ITEM 1. BUSINESS
General
Parker & Parsley Petroleum Company (the "Company") is one of the largest public independent oil and gas exploration and production companies in the United States. The Company's domestic oil and gas properties are located principally in the Permian Basin of West Texas, the onshore Gulf Coast region of South Texas and Louisiana and the Mid-Continent region. The Company also owns interests in oil and gas properties in Argentina.
The Company's executive offices and operating headquarters are located at 303 West Wall, Suite 101, Midland, Texas 79701, and its telephone number at those offices is (915) 683-4768. The Company maintains division offices in Midland and Corpus Christi, Texas, Oklahoma City, Oklahoma and Buenos Aires, Argentina. At December 31, 1996, the Company had 659 employees, 241 of which were employed in field and plant operations.
The Company was formed in May 1990 as a Delaware corporation and began operations on February 19, 1991. The Company's business activities are conducted through wholly-owned subsidiaries. Prior to 1991, the Company conducted its business activities through two partnerships that were under common control. Unless otherwise noted, references herein to the activities and properties of the Company are references to the collective activities and properties of the Company's subsidiaries and predecessors.
Mission and Strategies
The Company's mission is to provide its shareholders with superior long-term profitability and value. The strategies to be employed to achieve this mission will include: (a) developing and increasing production from existing properties through low-risk development drilling and other activities, (b) concentrating on defined geographic areas to achieve operating and technical efficiencies, (c) pursuing strategic acquisitions in the Company's core areas that will complement the Company's existing asset base and that will provide additional growth opportunities, (d) utilizing or acquiring technological and operating efficiencies to selectively expand into new geographic areas that feature producing properties and provide exploration/exploitation opportunities, (e) allocating the personnel and technology necessary to increase the Company's exploration opportunities, (f) maintaining financial flexibility to take advantage of additional exploration, development and acquisition opportunities and (g) encouraging high levels of equity ownership among senior managers and the Company's Board of Directors to further align the interests of management and shareholders. The Company is committed to continuing to enhance shareholder value through adherence to these strategies.
Business Activities
Production
Since it began operations, the Company has focused its efforts toward increasing its average daily production of oil and gas through development drilling and production enhancement activities and acquisitions of producing properties. Average daily oil and gas production have each increased every year since the Company's inception with the exception of 1996 when average daily production declined due to significant property dispositions. In spite of production decreases due to property sales, the Company's efforts towards production growth have been largely successful as illustrated by the five-year average daily production growth rates. Comparing 1992 to 1996, average daily oil production has increased 138% and average daily gas production has increased 208%, while production costs per BOE have declined 21%. Production, price and cost information with respect to the Company's properties for
each of 1996, 1995 and 1994 is set forth under "Item 2.
ITEM 2. PROPERTIES
The information included in this Report about the Company's proved oil and gas reserves at December 31, 1996, including estimated quantities and SEC 10 value, is based on reserve reports audited by Netherland, Sewell & Associates, Inc. for the Company's major domestic properties (representing approximately 52% of the total SEC 10 value of the Company's domestic proved reserves at December 31, 1996) and reserve reports prepared by the Company's engineers for all other domestic properties and the Company's Argentine properties. The estimate of the reserves related to the Company's interests in natural gas processing rights for proved reserves contractually or economically dedicated to the Company's natural gas processing plants is based on evaluations prepared by the Company's engineers.
Numerous uncertainties exist in estimating quantities of proved reserves and in projecting future rates of production and timing of development expenditures, including many factors beyond the Company's control. This Report contains estimates of the Company's proved oil and gas reserves and the related future net revenues therefrom, which are based on various assumptions, including those prescribed by the Securities and Exchange Commission. Actual future production, oil and gas prices, revenues, taxes, capital expenditures, operating expenses, geologic success and quantities of recoverable oil and gas reserves may vary substantially from those assumed in the estimates and could materially affect the estimated quantities and related SEC 10 value of proved reserves set forth in this Report. In addition, the Company's reserves may be subject to downward or upward revisions based on production performance, purchases or sales of properties, results of future development, prevailing oil and gas prices and other factors. Therefore, estimates of the SEC 10 value of proved reserves contained in this Report should not be construed as estimates of the current market value of the Company's proved reserves.
SEC 10 value is a reporting convention that provides a common basis for comparing oil and gas companies subject to the rules and regulations of the Securities and Exchange Commission. It requires the use of oil and gas prices prevailing as of the date of computation. Consequently, it may not reflect the prices ordinarily received or that will be received for oil and gas because of seasonal price fluctuations or other varying market conditions. SEC 10 values as of any date are not necessarily indicative of future results of operations. Accordingly, estimates of future net revenues in this Report may be materially different from the net revenues that are ultimately received.
The Company did not provide estimates of total proved oil and gas reserves during 1996 to any federal authority or agency, other than the Securities and Exchange Commission.
Proved Reserves
The Company's proved reserves totaled 302.2 million BOE at December 31, 1996, 296.8 million BOE at December 31, 1995 and 282.5 million BOE at December 31, 1994, representing $2.3 billion, $1.4 billion and $1.1 billion, respectively, in SEC 10 value. The Company achieved these annual increases in reserves despite having sold reserves of 45.8 million BOE in 1996 and 34.8 million BOE in 1995. Excluding these sold reserves, total proved reserves increased 21% in 1996 and 28% in 1995. Oil reserves at year-end 1996 were 163.9 million Bbls compared
to 147.3 million Bbls at year-end 1995 and 144.5 million Bbls at year-end 1994 (an 11% increase from 1995 to 1996 and a 2% increase from 1994 to 1995). Natural gas reserves at year-end 1996 were 829.4 Bcf, compared to 896.9 Bcf at year-end 1995 and 827.5 Bcf at year-end 1994 (an 8% decrease from 1995 to 1996 and an 8% increase from 1994 to 1995).
On a BOE basis, 78% of the Company's total proved reserves at December 31, 1996 are proved developed reserves. The Company operates 86% of its total proved reserves based on the December 31, 1996 SEC 10 value. Based on reserve information as of December 31, 1996 and using the Company's reserve report production information for 1997, the reserve-to-production ratio associated with the Company's proved reserves is 12.1 years on a BOE basis. The following table provides information regarding the Company's proved reserves by geographic area as of and for the year ended December 31, 1996.
In addition, proved NGLs of 12.6 million Bbls were attributable to the Company's interests in gas processing rights in reserves contractually or economically dedicated to the Company's natural gas processing plants at December 31, 1996. The present value of estimated future net revenues from those dedicated proved reserves was $44.3 million at December 31, 1996 (using a constant weighted average price of $11.46 per Bbl and a 10% discount rate). For the year ended December 31, 1996, average daily production from the Company's interests in natural gas processing plants was 2,327 NGLs per day.
Reserve Replacement
For the eighth consecutive year, the Company was able to replace its annual production volumes with proved reserves of crude oil and natural gas, stated on an energy equivalent basis. During 1996, the Company added 75 million BOE resulting in reserve replacement of 314% of total production. Of the 75 million BOE reserve additions, 71.1 million BOE were added through exploration and development drilling activities, 2.2 million BOE were added through acquisitions of proved properties and 1.7 million BOE were the net result of revisions. Reserves added by development drilling are primarily from the identification of additional infill drilling locations and new secondary recovery projects. Reserve revisions result from several factors including changes in existing estimates of quantities available for production and changes in estimates of quantities which are economical to produce under current pricing conditions. The Company's reserves as of December 31, 1996 were estimated using a price of $24.55 per Bbl and $3.97 per Mcf. Should prices decline in future years, reserves may be revised downward for quantities which may be uneconomical to produce at lower prices.
The Company's 1996 reserve replacement rate on a barrel of oil equivalent basis was 314%, which included reserve replacement rates for oil and natural gas of 398% and 239%, respectively. Previous reserve replacement performance
rates were 281% in 1995 (263% for oil and 297% for gas) and 537% in 1994 (549% for oil and 526% for gas). For the three year period ended December 31, 1996, the three year average reserve replacement rate was 377%, as compared to a three year average replacement rate of 412% in 1995 and 496% in 1994. Through 1994, the Company's reserve replacement rate was primarily the product of its acquisition activities. Beginning in 1995, and to a greater extent in 1996, the reserve replacement rates have been influenced more by exploration and development activities and less by acquisition activities. The Company seeks to achieve an annual reserve replacement rate of at least 150% through the emphasis on its exploration and development activities.
Finding Cost
The Company's acquisition and finding cost for 1996 was $3.10 per BOE as compared to the 1995 and 1994 acquisition and finding costs of $2.87 and $5.11 per BOE, respectively. The average acquisition and finding cost for the three-year period from 1994 to 1996 was $3.99 per BOE representing an 18% decrease from the 1995 three-year average rate of $4.84.
Oil and Gas Mix
The Company seeks to maintain a strategic balance between oil and natural gas reserves and production. While the Company's reserve and production mix may vary somewhat on a short-term basis as the Company takes advantage of market conditions and specific acquisition and development opportunities, management believes that a relative mix of approximately 50% oil and 50% natural gas is in the best long-term interests of the Company and its stockholders. The Company's reserve mix was 54% oil and 46% gas at December 31, 1996, and its production mix was 47% oil and 53% gas during 1996.
