-----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, MkfUFHr9TbL7p6FPaGtltW6RR5E9CS5XUfja/U2EmoWhBtKl4b9wb7CNEZD20DmK 6bK5V4R97b5UzYJhwkgpQw== 0000890566-95-000655.txt : 19951119 0000890566-95-000655.hdr.sgml : 19951119 ACCESSION NUMBER: 0000890566-95-000655 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19950930 FILED AS OF DATE: 19951114 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: 95592511 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 QUARTERLY REPORT FOR THE PERIOD ENDED 09/30/95 ============================================================================== 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 SEPTEMBER 30, 1995 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 November 1, 1995 -- 90,300,415 ============================================================================== PART I -- FINANCIAL STATEMENTS PAGE ---- Consolidated Statement of Operations Three Months and Nine Months Ended September 30, 1995 and 1994........ 2 Consolidated Balance Sheet September 30, 1995 and December 31, 1994............................... 3 Consolidated Statement of Cash Flows Three Months and Nine Months Ended September 30, 1995 and 1994........ 4 Consolidated Statement of Shareholders' Equity Three Months and Nine Months Ended September 30, 1995 and 1994........ 5 Notes to Consolidated Financial Statements......................... 6 Management's Discussion and Analysis of Financial Condition and Results of Operations.......... 10 1 SANTA FE ENERGY RESOURCES, INC. CONSOLIDATED STATEMENT OF OPERATIONS (UNAUDITED) (IN MILLIONS OF DOLLARS, EXCEPT PER SHARE DATA)
THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, -------------------- -------------------- 1995 1994 1995 1994 --------- --------- --------- --------- Revenues Crude oil and liquids........... $ 87.4 $ 82.4 $ 254.5 $ 215.8 Natural gas..................... 19.8 17.9 53.5 67.2 Crude oil marketing and trading....................... 4.2 3.0 10.3 8.7 Other........................... (0.3) 0.3 1.1 1.9 --------- --------- --------- --------- 111.1 103.6 319.4 293.6 --------- --------- --------- --------- Costs and Expenses Production and operating........ 38.0 35.6 114.2 113.9 Exploration, including dry hole costs......................... 6.6 5.6 17.7 15.5 Depletion, depreciation and amortization.................. 34.2 30.1 97.3 92.7 General and administrative...... 7.1 6.5 19.9 21.0 Taxes (other than income)....... 5.1 6.4 15.2 20.1 Restructuring charges........... -- -- -- 7.0 Loss (gain) on disposition of oil and gas properties........ 0.3 0.3 0.3 (8.5) --------- --------- --------- --------- 91.3 84.5 264.6 261.7 --------- --------- --------- --------- Income from Operations............... 19.8 19.1 54.8 31.9 Interest income................. 0.5 0.9 2.0 1.8 Interest expense................ (8.1) 1.2 (28.0) (19.2) Interest capitalized............ 2.2 1.0 4.3 2.8 Other income (expense).......... (2.1) (4.0) (0.7) 0.1 --------- --------- --------- --------- Income Before Income Taxes........... 12.3 18.2 32.4 17.4 Income tax benefit (expense).... (5.3) (7.2) (14.2) (4.8) --------- --------- --------- --------- Net Income........................... 7.0 11.0 18.2 12.6 Preferred dividend requirement................... (3.7) (3.7) (11.1) (8.0) --------- --------- --------- --------- Earnings Attributable to Common Shares............................. $ 3.3 $ 7.3 $ 7.1 $ 4.6 ========= ========= ========= ========= Earnings Attributable to Common Shares Per Share.......................... $ 0.04 $ 0.08 $ 0.08 $ 0.05 ========= ========= ========= ========= Weighted Average Number of Shares Outstanding (in millions)...................... 90.3 90.0 90.2 89.9 ========= ========= ========= =========
The accompanying notes are an integral part of these financial statements. 2 SANTA FE ENERGY RESOURCES, INC. CONSOLIDATED BALANCE SHEET (IN MILLIONS OF DOLLARS) SEPTEMBER 30, DECEMBER 31, 1995 1994 ------------- ------------ (UNAUDITED) ASSETS Current Assets Cash and cash equivalents....... $ 41.8 $ 53.7 Accounts receivable............. 69.6 76.2 Inventories..................... 10.4 9.2 Other current assets............ 19.1 18.1 ------------- ------------ 140.9 157.2 ------------- ------------ Investment in Hadson Corporation..... -- 57.0 ------------- ------------ Properties and Equipment, at cost Oil and gas (on the basis of successful efforts accounting).................... 2,314.5 2,145.9 Other........................... 34.7 32.7 ------------- ------------ 2,349.2 2,178.6 Accumulated depletion, depreciation, amortization and impairment..................... (1,423.5) (1,335.6) ------------- ------------ 925.7 843.0 ------------- ------------ Other Assets Receivable under gas balancing arrangements................... 4.7 4.6 Other........................... 9.1 9.6 ------------- ------------ 13.8 14.2 ------------- ------------ $ 1,080.4 $ 1,071.4 ============= ============ LIABILITIES AND SHAREHOLDERS' EQUITY Current Liabilities Accounts payable................ $ 75.5 $ 84.1 Interest payable................ 17.1 8.5 Current portion of long-term debt........................... -- 3.9 Other current liabilities....... 32.5 29.5 ------------- ------------ 125.1 126.0 ------------- ------------ Long-Term Debt....................... 344.4 350.4 ------------- ------------ Deferred Revenues.................... 