-----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, KcSdda+vhWq8vLUu5fl87c1DCR6TNzX1rObiKeGqo/A8U5aWZJo4ttvbjuRrgH0e s/sqGY/Px2NX9Jsw8khZBg== 0000890566-96-000120.txt : 19960301 0000890566-96-000120.hdr.sgml : 19960301 ACCESSION NUMBER: 0000890566-96-000120 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 9 CONFORMED PERIOD OF REPORT: 19951231 FILED AS OF DATE: 19960229 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-K SEC ACT: 1934 Act SEC FILE NUMBER: 001-07667 FILM NUMBER: 96528583 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-K 1 FORM 10-K SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------ FORM 10-K (MARK ONE) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 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 ------------------------ SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: NAME OF EACH TITLE OF EACH CLASS EXCHANGE ON WHICH REGISTERED Common Stock, $.01 par value New York Stock Exchange SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT: None Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X} No [ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ]. The aggregate market value of the voting stock held by non-affiliates of the Registrant as of February 1, 1996 was approximately $875 million. Shares of Common Stock outstanding at February 1, 1996 -- 90,329,311. DOCUMENTS INCORPORATED BY REFERENCE: PROXY STATEMENT DATED MARCH 21, 1996 .......... PART III PAGE i TABLE OF CONTENTS PAGE PART I Items 1 and 2. Business and Properties........................... 1 General......................... 1 Corporate Restructuring Program......................... 2 Reserves........................ 3 Domestic Development Activities...................... 4 Domestic Exploration Activities...................... 6 International Development Activities...................... 7 International Exploration Activities...................... 9 Drilling Activities............. 10 Producing Wells................. 10 Domestic Acreage................ 11 Foreign Acreage................. 11 Current Markets for Oil and Gas............................. 11 Santa Fe Energy Trust........... 12 Other Business Matters.......... 13 Item 3. Legal Proceedings.......... 18 Item 4. Submission of Matters to a Vote of Security Holders.. 18 Executive Officers of Santa Fe.................. 18 PART II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters....... 19 Item 6. Selected Financial Data.... 20 Item 7. Management's Discussion and Analysis of Financial Condition and Results Of Operations................ 22 Item 8. Financial Statements and Supplementary Data........ 29 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.. 29 PART III Item 10. Directors and Executive Officers of the Registrant 30 Item 11. Executive Compensation..... 30 Item 12. Security Ownership of Certain Beneficial Owners and Management................ 30 Item 13. Certain Relationships and Related Transactions...... 30 PART IV Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K....... 30 Signatures........................... 67 i PART I CERTAIN DEFINITIONS As used herein, the following terms have the specific meanings set out: "Bbl" means barrel. "MBbl" means thousand barrels. "MMBbl" means million barrels. "Mcf" means thousand cubic feet. "MMcf" means million cubic feet. "Bcf" means billion cubic feet. "BOE" means barrel of oil equivalent. "MBOE" means thousand barrels of oil equivalent and "MMBOE" means million barrels of oil equivalent. Natural gas volumes are converted to barrels of oil equivalent using the ratio of 6.0 Mcf of natural gas to 1.0 barrel of crude oil. Unless otherwise indicated, natural gas volumes are stated at the official temperature and pressure basis of the area in which the reserves are located. "Replacement cost" refers to a fraction, of which the numerator is equal to the costs incurred by the Company for property acquisition, exploration and development and of which the denominator is equal to proved reserve additions from extensions, discoveries, improved recovery, acquisitions and revisions of previous estimates. "Improved recovery," "enhanced oil recovery" and "EOR" include all methods of supplementing natural reservoir forces and energy, or otherwise increasing ultimate recovery from a reservoir, such as waterfloods, cyclic steam, steam drive and CO2 (carbon dioxide) injection and fireflood projects. "Heavy oil" is low gravity, high viscosity crude oil. ITEMS 1 AND 2. BUSINESS AND PROPERTIES GENERAL Santa Fe Energy Resources, Inc. ("Santa Fe" or the "Company") is engaged in the exploration, development and production of crude oil and natural gas in the continental United States and in certain foreign areas. At December 31, 1995 the Company had worldwide proved reserves totaling 320.1 MMBOE (consisting of approximately 279.2 MMBbls of oil and approximately 245.1 Bcf of natural gas), of which approximately 92% were domestic reserves and approximately 8% were foreign reserves. During 1995 the Company's worldwide production aggregated approximately 33.3 MMBOE, of which approximately 72% was crude oil and approximately 28% was natural gas. A substantial portion of the Company's domestic oil production is in long-lived fields with well-established production histories. With the sales of non-core properties pursuant to the Company's corporate restructuring program (see "-- Corporate Restructuring Program"), the Company has focused its activities in three domestic core areas -- the Permian Basin in Texas and New Mexico, the offshore Gulf of Mexico and the San Joaquin Valley of California -- as well as in Argentina and Indonesia. Santa Fe was incorporated in Delaware in 1971 as Santa Fe Natural Resources, Inc., a wholly owned subsidiary of a predecessor of Santa Fe Pacific Corporation ("SFP"). On January 8, 1990 Santa Fe Energy Company, which previously conducted a substantial portion of Santa Fe's domestic exploration and development operations, merged into Santa Fe. Santa Fe thereafter changed its name to Santa Fe Energy Resources, Inc. On March 8, 1990 Santa Fe sold 11,700,000 previously unissued shares of common stock in initial public offerings. On December 4, 1990 SFP distributed all of the shares of Santa Fe's common stock it held to its shareholders. In May 1992 Adobe Resources Corporation ("Adobe") was merged with and into the Company (the "Adobe Merger"). For the five years ended December 31, 1995 the Company has replaced approximately 161% of its production at an average replacement cost of $4.89 per BOE. Over the last five years, the Company has increased its overall production by increasing production from its existing properties and through acquisitions, and has reduced its overall cost structure in order to enhance operating results and to mitigate the Company's financial exposure in a low oil and natural gas price environment. For example, over the five-year period ended December 31, 1995, Santa Fe has increased its average daily production from 71.4 MBOE per day in 1991 to 91.3 MBOE per day in 1995 and has reduced its average production costs (including related production, severance and ad valorem taxes) from $6.06 per BOE in 1991 to $5.15 per BOE in 1995. 1 Most of the Company's domestic crude oil production is located in California and Texas, while its domestic natural gas production comes primarily from the Gulf of Mexico, New Mexico and Texas. During 1995 the Company's domestic daily production averaged approximately 58.5 MBbls of crude oil and 137.7 MMcf of natural gas. Substantially all of the Company's oil and gas production is sold at market responsive prices. The domestic crude oil marketing activities of the Company are conducted through its Santa Fe Energy Products Division ("Energy Products"), which is also engaged in crude oil trading. A substantial portion of the Company's domestic natural gas production is currently marketed under the terms of a sales contract with Hadson Corporation ("Hadson"). See "-- Current Markets for Oil and Gas." A substantial portion of the Company's domestic oil production is in long-lived fields with well-established production histories and where enhanced oil recovery ("EOR") methods are employed. As of December 31, 1995 approximately 65% of the Company's domestic proved crude oil and liquids reserves and 53% of its 1995 average daily domestic production of crude oil and liquids were attributable to the Midway-Sunset field in the San Joaquin Valley of California, where the Company first began production in 1905. Nearly all of the reserves in this field are heavy oil, the production of which depends primarily on steam injection. As of December 31, 1995, an additional 26% of the Company's domestic proved crude oil and liquids reserves and approximately 25% of its 1995 average daily domestic production of crude oil and liquids were attributable to five other oil producing properties: the Wasson and Reeves fields in the Permian Basin of west Texas and the South Belridge, Kern River and Coalinga fields in the San Joaquin Valley. The Company's foreign production is located in the El Tordillo and Sierra Chata fields in Argentina and in the Salawati Basin and Salawati Island areas of Indonesia. Production from the Argentine operations averaged 2,600 barrels of oil and 11.9 MMcf of natural gas per day in 1995 and production from the Indonesian operations averaged 5,200 barrels of oil per day in 1995. The Company's Argentine natural gas production is from the Sierra Chata field, which commenced production in the second quarter of 1995. The Company maintains an active exploration and development program, a significant portion of which consists of EOR projects on the producing fields discussed above. During 1995, Santa Fe spent $204.6 million on capital programs and has budgeted $200.5 million of expenditures for 1996. The actual amount expended by the Company in 1996 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. In the United States, at December 31, 1995, the Company held oil and gas rights to 337,631 net undeveloped leasehold and fee acres in 16 states and offshore areas. Outside the United States, at December 31, 1995, the Company held exploration rights with respect to an aggregate of 2,249,065 net undeveloped acres in Argentina, Ecuador, Gabon and Indonesia. CORPORATE RESTRUCTURING PROGRAM In the fourth quarter of 1993 the Company adopted a corporate restructuring program which included (i) the concentration of capital spending in the Company's core operating areas, (ii) the disposition of non-core assets, (iii) the elimination of the $0.04 per share quarterly Common Stock dividend and (iv) an evaluation of the Company's capital and cost structures to examine ways to increase flexibility and strengthen the Company's financial performance. See Note 2 to the Consolidated Financial Statements. The Company's capital program is concentrated in three domestic core areas - -- the Permian Basin in Texas and New Mexico, the offshore Gulf of Mexico and the San Joaquin Valley of California -- as well as its productive areas in Argentina and Indonesia. The domestic program includes exploration and development activities in the Delaware, Strawn, Cisco-Canyon and Atoka Morrow formations in west Texas and southeast New Mexico, a drilling program for the offshore Gulf of Mexico natural gas properties and a drilling and workover program in the San Joaquin Valley of 2 California. Internationally, the program includes exploration and development activities in Argentina, Indonesia, Ecuador and Gabon, including expansion of the Company's Sierra Chata field in Argentina, where gas sales commenced in April 1995. During 1993 the Company sold properties having combined production of 4,100 barrels of oil and 21.7 MMcf per day and estimated proved reserves of approximately 16.7 MMBOE for total proceeds of $91.4 million, sold its natural gas gathering and processing assets for Hadson securities and realized approximately $11.3 million from the sale of its remaining Depositary Units in Santa Fe Energy Trust (the "Trust") and $8.3 million from the sale of its interest in certain other oil and gas properties. As a result of these transactions, the Company disposed of substantially all of its inventory of non-core properties. In 1995, the Company sold its holdings in Hadson for $55.2 million in cash. See Notes 2 and 3 of the Notes to Consolidated Financial Statements. As a result of the review of its cost structure the Company implemented a cost reduction program that included the reduction of its salaried work force by approximately 20%, an improvement in the efficiency of its information systems and reductions in other general and administrative costs. As a result of the review of its capital structure, in May 1994, in concurrent public offerings, the Company issued $100.0 million of 11% Senior Subordinated Debentures due 2004 (the "Debentures") and 10,700,000 shares of $.732 Series A Convertible Preferred Stock (the "Series A Preferred"). The net proceeds from the offerings, $187.5 million after deducting related costs and expenses, were used to retire $132.3 million of existing long-term debt and to pay $6.5 million in accrued interest and prepayment penalties due upon the retirement of such debt and the remaining $48.7 million was used for working capital purposes. The refinancing reduced required debt amortization in the near-term and provided additional financial flexibility. RESERVES The following tables set forth information regarding changes in the Company's estimates of proved net reserves from January 1, 1993 to December 31, 1995 and the balance of the Company's estimated proved developed reserves at December 31 of each of the years 1992 through 1995.
INCREASES (DECREASES) ------------------------------------------------------------- BALANCE NET AT REVISION EXTENSIONS, PURCHASES BALANCE BEGINNING OF DISCOVERIES (SALES) OF AT END OF PREVIOUS IMPROVED AND MINERALS OF PERIOD ESTIMATES RECOVERY ADDITIONS IN PLACE PRODUCTION PERIOD --------- --------- -------- ------------ ---------- ---------- -------- PROVED RESERVES AT DECEMBER 31, 1993: Oil and Condensate (MMBbls)...... 255.1 (10.8) 26.7 6.2 (4.7) (24.3) 248.2 Gas (Bcf)........................ 277.5 26.7 -- 55.9 (36.7) (60.4) 263.0 Oil Equivalent (MMBOE)........... 301.5 (6.3) 26.7 15.4 (10.9) (34.4) 292.0 PROVED RESERVES AT DECEMBER 31, 1994: Oil and Condensate ((MMBbls)..... 248.2 15.2 13.9 5.5 (0.5) (24.0) 258.3 Gas (Bcf)........................ 263.0 (2.7) 0.9 36.2 (5.1) (49.9) 242.4 Oil Equivalent (MMBOE)........... 292.0 14.7 14.1 11.5 (1.3) (32.3) 298.7 PROVED RESERVES AT DECEMBER 31, 1995: Oil and Condensate (MMBbls)...... 258.3 18.2 16.1 4.4 6.3 (24.1) 279.2 Gas (Bcf)........................ 242.4 2.3 0.2 36.9 18.0 (54.7) 245.1 Oil Equivalent (MMBOE)........... 298.7 18.5 16.2 10.7 9.3 (33.3) 320.1(a) DECEMBER 31, ------------------------------------------ 1995 1994 1993 1992 --------- --------- --------- --------- PROVED DEVELOPED RESERVES (MMBOE)............................................... 253.6 224.5 225.5 248.4
- ------------ (a) At December 31, 1995, 3.8 MMBOE were subject to a 90% net profits interest held by Santa Fe Energy Trust. See "-- Santa Fe Energy Trust." 3 Historically, the Company has utilized active development and exploration programs as well as selected acquisitions to replace its reserves depleted by production. The Company has increased its proved reserves (net of production and sales) by approximately 26% over the five years ended December 31, 1995. Most of such increases are attributable to proved reserve additions from the Company's producing oil properties in the San Joaquin Valley of California and the Permian Basin in west Texas, proved reserves acquired in the Adobe Merger and other purchases of oil and gas reserves. Ryder Scott Company ("Ryder Scott"), a firm of independent petroleum engineers, prepared the above estimates of the Company's total proved reserves as of December 31, 1992 through 1995. During 1995 the Company filed Energy Information Administration Form 23 which reported natural gas and oil reserves for the year 1994. On an equivalent barrel basis, the reserve estimates for the year 1994 contained in such report and those reported herein for the year 1994 do not differ by more than five percent. DOMESTIC DEVELOPMENT ACTIVITIES The Company is engaged in development activities primarily through the application of thermal EOR techniques to its heavy oil properties in the San Joaquin Valley, the use of secondary waterfloods and tertiary CO2 floods on its properties in other mature fields and the development of producing properties discovered or acquired by the Company. Thermal EOR operations involve the injection of steam into a reservoir to raise the temperature and reduce the viscosity of the heavy oil, facilitating the flow of the oil into producing wellbores. The Company has operated thermal EOR projects in the San Joaquin Valley since the mid-1960s. Similarly, the Company has extensive experience in the use of waterfloods, which involves the injection of water into a reservoir to drive hydrocarbons into producing wellbores. The Company has an interest in more than 50 waterflood projects, and additional projects are planned for the future. Following the waterflood phase, certain fields may continue to produce in response to tertiary EOR projects, such as the injection of CO2 which mixes miscibly with the oil and improves the displacement efficiency of the water injection. The Company's principal CO2 floods are in the Wasson field and are operated by affiliates of Shell Oil Company, ARCO and Amoco. Set forth below is a discussion of some of the Company's principal development projects. The Company has operated in the Midway-Sunset and Wasson fields since 1905 and 1939, respectively. The Company acquired interests in the South Belridge field in 1987 and in January 1991 expanded its holdings in the field with the purchase of additional properties. The Company's interests in the Kern River and Coalinga fields were acquired in 1905 and 1977, respectively. The Gulf of Mexico fields were discovered on leases held by the Company or acquired as producing properties, while the southeastern New Mexico properties were acquired as undeveloped properties. SAN JOAQUIN VALLEY MIDWAY SUNSET. The Company owns a 100% working interest (92% average net revenue interest) in over 10,000 gross acres and 2,300 active wells in the Midway Sunset field. Substantially all the oil produced from the Midway Sunset field is heavy crude oil produced principally by cyclic steam and steamflood operations from Pleistocene and Miocene reservoirs at depths less than 2,000 feet. These steam stimulation operations were initiated in the field in the mid-1960s. During 1995 the Midway Sunset field accounted for approximately 53% of the Company's domestic crude oil and liquids production. At December 31, 1995 the Midway Sunset field accounted for approximately 65% of the Company's domestic proved crude oil and liquid reserves. Reservoir engineering studies prepared on behalf of the Company indicate significant additions to its proved reserves in this field can continue to be made through additional EOR and development projects. The Company has identified a substantial number of locations that could be drilled in the field, depending in part on future prices and economic conditions. During 1995 the Company drilled 173 development wells in the field. 4 SOUTH BELRIDGE. The South Belridge field is located 15 miles north of the Midway-Sunset field. The Company operates three leases in the field which produce heavy oil from the shallow Tulare sands and lighter low viscosity oil from the deeper Diatomite reservoirs. Steamflood operations in the lower Tulare sands are in progress on one of three leases and plans call for flooding the remaining Tulare sands on this lease and all Tulare sands on another lease in the coming years. Waterflood operations in the Diatomite reservoir have been initiated on two leases and the Company expects to expand these operations to include the rest of the developed area. COALINGA. The Coalinga field is located 55 miles southwest of Fresno, California. Successful steamfloods have been conducted in the Lower Temblor Sands on three properties in which the Company owns interests in the field. During the next several years, the Company plans to expand steam floods in the Upper and Lower Temblor Sands. Most of the facilities required for these projects are already in place. KERN RIVER. The Company has a 100% working interest (91% average net revenue interest) in four properties in the Kern River field which is located near Bakersfield, California. The Company operates over 300 wells and a large steam generation plant on the properties. The Lower Kern River Series sands have been successfully steamflooded on three of the properties. During the past several years the Company has conducted an ongoing infill drilling and redevelopment program to convert the operations to expanded cyclic steaming. At the conclusion of the cyclic steaming program, the Company will redeploy steamflood operations into the upper sands of the Kern River Series on all four properties. PERMIAN BASIN WASSON. The Company's interests in this field consist principally of royalty and working interests in three units which are presently under CO2flood. Most of the expenditures for plant, facilities, wells and equipment necessary for such tertiary recovery projects have been made. In addition, while expenditures relating to the purchase of CO2 for the Wasson field are expected to continue, CO2 can be recycled and, therefore, such expenditures should decline in the future. During 1995 the Wasson field accounted for approximately 8.0% of the Company's domestic crude oil and liquids production and at December 31, 1995 the field accounted for approximately 10.5% of the Company's domestic proved crude oil and liquids reserves. Since initiation of CO2 flooding operations in 1984, the field's previous production decline has been reversed. Reservoir engineering studies prepared on behalf of the Company indicate significant additions to proved reserves can be made through additional EOR and development projects. REEVES. The Company owns a 72% average net revenue interest in the Reeves field, which is located seven miles east of the Wasson field in west Texas. The field has been under waterflood since 1965. During 1995, 45 wells were drilled and 20 wells were worked over as part of a program to infill drill the unit to 20-acre spacing and enhance current waterflood operations. Based on the successes of the prior year's program, the Company plans to continue the infill drilling and workover program in this field in 1996. NEW MEXICO. During 1995 the Company continued its activity in the light-oil Delaware play in Lea and Eddy Counties of southeastern New Mexico. A total of 22 gross (6.5 net) development wells were completed in 1995 and net production from this area in December 1995 totaled approximately 1,300 barrels of oil and 2.1 MMcf of natural gas per day. The Company plans to drill additional development wells in 1996. Also in southeastern New Mexico, the Company participated in 2 gross (2 net) wells in 1995 in the light oil and gas Cisco-Canyon project and all major facilities were completed by mid-year. The Company's net production from the project is approximately 1,200 barrels of liquids and 8.8 MMcf of natural gas per day from eight wells. The Company plans to continue delineation of this project which contains approximately 47 potential development locations. 5 OFFSHORE GULF OF MEXICO At December 31, 1995 offshore Gulf of Mexico properties accounted for 48% of the Company's domestic proved natural gas reserves and during 1995 these properties accounted for approximately 57% of the Company's domestic natural gas production. Year-end net offshore Gulf of Mexico deliverability was over 3,600 barrels of oil per day and 92 MMcf of gas per day from 54 fields. The Company operates 16 producing fields on 22 blocks with three Company-operated blocks scheduled to begin production in 1996. The Company's activities in the offshore Gulf of Mexico are concentrated in the shallow water area (less than 400 feet of water) where the costs of drilling, completion and operation are predictable and the well developed pipeline infrastructure allows for relatively quick hookup of new wells. During 1995 the Company participated in the drilling of 7 gross (4.6 net) development wells, all of which resulted in successful completions. Four of these wells commenced production in 1995 with the remainder expected to begin production in 1996. Two of the wells are part of the development of the Company's 100%-owned Galveston A-34 project, which resulted in a discovery in 1995. These two wells, together with the discovery well, tested at a combined rate of over 23 MMcf of natural gas per day. Platform and pipeline construction is underway and initial production is expected in mid-1996. During 1995 the Company completed platform and pipeline construction and commenced production from its 55%-owned High Island A-442 project. Current production is approximately 7.0 MMcf of natural gas per day and associated oil and condensate. Additional development drilling is scheduled for mid-1996. In 1995 one of the Company's subsidiaries, Santa Fe Platform Management, Inc., was designated to assist the Company in the management of the Company's platform abandonment costs. Together with the involvement of a third party whose primary consideration will be based on the realization of savings by the Company, the subsidiary will attempt to find new ways to handle these costs in a more efficient manner. DOMESTIC EXPLORATION ACTIVITIES During 1995 the Company focused its domestic exploration activities in two core areas, the Permian Basin of west Texas and southeastern New Mexico and the offshore Gulf of Mexico. Overall the Company participated in 30 gross (14.7 net) domestic exploratory wells in 1995, completing 22 gross (9.6 net) wells as producers for a 65% net success rate. At year end there were 6 gross (1.7 net) wells in various stages of drilling or completion. As of December 31, 1995 the Company held approximately 252,200 net undeveloped leasehold acres in 16 states and offshore areas. The primary lease terms expire with respect to 24% of such acreage in 1996, 15% in 1997, 7% in 1998, 15% in 1999 and the remainder thereafter. In addition, the Company owns approximately 85,400 net acres of undeveloped fee minerals located primarily in Texas. The Company also holds the oil and gas rights on approximately 8.1 million net undeveloped acres in the western United States through direct ownership and pursuant to lease option agreements from Santa Fe Pacific Railroad Company and other former affiliates. These lands are located in high risk exploration areas. Due to this risk, an agreement relating to substantially all of these oil and gas rights has been entered into with another company. The Company will receive a small revenue interest in the event exploration activities on lands subject to these rights are successful. Set forth below is a brief discussion of some of the Company's principal exploration programs. PERMIAN BASIN The Permian Basin continues as one of the Company's most active domestic exploration area with the majority of the current drilling activity concentrated in Lea and Eddy counties, New Mexico and Andrews and Martin counties, Texas. During 1995 the Company participated in 15 gross (5.8 net) exploratory wells with 13 gross (5.4 net) of these wells being completed for a 92% net success rate. There were 4 gross (1.4 net) additional wells drilling or completing at the end of the year. 6 In southeastern New Mexico, the Company's exploratory program concentrates on multiple Permian and Pennsylvanian aged oil and gas reservoirs ranging in depth from 1,500 to 16,000 feet. The focus in 1995 was to drill for deeper, gas bearing objectives which also provide exposure to shallower Delaware and Bone Springs oil reserves. In the first quarter of 1995 the Company completed a 260-square mile 3-D seismic project in Midland and Andrews counties, Texas. Two wells were drilled in 1995 and completed as oil producers. Additional drilling is planned for 1996. OFFSHORE GULF OF MEXICO The Company participated in 12 gross (5.8 net) exploratory wells in 1995, including 9 gross (4.2 net) discovery wells, for a 72% net success rate. The Company's offshore program is focused on prospects in shallow and moderate water depths which display "hydrocarbon indicators" on seismic data. During 1995 an agreement was reached with a third party which gives the Company access to 3-D seismic data covering more than 500 blocks. The data will be used to add to the Company's prospect inventory. INTERNATIONAL DEVELOPMENT ACTIVITIES INDONESIA SALAWATI BASIN. The Company, through a wholly owned subsidiary, is engaged in the production of crude oil in Indonesia through a joint venture (the "Salawati Basin Joint Venture") formed in 1970 to explore for and develop hydrocarbon reserves in the Salawati Basin area of Irian Jaya. At December 31, 1995, the Company held a 33 1/3% participation interest in, and acts as operator for, the Salawati Basin Joint Venture. The Salawati Basin Joint Venture operates under a production sharing contract (the "PSC") with the Indonesia state oil agency ("Pertamina"), which had an initial term of 30 years and expires in the year 2000. The Company is currently negotiating with Pertamina to extend the contract for an additional 20 years and expects to sign the contract extension in the first half of 1996. As of December 31, 1995 the contract covered an area of approximately 235,000 acres. Production occurs from seven oil and three gas condensate fields. The PSC entitles the Salawati Basin Joint Venture to recover all of its expenditures related to the operation (the "cost recovery amount") before any additional production is shared with Pertamina, which recovery is effected by allocating to the Salawati Basin Joint Venture a portion of the crude oil production sufficient, at the Indonesia government official crude oil price ("ICP"), to offset the cost recovery amount. The balance of production after deducting the cost recovery amount is divided between the parties, with approximately 66% allocated to Pertamina and 34% allocated to the Salawati Basin Joint Venture. However, 25% of the 34% allocated to the Salawati Basin Joint Venture (8.5% of total production) must be sold into the Indonesian domestic market for $0.20 per barrel. The entire entitlement of the Salawati Basin Joint Venture under the PSC, including the domestic market obligation, averaged approximately 8.6 MBbls per day (approximately 2.9 MBbls per day net to the Company) for the year ended December 31, 1995. The Salawati Basin Joint Venture is required to pay Indonesian income taxes at the rate of 56%. SALAWATI ISLAND. The Company, through another subsidiary, has also entered into a joint venture with Pertamina to explore the Salawati Island Block of Irian Jaya. The effective date of this joint venture was April 23, 1990 with a term of 30 years. At December 31, 1995 the Company held a 16 2/3% participation interest in the block which covers approximately 1.1 million acres. The Company and Pertamina (with its 50% interest) jointly operate the contract area. In 1991 a successful exploratory well was drilled and sales from the Matoa field began in January of 1993. In December 1995 the Matoa field produced approximately 5.9 MBbls of oil per day (approximately 2.0 MBbls per day net to the Company) from 22 wells. Under the terms of the Salawati Island agreement, the joint venture participants are allowed to recover the cost recovery amount, after an initial 20% portion (2.9% to the joint venture participants 7 and 17.1% to Pertamina) has been deducted, by allocating to the joint venture participants a portion of the crude oil production ("cost oil") sufficient to offset the cost recovery amount. All unrecovered costs in any calendar year can be carried forward to future years. The balance of production after allocation of cost oil is allocated approximately 85.5% to Pertamina and 14.5% to the other Salawati Island Joint Venture participants. However, 7.25% of the gross production allocated to the joint venture participants must be sold into the Indonesian domestic market for 10% of ICP. TUBAN. In December 1995 on the Tuban block on the island of Java, the Company tested the Mudi No. 5, the fifth successful test of the Tuban Limestone formation on the Mudi prospect. The well tested at combined flow rates of approximately 10,500 barrels of 35 degree API gravity oil per day with individual flowing tubing pressures of 225 pounds per square inch through a 1 1/4 inch choke. The tests were conducted on approximately 535 feet of hydrocarbon bearing rock between depths of 8,365 to 8,900 feet. Tests of the other successful wells ranged from 1,350 to 5,000 barrels of oil per day. The Company and its partners have submitted a plan of development to Pertamina and are prepared to begin construction of the facilities required for development as soon as approval is received. Commercial oil sales could begin as early as mid-1997. The Company has a seismic program underway to delineate the extent of the field and to further define similar anomolies in the area. The Company holds a 12.5% interest and operates the Mudi project through a joint operating body comprised of Pertamina and the Company. ARGENTINA EL TORDILLO. In 1991 the Company acquired an 18% non-operated working interest (15.84% net revenue interest) in the El Tordillo field in Chubut Province, Argentina. At that time, the field was producing approximately 10,500 barrels of oil per day. As of December 31, 1995 the Company and its partners have completed 260 workovers and drilled 17 new wells, expanded the existing waterflood pilots and initiated one new waterflood pilot, increasing production to approximately 17,000 barrels of oil per day. The Company expects the drilling and workover programs to continue through 1996 and anticipates the expansion of the existing waterflood projects. The joint venture group is allowed to sell crude oil produced from this field into the open market. There is a 12% royalty on gross production and the joint venture is taxed at a 30% rate after deductions for capitalized costs and expenses. SIERRA CHATA. In April 1993 the Company completed the Sierra Chata X-1 as a successful natural gas and condensate exploratory test in Chihuidos Block, Neuquen Province, Argentina. Nine additional successful wells have been drilled and the combined deliverability of the ten wells is approximately 150 MMcf of natural gas per day with a carbon dioxide content of approximately 6%. The Company has a 19.9% working interest in the Block. The Company and its partners have built a gas processing facility and a 40-mile gathering pipeline which transports production from the field and interconnects with two main transmission lines owned by a third party that transport gas to Buenos Aires and other major markets. Sales of production from the Sierra Chata field commenced in April 1995 under a gas contract for a maximum of 106 MMcf per day with "take-or-pay" and "delivery-or-pay" obligations with MetroGas S.A., a Buenos Aires gas distribution company. Under the terms of the contract, MetroGas is required to take at least 90% of the contract maximum in the Argentine winter months and at least 80% of the contract maximum in the Argentine summer months. Natural gas produced in excess of the contract requirements is sold on the spot market when possible. There is a 12% royalty and a 1% provincial tax on gross production and the joint venture is taxed at a 30% rate after deductions for capitalized costs and expenses. Three additional wells have been drilled to extend the producing limits established by the ten producing wells. Testing of these wells is scheduled to be completed in the first quarter of 1996. 8 INTERNATIONAL EXPLORATION ACTIVITIES In 1995 the Company participated in 8 gross (2.6 net) international exploratory wells. Five of the wells (1.8 net) were completed as discoveries for a 67% net success rate. At December 31, 1995 the Company held exploration contracts in four countries covering 8.7 million acres (2.3 million net acres). The Company intends to participate in the drilling of eleven exploratory wells in 1996, including six wells in Indonesia, two wells in Argentina, two wells in Ecuador and one well in Gabon. INDONESIA SUMATRA. In the first quarter of 1995 the Company completed the North Geragai No. 1 discovery well on the Jabung Block in central Sumatra. The well tested at combined rates of 5,100 barrels of 52 degree API gravity oil plus 30 MMcf of gas and 350 barrels of condensate per day from multiple intervals. In December 1995 the North Geragai No. 2, which tested only oil zones plus any gas zones not tested in the No. 1 well, tested 2,800 barrels of 52 degree API gravity oil and 9.1 MMcf of gas per day. In February 1996 the North Geragai No. 3 tested at a combined rate of 2,800 barrels of 52 degree API gravity oil and 2.4 MMcf of natural gas per day from two zones which also demonstrated hydrocarbon producing capability in the first two wells. The North Geragai No. 4 is currently drilling. Based on the results of the No. 4 well, a plan of development will be filed with Pertamina. The Company holds a 33 1/3% interest and is the operator of the Jabung Block under the terms of a PSC with Pertamina. In August 1995 the Company tested its Northeast Betera No. 1 exploratory well, located on the Jabung Block approximately 25 miles northeast of the North Geragai No. 1. The well encountered approximately 130 feet of hydrocarbon bearing sands at depths of 4,908 to 5,164 feet. Three intervals totaling approximately 84 feet of net pay tested at combined rates of 420 barrels of condensate and 22 MMcf of natural gas (approximately 55% carbon dioxide) per day. The test results of the well are being analyzed and a delineation well is planned for mid-1996. In addition, in 1995 the Company signed a new contract for the 956 million acre Bangko Block in south Sumatra. Two exploratory wells are planned for 1996 based on evaluation of existing seismic data. Santa Fe is operator and holds a 33 1/3% interest in the block. The Company's share of costs through the first two exploratory wells will be paid by its partners. ECUADOR In January 1995 the Company signed a contract covering exploration rights on Oriente Block 11 which is located in the north central portion of the Oriente Basin in the northeast section of the country. The contract includes an initial exploration period of four years with optional extensions. Seismic operations began in the fourth quarter of 1995 and are expected to be completed in the first quarter of 1996. The first exploratory well is scheduled to be drilled in the third quarter of 1996. The Company is the operator and holds a 35% working interest in the block. GABON During 1995 the Company participated in the drilling of the Tchatamba Marine No. 1 on the Kowe permit, offshore Gabon. The well tested 4,545 barrels per day of 46 degree API gravity oil from a 74-foot interval in the Upper Madiela formation between 6,306 to 6,380 feet. Additional seismic is planned to delineate the Tchatamba structure and further define numerous other prospects on the block. In addition to drilling a confirmation well offsetting the discovery, a second exploratory well is planned on the Kowe permit during the fourth quarter of 1996. The Company holds a 25% working interest in the 614,200-acre permit area. 9 DRILLING ACTIVITIES The table below sets forth, for the periods indicated, the number of wells drilled in which Santa Fe had an economic interest. As of December 31, 1995 Santa Fe was in the process of drilling or completing 6 gross (1.7 net) domestic exploratory wells, 18 gross (10.3 net) domestic development wells, and 7 gross (1.5 net) foreign development wells.