Description of Properties
The Company manages its domestic oil and gas properties based upon their geographic area, and, as a result, the Company has divided its domestic operations into four operating divisions: the Spraberry Division, the Permian Division, the Gulf Coast Division, and the MidContinent Division. In addition, the Company has an international division that manages the Company's ownership in oil and gas properties outside the United States. At December 31, 1996, the Company's only properties outside the U.S. are located in Argentina.
Spraberry Division. The Spraberry field was discovered in 1949 and encompasses eight counties in West Texas. The field is approximately 150 miles long and 75 miles wide at its widest point. The oil produced is West Texas Intermediate Sweet, and the gas produced is casinghead gas with an average Btu content of 1,400 Btu per Mcf. The oil and gas is produced from three formations, the upper and lower Spraberry and the Dean, at depths ranging from 6,700 feet to 9,200 feet. The center of the Spraberry field was unitized in the late 1950's and early 1960's by the major oil companies but until the late 1980's experienced very limited development activity. Since 1989, the Company has focused acquisition and development drilling activities in the unitized portion of the Spraberry field due to the dormant condition of the properties and the high net revenue interests available. The Company believes the area offers excellent opportunities to enhance oil and gas reserves because of the hundreds of undeveloped infill drilling locations and the ability to reduce operating expenses through economies of scale. In February 1997, the Texas Railroad Commission (which regulates oil and gas production) entered a favorable order on the Company's application to allow administrative approval of uncontested applications to increase the density of drilling in the Spraberry field from one well per 80 acres to one well in 40. The Company believes such reduced spacing may provide in excess of 1,000 additional drilling locations which have the potential to add 70 million equivalent barrels to the Company's reserve base.
The Company continues to realize the benefits of its focus on the Spraberry field through significant reserve additions due to development drilling and identification of a large number of new drilling locations each year. As a result, the Company plans to continue to devote a great deal of its capital budget and operating resources to the ongoing development of the Spraberry field. Specifically, the Company has allocated $88 million, or 37%, of its 1997 exploration and development budget to drill approximately 225 development wells and to perform approximately 50 recompletions in the Spraberry field.
Permian Division. Since the early 1960's, the Company has been involved in acquisition and development activities in the Permian Division which includes all of West Texas and Southeastern New Mexico except for the Spraberry field. The Iatan field in Mitchell County, Texas, the Lusk and Dagger Draw fields in Eddy County, New Mexico, the Abell (Devonian) field in Crane and Pecos Counties of Texas and the Ozona field in Crockett and Sutton
Counties of Texas are core areas for the Company's Permian Division operations in terms of existing production, production and reserve growth, and identification of additional drilling locations. During 1996, the Permian Division expanded its growth strategy to include significant emphasis on exploration activities in order to produce a more balanced portfolio. In November 1996, the Company announced a significant oil discovery in the War-Wink West Field in the Delaware Basin of West Texas. This Company operated well, the University 18-34 #1, tested at rates of up to 720 barrels of oil per day and is currently producing at its expected allowable rate of approximately 270 barrels of oil per day and 374 thousand cubic feet of gas per day. The Company and Enserch Exploration, Inc. ("Enserch") each own a 50% working interest in this well, which is the first in their joint exploration and development of the 4,500 acre War-Wink prospect. In addition, during 1996, the Company experienced successful results from its exploratory efforts in the Permian reef play of the Southeastern Shelf of the Midland Basin.
The Company will continue to focus on the development of the existing properties utilizing waterflood procedures and secondary recovery technologies as these efforts have consistently resulted in increased production, reserve additions due to development drilling, and new drilling locations. In addition, all of the fields in this operational group have been screened for feasibility for carbon dioxide (CO2) flood implementation, and the Company plans to move forward in utilizing this technology in 1997. During 1997, the Company plans to continue its development of the War- Wink prospect by drilling two confirmation wells and an additional two to four development wells. Parker & Parsley and Enserch also control approximately 30,000 additional acres in the Delaware Basin play in Southeastern New Mexico and West Texas where they intend to drill eight exploratory wells in 1997. Also during 1997, the Company plans to perform additional 3-D seismic data interpretation in order to exploit the Midland Basin successes.
In total, the Company anticipates spending $45 million in 1997 in this area to drill approximately 220 wells and to perform recompletions on approximately 90 targeted wells. Eighty percent of these planned expenditures are devoted to development activities.
Gulf Coast Division. The Gulf Coast Division includes onshore oil and gas properties located in South and East Texas, Louisiana, Mississippi and Alabama. The primary producing formations in this region include the Wilcox, Frio and Yegua formations in Texas and the Cretaceous formation in Mississippi. The addition of the domestic properties acquired as a part of the Bridge Oil Limited acquisition (primarily in South Texas and Louisiana), positioned the Company to be better able to pursue and realize future economic growth in this area.
The strategy for the Gulf Coast Division has been to emphasize the growth of natural gas reserves. To accomplish this, the Company has devoted most of its domestic exploration efforts to this region as well as its investment in and utilization of 3-D seismic technology. In addition, the Company is successfully employing newer drilling techniques such as drilling horizontal wells. Utilization of 3-D seismic technology during 1996 yielded substantial results in the Company's Lopeno field which produces from the Wilcox formation. Gross gas production increased from 14 MMcf per day to 38 MMcf per day in 1996 in this area as a result of drilling six development wells, most of which were identified through the 3-D project, and the Company has identified several additional drilling locations after interpreting 3-D seismic data. In addition, the Company experienced successful results in its Central Texas Pawnee field which produces from the Edwards formation after drilling a successful horizontal well in late 1996. This well, the S.E. Turner Gas Unit #2, in which the Company owns a 100% working interest, is currently flowing at a rate of 3.1 MMcf per day. The Company plans to drill two additional horizontal wells and to initiate a 3-D project in this field during 1997 in order to exploit the 1996 successes.
Overall, the Company plans to continue its emphasis on exploration activities in the Gulf Coast Division with a total budget of $45 million being devoted to drilling approximately 25 exploratory wells and 40 development wells.
MidContinent Division. The Mid-Continent Division includes properties located in the Texas Panhandle and Oklahoma. In past years, the Company has aggressively engaged in both acquisitions and divestitures of oil and gas properties in order to position this portfolio of properties for significant growth through development and exploratory drilling opportunities. During 1997, the Company plans to spend approximately $23 million in the MidContinent Division on exploitation and exploration activities. This activity includes drilling approximately 45 development wells and performing recompletions on approximately 20 targeted wells.
International. The Company owns interests in Argentina consisting of a 14.42% interest in the Confluencia block and a 15% interest in the China Muerta block, both in the Neuquen Basin of Central Argentina. During 1996, the Company participated in several discoveries in the Confluencia Sur field in the Confluencia block. In early 1996, the Company announced the successful completion of two exploratory wells (the Naco x-1 and the Sierra de Reyes x-1), and, in January 1997, the Company announced the successful completion of three development wells, also in the
Confluencia Sur field. The three wells, the Sierra de Reyes 2, 3 and 4, operated by Petrolera Argentina San Jorge S.A., collectively tested 3,727 barrels of oil per day, and current gross production for the field is at a facility- constrained rate of 2,520 Bbls of oil per day. The Company expects to drill an additional two to three development wells in the Confluencia Sur field during the first six months of 1997 in order to increase daily oil production to 6,000 barrels (865 barrels net to the Company's interest).
Selected Oil and Gas Information
The following tables set forth selected oil and gas information for the Company as of and for each of the years ended December 31, 1996, 1995 and 1994. Because of normal production declines, increased or decreased drilling activities and the effects of future acquisitions or divestitures, the historical information presented below should not be interpreted as indicative of future results.
Production, Price and Cost Data. The following table sets forth production, price and cost data with respect to the Company's properties for the years ended December 31, 1996, 1995 and 1994.
Productive Wells. The following table sets forth the number of productive oil and gas wells attributable to the Company's properties as of December 31, 1996, 1995 and 1994.
Leasehold Acreage. The following table sets forth information about the Company's developed, undeveloped and royalty leasehold acreage as of December 31, 1996.
Drilling Activities. The following table sets forth the number of gross and net productive and dry wells in which the Company had an interest that were drilled and completed during the years ended December 31, 1996, 1995 and 1994. This information should not be considered indicative of future performance, nor should it be assumed that there is necessarily any correlation between the number of productive wells drilled and the oil and gas reserves generated thereby or the costs to the Company of productive wells compared to the costs of dry wells.
The following table sets forth information about the Company's wells that were in progress at December 31, 1996.
Gross Wells Net Wells ----------- --------- United States: Development............. 74 56.1 Exploratory............. 9 6.3 --- ---- Total................ 83 62.4 === ==== Argentina: Exploratory............. 2 0.3 === ====
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
The Company is a party to various legal proceedings incidental to its business involving claims in oil and gas leases or interests, other claims for damages in amounts not in excess of 10% of its current assets and other matters, none of which the Company believes to be material.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of the Company's stockholders during the fourth quarter of 1996.
PART II
ITEM 5.
