect, in the opinion of management, all adjustments, consisting only of normal and recurring adjustments, necessary to present fairly the Company's financial position at June 30, 1997 and the Company's results of operations and cash flows for the three-month and six-month periods ended June 30, 1997 and 1996. Interim period results are not necessarily indicative of results of operations or cash flows for a full-year period. In February 1997 the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 128 "Earnings Per Share" ("FAS 128"), which establishes new guidelines for computing and presenting earnings per share ("EPS") and is effective for financial statements issued for periods ending after December 15, 1997. If the provisions of FAS 128 had been in effect in the three-month and six-month periods ended June 30, 1997 and 1996 the Company's EPS would have been unchanged. These financial statements and the notes thereto should be read in conjunction with the Company's annual report on Form 10-K for the year ended December 31, 1996. (2) STATEMENT OF CASH FLOWS The Company made interest and income tax payments as follows during the three month and six-month periods ended June 30, 1997 and 1996 (in millions of dollars): THREE MONTHS SIX MONTHS ENDED JUNE 30 ENDED JUNE 30 --------------- ---------------- 1997 1996 1997 1996 ---- ----- ----- ----- Interest payments.................... $5.9 $18.5 $15.3 $18.5 Income tax payments.................. 8.6 1.9 9.4 2.1 (3) MONTEREY RESOURCES, INC. In 1996 the Company formed Monterey Resources Inc. ("Monterey") to assume the operations of the Company's Western Division (the "Western Division") which conducted the Company's oil and gas operations in the State of California. In November 1996, prior to the initial public offering (the "IPO") discussed below, pursuant to a contribution and conveyance agreement (the "Contribution Agreement"), among other things: (i) the Company contributed to Monterey substantially all of the assets and properties of the Western Division, subject to the retention by the Company of a production payment, as defined below, and certain other assets; (ii) the Company retained a $30.0 million production payment (the "Production Payment") with respect to certain properties in the Midway-Sunset field; (iii) Monterey assumed all obligations and liabilities of the Company associated with or allocated to the assets and properties of the Western Division, including $245.0 million of indebtedness in respect of Santa Fe's 10.23% Series E Notes due 1997, 10.27% Series F Notes due 1998 and 10.61% Series G Notes due 2005 (the "Series E Notes", "Series F Notes" and "Series G Notes", respectively) and (iv) Monterey agreed to purchase from the Company an $8.3 million promissory note receivable related to the sale to a third party of certain surface acreage located in Orange County, California. Also prior to the IPO, Monterey and the Company entered into a $75.0 million revolving credit facility with a group of banks (the "Monterey Credit Facility") and borrowed $16.0 million which was retained by the Company. In November 1996 Monterey sold 9,335,000 shares of its common stock for total consideration of $123.6 million (after deducting underwriting discounts of $9.1 million and other related costs of $2.6 million). The proceeds from the IPO were used in part to (i) repay the Series E Notes and Series F Notes ($70.0 million) and pay a prepayment penalty thereon of $2.5 million; (ii) retire the Production Payment ($30.0 million); (iii) repay the $16.0 million outstanding under the Monterey Credit Facility; and (iv) pay a 6 SANTA FE ENERGY RESOURCES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (UNAUDITED) $2.0 million fee with respect to a supplement to the indenture relating to the Company's 11% Senior Subordinated Debentures due 2004. Subsequent to the IPO, Monterey issued $175.0 million in aggregate principal amount of 10.61% Senior Notes due 2005 (the "Monterey Senior Notes") to holders of the Series G Notes in exchange for the cancellation of such notes and paid a $1.3 million consent fee in connection therewith. The costs and expenses related to the retirement of the Company's outstanding debt, as discussed above, and approximately $3.4 million of deferred debt issue costs and related transaction costs were reflected in the Company's 1996 Statement of Operations as an extraordinary item, net of $3.2 million in income taxes. At June 30, 1997, the Company owned 82.8% of Monterey's outstanding common stock. On July 25, 1997 the Company distributed pro rata to its common shareholders all of the shares of Monterey's common stock that it owned by means of a tax-free distribution (the "Spin Off"). Pursuant to the terms of a letter agreement dated as of June 13, 1996, upon consummation of the Spin Off, a fee is payable by Monterey to Chase Securities Inc. and Petrie Parkman & Co., Inc. of $3.3 million, one-half of which will be paid to each of Chase Securities and Petrie Parkman. In addition, a fee of $400,000 was paid to GKH Partners, L.P., of which $200,000 was paid by the Company and $200,000 was paid by Monterey. One of the Company's directors is associated with Chase Securities and another is associated with GKH Partners. Monterey has agreed to indemnify the Company if at any time during the one-year period after the consummation of the Spin Off (or if certain tax legislation is enacted and is applicable, such longer period as is required for the Spin Off to be tax free to the Company) Monterey takes certain actions, the effects of which result in the Spin Off being taxable to the Company. The Company provides various administrative and financial services to Monterey, including administration of certain employee benefits plans, access to telecommunications, corporate legal assistance and certain other corporate staff and support services. The Company and Monterey have entered into a Services Agreement, terminable by either party on thirty days' notice, under which Monterey pays a fee of $120,000 per month for such services until such time as Monterey assumes full responsibility during 1997 for each of the services covered by the agreement. The agreement is expected to be terminated by the end of the third quarter of 1997. The following table sets forth certain financial information for the Company, on a proforma basis assuming that the Spin Off occurred prior to the beginning of the periods presented(1): THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, ----------------- ----------------- 1997 1996 1997 1996 ------ ------ ------ ------ (MILLIONS OF DOLLARS, EXCEPT AS NOTED) Revenues............................. $ 75.1 $ 69.2 $164.2 $133.3 Income (loss) from operations........ 9.1 (2.1) 36.8 4.9 Net income (loss).................... 4.8 2.9 21.8 6.3 Earnings (loss) to common shares..... (4.9) (0.8) 9.7 (1.1) Earnings (loss) to common shares per share (in dollars)................. (0.05) (0.01) 0.10 (0.01) - ------------ (1) Does not give effect to (i) $3.7 million in advisory fees payable upon consummation of the Spin Off, $3.5 million of which is payable by Monterey and $0.2 million of which is payable by Santa Fe, (ii) $1.1 million of related costs and expenses ($0.8 million after giving effect to related income taxes) and (iii) $0.7 million in compensation expense resulting from the Spin Off with respect to certain outstanding shares of restricted Common Stock. 