YEAR ENDED DECEMBER 31, ------------------------------------------------------------ 1995 1994 1993 ------------------ ------------------ ------------------ GROSS NET GROSS NET GROSS NET ------ --------- ------ --------- ------ --------- Development Wells Domestic Completed as natural gas wells........................ 13 6.3 17 4.4 21 6.0 Completed as oil wells.......... 271 234.5 136 101.4 237 180.0 Dry holes....................... 4 1.5 4 2.5 10 3.6 Foreign Completed as natural gas wells........................... 3 0.9 2 0.4 4 1.0 Completed as oil wells.......... 17 3.2 14 4.3 3 0.9 Dry holes....................... 5 1.1 2 0.6 -- -- ------ --------- ------ --------- ------ --------- 313 247.5 175 113.6 275 191.5 ------ --------- ------ --------- ------ --------- Exploratory Wells Domestic Completed as natural gas wells........................ 13 6.3 3 1.5 3 0.9 Completed as oil wells.......... 9 3.3 9 3.5 7 2.7 Dry holes....................... 8 5.1 23 8.6 12 5.4 Foreign Completed as natural gas wells........................... 2 0.8 1 0.5 2 0.4 Completed as oil wells.......... 3 0.9 1 0.3 -- -- Dry holes....................... 3 0.8 6 2.1 4 1.3 ------ --------- ------ --------- ------ --------- 38 17.2 43 16.5 28 10.7 ------ --------- ------ --------- ------ --------- 351 264.7 218 130.1 303 202.2 ====== ========= ====== ========= ====== ========= PRODUCING WELLS The following table sets forth Santa Fe's ownership in producing wells at December 31, 1995: U.S. ARGENTINA(1) INDONESIA(2) TOTAL --------------------- -------------- ----------------- --------------- GROSS(3) NET GROSS NET GROSS(4) NET GROSS NET --------- --------- ------ ---- --------- ---- ------ ----- Oil.................................. 11,891 5,262 371 67 380 122 12,642 5,451 Natural gas.......................... 559 167 10 2 6 2 575 171 --------- --------- ------ ---- --------- ---- ------ ----- 12,450 5,429 381 69 386 124 13,217 5,622 ========= ========= ====== ==== ========= ==== ====== =====
___________ (1) At December 31, 1995 two gross gas wells were shut-in. (2) Includes 90 gross wells which were shut-in at December 31, 1995. (3) Includes 54 gross wells with multiple completions. (4) Includes one gross well with multiple completions. 10 DOMESTIC ACREAGE The following table summarizes Santa Fe's developed and undeveloped fee and leasehold acreage in the United States at December 31, 1995. Excluded from such information is acreage in which Santa Fe's interest is limited to royalty, overriding royalty and other similar interests. UNDEVELOPED DEVELOPED ------------------- -------------------- STATE GROSS NET GROSS NET Alabama -- Offshore.................. -- -- 23,040 12,480 Alabama -- Onshore................... -- -- 824 112 Arkansas............................. 314 45 816 180 California -- Offshore............... -- -- 17,280 1,781 California -- Onshore................ 5,112 5,112 20,202 19,963 Colorado............................. 381 237 5,771 5,249 Kansas............................... 84 54 3,824 865 Louisiana -- Offshore................ 225,895 93,851 198,101 71,599 Louisiana -- Onshore................. 1,574 454 9,036 2,102 Mississippi.......................... 21 1 3,168 554 Montana.............................. 4,558 1,536 670 43 New Mexico........................... 138,054 103,975 50,745 26,792 New York............................. -- -- 189 47 North Dakota......................... 2,643 666 4,530 1,025 Oklahoma............................. 2,708 1,551 20,466 7,328 Pennsylvania......................... 20 20 25 3 Texas -- Offshore.................... 31,111 24,278 58,301 27,035 Texas -- Onshore..................... 109,276 96,258 180,172 127,531 Utah................................. 886 460 3,325 1,527 Wyoming.............................. 16,257 9,133 22,972 10,809 -------- --------- --------- --------- 538,894 337,631 623,457 317,025 ======== ========= ========= ========= FOREIGN ACREAGE The following table summarizes Santa Fe's foreign acreage at December 31, 1995: UNDEVELOPED DEVELOPED ------------------------ -------------------- GROSS NET GROSS NET Argentina....................... 2,147,987 529,045 93,238 18,004 Ecuador......................... 494,200 172,970 -- -- Gabon........................... 614,200 153,550 -- -- Indonesia....................... 5,393,359 1,393,500 11,460 2,072 ----------- ----------- --------- --------- 8,649,746 2,249,065 104,698 20,076 =========== =========== ========= ========= CURRENT MARKETS FOR OIL AND GAS The revenues generated by the Company's operations are highly dependent upon the prices of, and demand for, oil and gas. For the last several years, prices of these products have reflected a worldwide surplus of supply over demand. The price received by the Company for its crude oil and natural gas depends upon numerous factors, the majority of which are beyond the Company's control, including economic conditions in the United States and elsewhere, the world political situation as it affects OPEC, the Middle East (including the current embargo of Iraqi crude oil from worldwide markets) and other producing countries, the actions of OPEC and governmental regulation. The fluctuation in world oil prices continues to reflect market uncertainty regarding OPEC's ability to 11 control member country production and underlying concern about the balance of world demand for and supply of oil and gas. Decreases in the prices of oil and gas have had, and could have in the future, an adverse effect on the Company's development and exploration programs, proved reserves, revenues, profitability and cash flow. See Item 7. "Management's Discussion and Analysis of Financial Condition and Results of Operations -- General." The market for heavy crude oil produced in California differs substantially from the remainder of the domestic crude oil market, due principally to the transportation and refining requirements associated with heavy crude. The profit margin realized from the sale of heavy crude oil is generally lower than that realized from the sale of light crude oil because the costs of producing heavy oil are generally higher, and the sales price realized for heavy crude oil is generally lower than the comparable costs and prices paid for light crude oils. From time to time the Company has hedged a portion of its oil and natural gas production to manage its exposure to volatility in prices of oil and natural gas. See Item 7. "Management's Discussion and Analysis of Financial Condition and Results of Operations -- General" for a discussion of the Company's hedging activities. During 1995 affiliates of Shell Oil Company and Celeron Corporation accounted for approximately 34% and 21%, respectively, of Energy Products' crude oil sales (which with respect to certain properties includes royalty and working interest owners' share of production). No other individual customer accounted for more than 10% of the Company's crude oil and liquids revenues during 1995. Substantially all of the Company's oil production is currently sold at market-responsive prices that approximate spot prices. Availability of a ready market for the Company's oil production depends on numerous factors, including the level of consumer demand, the extent of worldwide oil production, the cost and availability of alternative fuels, the availability of refining capacity, the cost of and proximity of pipelines and other transportation facilities, regulation by state and federal authorities and the cost of complying with applicable environmental regulations. In December 1993 the Company signed a seven-year gas sales contract with Hadson pursuant to the terms of which Hadson markets a substantial portion of the Company's domestic natural gas production. Pursuant to such gas contract, Hadson is required to pay the Company for all production delivered at a price for such gas equal to stipulated published monthly index prices. Hadson is obligated to use its best efforts to receive gas from the Company at delivery points so as to maximize the net price received by the Company for such production. Payment for purchases by Hadson are made in immediately available funds no later than the last working day of the month following the month of production. SANTA FE ENERGY TRUST In November 1992 5,725,000 Depositary Units ("Depositary Units"), each consisting of beneficial ownership of one unit of undivided interest in the Trust and a $20 face amount beneficial ownership interest in a $1,000 face amount zero coupon United States Treasury obligation maturing on February 15, 2008, were sold in a public offering. The assets of the Trust consist of certain oil and gas properties conveyed by the Company. A total of $114.5 million was received from public investors, of which $38.7 million was used to purchase the Treasury obligations and $5.7 million was used to pay underwriting commissions and discounts. The Company received the remaining $70.1 million and retained 575,000 Depositary Units. A portion of the proceeds received by the Company was used to retire $30.0 million of debt and the remainder was used for general corporate purposes. In the first quarter of 1994 the Company sold the remaining 575,000 Depositary Units it held for $11.3 million. The properties conveyed to the Trust consisted of two term royalty interests in two production units in the Wasson field in west Texas and a net profits royalty interest in certain royalty and working interests in a diversified portfolio of properties located in twelve states. At December 31, 1995, 3.8 MMBOE of the Company's estimated proved reserves were subject to such net profits interest. The reserve estimates included herein reflect the conveyance of the Wasson term royalties to the Trust. 12 For any calendar quarter ending on or prior to December 31, 2002, the Trust will receive additional royalty payments to the extent that such payments are required to provide distributions of $0.40 per Depositary Unit per quarter. Such additional royalty payments, if needed, will come from the Company's remaining royalty interest in one of the production units in the Wasson field described above, and are non-recourse to the Company. If such additional payments are made, certain proceeds otherwise payable to the Trust in subsequent quarters may be reduced to recoup the amount of such additional payments. The aggregate amount of the additional royalty payments (net of any amounts recouped) is limited to $20.0 million on a revolving basis. The Company was required to make additional royalty payments totalling $0.4 million, $1.1 million and $0.5 million with respect to the distributions made by the Trust for operations in 1993, 1994 and 1995, respectively. Dependent on various factors, such as sales volumes and prices and the level of operating costs and capital expenditures incurred, proceeds payable to the Trust with respect to operations in subsequent quarters may not be sufficient to make distributions of $0.40 per quarter. In such instances the Company would be required to make additional royalty payments. OTHER BUSINESS MATTERS COMPETITION The Company faces competition in all aspects of its business, including, but not limited to, acquiring reserves, leases, licenses and concessions; obtaining goods, services and labor needed to conduct its operations and manage the Company; and marketing its oil and gas. The Company's competitors include multinational energy companies, government-owned oil and gas companies, other independent producers and individual producers and operators. The Company believes that its competitive position is affected by price, its geological and geophysical capabilities and ready access to markets for production. Many competitors have greater financial and other resources than the Company, more favorable exploration prospects and ready access to more favorable markets for their production. The Company believes that the well-defined nature of the reservoirs in its long-lived oil fields, its expertise in EOR methods in these fields, its active development and exploration position, its financial flexibility and its experienced management may give it a competitive advantage over some other producers. REGULATION OF CRUDE OIL AND NATURAL GAS The petroleum industry is subject to various types of regulation throughout the world, including regulation in the United States by state and federal agencies. Domestic legislation affecting the oil and gas industry is under constant review for amendment or expansion, frequently increasing the regulatory burden. Also, numerous departments and agencies, both federal and state, are authorized by statute to issue and have issued rules and regulations binding on the oil and gas industry and its individual members, compliance with which is often difficult and costly and which may carry substantial penalties for non-compliance. Although the regulatory burden on the oil and gas industry increases the cost of doing business and, consequently, affects profitability, generally these burdens do not appear to affect the Company any differently or to any greater or lesser extent than other companies in the industry with similar types and quantities of production. While the Company is a party to several regulatory proceedings before governmental agencies arising in the ordinary course of business, the Company does not believe that the outcome of such proceedings will have a material adverse affect on its operations or financial condition. Set forth below is a general description of certain state and federal regulations which have an effect on the Company's operations. STATE REGULATION. State statutes and regulations require permits for drilling operations, drilling bonds and reports concerning operations. Most states in which the Company operates also have statutes and regulations governing the conservation of oil and gas and the prevention of waste, including the unitization or pooling of oil and gas properties and rates of production from oil and gas wells. Rates of production may be regulated through the establishment of maximum daily production allowables on a market demand or conservation basis or both. 13 FEDERAL REGULATION. A portion of the Company's oil and gas leases are granted by the federal government and administered by the Bureau of Land Management ("BLM") and the Minerals Management Service ("MMS"), both of which are federal agencies. Such leases are issued through competitive bidding, contain relatively standardized terms and require compliance with detailed BLM and MMS regulations and orders (which are subject to change by the BLM and the MMS). For offshore operations, lessees must obtain MMS approval for exploration plans and development and production plans prior to the commencement of such operations. In addition to permits required from other agencies (such as the Coast Guard, Army Corps of Engineers and Environmental Protection Agency), lessees must obtain a permit from the BLM or the MMS prior to the commencement of drilling. The interstate transportation of natural gas is regulated by the Federal Energy Regulatory Commission ("FERC") under the Natural Gas Act of 1938 and, to a lesser extent, the Natural Gas Policy Act of 1978 (collectively, the "Acts"). Since 1991, FERC's regulatory efforts have centered largely around its generic rulemaking proceedings, Order No. 636. Through Order No. 636 and successor orders, FERC has undertaken to restructure the interstate pipeline industry with the goal of providing enhanced access to, and competition among, alternative gas suppliers. By requiring interstate pipelines to "unbundle" their sales services and to provide their customers with direct access to any upstream pipeline capacity held by pipelines, Order No. 636 has enabled pipeline customers to choose the levels of transportation and storage service they require, as well as to purchase gas directly from third-party merchants other than the pipelines. Even though the implementation of Order No. 636 on individual interstate pipelines is largely complete, nearly all of these individual restructuring proceedings, as well as Order No. 636 itself and the regulations promulgated thereunder, are subject to pending appellate review and could possibly be substantially modified by the courts. Thus, while Order No. 636 has generally facilitated the transportation of gas and the direct access to end-user markets, the ultimate impact of these regulations on marketing production cannot be predicted at this time. With the completion of the Order No. 636 implementation process on the FERC level, FERC's natural gas regulatory efforts have turned towards a number of other important policies, all of which could significantly affect the marketing of gas. Some of the more notable of these regulatory initiatives include (i) a series of orders in individual pipeline proceedings articulating a policy (now pending court review) of generally approving the divestiture of pipeline-owned gathering facilities to pipeline affiliates, (ii) FERC's on-going efforts to promulgate standards for pipeline electronic bulletin boards, electronic data exchange, and, most recently, basic business and operational practices of the pipelines, (iii) a generic policy statement involving the pricing of interstate pipeline capacity, (iv) efforts to refine FERC's regulations controlling the operation of the secondary market for released pipeline capacity, (v) a policy statement regarding market and other non-cost-based rates for interstate pipeline transmission and storage capacity and (vi) an inquiry into the appropriate nature and extent of continuing FERC regulation of offshore pipelines. Recently, with the conclusion of the implementation of FERC Order No. 636 on the interstate pipelines, numerous states have begun the process of implementing regulatory initiatives requiring local distribution companies ("LDCs") to develop (to various degrees) unbundled transportation and related service options and rates. Typically, these programs are designed to allow LDCs' commercial, industrial, and, in a few cases, residential, customers to have access to transportation service on the LDC, coupled with an ability to select third-party city-gate gas suppliers. These developments have already led a number of industry participants to redirect significant marketing resources to these emerging downstream markets. ENVIRONMENTAL REGULATION Various federal, state and local laws and regulations covering the discharge of materials into the environment, or otherwise relating to the protection of the environment, may affect the Company's 14 operations and costs. In particular, the Company's oil and gas exploration, development, production and EOR operations, its activities in connection with storage and transportation of liquid hydrocarbons and its use of facilities for treating, processing, recovering or otherwise handling hydrocarbons and wastes therefrom are subject to stringent environmental regulation by governmental authorities. Such regulation has increased the cost of planning, designing, drilling, installing, operating and abandoning the Company's oil and gas wells and other facilities. The Company has expended significant resources, both financial and managerial, to comply with environmental regulations and permitting requirements and anticipates that it will continue to do so in the future in order to comply with stricter industry and regulatory safety standards such as those described below. Although the Company believes that 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 and there can be no assurance that significant costs and liabilities will not be incurred in the future. Moreover, it is possible that other developments, such as increasingly strict environmental laws, regulations and enforcement policies thereunder, and claims for damages to property, employees, other persons and the environment resulting from the Company's operations, could result in substantial costs and liabilities in the future. Although the resulting costs cannot be accurately estimated at this time, these requirements and risks typically apply to companies with types, quantities and locations of production similar to those of the Company and to the oil and gas industry in general. OFFSHORE PRODUCTION. Offshore oil and gas operations are subject to regulations of the United States Department of the Interior, the Department of Transportation, the United States Environmental Protection Agency ("EPA") and certain state agencies. In particular, the Federal Water Pollution Control Act of 1972, as amended ("FWPCA"), imposes strict controls on the discharge of oil and its derivatives into navigable waters. The FWPCA provides for civil and criminal penalties for any discharges of petroleum in reportable quantities and, along with the Oil Pollution Act of 1990 and similar state laws, imposes substantial liability for the costs of oil removal, remediation and damages. SOLID AND HAZARDOUS WASTE. The Company currently owns or leases, and has in the past owned or leased, numerous properties that have been used for production of oil and gas for many years. Although the Company has utilized operating and disposal practices that were standard in the industry at the time, hydrocarbons or other solid wastes may have been disposed or released on or under the properties owned or leased by the Company. State and federal laws applicable to oil and gas wastes and properties have gradually become more strict. Under these new laws, the Company has been, and in the future could be, required to remove or remediate previously disposed wastes or property contamination (including groundwater contamination) or to perform remedial plugging operations to prevent future contamination. The Company generates hazardous and nonhazardous wastes that are subject to the federal Resource Conservation and Recovery Act and comparable state statutes. The EPA has limited the disposal options for certain hazardous wastes and is considering the adoption of stricter disposal standards for nonhazardous wastes. Furthermore, it is anticipated that additional wastes (which could include certain wastes generated by the Company's oil and gas operations) will in the future be designated as "hazardous wastes," which are subject to more rigorous and costly disposal requirements. In response to the changing regulatory environment, the Company has made certain changes in its operations and disposal practices. For example, the Company has commenced remediation of sites or replacement of facilities where its wastes have previously been disposed. SUPERFUND. The Comprehensive Environmental Response, Compensation 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 EPA and, in some cases, third parties to take actions in responses to threats to the public health or the environment and to seek to recover from the responsible classes of 15 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. 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 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 $1.6 million ($0.9 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 $3.0 million (based on an agreement with other working interest participants in the unit to assume $1.3 million of the original settlement amount, the Company's net share of such costs is approximately $1.7 million) and such costs have been provided for in the financial statements. The Company 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. In 1989 Adobe received requests from the EPA for information pursuant to Section 104(e) of CERCLA with respect to the D. L. Mud and Gulf Coast Vacuum Services superfund sites located in Abbeville, Louisiana. With respect to the Gulf Coast Site the Company has entered into a sharing agreement with other PRPs to participate in the final remediation of the Gulf Coast site and a design plan has been submitted and is awaiting approval by the EPA. The Company's share of the remediation, which has been provided for in the financial statements, is approximately $277,000 and includes its proportionate share of those PRPs who do not have the financial resources to provide their share of the work at the site. A former site owner has already conducted remedial activities at the D. L. Mud Site under a state agency agreement. 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 16 to be $1.0 million. To date there has been no agreement on how to allocate costs among the PRPs. The Company has provided for such costs in the financial statements, assuming that the costs will be equally divided 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 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 has agreed to implement reasonable measures to bring new PRPs into the agreement. The DTSC will address subsequent phases of the cleanup, including remedial design and implementation in a separate order agreement. The cost of the remedial investigation and feasibility study is estimated to be $1.0 million and the Company has provided $80,000 in the financial statements as its estimated share of such costs. The costs of subsequent phases cannot be estimated until the remedial investigation and feasibility study is completed. AIR EMISSIONS. The operations of the Company, including most of its operations in the San Joaquin Valley, are subject to local, state and federal regulations for the control of emissions from sources of air pollution. Legal and regulatory requirements in this area are increasing, and there can be no assurance that significant costs and liabilities will not be incurred in the future as a result of new regulatory developments. In particular, the 1990 Clean Air Act Amendments will impose additional requirements that may affect the Company's operations, including permitting of existing sources and control of hazardous air pollutants. However, it is impossible to predict accurately the effects, if any, of the Clean Air Act Amendments on the Company at this time. The Company has been and may in the future be subject to administrative enforcement actions for failure to comply strictly with air regulations or permits. These administrative actions are generally resolved by payment of a monetary penalty and correction of any identified deficiencies. Alternatively, regulatory agencies may require the Company to forego construction or operation of certain air emission sources. OTHER. The Company is subject to the requirements of the federal Occupational Safety and Health Act ("OSHA") and comparable state statutes. The OSHA hazard communication standard, the EPA community right-to-know regulations under Title III of the federal Superfund Amendment and Reauthorization Act and similar state statutes (such as California Proposition 65) require the Company to organize information about hazardous materials used or produced in its operations. Certain of this information must be provided to employees, state and local governmental authorities and local citizens. The Company's facilities in California are also subject to California Proposition 65, which was adopted in 1986 to address discharges and releases of, or exposures to, toxic chemicals in the environment. Proposition 65 makes it illegal to knowingly discharge a listed chemical if the chemical will pass (or probably will pass) into any source of drinking water. It also prohibits companies from knowingly and intentionally exposing any individual to such chemicals through ingestion, inhalation or other exposure pathways without first giving a clear and reasonable warning. Although generally less stringent, the Company's foreign operations are subject to similar foreign laws respecting environmental and worker safety matters. INSURANCE COVERAGE MAINTAINED WITH RESPECT TO OPERATIONS The Company maintains insurance policies covering its operations in amounts and areas of coverage normal for a company of its size in the oil and gas exploration and production industry. These coverages include, but are not limited to, workers' compensation, employers' liability, automotive liability and general liability. In addition, an umbrella liability and operator's extra expense policies are maintained. All such insurance is subject to normal deductible levels. The Company does not insure 17 against all risks associated with its business either because insurance is not available or because it has elected not to insure due to prohibitive premium costs. EMPLOYEES As of December 31, 1995, the Company had approximately 660 employees, 189 of whom were covered by a collective bargaining agreement which expired on January 31, 1996 and is being renegotiated. The Company believes that its relations with its employees are satisfactory. ITEM 3. LEGAL PROCEEDINGS The Company, its subsidiaries and other related companies are named defendants in several lawsuits and named parties in certain governmental proceedings arising in the ordinary course of business. For a description of certain proceedings in which the Company is involved, see Items 1 and 2 " Business and Properties -- Other Business Matters -- Environmental Regulation" and Note 11 to the Consolidated Financial Statements. While the outcome of lawsuits or other proceedings against the Company cannot be predicted with certainty, the Company does not expect these matters to have a material adverse effect on its financial position or results of operations. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. EXECUTIVE OFFICERS OF SANTA FE Listed below are the names, ages (as of January 1, 1996) and positions of all executive officers of Santa Fe (excluding executive officers who are also directors of Santa Fe) and their business experience during the past five years. Unless otherwise stated, all offices were held with Santa Fe Energy Company prior to its merger with Santa Fe. Each executive officer holds office until his successor is elected or appointed or until his earlier death, resignation or removal. HUGH L BOYT, 50 Senior Vice President -- Production since March 1, 1990. From 1989 until March 1990, Mr. Boyt served as Corporate Production Manager. JERRY L BRIDWELL, 52 Senior Vice President -- Exploration and Land since 1986. MICHAEL J. ROSINSKI, 50 Senior Vice President -- Marketing and Environmental since January 1996. From January 1995 until January 1996 Mr. Rosinski served as Senior Vice President -- Administration and from September 1992 until January 1995 he served as Vice President and Chief Financial Officer. Prior to joining Santa Fe, Mr. Rosinski was with Tenneco Inc. and its subsidiaries for 24 years. From 1990 until August 1992 he was Executive Director of Investor Relations. R. GRAHAM WHALING, 41 Senior Vice President and Chief Financial Officer since January 1995. Mr. Whaling was with First Boston Corporation from 1989 until he joined Santa Fe. While with First Boston Corporation Mr. Whaling served in various capacities including Vice President, Corporate Finance from 1991 to 1994 and Director, Corporate Finance from 1994 to 1995. E. EVERETT DESCHNER, 55 Vice President -- Engineering and Evaluation since April 1990. C. ED HALL, 53 Vice President -- Public Affairs since March 1991. CHARLES G. HAIN, JR., 49 Vice President -- Human and Data Resources since 1994. Vice President -- Employee Relations from 1988 until 1994. DAVID L HICKS, 46 Vice President -- Law and General Counsel since March 1991. JOHN R. WOMACK, 57 Vice President -- Business Development since 1987. 18 PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS Santa Fe's common stock is listed on the New York Stock Exchange and trades under the symbol SFR. The following table sets forth information as to the last sales price per share of Santa Fe's common stock as quoted on the Consolidated Tape System for each calendar quarter in 1995 and 1994. LOW HIGH --- ---- 1995 1st Quarter..................... 8 9 3/4 2nd Quarter..................... 9 1/8 10 1/2 3rd Quarter..................... 9 10 5/8 4th Quarter..................... 8 1/2 9 7/8 1994 1st Quarter..................... 8 1/2 9 7/8 2nd Quarter..................... 7 5/8 9 3/4 3rd Quarter..................... 8 3/4 9 7/8 4th Quarter..................... 7 7/8 9 1/4 The Company has not paid dividends on its common stock since the third quarter of 1993. The determination of the amount of future cash dividends, if any, to be declared and paid is in the sole discretion of Santa Fe's Board of Directors and will depend on dividend requirements with respect to the Company's convertible preferred stock, the Company's financial condition, earnings and funds from operations, the level of its capital and exploration expenditures, dividend restrictions in its financing agreements, its future business prospects and other matters as the Company's Board of Directors deems relevant. For a discussion of certain restrictions on Santa Fe's ability to pay dividends, see Item 7. "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Financing Activities." At December 31, 1995 the Company had approximately 42,300 shareholders of record. 19 ITEM 6. SELECTED FINANCIAL DATA
YEAR ENDED DECEMBER 31, ------------------------------------------------------ 1995 1994 1993 1992(B) 1991 --------- --------- --------- ------- --------- (IN MILLIONS OF DOLLARS, EXCEPT AS NOTED) SELECTED FINANCIAL DATA INCOME STATEMENT DATA Revenues........................ 442.0 391.4 436.9 427.5 379.8 --------- --------- --------- ------- --------- Costs and Expenses Production and operating... 154.9 150.0 163.8 153.4 134.6 Oil and gas systems and pipelines................ -- -- 4.2 3.2 -- Exploration, including dry hole costs............... 23.4 20.4 31.0 25.5 18.7 Depletion, depreciation and amortization............. 133.2 121.3 152.7 146.3 106.6 Impairment of oil and gas properties............... 30.2 -- 99.3 -- -- General and administrative........... 26.9 27.3 32.3 30.9 27.8 Taxes (other than income).................. 19.2 25.8 27.3 24.3 27.2 Restructuring charges (a)...................... -- 7.0 38.6 -- -- Loss (gain) on disposition of oil and gas properties............... 0.3 (8.6) 0.7 (13.6) 0.5 --------- --------- --------- ------- --------- 388.1 343.2 549.9 370.0 315.4 --------- --------- --------- ------- --------- Income (Loss) from Operations... 53.9 48.2 (113.0) 57.5 64.4 Other income (expense)..... (1.6) (4.0) (4.8) (10.0) 5.6 Interest income............ 10.7 2.8 9.1 2.3 2.3 Interest expense........... (32.5) (27.5) (45.8) (55.6) (47.3) Interest capitalized....... 5.8 3.6 4.3 4.9 7.7 --------- --------- --------- ------- --------- Income (Loss) Before Income Taxes......................... 36.3 23.1 (150.2) (0.9) 32.7 Income taxes benefit (expense)................ (9.7) (6.0) 73.1 (0.5) (14.2) --------- --------- --------- ------- --------- Net Income (Loss)............... 26.6 17.1 (77.1) (1.4) 18.5 Preferred Dividend Requirement................... (14.8) (11.7) (7.0) (4.3) -- --------- --------- --------- ------- --------- Earnings (Loss) Attributable to Common Stock.................. 11.8 5.4 (84.1) (5.7) 18.5 ========= ========= ========= ======= ========= Per share data Earnings (loss) to common stock (in dollars)............. 0.13 0.06 (0.94) (0.07) 0.29 Weighted average number of common shares outstanding (in millions)............ 90.2 89.9 89.7 79.0 63.8 STATEMENT OF CASH FLOWS DATA Net cash provided by operating activities.................... 174.5 124.5 160.2 141.5 128.4 Net cash used in investing activities.................... 160.8 57.7 121.4 15.9 117.2 BALANCE SHEET DATA (AT PERIOD END) Properties and equipment, net... 889.5 843.0 832.7 1,101.8 797.4 Total assets.................... 1,064.8 1,071.4 1,076.9 1,337.2 911.9 Long-term debt.................. 344.4 350.4 405.4 492.8 440.8 Convertible preferred stock..... 80.0 80.0 80.0 80.0 -- Shareholders' equity............ 437.7 423.3 323.6 416.6 225.1 20 SELECTED OPERATING DATA DAILY AVERAGE PRODUCTION(C) Crude oil and liquids (MBbls/day) Domestic.................. 58.5 57.6 60.2 58.3 54.9 Argentina................. 2.6 2.4 2.4 2.4 0.6 Indonesia................. 5.2 5.7 4.1 1.8 -- --------- --------- --------- --------- --------- 66.3 65.7 66.7 62.5 55.5 ========= ========= ========= ======= ========= Natural gas (MMcf/day).......... 150.0 136.6 165.4 126.3 95.2 Total production (MBOE/day)..... 91.3 88.5 94.3 83.6 71.4 AVERAGE SALES PRICES Crude oil and liquids ($/Bbl) Unhedged Domestic............. 13.84 12.11 12.70 14.38 14.07 Argentina............ 14.72 13.23 14.07 15.99 16.24 Indonesia............ 16.10 15.09 15.50 17.51 -- Total................ 14.05 12.41 12.93 14.54 14.09 Hedged.................... 14.15 12.41 12.93 14.96 16.16 Natural Gas ($/Mcf) Unhedged.................. 1.44 1.75 2.03 1.71 1.49 Hedged.................... 1.43 1.73 1.89 1.70 1.49 PROVED RESERVES AT YEAR END(D) Crude oil, condensate and natural gas liquids (MMBbls)............. 279.2 258.3 248.2 255.1 229.2 Natural gas (Bcf)............... 245.1 242.4 263.0 277.5 170.8 Proved reserves (MMBOE)......... 320.1 298.7 292.0 301.5 257.7 Proved developed reserves (MMBOE)...................... 253.6 224.5 225.5 248.4 210.3 PRESENT VALUE OF PROVED RESERVES AT YEAR-END Before income taxes............. 1,257.2 970.8 567.8 915.2 602.6 After income taxes.............. 930.2 739.9 502.4 733.5 463.6 PRODUCTION COSTS PER BOE (including related production, severance and ad valorem taxes) (in dollars).................... 5.15 5.30 5.39 5.66 6.06