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
The Company's common stock is listed and traded on the New York Stock Exchange under the symbol "PDP". The following table sets forth, for the periods indicated, the high and low sales prices for the Company's common stock, as reported in the New York Stock Exchange composite transactions, and the amount of dividends paid. Dividends High Low Paid per share -------- -------- -------------- Fourth quarter................. $ 37 1/4 $ 26 1/8 - Third quarter.................. $ 27 3/4 $ 22 1/4 $.05 Second quarter................. $ 27 7/8 $ 22 3/4 - First quarter.................. $ 23 3/4 $ 19 3/8 $.05 Fourth quarter................. $ 22 1/2 $ 18 1/2 - Third quarter.................. $ 23 1/4 $ 17 3/8 $.05 Second quarter................. $ 22 3/4 $ 18 5/8 - First quarter.................. $ 22 7/8 $16 5/16 $.05
On February 3, 1997, the last reported sales price of the Company's common stock, as reported in the New York Stock Exchange composite transactions, was $34-1/8 per share.
As of February 3, 1997, the Company's common stock was held by approximately 39,000 holders of record and approximately 57,300 beneficial owners.
Since the third quarter of 1991, the Company has paid a cash dividend of $.05 per share of common stock in the first and third quarters of each calendar year. Subject to the continuation of successful operations and the discretion of the Company's Board of Directors, the Company intends to continue to declare a $.05 per share dividend on a semi-annual basis to achieve an annual dividend level of $.10 per share. The Company's Board of Directors may from time to time reconsider the dividend policy and make any changes that it deems appropriate. There can be no assurance that any future dividends or distributions will be paid on the Company's common stock. The Company's current bank credit facility agreement contains various restrictive covenants, which, among other things, limit to $5 million per year the sum of annual dividends that the Company may declare and pay and the amount of the Company's capital stock that the Company may redeem or purchase.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA
The following selected consolidated financial data for the Company should be read in conjunction with "Item 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
General
Operating Performance. The Company reported operating earnings for the year ended December 31, 1996 of $58.9 million or $1.65 per share. The operating earnings exclude certain items and their related tax effects described below under "Financial Performance". Excluding production from the Company's Australasian assets which were sold in 1996 and production from nonstrategic domestic assets which were sold in 1995 and 1996, average daily oil production increased 13% to 29,100 Bbls per day for the year ended December 31, 1996 from 25,718 Bbls per day for the year ended December 31, 1995, and average daily gas production increased 13% to 193,246 Mcf per day from 170,979 Mcf per day for the same period. In addition to increased production, the Company's operating performance for the year ended December 31, 1996 was positively affected by the following items: (i) improved oil and gas prices, (ii) decreases in production costs due to certain cost reduction efforts initiated in 1995 and 1996, (iii) a decrease in oil and gas property depletion expense as a result of significant increases in the Company's oil and gas reserves during 1995 and 1996, (iv) a decrease in general and administrative expenses primarily resulting from the implementation of measures during 1995 intended to reduce overall general and administrative expenses, and (v) a decrease in interest expense due to a decrease in the Company's outstanding long-term indebtedness.
Net cash provided by operating activities, before changes in operating assets and liabilities, increased 39% to $228.5 million for the year ended December 31, 1996 as compared to $164.2 million for the year ended December 31, 1995. This increase was primarily attributable to improved commodity prices during 1996, declining production costs due to the improvements made in the overall cost structure of the Company during 1995 and 1996 and decreased interest expense due to a decrease in long-term debt.
Long-term debt has been reduced by $265.6 million to $320.9 million at December 31, 1996 from $586.5 million at December 31, 1995 due principally to the application of substantially all of the proceeds from the disposition of the Company's Australasian and certain domestic assets to the Company's outstanding indebtedness, as described below. Consequently, the Company's long-term debt to total capitalization has been reduced to 31% at December 31, 1996 from 49% at December 31, 1995.
Financial Performance. The Company reported net income of $140.2 million ($3.92 per share) for the year ended December 31, 1996 as compared to a net loss of $99.8 million ($2.83 per share) for the year ended December 31, 1995. Net income for the year ended December 31, 1996 includes the following after-tax nonoperating items: (i) aggregate gains of $76.3 million related to the disposition of the Company's Australasian assets and certain nonstrategic domestic assets (see "Disposition of Australasian Assets" and "Asset Dispositions" below), (ii) income of $7.4 million related to the settlement of several litigation matters involving the Company's Hooker Natural Gas Processing Plant and related assets (see "Legal Actions" below), (iii) a loss of $2.8 million associated with the write-off of certain tax attributes related to litigation contingencies that are no longer available and (iv) income of $400,000 from the operations of the Australian assets and nonstrategic domestic assets prior to their sale in 1996. Net income for December 31, 1995 includes the following after-tax nonoperating items: (i) noncash charges of $84.8 million associated with the adoption of SFAS 121 (as defined in "Depletion Expense" below), (ii) charges of $6.9 million associated with the amortization of deferred compensation awarded in 1993 and organizational changes designed to reduce overall general and administrative expenses, (iii) charges of $4.4 million consisting of previously capitalized financing fees and expenses associated with certain legal matters, and (iv) net gains of $10.8 million associated with the disposition of nonstrategic assets (see "Asset Dispositions" below).
Significant Activities in 1996
Exploration and Development Activities. The Company continues to realize the benefits of its focused activities in the exploration and development of its existing core areas. Since completing two major acquisitions in 1994 (see Note D of Notes to Consolidated Financial Statements included in "Item 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Index to Consolidated Financial Statements
Page
Consolidated Financial Statements of Parker & Parsley Petroleum Company: Independent Auditors' Report............................... 30 Consolidated Balance Sheets as of December 31, 1996 and 1995................................................. 31 Consolidated Statements of Operations for the Years Ended December 31, 1996, 1995 and 1994................... 32 Consolidated Statements of Stockholders' Equity for the Years Ended December 31, 1996, 1995 and 1994......... 33 Consolidated Statements of Cash Flows for the Years Ended December 31, 1996, 1995 and 1994................... 34 Notes to Consolidated Financial Statements................. 35 Unaudited Supplementary Information........................ 53
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders Parker & Parsley Petroleum Company:
We have audited the consolidated financial statements of Parker & Parsley Petroleum Company and subsidiaries as listed in the accompanying index. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards 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. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Parker & Parsley Petroleum Company and subsidiaries as of December 31, 1996 and 1995, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 1996, in conformity with generally accepted accounting principles.
As discussed in Notes B and R to the consolidated financial statements, the Company changed its method of accounting for the impairment of long-lived assets and for long-lived assets to be disposed of in 1995 to adopt the provisions of the Financial Accounting Standards Board's Statement of Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of".
KPMG Peat Marwick LLP Midland, Texas January 29, 1997
PARKER & PARSLEY PETROLEUM COMPANY
CONSOLIDATED BALANCE SHEETS (in thousands, except share data)
PARKER & PARSLEY PETROLEUM COMPANY
CONSOLIDATED STATEMENTS OF OPERATIONS (in thousands, except share and per share data)
PARKER & PARSLEY PETROLEUM COMPANY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (in thousands)
PARKER & PARSLEY PETROLEUM COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands)
PARKER & PARSLEY PETROLEUM COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1996, 1995 and 1994
NOTE A. Organization and Nature of Operations
Parker & Parsley Petroleum Company (the "Company"), a Delaware Corporation whose common stock is listed and traded on the New York Stock Exchange, was formed in May 1990 and began operations on February 19, 1991, with the combination and conversion to corporate structure of two partnerships that were under common control with the Company.
The Company is an oil and gas exploration and production concern with oil and gas properties principally in the Permian Basin of West Texas, the onshore Gulf Coast region of South Texas and Louisiana and the Mid-Continent region. The Company also owns interests in oil and gas properties in Argentina.
NOTE B. Summary of Significant Accounting Policies
Principles of consolidation. The consolidated financial statements include the accounts of the Company and its majority-owned subsidiaries since their acquisition or formation and the Company's interest in the affiliated oil and gas partnerships for which it serves as general partner through certain of its wholly-owned subsidiaries. Investments in less-than- majority-owned subsidiaries where the Company has the ability to exercise significant influence over the investee's operations are accounted for by the equity method; otherwise, they are accounted for at cost. The Company proportionately consolidates less-than-100%-owned oil and gas partnerships in accordance with industry practice. All material intercompany balances and transactions have been eliminated.
Use of estimates in the preparation of financial statements. Preparation of the accompanying consolidated financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Cash equivalents. For purposes of the Consolidated Statements of Cash Flows, cash and cash equivalents include cash on hand and depository accounts held by banks.
Restricted cash at December 31, 1996 includes $1.7 million representing the Company's remaining obligation to redeem for cash the unconverted limited partner units in the acquired Prudential-Bache Energy limited partnerships.
Inventories. Inventories consist of lease and well equipment, natural gas processing plant products and oil in tanks. Lease and well equipment is carried at the lower of cost (first-in, first-out) or market. Natural gas processing plant products and oil in tanks are carried at market.
Impairment of long-lived assets. In accordance with Financial Accounting Standards Board Statement No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of" ("SFAS 121"), the Company reviews its long-lived assets to be held and used, including oil and gas properties accounted for under the successful efforts method of accounting, whenever events or circumstances indicate that the carrying value of those assets may not be recoverable. An impairment loss is indicated if the sum of the expected future cash flows is less than the carrying amount of the assets. In this circumstance, the Company recognizes an impairment loss for the amount by which the carrying amount of the asset exceeds the fair value of the asset.