4.1 7.4 ------------- ------------ Other Long-Term Obligations.......... 26.5 28.0 ------------- ------------ Deferred Income Taxes................ 67.5 56.3 ------------- ------------ Commitments and Contingencies (Note 4)........................... -- -- ------------- ------------ Convertible Preferred Stock.......... 80.0 80.0 ------------- ------------ Shareholders' Equity Preferred stock................. -- -- $.732 Series A preferred stock.......................... 91.4 91.4 Common stock.................... 0.9 0.9 Paid-in capital................. 501.2 498.9 Accumulated deficit............. (160.4) (167.5) Foreign currency translation adjustment..................... (0.3) (0.4) ------------- ------------ 432.8 423.3 ------------- ------------ $ 1,080.4 $ 1,071.4 ============= ============ 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 NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, ---------------------- ---------------------- 1995 1994 1995 1994 ---------- ---------- ---------- ---------- Operating Activities: Net income...................... $ 7.0 $ 11.0 $ 18.2 $ 12.6 Adjustments to reconcile net income to net cash provided by operating activities: Depletion, depreciation and amortization............. 34.2 30.1 97.3 92.7 Restructuring charges...... -- -- -- 1.0 Deferred income taxes...... 4.4 9.1 11.2 7.7 Net loss (gain) on disposition of properties............... 0.3 0.3 0.3 (8.5) Exploratory dry hole costs.................... 0.7 2.8 4.9 5.1 Other...................... 2.4 0.3 1.4 0.6 Changes in operating assets and liabilities: Decrease (increase) in accounts receivable...... (2.8) 20.5 6.6 18.2 Decrease (increase) in inventories.............. 2.0 (1.2) (1.2) (1.1) Increase (decrease) in accounts payable......... 1.9 3.7 (1.6) (6.2) Increase (decrease) in interest payable......... 9.2 (4.3) 8.6 (6.1) Increase (decrease) in income taxes payable..... 0.1 (0.2) 1.2 1.0 Net change in other assets and liabilities.......... 1.9 (19.2) (6.0) (16.6) ---------- ---------- ---------- ---------- Net Cash Provided by Operating Activities......................... 61.3 52.9 140.9 100.4 ---------- ---------- ---------- ---------- Investing Activities: Capital expenditures, including exploratory dry hole costs.... (51.2) (39.2) (157.4) (98.8) Acquisitions of producing properties.................... (5.2) (0.2) (33.0) (1.4) Net proceeds from sales of properties.................... -- 1.1 58.7 78.6 ---------- ---------- ---------- ---------- Net Cash Used in Investing Activities......................... (56.4) (38.3) (131.7) (21.6) ---------- ---------- ---------- ---------- Financing Activities: Net proceeds from issuance of: 11% senior subordinated debentures due 2004...... -- -- -- 96.1 $.732 Series A convertible preferred stock.......... -- -- -- 91.4 Principal payments on long-term borrowings.................... -- (5.1) (10.0) (144.7) Net change in revolving credit agreement..................... -- -- -- (50.0) Cash dividends paid............. (3.7) (3.5) (11.1) (7.0) ---------- ---------- ---------- ---------- Net Cash Used in Financing Activities......................... (3.7) (8.6) (21.1) (14.2) ---------- ---------- ---------- ---------- Net Increase (Decrease) in Cash and Cash Equivalents................... 1.2 6.0 (11.9) 64.6 Cash and Cash Equivalents at Beginning of Period................ 40.6 63.4 53.7 4.8 ---------- ---------- ---------- ---------- Cash and Cash Equivalents at End of Period............................. $ 41.8 $ 69.4 $ 41.8 $ 69.4 ========== ========== ========== ==========
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 FOREIGN CONVERTIBLE UNAMORTIZED CURRENCY PREFERRED STOCK COMMON STOCK RESTRICTED TRANSLA- --------------- --------------- PAID-IN STOCK ACCUMULATED TION SHARES AMOUNT SHARES AMOUNT CAPITAL AWARDS DEFICIT ADJUSTMENT ------ ------ ------ ------ ------- ----------- ----------- ---------- Balance at December 31, 1994.. 10.7 $91.4 90.0 $0.9 $ 498.9 $-- $ (167.5) $ (0.4) Issuance of common stock........... -- -- 0.3 -- 2.3 -- -- -- Foreign currency translation adjustment........................ -- -- -- -- -- -- -- 0.1 Net income......................... -- -- -- -- -- -- 18.2 -- Dividends declared................. -- -- -- -- -- -- (11.1) -- ---- ----- ---- ---- ------- ------- --------- ------ Balance September 30, 1995........... 10.7 $91.4 90.3 $0.9 $ 501.2 $-- $ (160.4) $ (0.3) ==== ===== ==== ==== ======= ======= ========= ====== Balance at December 31, 1993.. -- $-- 89.8 $0.9 $ 496.9 $ (0.1) $ (173.8) $ (0.3) Issuance of common stock.. -- -- 0.2 -- 1.7 -- -- -- Issuance of preferred stock........ 10.7 91.4 -- -- -- -- -- -- Amortization of restricted stock awards............................ -- -- -- -- -- 0.1 -- -- Foreign currency translation adjustment........................ -- -- -- -- -- -- -- 0.1 Net income......................... -- -- -- -- -- -- 12.6 -- Dividends declared................. -- -- -- -- -- -- (8.0) -- ---- ----- ---- ---- ------- ------- --------- ------ Balance at September 30, 1994.. 10.7 $91.4 90.0 $0.9 $ 498.6 $-- $ (169.2) $ (0.2) ==== ===== ==== ==== ======= ======= ========= ======