- ------------ (a) 1993 amount includes losses on property dispositions of $27.8 million, long-term debt repayment penalties of $8.6 million and accruals of certain personnel benefits and related costs of $2.2 million. (b) On May 19, 1992 Adobe was merged with and into the Company. (c) Includes production attributable to properties sold during 1993 of 4.1 MBbls of oil and 21.7 MMcf of natural gas per day (7.7 MBOE per day). (d) The amounts set forth in this table for 1993 give effect to the sale by the Company of approximately 8.0 MMBOE of proved reserves. 21 ITEM 7. 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 (excluding the effect of hedging transactions) for 1995 of $13.84 per barrel, compared to $16.76 per barrel for West Texas Intermediate ("WTI") crude oil (an industry posted price generally indicative of prices for sweeter light crude oil). In 1995 the Company's average sales price for California heavy crude oil was $13.35 per barrel, approximately 80% of the annual average posted price for 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 1994 and 1995 the actual average sales price (unhedged) received by the Company ranged from a high of $14.97 per barrel in the second quarter of 1995 to a low of $10.00 per barrel for the first quarter of 1994. Based on operating results for the year 1995, the Company estimates that a $1.00 per barrel increase or decrease in its average domestic crude oil sales prices would result in a corresponding $21.0 million change in income from operations and a $15.8 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 the Company's hedging program or depreciation and depletion, that would 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 the Company in 1995 for its natural gas ranged from a high of $1.66 per Mcf in the fourth quarter to a low of $1.31 per Mcf in the first quarter. Based on operating results for the year 1995, the Company estimates that a $0.10 per Mcf increase or decrease in its average domestic natural gas sales price would result in a corresponding $3.2 million change in income from operations and a $2.4 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 the Company's hedging program or depletion and depreciation, that would result from a change in natural gas prices. 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 22 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. At December 31, 1995 the Company had open crude hedges on (i) an average of 15,000 barrels per day for the period January to April 1996 at an average NYMEX WTI price of $18.52 per barrel and (ii) provided that the NYMEX WTI price is greater than $16.80 per barrel, up to an additional 15,000 barrels per day for the period January through March 1996 at an average NYMEX WTI price of $18.65 per barrel. The "approximate break-even price" (the average of the settlement prices which result in no settlement being due to or from the Company) with respect to all such contracts is approximately $18.56 per barrel. The following table reflects estimated amounts due to or from the Company 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) -------------------- --------------------- 20.00 (5.4) 19.00 (1.6) 18.00 1.8 17.00 3.6 16.00 4.6 During 1995 crude oil hedges resulted in a $2.4 million increase in revenues. Subsequent to year-end the Company hedged an additional 2,000 barrels per day for the second quarter of 1996 and, provided that the settlement price is above $17.00, up to an additional 8,000 barrels per day for the second quarter of 1996 and 2,000 barrels per day for the third quarter of 1996. The approximate break-even price is $18.54 per barrel for the second quarter hedges and $18.60 per barrel for the third quarter hedges. At December 31, 1995 the Company had open natural gas hedges on (i) an average of approximately 55.0 MMcf per day of its Gulf Coast production for the entire year of 1996 at an approximate break-even price of $1.82 per Mcf and (ii) an average of approximately 30.0 MMcf per day of its Permian Basin production for the entire year of 1996 at an approximate break-even price of $1.53 per Mcf. Due to its location, Permian Basin gas sells at a discount to Gulf Coast gas. Natural gas hedges resulted in decreases in revenues of $0.3 million in 1995 and $1.0 million in 1994. With respect to the Gulf Coast production hedges, a $0.10 per Mcf decrease or increase in the average settlement price for a month results in a $168,000 increase or decrease in revenues, respectively. With respect to the Permian Basin production hedges, a $0.10 per Mcf decrease or increase in the average settlement price for a month results in a $92,000 increase or decrease in revenues, respectively. In addition to its oil and gas sales hedges for the first six months of 1996 the Company has hedged 20.0 MMcf per day of the natural gas it purchases for use in its steam generation operations in the San Joaquin Valley of California. Monthly settlements are based on the difference between the settlement price quoted on the NYMEX and the index price for San Juan Basin natural gas. Gains or losses are recognized in production and operating costs in the period in which the hedged gas is consumed in operations. In instances where the difference between the NYMEX price and the San Juan Basin index price is greater than $0.53, the Company pays an amount based on the difference and in instances where the difference is less than $0.53, the Company receives a payment based on the difference. Each $0.10 per Mcf change in the spread between the NYMEX price and the San Juan Basin index price results in a monthly increase or decrease in revenues of $60,000. 23 RESULTS OF OPERATIONS REVENUES The following table reflects the components of the Company's crude oil and liquids and natural gas revenues: YEAR ENDED DECEMBER 31, ------------------------------- 1995 1994 1993 --------- --------- --------- CRUDE OIL AND LIQUIDS REVENUES ($ MILLIONS) Sales Domestic California Heavy........... 189.5 158.2 151.7 Other...................... 105.8 96.4 127.4 --------- --------- --------- 295.3 254.6 279.1 Argentina..................... 13.8 11.6 12.5 Indonesia..................... 30.8 31.3 23.1 Hedging......................... 2.4 -- -- Net Profits Payments............ (4.4) (3.8) (7.4) --------- --------- --------- 337.9 293.7 307.3 ========= ========= ========= VOLUMES (MBBLS/DAY) Domestic California Heavy.............. 38.9 38.3 37.0 Other......................... 19.6 19.3 23.2 --------- --------- --------- 58.5 57.6 60.2 Argentina....................... 2.6 2.4 2.4 Indonesia....................... 5.2 5.7 4.1 --------- --------- --------- 66.3 65.7 66.7 ========= ========= ========= SALES PRICES ($/BBL) Domestic California Heavy.............. 13.35 11.31 11.24 Other......................... 14.82 13.72 15.03 Total......................... 13.84 12.11 12.70 Argentina....................... 14.72 13.23 14.07 Indonesia....................... 16.10 15.09 15.50 Total........................... 14.05 12.41 12.93 Total Hedged.................... 14.15 12.41 12.93 NATURAL GAS REVENUES ($ MILLIONS) Sales Domestic...................... 73.3 87.2 122.3 Foreign....................... 5.5 0.1 -- --------- --------- --------- 78.8 87.3 122.3 Hedging......................... (0.3) (1.0) (8.2) Net Profits Payments............ (1.4) (2.9) (6.3) --------- --------- --------- 77.1 83.4 107.8 ========= ========= ========= VOLUMES (MMCF/DAY) Domestic........................ 137.7 136.3 165.1 Foreign......................... 12.3 0.3 0.3 --------- --------- --------- 150.0 136.6 165.4 ========= ========= ========= SALES PRICES ($/MCF) Unhedged Domestic...................... 1.46 1.75 2.03 Foreign....................... 1.22 0.99 0.96 Total......................... 1.44 1.75 2.03 Hedged.......................... 1.43 1.73 1.89 24 Total revenues increased 13% from $391.4 million in 1994 to $442.0 million in 1995. Crude oil and liquids revenues increased $44.2 million, primarily reflecting the effect of increased sales prices ($39.3 million) and increased volumes ($4.3 million). Natural gas revenues declined $6.3 million primarily due to the effect of lower sales prices ($14.6 million) which was partially offset by the effect of higher sales volumes ($8.6 million). The increase in natural gas sales volumes is principally due to sales from the Company's Sierra Chata field in Argentina, which commenced production in April 1995. Other revenues for 1995 includes $10.2 million related to the favorable settlement of a disputed natural gas sales contract. Total revenues declined 10% from $436.9 million in 1993 to $391.4 million in 1994. Crude oil and liquids revenues declined $13.6 million. The sale of certain domestic properties in the fourth quarter of 1993 and the second quarter of 1994 resulted in a decrease in oil revenues of approximately $20.4 million. The effect of increased volumes of California heavy and Indonesian crude, approximately $14.5 million, and lower net profits payments were partially offset by the effect of lower sales prices. Daily average oil production in 1994 decreased 1,000 barrels per day from 1993. The 3,800 barrel per day decrease in oil production resulting from the sale of properties was partially offset by a 1,300 barrel per day increase in California heavy crude and a 1,600 barrel per day increase in Indonesian production. Natural gas revenues declined from $107.8 million in 1993 to $83.4 million in 1994. The sales of properties to Vintage and Bridge resulted in a decrease in natural gas revenues of approximately $13.1 million and lower sales prices resulted in a reduction in revenues of approximately $7.6 million. In addition, revenues for 1993 included a positive adjustment of $3.2 million related to production in prior periods from certain nonoperated properties. Net profits payments in 1994 were $3.3 million lower than in 1993. Natural gas sales volumes decreased from 165.4 MMcf per day in 1993 to 136.6 MMcf per day in 1994 with the property sales accounting for approximately 18.6 MMcf per day of the decrease. The Company's curtailment program (see -- General) resulted in a reduction of approximately 5.1 MMcf per day and the prior period adjustment included in 1993 represented volumes of approximately 4.0 MMcf per day. Total revenues increased approximately 2% from $427.5 million in 1992 to $436.9 million in 1993. Crude oil and liquids revenues decreased from $333.6 million in 1992 to $307.3 million in 1993 as the effect of lower sales prices more than offset the effect of increased sales volumes. In addition, revenues for 1992 included gains on hedging transactions of $9.7 million. Crude oil and liquids sales volumes increased from 62.5 MBbls per day in 1992 to 66.7 MBbls per day in 1993, reflecting increased sales of California heavy crude as well as a full year of volumes from the properties acquired in the Adobe Merger (the "Adobe Properties"). Natural gas revenues increased from $74.8 million in 1992 to $107.8 million in 1993. Sales volumes increased from 126.3 MMcf per day in 1992 to 165.4 MMcf per day in 1993, primarily reflecting a full year of volumes from the Adobe Properties. In addition, natural gas revenues for 1993 were reduced by losses on hedging transactions of $8.2 million compared to losses of $0.5 million in 1992. COSTS AND EXPENSES The following table sets forth, on a per barrel of oil equivalent ("BOE") produced basis, certain of the Company's costs and expenses (in dollars): 1995 1994 1993 --------- --------- --------- Production and operating (a)......... 4.65 4.65 4.76 Exploration, including dry hole costs.............................. 0.70 0.63 0.90 Depletion, depreciation and amortization (b)................... 3.96 3.76 4.44 General and administrative........... 0.81 0.85 0.94 Taxes other than income (c).......... 0.58 0.80 0.79 Interest, net (d)(e)................. 0.93 1.08 1.30 25 ___________ (a) Excluding related production, severance and ad valorem taxes. (b) Excludes effect of unproved property writedown of $0.03 per BOE in 1995. (c) Includes production, severance and ad valorem taxes. (d) Reflects interest expense less amounts capitalized and interest income. (e) Excludes effects of (i) benefit of federal income tax audit refund of $0.25 per BOE in 1995; (ii) benefit of an adjustment to certain financing costs recorded in a prior period of $0.05 per BOE in 1995; (iii) benefit of adjustments to provisions for potential state income tax obligations of $0.15 per BOE in 1995 and $0.36 per BOE in 1994; (iv) benefit of adjustment to provisions made in prior periods with respect to interest on certain federal income tax audit adjustments of $0.07 per BOE in 1994; and (v) benefit of Federal income tax audit refund and revised tax sharing agreement with the Company's former parent of $0.36 per BOE in 1993. Costs and expenses totalled $388.1 million in 1995 compared to $343.2 million in 1994. Depletion, depreciation and amortization expense ("DD&A") increased $11.9 million primarily reflecting such expense associated with new production from the Company's Sierra Chata field in Argentina and increased expense associated with certain of the Company's Gulf Coast and Permian Basin properties principally due to the recent high level of capital expenditures. In 1995 the Company recognized $30.2 million in impairment of oil and gas properties associated with the adoption of a new accounting standard with respect to the impairment of certain assets. Taxes other than income are $6.6 million lower in 1995, primarily reflecting lower ad valorem taxes and a $0.7 million benefit reflecting adjustments to amounts accrued in prior periods due to the favorable settlement of a dispute with respect to certain sales and use taxes. Costs and expenses for 1994 totalled $343.2 million compared to $549.9 million for 1993. Costs and expenses for 1993 included impairments of oil and gas properties of $99.3 million and restructuring charges of $38.6 million. Costs and expenses for 1994 included restructuring charges of $7.0 million (see - -- Liquidity and Capital Resources). Property sales in the fourth quarter of 1993 and the second quarter of 1994 resulted in reductions in production and operating costs and DD&A of $12.4 million and $11.5 million, respectively. The remainder of the decrease in DD&A is primarily attributable to the effect of the property impairments taken in the fourth quarter of 1993. Exploration expenses were down $10.6 million primarily reflecting lower geological and geophysical costs with respect to foreign operations and lower overhead. General and administrative expenses were $5.0 million lower, primarily reflecting the effect of the corporate restructuring program. Costs and expenses increased from $370.0 million in 1992 to $549.9 million in 1993. Costs and expenses for 1993 included impairments of oil and gas properties of $99.3 million and restructuring charges of $38.6 million (see -- Liquidity and Capital Resources). The increase in 1993 in production and operating costs and taxes (other than income) primarily reflects a full year's costs for the Adobe Properties. Exploration costs were $5.5 million higher, primarily reflecting higher geological and geophysical and dry hole costs. DD&A increased $6.4 million reflecting a full year's costs for the Adobe Properties, partially offset by reduced amortization rates with respect to certain unproved properties. General and administrative costs for 1993 include a $1.8 million charge related to the adoption of Statement of Financial Accounting Standards No. 112 -- "Employer's Accounting for Postemployment Benefits". Interest income for 1995 includes $7.4 million related to a $12.0 million refund with respect to the audit of the Company's federal income tax returns for 1981 through 1985 and $0.8 million related to a $1.3 million refund with respect to the audit of Adobe's federal income tax returns for 1984 and 1985. Interest income for 1993 includes $6.8 million related to a $10.0 million refund received as a result of the completion of the audit of the Company's federal income tax returns for 1971 through 1980. Interest expense for 1995 includes a $5.0 million benefit reflecting adjustments to provisions made in prior periods for potential state income tax obligations. Interest expense for 1994 includes a benefit of $2.4 million reflecting adjustments to provisions made in prior periods with respect to interest on certain potential federal income tax audit adjustments and a benefit of $11.5 million reflecting adjustments to provisions made in prior periods for potential state income tax obligations. 26 Interest expense for 1993 includes a benefit of $5.7 million related to a revision to a tax sharing agreement with the Company's former parent. Other income (expense) for 1995 includes a $2.5 million gain on the sale of Cherokee Resources Incorporated, a privately-held oil and gas company, and a $1.8 million loss on the sale of the Company's investment in Hadson. Other income (expense) for 1994 includes (i) a $2.4 million gain on the sale of the Company's interest in a company which was acquired in the Adobe merger in 1992; (ii) a net $1.6 million charge with respect to the Company's investment in Hadson; and (iii) a $5.0 million charge with respect to certain litigation. Other income (expense) for 1993 includes a $4.0 million charge related to the accrual of a contingent loss with respect to a former affiliate of Adobe. Income taxes for 1995 include a $5.0 million benefit related to the previously discussed federal tax audit refunds and a $1.3 million benefit related to adjustments to provisions in prior periods for potential state income tax obligations. Income taxes for 1994 include a $3.0 million credit reflecting the benefit of adjustments to provisions made in prior periods with respect to certain potential federal income tax audit adjustments and a $2.6 million credit reflecting the benefit of adjustments to provisions made in prior periods for potential state income tax obligations. Income taxes for 1993 includes (i) a $2.6 million charge to reflect the increase in the Company's deferred income tax liability as a result of the increase in the federal income tax rate; (ii) a $3.2 million benefit related to the previously discussed federal tax audit refund; (iii) a $1.8 million benefit related to the previously discussed revision to a tax sharing agreement with the Company's former parent; and (iv) a $1.0 million benefit relating to prior periods resulting from the restructuring of certain of the Company's foreign operations which were conducted through foreign incorporated subsidiaries. The increase in the Company's preferred dividend requirement reflects the issuance of 10.7 million shares of $0.732 Series A Convertible Preferred Stock in the second quarter of 1994. In October 1995 the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 123 "Accounting for Stock-Based Compensation" ("FAS 123"), which established financial accounting and reporting standards for stock-based employee compensation plans. FAS 123 encourages companies to adopt a fair value based method of accounting for such plans but continues to allow the use of the intrinsic value based method prescribed by Accounting Principles Board Opinion No. 25 "Accounting for Stock Issued to Employees" ("Opinion 25"). Companies electing to continue accounting in accordance with Opinion 25 must make pro forma disclosures of net income and earnings per share as if the fair value based method defined in FAS 123 had been applied. The Company will continue to account for stock-based compensation in accordance with Opinion 25 and will make pro forma disclosures in accordance with the provisions of FAS 123 beginning in its 1996 financial statements. 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 26% over the five years ended December 31, 1995; 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. Net cash provided by operating activities and net proceeds from sales of properties (including $55.2 million from the sale of Hadson) totalled $236.9 million in 1995; net cash used for capital expenditures and producing property acquisitions in such period totalled $223.2 million. 27 The increase in accounts receivable from $76.2 million at December 31, 1994 to $89.0 million at December 31, 1995 primarily reflects a $12.0 million receivable at December 31, 1995 related to a refund with respect to the audit of the Company's federal income tax returns for 1981 through 1985. The decrease in amounts payable from $84.1 million at December 31, 1994 to $73.1 million at December 31, 1995 primarily reflects lower amounts payable with respect to capital projects in progress. The decrease in accounts receivable from $87.4 million at December 31, 1993 to $76.2 million at December 31, 1994 primarily reflects lower receivables with respect to natural gas sales due to lower prices and an acceleration of the collection of such receivables resulting from the marketing arrangement with Hadson and the collection of certain amounts with respect to the property sale to Vintage which had been held in escrow, partially offset by an increase in receivables for oil sales, primarily due to higher sales prices. The Company's 1995 capital program totalled approximately $204.6 million, a level which allowed the Company to more than replace its 1995 production. The Company expects to expend approximately $200.5 million on its 1996 program. However, the actual amount expended by the Company in 1996 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. At December 31, 1995, $6.4 million in letters of credit were outstanding under the terms of the Credit Agreement. 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 December 31, 1995 no amounts were outstanding under these lines of credit. Certain of the Company's credit agreements and the indenture for the Debentures include covenants that restrict the Company'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 December 31, 1995 the Company could incur up to $191.0 million of additional indebtedness and pay dividends of up to $114.2 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 $52.0 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 Items 1 and 2. "Business and Properties -- Other Business Matters -- Environmental Regulation" and Note 11 to the Consolidated Financial Statements. 28 DIVIDENDS Dividends on the Company's 7% Convertible Preferred Stock and Series A Preferred Stock 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 7% Convertible Preferred Stock or Series A Preferred Stock are in arrears. None of the dividends with respect to the Company's 7% Convertible Preferred Stock and Series A Preferred Stock 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. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA PAGE ---- Audited Financial Statements Report of Independent Accountants................. 31 Consolidated Statement of Operations for the years ended December 31, 1995, 1994 and 1993............... 32 Consolidated Balance Sheet -- December 31, 1995 and 1994........................ 33 Consolidated Statement of Cash Flows for the years ended December 31, 1995, 1994 and 1993............... 34 Consolidated Statement of Shareholders' Equity for the years ended December 31, 1995, 1994 and 1993..... 35 Notes to Consolidated Financial Statements........ 36 Unaudited Financial Information Supplemental Information to Consolidated Financial Statements.................. 58 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. 29 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT ITEM 11. EXECUTIVE COMPENSATION ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Except for the portion of Item 10 relating to Executive Officers of the Registrant which is included in Part I of this Report, the information called for by Items 10 through 13 is incorporated by reference from the Company's Notice of Annual Meeting and Proxy Statement dated March 21, 1996, which meeting involves the election of directors, in accordance with General Instruction G to the Annual Report on Form 10-K. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K. (a) The following documents are filed as a part of this report: PAGE ---- 1. Financial Statements: Report of Independent Accountants.............. 31 Consolidated Statement of Operations for the years ended December 31, 1995, 1994 and 1993.......................... 32 Consolidated Balance Sheet-- December 31, 1995 and 1994................................ 33 Consolidated Statement of Cash Flows for the years ended December 31, 1995, 1994 and 1993.......................... 34 Consolidated Statement of Shareholders' Equity for the years ended December 31, 1995, 1994 and 1993.......................... 35 Notes to Consolidated Financial Statements..... 36 2. Financial Statement Schedules: Schedule VIII -- Valuation and Qualifying Accounts..................................... 68 All other schedules have been omitted because they are not applicable or the required information is presented in the financial statements or the notes to financial statements. 3. Exhibits: See Index to Exhibits on page 69 for a description of the exhibits filed as a part of this report. (b) Reports on Form 8-K February 6, 1996 30 REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors and Shareholders of Santa Fe Energy Resources, Inc. In our opinion, the consolidated financial statements listed in the index appearing under Item 14(a)(1) and (2) on page 30 present fairly, in all material respects, the financial position of Santa Fe Energy Resources, Inc. and its subsidiaries at December 31, 1995 and 1994, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1995, in conformity with generally accepted accounting principles. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with generally accepted auditing standards which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above. As discussed in Note 1 to the consolidated financial statements, the Company changed its method of accounting for the impairment of long-lived assets in 1995 to comply with the provisions of Statement of Financial Accounting Standards No. 121. PRICE WATERHOUSE LLP Houston, Texas February 23, 1996 31 SANTA FE ENERGY RESOURCES, INC. CONSOLIDATED STATEMENT OF OPERATIONS (IN MILLIONS OF DOLLARS, EXCEPT PER SHARE DATA) YEAR ENDED DECEMBER 31, ------------------------------- 1995 1994 1993 --------- --------- --------- Revenues Crude oil and liquids........... $ 337.9 $ 293.7 $ 307.3 Natural gas..................... 77.1 83.4 107.8 Natural gas systems............. -- -- 8.2 Crude oil marketing and trading....................... 14.4 11.3 9.9 Other........................... 12.6 3.0 3.7 --------- --------- --------- 442.0 391.4 436.9 --------- --------- --------- Costs and Expenses Production and operating........ 154.9 150.0 163.8 Oil and gas systems and pipelines..................... -- -- 4.2 Exploration, including dry hole costs......................... 23.4 20.4 31.0 Depletion, depreciation and amortization.................. 133.2 121.3 152.7 Impairment of oil and gas properties.................... 30.2 -- 99.3 General and administrative...... 26.9 27.3 32.3 Taxes (other than income)....... 19.2 25.8 27.3 Restructuring charges........... -- 7.0 38.6 Loss (gain) on disposition of assets........................ 0.3 (8.6) 0.7 --------- --------- --------- 388.1 343.2 549.9 --------- --------- --------- Income (Loss) from Operations........ 53.9 48.2 (113.0) Interest income................. 10.7 2.8 9.1 Interest expense................ (32.5) (27.5) (45.8) Interest capitalized............ 5.8 3.6 4.3 Other income (expense).......... (1.6) (4.0) (4.8) --------- --------- --------- Income (Loss) Before Income Taxes.... 36.3 23.1 (150.2) Income taxes.................... (9.7) (6.0) 73.1 --------- --------- --------- Net Income (Loss).................... 26.6 17.1 (77.1) Preferred dividend requirement....... (14.8) (11.7) (7.0) --------- --------- --------- Earnings (Loss) Attributable to Common Shares...................... $ 11.8 $ 5.4 $ (84.1) ========= ========= ========= Earnings (Loss) Attributable to Common Shares Per Share............ $ 0.13 $ 0.06 $ (0.94) ========= ========= ========= Weighted Average Number of Common Shares Outstanding (in millions)...................... 90.2 89.9 89.7 ========= ========= ========= The accompanying notes are an integral part of these financial statements. 32 SANTA FE ENERGY RESOURCES, INC. CONSOLIDATED BALANCE SHEET (IN MILLIONS OF DOLLARS) DECEMBER 31, ------------------------ 1995 1994 ----------- ----------- ASSETS Current Assets Cash and cash equivalents....... $ 42.6 $ 53.7 Accounts receivable............. 89.0 76.2 Inventories..................... 10.5 9.2 Other current assets............ 17.2 18.1 ----------- ----------- 159.3 157.2 ----------- ----------- Investment in Hadson Corporation..... -- 57.0 ----------- ----------- Properties and Equipment, at cost Oil and gas (on the basis of successful efforts accounting)................... 2,336.3 2,145.9 Other........................... 35.6 32.7 ----------- ----------- 2,371.9 2,178.6 Accumulated depletion, depreciation, amortization and impairment.................... (1,482.4) (1,335.6) ----------- ----------- 889.5 843.0 ----------- ----------- Other Assets Receivable under gas balancing arrangements.................. 5.8 4.6 Other........................... 10.2 9.6 ----------- ----------- 16.0 14.2 ----------- ----------- $ 1,064.8 $ 1,071.4 =========== =========== LIABILITIES AND SHAREHOLDERS' EQUITY Current Liabilities Accounts payable................ $ 73.1 $ 84.1 Interest payable................ 7.9 8.5 Current portion of long-term debt.......................... -- 3.9 Other current liabilities....... 28.6 29.5 ----------- ----------- 109.6 126.0 ----------- ----------- Long-Term Debt....................... 344.4 350.4 ----------- ----------- Deferred Revenues.................... 4.9 7.4 ----------- ----------- Other Long-Term Obligations.......... 24.2 28.0 ----------- ----------- Deferred Income Taxes................ 64.0 56.3 ----------- ----------- Commitments and Contingencies (Note 11)................................ -- -- ----------- ----------- Convertible Preferred Stock, $0.01 par value, 5.0 million shares authorized, issued and outstanding........................ 80.0 80.0 ----------- ----------- Shareholders' Equity Preferred stock, $0.01 par value, 34.3 million shares authorized, none issued....... -- -- $.732 Series A preferred stock, $0.01 par value, 10.7 million shares authorized, issued and outstanding................... 91.4 91.4 Common stock, $0.01 par value, 200.0 million shares authorized.................... 0.9 0.9 Paid-in capital................. 501.4 498.9 Accumulated deficit............. (155.7) (167.5) Foreign currency translation adjustment.................... (0.3) (0.4) ----------- ----------- 437.7 423.3 ----------- ----------- $ 1,064.8 $ 1,071.4 =========== =========== The accompanying notes are an integral part of these financial statements. 33 SANTA FE ENERGY RESOURCES, INC. CONSOLIDATED STATEMENT OF CASH FLOWS (IN MILLIONS OF DOLLARS) YEAR ENDED DECEMBER 31, ------------------------------- 1995 1994 1993 --------- --------- --------- Operating Activities: Net income (loss)............... $ 26.6 $ 17.1 $ (77.1) Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depletion, depreciation and amortization............. 133.2 121.3 152.7 Impairment of oil and gas properties............... 30.2 -- 99.3 Restructuring charges...... -- 1.0 27.8 Deferred income taxes...... 7.7 11.3 (71.9) Loss (gain) on disposition of assets................ 0.3 (8.6) 0.7 Exploratory dry hole costs.................... 5.5 6.5 8.9 Equity in losses and adjustment to valuation of investment in Hadson Corporation.............. -- 6.1 -- Hadson Corporation preferred dividends received in-kind......... -- (4.5) -- Other...................... 2.4 3.0 4.2 Changes in operating assets and liabilities: Decrease (increase) in accounts receivable...... (12.8) 1.3 12.4 Decrease (increase) in inventories.............. (1.3) (0.5) (3.8) Increase (decrease) in accounts payable......... (4.5) (8.6) (2.6) Increase (decrease) in interest payable......... (0.6) (1.7) (0.8) Increase (decrease) in income taxes payable..... 1.5 0.2 (0.6) Net change in other assets and liabilities.......... (13.7) (19.4) 11.0 --------- --------- --------- Net Cash Provided by Operating Activities......................... 174.5 124.5 160.2 --------- --------- --------- Investing Activities: Capital expenditures, including exploratory dry hole costs.... (189.4) (136.6) (127.0) Acquisitions of producing properties, net of related debt.......................... (33.8) (2.2) (4.4) Acquisition of Santa Fe Energy Partners, L.P................. -- -- (28.3) Proceeds from sale of investment in Hadson Corporation......... 55.2 -- -- Net proceeds from sales of properties.................... 7.2 81.1 39.9 Increase in partnership interest due to reinvestment........... -- -- (1.6) --------- --------- --------- Net Cash Used in Investing Activities......................... (160.8) (57.7) (121.4) --------- --------- --------- Financing Activities: Net proceeds from issuance of 11% senior subordinated debentures due 2004........... -- 96.1 -- Net proceeds from issuance of $.732 Series A convertible preferred stock............... -- 91.4 -- Principal payments on long-term borrowings.................... (10.0) (144.7) (41.5) Net change in revolving credit agreement..................... -- (50.0) (55.0) Cash dividends paid............. (14.8) (10.7) (21.3) --------- --------- --------- Net Cash Used in Financing Activities......................... (24.8) (17.9) (117.8) --------- --------- --------- Net Increase (Decrease) in Cash and Cash Equivalents................... (11.1) 48.9 (79.0) Cash and Cash Equivalents at Beginning of Year.................. 53.7 4.8 83.8 --------- --------- --------- Cash and Cash Equivalents at End of Year............................... $ 42.6 $ 53.7 $ 4.8 ========= ========= ========= The accompanying notes are an integral part of these financial statements. 34 SANTA FE ENERGY RESOURCES, INC. CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY (SHARES AND DOLLARS IN MILLIONS)
$.732 SERIES A CONVERTIBLE UNAMORTIZED FOREIGN PREFERRED STOCK COMMON STOCK RESTRICTED CURRENCY --------------- --------------- PAID-IN STOCK ACCUMULATED TRANSLATION SHARES AMOUNT SHARES AMOUNT CAPITAL AWARDS DEFICIT ADJUSTMENT ------ ------ ------ ------ ------- ----------- ----------- ---------- Balance at December 31, 1992......... -- $-- 89.5 $0.9 $ 494.3 $(0.4) $ (78.0) $ (0.2) Issuance of common stock Employee stock compensation and savings plans.................. -- -- 0.3 -- 2.6 (0.1) -- -- Amortization of restricted stock awards..................... -- -- -- -- -- 0.4 -- -- Pension liability adjustment....... -- -- -- -- -- -- (0.9) -- Foreign currency transaction adjustments...................... -- -- -- -- -- -- -- (0.1) Net loss........................... -- -- -- -- -- -- (77.1) -- Dividends declared................. -- -- -- -- -- -- (17.8) -- ------ ------ ------ ------ ------- ----------- ----------- ---------- Balance at December 31, 1993......... -- -- 89.8 0.9 496.9 (0.1) (173.8) (0.3) Issuance of common stock Employee stock compensation and savings plans.................. -- -- 0.2 -- 2.0 -- -- -- Issuance of preferred stock........ 10.7 91.4 -- -- -- -- -- -- Amortization of restricted stock awards........................... -- -- -- -- -- 0.1 -- -- Pension liability adjustment....... -- -- -- -- -- -- 0.9 -- Foreign currency transaction adjustments...................... -- -- -- -- -- -- -- (0.1) Net income......................... -- -- -- -- -- -- 17.1 -- Dividends declared................. -- -- -- -- -- -- (11.7) -- ------ ------ ------ ------ ------- ----------- ----------- ---------- Balance at December 31, 1994......... 10.7 91.4 90.0 0.9 498.9 -- (167.5) (0.4) Issuance of common stock Employee stock compensation and savings plans.................. -- -- 0.3 -- 2.5 -- -- -- Foreign currency translation adjustments...................... -- -- -- -- -- -- -- 0.1 Net income......................... -- -- -- -- -- -- 26.6 -- Dividends declared................. -- -- -- -- -- -- (14.8) -- ------ ------ ------ ------ ------- ----------- ----------- ---------- Balance at December 31, 1995......... 10.7 $91.4 90.3 $0.9 $ 501.4 $-- $(155.7) $ (0.3) ====== ====== ====== ====== ======== =========== =========== ========== TOTAL SHAREHOLDERS' EQUITY -------------- Balance at December 31, 1992......... $416.6 Issuance of common stock Employee stock compensation and savings plans.................. 2.5 Amortization of restricted stock awards..................... 0.4 Pension liability adjustment....... (0.9) Foreign currency transaction adjustments...................... (0.1) Net loss........................... (77.1) Dividends declared................. (17.8) -------------- Balance at December 31, 1993......... 323.6 Issuance of common stock Employee stock compensation and savings plans.................. 2.0 Issuance of preferred stock........ 91.4 Amortization of restricted stock awards........................... 0.1 Pension liability adjustment....... 0.9 Foreign currency transaction adjustments...................... (0.1) Net income......................... 17.1 Dividends declared................. (11.7) -------------- Balance at December 31, 1994......... 423.3 Issuance of common stock Employee stock compensation and savings plans.................. 2.5 Foreign currency translation adjustments...................... 0.1 Net income......................... 26.6 Dividends declared................. (14.8) -------------- Balance at December 31, 1995......... $437.7 ==============