The Company accounts for long-lived assets to be disposed of at the lower of their carrying amount or fair value less cost to sell once management has committed to a plan to dispose of the assets.
Oil and gas properties. The Company utilizes the successful efforts method of accounting for its oil and gas properties as promulgated by Statement of Financial Accounting Standards No. 19, "Financial Accounting and Reporting by Oil and Gas Producing Companies". Under this method, all costs associated with productive wells and nonproductive development wells are capitalized while nonproductive exploration costs are expensed. Capitalized costs relating to proved properties are depleted using the unit-of-production method based on proved reserves expressed as net equivalent barrels ("BOE") as audited by independent petroleum engineers with respect to the Company's major properties and as prepared by the Company's engineers with respect to all other properties.
PARKER & PARSLEY PETROLEUM COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1996, 1995 and 1994
Capitalized costs of individual properties abandoned or retired are charged to accumulated depletion, depreciation and amortization. Proceeds from sales of individual properties are credited to property costs. No gain or loss is recognized until the entire amortization base is sold or abandoned.
Costs of significant nonproducing properties, wells in the process of being drilled and development projects are excluded from depletion until such time as the related project is developed and proved reserves are established or impairment is determined. The Company capitalizes interest on expenditures for significant development projects until such time as significant operations commence.
Unproved oil and gas properties that are individually significant are periodically assessed for impairment. A loss is recognized at the time of impairment by providing an impairment allowance. The remaining unproved oil and gas properties are aggregated and an overall impairment allowance is provided based on the Company's historical experience.
Natural gas processing facilities. The Company depreciates its gas processing, gathering and transmission facilities and equipment on a straight-line basis over the estimated useful lives of the assets, which range from 14 to 21 years. Capitalized costs relating to gas contracts, representing the right to extract liquids and gas, are amortized on a plant-by-plant basis using the unit-of-production method over the lives of gas reserves expected to be processed through the facility, as prepared by the Company's engineers. Upon disposition of a natural gas processing facility, the cost and related accumulated depreciation and amortization are eliminated from the accounts and any gain or loss is included in operations.
Treasury stock. Treasury stock purchases are recorded at cost. Upon reissuance, the cost of treasury shares held is reduced by the average purchase price per share of the aggregate treasury shares held.
Income taxes. The Company accounts for income taxes in accordance with the provisions of Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes" ("SFAS 109"). Under the asset and liability method of SFAS 109, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. Under SFAS 109, the effect on deferred tax assets and liabilities of a change in tax rate is recognized in income in the period that includes the enactment date.
The Company and its eligible subsidiaries file a consolidated U.S. federal income tax return. Certain subsidiaries that are consolidated for financial reporting purposes are not eligible to be included in the consolidated U.S. federal income tax return and separate provisions for income taxes have been determined for these entities or groups of entities.
Income (loss) per share. Primary net income (loss) per share is computed based on the weighted average number of shares of common stock and common stock equivalents outstanding during the period. The computation of fully diluted net income per share for the year ended December 31, 1996 assumes conversion of the Company's 6-1/4% Cumulative Guaranteed Monthly Income Convertible Preferred Shares which increased the weighted average number of shares outstanding to 42.6 million. For 1995 and 1994, the computation of fully diluted net income (loss) per share was antidilutive; therefore, the amounts reported for primary and fully diluted net income (loss) per share were the same.
Environmental. The Company is subject to extensive federal, state, local and foreign environmental laws and regulations. These laws, which are constantly changing, regulate the discharge of materials into the environment and may require the Company to remove or mitigate the environmental effects of the disposal or release of petroleum or chemical substances at various sites. Environmental expenditures are expensed or capitalized depending on their future economic benefit. Expenditures that relate to an existing condition caused by past operations and that have no future economic benefits are expensed. Liabilities for expenditures of a noncapital nature are recorded when environmental assessment and/or remediation is probable and the costs can be reasonably estimated.
Revenue recognition. The Company uses the sales method of accounting for crude oil revenues. To the extent that crude oil is produced but not sold, the oil in tanks, if material, is recorded as inventory in the accompanying consolidated financial statements.
PARKER & PARSLEY PETROLEUM COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1996, 1995 and 1994
Revenues from natural gas production are generally recorded using the entitlements method. Sales proceeds in excess of the Company's entitlement are included in Other liabilities and the Company's share of sales taken by others is included in Other assets in the accompanying Consolidated Balance Sheets. The Company did not have a material amount recorded in Other assets or Other liabilities associated with gas balancing during 1996, 1995 or 1994.
Stock-based compensation. The Company accounts for employee stock-based compensation using the intrinsic value method prescribed by Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB 25"). Accordingly, the Company has only adopted the disclosure provisions of Statement of Financial Accounting Standards No.123, "Accounting for Stock-Based Compensation" ("SFAS 123"). See Note G for the pro forma disclosures of compensation expense determined under the fair-value provisions of SFAS 123.
Hedging. The financial instruments that the Company accounts for as hedging contracts must meet the following criteria: the underlying asset or liability must expose the Company to price or interest rate risk that is not offset in another asset or liability, the hedging contract must reduce that price or interest rate risk, and the instrument must be designated as a hedge at the inception of the contract and throughout the hedge period. In order to qualify as a hedge, there must be clear correlation between changes in the fair value of the financial instrument and the fair value of the underlying asset or liability such that changes in the market value of the financial instrument will be offset by the effect of price or interest rate changes on the exposed items. The following is a description of the specific types of hedging transactions in which the Company participates:
Commodity hedging. The Company periodically enters into commodity derivative contracts (swaps, futures and options) in order to (i) reduce the effect of the volatility of price changes on the commodities the Company produces and sells, (ii) support the Company's annual capital budgeting and expenditure plans and (iii) lock in prices to protect the economics related to certain capital projects. Gains and losses on contracts that are designed to hedge commodities are included in income recognized from the sale of those commodities. Other commodity futures contracts are valued at market.
Interest rate hedging. The Company enters into interest rate swap transactions and forward rate lock transactions to hedge its interest rate exposure. Interest rate swap agreements, in general, involve the exchange of fixed and floating interest payment obligations with no exchange of the underlying principal amounts. The interest rate differential to be received or paid is recognized over the lives of the agreements as an adjustment to interest expense. Forward rate lock transactions involve selling certain U.S. Treasury securities at a date certain in the future. The Company uses these transactions to hedge the interest rates on issuances of obligations in the public bond market since the obligations' interest rates are determined based on the rate of the certain U.S. Treasury security at time of issuance of the obligation. The interest rate differential to be received or paid is recognized in interest expense over the life of the obligation under the effective interest rate method.
Foreign currency translation. The financial statements of non-U.S. entities are translated to U.S. dollars as follows: all assets and liabilities at year-end exchange rates; revenues, costs and expenses at average exchange rates. Gains and losses from translating non-U.S. balances are recorded directly in stockholders' equity. Foreign currency transaction gains and losses are included in net income (loss).
Reclassifications. Certain reclassifications have been made to the 1995 and 1994 amounts to conform to the 1996 presentation.
PARKER & PARSLEY PETROLEUM COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1996, 1995 and 1994
NOTE C. Disclosures About Fair Value of Financial Instruments
The following table presents the carrying amounts and estimated fair values of the Company's financial instruments at December 31, 1996 and 1995:
Cash and cash equivalents, restricted cash, accounts receivable, other current assets, accounts payable and other current liabilities. The carrying amounts approximate fair value due to the short maturity of these instruments.
Restricted investments. The fair value of noncurrent investments is based on quoted market prices.
Long-term debt. The carrying amount of borrowings outstanding under the Company's Line of Credit and GRUF (see Note E for definition and description of each) approximates fair value because these instruments bear interest at rates tied to current market rates. The fair values of the 8-7/8% senior notes due 2005 and the 8-1/4% senior notes due 2007 were both based on quoted market prices for these issues.
It was not practicable to estimate the fair value of certain of the long-term debt obligations because quoted market prices are not available and the Company does not have a current borrowing rate which could be used as a comparable rate for the stated maturities of the obligations.
Interest rate swap agreements. At December 31, 1996, the Company had five interest rate swap agreements outstanding with an aggregate notional amount of $150 million. These are more fully described in Note N. The fair values of each of the open interest rate swap agreements were obtained from bank quotes and represent the estimated amount the Company would receive upon termination of the agreements at December 31, 1996, taking into consideration interest rates at that time.
Commodity price hedges. The fair values of commodity price hedges outstanding at December 31, 1996 and 1995 were obtained from quotes provided by the individual counterparties for each agreement and represent the amount which the Company would be required to pay as of December 31 of each of the respective years, based upon the differential between a fixed and a variable commodity price as specified in the hedge contracts. As of March 3, 1997, the fair value of the Company's obligation for commodity price hedges outstanding at December 31, 1996 was $13.1 million. This fair value consists of the following two components: (i) payments made for swap contracts related to oil and gas production for the months of January and February 1997 and (ii) the amount the Company is obligated to pay for swap contracts related to oil and gas production for the period from March 1997 through April 1999 based upon the differentials as described above using quotes in effect at March 3, 1997.