TOTAL SHAREHOLDERS' EQUITY ------------- Balance at December 31, 1994.. $ 423.3 Issuance of common stock........... 2.3 Foreign currency translation adjustment........................ 0.1 Net income......................... 18.2 Dividends declared................. (11.1) ------------- Balance September 30, 1995........... $ 432.8 ============= Balance at December 31, 1993.. $ 323.6 Issuance of common stock.. 1.7 Issuance of preferred stock........ 91.4 Amortization of restricted stock awards............................ 0.1 Foreign currency translation adjustment........................ 0.1 Net income......................... 12.6 Dividends declared................. (8.0) ------------- Balance at September 30, 1994.. $ 421.5 ============= 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. ("Santa Fe" or 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 September 30, 1995 and the Company's results of operations and cash flows for the three-month and nine-month periods ended September 30, 1995 and 1994. Interim period results are not necessarily indicative of results of operations or cash flows for a full-year period. 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, 1994. (2) STATEMENT OF CASH FLOWS The Company made interest and income tax payments as follows (in millions of dollars):
THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, ---------------------- -------------------- 1995 1994 1995 1994 ----- --------- --------- --------- Interest payments............... -- 14.2 19.2 42.7(a) Income tax payments............. 0.4 0.7 1.2 1.6
- ------------ (a) Includes $6.5 million in prepayment penalties and accrued interest paid upon the retirement of certain long-term debt. In addition, during the nine months ended September 30, 1995 the Company received a $1.0 million income tax refund. (3) INVESTMENT IN HADSON CORPORATION In February 1995 the Company entered into a Securities Purchase Agreement under the terms of which the Company agreed to sell its holdings in Hadson Corporation ("Hadson") for $55.2 million. In addition, the Company agreed to negotiate with the purchaser certain amendments to its existing gas sales contract with Hadson which if consummated would have resulted in additional consideration to the Company. The sale closed in May 1995, however, negotiations with respect to the gas sales contract continued until August when they were terminated without agreement as to any amendments to the contract. At the time the negotiations terminated, the Company charged earnings for $1.8 million, the estimated net realizable value of the renegotiated gas sales contract. No other gain or loss was recognized with respect to the transaction. (4) COMMITMENTS AND CONTINGENCIES 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 Company has been identified as one of over 250 potentially responsible parties ("PRPs") at a superfund site in Los Angeles County, California. The site was operated by a third party as a waste disposal facility from 1948 until 1983. The Environmental Protection Agency ("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 1989 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 is a member 6 SANTA FE ENERGY RESOURCES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED) of the group Coalition Undertaking Remediation Efforts ("CURE") which is responsible for constructing and operating the leachate treatment plant. Treatment tests will begin shortly. Site monitoring and maintenance will continue throughout the life of the facility. The Company's share of costs with respect to this phase are expected to total approximately $2.4 million ($1.3 million after recoveries from working interest participants in the unit in which the wastes were generated). Another consent decree provides for the predesign, design and construction of a gas plant to harness and market methane gas emissions. The Company is a member of the New CURE group which is responsible for the gas plant construction and operation and landfill cover. Currently, New CURE is in the design stage of the gas plant. The Company's share of costs of this phase is expected to be of approximately the same magnitude as that of the first phase and such costs have been provided for in the financial statements. As previously discussed, the Company has provided for its share of costs with respect to the site monitoring, leachate control and gas control phases; however, it cannot currently estimate the cost of any subsequent phases of work or final remediation which may be required by the EPA. Another consent decree is currently being executed by the PRPs and will be logged with the court for approval. This consent decree allows for the settlement of the pending lawsuits against the municipalities and transporters not named by the EPA. The settlement payment by such municipalities and transporters totals approximately $70.0 million of which approximately $55.0 million will be credited against future expenses. The Company has entered into a Joint Defense Agreement with the other PRPs to defend against a lawsuit filed September 7, 1994 by ninety-five homeowners alleging, among other things, nuisance, trespass, strict liability and infliction of emotional distress. At this stage of the lawsuit the Company is not able to estimate costs or potential liability but the defendants intend to aggressively pursue the defense and discovery once all defendants have been served and answers have been filed. On April 4, 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 seven other PRPs to negotiate with the EPA regarding implementation of a remedial plan for a site located in Santa Fe Springs, California. The Company owned the property on which the 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, hazardous wastes were allegedly disposed at the site. The EPA estimates that the total past and future costs for remediation will approximate $9.4 million. 