7 SANTA FE ENERGY RESOURCES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (UNAUDITED) (4) CONVERTIBLE PREFERRED STOCK In the second quarter of 1997 the Company redeemed all 10.7 million outstanding shares of its $.732 Series A Convertible Preferred Stock (the "DECS") for 9.1 million shares of common stock and converted all 1.2 million outstanding shares of its Convertible Preferred Stock, Series 7% (the "7% Preferred") for 2.3 million shares of common stock. The conversion of the 7% Preferred resulted in a noncash reduction in earnings to common shares (which is reflected as a convertible preferred premium in the statement of operations) of $8.5 million. The conversion of the DECS had no effect on the Company's earnings to common shares. (5) COMMITMENTS AND CONTINGENCIES OIL AND GAS HEDGING From time to time the Company hedges a portion of its oil and gas sales to provide a certain minimum level of cash flow from its sales of oil and gas. While the hedges are generally intended to reduce the Company's exposure to declines in market price, the Company's gain from increases in market price may be limited. The Company uses various financial instruments whereby monthly settlements are based on differences between the prices specified in the instruments and the settlement prices of certain futures contracts quoted on the New York Mercantile Exchange ("NYMEX") or certain other indices. Generally, in instances where the applicable settlement price is less than the price specified in the contract, the Company receives a settlement based on the difference; in instances where the applicable settlement price is higher than the specified price, the Company pays an amount based on the difference. The instruments utilized by the Company differ from futures contracts in that there is no contractual obligation which requires or allows for the future delivery of the product. Gains or losses on hedging activities are recognized in oil and gas revenues in the period in which the hedged production is sold. Crude oil sales hedges resulted in an increase in revenues of $1.4 million in the second quarter of 1997 and $1.7 million in the first six months of 1997 and a decrease in revenues of $5.5 million in the second quarter of 1996 and $9.0 million in the first six months of 1996. At June 30, 1997 the Company had open crude oil sales hedges on 646,000 barrels during the period July to October 1997. The instruments used have floors ranging from $20.00 to $21.00 per barrel and ceilings ranging from $20.14 to $23.82 per barrel. Under the terms of the instruments, if the aggregate average of the applicable daily settlement prices is below the floor, the Company will receive a settlement based on the difference, and if the aggregate average of the applicable daily settlement prices is above the ceiling, the Company will be required to pay an amount based on the difference. Based on the July 1997 settlement price of the applicable NYMEX futures contract, the Company would recognize a $0.4 million gain with respect to such hedges at June 30, 1997. The actual gains or losses realized by the Company from these hedges may vary significantly due to the volatility of the futures markets. The Company has had no open natural gas sales hedges during 1997. Natural gas sales hedges resulted in a decrease in revenues of $5.1 million in the second quarter of 1996 and $10.8 million in the first six months of 1996. In addition to its oil and gas sales hedges, for the first six months of 1996 Monterey hedged 20 MMcf per day of the natural gas it purchases for use in its steam generation operations in the San Joaquin Valley of California. Such hedges resulted in a $1.5 million increase in production and operating costs in the second quarter of 1996 and $3.2 million in the first six months of 1996. ENVIRONMENTAL REGULATION Federal, state and local laws and regulations relating to environmental quality control affect the Company in all of its oil and gas operations. The Comprehensive Environmental Response, Compensation 8 SANTA FE ENERGY RESOURCES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (UNAUDITED) and Liability Act ("CERCLA"), also known as the "Superfund" law, imposes liability, without regard to fault or the legality of the original conduct, on certain classes of persons that contributed to the release of a "hazardous substance" into the environment. These persons include the owner or operator of a site and companies that disposed or arranged for the disposal of the hazardous substance found at a site. CERCLA also authorizes the Environmental Protection Agency (the "EPA") and, in some cases, third parties to take actions in response to threats to the public health or the environment and to seek to recover from the responsible classes of persons the costs they incur. In the course of its operations, the Company has generated and will generate wastes that may fall within CERCLA's definition of "hazardous substances". The Company may be responsible under CERCLA for all or part of the costs to clean up sites at which such wastes have been disposed. Certain properties owned or used by the Company or its predecessors have been investigated under state and Federal Superfund statutes, and the Company has been and could be named a potentially responsible party ("PRP") for the cleanup of some of these sites. Pursuant to the Contribution Agreement, Monterey agreed to indemnify and hold harmless the Company from and against any costs incurred in the future relating to environmental liabilities of the Western Division assets (other than those retained by the Company), including any costs or expenses incurred at any of the OII Site, the Santa Fe Springs Site and the Eastside Site, and any costs or liabilities that may arise in the future that are attributable to laws, rules or regulations in respect to any property or interest therein located in California and formerly owned or operated by the Western Division or its precedessors. The Company has been identified as one of over 250 PRPs at a Superfund site in Los Angeles County, California (the "OII Site"). The OII Site was operated by a third party as a waste disposal facility from 1948 until 1983. The EPA is requiring the PRPs to undertake remediation of the site in several phases, which include site monitoring and leachate control, gas control and final remediation. In November 1988 the EPA and a group of PRPs that includes the Company entered into a consent decree covering the site monitoring and leachate control phases of remediation. The Company was a member of the group Coalition Undertaking Remediation Efforts ("CURE") which was responsible for constructing and operating the leachate treatment plant. This phase is now complete and the Company's share of costs with respect to this phase was $0.9 million. Another consent decree provides for the predesign, design and construction of a landfill gas treatment system to harness and market methane gas emissions. The Company is a member of the New CURE group which is responsible for the gas treatment system construction and operation and landfill cover. Currently, New CURE is in the design stage of the gas treatment system. The Company's share of costs of this phase is expected to be $1.6 million and such costs have been provided for in the financial statements. Pursuant to consent decrees settling lawsuits against the municipalities and transporters involved with the OII site but not named by the EPA as PRPs, such parties are required to pay approximately $84 million, of which approximately $76 million will be credited against future remediation expenses. The EPA and the PRPs are currently negotiating the final closure requirements. After taking into consideration the credits from the municipalities and transporters, the Company estimates its share of final costs of closure will be approximately $0.8 million, which amount has been provided for by the Company in its financial statements. The Company has entered into a Joint Defense Agreement with the other PRPs to defend against a lawsuit filed in September 1994 by 95 homeowners alleging, among