PARKER & PARSLEY PETROLEUM COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1996, 1995 and 1994
NOTE D. Acquisitions
Acquisition of Bridge Oil Limited. During 1994, the Company completed an acquisition of the issued and outstanding shares of Bridge Oil Limited. The acquisition was the result of an unsolicited tender offer that commenced in May and was completed in September with Bridge Oil Limited becoming a wholly-owned subsidiary of the Company. The total consideration paid for all outstanding shares in Bridge Oil Limited and related transaction costs was approximately $290.6 million.
The acquisition of Bridge Oil Limited, accounted for using the purchase method, resulted in the following noncash investing activities (in thousands):
Recorded amounts of assets acquired, including cash acquired of $20,797......................... $ 579,190 Liabilities assumed, including $61,267 of deferred income taxes............................ (288,555) --------- Cash paid.......................................... $ 290,635 =========
The liabilities assumed include amounts recorded for litigation and certain other preacquisition contingencies of Bridge Oil Limited.
Certain of the wholly-owned subsidiaries acquired as part of the Bridge Oil Limited acquisition were sold in 1996. See Note Q for a description of the subsidiaries sold.
Property acquisition from PG&E Resources Company. On August 1, 1994, the Company completed the acquisition of certain oil and gas properties and related assets from PG&E Resources Company, a subsidiary of Pacific Gas and Electric Company, for $115.7 million after preliminary purchase price adjustments. The Company funded the acquisition under the bank credit facility described in Note E.
Pro forma results of operations. The following table reflects the pro forma results of operations as though the acquisition of Bridge Oil Limited and the acquisition of the properties from PG&E Resources Company occurred on January 1, 1994. Year ended December 31, (in thousands, except per share data) (Unaudited)
Revenues........................................... $ 576,060 Loss before extraordinary item..................... $ (25,026) Loss per share before extraordinary item........... $ (.72)
NOTE E. Long-term Debt
Long-term debt consists of the following: December 31, 1996 1995 -------- -------- (in thousands)
Line of credit..................................... $ 9,000 $225,000 8-7/8% senior notes due 2005....................... 150,000 150,000 8-1/4% senior notes due 2007 (net of discount)..... 149,277 149,209 Project finance facility........................... - 42,000 Fixed rate building loan........................... 10,121 11,168 Other.............................................. 7,891 11,780 ------- ------- 326,289 589,157 Less current maturities............................ 5,381 2,608 ------- -------
$320,908 $586,549 ======= =======
PARKER & PARSLEY PETROLEUM COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1996, 1995 and 1994
Maturities of long-term debt at December 31, 1996 are as follows (in thousands):
1997................................................. $ 5,381 1998................................................. 1,558 1999................................................. 1,315 2000................................................. 3,172 2001................................................. 1,109 Thereafter........................................... 313,754
Line of credit. At December 31, 1996, the Company is party to a Credit Facility Agreement (as amended and restated, the "Credit Agreement") with a syndicate of banks (the "Banks"). The Credit Agreement provides for a $350 million senior unsecured revolving line of credit (the "Line of Credit"), comprised of one facility subject to a borrowing base. On May 15, 1998, the facility converts to a four-year reducing revolving line of credit, at which time each Bank's commitment as of that date is automatically and permanently reduced by 1/16 on each August 15, November 15, February 15 and May 15 beginning on August 15, 1998 and continuing until the earlier of May 15, 2002 or termination by the Company pursuant to the Credit Agreement.
The Company's Line of Credit has a current borrowing base of $350 million. The borrowing base is determined by the Banks in their sole discretion and is redetermined at least annually as of each April utilizing oil and gas reserve information as of the immediately preceding December 31. In addition, the Company or a 66-2/3% majority of the Banks can request one additional redetermination at any time during the year and the Company can request additional redeterminations upon the payment to the Banks of specified fees.
Advances under the Line of Credit bear interest, at the Company's option, based on (a) the prime rate of NationsBank of Texas, N.A. ("Prime Rate") (8.25% at December 31, 1996), (b) a Eurodollar rate (substantially equal to the London Interbank Offered Rate), adjusted for the reserve requirement as determined by the Board of Governors of the Federal Reserve System with respect to transactions in Eurocurrency liabilities ("LIBOR Rate"), or (c) quoted rates from participating banks under a competitive bid option. Advances that are based on LIBOR Rate have periodic maturities, at the Company's option, of one, two, three, six, nine or twelve months. Maturities of greater than three months are subject to availability of such deposits in the relevant markets. Advances on the competitive bid have periodic maturities, at the Company's option, of not less than seven days nor more than 180 days. The interest rates on the LIBOR Rate advances vary, with the interest rate margin ranging from 25 to 70 basis points depending on the Company's senior unsecured long-term public debt rating.
The Credit Agreement contains various restrictive covenants and compliance requirements, which include (a) limiting to $5 million per annum the sum of annual dividends the Company may declare and pay and the amount of the Company's capital stock the Company may redeem or purchase; (b) limiting the incurrence of additional indebtedness; and (c) restrictions as to merger, sale or transfer of assets and transactions with affiliates without the Banks' consent.
Senior notes. At December 31, 1996, the following two issuances of senior indebtedness are outstanding.
8-7/8% senior notes due 2005. $150 million aggregate principal amount 8-7/8% senior notes dated April 12, 1995, due April 15, 2005. Interest on the 8-7/8% senior notes is payable semi-annually on April 15 and October 15 of each year, commencing October 15, 1995.
8-1/4% senior notes due 2007. $150 million aggregate principal amount 8-1/4% senior notes dated August 22, 1995, due August 15, 2007. These 8-1/4% senior notes were sold at a discount aggregating $816,000. Interest on the 8-1/4% senior notes is payable semi-annually on February 15 and August 15 of each year, commencing February 15, 1996.
Both senior note issuances are governed by an Indenture between the Company and The Chase Manhattan Bank (National Association) dated April 12, 1995. Both senior note issuances are general unsecured obligations of the Company ranking equally in right of payment with all other senior unsecured indebtedness of the Company and are senior in right of payment to all existing and future subordinated indebtedness of the Company. In addition, the Company is a holding company that conducts all its operations through subsidiaries, and the senior notes issuances are structurally subordinated to all obligations of its subsidiaries.
PARKER & PARSLEY PETROLEUM COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1996, 1995 and 1994
Project finance facility. The Global Revolving Underwriting Facility (the "GRUF"), as amended, was originally entered into by Bridge Oil International Finance Limited as borrower and a syndicate of banks on December 19, 1986. The GRUF was outstanding at December 31, 1995 and, at that time, had a scheduled maturity date of June 30, 1997. As part of the sale of certain wholly-owned Australian subsidiaries on March 28, 1996, the buyer of such subsidiaries assumed the GRUF obligations.
Fixed rate building loan. In March 1994, the Company entered into a 12-year, $13 million fixed rate loan to finance the acquisitions of two office buildings in Midland, Texas. One of the office buildings was acquired from an affiliated partnership of which the Company was a 42.5% limited partner. This building is also the Company's headquarters. The loan is payable in monthly principal payments of $87,250 plus interest at the rate of 7.9% beginning April 7, 1994 and continuing until the final maturity of August 4, 2006. Security for the loan consists of first lien deeds of trust on the two buildings, collateral assignments of all rents and leases related to the two buildings and security interests in all contracts and fixed assets of the borrower that are related to the buildings.
Extraordinary item. In October 1995, the Company transferred cash and certain oil and gas properties with an aggregate estimated value of $1.1 million in full satisfaction of a non-recourse note secured by the properties, the balance of which was approximately $7.7 million As a result, the Company recognized an extraordinary gain on the early extinguishment of debt of $4.3 million (net of related tax expense of $2.3 million).
Interest expense. The following amounts have been charged to interest expense for the years ended December 31, 1996, 1995 and 1994:
1996 1995 1994 -------- -------- -------- (in thousands)
Cash payments for interest.................... $ 44,405 $ 59,767 $ 41,933 Cash payments for commitment and agency fees.. 804 1,650 1,265 Accretion of discounts on loans............... 261 617 402 Amortization of capitalized loan fees......... 1,286 2,022 2,308 Net change in accruals........................ (601) 1,393 4,644 ------- ------- ------- $ 46,155 $ 65,449 $ 50,552 ======= ======= =======
The above amounts include $12 million in 1996, $12 million in 1995 and $9.1 million in 1994 associated with the 6- 1/4% Cumulative Guaranteed Monthly Income Convertible Preferred Shares of the Company's wholly-owned finance subsidiary (see Note K).
NOTE F. Related Party Transactions
Activities with affiliated partnerships. The Company, through its wholly-owned subsidiaries, has in the past sponsored certain affiliated partnerships, including thirty-five public and nine private drilling partnerships and three public income partnerships, all of which were formed primarily for the purpose of drilling and completing wells or acquiring producing properties. In accordance with the terms of the partnership agreements and the related tax partnership agreements of the affiliated partnerships, the Company participated in the activities of the sponsored partnerships on a promoted basis. In 1992, the Company discontinued sponsoring public and private oil and gas development drilling and income partnerships.