The accompanying notes are an integral part of these financial statements. 35 SANTA FE ENERGY RESOURCES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (1) ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES PRINCIPLES OF CONSOLIDATION The consolidated financial statements of Santa Fe Energy Resources, Inc. ("Santa Fe" or the "Company") and its subsidiaries include the accounts of all wholly owned subsidiaries. The accounts of Santa Fe Energy Partners, L.P., (the "Partnership") are included on a proportional basis until September 1993 when Santa Fe purchased all the Partnership's outstanding Depositary Units and undeposited LP Units other than those units held by Santa Fe and its affiliates. On September 27, 1993 the Company exercised its right under the Agreement of Limited Partnership to purchase all of the Partnership's outstanding Depositary Units and undeposited LP Units, other than those units held by the Company and its affiliates, at a redemption price of $4.9225 per unit. Consideration for the 5,749,500 outstanding units totalled $28.3 million. The acquisition of the units was accounted for as a purchase and the results of operations of the Partnership attributable to the units acquired are included in the Company's results of operations with effect from October 1, 1993. The purchase price was allocated primarily to oil and gas properties. References herein to the "Company" or "Santa Fe" relate to Santa Fe Energy Resources, Inc., individually or together with its consolidated subsidiaries; references to the "Partnership" relate to Santa Fe Energy Partners, L.P. All significant intercompany accounts and transactions have been eliminated. Certain prior period amounts have been reclassified to conform to current presentation. OIL AND GAS OPERATIONS The Company follows the successful efforts method of accounting for its oil and gas exploration and production activities. Costs (both tangible and intangible) of productive wells and development dry holes, as well as the cost of prospective acreage, are capitalized. The costs of drilling and equipping exploratory wells which do not find proved reserves are expensed upon determination that the well does not justify commercial development. Other exploratory costs, including geological and geophysical costs and delay rentals, are charged to expense as incurred. Depletion and depreciation of proved properties are computed on an individual field basis using the unit-of-production method based upon proved oil and gas reserves attributable to the field. Certain other oil and gas properties are depreciated or amortized on a straight-line basis. In the fourth quarter of 1995 the Company changed its impairment policy to conform to the provisions of Statement of Financial Accounting Standards No. 121 "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of" ("FAS 121"). In accordance with the provisions of FAS 121 individual proved properties are reviewed periodically to determine if the carrying value of the property exceeds the expected undiscounted future net revenues from the operation of the property. Based on this review and the continuing evaluation of development plans, economics and other factors, as appropriate, the Company records impairment (additional depletion and depreciation) to the extent that the carrying value of the property exceeds the present value of such expected future net revenues. The Company recorded impairments of $30.2 million in 1995 and $99.3 million in 1993. With respect to the impairments recorded in 1995, approximately $22.1 million was due to the adoption of FAS 121. The Company provides for future abandonment and site restoration costs with respect to certain of its oil and gas properties. The Company estimates that with respect to these properties such future costs total approximately $34.2 million and such amount is being accrued over the expected life of the properties. At December 31, 1995 and 1994 Accumulated Depletion, Depreciation, Amortization and Impairment includes $15.5 million and $15.0 million, respectively, with respect to such costs. 36 SANTA FE ENERGY RESOURCES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The value of undeveloped acreage is aggregated and the portion of such costs estimated to be nonproductive, based on historical experience, is amortized to expense over the average holding period. Additional amortization may be recognized based upon periodic assessment of prospect evaluation results. The cost of properties determined to be productive is transferred to proved properties; the cost of properties determined to be nonproductive is charged to accumulated amortization. Maintenance and repairs are expensed as incurred; major renewals and improvements are capitalized. Gains and losses arising from sales of properties are included in income currently. REVENUE RECOGNITION Revenues from the sale of crude oil and liquids produced are generally recognized upon the passage of title, net of royalties and net profits interests. Revenues from natural gas production are generally recorded using the entitlement method, net of royalties and net profits interests. Sales proceeds in excess of the Company's entitlement are included in Deferred Revenues and the Company's share of sales taken by others is included in Other Assets. At December 31, 1995 the Company's deferred revenues for sales proceeds received in excess of the Company's entitlement was $4.7 million with respect to 3.4 MMcf and the asset related to the Company's share of sales taken by others was $5.8 million with respect to 4.1 MMcf. The Company hedges a portion of its oil and gas sales. See Note 11 -- Commitments and Contingencies -- Oil and Gas Hedging. Revenues from crude oil marketing and trading represent the gross margin resulting from such activities. Revenues from such activities are net of costs of sales of $225.9 million in 1993, $204.7 million in 1994 and $251.1 million in 1995. Revenues from natural gas systems are net of the cost of natural gas purchased and resold. Such costs totalled $49.9 million in 1993. EARNINGS PER SHARE Earnings per share are based on the weighted average number of common shares outstanding during the year. ACCOUNTS RECEIVABLE Accounts Receivable relates primarily to sales of oil and gas and amounts due from joint interest partners for expenditures made by the Company on behalf of such partners. The Company reviews the financial condition of potential purchasers and partners prior to signing sales or joint interest agreements. At December 31, 1995 and 1994 the Company's allowance for doubtful accounts receivable, which is reflected in the consolidated balance sheet as a reduction in accounts receivable, totalled $2.0 million and $3.1 million, respectively. Accounts receivable totalling $1.1 million, $3.8 million and $0.1 million were written off as uncollectible in 1995, 1994 and 1993, respectively. INVENTORIES Inventories are valued at the lower of cost (average price or first-in, first-out) or market. Crude oil inventories at December 31, 1995 and 1994 were $2.7 million and $1.6 million, respectively, and materials and supplies inventories at such dates were $7.8 million and $7.6 million, respectively. ENVIRONMENTAL EXPENDITURES Environmental expenditures relating to current operations are expensed or capitalized, as appropriate, depending on whether such expenditures provide future economic benefits. Liabilities are 37 SANTA FE ENERGY RESOURCES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) recognized when the expenditures are considered probable and can be reasonably estimated. Measurement of liabilities is based on currently enacted laws and regulations, existing technology and undiscounted site-specific costs. Generally, such recognition coincides with the Company's commitment to a formal plan of action. INCOME TAXES The Company follows the asset and liability approach to accounting for income taxes. Deferred tax assets and liabilities are determined using the tax rate for the period in which those amounts are expected to be received or paid, based on a scheduling of temporary differences between the tax bases of assets and liabilities and their reported amounts. Under this method of accounting for income taxes, any future changes in income tax rates will affect deferred income tax balances and financial results. USE OF ESTIMATES The preparation of the Company's financial statements in conformity with generally accepted accounting principles requires the Company to make certain estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities and the periods in which certain items of revenue and expense are included. Actual results may differ from such estimates. (2) CORPORATE RESTRUCTURING PROGRAM In the fourth quarter of 1993 the Company adopted a corporate restructuring program which included (i) the concentration of capital spending in the Company's core operating areas; (ii) the disposition of non-core assets; (iii) the elimination of the $0.04 per share quarterly common stock dividend; and (iv) an evaluation of the Company's capital and cost structures. The Company's non-core asset disposition program included the sale of its natural gas gathering and processing assets to Hadson Corporation ("Hadson") (see Note 3), the sale to Vintage Petroleum, Inc. ("Vintage") of certain southern California and Gulf Coast oil and gas producing properties and the sale to Bridge Oil (U.S.A.) Inc. ("Bridge") of certain mid-Continent and Rocky Mountain oil and gas producing properties and undeveloped acreage. Based on the evaluation of its capital and cost structures, the Company (i) implemented a cost reduction program which included the reduction of its salaried work force by approximately 20%, an improvement in the efficiency of its information systems and reductions in other general and administrative and production and operating costs and (ii) issued $100 million of 11% Senior Subordinated Debentures and 10,700,000 shares of $.732 Series A Convertible Preferred Stock (the "Series A Preferred") and used a portion of the proceeds to retire certain of its long-term debt (see Note 6). In implementing the corporate restructuring program, in 1993 the Company recorded restructuring charges of $38.6 million comprised of (i) losses on property dispositions of $27.8 million; (ii) long-term debt repayment penalties and interest of $8.6 million; and (iii) accruals for certain personnel benefits and related costs of $2.2 million. In the first quarter of 1994 the Company recorded additional restructuring charges of $7.0 million comprised of severance, benefits and relocation expenses associated with the cost reduction program. SALE TO VINTAGE. In November 1993 the Company completed the sale of certain southern California and Gulf Coast producing properties for net proceeds totalling $42.0 million in cash, $31.5 million of which was collected in 1993. The Company's income from operations for 1993 includes $2.7 million attributable to the assets sold to Vintage. SALE TO BRIDGE. In April 1994 the Company completed the sale to Bridge of certain Mid-Continent and Rocky Mountain producing and nonproducing oil and gas properties for net proceeds 38 SANTA FE ENERGY RESOURCES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) totalling $46.7 million in cash. The net book value of these assets was included in Assets Held for Sale at December 31, 1993. The Company's income from operations for 1994 and 1993 includes $2.2 million and $5.8 million, respectively, attributable to the assets sold to Bridge. OTHER DISPOSITIONS. In the first quarter of 1994 the Company sold its interest in certain other oil and gas properties, in which it had no remaining basis, for $8.3 million. 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. Had SAB 94 been in effect in 1993, the $8.6 million in long-term debt repayment penalties and interest which was included in the Company's 1993 results of operations 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 ---------- ----------- ---------- ----------- (UNAUDITED) (UNAUDITED) 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)
(3) INVESTMENT IN HADSON In December 1993 the Company completed a transaction with Hadson under the terms of which the Company sold the common stock of Adobe Gas Pipeline Company ("AGPC"), a wholly-owned subsidiary which held the Company's natural gas gathering and processing assets, to Hadson in exchange for Hadson 11.25% preferred stock with a face value of $52.0 million and 40% of Hadson's common stock. The Company accounted for the sale as a non-monetary transaction and the investment in Hadson was valued at $56.2 million, the carrying value of the Company's investment in AGPC. The Company's investment in Hadson is accounted for on the equity basis. The Company's income from operations for 1993 includes $1.6 million attributable to the assets sold to Hadson. Also in December 1993 the Company signed a seven-year gas sales contract with Hadson under the terms of which Hadson markets a substantial portion of the Company's domestic natural gas production at market prices as defined by published monthly indices for relevant production locations. In November 1994 the Company and Hadson settled a lawsuit related to certain of the assets sold to Hadson by the Company in December 1993. The settlement totalled $5.7 million and the Company's share, approximately $3.3 million, is included in Other Income (Expense) in the income statement. The Company paid the full amount of the settlement and Hadson gave the Company a $2.4 million ten-year 39 SANTA FE ENERGY RESOURCES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) note for its share. The note bore interest at 9%, payable annually, with the principal amount due at maturity. The note was retired as part of the sales transaction discussed below. In 1995 the Company sold its holdings in Hadson for $55.2 million. Other Income (Expense) for 1995 includes a $1.8 million charge with respect to the Company's loss on the sale. The following table summarizes the Company's investment in Hadson and the changes in such investment during 1994 and 1995 (in millions of dollars): Investment at December 31, 1993...... 56.2 Preferred dividends, paid in-kind.... 4.5 Equity in losses and valuation adjustments........................ (6.1) Note receivable...................... 2.4 ----- Investment at December 31, 1994...... 57.0 Proceeds from sale................... (55.2) ----- Loss on sale......................... 1.8 ===== (4) SANTA FE ENERGY TRUST In November 1992 5,725,000 Depository Units ("Trust Units"), each consisting of beneficial ownership of one unit of undivided beneficial interest in the Santa Fe Energy Trust (the "Trust") and a $20 face amount beneficial ownership interest in a $1,000 face amount zero coupon United States Treasury obligation maturing on or about February 15, 2008, were sold in a public offering. The Trust consists of certain oil and gas properties conveyed by Santa Fe. In the first quarter of 1994, the Company sold 575,000 Trust Units which it held for $11.3 million. The gain on the sale of $0.8 million is included in Other Income (Expense). For any calendar quarter ending on or prior to December 31, 2002, the Trust will receive additional royalty payments to the extent that it needs such payments to distribute $0.40 per Depository Unit per quarter. The source of such additional royalty payments, if needed, will be limited to the Company's remaining royalty interest in certain of the properties conveyed to the Trust. If such additional payments are made, certain proceeds otherwise payable to the Trust in subsequent quarters may be reduced to recoup the amount of such additional payments. The aggregate amount of the additional royalty payments (net of any amounts recouped) will be limited to $20.0 million on a revolving basis. The Company has been required to make additional royalty payments totalling $0.4 million in 1993, $1.1 million in 1994 and $0.5 million in 1995. At December 31, 1995 and 1994, Accounts Payable included $2.6 million and $2.7 million, respectively, due to the Trust. 40 SANTA FE ENERGY RESOURCES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (5) CASH FLOWS The Company considers all highly liquid investments with a maturity of three months or less when purchased to be cash equivalents. The Company made interest payments of $48.0 million, $47.9 million and $37.6 million in 1993, 1994 and 1995, respectively. In 1993, 1994 and 1995, the Company made tax payments of $5.0 million, $1.8 million and $1.6 million, respectively, and in 1993 and 1995 received tax refunds of $4.1 million and $1.3 million, respectively, primarily related to the audit of prior years' returns. (6) FINANCING AND DEBT Long-term debt at December 31, 1995 and 1994 consisted of (in millions of dollars): DECEMBER 31, -------------------------------------------- 1995 1994 -------------------- -------------------- CURRENT LONG-TERM CURRENT LONG-TERM ------- --------- ------- --------- Senior Notes........................ -- 245.0 -- 245.0 11% Senior Subordinated Debentures.. -- 99.4 -- 99.3 Notes Payable to Bank............... -- -- 3.9 6.1 ------- --------- ------- --------- -- 344.4 3.9 350.4 ======= ========= ======= ========= Aggregate total maturities of long-term debt during the next five years are as follows: 1996 -- none; 1997 -- $35.0 million; 1998 -- $35.0 million; 1999 -- $25.0 million; and 2000 -- $25.0 million. 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 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 December 31, 1995, $6.4 million in letters of credit were outstanding under the terms of the Credit Agreement. In a public offering in May 1994 the Company issued $100.0 million of 11% Senior Subordinated Debentures due 2004 (the "Debentures"). The Debentures were issued for 99.266% of face value and the Company received proceeds of $96.1 million, after deducting related costs and expenses of $3.2 million. The Debentures, which mature May 15, 2004, are not redeemable prior to May 15, 1999 and may be redeemed after such date at the option of the Company at prices set forth in the indenture for the Debentures. Under certain circumstances, the Company may be required to redeem the Debentures for 101% of the principal amount. The Debentures are general unsecured subordinated obligations of the Company. The Company used the proceeds from the issuance of the Debentures, together with a portion of the proceeds from the issuance of the Series A Preferred (see Note 9), to retire certain of its then outstanding long-term debt. The Company retired $65.0 million of Senior Notes, the $12.3 million outstanding balance of a term loan agreement which the Company had executed in 1991 in connection with the purchase of certain producing properties, the $30.0 million outstanding balance of the Partnership's credit agreement and the $25.0 million outstanding balance of the Bank Facility. 41 SANTA FE ENERGY RESOURCES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) On April 11, 1990 the Company issued $365.0 million of serial unsecured Senior Notes with interest rates averaging 10.35%. At December 31, 1995, $245.0 million in Senior Notes were outstanding and are to be repaid, $35.0 million in 1997 and 1998 and $25.0 million per year in 1999 through 2005. 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 December 31, 1995 no amounts were outstanding under these lines of credit. Certain of the Company's credit agreements and the indenture for the Debentures include covenants that restrict the Company'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 December 31, 1995 the Company could incur up to $191.0 million of additional indebtedness and pay dividends of up to $114.2 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 $52.0 million. 42 SANTA FE ENERGY RESOURCES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (7) SEGMENT INFORMATION The principal business of the Company consists of the acquisition, exploration and development of oil and gas properties and the production and sale of crude oil and liquids and natural gas. Pertinent information with respect to the Company's oil and gas business is presented in the following table (in millions of dollars):
OIL AND GAS ------------------------------------------ OTHER GENERAL U.S. ARGENTINA INDONESIA FOREIGN CORPORATE TOTAL --------- --------- --------- ------- --------- --------- 1995 Revenues........................... 391.2 19.2 31.6 -- -- 442.0 Income (Loss) from Operations...... 87.9 3.6 0.8 (6.5) (31.9) 53.9 Depletion, Depreciation, Amortization and Impairment..... 143.3 7.0 10.0 0.5 2.6 163.4 Additions to Property and Equipment....................... 175.4 14.4 16.7 3.8 6.5 216.8 Identifiable Assets at December 31.............................. 806.7 73.0 84.8 9.5 90.8 1,064.8 1994 Revenues........................... 346.7 12.9 31.8 -- -- 391.4 Income (Loss) from Operations...... 88.9 3.1 6.1 (10.3) (39.6) 48.2 Depletion, Depreciation, Amortization and Impairment..... 99.9 3.8 9.7 6.3 1.6 121.3 Additions to Property and Equipment....................... 98.2 13.6 16.3 4.4 5.4 137.9 Identifiable Assets at December 31.............................. 817.6 57.8 103.1 6.5 86.4 1,071.4 1993 Revenues........................... 401.2 12.5 23.2 -- -- 436.9 Income (Loss) from Operations...... (33.6) 3.0 (13.4) (18.4) (50.6) (113.0) Depletion, Depreciation, Amortization and Impairment..... 218.8 3.6 21.2 6.7 1.7 252.0 Additions to Property and Equipment....................... 116.1 7.3 16.8 6.1 4.4 150.7 Identifiable Assets at December 31.............................. 862.0 48.2 65.3 2.8 98.6 1,076.9
Crude oil and liquids and natural gas accounted for more than 93% of revenues in 1993, 1994 and 1995. The following table (which with respect to certain properties includes royalty and working interest owners' share of production) reflects sales to crude oil purchasers who accounted for more than 10% of the Company's crude oil and liquids revenues (in millions of dollars): YEAR ENDED DECEMBER 31, ------------------------ 1995 1994 1993 ----- ----- ---- Celeron Corporation.................. 62.1 58.7 56.8 Shell Oil Company.................... 100.4 94.5 86.3 None of the Company's purchasers of natural gas accounted for more than 10% of natural gas revenues in 1993. In 1995 and 1994 the only purchaser of the Company's natural gas to account for more than 10% of natural gas revenues was Hadson (see Note 3 with respect to the Company's gas sales contract with Hadson). (8) CONVERTIBLE PREFERRED STOCK The convertible preferred stock issued in connection with the Company's merger with Adobe Resources Corporation ("Adobe") in 1992 is non-voting and entitled to receive cumulative cash 43 SANTA FE ENERGY RESOURCES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) dividends at an annual rate equivalent to $1.40 per share. The holders of the convertible preferred shares may, at their option, convert any or all such shares into 1.3913 shares of the Company's common stock. The Company may, at any time after the fifth anniversary of the effective date of the Merger and upon the occurrence of a "Special Conversion Event", convert all outstanding shares of convertible preferred stock into common stock at the initial conversion rate of 1.3913 shares of common stock, subject to certain adjustments, plus additional shares in respect to accrued and unpaid dividends. A Special Conversion Event is deemed to have occurred when the average daily closing price for a share of the Company's common stock for 20 of 30 consecutive trading days equals or exceeds 125% of the quotient of $20.00 divided by the then applicable conversion rate (approximately $18.00 per share at a conversion rate of 1.3913). Upon the occurrence of the "First Ownership Change" of Santa Fe, each holder of shares of convertible preferred stock shall have the right, at the holder's option, to elect to have all of such holder's shares redeemed for $20.00 per share plus accrued and unpaid interest and dividends. The First Ownership Change shall be deemed to have occurred when any person or group, together with any affiliates or associates, becomes the beneficial owner of 50% or more of the outstanding common stock of Santa Fe. (9) SHAREHOLDERS' EQUITY COMMON STOCK In 1993, 1994 and 1995 the Company issued a total of 0.8 million previously unissued shares of common stock in connection with certain employee benefit and compensation plans. The Company declared dividends to common shares of $0.12 per share in 1993. No dividends were declared in 1994 or 1995 (see Note 2). $.732 SERIES A CONVERTIBLE PREFERRED STOCK In a public offering in May 1994 the Company issued 10,700,000 shares of $.732 Series A Convertible Preferred Stock. The Series A Preferred was issued at $8.875 per share and the Company received total proceeds of $91.4 million after deducting related costs and expenses of $3.6 million. Each share of Series A Preferred mandatorily converts into one share of common stock on May 15, 1998 and the Company has the option to redeem the shares, in whole or in part, on or after May 15, 1997 and prior to May 15, 1998 at prices set forth in the certificate of designation for the Series A Preferred, payable in common stock. Each share of Series A Preferred is convertible at the option of the holder into 0.8474 shares of common stock at any time prior to May 15, 1998. The Series A Preferred ranks prior to common stock both as to payment of dividends and distribution of assets upon liquidation. The holders of Series A Preferred are entitled to receive cumulative preferential dividends, accruing at the rate per share of $0.732 per annum ($0.183 per quarter) payable quarterly in arrears. PREFERRED STOCK The Board of Directors of the Company is empowered, without approval of the shareholders, to cause shares of preferred stock to be issued in one or more series, and to determine the number of shares in each series and the rights, preferences and limitations of each series. Among the specific matters which may be determined by the Board of Directors are: the annual rate of dividends; the redemption price, if any; the terms of a sinking or purchase fund, if any; the amount payable in the event of any voluntary liquidation, dissolution or winding up of the affairs of the Company; conversion rights, if any; and voting powers, if any. 44 SANTA FE ENERGY RESOURCES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 1990 INCENTIVE STOCK COMPENSATION PLAN Under the terms of the Santa Fe Energy Resources 1990 Incentive Stock Compensation Plan (the "Plan") the Company may grant options and awards with respect to no more than 7,500,000 shares of common stock to officers, directors and key employees. Options granted in 1991 and prior are fully vested and expire in 2000. Options granted in 1992 are fully vested and expire in 2002. The options granted in 1993 have a ten year term and vest as to 50 percent 5 years after grant, as to a cumulative 75 percent 6 years after grant and as to the entire amount 7 years after grant. The options are exercisable on an accelerated basis beginning one year and ending three years after grant in certain circumstances. If the market value per share of the Company's common stock (sustained in all events for at least 60 days) exceeds $15, 25 percent of the options shall become exercisable; in the event the market value per share exceeds $20, 50 percent of the options shall become exercisable; and in the event the market value exceeds $25, 100 percent shall become exercisable. The options granted in 1995 have a ten year term. With respect to 250,000 of such options, vesting occurs 50 percent six months after grant, as to a cumulative 75 percent one year after grant and as to the entire amount two years after grant. The remainder of the options granted in 1995 vest as to 33.33 percent one year after grant, as to a cumulative 66.67 percent two years after grant and as to the entire amount three years after grant. The following table reflects activity with respect to Non-Qualified Stock Options during 1993 through 1995: OPTION OPTIONS PRICE OUTSTANDING PER SHARE ------------ ------------------- Outstanding at January 1, 1993....... 2,811,928 $9.5625 to $ 24.24 Grants............................... 800,000 $9.5625 Cancellations........................ (95,398) $9.5625 to $ 24.24 Exercises............................ (6,945) $9.5625 ------------ Outstanding at December 31, 1993..... 3,509,585 $9.5625 to $ 24.24 Cancellations........................ (206,063) $9.5625 to $ 24.24 ------------ Outstanding at December 31, 1994..... 3,303,522 $9.5625 to $ 24.24 Grants............................... 985,500 $7.875 to $ 8.00 Cancellations........................ (61,280) $7.875 to $ 24.24 Exercises............................ (9,444) $7.875 to $9.5625 ------------ Outstanding at December 31, 1995..... 4,218,298 $7.875 to $ 24.24 =========== At December 31, 1995 options on 2,243,644 shares were available for future grants. In 1995 and 1994 the Company issued 217,566 and 101,423 common shares, respectively, in accordance with the terms of certain employee compensation plans. In December 1995 the Company granted 104,542 "Phantom Units" to certain executive officers. The Phantom Units are to be earned over a three-year period commencing January 1, 1996. The number of Phantom Units earned is dependent upon the Company achieving certain goals with respect to cash flows, production volumes and stock price. Ultimate payment, if any, will be made in an 45 SANTA FE ENERGY RESOURCES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) equivalent number of shares of the Company's common stock. Compensation expense will be recognized over the period the Phantom Units are earned based on the market price of the Company's common stock. 1995 INCENTIVE STOCK COMPENSATION PLAN Under the terms of the Santa Fe Energy Resources 1995 Incentive Stock Compensation Plan for Nonexecutive Employees the Company may grant options and awards with respect to not more than 1,000,000 shares of common stock per year to employees other than executive officers and directors. During 1995 the Company granted options on 218,750 shares (8,500 of which were subsequently cancelled) at $9.625 per share. The grants, which were made at the market price of the Company's common stock at the time of grant, vest one year from the date of grant. During 1995 the Company also issued 2,000 restricted shares in accordance with the terms of the plan. At December 31, 1995 options on 212,250 shares were outstanding. (10) PENSION AND OTHER EMPLOYEE BENEFIT PLANS PENSION PLANS The Company has a defined benefit retirement plan (the "SFER Plan") covering substantially all salaried employees not covered by collective bargaining agreements and a nonqualified supplemental retirement plan (the "Supplemental Plan"). The Supplemental Plan will pay benefits to participants in the SFER Plan in those instances where the SFER Plan formula produces a benefit in excess of limits established by ERISA and the Tax Reform Act of 1986. Benefits payable under the SFER Plan are based on years of service and compensation during the five highest paid years of service during the ten years immediately preceding retirement. The Company's funding policy is to contribute annually not less than the minimum required by ERISA and not more than the maximum amount deductible for income tax purposes. 46 SANTA FE ENERGY RESOURCES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The following table sets forth the funded status of the SFER Plan and the Supplemental Plan at December 31, 1995 and 1994 (in millions of dollars): SFER PLAN SUPPLEMENTAL PLAN -------------------- ------------------ 1995 1994 1995 1994 --------- --------- --------- ------- Plan assets at fair value, primarily invested in common stocks and U.S. and corporate bonds................ 32.5 29.1 -- -- Actuarial present value of projected benefit obligations: Accumulated benefit obligations Vested.................... (30.4) (26.4) (0.7) (0.8) Nonvested................. (1.3) (1.3) -- -- Effect of projected future salary increases.................... (7.3) (5.3) (1.3) (4.0) --------- --------- --------- ------- Excess of projected benefit obligations over plan assets....... (6.5) (3.9) (2.0) (4.8) Unrecognized net loss from past experience different from that assumed and effects of changes in assumptions........................ 3.0 1.7 (2.1) 1.6 Unrecognized prior service cost...... (2.0) (2.1) 2.0 2.1 Unrecognized net (asset) obligation being recognized over plan's average remaining service life....................... (0.9) (1.0) 0.2 0.2 --------- --------- --------- ------- Accrued pension liability............ (6.4) (5.3) (1.9) (0.9) ========= ========= ========= ======= Major assumptions at year-end Discount rate................... 7.50% 8.25% 7.50% 8.25% Long-term asset yield........... 9.50% 9.50% 9.50% 9.50% Rate of increase in future compensation................. 5.25% 5.25% 5.25% 5.25% The following table sets forth the components of pension expense for the SFER Plan and Supplemental Plan for 1995, 1994 and 1993 (in millions of dollars):
SFER PLAN SUPPLEMENTAL PLAN ---------------------- ---------------------- 1995 1994 1993 1995 1994 1993 ---- ---- ---- ---- ---- ---- Service cost......................... 1.3 1.7 1.4 0.4 -- -- Interest cost........................ 2.7 2.8 2.6 0.4 0.1 0.1 Return on plan assets................ (5.5) 0.5 (1.4) -- -- -- Net amortization and deferral........ 2.5 (3.3) (1.3) 0.3 -- -- ---- ---- ---- ---- ---- ---- 1.0 1.7 1.3 1.1 0.1 0.1 ==== ==== ==== ==== ==== ====