other things, nuisance, trespass, strict liability and infliction of emotional distress. A second lawsuit has been filed by 33 additional homeowners and the Company and the other PRPs have entered into a Joint Defense Agreement. At this stage of the lawsuit the Company is not able to estimate costs or potential liability. In 1994 the Company received a request from the EPA for information pursuant to Section 104(e) of CERCLA and a letter ordering the Company and other PRPs to negotiate with the EPA regarding implementation of a remedial plan for a site located in Santa Fe Springs, California (the "Santa Fe Springs 9 SANTA FE ENERGY RESOURCES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (UNAUDITED) Site"). The Company owned the property on which the Santa Fe Springs Site is located from 1921 to 1932. During that time the property was leased to another company and in 1932 the property was sold to that company. During the time the other company leased or owned the property and for a period thereafter, hazardous wastes were allegedly disposed at the Santa Fe Springs Site. The Company filed its response to the Section 104(e) order setting forth its position and defenses based on the fact that the other company was the lessee and operator of the site during the time the Company was the owner of the property. However, the Company has also given its Notice of Intent to comply with the EPA's order to prepare a remediation design plan. In March 1997 the EPA issued an Amended Order for Remedial Design to the original eight PRPs plus an additional thirteen PRPs. The Amended Order directs the twenty-one PRPs to complete certain work required under the original Order, plus additional remedial design and investigative work. The total cost to complete this work and to complete the final remedy (including ongoing operations and maintenance) is currently estimated to be $5 million. Past costs incurred by the EPA for this site for which the EPA is seeking reimbursement totals approximately $6 million. The Company has provided $250,000 in its financial statements for its share of future costs at the Santa Fe Springs Site. In 1995 the Company and eleven other companies received notice that they have been identified as PRPs by the California Department of Toxic Substances Control (the "DTSC") as having generated and/or transported hazardous waste to the Environmental Protection Corporation ("EPC") Eastside Landfill (the "Eastside Site") during its fourteen-year operation from 1971 to 1985. EPC has since liquidated all of its assets and placed the proceeds in trust (the "EPC Trust") for closure and post-closure activities. However, these monies may not be sufficient to close the site. The PRPs have entered into an enforceable agreement with the DTSC to characterize the contamination at the site and prepare a focused remedial investigation and feasibility study. The DTSC recently designated 27 new PRPs with respect to the Eastside Site. The cost of the remedial investigation and feasibility study is estimated to be $1.0 million, the cost of which will be shared by the PRPs and the EPC Trust. The ultimate costs of subsequent phases will not be known until the remedial investigation and feasibility study is completed and a remediation plan is accepted by the DTSC. The Company currently estimates final remediation could cost $2 million to $6 million and believes the monies in the EPC Trust will be sufficient to fund the lower end of this range of costs. The Company has provided $80,000 in its financial statements for its share of costs related to this site. EMPLOYMENT AGREEMENTS The Company has entered into employment agreements with eleven employees. The initial term of ten of the agreements expire on December 31, 1998; however, beginning January 1, 1998 and on each January 1 thereafter, the term is automatically extended for one-year periods, unless by September 30 of the preceding year the Company gives notice that the agreement will not be extended. The term of the agreements is automatically extended for a period of two years following a change of control. The initial term of the other agreement expires December 31, 1999 and beginning January 1, 2000, is automatically extended for one-year periods and is automatically extended for a three-year period following a change of control. In the event that following a change in control an employee is terminated for reasons specified in the employment agreements, the employment agreements provide for payment of certain amounts to the employee based on the employee's salary and bonus under the Company's incentive compensation plan; payout of non-vested restricted stock, phantom units, stock options, if any, and continuation of certain insurance benefits on a tax neutral basis for a period of up to 36 months. The payments and benefits are payable pursuant to the employment agreements only to the extent they are not paid out under the terms of any other plan of the Company. The payments and benefits provided by the employment agreements may be limited, with the exception of those made to Mr. Payne, by certain provisions of the Internal Revenue Code. 10 SANTA FE ENERGY RESOURCES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (UNAUDITED) OTHER MATTERS Monterey has certain long-term contracts ranging up to twelve years for the supply and transportation of approximately 20 million cubic feet per day of natural gas to the Company's operations in Kern County, California. In the aggregate, these contracts involve a minimum commitment on the part of the Company of approximately $12.2 million per year (based on prices and transportation charges in effect for June 1997). In connection with the development of a gas field in Argentina in which the Company has a 19.9% working interest, a gas contract with "take-or-pay" and "delivery-or-pay" obligations was executed in 1994 with a gas distribution company. On July 24, 1997 the Company announced that an exploratory well in which it was a participant was determined to be nonproductive. The Company's share of the cost of the well, approximately $2.2 million (approximately $1.4 million after the effect of related income taxes), will be included in the Company's results of operations in the third quarter of 1997. On July 24, Monterey acquired all of the outstanding common shares of McFarland Energy, Inc. ("McFarland"), for $106.2 million in cash ($18.55 per share for each of the 5.7 million outstanding common shares of McFarland.) Monterey borrowed $100 million under the terms of a credit agreement to fund the acquisition. There are other claims and actions, including certain other environmental matters, pending against the Company. In the opinion of management, the amounts, if any, which may be awarded in connection with any of these claims and actions could be significant to the results of operations of any period but would not be material to the Company's consolidated financial position. 