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. Six of the other PRPs have also notified the EPA of their intent to comply. The cost of such a remediation design plan is estimated to be approximately $1.0 million. To date there has been no agreement on how to allocate costs among the PRPs. On March 23, 1995 the Company and twelve 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 during its fourteen-year operation from 1971 to 1985. EPC has since liquidated all assets and placed the proceeds in trust for closure and post-closure activities. However, these monies will not be sufficient to close the site. The DTSC is seeking additional PRPs for participation in the forthcoming order for the cleanup of this site. The order will require the characterization of contamination at the site through a remedial investigation and feasibility study, 7 SANTA FE ENERGY RESOURCES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED) preparation of a remedial action plan, remediation of the site and closure and post-closure activities. The Company is not able to estimate its exposure with respect to this site at this time. There are certain other environmental matters pending, with respect to which the Company is unable to estimate its exposure at this time. EMPLOYMENT AGREEMENTS The Company has entered into employment agreements with certain key employees. The initial term of each agreement expired on December 31, 1990. On January 1, 1991 and beginning on each January 1 thereafter, each agreement is automatically extended for one-year periods, unless by September 30 of any year the Company gives notice that the agreement will not be extended. The term of the agreements is automatically extended for a minimum of 24 months following a change of control. The consummation of the Company's transaction with Adobe in 1992 constituted a change of control as defined in the agreements. In the event that following a change of control employment is terminated for reasons specified in the agreements, the employee would receive: (i) a lump sum payment equal to two years' base salary; (ii) the maximum possible bonus under the terms of the Company's incentive compensation plan; (iii) a lapse of restrictions on any outstanding restricted stock grants and full payout of any outstanding Phantom Units; (iv) cash payment for each outstanding stock option equal to the amount by which the fair market value of the common stock exceeds the exercise price of the option; and, (v) life, disability and health benefits for a period of up to two years. In addition, payments and benefits under certain employment agreements are subject to further limitations based on certain provisions of the Internal Revenue Code. OTHER MATTERS The Company 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 $9.6 million per year (based on prices and transportation charges in effect for September 1995). 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. (5) DEBT EXTINGUISHMENT In April 1995 the Securities and Exchange Commission issued Staff Accounting Bulletin No. 94, "Recognition of a Gain or Loss on Early Extinguishment of Debt" ("SAB 94") which changes in some respects the accounting which has evolved in practice for gains or losses on anticipated debt extinguishments. Among other things, SAB 94 precludes the recognition of a gain or loss from debt extinguishment in a period other than the period in which the debt is considered extinguished, including circumstances in which a company announces prior to a period end the intention to retire debt in a subsequent period. 8 SANTA FE ENERGY RESOURCES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED) In the fourth quarter of 1993 the Company adopted a corporate restructuring program which included, among other things, retiring certain of the Company's long-term debt. In accordance with this plan, in 1994 the Company retired $132.3 million of outstanding Senior Notes and bank debt. The Company's results of operations for 1993 included $8.6 million in debt repayment penalties and interest associated with the debt to be retired. Had SAB 94 been in effect in 1993, such penalties and interest would have been included in the Company's 1994 results of operations. The following table reflects, on a proforma basis, the Company's results of operations assuming SAB 94 was in effect in 1993 (in millions of dollars, except per share data):