The Company sponsors a pension plan covering certain hourly-rated employees in California (the "Hourly Plan"). The Hourly Plan provides benefits that are based on a stated amount for each year of service. The Company annually contributes amounts which are actuarially determined to provide the Hourly Plan with sufficient assets to meet future benefit payment requirements. 47 SANTA FE ENERGY RESOURCES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The following table sets forth the funded status of the Hourly Plan at December 31, 1995 and 1994 (in millions of dollars): 1995 1994 --------- --------- Plan assets at fair value, primarily invested in fixed-rate securities.... 8.7 7.5 Actuarial present value of projected benefit obligations Accumulated benefit obligations Vested.................... (10.4) (9.3) Nonvested................. (0.4) (0.3) --------- --------- Excess of projected benefit obligation over plan assets........ (2.1) (2.1) Unrecognized net (gain) loss from past experience different from that assumed and effects of changes in assumptions........................ (0.3) (0.4) Unrecognized prior service cost...... 0.4 0.5 Unrecognized net obligation.......... 1.2 1.3 Additional minimum liability......... (1.3) (1.3) --------- --------- Accrued pension liability....... (2.1) (2.0) ========= ========= Major assumptions at year-end Discount rate................... 7.50% 8.25% Expected long-term rate of return on plan assets......... 8.50% 8.50% The following table sets forth the components of pension expense for the Hourly Plan for 1995, 1994 and 1993 (in millions of dollars): YEAR ENDED DECEMBER 31, ------------------------------- 1995 1994 1993 --------- --------- --------- Service cost.................... 0.2 0.2 0.2 Interest cost................... 0.8 0.8 0.7 Return on plan assets........... (1.4) (0.4) (0.8) Net amortization and deferral... 0.9 -- 0.4 --------- --------- --------- 0.5 0.6 0.5 ========= ========= ========= In the fourth quarter of 1993 the Company established a pension plan for certain persons employed in foreign locations (the "Foreign Plan"). The following table sets forth the funded status of the Foreign Plan at December 31, 1995 and 1994 (in millions of dollars): 1995 1994 --------- --------- Plan assets.......................... -- -- Actuarial present value of projected benefit obligations: Accumulated benefit obligations -- nonvested..... (0.2) (0.1) Effect of projected future salary increases............. -- -- --------- --------- Excess of projected benefit obligations over plan assets....... (0.2) (0.1) Unrecognized prior service costs..... 0.1 0.1 --------- --------- Accrued pension liability............ (0.1) -- ========= ========= Major assumptions at year-end: Discount rate................... 7.50% 8.25% Rate of increase in future compensation................. 5.25% 5.25% 48 SANTA FE ENERGY RESOURCES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The following table sets forth the components of pension expense for the Foreign Plan for 1995 and 1994 (in millions of dollars): YEAR ENDED DECEMBER 31, -------------------- 1995 1994 --------- --------- Service cost......................... 0.1 -- Interest cost........................ -- -- Net amortization and deferral........ -- -- --------- --------- 0.1 -- ========= ========= POSTRETIREMENT BENEFITS OTHER THAN PENSIONS The Company provides health care and life insurance benefits for substantially all employees who retire under the provisions of a Company-sponsored retirement plan and their dependents. Participation in the plans is voluntary and requires a monthly contribution by the employee. Effective January 1, 1993 the Company adopted the provisions of SFAS No. 106 -- "Employers" Accounting for Postretirement Benefits Other Than Pensions'. The Statement requires the accrual, during the years the employee renders service, of the expected cost of providing postretirement benefits to the employee and the employee's beneficiaries and covered dependents. The following table sets forth the plan's funded status at December 31, 1995 and 1994 (in millions of dollars): DECEMBER 31, -------------------- 1995 1994 --------- --------- Plan assets, at fair value........... -- -- Accumulated postretirement benefit obligation Retirees........................... (4.6) (4.2) Eligible active participants....... (1.4) (0.9) Other active participants.......... (1.2) (0.9) --------- --------- Accumulated postretirement benefit obligation in excess of plan assets............................. (7.2) (6.0) Unrecognized transition obligation... 3.8 4.1 Unrecognized net loss (gain) from past experience different from that assumed and from changes in assumptions........................ 0.3 (0.4) --------- --------- Accrued postretirement benefit cost............................... (3.1) (2.3) ========= ========= Assumed discount rate................ 7.75% 8.50% Assumed rate of compensation increase........................... 5.25% 5.25% The Company's net periodic postretirement benefit cost for 1995, 1994 and 1993 includes the following components (in millions of dollars): YEAR ENDED DECEMBER 31, ------------------------ 1995 1994 1993 ---- ---- ---- Service costs........................ 0.3 0.4 0.3 Interest costs....................... 0.5 0.5 0.4 Amortization of unrecognized transition obligation.............. 0.3 0.3 0.3 ---- ---- ---- 1.1 1.2 1.0 ==== ==== ==== Estimated costs and liabilities have been developed assuming trend rates for growth in future health care costs beginning with 8.0% for 1995 graded to 6.0% (5.5% for post age 65) by the year 2000 49 SANTA FE ENERGY RESOURCES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) and remaining constant thereafter. Increasing the assumed health care cost trend rate by one percent each year would increase the accumulated postretirement benefit obligation as of December 31, 1995 by $0.7 million and the aggregate of the service cost and interest cost components of the net periodic postretirement benefit cost for 1996 by $0.1 million. SAVINGS PLAN The Company has a savings plan available to substantially all salaried employees and intended to qualify as a deferred compensation plan under Section 401(k) of the Internal Revenue Code (the "401(k) Plan"). The Company will match employee contributions for an amount up to 4% of each employee's base salary. In addition, if at the end of each fiscal year the Company's performance for such year has exceeded certain predetermined criteria, each participant will receive an additional matching contribution equal to 50% of the regular matching contribution. The Company's contributions to the 401(k) Plan, which are charged to expense, totalled $1.5 million in 1993, $1.2 million in 1994 and $1.3 million in 1995. In the fourth quarter of 1993 the Company established a new savings plan with respect to certain personnel employed in foreign locations. The plan is an unsecured creditor of the Company and at December 31, 1995 and 1994 the Company's liability with respect to the plan totalled $0.1 million and $0.1 million, respectively. OTHER POSTEMPLOYMENT BENEFITS In the fourth quarter of 1993 the Company adopted SFAS No. 112 -- "Employers" Accounting for Postemployment Benefits'. The Statement requires the accrual of the estimated costs of benefits provided by an employer to former or inactive employees after employment but before retirement. Such benefits include salary continuation, supplemental unemployment benefits, severance benefits, disability-related benefits, job training and counseling and continuation of benefits such as health care and life insurance coverage. The adoption of SFAS No. 112 resulted in a charge to earnings of $1.8 million in 1993. (11) COMMITMENTS AND CONTINGENCIES OIL AND GAS HEDGING 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. At December 31, 1995 the Company had open crude hedges on (i) an average of 15,000 barrels per day for the period January to April 1996 at an average NYMEX WTI price of $18.52 per barrel and (ii) provided that the NYMEX WTI price is greater than $16.80 per barrel, up to an additional 15,000 barrels per day for the period January through March 1996 at an average NYMEX WTI price of $18.65 per barrel. The "approximate break-even price" (the average of the daily settlement prices which 50 SANTA FE ENERGY RESOURCES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) result in no settlement being due to or from the Company) with respect to all such contracts is approximately $18.56 per barrel. During 1995 crude oil hedges resulted in a $2.4 million increase in revenues. Subsequent to year-end the Company hedged an additional 2,000 barrels per day for the second quarter of 1996 and, provided that the settlement price is above $17.00, up to an additional 8,000 barrels per day for the second quarter of 1996 and 2,000 barrels per day for the third quarter of 1996. The approximate break-even price is $18.54 per barrel for the second quarter hedges and $18.60 per barrel for the third quarter hedges. At December 31, 1995 the Company had open natural gas hedges on (i) an average of approximately 55 MMcf per day of its Gulf Coast production for the entire year of 1996 at an approximate break-even price of $1.82 per Mcf and (ii) an average of approximately 30 MMcf per day of its Permian Basin production for the entire year of 1996 at an approximate break-even price of $1.53 per Mcf. Due to its location, Permian Basin gas sells at a discount to Gulf Coast gas. Natural gas hedges resulted in a decrease in revenues of $0.3 million in 1995 and $1.0 million in 1994. In addition to its oil and gas sales hedges, for the first six months of 1996 the Company has 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. Monthly settlements are based on the difference between the settlement price quoted on the NYMEX and the index price for San Juan Basin natural gas. Gains or losses are recognized in production and operating costs in the period in which the hedged gas is consumed in operations. In instances where the difference between the NYMEX price and the San Juan Basin index price is greater than $0.53, the Company pays an amount based on the difference and in instances where the difference is less than $0.53, the Company receives a payment based on the difference. Each $0.10 per Mcf change in the spread between the NYMEX price and the San Juan Basin index price results in a monthly increase or decrease in revenues of $60,000. INDEMNITY AGREEMENT WITH SANTA FE PACIFIC CORPORATION ("SFP") In December 1990 SFP distributed all of the shares of the Company it held to its shareholders (the "Spin-Off"). At the time of the Spin-Off, the Company and SFP entered into an agreement to protect SFP from federal and state income taxes, penalties and interest that would be incurred by SFP if the Spin-off were determined to be a taxable event resulting primarily from actions taken by the Company during a one-year period that ended December 4, 1991. If the Company were required to make payments pursuant to the agreement, such payments could have a material adverse effect on its financial condition; however, the Company does not believe that it took any actions during such one-year period that would have such an effect on the Spin-Off. 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 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 51 SANTA FE ENERGY RESOURCES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) treatment plant. This phase is now complete and the Company's share of costs with respect to this phase was $1.6 million ($0.9 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 $3.0 million (based on an agremeent with the other working interest participants in the unit to assume $1.3 million of the original settlement amount, the Company's net share of such costs is $1.7 million and such costs have been provided for in the financial statements. The Company 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. In 1989 Adobe received requests from the EPA for information pursuant to Section 104(e) of the Comprehensive Environmental Response, Compensation and Liability Act ("CERCLA") with respect to the D. L. Mud and Gulf Coast Vacuum Services superfund sites located in Abbeville, Louisiana. With respect to the Gulf Coast Site the Company has entered into a sharing agreement with other PRPs to participate in the final remediation of the Gulf Coast site and a design plan has been submitted and is awaiting approval by the EPA. The Company's share of the remediation, which has been provided for in the financial statements, is $277,000 and includes its proportionate share of those PRPs who do not have the financial resources to provide their share of the work at the site. A former site owner has already conducted remedial activities at the D. L. Mud Site under a state agency agreement. 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 $1.0 million. To date there has been no agreement on how to allocate costs among the PRPs. The Company has provided for such costs in the financial statements, assuming that the costs will be equally divided 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 52 SANTA FE ENERGY RESOURCES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 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 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 has agreed to implement reasonable measures to bring new PRPs into the agreement. The DTSC will address subsequent phases of the cleanup, including remedial design and implementation in a separate order agreement. The cost of the remedial investigation and feasibility study is estimated to be $1.0 million and the Company has provided $80,000 in the financial statements as its estimated share of such costs. The costs of subsequent phases cannot be estimated until the remedial investigation and feasibility study is completed. 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 eight key employees. The initial term of seven of the agreements expired on December 31, 1990 and, on January 1, 1991 and beginning on each January 1 thereafter, 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 the Company's merger with Adobe in 1992 constituted a change of control as defined in the agreements. The initial term of the other agreement will expire December 31, 1996 and beginning on each January 1 thereafter, 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 agreement is automatically extended for a minimum of 24 months following a change of control. 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. INTEREST RATE SWAPS The Company was a party to an interest rate swap with a bank with a notional principal amount of $20.0 million which expired in April 1994. The amount due the bank in accordance with the terms of the swap totalled $0.9 million and $0.2 million in 1993 and 1994, respectively. OPERATING LEASES The Company has noncancellable agreements with terms ranging from one to ten years to lease office space and equipment. Minimum rental payments due under the terms of these agreements are: 1996 -- $5.2 million, 1997 -- $4.9 million, 1998 -- $4.6 million, 1999 -- $2.8 million, 2000 -- $1.1 million and $0.8 million thereafter. Rental payments made under the terms of noncancellable agreements totaled $5.5 million in 1993, $6.2 million in 1994 and $6.1 million in 1995. 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 53 SANTA FE ENERGY RESOURCES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) operations in Kern County, California. In the aggregate, these contracts involve a minimum commitment on the part of the Company of approximately $10.2 million per year (based on prices and transportation charges in effect for December 1995). In connection with the development of a gas field in Argentina in which the Company has a 19.9% working interest, a gas contract for 106 million cubic feet of gas per day with "take-or-pay" and "delivery-or-pay" obligations was executed in 1994 with a gas distribution company. 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. (12) INCOME TAXES Through the date of the Spin-Off the taxable income or loss of the Company was included in the consolidated federal income tax return filed by SFP. The consolidated federal income tax returns of SFP have been examined through 1990 and all years prior to 1986 are closed. Issues relating to the open years are being contested through various stages of administrative appeal. Accounts Receivable at December 31, 1995 includes $12.0 million with respect to a refund related to the audit of the years 1981 through 1985. The Company has filed separate consolidated federal income tax returns for periods subsequent to the Spin-Off. The consolidated returns of the Company through 1991 have been audited and are closed. During 1989, the Company received a notice of deficiency for certain state franchise tax returns filed for the years 1978 through 1983 as part of the consolidated tax returns of SFP. The matter was contested by the Company and resolved in 1994. The years 1984 through 1992 are currently being audited. With the Merger of Adobe the Company succeeded to a net operating loss carryforward that is subject to Internal Revenue Code Section 382 limitations which annually limit taxable income that can be offset by such losses. Certain changes in the Company's shareholders in 1995 resulted in a second Section 382 limitation, the imposition of which is not expected to result in a limitation of the Company's ability to use its net operating losses. Losses carrying forward of $156.2 million will expire beginning in 1998. Pretax income from continuing operations for the years ended December 31, 1995, 1994 and 1993 was taxed under the following jurisdictions (in millions of dollars): 1995 1994 1993 --------- --------- --------- Domestic............................. 40.5 22.0 (120.9) Foreign.............................. (4.2) 1.1 (29.3) --------- --------- --------- 36.3 23.1 (150.2) --------- --------- --------- --------- --------- --------- 54 SANTA FE ENERGY RESOURCES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The Company's income tax expense (benefit) for the years ended December 31, 1995, 1994 and 1993 consisted of (in millions of dollars): 1995 1994 1993 --------- --------- --------- Current U.S. federal.................... 1.5 (3.5) (1.3) State........................... (2.1) (3.2) (1.2) Foreign......................... 2.6 1.4 1.3 --------- --------- --------- 2.0 (5.3) (1.2) --------- --------- --------- Deferred U.S. federal.................... 13.3 8.6 (65.6) U.S. federal tax rate change.... -- -- 2.6 State........................... (0.6) 2.4 (8.0) Foreign......................... (5.0) 0.3 (0.9) --------- --------- --------- 7.7 11.3 (71.9) --------- --------- --------- 9.7 6.0 (73.1) --------- --------- --------- --------- --------- --------- The Company's deferred income tax liabilities (assets) at December 31, 1995 and 1994 are composed of the following differences between financial and tax reporting (in millions of dollars): 1995 1994 --------- --------- Capitalized costs and write-offs..... 138.5 113.8 Differences in Partnership basis..... -- 3.9 State deferred liability............. 7.6 8.2 Foreign deferred liability........... 9.1 14.1 --------- --------- Gross deferred liabilities........... 155.2 140.0 --------- --------- Accruals not currently deductible for tax purposes....................... (16.7) (14.1) Alternative minimum tax carryforwards...................... (12.7) (11.7) Net operating loss carryforwards..... (54.7) (57.4) Other................................ (7.1) (0.5) --------- --------- Gross deferred assets................ (91.2) (83.7) --------- --------- Deferred tax liability............... 64.0 56.3 ========= ========= 55 SANTA FE ENERGY RESOURCES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) A reconciliation of the Company's U.S. income tax expense (benefit) computed by applying the statutory U.S. federal income tax rate to the Company's income (loss) before income taxes for the years ended December 31, 1995, 1994 and 1993 is presented in the following table (in millions of dollars): 1995 1994 1993 --------- --------- --------- U.S. federal income taxes (benefit) at statutory rate.................. 12.7 8.1 (52.6) Increase (reduction) resulting from: State income taxes, net of federal effect.......................... 0.6 0.9 (1.0) Foreign income taxes in excess of (less than) U.S. rate........... (0.9) 1.4 (0.8) U.S. tax on foreign reinvested earnings........................ 0.8 1.2 -- Effect of increase in statutory rate on deferred taxes.......... -- -- 2.6 Benefit of tax losses.............. (0.3) (4.3) (11.2) Prior period adjustments........... (2.7) (1.6) (9.9) Other.............................. (0.5) 0.3 (0.2) --------- --------- --------- 9.7 6.0 (73.1) ========= ========= ========= The Company increased its deferred tax liability in 1993 as a result of legislation enacted during 1993 increasing the corporate tax rate from 34% to 35% commencing in 1993. (13) FAIR VALUE OF FINANCIAL INSTRUMENTS SFAS No. 107 "Disclosure About Fair Value of Financial Instruments" requires the disclosure, to the extent practicable, of the fair value of financial instruments which are recognized or unrecognized in the balance sheet. The fair value of the financial instruments disclosed herein is not representative of the amount that could be realized or settled, nor does the fair value amount consider the tax consequences, if any, of realization or settlement. The following table reflects the financial instruments for which the fair value differs from the carrying amount of such financial instrument in the Company's December 31, 1995 and 1994 balance sheets (in millions of dollars): 1995 1994 ------------------- ------------------- CARRYING FAIR CARRYING FAIR AMOUNT VALUE AMOUNT VALUE -------- ----- -------- ----- Assets Note receivable from Hadson..... -- -- 2.4 2.4 Liabilities Long-Term Debt (including current portion)..................... 344.4 378.5 354.3 355.6 Convertible Preferred Stock..... 80.0 95.6 80.0 80.6 Shareholders' Equity $.732 Series A Convertible Preferred Stock.............. 91.4 105.7 91.4 92.3 The fair value of the Convertible Preferred Stock and the $.732 Series A Convertible Preferred Stock is based on market prices. The fair value of the Company's fixed-rate long-term debt is based on current borrowing rates available for financings with similar terms and maturities. With respect to the Company's floating-rate debt and the note receivable from Hadson, the carrying amount approximates fair value. 56 SANTA FE ENERGY RESOURCES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) At December 31, 1995 the Company had open hedging contracts on both oil and natural gas (see Note 11. Based on the year-end 1995 settlement prices of the applicable NYMEX futures contracts or the estimated prices with respect to certain other indices, the loss to the Company in 1996 with respect to such hedges would be approximately $8.1 million. The actual gains or losses realized by the Company from these hedges may vary significantly from the foregoing amount due to the volatility of the futures markets and other indices. 57 SANTA FE ENERGY RESOURCES, INC. SUPPLEMENTAL INFORMATION TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) OIL AND GAS RESERVES AND RELATED FINANCIAL DATA Information with respect to the Company's oil and gas producing activities is presented in the following tables. Reserve quantities as well as certain information regarding future production and discounted cash flows were determined by independent petroleum consultants, Ryder Scott Company. OIL AND GAS RESERVES The following table sets forth the Company's net proved oil and gas reserves at December 31, 1992, 1993, 1994 and 1995 and the changes in net proved oil and gas reserves for the years ended December 31, 1993, 1994 and 1995.
CRUDE OIL AND LIQUIDS (MMBBLS) NATURAL GAS (BCF) ---------------------------------------- --------------------------------------------- U.S. ARGENTINA INDONESIA TOTAL U.S. ARGENTINA INDONESIA TOTAL --------- --------- --------- ----- --------- --------- ---------- --------- Proved reserves at December 31, 1992................... 240.0 8.7 6.4 255.1 276.9 -- 0.6 277.5 Revisions to previous estimates.... (11.9) 0.5 0.6 (10.8) 26.6 -- 0.1 26.7 Improved recovery techniques....... 26.7 -- -- 26.7 -- -- -- -- Extensions, discoveries and other additions........................ 3.4 0.5 2.3 6.2 29.5 26.4 -- 55.9 Purchases of minerals-in-place..... 3.3 -- 0.7 4.0 10.6 -- 0.1 10.7 Sales of minerals in place......... (8.7) -- -- (8.7) (47.4) -- -- (47.4) Production......................... (21.9) (0.9) (1.5) (24.3) (60.3) -- (0.1) (60.4) --------- --------- --------- ----- --------- --------- ----- --------- Proved reserves at December 31, 1993................... 230.9 8.8 8.5 248.2 235.9 26.4 0.7 263.0 Revisions of previous estimates.... 13.3 0.6 1.3 15.2 (2.7) -- -- (2.7) Improved recovery techniques....... 13.9 -- -- 13.9 0.9 -- -- 0.9 Extensions, discoveries and other additions........................ 3.6 0.8 1.1 5.5 22.5 13.7 -- 36.2 Purchases of minerals-in-place..... 0.2 -- -- 0.2 0.5 -- -- 0.5 Sales of minerals-in-place......... (0.7) -- -- (0.7) (2.5) (3.1) -- (5.6) Production......................... (21.0) (0.9) (2.1) (24.0) (49.8) -- (0.1) (49.9) --------- --------- --------- ----- --------- --------- ----- --------- Proved reserves at December 31, 1994................... 240.2 9.3 8.8 258.3 204.8 37.0 0.6 242.4 Revisions of previous estimates.... 16.4 1.4 0.4 18.2 1.0 1.3 -- 2.3 Improved recovery techniques....... 15.3 0.8 -- 16.1 -- 0.2 -- 0.2 Extensions, discoveries and other additions........................ 1.7 2.2 0.5 4.4 36.4 0.5 -- 36.9 Purchases of minerals-in-place..... 6.3 -- -- 6.3 18.0 -- -- 18.0 Production......................... (21.3) (0.9) (1.9) (24.1) (50.3) (4.3) (0.1) (54.7) --------- --------- --------- ----- --------- --------- ----- --------- Proved reserves at December 31, 1995................... 258.6 12.8 7.8 279.2 209.9 34.7 0.5 245.1 ========= ========= ========= ===== ========= ========= ====== =========
58 SANTA FE ENERGY RESOURCES, INC. SUPPLEMENTAL INFORMATION TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED)
CRUDE OIL AND LIQUIDS (MMBBLS) NATURAL GAS (BCF) ---------------------------------------- --------------------------------------------- U.S. ARGENTINA INDONESIA TOTAL U.S. ARGENTINA INDONESIA TOTAL --------- --------- --------- ----- --------- --------- ---------- --------- Proved developed reserves at December 31 1992............................ 194.6 5.6 6.4 206.6 250.2 -- 0.6 250.8 1993............................ 178.8 5.5 6.7 191.0 206.0 -- 0.7 206.7 1994............................ 181.3 6.1 7.1 194.5 178.2 1.3 0.6 180.1 1995............................ 206.5 7.1 6.0 219.6 170.2 33.3 0.5 204.0
Proved reserves are estimated quantities of crude oil and natural gas which geological and engineering data indicate with reasonable certainty to be recoverable in future years from known reservoirs under existing economic and operating conditions. Proved developed reserves are proved reserves which can be expected to be recovered through existing wells with existing equipment and operating methods. Indonesian reserves represent an entitlement to gross reserves in accordance with a production sharing contract. These reserves include estimated quantities allocable to the Company for recovery of operating costs as well as quantities related to the Company's net equity share after recovery of costs. Accordingly, these quantities are subject to fluctuations with an inverse relationship to the price of oil. If oil prices increase, the reserve quantities attributable to the recovery of operating costs decline. Although this reduction would be offset partially by an increase in the net equity share, the overall effect would be a reduction of reserves attributable to the Company. At December 31, 1995, the quantities include 0.4 million barrels which the Company is contractually obligated to sell for $.20 per barrel. At December 31, 1993 the Company's reserves were 6.9 million barrels of crude oil and liquids and 14.5 Bcf of natural gas lower than at December 31, 1992, reflecting the sale in 1993 of properties with reserves totalling 8.7 million barrels of crude oil and liquids and 47.4 Bcf of natural gas. The Company has certain commitments with respect to the delivery of natural gas (see Note 11) which the Company believes it can fulfill from its proved reserves and supply contracts with other companies. At December 31, 1995, 1.7 million barrels of crude oil reserves and 12.8 billion cubic feet of natural gas reserves were subject to a 90% net profits interest held by Santa Fe Energy Trust. 59 SANTA FE ENERGY RESOURCES, INC. SUPPLEMENTAL INFORMATION TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED) ESTIMATED PRESENT VALUE OF FUTURE NET CASH FLOWS Estimated future net cash flows from the Company's proved oil and gas reserves at December 31, 1995, 1994 and 1993 are presented in the following table (in millions of dollars, except as noted):
U.S. ARGENTINA INDONESIA TOTAL ---------- --------- --------- ---------- 1995 Future cash inflows............. 4,191.2 244.7 137.4 4,573.3 Future production costs......... (1,852.8) (103.0) (63.0) (2,018.8) Future development costs........ (282.8) (36.1) (6.1) (325.0) Future income tax expenses...... (541.7) (11.8) (25.1) (578.6) ---------- --------- --------- ---------- Net future cash flows..... 1,513.9 93.8 43.2 1,650.9 Discount at 10% for timing of cash flows................... (672.0) (35.7) (13.0) (720.7) ---------- --------- --------- ---------- Present value of future net cash flows from proved reserves.............. 841.9 58.1 30.2 930.2 ========== ========= ========= ========== Present value of pretax future net cash flows from proved reserves..................... 1,143.1 65.4 48.7 1,257.2 ========== ========= ========= ========== Average sales prices Oil ($/Barrel)............ 14.75 15.66 17.51 Natural gas ($/Mcf)....... 1.88 1.27 1.03 1994 Future cash inflows............. 3,488.8 176.9 134.9 3,800.6 Future production costs......... (1,614.6) (89.6) (69.4) (1,773.6) Future development costs........ (263.7) (32.3) (6.2) (302.2) Future income tax expenses...... (385.2) (3.7) (20.0) (408.9) ---------- --------- --------- ---------- Net future cash flows..... 1,225.3 51.3 39.3 1,315.9 Discount at 10% for timing of cash flows................... (544.9) (20.1) (11.0) (576.0) ---------- --------- --------- ---------- Present value of future net cash flows from proved reserves.............. 680.4 31.2 28.3 739.9 ========== ========= ========= ========== Present value of pretax future net cash flows from proved reserves..................... 894.3 33.5 43.0 970.8 ========== ========= ========= ========== Average sales prices Oil ($/Barrel)............ 13.18 14.06 15.21 Natural gas ($/Mcf)....... 1.63 1.25 0.97 1993 Future cash inflows............. 2,654.9 117.9 115.6 2,888.4 Future production costs......... (1,547.2) (65.9) (78.7) (1,691.8) Future development costs........ (216.7) (32.4) (8.9) (258.0) Future income tax expenses...... (100.5) -- (6.9) (107.4) ---------- --------- --------- ---------- Net future cash flows..... 790.5 19.6 21.1 831.2 Discount at 10% for timing of cash flows................... (308.5) (12.1) (8.2) (328.8) ---------- --------- --------- ---------- Present value of future net cash flows from proved reserves.............. 482.0 7.5 12.9 502.4 ========== ========= ========= ========== Present value of pretax future net cash flows from proved reserves..................... 543.2 7.5 17.1 567.8 ========== ========= ========= ========== Average sales prices Oil ($/Barrel)............ 9.10 9.74 13.50 Natural gas ($/Mcf)....... 2.28 1.23 0.97 60 1995 Balance at beginning of year....... 680.4 31.2 28.3 739.9 ---------- --------- --------- ---------- Increase (decrease) due to: Sales of oil and gas, net of production costs of $171.7 million...................... (244.7) (11.8) (13.2) (269.7) Net changes in prices and production costs............. 178.2 13.9 9.1 201.2 Extensions, discoveries and improved recovery............ 110.3 4.6 4.2 119.1 Purchases of minerals-in-place............ 56.6 -- -- 56.6 Development costs incurred...... 145.4 13.7 11.3 170.4 Changes in estimated volumes.... 19.9 9.6 0.3 29.8 Changes in estimated development costs........................ (105.6) (2.4) (10.2) (118.2) Interest factor -- accretion of discount..................... 88.7 4.4 4.2 97.3 Income taxes.................... (87.3) (5.1) (3.8) (96.2) ---------- --------- --------- ---------- 161.5 26.9 1.9 190.3 ---------- --------- --------- ---------- 841.9 58.1 30.2 930.2 ========== ========= ========= ========== 1994 Balance at beginning of year....... 482.0 7.5 12.9 502.4 ---------- --------- --------- ---------- Increase (decrease) due to: Sales of oil and gas, net of production costs of $170.9 million...................... (196.0) (7.3) (17.2) (220.5) Net changes in prices and production costs............. 389.0 21.1 19.6 429.7 Extensions, discoveries and improved recovery............ 78.8 7.4 10.4 96.6 Purchases of minerals-in-place............ 1.2 -- -- 1.2 Sales of minerals-in-place...... (8.9) (0.4) -- (9.3) Development costs incurred...... 81.7 13.0 9.3 104.0 Changes in estimated volumes.... 18.5 (2.6) 8.3 24.2 Changes in estimated development costs........................ (66.6) (7.3) (6.5) (80.4) Interest factor -- accretion of discount..................... 53.3 2.0 2.0 57.3 Income taxes.................... (152.6) (2.2) (10.5) (165.3) ---------- --------- --------- ---------- 198.4 23.7 15.4 237.5 ---------- --------- --------- ---------- 680.4 31.2 28.3 739.9 ========== ========= ========= ========== 61 1993 Balance at beginning of year....... 697.6 22.3 13.6 733.5 ---------- --------- --------- ---------- Increase (decrease) due to: Sales of oil and gas, net of production costs of $189.5 million...................... (230.1) (7.3) (10.0) (247.4) Net changes in prices and production costs............. (325.1) (7.7) 1.7 (331.1) Extensions, discoveries and improved recovery............ 94.8 14.8 7.0 116.6 Purchases of minerals-in-place............ 21.6 -- 2.1 23.7 Sales of minerals-in-place...... (84.7) -- -- (84.7) Development costs incurred...... 50.0 5.1 -- 55.1 Changes in estimated volumes.... 28.3 1.5 1.8 31.6 Changes in estimated development costs........................ 25.6 (24.1) (8.9) (7.4) Interest factor -- accretion of discount..................... 87.1 2.3 2.1 91.5 Income taxes.................... 112.0 0.6 3.5 116.1 Other........................... 4.9 -- -- 4.9 ---------- --------- --------- ---------- (215.6) (14.8) (0.7) (231.1) ---------- --------- --------- ---------- 482.0 7.5 12.9 502.4 ========== ========= ========= ==========
Estimated future cash flows represent an estimate of future net cash flows from the production of proved reserves using estimated sales prices and estimates of the production costs, ad valorem and production taxes, and future development costs necessary to produce such reserves. No deduction has been made for depletion, depreciation or any indirect costs such as general corporate overhead or interest expense. The sales prices used in the calculation of estimated future net cash flows are based on the prices in effect at year end. Such prices have been held constant except for known and determinable escalations. Operating costs and ad valorem and production taxes are estimated based on current costs with respect to producing oil and gas properties. Future development costs are based on the best estimate of such costs assuming current economic and operating conditions. Income tax expense is computed based on applying the appropriate statutory tax rate to the excess of future cash inflows less future production and development costs over the current tax basis of the properties involved. While applicable investment tax credits and other permanent differences are considered in computing taxes, no recognition is given to tax benefits applicable to future exploration costs or the activities of the Company that are unrelated to oil and gas producing activities. The information presented with respect to estimated future net revenues and cash flows and the present value thereof is not intended to represent the fair value of oil and gas reserves. Actual future sales prices and production and development costs may vary significantly from those in effect at year-end and actual future production may not occur in the periods or amounts projected. This information is presented to allow a reasonable comparison of reserve values prepared using standardized measurement criteria and should be used only for that purpose. 62 SANTA FE ENERGY RESOURCES, INC. SUPPLEMENTAL INFORMATION TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED) COSTS INCURRED IN OIL AND GAS PRODUCING ACTIVITIES The following table includes all costs incurred, whether capitalized or charged to expense at the time incurred (in millions of dollars):
OTHER U.S. ARGENTINA INDONESIA FOREIGN TOTAL ---------- --------- --------- ---------- ---------- 1995 Property acquisition costs Unproved........................ 13.0 -- 0.7 0.1 13.8 Proved.......................... 33.8 -- -- -- 33.8 Exploration costs.................. 27.7 1.2 7.7 7.2 43.8 Development costs.................. 111.5 13.7 11.3 0.5 137.0 ---------- --------- --------- ---------- ---------- 186.0 14.9 19.7 7.8 228.4 ========== ========= ========= ========== ========== 1994 Property acquisition costs Unproved........................ 4.5 0.1 0.6 0.2 5.4 Proved.......................... 1.8 0.3 -- -- 2.1 Exploration costs.................. 19.3 1.2 7.5 6.8 34.8 Development costs.................. 81.7 13.0 9.3 0.1 104.1 ---------- --------- --------- ---------- ---------- 107.3 14.6 17.4 7.1 146.4 ========== ========= ========= ========== ---------- 1993 Property acquisition costs Unproved........................ 6.4 -- 1.8 3.8 12.0 Proved.......................... 29.7 -- 2.9 -- 32.6 Other........................... 0.8 -- -- -- 0.8 Exploration costs.................. 20.9 0.7 5.2 11.7 38.5 Development costs.................. 85.3 7.3 7.6 -- 100.2 ---------- --------- --------- ---------- ---------- 143.1 8.0 17.5 15.5 184.1 ========== ========= ========= ========== ==========
63 SANTA FE ENERGY RESOURCES, INC. SUPPLEMENTAL INFORMATION TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED) CAPITALIZED COSTS RELATED TO OIL AND GAS PRODUCING ACTIVITIES The following table sets forth information concerning capitalized costs at December 31, 1995 and 1994 related to the Company's oil and gas operations (in millions of dollars):
1995 1994 ---------------------------------------------------------- -------------------- OTHER U.S. ARGENTINA INDONESIA FOREIGN TOTAL U.S. ARGENTINA --------- ---------- --------- ------- --------- ------- --------- Oil and gas properties Unproved......................... 41.7 4.5 12.0 3.0 61.2 41.0 0.3 Proved........................... 2,090.6 70.8 99.1 1.8 2,262.3 1,924.5 61.4 Other............................ 12.8 -- -- -- 12.8 12.7 -- Accumulated amortization of unproved properties......................... (12.8) (2.4) (3.8) (1.8) (20.8) (12.7) (0.3) Accumulated depletion, depreciation and impairment of proved properties......................... (1,385.9) (15.9) (39.7) -- (1,441.5) (1,247.4) (11.4) Accumulated depreciation of other oil and gas properties (5.3) -- -- -- (5.3) (4.3) (0.4) --------- ----- --------- ------- --------- ------- --------- 741.1 57.0 67.6 3.0 868.7 713.8 49.6 ========= ===== ========= ======= ========= ======= ========= OTHER INDONESIA FOREIGN TOTAL --------- ------- --------- Oil and gas properties Unproved......................... 11.3 9.7 62.3 Proved........................... 83.2 1.9 2,071.0 Other............................ -- -- 12.7 Accumulated amortization of unproved properties......................... (2.6) (9.7) (25.3) Accumulated depletion, depreciation and impairment of proved properties......................... (30.9) (0.3) (1,290.0) Accumulated depreciation of other oil and gas properties -- (0.1) (4.8) --------- ------- --------- 61.0 1.5 825.9 ========= ======= =========
64 SANTA FE ENERGY RESOURCES, INC. SUPPLEMENTAL INFORMATION TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED) RESULTS OF OPERATIONS FROM OIL AND GAS PRODUCING ACTIVITIES The following table sets forth the Company's results of operations from oil and gas producing activities for the years ended December 31, 1995, 1994 and 1993 (in millions of dollars):
OTHER U.S. ARGENTINA INDONESIA FOREIGN TOTAL ------ --------- --------- ------- --------- 1995 Revenues........................... 391.2 19.2 31.6 -- 442.0 Production costs Production and operating costs........................ (129.7) (7.1) (17.7) (0.4) (154.9) Taxes (other than income)....... (16.5) (0.3) -- -- (16.8) Exploration, including dry hole costs........................... (13.6) (1.2) (3.1) (5.5) (23.4) Depletion, depreciation, amortization and impairments.... (143.3) (7.0) (10.0) (0.5) (160.8) Gain (loss) on disposition of properties...................... (0.2) -- -- (0.1) (0.3) ------ --------- --------- ------- --------- 87.9 3.6 0.8 (6.5) 85.8 Income taxes....................... (34.8) (1.1) (1.2) -- (37.1) ------ --------- --------- ------- --------- 53.1 2.5 (0.4) (6.5) 48.7 ====== ========= ========= ======= ========= 1994 Revenues........................... 346.7 12.9 31.8 -- 391.4 Production costs Production and operating costs........................ (129.7) (5.5) (14.6) (0.2) (150.0) Taxes (other than income)....... (21.0) (0.1) -- -- (21.1) Exploration, including dry hole costs........................... (14.0) (1.2) (1.4) (3.8) (20.4) Depletion, depreciation, amortization and impairments.... (99.9) (3.8) (9.7) (6.3) (119.7) Gain (loss) on disposition of properties...................... 6.8 0.8 -- -- 7.6 ------ --------- --------- ------- --------- 88.9 3.1 6.1 (10.3) 87.8 Income taxes....................... (31.0) (0.9) (2.6) -- (34.5) ------ --------- --------- ------- --------- 57.9 2.2 3.5 (10.3) 53.3 ====== ========= ========= ======= ========= 1993 Revenues........................... 401.2 12.5 23.2 -- 436.9 Production costs Production and operating costs........................ (145.5) (5.1) (13.2) -- (163.8) Taxes (other than income)....... (21.4) (0.1) -- -- (21.5) Oil and gas systems and pipelines....................... (4.2) -- -- -- (4.2) Exploration, including dry hole costs........................... (16.4) (0.7) (2.2) (11.7) (31.0) Depletion, depreciation, amortization and impairments.... (218.8) (3.6) (21.2) (6.7) (250.3) Restructuring charges.............. (27.8) -- -- -- (27.8) Gain (loss) on disposition of properties...................... (0.7) -- -- -- (0.7) ------ --------- --------- ------- --------- (33.6) 3.0 (13.4) (18.4) (62.4) Income taxes....................... 24.1 (0.9) 1.9 -- 25.1 ------ --------- --------- ------- --------- (9.5) 2.1 (11.5) (18.4) (37.3) ====== ========= ========= ======= =========
Income taxes are computed by applying the appropriate statutory rate to the results of operations before income taxes. Applicable tax credits and allowances related to oil and gas producing activities have been taken into account in computing income tax expenses. No deduction has been made for indirect cost such as corporate overhead or interest expense. 65 SANTA FE ENERGY RESOURCES, INC. SUPPLEMENTAL INFORMATION TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED) SUMMARIZED QUARTERLY FINANCIAL DATA