11 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS At June 30, 1997 Santa Fe Energy Resources, Inc. (the "Company") owned approximately 83% of the outstanding common stock of Monterey Resources, Inc. ("Monterey"), which conducts all of the Company's oil and gas operations in the state of California. The Company's other operations are conducted by (i) the Central Division, which operates primarily in the Permian Basin of west Texas and in southeastern New Mexico; (ii) the Gulf Division which operates in the Gulf of Mexico and adjacent onshore areas; and (iii) the International Division, which operates in areas outside the United States. References herein to the "Company" or "Consolidated" relate to operations and the results thereof including Monterey and references to "Santa Fe" relate to operations and the results thereof excluding Monterey. The Company distributed pro rata to its common shareholders all of its ownership in Monterey by means of a tax-free distribution (the "Spin Off", see -- Initial Public Offering and Spin Off) on July 25, 1997. CONSOLIDATED The Company reported earnings to common shares of $2.8 million, $0.03 per share, in the second quarter of 1997, compared to earnings to common shares of $13.7 million, $0.15 per share, in the second quarter of 1996. Income from operations for the second quarter of 1997 totalled $27.2 million compared to $26.0 million in the second quarter of 1996. Sales of crude oil and liquids produced averaged 79,100 barrels per day in the second quarter of 1997, which equaled the highest quarter in the Company's history, compared to 74,300 barrels per day in the second quarter of 1996. The Company's average hedged sales price for crude oil and liquids produced of $15.37 per barrel in the second quarter of 1997 was $1.21 per barrel lower than in the second quarter of 1996. Natural gas sales averaged 182.7 MMcf per day in the second quarter of 1997 compared to 164.3 MMcf per day in the second quarter of 1996. The Company's average realized sales price for natural gas was $1.89 per Mcf in the second quarter of 1997 compared to $1.76 per Mcf (net of a $0.34 per Mcf hedging loss) in the same period in 1996. The Company reported earnings to common shares of $28.3 million, $0.30 per share, in the first six months of 1997, compared to earnings to common shares of $22.6 million, $0.25 per share, in the first six months of 1996. Income from operations for the first six months of 1997 totalled $83.0 million compared to $55.5 million in the first six months of 1996. Sales of crude oil and liquids produced averaged 79,100 barrels per day in the first six months of 1997 compared to 72,300 barrels per day in the first six months of 1996. The Company's average hedged sales price for crude oil and liquids produced of $16.70 per barrel in the first six months of 1997 was $0.61 per barrel higher than in the first six months of 1996. Natural gas sales averaged 176.7 MMcf per day in the first six months of 1997 compared to 159.1 MMcf per day in the first six months of 1996. The Company's average realized sales price for natural gas was $2.19 per Mcf in the first six months of 1997 compared to $1.79 per Mcf (net of a $0.38 per Mcf hedging loss) in the first six months in 1996. SANTA FE Santa Fe's sales of crude oil and liquids produced averaged 28,800 barrels per day in the second quarter of 1997 compared to 27,900 barrels per day in the second quarter of 1996, and the average hedged sales price for crude oil and liquids produced was $17.59 per barrel in the second quarter of 1997 compared to $17.77 per barrel in the second quarter of 1996. Natural gas sales averaged 179.5 MMcf per day in the second quarter of 1997 compared to 163.3 MMcf per day in the second quarter of 1996, and the average realized sales price for natural gas was $1.91 per Mcf in the second quarter of 1997 compared to $1.76 per Mcf (net of a $0.35 per Mcf hedging loss) in the same period in 1996. Santa Fe's sales of crude oil and liquids produced averaged 28,900 barrels per day in the first six months of 1997 compared to 27,300 barrels per day in the first six months of 1996, and the averaged hedged sales price for crude oil and liquids produced of $19.10 per barrel in the first six months of 1997 was $1.86 per barrel higher than in the first six months of 1996. Natural gas sales averaged 173.6 MMcf per day in the first six months of 1997 compared to 156.9 MMcf per day in the first six months of 1996, and the average 12 realized sales price for natural gas was $2.21 per Mcf in the first six months of 1997 compared to $1.80 per Mcf (net of a $0.38 per Mcf hedging loss) in the first six months of 1996. INITIAL PUBLIC OFFERING AND SPIN OFF In the third quarter of 1996 the Company announced its intention to separate its operations in the State of California from the rest of its domestic and international operations. In November such operations were assumed by Monterey which subsequently issued 9.3 million shares of its common stock in an initial public offering. The proceeds from the offering were primarily used to retire outstanding long-term debt. On July 25, 1997 the Company distributed pro rata to its common shareholders all of the shares of Monterey common stock that it owned by means of a tax-free distribution. The Company took these actions because of its belief that its oil and gas operations had developed over time into separate businesses that operate independently and have diverging capital requirements and risk profiles. In addition, the Board of Directors believes that dividing the Company's operations into two independent companies allows each to more efficiently develop its distinct resource base and pursue separate business opportunities while providing each with improved access to capital markets. The Board of Directors also believes that the IPO and the Spin Off allow investors to better evaluate each business, enhancing the likelihood that each would achieve appropriate market recognition for its performance. As a result of the Spin Off, the market price of the Company's common stock declined to reflect the distribution of the Monterey common stock. GENERAL Crude oil prices are subject to significant changes in response to fluctuations in the domestic and world supply and demand and other market conditions as well as the world political situation as it affects OPEC, the Middle East and other producing countries. Since the beginning of 1996 the actual average crude oil sales price (unhedged) received by Santa Fe ranged from a high of $21.47 per barrel in the fourth quarter of 1996 to a low of $17.43 per barrel for the first quarter of 1996. Based on operating results for the first six months of 1997, Santa Fe estimates that on an annualized basis a $1.00 per barrel increase or decrease in its average crude oil sales prices would result in a corresponding $6.1 million change in net income and a $7.6 million change in cash flow from operating activities. The foregoing estimates do not give effect to changes in any other factors, such as the effect of Santa Fe's hedging program or its debt levels and related interest expense, that might result from a change in oil prices. The price of natural gas fluctuates due to weather conditions, the level of natural gas in storage, the relative balance between supply and demand and other economic factors. The actual average sales price (unhedged) received by Santa Fe since the beginning of 1996 for its natural gas ranged from a high of $2.53 per Mcf in the first quarter of 1997 to a low of $1.91 per Mcf in the third quarter of 1996. Based on operating results for the first six months of 1997, Santa Fe estimates that on an annualized basis a $0.10 per Mcf increase or decrease in its average natural gas sales price would result in a corresponding $3.7 million change in net income and a $4.6 million change in cash flow from operating activities. The foregoing estimates do not give effect to changes in any other factors, such as the effect of Santa Fe's hedging program or its debt levels and related interest expense, that might result from a change in natural gas prices. 13 RESULTS OF OPERATIONS REVENUES The following table reflects the components of the Company's crude oil and natural gas liquids and natural gas revenues:
CONSOLIDATED SANTA FE ------------------------------------------ ------------------------------------------ THREE MONTHS ENDED SIX MONTHS ENDED THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, JUNE 30, JUNE 30, -------------------- -------------------- -------------------- -------------------- 1997 1996 1997 1996 1997 1996 1997 1996 --------- --------- --------- --------- --------- --------- --------- --------- CRUDE OIL AND LIQUIDS PRODUCED Sales Volumes (MBbls/day) Domestic California Heavy............... 46.6 43.1 46.0 42.1 -- -- -- -- Other.......................... 24.6 22.8 25.0 22.3 20.9 19.5 20.8 19.4 --------- --------- --------- --------- --------- --------- --------- --------- 71.2 65.9 71.0 64.4 20.9 19.5 20.8 19.4 Argentina...................... 4.3 3.7 4.4 3.3 4.3 3.7 4.4 3.3 Indonesia...................... 3.6 4.7 3.7 4.6 3.6 4.7 3.7 4.6 --------- --------- --------- --------- --------- --------- --------- --------- 79.1 74.3 79.1 72.3 28.8 27.9 28.9 27.3 ========= ========= ========= ========= ========= ========= ========= ========= Sales Prices ($/Bbl) Unhedged Domestic California Heavy............. $ 13.85 $ 15.83 $ 14.99 $ 15.53 $ -- $ -- $ -- $ -- Other........................ 17.19 20.13 19.18 18.82 17.19 20.35 19.21 18.95 Total........................ 15.01 17.31 16.46 16.67 17.19 20.35 19.21 18.95 Argentina...................... 16.50 18.42 17.63 17.41 16.50 18.42 17.63 17.41 Indonesia...................... 16.90 17.74 17.63 17.76 16.90 17.74 17.63 17.76 Total.......................... 15.17 17.39 16.58 16.77 17.05 19.65 18.77 18.56 Hedged........................... 15.37 16.58 16.70 16.09 17.59 17.77 19.10 17.24 Revenues ($/millions) Sales Domestic California Heavy............. $ 58.8 $ 62.0 $ 124.9 $ 118.9 $ -- $ -- $ -- $ -- Other........................ 38.4 41.7 86.7 76.6 32.7 36.0 72.2 66.9 --------- --------- --------- --------- --------- --------- --------- --------- 97.2 103.7 211.6 195.5 32.7 36.0 72.2 66.9 Argentina...................... 6.5 6.2 14.1 10.5 6.5 6.2 14.1 10.5 Indonesia...................... 5.5 7.7 11.7 14.8 5.5 7.7 11.7 14.8 Hedging.......................... 1.4 (5.5) 1.7 (9.0) 1.4 (4.8) 1.7 (6.6) Net Profits Payments............. (1.5) (1.2) (2.7) (2.3) (0.9) (0.9) (1.9) (1.8) --------- --------- --------- --------- --------- --------- --------- --------- $ 109.1 $ 110.9 $ 236.4 $ 209.5 $ 45.2 $ 44.2 $ 97.8 $ 83.8 ========= ========= ========= ========= ========= ========= ========= ========= NATURAL GAS PRODUCED Sales Volumes (MMcf/day) Domestic......................... 159.7 145.6 155.6 140.9 156.5 144.6 152.5 138.7 Foreign.......................... 23.0 18.7 21.1 18.2 23.0 18.7 21.1 18.2 --------- --------- --------- --------- --------- --------- --------- --------- 182.7 164.3 176.7 159.1 179.5 163.3 173.6 156.9 ========= ========= ========= ========= ========= ========= ========= ========= Sales Prices ($/Mcf) Unhedged Domestic....................... $ 1.97 $ 2.21 $ 2.31 $ 2.28 $ 1.99 $ 2.21 $ 2.34 $ 2.30 Foreign........................ 1.35 1.30 1.30 1.24 1.35 1.30 1.30 1.24 Total.......................... 1.89 2.10 2.19 2.17 1.91 2.11 2.21 2.18 Hedged(1)........................ 1.89 1.76 2.19 1.79 1.91 1.76 2.21 1.80 Revenues ($/millions) Sales Domestic....................... $ 28.6 $ 29.2 $ 65.1 $ 58.6 $ 28.3 $ 29.0 $ 64.5 $ 58.0 Foreign........................ 2.9 2.2 5.0 4.1 2.9 2.2 5.0 4.1 --------- --------- --------- --------- --------- --------- --------- --------- 31.5 31.4 70.1 62.7 31.2 31.2 69.5 62.1 Hedging(1)....................... -- (5.1) -- (10.8) -- (5.1) -- (10.8) Net Profits Payments............. (1.0) (1.4) (2.9) (2.1) (1.0) (1.3) (2.9) (2.0) --------- --------- --------- --------- --------- --------- --------- --------- $ 30.5 $ 24.9 $ 67.2 $ 49.8 $ 30.2 $ 24.8 $ 66.6 $ 49.3 ========= ========= ========= ========= ========= ========= ========= =========
- ------------ (1) The Company has not hedged any gas production in 1997. 14 CONSOLIDATED A material portion of the Company's crude oil production is from Monterey's long-lived fields in the San Joaquin Valley of California where enhanced oil recovery methods are being utilized. The market price of the heavy (i.e., low gravity, high viscosity) and sour (i.e., high sulfur content) crude oils produced in these fields is lower than sweeter, light (i.e., low sulfur and low viscosity) crude oils, reflecting higher transportation and refining costs. The lower price received for Monterey's domestic heavy and sour crude oil is reflected in the average sales price of the Company's domestic crude oil and liquids (excluding the effect of hedging transactions) for the first six months of 1997 of $16.46 per barrel, compared to $19.57 per barrel for West Texas Intermediate ("WTI") crude oil (an industry posted price generally indicative of prices for sweeter light crude oil). In the first six months of 1997 Monterey's average sales price for California heavy crude oil was $14.99 per barrel, approximately 77% of the average posted price for WTI. Revenues from the sales of crude oil and liquids produced decreased from $110.9 million in the second quarter of 1996 to $109.1 million in the second quarter of 1997 reflecting lower prices as the Company's unhedged average sales price declined from $17.39 per barrel in 1996 to $15.17 per barrel in 1997, partially offset by an increase in crude oil and liquids production from 74,300 barrels per day in 1996 to 79,100 barrels per day in 1997. Monterey's crude oil production increased 3,900 barrels per day, primarily reflecting the effect of its development program in 1996 and reduced royalties on Federal heavy oil leases. Production from the Company's Central Division increased 2,000 barrels per day, primarily reflecting the effect of properties acquired in 1996 and early 1997, and production from the El Tordillo field in Argentina increased 600 barrels per day, reflecting the effect of new wells and the workover of existing wells and the acquisition of an additional 4% working interest. Indonesian production declined 1,100 barrels per day, primarily reflecting lower cost recovery volumes due to the payout of the government oil company's carried interest at the Salawati Island field. Revenues from the sales of crude oil and liquids produced for 1997 include a $1.4 million gain on hedging transactions compared to a $5.5 million loss on such transactions in 1996. Revenues from the sales of crude oil and liquids produced increased from $209.5 million in the first six months of 1996 to $236.4 million in the first six months of 1997 primarily reflecting increased production volumes. The Company's crude oil and liquids production increased from 72,300 barrels per day in 1996 to 79,100 barrels per day in 1997 while the unhedged average sales price declined from $16.77 per barrel in 1996 to $16.58 per barrel in 1997. Monterey's crude oil production increased 5,200 barrels per day, primarily reflecting the effect of its development program in 1996 and reduced royalties on Federal heavy oil leases. Production from the Company's Central Division increased 1,800 barrels per day, primarily reflecting the effect of properties acquired in 1996 and early 1997, and production from the El Tordillo field in Argentina increased 1,100 barrels per day, reflecting the effect of new wells and the workover of existing wells and the acquisition of an additional 4% working interest. Indonesian production declined 900 barrels per day, primarily reflecting lower cost recovery volumes due to the payout of the government oil company's carried interest at the Salawati Island field. Revenues from the sales of crude oil and liquids produced for 1997 include a $1.7 million gain on hedging transactions compared to a $9.0 million loss on such transactions in 1996. Revenues from the sales of natural gas produced increased from $24.9 million in the second quarter of 1996 to $30.5 million in the second quarter of 1997, reflecting an increase in production from 164.3 MMcf per day in 1996 to 182.7 MMcf per day in 1997, partially offset by a decline