During each of 1994, 1993 and 1992, the Company formed a Direct Investment Partnership for the purpose of permitting selected key employees to invest directly, on an unpromoted basis, in wells that the Company drills. The partners in the Direct Investment Partnerships formed in 1994, 1993 and 1992 pay and receive approximately .337%, 1.5375% and 1.865%, respectively, of the costs and revenues attributable to the Company's interest in the wells in which such Direct Investment Partnership participates. The Company discontinued the formation of Direct Investment Partnerships in 1995.
The Company, through certain wholly-owned subsidiaries, serves as operator of properties in which it and its affiliated partnerships have an interest. Accordingly, the Company receives producing well overhead, drilling well overhead and other fees related to the operation of the properties. The affiliated partnerships also reimburse the Company for their allocated share of general and administrative charges.
PARKER & PARSLEY PETROLEUM COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1996, 1995 and 1994
The activities with affiliated partnerships are summarized for the following related party transactions for the years ended December 31, 1996, 1995 and 1994: 1996 1995 1994 ------ ------ ------ (in thousands) Receipt of lease operating and supervision charges in accordance with standard industry operating agreements.......................................... $8,484 $8,458 $8,556 Reimbursement of general and administrative expenses.. 1,246 1,153 1,143
NOTE G. Long-term Incentive Plan
During 1991, the Company's stockholders approved a long-term incentive plan (the "Long-term Incentive Plan"), which provides for the granting of incentive awards in the form of stock options, stock appreciation rights, performance units, restricted stock and cash to certain directors, officers and key employees of the Company. The Long-term Incentive Plan provides for the issuance of a maximum number of shares of common stock equal to 10% of the total shares outstanding.
The following table summarizes the cumulative stock and option awards granted by the Company and the shares or options available for future grant under the Company's Long-term Incentive Plan at the end of 1996 and 1995:
For the year ended December 31, 1996 1995 --------- ---------
Cumulative shares/options granted, beginning of year 2,766,069 2,234,616 Shares/options granted 672,380 548,117 Shares/options forfeited (36,980) (16,664) --------- --------- Cumulative shares/options granted, end of year 3,401,469 2,766,069 --------- --------- Maximum shares/options allowed under Long-term Incentive Plan 3,506,624 3,538,328 --------- --------- Shares/options available for future grant at end of year 105,155 772,259 ========= =========
Directors
Under the Company's Long-term Incentive Plan, each non-employee director, upon commencement of service as a director, is eligible to receive $125,000 of Company common stock. The price used to calculate the number of shares to be awarded is generally equal to the average trading price of the Company's common stock during the 60 days immediately preceding the award. The shares awarded are subject to vesting and transfer restrictions that lapse with respect to one-third of the shares six months after the award, another one-third of the shares one year after the award and the remaining one-third of the shares two years after the award. The vesting of ownership and lapse of the transfer restrictions may be accelerated in the event of the death, disability or retirement of the director or a change in control of the Company. The Long-term Incentive Plan requires each non-employee director to make an election under the Internal Revenue Code to include the value of the stock in his income in the year of grant and provides for a cash award to the non-employee director in an amount sufficient to pay the federal income taxes due with respect to the award and such cash payment. During 1995, there were two new directors elected to the Board of Directors each of whom received a grant of 6,528 shares of restricted stock. No such awards were made during 1996 or 1994.
Officers and Key Employees
Restricted stock awards. The Company's policy is to pay any annual bonuses awarded to selected officers and key employees partially in cash and partially in the form of restricted stock awards under the Long-term Incentive Plan. Prior to 1996, annual bonuses, if awarded, were paid one-half in cash and one-half in the form of restricted stock awards. In 1996, target bonus levels were established for each officer and key employee. Based upon Company and individual performance during the year, each officer or key employee has the potential to earn more or less than their target bonus level. Beginning in 1996, the bonus awards are determined in the quarter following the Company's December 31 year-end. Any restricted
PARKER & PARSLEY PETROLEUM COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1996, 1995 and 1994
stock awarded pursuant to this program will be limited to one-half of each officer's or key employee' s target bonus level, and the remainder of the officer's or key employee's annual bonus will be paid in cash. The number of shares of restricted stock that are awarded pursuant to the annual bonus program is based on the closing sales price of the Company's common stock on the day immediately preceding the date of the award. Ownership of the restricted stock awarded vests six months after the date it is issued but is subject to transfer restrictions that lapse on one-third of the shares on each of the first, second and third anniversaries of the date of grant. Each recipient of restricted stock also receives an amount of cash equal to the estimated federal income taxes payable as a result of the receipt of such award. On February 13, 1997, the Company awarded an aggregate of 29,872 shares of restricted stock at a price of $30.125 pursuant to the 1996 annual bonus program. The Company did not award any restricted stock under the annual bonus program in 1995. In 1994, the Company awarded an aggregate of 46,776 shares of restricted stock pursuant to this annual bonus program.
During 1996, 1995 and 1994, the Company has made other incentive awards of 35,080 shares, 20,778 shares and 29,418 shares of restricted stock, respectively, to certain officers and key employees. The shares awarded are subject to a vesting period and transfer restrictions.
The following table reflects the outstanding restricted stock awards and activity related thereto for 1996, 1995 and 1994:
Stock options awards. The Company also has an annual stock option award program for selected key employees and officers. This program provides for annual awards at an exercise price based on the closing sales price of the Company's common stock on the date of grant, a three-year vesting schedule and a five-year exercise period.
The Company applies APB 25 and related Interpretations in accounting for its stock option awards. Accordingly, no compensation expense has been recognized for its stock option awards. If compensation expense for the stock option awards had been determined consistent with SFAS 123, the Company's net income (loss) and net income (loss) per share would have been adjusted to the pro forma amounts indicated below: For the year ended December 31, 1996 1995 -------- -------- (in thousands, except per share amounts)
Net income (loss): $139,301 $(99,891) Primary net income (loss) per share: $ 3.90 $ (2.83) Fully diluted net income (loss) per share: $ 3.43 $ (2.83)
The pro forma net income (loss) and pro forma net income (loss) per share amounts noted above are not likely to be representative of the pro forma amounts to be reported in future years. The pro forma amounts for 1996 and 1995 reflect the initial phase-in of SFAS 123 and as a result do not reflect any compensation expense for options granted prior to 1995. Pro forma adjustments in future years will include compensation expense associated with the options granted in 1995 and 1996 plus compensation expense associated with any options awarded in future years. As a result, such proforma compensation expense is likely to be higher than the levels experienced in 1995 and 1996.
PARKER & PARSLEY PETROLEUM COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1996, 1995 and 1994
Under SFAS 123, the fair value of each stock option grant is estimated on the date of grant using the Black-Scholes option pricing model with the following weighted average assumptions used for grants in 1996 and 1995:
1996 1995 -------- --------
Risk-free interest rate 6.18% 6.06% Expected life 4 years 4 years Expected volatility 32% 35% Expected dividend yield .34% .52%
A summary of the Company's stock option plan as of December 31, 1996, 1995 and 1994, and changes during the years ended on those dates is presented below:
The following table summarizes information about the Company's stock options outstanding at December 31, 1996:
Loans. During 1995, the Compensation Committee approved loans aggregating $870,000 to certain officers of the Company and its subsidiaries to fund option exercises for and open market purchases of Company common stock. Each loan provides that one-third of the principal and all accrued interest will be deemed paid on each of the first three anniversaries of the loan if the officer has continued as an employee of the Company through that date.
Retirement plan. Effective January 1, 1996, the Compensation Committee approved a deferred compensation retirement plan for the officers of the Company. Each officer is allowed to contribute up to 25% of their base salary. The Company will then provide a matching contribution of 100% of the officer's contribution limited to the first 10% of the officer's base salary. The Company's matching contribution vests immediately. A trust fund has been established by the Company to accumulate the contributions made under this retirement plan. The Company does not have a defined benefit retirement plan.
The Company recognized $1.9 million, $7.7 million and $4.1 million in compensation expense related to its Long-term Incentive Plan during 1996, 1995 and 1994, respectively.
PARKER & PARSLEY PETROLEUM COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1996, 1995 and 1994
NOTE H. Non-Employee Director Equity Compensation Plan
During 1994, the Company authorized and adopted a Non-Employee Director Equity Compensation Plan (the "Director Plan"), which was approved by the Company's stockholders. Pursuant to the Director Plan, on the last business day of the month in which the annual meeting of the stockholders of the Company is held, each non-employee director will automatically receive an award of Common Stock equal to 50% of the then current annual retainer fee (which was $40,000 for 1996, 1995 and 1994). This award is made in lieu of an amount of cash equal to 50% of the annual retainer fee. The number of shares included in each such award is determined by dividing 50% of the annual retainer fee by the closing sales price of the Company's common stock on the business day immediately preceding the date of the award. On May 31, 1996, each non-employee director received an award of 812 shares of common stock (which number was calculated by dividing $20,000 by $24.625, the closing sales price of the common stock on May 30, 1996). On June 30, 1995, each non-employee director received an award of 1,025 shares of common stock (which number was calculated by dividing $20,000 by $19.50, the closing sales price of the common stock on June 29, 1995). On May 31, 1994, each non-employee director received an award of 816 shares of common stock (which number was calculated by dividing $20,000 by $24.50, the closing sales price of the common stock on May 27, 1994).