YEAR ENDED DECEMBER 31, ---------------------------------------------------- 1994 1993 ------------------------ ------------------------ HISTORICAL PROFORMA HISTORICAL PROFORMA ----------- --------- ----------- --------- Income (Loss) from Operations........ 48.2 48.2 (113.0) (104.4) Income (Loss) Before Extraordinary Item............................... 17.1 15.1 (77.1) (71.8) Extraordinary Item -- Loss on Extinguishment of Debt............. -- (3.3) -- -- Net Income (Loss).................... 17.1 11.8 (77.1) (71.8) Earnings (Loss) Attributable to Common Shares...................... 5.4 0.1 (84.1) (78.8) Earnings (Loss) Per Share Extraordinary Item.............. -- (0.04) -- -- Attributable to Common Shares... 0.06 -- (0.94) (0.88)
9 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS GENERAL As an independent oil and gas producer, the Company's results of operations are dependent upon the difference between the prices received for oil and gas and the costs of finding and producing such resources. A material portion of the Company's crude oil production is from long-lived fields in the San Joaquin Valley of California where EOR 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. In addition, the lifting costs of heavy crude oils are generally higher than the lifting costs of light crude oils. As a result of these narrower margins, even relatively modest changes in crude oil prices may significantly affect the Company's revenues, results of operations, cash flows and proved reserves. In addition, prolonged periods of high or low oil prices may have a material effect on the Company's financial position. The lower price received for the Company's domestic heavy and sour crude oil is reflected in the average sales price of the Company's domestic crude oil and liquids for the first nine months of 1995 of $14.03 per barrel, compared to $16.85 per barrel for West Texas Intermediate ("WTI") crude oil (an industry posted price generally indicative of spot prices for sweeter light crude oil). In the first nine months of 1995 the Company's average sales price for California heavy crude oil was $13.59 per barrel, approximately 81% of the average posted price for WTI. This ratio is considered positive since historically heavy crude oil has sold for an average of approximately 66% of WTI. 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. During the first nine months of 1995 the actual average sales price (unhedged) received by the Company averaged $14.24 per barrel compared to $12.14 per barrel in the first nine months of 1994. Based on operating results for the first nine months of 1995, the Company estimates that, on an annualized basis, a $1.00 per barrel increase or decrease in its average domestic crude oil sales prices would result in a corresponding $20.6 million change in income from operations and a $15.5 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 on depreciation and depletion or the Company's hedging program, that would result from a change in oil prices. In June 1995 the Company initiated a hedging program designed to provide a certain minimum level of cash flow from its sales of crude oil. The Company has used several instruments whereby monthly settlements are based on the difference between the price specified in the instruments and the monthly average of the daily settlement prices of certain WTI futures contracts. 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. Settlements are included in oil revenues in the period in which the oil is sold. In the second and third quarters of 1995 hedges on 5,800 barrels per day and 20,000 barrels per day, respectively, resulted in increases in oil revenues of $0.4 million and $2.7 million, respectively. At September 30, the Company had open contracts on 7,000 barrels per day for the fourth quarter of 1995. The "approximate break-even price" (the average of the daily settlement prices which would result in no settlement being due to or from the Company) with respect to such contracts is approximately $19.15 per barrel (WTI). In the fourth quarter of 1995 the Company hedged an additional 33,500 barrels per day of its fourth quarter 1995 production. In connection with such contracts, the Company paid a net fee of approximately $0.4 million. The approximate break-even price with respect to the Company's outstanding contracts at November 10, 1995 is approximately $18.31 per barrel (WTI). 10 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 received by the Company in the third quarter of 1995 for its natural gas averaged $1.35 per Mcf compared to $1.31 per Mcf in the first quarter of 1995. The $1.31 per Mcf average for the first quarter of 1995 is lower than any quarter since 1990. Based on operating results for the first nine months of 1995, the Company estimates that, on an annualized basis, a $0.10 per Mcf increase or decrease in its average domestic natural gas sales price would result in a corresponding $3.3 million change in income from operations and a $2.5 million change in cash flow from operating activities. The foregoing estimates give effect to changes in natural gas revenues and the related production and severance taxes and the cost of natural gas purchased in connection with the Company's heavy oil operations but do not give effect to changes in any other factors, such as the effect on depletion and depreciation or the Company's hedging programs, that would result from a change in natural gas prices. In the third quarter of 1995 the Company initiated a hedging program designed to provide a certain minimum level of cash flow from its sales of natural gas. The Company has used various instruments whereby monthly settlements are based on differences between the price specified in the instruments and the settlement price of certain natural gas futures contracts quoted on the New York Mercantile Exchange ("NYMEX") or certain other indices. 