in the Company's average unhedged sales price from $2.10 per Mcf in 1996 to $1.89 per Mcf in 1997. Natural gas production increased 4.9 MMcf per day in the Gulf Division and 7.0 MMcf per day in the Central Division, primarily reflecting the results of exploration and development drilling, and 4.3 MMcf per day in Argentina, primarily reflecting the expansion of the gas processing plant at the Sierra Chata field. Revenues from the sales of natural gas produced in 1996 included a $5.1 million loss on hedging transactions. Revenues from the sales of natural gas produced increased from $49.8 million in the first six months of 1996 to $67.2 million in the first six months of 1997, primarily reflecting an increase in production from 159.1 MMcf per day in 1996 to 176.7 MMcf per day in 1997. Natural gas production increased 8.6 MMcf 15 per day in the Gulf Division and 5.3 MMcf per day in the Central Division, primarily reflecting the results of exploration and development drilling, and 2.8 MMcf per day in Argentina, primarily reflecting the expansion of the gas processing plant at the Sierra Chata field. Revenues from the sales of natural gas produced in 1996 included a $10.8 million loss on hedging transactions. Revenues from the sales of crude oil purchased relate to the sale of crude oil purchased and blended with certain of Monterey's heavy oil production to facilitate pipeline production. The cost to purchase such crude oil is included in Costs and Expenses. SANTA FE Revenues from the sales of crude oil and liquids produced increased from $44.2 million in the second quarter of 1996 to $45.2 million in the second quarter of 1997. Santa Fe's unhedged average sales price decreased from $19.65 per barrel in 1996 to $17.05 per barrel in 1997, and crude oil and liquids production increased from 27,900 barrels per day in 1996 to 28,800 barrels per day in 1997. The increased production reflects the previously discussed increases in Central Division and Argentine production, partially offset by the decrease in Indonesian production. Revenues from the sales of crude oil and liquids produced for 1997 include a $1.4 million gain on hedging transactions compared to a $4.8 million loss on such transactions in 1996. Revenues from the sales of crude oil and liquids produced increased from $83.8 million in the first six months of 1996 to $97.8 million in the first six months of 1997 reflecting improved market conditions, which resulted in an increase in crude oil and liquids production from 27,300 barrels per day in 1996 to 28,900 barrels per day in 1997 and an increase in unhedged average sales prices from $18.56 per barrel in 1996 to $18.77 per barrel in 1997. The increased production reflects the previously discussed increases in Central Division and Argentine production, partially offset by the decrease in Indonesian production. Revenues from the sales of crude oil and liquids produced for 1997 include a $1.7 million gain on hedging transactions compared to a $6.6 million loss on such transactions in 1996. From time to time Santa Fe hedges a portion of its oil and gas sales to provide a certain minimum level of cash flow from its sales of oil and gas as discussed in Note 5 to the Consolidated Financial Statements. At July 31, 1997 Santa Fe had open crude hedges on an average of approximately 643,000 barrels for the period August to December 1997. The instruments used have floors ranging from $20.00 to $21.00 per barrel and ceilings ranging from $20.10 to $23.10 per barrel. Under the terms of the instruments, if the aggregate average of the applicable daily settlement prices is below the floor, Santa Fe will receive a settlement based on the difference, and if the aggregate average of the applicable daily settlement prices is above the ceiling, Santa Fe will be required to pay an amount based on the difference. The settlement price for July 1997 was $19.62 per barrel. The following table reflects estimated amounts due to or from Santa Fe assuming the stated settlement prices are in effect for the entire period the aforementioned hedges are in effect. SETTLEMENT PRICE DUE TO (FROM) COMPANY (DOLLARS PER BARREL) (MILLIONS OF DOLLARS) -------------------- --------------------- $23.00 $(1.0) 22.00 (0.5) 21.00 (0.2) 19.00 0.7 18.00 1.3 Santa Fe has had no open natural gas hedges in 1997. In the first six months of 1996 natural gas hedges resulted in a decrease in revenues of $10.8 million. 16 COSTS AND EXPENSES The following table sets forth certain costs and expenses, expressed in millions of dollars and in dollars per barrel of oil equivalent ("BOE") produced during the period:
CONSOLIDATED SANTA FE ------------------------------------------ ------------------------------------------ THREE MONTHS ENDED SIX MONTHS ENDED THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, JUNE 30, JUNE 30 -------------------- -------------------- -------------------- -------------------- 1997 1996 1997 1996 1997 1996 1997 1996 --------- --------- --------- --------- --------- --------- --------- --------- IN MILLIONS OF DOLLARS Production and operating costs(a)....... $ 49.4 $ 44.3 $ 101.6 $ 88.3 $ 19.8 $ 20.0 $ 40.9 $ 39.5 Exploration, including dry hole costs... 10.1 5.9 19.4 11.5 9.6 5.3 18.6 10.6 Depletion, depreciation and amortization.......................... 35.5 35.1 69.1 67.4 25.8 25.4 50.1 49.2 General and administrative.............. 10.1 7.9 17.2 13.9 6.3 5.8 10.7 9.9 Taxes, other than income(b)............. 6.6 6.5 14.1 12.6 3.2 4.1 8.1 8.3 Interest income......................... 0.9 0.5 1.8 1.0 0.6 0.5 1.0 1.0 Interest expense........................ 7.8 9.7 15.5 19.3 2.9 3.2 5.9 6.4 Interest capitalized.................... 1.9 1.2 3.5 2.5 1.5 0.9 2.8 2.1 IN DOLLARS PER BOE Production and operating costs(a)....... $ 4.95 $ 4.79 $ 5.17 $ 4.88 $ 3.70 $ 4.00 $ 3.90 $ 4.06 Exploration, including dry hole costs... 1.01 0.64 0.99 0.64 1.80 1.05 1.78 1.09 Depletion, depreciation and amortization.......................... 3.56 3.78 3.52 3.74 4.83 5.08 4.79 5.06 General and administrative.............. 0.90(d) 0.68(e) 0.82(d) 0.68(e) 0.96(f) 0.85(g) 0.91(f) 0.86(g) Taxes, other than income(b)............. 0.66 0.70 0.72 0.70 0.62 0.82 0.78 0.86 Interest expense, net(c)................ 0.51 0.86 0.52 0.87 0.19 0.34 0.21 0.34
- ------------ (a) Excluding related production, severance and ad valorem taxes. (b) Includes production, severance and ad valorem taxes. (c) Reflects interest expense less amounts capitalized and interest income. (d) Excludes effect of $1.1 million in administrative costs related to the Spin Off -- $0.11 per BOE for the three months ended June 30, 1997 and $0.05 per BOE for the six months ended June 30, 1997. (e) Excludes effect of $1.6 million charge related to the abandonment of an office lease -- $0.17 per BOE for the three months ended June 30, 1996 and $0.09 per BOE for the six months ended June 30, 1996. (f) Excludes effect of $1.1 million in administrative costs related to the Spin Off -- $0.21 per BOE for the three months ended June 30, 1997 and $0.11 per BOE for the six months ended June 30, 1997. (g) Excludes effect of $1.6 million charge related to the abandonment of an office lease -- $0.32 per BOE for the three months ended June 30, 1996 and $0.17 per BOE for the six months ended June 30, 1996. CONSOLIDATED Consolidated costs and expenses totalled $122.6 million in the second quarter of 1997 compared to $111.5 million in the second quarter of 1996. Production and operating costs increased $5.1 million, primarily due to an increase in Monterey's costs which principally reflects higher production volumes, prices and volumes for natural gas purchased in connection with steam generation operations and costs related to properties acquired in 1996. Exploration