When issued, the shares of common stock awarded pursuant to the Director Plan are subject to transfer restrictions that lapse on the first anniversary of the date of the award. In addition, if a non-employee director's services as a director of the Company are terminated for any reason before the next annual meeting of the Company's stockholders, a portion of the shares are forfeited, with the number of forfeited shares being based on the number of regularly scheduled meetings of the Board of Directors remaining to be held before the next annual meeting of the Company's stockholders.
NOTE I. Rights Agreement
During 1991, the Company distributed a dividend of one common share purchase right ("Right") for each share of common stock then outstanding. A Right was or will be distributed for each share of common stock that was or will be issued subsequent to February 19, 1991 until the occurrence of the earlier of the Distribution Date (herein defined), the redemption of the Rights or the expiration of the Rights on February 19, 2001. Initially, each Right entitles the registered holder to purchase from the Company one share of common stock at a price per share of $52.50, subject to adjustment. The Rights are attached to all certificates representing shares of common stock outstanding, and no separate certificates representing the Rights will be distributed to stockholders until the earlier of (a) 10 days following a public announcement that (1) a person or group acquires 20% or more of the outstanding shares of common stock or (2) a person or group holding 10% of the common stock is determined to have intentions and actions adverse to the best interest of the Company (an "Adverse Person") (persons in (1) or (2), an "Acquiring Person") or (b) 10 business days following the commencement of a tender offer or exchange offer that would result in a person or group beneficially owning 20% or more of the outstanding shares of common stock (the "Distribution Date"). The Rights are not exercisable until the Distribution Date and will expire on February 19, 2001, unless earlier redeemed by the Company. If at any time following the Rights Distribution Date (a) the Company is a surviving corporation in a merger or combination with an Acquiring Person and the shares of common stock remain outstanding and are not changed or exchanged, (b) a person becomes the beneficial owner of 20% or more of the then outstanding shares of common stock, (c) an Acquiring Person engages in one or more "self-dealing" transactions as set forth in the rights agreement governing the Rights or (d) a person is determined to be an Adverse Person, each holder of a Right then will have the right to receive, upon exercise, common stock (or, in certain circumstances, cash, property or other securities of the Company or an acquiring company) having a value equal to two times the exercise price of the Right. Thereafter, in general, all Rights that are beneficially owned by an Acquiring Person will be void. In the event that, at any time following the date that a person has become an Acquiring Person, (i) the Company is acquired in a merger or other combination transaction in which the Company is not the surviving entity, (ii) the Company consolidates with or merges with or into any other person pursuant to which the Company is the surviving entity but all or a part of the shares of common stock are changed into or exchanged for stock of another person or cash or other property or (iii) 50% or more of the Company's assets or earning power is sold or transferred, each holder of a Right (except Rights that previously have been voided as described above) shall thereafter have the right to receive, upon exercise, common stock or other securities of the acquiring company having a value equal to two times the exercise price of the Right. The Company may redeem the Rights in certain circumstances. Until a Right is exercised, the holder of the Right, as such, will have no rights as a stockholder of the Company, including the right to vote or to receive dividends.
PARKER & PARSLEY PETROLEUM COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1996, 1995 and 1994
NOTE J. Commitments and Contingencies
Severance agreements. On January 1, 1996, the Company entered into severance agreements with its officers to replace their employment agreements that expired at the end of 1995. Salaries and bonuses for the Company's officers are set by the Compensation Committee of the Company's Board of Directors (the "Committee") independent of this severance agreement, and the Committee can grant increases or reductions to base salary at its discretion. The current annual salaries for the officers covered under such severance agreements total approximately $3.5 million.
Either the Company or the officer may terminate the officer's employment under the severance agreement at any time. The Company must pay the officer an amount equal to one year's base salary if employment is terminated because of death, disability, or normal retirement. The Company must pay the officer an amount equal to one year's base salary and continue health insurance for the officer and his immediate family for one year if the Company terminates employment without cause or if the officer terminates employment with good reason, which occurs when reductions in the officer's base annual salary exceed specified limits or when the officer's responsibilities have been significantly reduced. If within one year after a change of control of the Company, the Company terminates the officer without cause or if the officer terminates employment with good reason, the Company must pay the officer an amount equal to 2.99 times the sum of the officer's base salary plus target bonus for the year and continue health insurance for the officer and his immediate family for one year. If the officer terminates employment with the Company without good reason between six months and one year after a change in control, or at any time within one year after a change in control if the officer is required to move, then the Company must pay the officer one year's base salary and continue health insurance for the officer and his immediate family for one year. Officers are also entitled to additional payments for certain tax liabilities that may apply to severance payments following a change of control.
Indemnifications. The Company has indemnified its directors and certain of its officers, employees and agents with respect to claims and damages arising from acts or omissions taken in such capacity, as well as with respect to certain litigation.
Legal actions. The Company is party to various legal actions incidental to its business. These lawsuits primarily involve claims for damages arising from oil and gas leases and ownership interest disputes. The Company believes that the ultimate disposition of these legal actions will not have a material adverse effect on the Company's consolidated financial position, liquidity, capital resources or future results of operations. The Company will continue to evaluate its litigation matters on a quarter-by-quarter basis and will adjust the litigation reserve as appropriate to reflect the then current status of its litigation.
Lease agreements. The Company leases equipment and office facilities under noncancellable operating leases on which rental expense for the years ended December 31, 1996, 1995 and 1994 was approximately $2.9 million, $3.6 million and $1.5 million, respectively. Future minimum lease commitments under noncancellable operating leases at December 31, 1996 are as follows (in thousands):
1997....................................................... $ 3,304 1998....................................................... 2,419 1999....................................................... 1,432 2000....................................................... 835 2001....................................................... 458 Thereafter................................................. 1,132
Crude oil purchase agreements. On September 23, 1996, the Company and Basis Petroleum, Inc. (formerly Phibro Energy, Inc.) entered into an agreement that supersedes the prior crude oil purchase agreement and memorandum of agreement between the parties. On November 25, 1996, the Company consented to the assignment of the agreement to Genesis Crude Oil, L.P. ("Genesis"), a limited partnership formed by Basis Petroleum, Inc. and Howell Corporation. The price to be paid by Genesis for oil purchased under the agreement ("Genesis Agreement") is to be competitive with prices paid by other substantial purchasers in the same areas who are significant competitors of Genesis. The price to be paid for oil purchased under the Genesis Agreement includes a market-related bonus that may vary from month to month based upon spot oil prices at various commodity trade points. The term of the Genesis Agreement is through June 30, 1998, and it may continue thereafter subject to termination rights afforded each party. Salomon, Inc., the parent company of Basis Petroleum,
PARKER & PARSLEY PETROLEUM COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1996, 1995 and 1994
Inc. and a subordinated limited partner in Genesis, secures the payment obligations under the Genesis Agreement with a $25 million payment guarantee.
Certain properties acquired from Mobil Oil Corporation ("Mobil") are subject to a call on crude oil production (the "Mobil Call Option"). The Mobil Call Option provides a continuing option, but no obligation, for Mobil to purchase all crude oil produced from those properties. The purchase price that Mobil must pay for production purchased pursuant to the Mobil Call Option is the average of the daily prices as posted by specified crude oil purchasers, including Mobil, during the month of delivery without reduction for transportation fees or other penalties. Regardless of these pricing provisions, if the Company has a bona fide purchase offer from a third party under a contract with at least a six-month term that the Company desires to accept, the price Mobil must pay is the price under that offer for that term. If Mobil elects not to match the third-party price for the term, the Company may sell the production to the third party for that term.
NOTE K. Preferred Stock of Subsidiary
On March 29, 1994, Parker & Parsley Capital LLC ("P&P Capital"), a limited life company organized under the laws of the Turks and Caicos Islands and a wholly-owned finance subsidiary of the Company, issued 3,776,400 shares of 6-1/4% Cumulative Guaranteed Monthly Income Convertible Preferred Shares (the "Preferred Shares") with a liquidation preference of $50 per share. The proceeds, net of issuance costs, from the sale of the Preferred Shares was approximately $182.2 million. During 1996, 1995 and 1994, the Company recorded $12 million, $12 million and $9.1 million, respectively, of interest expense associated with the Preferred Shares.
Dividends on the Preferred Shares are payable in United States dollars at an annual rate of 6-1/4% of the liquidation preference and are payable monthly in arrears on the last day of each calendar month. Each Preferred Share is convertible at the option of the holder at any time, unless previously redeemed or exchanged, into the Company's common stock at the rate of 1.7778 shares of common stock for each Preferred Share, subject to adjustment in certain circumstances. On or after April 1, 1997, the Preferred Shares are subject to exchange in whole or in part at the Company's option, for the number of shares of common stock into which the Preferred Shares are convertible, so long as the closing price for the common stock equals or exceeds 125% of the then applicable conversion price during certain periods and certain other conditions are satisfied. The Preferred Shares are redeemable, at the option of P&P Capital, in whole or in part, from time to time on or after April 1, 1997, at an initial redemption price of $52.1875 per share and declining ratably thereafter to $50 per share on and after April 1, 2004, plus, in each case, accumulated and unpaid dividends to the date fixed for redemption, but only if certain conditions are satisfied. The Preferred Shares are subject to mandatory redemption on the 30th anniversary of the date of original issuance. The Preferred Shares are also subject to exchange, in whole but not in part, on a share-for-share basis, into Series A Convertible Preferred Stock of the Company (the "Company Preferred Stock") at the option of the holders of a majority of all outstanding Preferred Shares upon the occurrence of certain events. The Company Preferred Stock will have dividend, optional conversion, liquidation preference and optional redemption features substantially identical to the Preferred Shares but will not be subject to mandatory redemption.