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. Settlements are included in natural gas revenues in the period in which the gas is sold. The Company has hedged approximately 100 MMcf per day of its November and December 1995 production at a break even price of approximately $1.91 per Mcf and approximately 50 MMcf per day of its 1996 production at a break even price of approximately $1.78 per Mcf, based on certain NYMEX futures contracts. In addition, the Company has hedged approximately 30 MMcf per day of its 1996 production at a break even price of approximately $1.52 per Mcf, based on the El Paso Natural Gas Co., Permian Basin index. The "break even price" represents the average of the applicable monthly settlement prices which would result in no payment being due to or from the Company. 11 RESULTS OF OPERATIONS Earnings attributable to common shares for the third quarter of 1995 totaled $3.3 million, $0.04 per share compared to $7.3 million, $0.08 per share, for the same period in 1994. Earnings for the 1994 period included a benefit of approximately $3.3 million, $0.04 per share, primarily related to adjustments to provisions for potential federal and state income tax obligations and litigation expenses. Earnings attributable to common shares for the nine months ended September 30, 1995 totalled $7.1 million, $0.08 per share, compared to $4.6 million, $0.05 per share, in the same period in 1994. REVENUES The following table reflects the components of the Company's crude oil and liquids and natural gas revenues:
THREE MONTHS NINE MONTHS ENDED SEPTEMBER 30, ENDED SEPTEMBER 30, -------------------- -------------------- 1995 1994 1995 1994 --------- --------- --------- --------- Crude Oil and Liquids Revenues ($/Millions) Sales Domestic California Heavy........... 48.9 45.4 142.3 114.2 Other...................... 26.2 25.9 77.9 71.4 --------- --------- --------- --------- 75.1 71.3 220.2 185.6 Argentina.................. 3.1 3.3 10.2 8.7 Indonesia.................. 7.6 8.9 24.3 24.4 Hedging....................... 2.7 -- 3.1 -- Net Profits Payments.......... (1.1) (1.1) (3.3) (2.9) --------- --------- --------- --------- 87.4 82.4 254.5 215.8 ========= ========= ========= ========= Sales Volumes (MBbls/day) Domestic California Heavy.............. 39.1 38.5 38.4 38.3 Other......................... 20.1 19.1 19.2 19.3 --------- --------- --------- --------- 59.2 57.6 57.6 57.6 Argentina....................... 2.5 2.4 2.5 2.4 Indonesia....................... 5.5 6.0 5.5 6.0 --------- --------- --------- --------- 67.2 66.0 65.6 66.0 ========= ========= ========= ========= Sales Prices ($/Bbl) Unhedged Domestic California Heavy........... 13.60 12.80 13.59 10.92 Other...................... 14.18 14.77 14.90 13.55 Total...................... 13.80 13.45 14.03 11.80 Argentina..................... 13.69 15.38 14.86 13.13 Indonesia..................... 15.06 16.00 16.14 15.10 Total......................... 13.90 13.75 14.24 12.14 Hedged.......................... 14.32 13.75 14.41 12.14 Natural Gas Revenues ($/Millions) Sales Domestic...................... 17.7 18.6 50.8 70.7 Foreign....................... 2.3 -- 3.6 0.1 --------- --------- --------- --------- 20.0 18.6 54.4 70.8 Hedging......................... -- (0.1) -- (1.0) Net Profits Payments............ (0.2) (0.6) (0.9) (2.6) --------- --------- --------- --------- 19.8 17.9 53.5 67.2 ========= ========= ========= ========= Sales Volumes (MMcf/day) Domestic........................ 140.7 127.7 136.1 139.6 Foreign......................... 19.7 0.3 10.5 0.4 --------- --------- --------- --------- 160.4 128.0 146.6 140.0 ========= ========= ========= ========= Sales Prices ($/Mcf) Unhedged Domestic...................... 1.36 1.58 1.37 1.85 Foreign....................... 1.25 0.98 1.25 0.98 Total......................... 1.35 1.58 1.36 1.84 Hedged.......................... 1.35 1.57 1.36 1.82
12 Total revenues increased approximately 9% from $293.6 million in the first nine months of 1994 to $319.4 million in the first nine months of 1995. Crude oil and liquids revenues increased $38.7 million, primarily reflecting improved market conditions which resulted in an increase in the Company's average sales price (hedged) from $12.14 per barrel in 1994 to $14.41 per barrel in 1995. In June 1995 the Company initiated a cash oil hedging program which contributed $3.1 million to 1995 revenues (see -- General). Natural gas revenues decreased $13.7 million as the effect of the decline in the Company's average sales price (hedged) from $1.82 per Mcf in 1994 to $1.36 per Mcf in 1995 was partially offset by increased sales volumes. The increased sales volumes primarily resulted from new production from the Company's Sierra Chata field in Argentina and certain domestic properties acquired in the second quarter of 1995, partially offset by lower production from certain domestic offshore properties