expense increased $4.2 million, primarily reflecting higher dry hole costs (up $2.1 million). General and administrative expense increased $2.2 million, primarily due to a $1.8 million increase in Monterey's expenses, reflecting additional costs related to Monterey becoming a publicly-traded company and $1.1 million in administrative costs associated with the Spin Off. Costs and expenses for the second quarter of 1996 included a $10.4 million charge for the impairment of a producing oil and gas property. Consolidated costs and expenses totalled $240.7 million in the first six months of 1997 compared to $205.7 million in the first six months of 1996. Production and operating costs increased $13.3 million, primarily due to a $11.7 million increase in Monterey's costs. The increase in Monterey's costs primarily reflects higher production volumes, prices and volumes for natural gas purchased in connection with steam generation operations and costs related to properties acquired in 1996. Costs associated with Central Division properties increased $1.7 million, principally due to costs related to properties acquired in 1996 17 and early 1997. Exploration expense increased $7.9 million, primarily reflecting higher dry hole costs (up $6.9 million). General and administrative expense increased $3.3 million, primarily due to a $2.6 million increase in Monterey's expenses, reflecting additional costs related to Monterey becoming a publicly-traded company, and $1.1 million in administrative costs related to the Spin Off. The increase in taxes other than income primarily reflects higher production and severance taxes. Costs and expenses for the first six months of 1996 included a $10.4 million charge for the impairment of a producing oil and gas property. Interest expense for the second quarter and first six months of 1997 is lower than the comparable periods in 1996 primarily due to the retirement of certain of Monterey's long-term debt. Income taxes for the second quarter and first six months of 1996 include a $6.8 million deferred benefit related to certain foreign expenditures incurred in prior periods. The decrease in the Company's preferred dividend requirement primarily results from the repurchase of 3.8 million shares of Convertible Preferred Stock, 7% Series (the "7% Preferred") in the fourth quarter of 1996. The premium on the 7% Preferred in the second quarter of 1997 relates to the conversion of 1.2 million shares of 7% Preferred (see "Liquidity and Capital Resources -- Consolidated"). SANTA FE Costs and expenses totalled $64.9 million in the second quarter of 1997 compared to $71.3 million in the second quarter of 1996. Exploration expense increased $4.3 million, primarily reflecting higher dry hole costs (up $2.4 million). Costs and expenses for the second quarter of 1996 included a $10.4 million charge for the impairment of a producing oil and gas property. Costs and expenses totalled $126.3 million in the first six months of 1997 compared to $128.4 million in the first six months of 1996. Production and operating costs increased $1.4 million, primarily due to costs associated with Central Division properties acquired in 1996 and early 1997. Exploration expense increased $8.0 million, primarily reflecting higher dry hole costs (up $7.2 million). Costs and expenses for the first six months of 1996 included a $10.4 million charge for impairment of a producing oil and gas property. On July 24, 1997 the Company announced that an exploratory well in which it was a participant was determined to be nonproductive. The Company's share of the cost of the well, approximately $2.2 million (approximately $1.4 million after the effect of related income taxes), will be included in the Company's results of operations in the third quarter of 1997. EARNINGS PER SHARE CONSOLIDATED In February 1997 the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 128 "Earnings Per Share" ("FAS 128"), which establishes new guidelines for computing and presenting earnings per share ("EPS") and is effective for financial statements issued for periods ending after December 15, 1997. If the provisions of FAS 128 had been in effect in the three-month and six-month periods ended June 30, 1997 and 1996 the Company's EPS would have been unchanged. LIQUIDITY AND CAPITAL RESOURCES CONSOLIDATED The $29.3 million net change in other assets and liabilities (a source of funds provided by operating activities) in the first six months of 1997 principally reflects a decrease in other assets, primarily due to the release of $24.2 million escrowed in the fourth quarter of 1996 related to a producing property acquisition which was completed in January 1997. In the second quarter of 1997 the Company redeemed all 10.7 million outstanding shares of its $.732 Series A Convertible Preferred stock (the "DECS") for 9.1 million shares of common stock and converted all 1.2 million outstanding shares of its 7% Preferred for 2.3 million shares of common stock. The conversion of the 7% Preferred resulted in a noncash reduction in earnings to common shares (which is reflected as a convertible preferred premium in the statement of operations) of $8.5 million. The conversion of the DECS had no effect on the Company's earnings to common shares. Monterey intends to pay its shareholders a quarterly dividend of $0.15 per share. The first dividend, consisting of a prorated dividend of $0.22 per share in respect of Monterey's first partial quarter which 18 ended December 31, 1996 and its first full quarter ending March 31, 1997, was paid in April 1997 and Santa Fe received a total of $10.0 million. Santa Fe received a dividend of $6.8 million in the second quarter. Such amounts were used to fund Santa Fe's operations. Effective November 13, 1996 Monterey entered into the Monterey Credit Agreement which matures November 13, 2000. The Monterey Credit Agreement permits Monterey to obtain revolving credit loans and issue letters of credit up to an aggregate amount of up to $75.0 million, with the aggregate amount of letters of credit outstanding at any time limited to $15.0 million. Borrowings under the Monterey Credit Agreement are unsecured and interest rates are tied to the bank's prime rate or eurodollar offering rate, at the option of Monterey. At June 30, 1997 $10.0 million in loans and $2.4 million in letters of credit were outstanding under the terms of the Monterey Credit Agreement. Effective July 22, 1997 Monterey terminated the Monterey Credit Agreement and entered into a new credit agreement (the "New Monterey Credit Agreement") which matures in July 2002. The New Monterey Credit Agreement permits Monterey to obtain revolving credit loans and issue letters of credit up to an aggregate amount of $200 million, with the aggregate amount of letters of credit outstanding at any time limited to $50 million. Borrowings under the New Monterey Credit Agreement are unsecured and interest rates are tied to the bank's prime rate or the eurodollar offering rate, at the option of Monterey. In November 1996 Monterey issued the Monterey Senior Notes which were exchanged for $175.0 million of senior notes previously issued by Santa Fe. The Monterey Senior Notes bear interest at 10.61% per annum and are payable in full in 2005. Monterey is required to repay, without premium, $25.0 million of the principal amount each year from 1999 through 2005. On July 24, 1997 Monterey acquired all of the outstanding common shares of McFarland Energy, Inc. ("McFarland"), for $106.2 million in cash ($18.55 per share for each of the 5.7 million outstanding common shares of McFarland). Monterey borrowed $100 million under the New Monterey Credit Agreement to fund the acquisition. SANTA FE Santa Fe's cash flow from operating activities is a function of the