1 QTR 2 QTR 3 QTR 4 QTR YEAR ------ ------ ------ ------ ----- (IN MILLIONS OF DOLLARS EXCEPT PER SHARE DATA) 1995 Revenues........................ 98.6 109.7 111.1 122.6 442.0 Gross profit (a)................ 18.4 29.4 26.9 6.1 80.8 Income (loss) from operations... 12.5 22.5 19.8 (0.9)(b) 53.9(b) Net income (loss)............... 3.6 7.6 7.0 8.4 26.6 Earnings (loss) attributable to common shares................. (0.1) 3.9 3.3 4.7 11.8 Earnings (loss) attributable to common shares per share....... -- 0.04 0.04 0.05 0.13 Average shares outstanding (millions).................... 90.1 90.3 90.3 90.3 90.2 1994 Revenues........................ 90.3 99.7 103.6 97.8 391.4 Gross profit (a)................ 7.6 19.7 25.6 22.6 75.5 Income (loss) from operations... -- 12.8 19.1 16.3 48.2 Net income (loss)............... (2.5) 4.1 11.0 4.5 17.1 Earnings (loss) attributable to common shares................. (4.3) 1.6 7.3 0.8 5.4 Earnings (loss) attributable to common shares per share....... (0.05) 0.02 0.08 0.01 0.06 Average shares outstanding (millions).................... 89.9 90.0 90.0 90.0 89.9
- ------------ (a) Revenues less operating expenses other than general and administrative. (b) Includes charges of $30.2 million for impairment of oil and gas properties. 66 SIGNATURES PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934, THE REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED. SANTA FE ENERGY RESOURCES, INC. By ____/s/__R. GRAHAM WHALING_______ ------------------------------------ R. GRAHAM WHALING SENIOR VICE PRESIDENT AND CHIEF FINANCIAL OFFICER (PRINCIPAL FINANCIAL AND ACCOUNTING OFFICER) Dated: February 29, 1996 PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS REPORT HAS BEEN SIGNED BY THE FOLLOWING PERSONS ON BEHALF OF THE REGISTRANT AND IN THE CAPACITIES AND ON THE DATE INDICATED. SIGNATURE AND TITLE ------------------- JAMES L. PAYNE, Chairman of the Board, President and Chief Executive Officer and Director (PRINCIPAL EXECUTIVE OFFICER) R. GRAHAM WHALING, Senior Vice President and Chief Financial Officer (PRINCIPAL FINANCIAL AND ACCOUNTING OFFICER) DIRECTORS --------- William E. Greehey Melvyn N. Klein Robert D. Krebs Allan V. Martini Michael A. Morphy By: /s/R. GRAHAM WHALING Reuben F. Richards R. GRAHAM WHALING Marc J. Shapiro SENIOR VICE PRESIDENT AND Robert F. Vagt CHIEF FINANCIAL OFFICER Kathryn D. Wriston ATTORNEY IN FACT Dated: February 29, 1996 67 SANTA FE ENERGY RESOURCES, INC. SCHEDULE VIII -- VALUATION AND QUALIFYING ACCOUNTS THREE YEARS ENDED DECEMBER 31, 1995 (IN MILLIONS OF DOLLARS) ================================================================================ 1995 1994 1993 - -------------------------------------------------------------------------------- Accounts receivable Balance at the beginning of period........................ 3.1 6.3 5.0 Charge (credit) to income.................. -- 0.6 -- Net amounts written off... (1.1) (3.8) (0.1) Other(a).................. -- -- 1.4 ----- ----- ----- Balance at the end of period.... 2.0 3.1 6.3 ===== ===== ===== - ------------ (a) Represents valuation accounts related to accounts receivable acquired in merger with Adobe Resources Corporation in 1992. 68 INDEX OF EXHIBITS A. EXHIBITS EXHIBIT NUMBER DESCRIPTION 3(a) Restated Certificate of Incorporation (incorporated by reference to Exhibit 3.1 of the Form S-2 Registration Statement of Santa Fe Energy Resources, Inc. ("SFER, Inc.") Commission File No. 33-32831). 3(b) Bylaws, as amended (incorporated by reference to Exhibit 3(b) to SFER, Inc.'s Annual Report on Form 10-K for the year ended December 31, 1992). 4(a) Form of Certificate of Designation, Rights and Preferences of the 7% Convertible Preferred Stock of Santa Fe Energy Resources, Inc. (incorporated by reference to Exhibit 3(b) of the Form S-4 Registration Statement of SFER, Inc., Commission File No. 33-45043). 4(b) Note Agreement dated as of March 31, 1990, by and among Santa Fe Energy Resources, Inc. and various institutional investors relating to the issuance of $365,000,000 of Senior Notes maturing 1993-2005, as amended (incorporated by reference to Exhibit 4(b) to SFER, Inc.'s Annual Report on Form 10-K for the year ended December 31, 1990). 4(c) Amendment dated as of November 1, 1992, to Note Agreement dated as of March 30, 1990, by and among Santa Fe Energy Resources, Inc. and various institutional investors, relating to the issuance of $365,000,000 of Senior Notes maturing 1993 to 2005, as amended (incorporated by reference to Exhibit 4(c) to SFER, Inc.'s Annual Report on Form 10-K for the year ended December 31, 1992). 4(d) Amendment dated as of December 31, 1993, to Note Agreement dated as of March 30, 1990, by and among Santa Fe Energy Resources, Inc. and various institutional investors, relating to the issuance of $365,000,000 of Senior Notes maturing 1993 to 2005, as amended (incorporated by reference to Exhibit 4(d) to SFER Inc.'s Annual Report on Form 10-K for the year ended December 31, 1993). 4(e) Form of Certificate of Designation of the Dividend Enhanced Convertible Stock, $.732 Series A Convertible Preferred Stock of Santa Fe Energy Resources, Inc. (incorporated by reference to Exhibit 4.3 of the Form S-3 Registration Statement of SFER, Inc., Commission File No. 33-52849). 4(f) Form of Indenture dated as of May 25, 1994 and Form of Debenture relating to Santa Fe Energy Resources, Inc. 11% Senior Subordinated Debentures Due 2004 (incorporated by reference to Exhibit 4.1 of the Form S-3 Registration Statement of SFER, Inc., Commission File No. 33-52849). 10(a) Agreement for the Allocation of the Consolidated Federal Income Tax Liability Among the Members of the Santa Fe Pacific Corporation ("SFP") Affiliated Group, as amended, dated December 23, 1983 (incorporated by reference to Exhibit 10.8 of the Form S-2 Registration Statement of SFER, Inc. Commission File No. 33-32831). *10(b) Santa Fe Energy Resources, Inc. Incentive Compensation Plan, as amended. *10(c) Santa Fe Energy Resources, Inc. 1990 Incentive Stock Compensation Plan, Second Amendment and Restatement. 10(d) Example of employment agreements entered into with executive officers of SFER, Inc (incorporated by reference to Exhibit 10(f) to SFER, Inc.'s Annual Report on Form 10-K for the year ended December 31, 1990). 10(e) Example of Indemnification Agreement with SFER, Inc. directors and officers (incorporated by reference to Exhibit 10(g) to SFER, Inc.'s Annual Report on Form 10-K for the year ended December 31, 1990). 10(f) Spin Off Tax Indemnification Agreement between SFER, Inc. and SFP (incorporated by reference to Exhibit 10(h) to SFER, Inc.'s Annual Report on Form 10-K for the year ended December 31, 1990). 69 10(g) Agreement Concerning Taxes among the Company, certain subsidiaries of the Company and SFP (incorporated by reference to Exhibit 10(i) to SFER, Inc.'s Annual Report on Form 10-K for the year ended December 31, 1990). 10(h) Santa Fe Energy Resources Supplemental Retirement Plan, effective as of December 4, 1990 (incorporated by reference to Exhibit 10(l) to SFER, Inc.'s Annual Report on Form 10-K for the year ended December 31, 1990). 10(i) Santa Fe Energy Resources, Inc. Deferred Compensation Plan, effective as of January 1, 1991 as amended and restated, effective February 1, 1994 (incorporated by reference to Exhibit 10(p) to SFER Inc.'s Annual Report on Form 10-K for the year ended December 31, 1993). 10(j) Stock Ownership and Registration Rights Agreement dated December 10, 1991, by, between and among SFER, Inc., Minorco, and Minorco (U.S.A.) Inc. (incorporated by reference to Exhibit 10(r) of the Form S-4 Registration Statement of SFER, Inc., Commission File No. 33-45043). 10(k) Gas Marketing Agreement, dated as of December 14, 1993, between Santa Fe Energy Resources, Inc., Santa Fe Energy Operating Partners, L.P. and Adobe Gas Pipeline Company (incorporated by reference to Exhibit 10(t) to SFER Inc.'s Annual Report on Form 10-K for the year ended December 31, 1993). 10(l) Second Amended and Restated Revolving Credit Agreement dated as of April 1, 1995 among Santa Fe Energy Resources, Inc., the banks signatory thereto, and Texas Commerce Bank National Association as Co-Agent and Administrative Agent and NationsBank of Texas, N.A. as Co-Agent (incorporated by reference to Exhibit 10(a) to SFER Inc.'s Quarterly Report on Form 10-Q for the quarter ended March 31, 1995). 10(m) Letter of Credit Agreement dated as of April 1, 1995 among Santa Fe Energy Resources, Inc., the banks signatory thereto, and Texas Commerce Bank National Association as Co-Agent and Administrative Agent and NationsBank of Texas, N.A. as Co-Agent (incorporated by reference to Exhibit 10(b) to SFER Inc.'s Quarterly Report on Form 10-Q for the quarter ended March 31, 1995). 10(n) Securities Purchase Agreement among Santa Fe Energy Resources, Inc., as Seller, and LG&E Energy Corp. and Carousel Acquisition Corporation, as Buyers, dated February 10, 1995. *10(o) Agreement Regarding Shelf Registration Statement dated March 24, 1995 between Santa Fe Energy Resources, Inc. and HC Associates, GKH Partners, L.P., GKH Investments, L.P., Ernest H. Cockrell Texas Testamentary Trust and Carol Cockrell Jennings Texas Testamentary Trust. *21 Subsidiaries of the registrant. *23(a) Consent of Independent Accountants with respect to Registration Statements on Form S-8 (Nos. 33-37175, 33-44541, 33-44542, 33-58613, 33-59253 and 33-59255) and Form S-3 (No. 333-00753). *23(b) Consent of Ryder Scott Company with respect to Registration Statements on Form S-8 (Nos. 33-37175, 33-44541 33-44542, 33-58613, 33-59253 and 33-59255) and Form S-3 (No. 333-00753). *24 Powers of Attorney - ------------ * Included in this report. B. REPORTS ON FORM 8-K. February 6, 1996 70 EX-10.B 2 INCENTIVE COMPENSATION PLAN AS AMMENDED EXHIBIT 10(b) SANTA FE ENERGY RESOURCES, INC. INCENTIVE COMPENSATION PLAN (AS AMENDED DECEMBER 12, 1995) I. OBJECTIVES The objectives of the Incentive Compensation Plan (the "Plan") are: To communicate and focus management's attention on significant business goals. To identify and reward superior performance. To provide a competitive compensation package to attract and retain high quality key employees. The Plan is intended to encourage key management to achieve and surpass Company, group and individual objectives through establishing annual objectives, reviewing performance and awarding cash bonuses based on the achievement of such objectives. The purposes of the Plan are to achieve strong business performance, equitable compensation and a staff of high quality, motivated key employees. II. ADMINISTRATION The Plan shall be under the direction of the Compensation and Benefits Committee ("Committee") of the Board of Directors of Santa Fe Energy Resources, Inc. (the "Company"). However, the responsibility for ensuring that administrative procedures are established for Plan operation, that the Plan is managed in a timely and effective manner and that periodic analyses of the Plan's effectiveness are undertaken shall be the duty of a Plan Administrator appointed by the Committee, who need not be a member of the Committee. The Plan Administrator shall report his findings, conclusions and recommendations regarding the Plan's operation and effectiveness to the Committee from time to time. The Committee shall have such discretionary authority to administer the Plan, to construe and interpret the Plan, to decide all questions of eligibility, to determine the amount, manner and time of payment of any benefits hereunder and to make all other determinations deemed necessary or advisable for the administration of the Plan. The attached Administrative Guidelines have been adopted by the Committee and may be changed at any time by the Committee in its discretion. III. ELIGIBILITY Eligible employees under the Plan are those key employees of the Company and its subsidiaries who may have a substantial impact on the operating performance of the Company and its subsidiaries. Employment positions eligible for participation in the Plan each Plan Year, and the assigned levels of participation for such positions, shall be determined by the Committee based upon the recommendation of the Plan Administrator. However, the Committee may modify such recommendations in any manner it deems appropriate. IV. INCENTIVE OPPORTUNITIES The incentive award opportunity with respect to an eligible employment position shall be designed to reflect the overall impact of the position on Company performance and to provide a total cash compensation package for such position that is in line with key competitors of the Company. V. BASIS FOR DETERMINING THE INCENTIVE AWARD The incentive award may be based upon a combination of Company, operating unit and/or individual results, in the Committee's discretion. The combination of factors, and the respective weights, used in determining the maximum award for an eligible position will be established by the Committee on an annual basis. The maximum award with respect to an eligible position shall be expressed as a percentage (which shall not be less than 20% nor more than 100%) of the participant's base salary at the beginning of the Plan year. The percentage applicable to an eligible position shall be determined by the Committee. A participant's basis of participation in the Plan will be communicated to him in writing as early as possible in the Plan year. However, incentive awards may be increased by up to 25% at the discretion of the Committee or reduced or eliminated in certain instances pursuant to Article VII and/or VIII. VI. PERFORMANCE OBJECTIVES Performance objectives are intended to support the strategic mission of the Company and shall be: Specific and based upon measurable results, Challenging, but attainable, and Tailored to each position. The basis and amount of the incentive award to be provided for different levels of performance will be established at the beginning of the Plan Year for each participating position. A performance schedule for each specific objective shall be established by the Committee to indicate the award payable at varying levels of performance. Performance objectives may be revised at any time by the Committee in light of unanticipated or extraordinary events. Specific objectives will be based primarily on the Company's business plans and competitive levels of performance. For any specific performance objective, the award payable (as a percent of the maximum) for a given level on performance will be consistent throughout the Plan. The Committee will assign objectives, based upon the recommendation of the Plan Administrator, which are appropriate to the managerial impact of each participant's position. As appropriate, the individual objectives may include divisional, district or combined operating unit performance objectives. Performance objectives may include, among others: Pre-tax income and Cash Flow, Operating Expenses Control, Capital Spending Control, Reserve Additions, "Dry Hole Control", Reservoir Management, Prospect Development, and Land Management. VII. PERFORMANCE Performance will be reviewed at appropriate intervals as financial and operating results are available. At the end of each Plan Year, the determination of the achievement of the objectives for such Plan Year and the payment of awards earned will occur as soon as practicable after the compilation of the year-end financial and operating results. All financial and operating results will be reviewed by the Controller of the Company and the achievement of all individual objectives shall be approved by the President of the Company prior to the recommendation to the Committee of the payment of awards by the Plan Administrator. The Committee has the authority to approve all awards recommended for payment. At the discretion of the Committee, incentive awards, either individually or collectively, may be increased, decreased, or completely eliminated at any time during a Plan Year or after the end of the Plan Year but before payment of the basis of the following considerations: Company performance relative to its competitors, Balancing of long-term versus short-term considerations, Handling of unforeseen opportunities and obstacles, or Individual professional conduct. VIII. AWARD PAYMENTS Payment of earned awards will be made as soon as possible after the close of each Plan Year upon the approval of the Committee. Payments will be subject to all applicable tax withholding requirements. If a participant's employment terminates during a Plan Year, whether voluntarily or involuntarily, the participant shall forfeit all rights to any incentive award for the Plan Year, unless the Committee, in its discretion, elects to pay all or a portion of the award. If a participant voluntarily resigns after the Plan-Year end, but before payout, the participant shall be entitled to the incentive award payment, if any, he would be eligible to receive pursuant to Article VII. In the discretion of the Committee and the election of the participant - made irrevocably prior to the beginning of the applicable Plan Year - all or a portion of an incentive award for a Plan Year may be deferred until termination of employment or immediately prior to termination of employment. The methods of deferment and subsequent payment shall be determined by the Committee. IX. COMMUNICATIONS The effectiveness of the Plan depends upon participants fully understanding the purpose of the Plan, the performance objectives and the administration of the Plan. It shall be the responsibility of the Plan Administrator to ensure that all aspects of the Plan are presented to and understood by the participants. X. CHANGE IN CONTROL A "Change in Control" shall be deemed to have occurred if: a) any "person," as such term is used in Section 13(d) and 14(d) of the Securities Exchange Act of 1934, as amended (the "Exchange Act") (other than Santa Fe Pacific Corporation ("SFP"), any trustee or other fiduciary holding securities under an employee benefit plan of SFP, or any company owned, directly or indirectly, by the stockholders of SFP in substantially the same proportions as their ownership of stock of SFP), is or becomes the "beneficial Owner" (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of SFP representing 25% or more of the combined voting power of SFP's then outstanding securities; b) during any period of two consecutive years (not including any period prior to the effective date of this provision), individuals who at the beginning of such period constitute the Board of Directors of SFP, and any new director (other than a director designated by a person who has entered into an agreement with SFP to effect a transaction described in clause (a), (c) or (d) of this definition) whose election by the Board of Directors of SFP or nomination for election by SFP's stockholders was approved by a vote of at least two-thirds (2/3) of the directors then still in office who either were directors at the beginning of the period or whose election or nomination for election was previously so approved, cease for any reason to constitute at least a majority thereof; c) the stockholders of SFP approve a merger or consolidation of SFP with any other company other than (i) a merger or consolidation which would result in the voting securities of SFP outstanding immediately prior thereto continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity) more than 80% of the combined voting power of the voting securities of SFP (or such surviving entity) outstanding immediately after such merger or consolidation, or (ii) a merger or consolidation effected to implement a recapitalization of SFP (or similar transaction) in which no "person" (as hereinabove defined) acquires more than 25% of the combined voting power of SFP's then outstanding securities; or d) the stockholders of SFP adopt a plan of complete liquidation of SFP or approve an agreement for the sale or disposition by the Company of all or substantially all of SFP's assets. For purposes of this clause (d), the term "the sale or disposition by SFP of all or substantially all of SFP's assets" shall mean a sale or other disposition transaction or series of related transactions involving assets of SFP or of any direct or indirect subsidiary of SFP (including the stock of any direct or indirect subsidiary of SFP) in which the value of the assets or stock being sold or otherwise disposed of (as measured by the purchase price being paid therefor or by such other method as the Board of Directors of SFP determines is appropriate in a case where there is no readily ascertainable purchase price) constitutes more than two-thirds of the fair market value of SFP (as hereinafter defined). For purposes of the preceding sentence, the "fair market value of SFP" shall be the aggregate market value of the outstanding shares of common stock of SFP (on a fully diluted basis) plus the aggregate market value of SFP's other outstanding equity securities. The aggregate market value of the shares of common stock of SFP shall be determined by multiplying the number of shares of SFP's common stock (on a fully diluted basis) outstanding on the date of the execution and delivery of a definitive agreement with respect to the transaction or series of related transactions (the "Transaction Date") by the average closing price of the shares of common stock of SFP for the ten trading days immediately preceding the Transaction Date. The aggregate market value of any other equity securities of SFP shall be determined in a manner similar to that prescribed in the immediately preceding sentence for determining the aggregate market value of the shares of common stock of SFP or by such other method as the Board of Directors of SFP shall determine is appropriate. e) if SFP ceases to own 70% of the combined voting power of the then outstanding voting securities of the Company, the term "Company" shall be substituted for SFP as used in this definition of "Change in Control. Further, notwithstanding anything herein to the contrary, a pro-rata distribution by SFP to its stockholders of its interest in such voting securities of the Company shall not constitute a Change in Control. In the event that a Change in Control occurs, the performance objectives established pursuant to Section V hereof for the year during which the Change in Control occurred shall be deemed to have been met in full at the maximum performance level so established, and each participant shall be entitled to receive a bonus in respect of the year in which such Change in Control occurs; provided, however, that if a participant's employment is terminated prior to December 31 of such year, such participant shall be entitled to a prorated bonus, the amount of which shall be determined by multiplying the bonus which he would have been entitled had he remained employed until December 31 by a fraction, the numerator of which is the number of days in such year through the date of the participant's termination of employment, and the denominator of which is 365. XI. TERMINATION OR AMENDMENT The Plan may be terminated or amended at any time by the Board of Directors of the Company. XII. EFFECTIVE DATE This Plan is effective as of January 1, 1990. ATTACHMENT A ADMINISTRATIVE GUIDELINES 1. An employee's participation in the Plan will be based upon the calendar months in which the employee held a position eligible for participation during a Plan Year. 2. The employee must be in an eligible position on the 1st day of the month in order to participate in the Plan for that month. 3. Except as provided for in the Plan, an employee must be on the active payroll on the last day of the Plan Year in order to participate for any portion that year. 4. If a participant transfers between eligible positions under the Plan during the Plan Year, his/her participation will be based on full months of participation in each position at the participation levels established for each position. 5. New hires or employees who first assume an eligible position on October 1st or later in a given Plan Year are not eligible for participation in that Plan Year. 6. Nothing contained in these Administrative Guidelines will take precedence over specific decisions rendered by the Committee concerning eligibility, participation, or other Plan administration policies and practices. EX-10.C 3 INCENTIVE STOCK COMPENSATION EXHIBIT 10(c) SANTA FE ENERGY RESOURCES, INC. 1990 INCENTIVE STOCK COMPENSATION PLAN (SECOND AMENDMENT AND RESTATEMENT) STATEMENT OF PURPOSE One purpose of the Santa Fe Energy Resources, Inc. 1990 Incentive Stock Compensation Plan (the "Plan") is to encourage superior performance by employees, by allowing the Board of Directors of Santa Fe Energy Resources, Inc. ("SFER") to award several forms of incentive compensation to employees of the Company. By providing incentive compensation commensurate and competitive with that provided by other companies, the Plan should also assist SFER in attracting and retaining the services of qualified and capable employees. In order to further the identity of interest of employees with the stockholders of SFER, all of the forms of compensation under the Plan relate to SFER Common Stock. Employees' success in enhancing stockholder value will translate directly into an enhanced benefit for the employee. An additional purpose of the Plan is to encourage the Directors to own shares of the Company's stock and thereby to align their interests more closely with the interests of the other stockholders of SFER, to encourage the highest level of Director performance by providing the Directors with a direct interest in SFER's attainment of its financial goals, and to provide a financial incentive that will help attract and retain the most qualified Directors. I. DEFINITIONS Unless the context indicates otherwise, the following terms have the meanings set forth below: "Acceleration Date" means the earliest date on which any of the following events shall first have occurred: (i) the acquisition described in clause (a) of the definition of "Change in Control" contained in this Section I, (ii) the change in the composition of the Board of Directors described in clause (b) of such definition or (iii) the stockholder approval or adoption described in clause (c) or (d) of such definition. "Award" means a grant of Options, Restricted Stock, Phantom Units, Bonus Stock or Stock Appreciation Rights pursuant to the Plan. "Board" means the Board of Directors of SFER. "Bonus Stock" means Common Stock, which is not subject to a Restricted Period, awarded by the Committee pursuant to the Plan. "Cause" means (a) the willful and continued failure by the Participant to substantially perform his duties with the Company (other than any such failure resulting from his incapacity due to physical or mental illness), or (b) the willful engaging by the Participant in conduct which is demonstrably and materially injurious to the Company, monetarily or otherwise. For purposes of this definition, no act, or failure to act, shall be deemed "willful" unless done, or omitted to be done, by the Participant not in good faith and without reasonable belief that his action or omission was in the best interest of the Company. A "Change in Control" shall be deemed to have occurred if: (a) any "person," as such term is used in Section 13(d) and 14(d) of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), other than any trustee or other fiduciary holding securities under an employee benefit plan of SFER or any company owned, directly or indirectly, by the stockholders of SFER in substantially the same proportions as their ownership of stock of SFER, is or becomes the "beneficial owner" (as defined in Rule A-1 13d-3 under the Exchange Act), directly or indirectly, of securities of SFER representing 25% or more of the combined voting power of SFER's then outstanding securities; (b) during any period of two consecutive years (not including any period prior to the effective date of this provision), individuals who at the beginning of such period constitute the Board of Directors of SFER, and any new director (other than a director designated by a person who has entered into an agreement with SFER to effect a transaction described in clause (a), (c) or (d) of this definition) whose election by the Board of Directors of SFER or nomination for election by SFER's stockholders was approved by a vote of at least two-thirds ( 2/3) of the directors then still in office who either were directors at the beginning of the period or whose election or nomination for election was previously so approved, cease for any reason to constitute at least a majority thereof; (c) the stockholders of SFER approve a merger or consolidation of SFER with any other company other than (i) a merger or consolidation which would result in the voting securities of SFER outstanding immediately prior thereto continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity) more than 65% of the combined voting power of the voting securities of SFER (or such surviving entity) outstanding immediately after such merger or consolidation, or (ii) a merger or consolidation effected to implement a recapitalization of SFER (or similar transaction) in which no "person" (as hereinabove defined) acquires more than 25% of the combined voting power of SFER's then outstanding securities; or (d) the stockholders of SFER adopt a plan of complete liquidation of SFER or approve an agreement for the sale or disposition by SFER of all or substantially all of SFER's assets. For purposes of this clause (d), the term "the sale or disposition by SFER of all or substantially all of SFER's assets" shall mean a sale or other disposition transaction or series of related transactions involving assets of SFER or of any direct or indirect subsidiary of SFER (including the stock of any direct or indirect subsidiary of SFER) in which the value of the assets or stock being sold or otherwise disposed of (as measured by the purchase price being paid therefor or by such other method as the Board of Directors of SFER determines is appropriate in a case where there is no readily ascertainable purchase price) constitutes more than two-thirds of the fair market value of SFER (as hereinafter defined). For purposes of the preceding sentence, the "fair market value of SFER" shall be the aggregate market value of the outstanding shares of common stock of SFER (on a fully diluted basis) plus the aggregate market value of SFER's other outstanding equity securities. The aggregate market value of the shares of common stock of SFER shall be determined by multiplying the number of shares of SFER's common stock (on a fully diluted basis) outstanding on the date of the execution and delivery of a definitive agreement with respect to the transaction or series of related transactions (the "Transaction Date") by the average closing price of the shares of common stock of SFER for the ten trading days immediately preceding the Transaction Date. The aggregate market value of any other equity securities of SFER shall be determined in a manner similar to that prescribed in the immediately preceding sentence for determining the aggregate market value of the shares of common stock of SFER or by such other method as the Board shall determine is appropriate. "Code" means the Internal Revenue Code of 1986, as amended. "Committee" means the Compensation and Benefits Committee of the Board. "Common Stock" means the common stock, $0.01 par value, of SFER. "Company" means collectively SFER and all companies in which SFER owns, directly or indirectly, more than 50% of the voting stock. "Director" means a member of the Board who is not also an employee of the Company. A-2 "Disability" means the inability of a Participant to continue to perform the duties of his or her employment with the Company or as a member of the Board, as the case may be, as determined by the Committee. "Fair Market Value" shall mean the value per share equal to the Market Price as of the date of determination unless, with respect to an Award to a key employee, the Board or the Committee shall, in good faith and using any fair and reasonable means selected in its discretion, determine another value to be used for such purpose. "Grant Date" as used with respect to a particular Award means the date as of which such Award is granted pursuant to the Plan. "Option" means an option to purchase shares of Common Stock granted by the Committee pursuant to the Plan, which may be designated as either an "Incentive Stock Option" or a "Non-Qualified Stock Option." "Incentive Stock Option" means an option that is intended to qualify as an Incentive Stock Option as described in Section 422 of the Code. "Limited Right" means a Stock Appreciation Right that is exercisable only as set forth in Section XIV of the Plan. "Market Price" means the average of the daily closing prices per share of the Common Stock for the 10 consecutive trading days immediately preceding the day as of which "Market Price" is being determined. The closing price for each day shall be the last sale price regular way or, in case no such sale takes place on such day, the average of the closing bid and asked prices regular way, in either case on the New York Stock Exchange, or, if shares of the Common Stock are not listed or admitted to trading on the New York Stock Exchange, on the principal national securities exchange on which the shares are listed or admitted to trading, or if the shares are not so listed or admitted to trading, the average of the highest reported bid and lowest reported asked prices as furnished by the National Association of Securities Dealers, Inc., through NASDAQ, or through a similar organization if NASDAQ is no longer reporting such information. If shares of Common Stock are not listed or admitted to trading on any exchange or quoted through NASDAQ or any similar organization, the "Market Price" shall be determined by the Board in good faith using any fair and reasonable means selected in its discretion. "Non-Qualified Stock Option" means an option granted pursuant to the Plan, other than an Incentive Stock Option. "Participant" means any key employee of the Company or Director who has an Award outstanding under the Plan. "Phantom Unit" means a right to receive upon the achievement of specified performance goals a payment from the Company in an amount equal to a specified percentage of the Fair Market Value of a share of Common Stock on the date on which such right becomes payable. "Plan" means the Santa Fe Energy Resources, Inc. 1990 Incentive Stock Compensation Plan as set forth herein and as may be amended from time to time. "Related LSAR Option" means an Option outstanding under the Plan with respect to which a Limited Right is granted pursuant to Section XIV. "Restricted Period" means the period of time for which Restricted Stock and/or Phantom Units are subject to forfeiture pursuant to the Plan or during which Options and Stock Appreciation Rights are not exercisable. "Restricted Stock" means Common Stock subject to a Restricted Period which is granted pursuant to the Plan. "Retirement" means an Employee's leaving the employment of the Company, other than for Cause, after his early retirement date as defined in the Company's tax-qualified retirement plan, or predecessor A-3 plan, under which the Participant is entitled to the immediate receipt of a benefit thereunder. With respect to a Director, "Retirement" means ceasing to be a member of the Board on or after reaching age 65. "Stock Appreciation Right" means the right, granted by the Committee pursuant to the Plan, to receive a payment equal to the increase in the Fair Market Value of a share of Common Stock subsequent to the Grant Date of such Award. II. STOCK AND PHANTOM UNITS SUBJECT TO THE PLAN Subject to adjustment as provided in the Plan, the maximum aggregate number of shares of Common Stock with respect to which Options, Restricted Stock, Bonus Stock, Phantom Units and Stock Appreciation Rights may be granted from time to time under the Plan is 7,500,000; provided, however, no more than 500,000 shares of Common Stock shall be issued after January 1, 1995 as Restricted Stock. The Common Stock issued under the Plan may be either previously authorized but unissued shares or treasury shares acquired by SFER. In the event that any Award expires, lapses, is forfeited or otherwise terminates, any shares of Common Stock allocable to the terminated portion of such Award may again be made subject to an Award under the Plan. Further, to the extent an Award is paid in cash, rather than in Common Stock, or shares of Common Stock are tendered to the Company, or withheld by the Company from an Award, as payment of the exercise price of an Award or in satisfaction of any Company tax withholding obligation, such shares of Common Stock may again be made subject to an Award (other than Incentive Stock Options) under the Plan. III. ADMINISTRATION OF THE PLAN The Plan shall be administered by the Committee. The members of the Committee shall not be eligible to participate in the Plan, except as provided in Section XVIII, concerning automatic grants of Restricted Stock to Directors. The Committee shall select from time to time those employees to be granted Awards under the Plan. The Committee shall also determine the terms and provisions of Awards, which need not be identical. The Committee shall grant all Awards. The Committee shall construe the Plan, prescribe and rescind rules and regulations relating to the Plan and make all other determinations deemed necessary or advisable for the administration of the Plan, subject to the limitations of Section XXII. IV. ELIGIBILITY Subject to the discretion of the Committee, all officers and other key employees of the Company who have responsibility for the growth and profitability of the Company are eligible to receive Awards under the Plan; provided, however, no employee may receive in any calendar year an Award or Awards of Options and/or Stock Appreciation Rights with respect to more than 1,000,000 shares of Common Stock. Directors shall automatically participate in the Plan as provided in Section XVIII. V. OPTIONS The Committee may, from time to time and subject to the provisions of the