principally due to the loss of a well and certain other mechanical problems. Total revenues increased approximately 7% from $103.6 million in the third quarter of 1994 to $111.1 million in the third quarter of 1995. Crude oil and liquids revenues increased $5.0 million primarily reflecting an increase in average sales prices (hedged) from $13.75 per barrel in 1994 to $14.32 per barrel in 1995. Natural gas revenues increased $1.9 million with the effect of lower prices being offset by increased volumes. The higher volumes reflect the effect of new production from the Company's Sierra Chata field in Argentina and certain domestic properties acquired in the second quarter of 1995, partially offset by the previously discussed lower production from certain domestic offshore properties. COSTS AND EXPENSES The following table sets forth, on the basis of the barrel of oil equivalent ("BOE") produced by the Company during the applicable period, certain of the Company's costs and expenses (in dollars): THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, -------------------- ------------------- 1995 1994 1995 1994 --------- --------- --------- -------- Production and operating costs(a).... 4.40 4.44 4.65 4.67 Exploration, including dry hole costs.............................. 0.77 0.70 0.72 0.64 Depletion, depreciation and amortization....................... 3.96 3.75 3.96 3.80 General and administrative costs..... 0.82 0.81 0.81 0.86 Taxes other than income(b)........... 0.59 0.79 0.62 0.82 Interest, net(c) (d)................. 0.62 1.04 0.89 1.17 - ------------ (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 effects of (i) benefit of an adjustment to provisions made in prior periods with respect to interest on certain potential state income tax obligations of $1.43 per BOE in the third quarter of 1994 and $0.47 per BOE in the first nine months of 1994; and (ii) benefit of an adjustment to provisions made in prior periods with respect to interest on certain federal income tax audit adjustments of $0.10 per BOE in the first nine months of 1994. Total costs and expenses for the first nine months of 1995 totalled $264.6 million compared to $261.7 million in the first nine months of 1994. Exploration expenses were up $2.2 million primarily due to higher geological and geophysical costs reflecting the Company's increased level of capital expenditures. Taxes other than income in the first nine months of 1995 also includes benefits of $2.0 million related to an adjustment to ad valorem taxes recorded in prior periods ($1.0 million of which was recorded in the third quarter) and $0.7 million related to the settlement of certain disputed sales and use taxes (which was recorded in the first quarter). Costs and expenses for the first nine months of 1994 include $7.0 million in restructuring charges and an $8.5 million gain on the sale of certain oil and gas properties. Interest expense for the first nine months of 1994 includes an $11.5 million third quarter benefit related to an adjustment to provisions made in prior periods with respect to interest on certain potential state income tax obligations and a $2.4 million first quarter benefit related to an adjustment 13 to provisions made in prior periods with respect to interest on certain federal income tax audit adjustments. Other income (expense) for the first nine months of 1995 includes a $2.5 million gain on the sale in the first quarter of the Company's interest in Cherokee Resources Incorporated, a privately-held oil and gas company and a $1.8 million third quarter loss on the sale of the Company's investment in Hadson Corporation ("Hadson"). Such amount for 1994 includes a $2.4 million gain on the sale of the Company's interest in a publishing company which was acquired in the Adobe merger in 1992 ($0.3 million of which relates to the third quarter), $4.5 million in dividend income on Hadson preferred stock (paid in-kind, $1.5 million of which relates to the third quarter), a $1.9 million loss on the Company's equity in Hadson common stock ($1.0 million of which relates to the third quarter) and a $5.0 million third quarter charge with respect to the settlement of certain litigation. Income taxes for the first nine months of 1994 includes a $3.0 million first quarter credit reflecting the benefit related to an adjustment to provisions made in prior periods with respect to certain federal income tax audit adjustments and a $2.6 million third quarter credit related to an adjustment to provisions made in prior periods with respect to certain potential state income tax obligations. In March 1995 the Financial Accounting Standards Board adopted Statement of Financial Accounting Standards ("SFAS") No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of", effective for financial statements for fiscal years beginning after December 15, 1995. SFAS No. 121 establishes accounting standards for the impairment of long-lived assets, certain identifiable intangibles and goodwill related to those assets to be held and used and for long-lived assets and certain identifiable intangibles to be disposed of. The Company expects to adopt the provisions of SFAS No. 121 effective January 1, 1996. Had SFAS No. 121 been adopted by the Company effective January 1, 1995, the