volumes of oil and gas produced from Santa Fe's properties and the sales prices received therefor. Since crude oil and natural gas are depleting assets, unless Santa Fe replaces the oil and gas produced from its properties, Santa Fe's assets will be depleted over time and its ability to incur debt at constant or declining prices will be reduced. Santa Fe increased its proved reserves (net of production and sales) by approximately 76% over the five years ended December 31, 1996; however, no assurances can be given that such increase will occur in the future. Historically, Santa Fe has generally funded development and exploration expenditures and working capital requirements from cash provided by operating activities. Depending upon the future levels of operating cash flows, which are significantly affected by oil and gas prices, the restrictions on additional borrowings included in certain of Santa Fe's debt agreements, together with debt service requirements and dividends, may limit the cash available for future exploration, development and acquisition activities. Income from operations before exploratory dry hole costs, depletion, depreciation and amortization and gain or loss on disposition of assets totalled $94.2 million in the first six months of 1997 and net cash used for capital expenditures and producing property acquisitions in such period totalled $111.5 million. Effective November 13, 1996 Santa Fe entered into a revolving credit agreement (the "Santa Fe Credit Agreement") which matures November 13, 2001. The Santa Fe Credit Agreement permits Santa Fe to obtain revolving credit loans and issue letters of credit up to an aggregate amount of up to $150.0 million, with the aggregate amount of letters of credit outstanding at any time limited to $30.0 million. Borrowings under the Santa Fe Credit Agreement are unsecured and interest rates are tied to the bank's prime rate or eurodollar offering rate, at the option of Santa Fe. At June 30, 1997, no loans or letters of credit were outstanding under the terms of the Santa Fe Credit Agreement. The Santa Fe Credit Agreement and the indenture for the Debentures include covenants that restrict Santa Fe's ability to take certain actions, including the ability to incur additional indebtedness and to pay dividends on capital stock. Under the most restrictive of these covenants, at June 30, 1997 Santa Fe could incur up to $495.0 million of additional indebtedness and pay dividends of up to $48.8 million on its aggregate capital stock. 19 Santa Fe has three short-term uncommitted lines of credit totalling $60.0 million which are used to meet short-term cash needs. Interest rates on borrowings under these lines of credit are typically lower than rates paid under the Bank Facility. At June 30, 1997 no amounts were outstanding under these lines of credit. At June 30, 1997 Santa Fe had one letter of credit for $1.8 million outstanding related to certain of its foreign operations. ENVIRONMENTAL MATTERS Almost all phases of the Company's oil and gas operations are subject to stringent environmental regulation by governmental authorities. Such regulation has increased the costs of planning, designing, drilling, installing, operating and abandoning oil and gas wells and other facilities. The Company has expended significant financial and managerial resources to comply with such regulations. Although the Company believes its operations and facilities are in general compliance with applicable environmental regulations, risks of substantial costs and liabilities are inherent in oil and gas operations. It is possible that other developments, such as increasingly strict environmental laws, regulations and enforcement policies or claims for damages to property, employees, other persons and the environment resulting from the Company's operations, could result in significant costs and liabilities in the future. As it has done in the past, the Company intends to fund its cost of environmental compliance from operating cash flows. See Note 5 to the Consolidated Financial Statements. Monterey has agreed to indemnify and hold harmless the Company from and against any costs incurred in the future relating to environmental liabilities of the Western Division assets (other than those retained by the Company), including any costs or expenses incurred at any of the OII Site, the Santa Fe Springs Site and the Eastside Site, and any costs or liabilities that may arise in the future that are attributable to laws, rules or regulations in respect to any property or interest therein located in California and formerly owned or operated by the Western Division or its precedessors. DIVIDENDS The determination of the amount of future cash dividends, if any, to be declared and paid on the Company's common stock is in the sole discretion of the Company's Board of Directors and will depend on the Company's financial condition, earnings and funds from operations, the level of capital and exploration expenditures, dividend restrictions in financing agreements, future business prospects and other matters the Board of Directors deems relevant. FORWARD LOOKING STATEMENTS In its discussion and analysis of financial condition and results of operations, the Company has included certain statements (other than statements of historical fact) that constitute forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. When used herein, the words "budget," "budgeted," "anticipate," "expects," "believes," "seeks," "goals," "intends" or "projects" and similar expressions are intended to identify forward-looking statements. It is important to note that the Company's actual results could differ materially from those projected by such forward-looking statements. Although the Company believes that the expectations reflected in such forward-looking statements are reasonable and such forward-looking statements are based upon the best data available at the time this report is filed with the Securities and Exchange Commission, no assurance can be given that such expectations will prove correct. Factors that could cause the Company's results to differ materially from the results discussed in such forward-looking statements include, but are not limited to, the following: production variances from expectations, volatility of oil and gas prices, the need to develop and replace its reserves, the substantial capital expenditures required to fund its operations, exploration risks, environmental risks, uncertainties about estimates of reserves, competition, government regulation and political risks, and the ability of the Company to implement its business strategy. All such forward-looking statements in this document are expressly qualified in their entirety by the cautionary statements in this paragraph. 20 PART II OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K (a) Exhibits None (b) Reports on Form 8-K DATE ITEM - ---------------- ---- July 14, 1997 5 August , 1997 2 21 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Company has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. SANTA FE ENERGY RESOURCES, INC. (Registrant) By /s/ JANET F. CLARK Janet F. Clark Vice President, Chief Financial Officer and Treasurer (Principal Financial and Accounting Officer) Houston, Texas August 13, 1997 22 EX-27 2
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE BALANCE SHEET AS OF JUNE 30, 1997 AND THE INCOME STATEMENT FOR THE THREE MONTHS ENDED JUNE 30, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 6-MOS DEC-31-1997 JUN-30-1997 41,900 0 102,100 2,700 15,500 179,600 2,702,700 1,724,300 1,167,200 150,500 0 0 0 1,000 586,500 1,167,200 323,500 323,700 240,700 240,700 0 0 12,000 72,500 27,800 40,400 0 0 0 40,400 0.30 0.30
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