Plan, grant Awards of Options to employees of the Company to purchase shares of Common Stock. Any Options granted may be designated as either Incentive Stock Options or as Non-Qualified Stock Options, or the Committee may designate a portion of an Award as "Incentive Stock Options" and the remaining portion as "Non-Qualified Stock Options." Any portion of an Award that is not designated as "Incentive Stock Options" shall be "Non-Qualified Stock Options" and shall not be subject to the requirements of Section VI of the Plan. The purchase price of the Common Stock subject to any Options shall be determined by the Committee, but, with respect to a Non-Qualified Stock Option, may not be less than 50% of the Fair Market Value of the Common Stock on the Grant Date. Such price shall be subject to adjustment as provided in Section XIII of the Plan. A-4 Options shall not be exercisable prior to the date that is six months after the Grant Date. In addition, the Committee may include in each agreement evidencing the Option grant a provision stating that the Option granted therein may not be exercised in whole or in part for an additional period(s) of time specified in such agreement, and may further limit the exercisability of the Option in such manner as the Committee deems appropriate, including, without limitation, the achievement of performance goals. The Committee may, in its discretion, at any time and from time-to-time accelerate the exercisability of all or part of any Option. The period of any Option, which is the time period during which the Option may be exercised, shall be determined by the Committee and shall not extend more than ten years after the Grant Date. Options shall not be transferable other than by will or the laws of descent and distribution and during the Participant's lifetime shall be exercisable only by the Participant. Termination for Cause, as defined in Section I, shall result in forfeiture of all outstanding Options. Termination by the Company for any reason other than Cause (including terminations pursuant to formal severance programs sponsored by the Company or an affiliate), or terminations by reason of death, Disability or Retirement, shall result in a lapse of all or a proportion of the Restricted Period applicable to any outstanding Award as set forth in Section XI. A person electing to exercise an Option shall give written notice of such election to the Company in such form as the Committee may require. Upon exercise of an Option, the full option purchase price for the shares with respect to which the Option is being exercised shall be payable to the Company (i) in cash or by check payable and acceptable to the Company or (ii) subject to the approval of the Committee, (a) by tendering to the Company shares of Common Stock owned by such person having an aggregate Fair Market Value as of the date of exercise and tender that is not greater than the full option purchase price for the shares with respect to which the Option is being exercised and by paying any remaining amount of the option purchase price as provided in (i) above (provided that the Committee may, upon confirming that such person owns the number of additional shares being tendered, authorize the issuance of a new certificate for the number of shares being acquired pursuant to the exercise of the Option less the number of shares being tendered upon the exercise and return to such person (or not require surrender of) the certificate for the shares being tendered upon the exercise) or (b) by such person delivering to the Company a properly executed exercise notice together with irrevocable instructions to a broker to promptly deliver to the Company cash or a check payable and acceptable to the Company to pay the option purchase price; provided that in the event such person chooses to pay the option purchase price as provided in (ii)(b) above, such person and the broker shall comply with such procedures and enter into such agreements of indemnity and other agreements as the Committee shall prescribe as a condition of such payment procedure. Payment instruments will be received subject to collection. Notwithstanding any other provision in the Plan, if a Change in Control occurs while unexercised Options, and Stock Appreciation Rights relating thereto, remain outstanding under the Plan, then from and after the Acceleration Date, all Options and Stock Appreciation Rights shall be exercisable in full, whether or not otherwise exercisable; provided, however, that no Option or Stock Appreciation Right shall become exercisable by reason of this paragraph to the extent that such acceleration of exercisability, when aggregated with other payments or benefits to the Participant pursuant to this Plan or any other plan, arrangement or agreement with the Company, any person whose actions result in a Change in Control or any person affiliated with the Company or such person, would, as determined by tax counsel selected by the Company, result in "Excess Parachute Payments" (as defined below) equal to or greater than three times the "base amount" as defined in Section 280G of the Code. "Excess Parachute Payments" shall mean "parachute payments" as defined in Section 280G of the Code other than (1) health and life insurance benefits and (2) payments attributable to any award, benefit or other compensation plan or program based upon the number of full or fractional months of any restricted period (relating thereto) which has elapsed prior to the date of the Change in Control. Furthermore, such payments or benefits provided to a Participant under this Plan shall be reduced to the extent necessary so that no portion thereof shall be subject to the excise tax imposed by Section 4999 of the Code, but only if, by reason of such reduction, the Participant's net after tax benefit shall exceed the net after tax benefit if such reduction were not made. "Net after tax benefit" shall mean the sum of (i) all A-5 payments and benefits which a Participant receives or is then entitled to receive from the Company that would constitute a "parachute payment" within the meaning of Section 280G of the Code, less (ii) the amount of federal income taxes payable with respect to the payments and benefits described in (i) above calculated at the maximum marginal income tax rate for each year in which such payments and benefits shall be paid to the Participant (based upon the rate for such year as set forth in the Code at the time of the first payment of the foregoing), less (iii) the amount of excise taxes imposed with respect to the payments and benefits described in (i) above by Section 4999 of the Code. VI. INCENTIVE STOCK OPTIONS An Option designated by the Committee as an "Incentive Stock Option" is intended to qualify as an "incentive stock option" within the meaning of Section 422 of the Code and shall satisfy, in addition to the conditions of Section V, the conditions set forth in this Section VI. The purchase price of the Common Stock subject to an Incentive Stock Option shall be the greater of the Fair Market Value of the Common Stock on the Grant Date or the "fair market value" of the Common Stock as such term is used for purposes for Section 422(b)(4) of the Code. An Incentive Stock Option shall not be granted to an employee who, on the Grant Date, owns stock possessing more than ten percent of the total combined voting power of all classes of stock of SFER, or of its parent or subsidiary corporations. VII. RESTRICTED STOCK The Committee may, from time to time and subject to the provisions of the Plan, grant Awards of Restricted Stock to employees of the Company; provided, however, no employee may receive in any calendar year Restricted Stock Awards with respect to more than 500,000 shares of Common Stock. The Committee shall, at the time shares of Restricted Stock are granted, designate the Restricted Period and the performance goals, if any, of the Company with respect to such Award. Such goals must be achieved (and certified by the Committee) in order for a Participant to receive the unrestricted shares of Common Stock at the designated time. With respect to any Restricted Stock Award that is intended to meet the requirements of Section 162(m) of the Code, the performance goal or goals for such Award shall be with respect to one or more of the following: earnings per share; earnings before interest, taxes, depreciation and amortization expenses ("EBITDA"); earnings before interest and taxes ("EBIT"); EBITDA, EBIT or earnings before taxes and unusual or nonrecurring items as measured either against the annual budget or as a ratio to revenue; market share; sales; costs; return on equity; operating cash flow; production volumes compared to plan or prior years; reserves added; discretionary cash flow; return on net capital employed and/or stock price performance. The goals can be applied, where appropriate, with respect to an individual, a business unit or the Company as a whole and need not be based on increases or positive results, but can be based on maintaining the status quo or limiting economic losses, for example. Which goals to use with respect to such Award, the weighting of the goals if more than one is used, and whether the goal is to be measured against a Company-established budget or target, an index or a peer group of companies, shall also be determined by the Committee at the time of grant of the Award. Each certificate representing Restricted Stock awarded under the Plan shall be registered in the name of the Participant and, during the Restricted Period, shall be left on deposit with the Company with a stock power endorsed in blank. Participants shall have the right to receive dividends paid on their Restricted Stock and to vote such shares. Restricted Stock may not be sold, pledged, assigned, transferred or encumbered during the Restricted Period other than by will or the laws of descent and distribution. Termination for Cause, as defined in Section I, shall result in forfeiture of all outstanding Restricted Stock. Termination by the Company for any reason other than Cause (including terminations pursuant to formal severance programs sponsored by the Company or an affiliate), or termination by reason of death, A-6 Disability or Retirement, shall result in a lapse on all or a portion of the Restricted Period applicable to any outstanding Award as set forth in Section XI. Notwithstanding any other provisions in the Plan, if a Change in Control occurs while any shares of Restricted Stock remain subject to restrictions relating thereto, then from and after the Acceleration Date, (1) all such restrictions and all Restricted Periods shall lapse and (2) no later than the fifth day following the Acceleration Date, any Restricted Stock theretofore granted a Participant shall be delivered to the Participant; provided, however, that no restriction or Restricted Period shall lapse or payment or benefit shall be made by reason of this paragraph to the extent that such lapse or payment or benefit, when aggregated with other payments or benefits to the Participant pursuant to this Plan or any other plan, arrangement or agreement with the Company, any person whose actions result in a Change in Control or any person affiliated with the Company or such person, would, as determined by tax counsel selected by the Company, result in Excess Parachute Payments equal to or greater than three times the "base amount" as defined in Section 280G of the Code. "Excess Parachute Payments" shall mean "parachute payments" as defined in Section 280G of the Code other than (1) health and life insurance benefits and (2) payments attributable to any award, benefit or other compensation plan or program based upon the number of full or fractional months of any restricted period (relating thereto) which has elapsed prior to the date of the Change in Control. Furthermore, such payments or benefit provided to a Participant under this Plan shall be reduced to the extent necessary so that no portion thereof shall be subject to the excise tax imposed by Section 4999 of the Code, but only if, by reason of such reduction, the Participant's net after tax benefit shall exceed the net after tax benefit if such reduction were not made. "Net after tax benefit" shall have the meaning prescribed in Section V. VIII. STOCK APPRECIATION RIGHTS The Committee may, from time to time and subject to the provisions of the Plan, grant Awards of Stock Appreciation Rights to employees of the Company subject to the limitation in Section II. An Award of Stock Appreciation Rights, in the Committee's discretion, may or may not be made in tandem with the grant of an Option, and need not be granted at the same time as the Option grant to be made in tandem with the Option grant. The period of any Stock Appreciation Right, which is the time period during which the Stock Appreciation Right may be exercised, shall be determined by the Committee and shall not extend more than ten years after the Grant Date or, if in tandem with an Option, the period of such Option. Stock Appreciation Rights shall not be transferable other than by will or the laws of descent and distribution and during the Participant's lifetime shall be exercisable only by the Participant. Termination for Cause, as defined in Section I, shall result in forfeiture of all outstanding Stock Appreciation Rights. Termination by the Company for any reason other than Cause (including terminations pursuant to formal severance programs sponsored by the Company or an affiliated company), or termination by reason of death, Disability or Retirement, shall result in a lapse on all or a portion of the Restricted Period applicable to any outstanding Award as set forth in Section XI. Subject to any restrictions or conditions imposed by the Committee, upon the exercise of a Stock Appreciation Right, the Company shall pay the amount, if any, by which the Fair Market Value of a share of Common Stock on the date of exercise exceeds the Fair Market Value of a share of Common Stock on the Grant Date. The amount payable by the Company upon the exercise of a Stock Appreciation Right may be paid in cash or in shares of Common Stock or in any combination thereof as the Committee, in its sole discretion, shall determine, but no fractional shares shall be issuable pursuant to any Stock Appreciation Right. A person electing to exercise a Stock Appreciation Right shall give written notice of such election to the Company in such form as the Committee may require. The exercise of Stock Appreciation Rights or Options granted in tandem will result in an equal reduction in the number of corresponding Options or Stock Appreciation Rights which were granted in tandem with such Stock Appreciation Rights and Options. A-7 The Change in Control provisions in Section V, concerning Options and Stock Appreciation Rights granted in tandem with an Option, shall also apply to Stock Appreciation Rights that are not granted in tandem with Options. IX. PHANTOM UNITS The Committee may, from time to time and subject to the provisions of the Plan, grant Awards of Phantom Units to employees of the Company; provided, however, no employee may receive in any calendar year Phantom Unit Awards with respect to more than 500,000 shares of Common Stock. Phantom Units may not be sold, pledged, assigned, transferred or encumbered during the Restricted Period, other than by will or the laws of descent and distribution. The Committee shall, at the time Phantom Units are granted, designate the Restricted Period and the performance goals, if any, of the Company with respect to such Award. Such goals must be achieved (and certified by the Committee) in order for a Participant to receive the value of the Phantom Units at the designated time. To the extent earned in accordance with this Section and the grant of such Award, all such Phantom Units must be paid as soon as practicable following the end of the Restricted Period in cash or in shares of Common Stock or in any combination thereof as the Committee, in its sole discretion shall determine, but no fractional shares shall be issuable pursuant to any Phantom Unit. With respect to any Phantom Unit Award that is intended to meet the requirements of Section 162(m) of the Code, the performance goal or goals for such Award shall be with respect to one or more of the following: earnings per share; earnings before interest, taxes, depreciation and amortization expenses ("EBITDA"); earnings before interest and taxes ("EBIT"); EBITDA, EBIT or earnings before taxes and unusual or nonrecurring items as measured either against the annual budget or as a ratio to revenue; market share; sales; costs; return on equity; operating cash flow; production volumes compared to plan or prior years; reserves added; discretionary cash flow; return on net capital employed and/or stock price performance. The goals can be applied, where appropriate, with respect to an individual, a business unit or the Company as a whole and need not be based on increases or positive results, but can be based on maintaining the status quo or limiting economic losses, for example. Which goals to use with respect to such Award, the weighting of the goals if more than one is used, and whether the goal is to be measured against a Company-established budget or target, an index or a peer group of companies, shall also be determined by the Committee at the time of grant of the Award. At the discretion of the Committee, Phantom Units may at any time be converted into Non-Qualified Stock Options, Bonus Stock or shares of Restricted Stock or any combination thereof having a value, as determined in the good faith judgment of the Committee, substantially equal to the value of the Phantom Units so converted. Termination for Cause, as defined in Section I, shall result in forfeiture of all outstanding Phantom Units. Termination by the Company for any reason other than Cause (including terminations pursuant to formal severance programs sponsored by the Company or an affiliate), or termination by reason of death, Disability or Retirement, shall result in a lapse on all or a proportion of the Restricted Period applicable to any outstanding Award as set forth in Section XI. Notwithstanding any other provisions in the Plan, if a Change in Control occurs while any Phantom Units remain outstanding, then from and after the Acceleration Date, (1) all designated goals shall be deemed to have been met and (2) no later than the fifth day following the Acceleration Date, the full value of all such Phantom Units shall be paid to the Participant in cash; provided, however, that no payment or benefit shall be made by reason of this paragraph to the extent that such payment or benefit, when aggregated with other payments or benefits to the Participant pursuant to this Plan or any other plan, arrangement or agreement with the Company, any person whose actions result in a Change in Control or any person affiliated with the Company or such person, would, as determined by tax counsel selected by the Company, result in Excess Parachute Payments equal to or greater than three times the "base amount" as defined in Section 280G of the Code. "Excess Parachute Payments" shall mean "parachute payments" as defined in Section 280G of the Code other than (1) health and life insurance benefits and (2) payments attributable to any award, benefit or A-8 other compensation plan or program based upon the number of full or fractional months of any restricted period (relating thereto) which has elapsed prior to the date of the Change in Control. Furthermore, such payments or benefit provided to a Participant under this Plan shall be reduced to the extent necessary so that no portion thereof shall be subject to the excise tax imposed by Section 4999 of the Code, but only if, by reason of such reduction, the Participant's net after tax benefit shall exceed the net after tax benefit if such reduction were not made. "Net after tax benefit" shall have the meaning prescribed in Section V. X. CONTINUED EMPLOYMENT Participation in the Plan shall confer no rights to continued employment with the Company, nor shall it restrict the rights of the Company to terminate a Participant's employment relationship at any time. XI. TERMINATION OF EMPLOYMENT In the event of a Participant's termination of employment with the Company by reason of death, the Restricted Period shall lapse on all of the Participant's outstanding Awards. In the event of a Participant's termination of employment with the Company by reason of Disability, Retirement or by the Company for any reason other than Cause, a portion of all of the Participant's outstanding Awards shall be immediately forfeited to the extent not then otherwise vested. The portion of an Award forfeited shall be a fraction, the denominator of which is the total number of months of any Restricted Period applicable to the Award (rounded up to the nearest whole month) and the numerator of which is the number of months remaining in such Restricted Period (rounded up to the nearest whole month) as of the termination of employment. Unless the Committee directs the acceleration of the payment of that portion of an Award of Phantom Units or Restricted Stock that is not automatically forfeited as provided above upon the Participant's termination of employment, such Phantom Units and Restricted Stock shall be payable or issued, as the case may be, at the end of the Restricted Period applicable to such Awards, but only to the extent otherwise payable pursuant to the Award Agreement evidencing such Phantom Units or Restricted Stock, e.g., the goals, if any, for such Award are achieved. Any such Awards not payable or earned at the end of such Restricted Period, as provided above, shall be forfeited at such time. Phantom Units and Restricted Stock upon which the Restricted Period lapse as provided above shall be paid or issued to the Participant or, in the case of death prior to such payment or issuance, to the Participant's designated beneficiary, or in the absence of such designation, to the person to whom the Participant's rights pass by will or the laws of descent and distribution. Options and Stock Appreciation Rights which are or become exercisable at the time of a Participant's termination of employment with the Company by reason of Disability, Retirement or any reason other than Cause, may be exercised by the Participant within three months following such termination of employment but not after the expiration of the period of the Option or Stock Appreciation Right. Options and Stock Appreciation Rights which are or become exercisable at the time of a Participant's termination of employment with the Company by reason of death, may be exercised by the Participant's designated beneficiary, or in the absence of such designation, by the person to whom the Participant's rights pass by will or the laws of descent and distribution at any time within one year after the Participant's death but not after the expiration of the period of the Option or Stock Appreciation Right. Options and Stock Appreciation Rights that do not become exercisable as provided above, or that are not otherwise vested, shall be forfeited. In the event of a Participant's termination of employment with the Company for any reason other than as provided above, all Awards not otherwise vested or earned as of the date of such termination of employment shall be forfeited. If a Participant's employer ceases to be a part of the Company as defined in Section I, such Participant shall be deemed to have been involuntarily terminated by the Company (other than for Cause) as of the date the Participant's employer so ceased to be a company of which more than 50% of the voting stock is owned directly or indirectly by SFER. A-9 Notwithstanding the foregoing however, the Committee may determine that termination of employment by reasons of any other special circumstances not set forth above shall not terminate an Award or a portion thereof. XII. AWARD AGREEMENT Each employee granted an Award pursuant to the Plan shall sign an Award Agreement which signifies the offer of the Award by the Company and the acceptance of the Award by the employee in accordance with the terms of the Award and the provisions of the Plan. Each Award Agreement shall reflect the terms and conditions of the Award. XIII. ADJUSTMENTS UPON CHANGES IN CAPITALIZATION In the event of a change in the capitalization of SFER due to a stock split, stock dividend, recapitalization, merger, consolidation, combination, or similar event, the aggregate shares subject to the Plan and the terms of any existing Awards shall be adjusted by the Committee to reflect such change. XIV. LIMITED STOCK APPRECIATION RIGHTS (a) The Committee shall have authority to grant a Limited Right to the holder of any Option with respect to all or some of the shares of Common Stock covered by such Option. A Limited Right may be granted either at the time of grant of the Related LSAR Option or any time thereafter during its term. A Limited Right may be exercised only during the sixty-day period beginning on an Acceleration Date. Each Limited Right shall be exercisable only if, and to the extent that, the Related LSAR Option is exercisable. Notwithstanding the provisions of the two immediately preceding sentences, no Limited Right may be exercised by a holder who is subject to Section 16 of the Exchange Act until the expiration of six months from the date of grant of the Limited Right. Upon the exercise of a Limited Right, the Related LSAR Option (and any tandem Stock Appreciation Right) shall cease to be exercisable to the extent of the shares of Common Stock with respect to which such Limited Right is exercised, but shall be considered to have been exercised to that extent for purposes of determining the number of shares of Common Stock available for the grant of further Options, Stock Appreciation Rights and Limited Rights pursuant to this Plan. Upon the exercise or termination of a Related LSAR Option, the Limited Right with respect to such Related LSAR Options shall terminate to the extent of the shares of Common Stock with respect to which the Related LSAR Option was exercised or terminated. (b) Upon the exercise of a Limited Right, the holder thereof shall receive in cash whichever of the following amounts is applicable: (i) in the case of an exercise of Limited Rights by reason of an acquisition of Common Stock described in clause (a) of the definition of Change in Control contained in Section I hereof, an amount equal to the Acquisition Spread (as defined in Subsection (d) hereof); (ii) in the case of an exercise of Limited Rights by reason of the change in composition of the Board of Directors described in clause (b) of the definition of Change in Control contained in Section I hereof, an amount equal to the Spread (as defined in Subsection (g) hereof); or (iii) in the case of an exercise of Limited Rights by reason of stockholder approval of an agreement or adoption of a plan described in clause (c) or (d) of the definition of Change in Control contained in Section I hereof, an amount equal to the Merger Spread (as defined in Subsection (f) hereof). Notwithstanding the foregoing provisions of this Section XIV(b), (i) in the case of a Limited Right granted in respect of an Incentive Stock Option, the holder may not receive an amount in excess of the maximum amount that will enable such option to continue to qualify as an Incentive Stock Option, and (ii) no payment shall occur by reason of this Section XIV(b) to the extent that such payment, when aggregated with other payments or benefits to the Participant, would as determined by tax counsel selected by the Company, result in an Excess Parachute Payment equal to or greater than three times the "base amount" as defined in A-10 Section 280G of the Code. Furthermore, such payments or benefits provided to a Participant under this Plan shall be reduced to the extent necessary so that no portion thereof shall be subject to the excise tax imposed by Section 4999 of the Code, but only if, by reason of such reduction, the Participant's net after tax benefit shall exceed the net after tax benefit if such reduction were not made. "Net after tax benefit" shall have the meaning prescribed in Section V. (c) The term "Acquisition Price Per Share" as used in this Section XIV shall mean, with respect to the exercise of any Limited Right by reason of an acquisition of Common Stock described in clause (a) of the definition of Change in Control contained in Section I, the highest Fair Market Value per share of Common Stock during the sixty-day period ending on the date the Limited Right is exercised. (d) The term "Acquisition Spread" as used in this Section XIV shall mean an amount equal to the product obtained by multiplying (i) the excess of (A) the Acquisition Price Per Share over (B) the price per share of Common Stock at which the Related LSAR Option is exercisable, by (ii) the number of shares of Common Stock with respect to which such Limited Right is being exercised. (e) The term "Merger Price Per Share" as used in this Section XIV shall mean, with respect to the exercise of any Limited Right by reason of stockholder approval of an agreement or adoption of a plan described in clause (c) or (d) of the definition of Change in Control contained in Section I, the greater of (i) the fixed or formula price for the acquisition of shares of Common Stock specified in such agreement or adoption, if such fixed or formula price is determinable on the date on which such Limited Right is exercised, and (ii) the highest Fair Market Value per share of Common Stock during the sixty-day period ending on the date on which such Limited Right is exercised. (f) The term "Merger Spread" as used in this Section XIV shall mean an amount equal to the product obtained by multiplying (i) the excess of (A) the Merger Price Per Share over (B) the price per share of Common Stock at which the Related LSAR Option is exercisable, by (ii) the number of shares of Common Stock with respect to which such Limited Right is being exercised. (g) The term "Spread" as used in this Section XIV shall mean, with respect to the exercise of any Limited Right by reason of a change in the composition of the Board described in clause (b) of the definition of Change in Control contained in Section I, an amount equal to the product obtained by multiplying (i) the excess of (A) the highest Fair Market Value per share of Common Stock during the sixty-day period ending on the date the Limited Right is exercised over (B) the price per share of Common Stock at which the Related LSAR Option is exercisable, by (ii) the number of shares of Common Stock with respect to which the Limited Right is being exercised. (h) A Limited Right shall not be transferable except by will or by the laws of descent and distribution. During the lifetime of a Participant, the Limited Right shall be exercisable only by such Participant or by the Participant's guardian or legal representative. (i) Each Limited Right shall be granted on such terms and conditions not inconsistent with the Plan as the Committee may determine. (j) To exercise a Limited Right, the Participant shall (i) give written notice thereof to the Committee in form satisfactory to the Committee specifying the number of shares of Common Stock with respect to which the Limited Right is being exercised, and (ii) if requested by the Committee, deliver the option agreement to the Committee, who shall endorse thereon a notation of such exercise and return the option agreement to the Participant. The date of exercise of a Limited Right that is validly exercised shall be deemed to be the date on which there shall have been delivered the instruments referred to in the first sentence of this paragraph (j). (k) The Company intends that this Section XIV shall comply with the requirements of Rule 16b-3 and any future rules promulgated in substitution therefor ("the Rule") under the Exchange Act during the term of the Plan. Should any provision of this Section XIV not be necessary to comply with the requirements of the Rule or should any additional provisions be necessary for this Section XIV to comply with the requirements of the Rule, the Board may amend the Plan to add to or modify the provisions of the Plan accordingly. A-11 XV. BONUS STOCK The Committee may, from time to time and subject to the provision of the Plan, grant Awards of Bonus Stock to employees of the Company. In addition, the Committee shall have the authority to pay in shares of Common Stock all or any portion of the cash amounts payable under any other compensation program of the Company, but not exceeding $2 million with respect to any employee during any calendar year. XVI. EMPLOYEE'S AGREEMENT If, at the time of the exercise of any Option or Stock Appreciation Right or Award of Restricted Stock or Bonus Stock, in the opinion of counsel for the Company, it is necessary or desirable, in order to comply with any then applicable laws or regulations relating to the sale of securities, for the individual exercising the Option or Stock Appreciation Right or receiving the Restricted Stock or Bonus Stock to agree to hold any shares issued to the individual for investment and without intention to resell or distribute the same and for the individual to agree to dispose of such shares only in compliance with such laws and regulations, the individual will, upon the request of the Company, execute and deliver to the Company a further agreement to such effect. XVII. WITHHOLDING FOR TAXES Any cash payment under the Plan shall be reduced by any amounts required to be withheld or paid with respect thereto under all present or future federal, state and local taxes and other laws and regulations that may be in effect as of the date of each such payment ("Tax Amounts"). Any issuance of Common Stock pursuant to the exercise of an Option or other distribution of Common Stock under the Plan shall not be made until appropriate arrangements have been made for the payment of any amounts that may be required to be withheld or paid with respect thereto. Such arrangements may, at the discretion of the Committee, include allowing the Participant to tender to the Company shares of Common Stock owned by the Participant, or to request the Company to withhold a portion of the shares of Common Stock being acquired pursuant to the exercise or otherwise distributed to the Participant, which have a Fair Market Value per share as of the date of such Award exercise, tender or withholding that is not greater than the sum of all Tax Amounts, together with payment of any remaining portion of all Tax Amounts in cash or by check payable and acceptable to the Company. XVIII. AUTOMATIC DIRECTOR AWARDS Beginning with the 1992 annual meeting of the stockholders of SFER, and on each annual stockholders' meeting date thereafter, except as provided below, each Director shall receive 37.5% of the value of his annual retainer fee for serving as Director for such year then commencing paid in the form of a Restricted Stock Award. The total number of shares of Common Stock included in each such Restricted Stock Award shall be determined by dividing the amount of the Director's annual retainer fee that is to be paid in Common Stock by the Fair Market Value of a share of Common Stock on such Grant Date. In no event, however, shall SFER be required to issue a fractional share and whenever a fractional share of Common Stock would otherwise be required to be issued, an amount in lieu thereof shall be paid in cash based upon the Fair Market Value of such fractional share. The Restricted Period shall lapse on an Award of Restricted Stock granted pursuant to this Section XVIII upon the earlier of the date that is six months and one day after the Grant Date, the Director's death, Retirement, or Disability or the occurrence of a Change in Control. If a Director ceases to be a member of the Board during a Restricted Period for any reason other than death, Disability or Retirement, the Restricted Stock subject to such Restricted Period shall be forfeited. Each certificate representing Restricted Stock awarded hereunder shall be registered in the name of the Director and, during the Restricted Period, shall be left on deposit with SFER with a stock power endorsed in blank. Directors shall have the right to receive dividends paid on their Restricted Stock and to vote such shares. Restricted Stock may not be sold, pledged, assigned, transferred or encumbered during the Restricted Period other than by will or the laws of descent and distribution. A-12 Notwithstanding the foregoing, any Director who immediately prior to the relevant Grant Date owns, directly or indirectly, a beneficial interest in 25,000 or more shares of Common Stock shall receive his annual retainer fee paid solely in cash and not partly in the form of a Restricted Stock Award as provided above. XIX. DESIGNATION OF BENEFICIARY Each Participant to whom an Award has been made under this Plan may designate a beneficiary or beneficiaries (which beneficiary may be an entity other than a natural person) to exercise any rights or receive any payment that under the terms of such Award may become exercisable or payable on or after the Participant's death. At any time, and from time to time, any such designation may be changed or canceled by the Participant without the consent of any such beneficiary. Any such designation, change or cancellation must be on a form provided for that purpose by the Committee and shall not be effective until received by the Committee. If no beneficiary has been named by a deceased Participant, or the designated beneficiaries have predeceased the Participant, the beneficiary shall be the Participant's estate. If a Participant designates more than one beneficiary, any such exercise or payment under this Plan shall be made in equal shares unless the Participant has designated otherwise, in which case the exercise or payment shall be made in the shares designated by the Participant. XX. PREEMPTION BY APPLICABLE LAWS AND REGULATIONS Anything in the Plan or any agreement