adoption at that time would have had no effect on the Company's results of operations or financial position. LIQUIDITY AND CAPITAL RESOURCES The Company's cash flow from operating activities is a function of the volumes of oil and gas produced from the Company's properties and the sales prices received therefor. Since crude oil and natural gas are depleting assets, unless the Company replaces the oil and gas produced from its properties, the Company's assets will be depleted over time and its ability to incur debt at constant or declining prices will be reduced. The Company increased its proved reserves (net of production and sales) by approximately 19% over the five years ended December 31, 1994; however, no assurances can be given that such increase will occur in the future. Historically, the Company 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 the Company's debt agreements, together with debt service requirements and dividends, may limit the cash available for future exploration, development and acquisition activities. During the first nine months of 1995 net cash provided by operating activities and net proceeds from sales of properties (including $54.2 million from the sale of Hadson) totalled $199.6 million; during such period capital expenditures and acquisitions of producing properties totalled $190.4 million. The Company expects to expend approximately $206 million on its 1995 capital program; however, the actual amount expended by the Company in 1995 will be based upon numerous factors, the majority of which are outside its control, including, without limitation, prevailing oil and natural gas prices and the outlook therefor and the availability of funds. Effective April 1, 1995 the Company entered into the Second Amended and Restated Revolving Credit Agreement (the "Credit Agreement"), an unsecured revolving credit agreement which matures December 31, 1998. The maximum borrowing limits under the Credit Agreement are initially $125.0 million, $105.0 million beginning February 28, 1996, $65.0 million beginning February 28, 1997 and $30.0 million beginning February 28, 1998. Interest rates under the Credit Agreement are tied to LIBOR or the bank's prime rate with the actual interest rate based upon certain ratios and the value and projected timing of production of the Company's oil and gas reserves. These and other similar 14 ratios will also affect the Company's ability to borrow under the Credit Agreement and the timing and amount of any required repayments and corresponding commitment reductions. At September 30, 1995, $6.3 million in letters of credit were outstanding under the terms of the Credit Agreement. In the first quarter of 1995 the Company retired the $10.0 million balance of a loan from an Argentine bank. The loan, which related to the Company's purchase of an interest in a producing oil field in Argentina in 1991, bore interest at 13% at the time it was retired. The Company has three short-term uncommitted lines of credit totalling $50.0 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 September 30, 1995 no amounts were outstanding under these lines of credit. Certain of the Company's credit agreements and the indenture for the Debentures restrict the Company's ability to take certain actions, including covenants that restrict the Company's ability to incur additional indebtedness and to pay dividends on its capital stock. Under the most restrictive of these covenants, at September 30, 1995 the Company could incur up to $200.0 million of additional indebtedness and pay dividends of up to $111.7 million on its aggregate capital stock (including its common stock, 7% Convertible Preferred Stock and Series A Preferred) with the amount payable on its common stock limited to $51.9 million. 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 4 to the Consolidated Financial Statements. DIVIDENDS Dividends on the Company's 7% Convertible Preferred Stock and Series A Preferred are cumulative at an annual rate of $1.40 per share and $0.732 per share, respectively. No dividends may be declared or paid with respect to the Company's common stock if any dividends with respect to the convertible preferred stock or Series A Preferred are in arrears. 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 dividend requirements with respect to the preferred stock, 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. 15 PART II OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K (a) Exhibits None (b) Reports on Form 8-K None 16 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/ R. Graham Whaling R. Graham Whaling Senior Vice President and Chief Financial Officer (Principal Financial and Accounting Officer) Houston, Texas November 10, 1995 17 EX-27 2 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE BALANCE SHEET AS OF SEPTEMBER 30, 1995 AND THE INCOME STATEMENT FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1995 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 9-MOS DEC-31-1995 JAN-01-1995 SEP-30-1995 41,800 0 72,700 3,100 10,400 140,900 2,349,200 1,423,500 1,080,400 125,100 0 900 171,400 0 340,500 1,080,400 318,300 319,400 264,600 264,600 0 0 23,700 32,400 14,200 18,200 0 0 0 18,200 0.08 0.08
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