entered into pursuant to the Plan to the contrary notwithstanding, if, at any time specified herein or therein for the making of any determination, the issuance or other distribution of shares of Common Stock, the payment of consideration to an employee as a result of the exercise of any Stock Appreciation Right or Limited Right, or the payment of any Phantom Units, as the case may be, any law, regulation or requirement of any governmental authority having jurisdiction in the premises shall require either the Company or the Participant (or the Participant's beneficiary), as the case may be, to take any action in connection with any such determination, the shares then to be issued or distributed, or such payment, the issue or distribution of such shares or the making of such determination or payment, as the case may be, shall be deferred until such action shall have been taken. XXI. EFFECTIVE DATE AND DURATION OF PLAN This Plan amendment and restatement shall become effective upon its approval by the stockholders of SFER. Unless previously terminated by the Board, the Plan shall terminate on the tenth anniversary of its approval by the stockholders; provided, however, that such termination shall not terminate any Award then outstanding. No Awards shall be made pursuant to this Plan after December 31, 1999. XXII. TERMINATION AND AMENDMENT The Board may suspend, terminate, modify or amend the Plan, provided that any amendment that would increase the aggregate number of shares which may be issued under the Plan or materially modify the requirements as to eligibility for participation in the Plan, shall be subject to the approval of SFER's stockholders, except that any such increase or modification that may result from adjustments authorized by Section XIII does not require such approval; provided, further, that no amendment or modification shall be made to Section XVIII more than once every six months, other than to comport with changes in the Code or the Employee Retirement Income Security Act of 1974, as amended, or rules promulgated thereunder. No suspension, termination, modification or amendment of the Plan may terminate a Participant's existing Award or materially adversely affect a Participant's rights under such Award. XXIII. MISCELLANEOUS (a) Nothing contained in the Plan shall be construed as conferring upon any employee the right to continue in the employ of the Company. (b) An employee shall have no rights as a stockholder with respect to shares covered by such employee's Option, Stock Appreciation Rights or Restricted Stock award until the date of the issuance of shares to the A-13 employee pursuant thereto. No adjustment will be made for dividends or other distributions or rights for which the record date is prior to the date of such issuance. An employee shall have no rights as a stockholder with respect to any award of Phantom Units under the Plan. (c) Nothing contained in the Plan shall be construed as giving any employee, such employee's beneficiaries or any other person any equity or other interest of any kind in any assets of the Company or creating a trust of any kind or a fiduciary relationship of any kind between the Company and any such person. (d) Nothing contained in the Plan shall be construed to prevent the Company from taking any corporate action that is deemed by the Company to be appropriate or in its best interest, whether or not such action would have an adverse effect on the Plan or any award made under the Plan. No employee, beneficiary or other person shall have any claim against the Company as a result of any such action. (e) Neither an employee nor an employee's beneficiary shall have the power or right to sell, exchange, pledge, transfer, assign or otherwise encumber or dispose of such employee's or beneficiary's interest arising under the Plan or in any Award received under the Plan; nor shall such interest be subject to seizure for the payment of an employee's or beneficiary's debts, judgments, alimony, or separate maintenance or be transferable by operation of law in the event of an employee's or beneficiary's bankruptcy or insolvency and to the extent any such interest arising under the Plan or Award received under the Plan is awarded to a spouse pursuant to any divorce proceeding, such interest shall be deemed to be terminated and forfeited notwithstanding any vesting provisions or other terms herein or in the agreement evidencing such award. (f) All rights and obligations under the Plan shall be governed by, and the Plan shall be construed in accordance with, the laws of the State of Texas without regard to the principles of conflicts of laws. Titles and headings to Sections herein are for purposes of reference only, and shall in no way limit, define or otherwise affect the meaning or interpretation of any provisions of the Plan. A-14 EX-10.O 4 AGREEMENT REGARDING SHELF REG. STATMENT EXHIBIT 10(o) SANTA FE ENERGY RESOURCES, INC. David L. Hicks Vice President, Law and General Counsel March 24, 1995 HC Associates 200 West Madison Street 27th Floor Chicago, Illinois 60606 Re: Agreement Regarding Shelf Registration Statement Gentlemen: As we discussed, Santa Fe Energy Resources, Inc. (the "Company"), agrees that upon the receipt of a written demand (which demand may be submitted to the Company once, provided such registration is effected and the registration statement is declared effective) from HC Associates, GKH Partners, L.P., GKH Investments, L.P., Ernest H. Cockrell Texas Testamentary Trust or Carol Cockrell Jennings Texas Testamentary Trust (collectively, the "Selling Stockholders") at any time prior to March 27, 2000 to file with the Securities and Exchange Commission (the "Commission") a registration statement on Form S-3 or such other form as may be appropriate (the "Registration Statement") to register the offer and sale, from time to time, by the Selling Stockholders of up to 5,203,091 shares of the Company's common stock, par value $0.01 per share, that are beneficially owned by the Selling Stockholders as of the date hereof, plus such additional number of shares of the Company's common stock that the Selling Stockholders may own in the future as a result of any stock split, stock distribution or stock dividend made by the Company (collectively, the "Shares"). Such agreement to register shall be subject to the following terms and conditions: 1. REGISTRATION PROCEDURES. Upon your demand, the Company will use its reasonable best efforts to effect the registration and facilitate the sale and distribution of all of the Shares or such portion thereof as the Selling Stockholders may elect (the "Offered Securities") in accordance with the intended method of disposition thereof and pursuant thereto the Company will as expeditiously as reasonably possible, but subject to the provisions hereof: (a) prepare and file with the Commission a registration statement with respect to such Offered Securities and use its reasonable best efforts to cause such registration statement to become effective (provided that before filing a registration statement or prospectus or any amendments or supplements thereto, the Company will furnish on a timely basis to the counsel selected by the Selling Stockholders copies of all such documents proposed to be filed, which documents will be subject to the review of such counsel); (b) subject to the terms of paragraph 3, prepare and file with the Commission such amendments, post-effective amendments and supplements to such registration statement and the prospectus used in connection therewith as may be necessary to keep such registration statement continuously effective for the period required by the intended method of disposition or to describe the terms of any offering made from an effective shelf registration, and comply with the provisions of the Securities Act of 1993, as amended (the "Securities Act") with respect to the disposition of all securities covered by such registration statement during such period in accordance with the intended methods of disposition by The Selling Stockholders set forth in such registration statement; (c) furnish to the Selling Stockholders such number of copies of such registration statement, each amendment, post-effective amendment and supplement thereto, the prospectus included in such registration statement (including each preliminary prospectus) and such other documents as the Selling Stockholders may reasonably request in order to facilitate the disposition of the Offered Securities; the Company consents to the use of the prospectus, including each preliminary prospectus, by the Selling Stockholders in connection with the offering and sale of the Offered Securities covered by the prospectus or the preliminary prospectus; (d) use its reasonable best efforts to register or qualify such Offered Securities under such other securities or blue sky laws of such jurisdictions as the Selling Stockholders reasonably request and do any and all other acts and things which may be reasonably necessary or advisable to enable the Selling Stockholders to consummate the disposition in such jurisdictions of the Offered Securities owned by the Selling Stockholders (provided that the Company will not be required to (i) qualify generally to do business in any jurisdiction where it would not otherwise be required to qualify but for this subparagraph, (ii) subject itself to taxation in any such jurisdiction, (iii) consent to general service of process in any such jurisdiction (unless the Company is subject to service in such jurisdiction and except as may be required by the Securities Act), or (iv) qualify such Offered Securities in a given jurisdiction where expressions of investment interest are not sufficient in such jurisdiction to reasonably justify the expense of qualification in that jurisdiction or where such qualification would require the Company to register as a broker or dealer in such jurisdiction); (e) promptly notify the Selling Stockholders at any time when a prospectus relating thereto is required to be delivered under the Securities Act, of the occurrence of any event as a result of which the prospectus included in such registration statement contains an untrue statement of a material fact or omits any material fact necessary, in light of the circumstances under which made, to make the statements therein not misleading, and, at the request of the Selling Stockholders and subject to the third paragraph of paragraph 3, the Company will promptly prepare and furnish to the Selling Stockholders a supplement or amendment to such prospectus so that, as thereafter delivered to the purchasers of such Offered Securities, such prospectus will not contain an untrue statement of a material fact or omit to state any material fact necessary, in light of the circumstances under which made, to make the statements therein not misleading; (f) provide a transfer agent and registrar of all such Offered Securities not later than the effective date of such registration statement and thereafter maintain such a transfer agent and registrar, and otherwise cooperate with the Selling Stockholders and any managing underwriter of such offering to facilitate the timely preparation and delivery of certificates representing Offered Securities to be sold, and enable such Offered Securities to be in such denominations and registered in such names as the managing underwriter may reasonably request at least two business days prior to any sale of Offered Securities to the underwriters; (g) enter into such customary agreements (including underwriting agreements in customary form) and take all such other actions as the Selling Stockholders or the underwriters, if any, reasonably request in order to expedite or facilitate the disposition of such Offered Securities, including, without limitations: (i) making such representations and warranties to the underwriters in form, substance and scope reasonably satisfactory to the managing underwriter and the Company, as are customarily made by issuers to underwriters in primary underwritten offerings; (ii) obtaining opinions (and, if required, updates thereof) of counsel, which counsel and opinions (in form, scope and substance) shall be reasonably satisfactory to the managing underwriter, if any, and addressed to the managing underwriter covering the matters customarily covered in opinions requested in underwritten offerings and such other matters as may be reasonably requested by the managing underwriter; (iii) causing the underwriting agreements to set forth in full the indemnification provisions and procedures of paragraph 2 (or such other substantially similar provisions and procedures as the managing underwriter shall reasonably request) with respect to all parties to be indemnified pursuant to said paragraph; and (iv) delivering such documents (including causing the Company's independent public accountants to furnish a customary "cold comfort" letter) and certificates as may be reasonably requested by the Selling Stockholders to evidence compliance with the provisions of this paragraph 1 and with any customary conditions contained in the underwriting agreement or other agreement entered into by the Company; (h) upon receipt by the Company of reasonable confidentiality agreements, make available for inspection by any underwriter participating in any disposition pursuant to such registration statement and any attorney, accountant or other agent retained by any such underwriter, all financial and other records, pertinent corporate documents and properties of the Company, and cause the Company's officers, directors, employees and independent accountants to be available on a reasonable basis and cooperate with such parties' "due diligence" and to supply all information reasonably requested by any such underwriter, attorney, accountant or agent in connection with such registration statement, provided that the Company may refrain from disclosing any proprietary or other information that is not material to the Company's financial condition or results of operations; (i) in the event of the issuance of any stop order suspending the effectiveness of a registration statement, or of any order suspending or preventing the use of any related prospectus or suspending the qualification of any Common Stock included in such registration statement for sale in any jurisdiction, the Company will use its reasonable best efforts promptly to obtain the withdrawal of such order; and (j) use its reasonable best efforts to cause the Offered Securities covered by a registration statement to be registered with or approved by such other governmental agencies or authorities as may be necessary by virtue of the business and operations of the Company to enable the Selling Stockholders to consummate the disposition of such Offered Securities. The Selling Stockholders agree that, upon receipt of any notice from the Company of the occurrence of any event of the kind described in paragraphs 1(e) or 1(i) hereof, the Selling Stockholders will forthwith discontinue disposition of the Offered Shares until receipt of the copies of an appropriate supplement or amendment to the prospectus under paragraph 1(e) or until the withdrawal of such order under paragraph 1(i). 2. INDEMNIFICATION. (a) The Company agrees to indemnify to the fullest extent permitted by law, the Selling Stockholders, its officers, directors, stockholders, partners, employees and directors and each person who controls (within the meaning of the Securities Act) the Selling Stockholders against all losses, claims, damages, liabilities and expenses whatsoever, as incurred, including any of the foregoing, and reasonable fees and expenses of counsel incurred in investigating, preparing or defending against, or aggregate amounts paid in settlement of, any litigation, action, investigation or proceeding by any third party or governmental agency or body, commenced or threatened, in each case whether or not a party, or any claim whatsoever based upon, caused by or arising out of any untrue or alleged untrue statement of a material fact contained in any registration statement, prospectus or preliminary prospectus or any amendment thereof or supplement thereto or any omission or alleged omission of a material fact required to be stated therein or necessary to make the statements therein not misleading, except insofar as the same are caused by or contained in any information furnished in writing to the Company by the Selling Stockholders (or on behalf of the Selling Stockholders) expressly for use therein or by the Selling Stockholders' failure to deliver a copy of the registration statement or prospectus or any amendments or supplements thereto after the Company has furnished the Selling Stockholders with a sufficient number of copies of the same. In connection with an underwritten offering, the Company will indemnify such underwriters, their officers and directors and each person who controls (within the meaning of the Securities Act) such underwriters to the same extent as provided above with respect to the indemnification. (b) In connection with any registration statement in which any of the Selling Stockholders is participating, the Selling Stockholders will furnish to the Company in writing such information relating to the Selling Stockholders as the Company reasonably requests for use in connection with any such registration statement or prospectus and, to the fullest extent permitted by law, will indemnify the Company, its directors, shareholders, employees and officers and each Person who controls (within the meaning of the Securities Act) the Company against any losses, claims, damages, liabilities and expenses whatsoever, as incurred, including any of the foregoing, and reasonable fees and expenses of counsel incurred in investigating, preparing or defending against, or aggregate amounts paid in settlement of, any litigation, action, investigation or proceeding by any third party or governmental agency or body, commenced or threatened, in each case whether or not a party, or any claim whatsoever based upon, caused by or arising out of any untrue or alleged untrue statement of a material fact contained in the registration statement, prospectus or preliminary prospectus or any amendment thereof or supplement thereto or any omission or alleged omission of a material fact required to be stated therein or necessary to make the statements therein not misleading, but only to the extent that such untrue statement or omission is contained in any information so furnished in writing by the Selling Stockholders expressly for such purpose and is reasonable relied upon in conformity with such written information, or by the Selling Stockholders' failure to deliver a copy of the registration statement or prospectus or any amendments or supplements thereto after the Company has furnished the Selling Stockholders with a sufficient number of copies of same. (c) Any person entitled to indemnification hereunder will (i) give reasonably prompt written notice to the indemnifying party of any claim with respect to which it seeks indemnification and (ii) unless in such indemnified party's reasonable judgment a conflict of interest between such indemnified and indemnifying parties may exist with respect to such claim, permit such indemnifying party to assume the defense of such claim with counsel reasonably satisfactory to the indemnified party. If such defense is assumed, the indemnifying party will not be subject to any liability for any settlement made by the indemnified party without its consent (but such consent will not be unreasonably withheld). An indemnifying party who is not entitled to, or elects not to, assume the defense of a claim will not be obligated to pay the fees and expenses of more than one counsel for all parties indemnified by such indemnifying party with respect to such claim, unless in the reasonable judgment of any indemnified party a conflict of interest may exist between such indemnified party and any other of such indemnified parties with respect to such claim. (d) The indemnification provided for under this Agreement will remain in full force and effect regardless of any investigation made by or on behalf of the indemnified party or any officer, director or controlling Person of such indemnified party and will survive the transfer of securities. The Company also agrees to make such provisions, as are reasonably requested by any indemnified party, for contribution to such party in the event the Company's indemnification is unavailable for any reason. Such right to contribution shall be in such proportion as is appropriate to reflect the relative fault of and benefits to the Company on the one hand and the Selling Stockholders on the other, in connection with the statements or omissions which result in such losses, claims, damages, liabilities or expenses, as well as any other relevant equitable considerations. The relative benefits to the indemnifying party and indemnified parties shall be determined by reference to, among other things, the total proceeds received by the indemnifying party and indemnified parties in connection with the offering to which such losses, claims, damages, liabilities or expenses relate. The relative fault of the indemnifying party and indemnified parties shall be determined by reference to, among other things, whether the action in question, including any untrue or alleged untrue statement of a material fact or omission or alleged omission to state a material fact, has been made by, or relates to information supplied by, such indemnifying party or the indemnified parties, and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such action. The parties hereto agree that it would not be just or equitable if contribution pursuant hereto were determined by pro rata allocation or by any other method of allocation which does not take account of the equitable considerations referred to in the immediate preceding paragraph. No person found guilty of any fraudulent misrepresentation (within the meaning of Section 11(f) of the Securities Act) shall be entitled to contribution from any person who was not found guilty of such fraudulent misrepresentation. 3. UNDERWRITTEN OFFERINGS AND BLACK-OUT PERIODS. The Company agrees to maintain an effective registration statement covering the Offered Securities until the second anniversary of the date that such registration statement is declared effective by the commission plus any additional periods represented by any "Black-out Period" (defined below). The Selling Stockholders may request permission from the Company to offer and sell Offered Securities pursuant to an underwritten offering (an "Underwritten Offering") Any request (an "Underwriting Request") for an Underwritten Offering shall be in writing and shall specify the approximate number of Offered Securities to be included in such offering. Within 10 days after receipt by the Company of such Underwriting Request, the Company will provide written notice to the Selling Stockholders indicating whether or not it consents to such request. The Company shall be entitled to refuse its consent and to postpone the commencement of any Underwritten Offering for a period of up to 180 days after written notice to the Selling Stockholders of its refusal to consent to such request based upon a determination made by the Company to promptly proceed to prepare and file a registration statement (other than the registration pursuant to which the offer and sale of the Offered Securities shall be registered or registration statements on Form S-8 or other similar form) and the Company shall be entitled to postpone for up to 90 days an Underwritten Offering if such offering (y) would require disclosure of material information the Company has a bona file business purpose of retaining as confidential or (z) have a material adverse effect on the Company or its shareholders in relation to any financing, acquisition, corporate reorganization or other material transaction contemplated by the Board of Directors of the Company, involving the Company or any of its affiliates, in each case as determined by the Company. The Company agrees to notify the Selling Stockholders promptly upon its abandonment of any proposed offering or other material transaction as described above, upon which notification the Selling Stockholders shall be permitted to proceed with the Underwritten Offering. The Selling Stockholders agree that if the Company has delivered preliminary or final prospectuses to the Selling Stockholders and after having done so (a) the Company determines that the prospectus needs to be amended or supplemented to comply with the requirements of the Securities Act, (b) a stop order suspending the effectiveness of the registration statement is issued by the Commission or (c) the Company shall, in good faith and for business reasons, enter into negotiations relating to or otherwise commence a material business transaction, including, without limitation, the acquisition or divestiture of assets or the offering or sale of securities, then the Company shall promptly notify the Selling Stockholders and the Selling Stockholders shall immediately cease making offers of the Shares and return all remaining prospectuses to the Company. Following such amendment or supplement, the lifting of any stop order or the completion or termination of any material transaction, the Company shall promptly provide the Selling Stockholders with revised prospectuses and, following receipt of the revised prospectuses, the Selling Stockholders shall be free to resume making offers of the Offered Securities, or any portion thereof. The period during which the Company exercises its rights as described in this paragraph 3 to postpone, delay or interrupt the offer and sale of the Offered Securities or during the dependency of any stop order, injunction or other order or requirement of the Commission or any other governmental agency or court shall be referred to herein as a "Black-out Period." 4. HOLDBACK AGREEMENTS. The Company agrees (a) not to effect any public sale or public distribution of its equity securities, or any securities convertible into or exchangeable or exercisable for such securities, during the 20-day period prior to and during the 120-day period beginning on the commmencement date of any Underwritten Offering on behalf of the Selling Stockholders (except pursuant to (i) registrations on Form S-8 or any successor form, (ii) registrations on Form S-4 or any successor form, (iii) registrations of securities in connection with a dividend reinvestment plan on forms(s) applicable to such securities) unless the underwriters managing an Underwritten Offering on behalf of the Selling Stockholders otherwise agree, and (b) to use its reasonable best efforts to obtain agreements from its officers and directors to agree not to effect any public sale or public distribution of any such securities during such period (except as part of such underwritten registration, if otherwise permitted), unless the underwriters managing the Underwritten Offering on behalf of the Selling Stockholders otherwise agree. The Selling Stockholders agree not to effect any public sale or public distribution of the Offered Securities, during the 20-day period prior to and during the 120-day period beginning on the effective date of any underwritten offering on behalf of the Company unless the underwriters managing such underwritten offering on behalf of the Company otherwise agree; provided, however, that the Company agrees that the Selling Stockholders need not comply with the foregoing restriction unless the Company's directors, officers and their 5% stockholders agree to a similar restriction in connection with such underwritten offering. The Company will pay all costs and expenses of the registration of the Shares (including any costs and expenses incurred, to amend or supplement the prospectus, if required), except that the Selling Stockholders shall pay, and the Company shall not pay, any underwriting or brokerage discounts or commissions, any fees or disbursements of legal counsel for the Selling Stockholders, or any of them, or transfer or other taxes attributable to the registration or sale of the Shares. Each of the Selling Stockholders shall be required to furnish to the Company such information regarding such Selling Stockholder and the distribution proposed by such Selling Stockholder as the Company may request and as shall be required in connection with any registration, qualification or compliance referred to herein. If the foregoing is acceptable to you, please execute this letter and enclosed duplicate in the space provided below and return one executed original to me. Very truly yours, SANTA FE ENERGY RESOURCES, INC. By: /s/ David Z. Hicks Its: Vice President, Law and General Counsel Agreed to and accepted this the day of March 1995. HC ASSOCIATES By: Its: GKH INVESTMENT, L.P. By: Its: GKH PARTNERS, L.P. By: Its: ERNEST H. COCKRELL TEXAS TESTAMENTARY TRUST By: Its: CAROL COCKRELL JENNINGS TEXAS TESTAMENTARY TRUST By: Its: EX-21 5 SUBSIDARIES OF REGISTRANT EXHIBIT 21 SUBSIDIARIES OF THE REGISTRANT Santa Fe Energy Resources, Inc. has 28 wholly-owned subsidiaries, all of which are engaged in the exploration for and development and production of oil and natural gas. Five subsidiaries conduct operations in the United States and 23 subsidiaries conduct operations in foreign areas. EX-23.A 6 CONSENT OF IND. ACCNTS REG STATMNTS ON S-8 EXHIBIT 23(A) CONSENT OF INDEPENDENT ACCOUNTANTS We hereby consent to the incorporation by reference in the Prospectuses constituting part of the Registration Statements on Form S-8 (Nos. 33-37175, 33-44541, 33-44542, 33-58613, 33-59253 and 33-59255) and Form S-3 (No. 333-00753) of Santa Fe Energy Resources, Inc. of our report dated February 23, 1996 appearing on page 31 of this Form 10-K. PRICE WATERHOUSE LLP Houston, Texas February 29, 1996 EX-23.B 7 CONSENT OF RYDER SCOTT WTH RSPCT TO REG.STMNT S-8 EXHIBIT 23(B) CONSENT OF EXPERTS As petroleum engineers, we hereby consent to the incorporation by reference in the Prospectuses constituting part of the Registration Statements on Form S-8 (Nos. 33-37175, 33-44541, 33-44542, 33-58613, 33-59253 and 33-59255) and Form S-3 (No. 333-00753) of Santa Fe Energy Resources, Inc. of our oil and gas reserve reports as of December 31, 1992, December 31, 1993, December 31, 1994 and December 31, 1995 included in the Santa Fe Resources, Inc. Form 10-K for the year ended December 31, 1995. RYDER SCOTT COMPANY PETROLEUM ENGINEERS Houston, Texas February 27, 1996 EX-24 8 POWERS OF ATTORNEY EXHIBIT 24 POWER OF ATTORNEY Know all men by these presents that W. E. GREEHEY constitutes and appoints J. L. PAYNE, R. GRAHAM WHALING and DAVID L. HICKS and each or any of them, as his true and lawful attorneys-in-fact and agents, with full power of substitution, for him and in his name, place and stead, in any and all capacities to sign in his name to the Annual Report on Form 10-K of SANTA FE ENERGY RESOURCES, INC. for the fiscal year ended December 31, 1995 and to file the same, and with all exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents, or any of them or their substitutes may lawfully do or cause to be done by virtue hereof. Dated February 26, 1996 W. E. GREEHEY W. E. Greehey POWER OF ATTORNEY Know all men by these presents that M. N. KLEIN constitutes and appoints J. L. PAYNE, R. GRAHAM WHALING and DAVID L. HICKS and each or any of them, as his true and lawful attorneys-in-fact and agents, with full power of substitution, for him and in his name, place and stead, in any and all capacities to sign in his name to the Annual Report on Form 10-K of SANTA FE ENERGY RESOURCES, INC. for the fiscal year ended December 31, 1995 and to file the same, and with all exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents, or any of them or their substitutes may lawfully do or cause to be done by virtue hereof. Dated February 26, 1996 M. N. KLEIN M. N. Klein POWER OF ATTORNEY Know all men by these presents that R. D. KREBS constitutes and appoints J. L. PAYNE, R. GRAHAM WHALING and DAVID L. HICKS and each or any of them, as his true and lawful attorneys-in-fact and agents, with full power of substitution, for him and in his name, place and stead, in any and all capacities to sign in his name to the Annual Report on Form 10-K of SANTA FE ENERGY RESOURCES, INC. for the fiscal year ended December 31, 1995 and to file the same, and with all exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents, or any of them or their substitutes may lawfully do or cause to be done by virtue hereof. Dated February 26, 1996 R. D. KREBS R. D. Krebs POWER OF ATTORNEY Know all men by these presents that A. V. MARTINI constitutes and appoints J. L. PAYNE, R. GRAHAM WHALING and DAVID L. HICKS and each or any of them, as his true and lawful attorneys-in-fact and agents, with full power of substitution, for him and in his name, place and stead, in any and all capacities to sign in his name to the Annual Report on Form 10-K of SANTA FE ENERGY RESOURCES, INC. for the fiscal year ended December 31, 1995 and to file the same, and with all exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents, or any of them or their substitutes may lawfully do or cause to be done by virtue hereof. Dated February 26, 1996 A. V. MARTINI A. V. Martini POWER OF ATTORNEY Know all men by these presents that M. A. MORPHY constitutes and appoints J. L. PAYNE, R. GRAHAM WHALING and DAVID L. HICKS and each or any of them, as his true and lawful attorneys-in-fact and agents, with full power of substitution, for him and in his name, place and stead, in any and all capacities to sign in his name to the Annual Report on Form 10-K of SANTA FE ENERGY RESOURCES, INC. for the fiscal year ended December 31, 1995 and to file the same, and with all exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents, or any of them or their substitutes may lawfully do or cause to be done by virtue hereof. Dated February 26, 1996 M. A. MORPHY M. A. Morphy POWER OF ATTORNEY Know all men by these presents that J. L. PAYNE, consitures and appointes, R. GRAHAM WHALING and DAVID L. HICKS and each or any of them, as his true and lawful attorneys-in-fact and agents, with full power of substitution, for him and in his name, place and stead, in any and all capacities to sign in his name to the Annual Report on Form 10-K of SANTA FE ENERGY RESOURCES, INC. for the fiscal year ended December 31, 1995 and to file the same, and with all exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents, or any of them or their substitutes may lawfully do or cause to be done by virtue hereof. Dated February 26, 1996 J. L. PAYNE J. L. Payne POWER OF ATTORNEY Know all men by these presents that R. F. RICHARDS constitutes and appoints J. L. PAYNE, R. GRAHAM WHALING and DAVID L. HICKS and each or any of them, as his true and lawful attorneys-in-fact and agents, with full power of substitution, for him and in his name, place and stead, in any and all capacities to sign in his name to the Annual Report on Form 10-K of SANTA FE ENERGY RESOURCES, INC. for the fiscal year ended December 31, 1995 and to file the same, and with all exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents, or any of them or their substitutes may lawfully do or cause to be done by virtue hereof. Dated February 26, 1996 R. F. RICHARDS R. F. Richards POWER OF ATTORNEY Know all men by these presents that M. J. SHAPIRO constitutes and appoints J. L. PAYNE, R. GRAHAM WHALING and DAVID L. HICKS and each or any of them, as his true and lawful attorneys-in-fact and agents, with full power of substitution, for him and in his name, place and stead, in any and all capacities to sign in his name to the Annual Report on Form 10-K of SANTA FE ENERGY RESOURCES, INC. for the fiscal year ended December 31, 1995 and to file the same, and with all exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents, or any of them or their substitutes may lawfully do or cause to be done by virtue hereof. Dated February 26, 1996 M. J. SHAPIRO M. J. Shapiro POWER OF ATTORNEY Know all men by these presents that R. F. VAGT constitutes and appoints J. L. PAYNE, R. GRAHAM WHALING and DAVID L. HICKS and each or any of them, as his true and lawful attorneys-in-fact and agents, with full power of substitution, for him and in his name, place and stead, in any and all capacities to sign in his name to the Annual Report on Form 10-K of SANTA FE ENERGY RESOURCES, INC. for the fiscal year ended December 31, 1995 and to file the same, and with all exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents, or any of them or their substitutes may lawfully do or cause to be done by virtue hereof. Dated February 26, 1996 R. F. VAGT R. F. Vagt POWER OF ATTORNEY Know all men by these presents that K. D. WRISTON constitutes and appoints J. L. PAYNE, R. GRAHAM WHALING and DAVID L. HICKS and each or any of them, as his true and lawful attorneys-in-fact and agents, with full power of substitution, for him and in his name, place and stead, in any and all capacities to sign in his name to the Annual Report on Form 10-K of SANTA FE ENERGY RESOURCES, INC. for the fiscal year ended December 31, 1995 and to file the same, and with all exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents, or any of them or their substitutes may lawfully do or cause to be done by virtue hereof. Dated February 26, 1996 K. D. WRISTON K. D. Wriston EX-27 9 FINANCIAL DATA STATEMENT WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
5 This schedule contains summary financial information extracted from the balance sheet as of December 31, 1995 and the income statement for the twelve months ended December 31, 1995 and is qualified in its entirety by reference to such financial statements. 1,000 12-MOS DEC-31-1995 DEC-31-1995 42,600 0 91,000 2,000 10,500 159,300 2,371,900 1,482,400 1,064,800 109,600 0 171,400 0 900 345,400 1,064,800 429,400 442,000 388,100 388,100 0 0 26,700 36,300 9,700 26,600 0 0 0 26,600 0.13 0.13
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