NOTE L. Odd-Lot Repurchase Program
In October 1996, the Company announced an odd-lot repurchase program for shareholders who, as of October 7, 1996, individually owned 99 or fewer shares of Parker & Parsley Petroleum Company Common Stock. The Company purchased a total of 772,986 shares, associated with approximately 25,000 shareholder accounts, and such shares were added to the Company's shares held in treasury. The shares were purchased at an average price of $30.17 per share which represented the average of the five highest closing market prices as reported by the New York Stock Exchange from October 8, 1996 through November 22, 1996, less a processing fee of seventy-five cents per share. The accompanying Consolidated Statements of Cash Flows for the year ended December 31, 1996, includes $23.3 million of treasury stock repurchases related to this program.
NOTE M. Equity Offerings
On November 7, 1994 and June 30, 1994, the Company completed public offerings of 4.5 million and 2.36 million shares of common stock, respectively, at a price of $25.00 per share and $25.25 per share, respectively. Aggregate net proceeds of the offerings were $164.6 million.
PARKER & PARSLEY PETROLEUM COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1996, 1995 and 1994
NOTE N. Derivative Financial Instruments
The Company has only limited involvement with derivative financial instruments and does not use them for trading purposes. They are used to manage well-defined interest rate and commodity price risks. The Company is exposed to credit losses in the event of nonperformance by the counterparties to its interest rate swap agreements and its commodity hedges. The Company anticipates, however, that such counterparties will be able to fully satisfy their obligations under the contracts. The Company does not obtain collateral or other security to support financial instruments subject to credit risk but monitors the credit standing of the counterparties.
Interest rate swap agreements. At December 31, 1996, the Company was a party to a series of interest rate swap agreements for an aggregate amount of $150 million with four counterparties. These agreements, which have a term of three years, effectively convert a portion of the Company's fixed-rate borrowings into floating-rate obligations. The weighted average fixed rate being received by the Company over the term of these agreements is 6.62% while the weighted average variable rate being paid by the Company for the year ended December 31, 1996 is 5.56%. The variable rate will be redetermined approximately every six months based upon the London interbank offered rate at that point in time. The accompanying Consolidated Statements of Operations for the year ended December 31, 1996 includes a reduction in interest expense of $787 thousand to account for the settlement of these interest rate swap agreements.
Commodity hedges. The Company utilizes various swap and option contracts to (i) reduce the effect of the volatility of price changes on the commodities the Company produces and sells, (ii) support the Company's annual capital budgeting and expenditure plans and (iii) lock in prices to protect the economics related to certain capital projects.
Natural Gas. The Company employs a policy of hedging gas production based on the index price upon which the gas is actually sold in order to mitigate the basis risk between NYMEX prices and actual index prices. The following table sets forth the Company's outstanding gas swap contracts as of December 31, 1996. Prices included herein represent the Company's weighted average index price per MMBtu and, as an additional point of reference, the weighted average price for the portion of the Company's gas which is hedged based on NYMEX.
First Second Third Fourth Quarter Quarter Quarter Quarter Total ------- ------- ------- ------- ------- Gas production: 1997 - Swap Contracts Volume (Bcf) 8.5 6.0 2.9 2.6 20.0 Index price per MMBtu $ 2.04 $ 2.01 $ 1.89 $ 1.86 $ 1.98 NYMEX price per MMBtu $ 2.29 $ 2.27 $ 2.15 $ 2.03 $ 2.23
1998 - Swap Contracts Volume (Bcf) 2.5 1.8 1.4 1.4 7.1 Index price per MMBtu $ 1.86 $ 1.86 $ 1.86 $ 1.86 $ 1.86 NYMEX price per MMBtu $ 2.03 $ 2.03 $ 2.03 $ 2.03 $ 2.03
1999 - Swap Contracts Volume (Bcf) 1.4 .4 - - 1.8 Index price per MMBtu $ 1.86 $ 1.86 $ - $ - $ 1.86 NYMEX price per MMBtu $ 2.03 $ 2.03 $ - $ - $ 2.03
The Company reports average gas prices per Mcf including the effects of Btu content, gathering and transportation costs, gas processing and shrinkage and the net effect of the gas hedges. The Company reported an average gas price of $2.27 per Mcf for the year ended December 31, 1996. The Company's average realized price for physical gas sales (excluding hedge results) for the same period was $2.39 per Mcf. The comparable average NYMEX prompt month closing for the year ended December 31, 1996 was $2.50 per Mcf.
PARKER & PARSLEY PETROLEUM COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1996, 1995 and 1994
Crude Oil. All material purchase contracts governing the Company's oil production are tied directly or indirectly to NYMEX prices. The following table sets forth the Company's outstanding oil swap contracts as of December 31, 1996.
First Second Third Fourth Quarter Quarter Quarter Quarter Total ------- ------- ------- ------- ------- Oil production: 1997 - Swap Contracts Volume (MMBbl) 1.9 1.5 1.2 .7 5.3 Price per Bbl $ 20.05 $19.56 $19.28 $18.56 $19.53
1998 - Swap Contracts Volume (MMBbl) .2 .2 .3 .2 .9 Price per Bbl $ 18.53 $18.53 $18.53 $18.53 $18.53
The Company reports average oil prices per Bbl including the effects of oil quality, gathering and transportation costs and the net effect of the oil hedges. The Company reported an average oil price of $19.96 per Bbl for the year ended December 31, 1996. The Company's average realized price for physical oil sales (excluding hedge results) for the same period was $21.33 per Bbl. The comparable average NYMEX prompt month closing for the year ended December 31, 1996 was $22.03 per Bbl.
NOTE O. Sales to Major Customers
The Company's share of oil and gas production is sold to various purchasers. The Company is of the opinion that the loss of any one purchaser would not have an adverse effect on the ability of the Company to sell its oil and gas production.
The following customers individually accounted for more than 10% of the consolidated oil and gas revenues of the Company:
Percentage of Consolidated Customer Oil and Gas Revenues -------- -------------------------- 1996 1995 1994 ---- ---- ---- Genesis Crude Oil, L.P.............. 28% 19% 17% Mobil Oil Corporation............... 22% 17% 16%
At December 31, 1996, the amounts receivable from Genesis and Mobil were $12.7 million and $9.4 million, respectively, which are included in the caption "Accounts receivable - oil and gas sales" in the accompanying Consolidated Balance Sheet.
NOTE P. Gas Marketing
Effective January 1, 1996, the Company, along with Apache Corporation and Oryx Energy Company, formed Producers Energy Marketing, LLC ("ProEnergy"), a natural gas marketing company organized to create a direct link between gas producers and purchasers. The venture is structured to flow through the benefits arising out of the expanded services and the economies of scale from the aggregation of substantial volumes of gas. The Company is obligated to sell to ProEnergy all gas production (subject to certain exclusions relative to immaterial volumes) for a period of five years that is owned or controlled by the Company, or any affiliate, in North America (onshore and offshore), which is not subject to a binding and enforceable gas sales contract in effect on July 1, 1996. The Company currently owns approximately 9.59% of ProEnergy which markets approximately 1.8 MMBtu per day. As a result, as of January 1, 1996, the Company no longer reports revenues or expenses associated with third party gas marketing activities.
NOTE Q. Disposition of Australasian Assets
On March 28, 1996, the Company completed the sale of certain wholly-owned Australian subsidiaries to Santos Ltd., and on June 20, 1996, the Company completed the sale of another wholly-owned subsidiary, Bridge Oil Timor Sea, Inc., to Phillips Petroleum International Investment Company. During the year ended December 31, 1996, the Company received
PARKER & PARSLEY PETROLEUM COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1996, 1995 and 1994
aggregate consideration of $237.5 million for these combined sales which consisted of $186.6 million of proceeds for the equity of such entities, $21.8 million for reimbursement of certain intercompany cash advances, and the assumption of such subsidiaries' net liabilities, exclusive of oil and gas properties, of $29.1 million. The accompanying Consolidated Statements of Operations for the year ended December 31, 1996 includes a pre-tax gain of $83.3 million from the disposition of these subsidiaries (net of transaction expenses of $8.7 million) and an income tax provision of $16 million. The income tax provision includes $6.4 million related to the write-off of certain net operating loss carryforwards which, with the sale of the income producing assets in the Australian tax jurisdiction, will not be utilized in the future.
The assets sold to Santos Ltd. consisted primarily of properties located in the Cooper Basin in Central Australia, the Surat Basin in Northeast Australia, the Carnarvon Basin on the Northwest Shelf off the coast of Western Australia, the Otway Basin off the coast of Southeast Australia and the Central Sumatra Basin in Indonesia. At December 31, 1995, the Company's interests in these properties contained 32.1 million BOE of proved reserves (consisting of 12.4 million Bbls of oil and 118.3 Bcf of gas), representing $133.8 million of SEC 10 value. The accompanying Consolidated Statements of Operations for the year ended December 31, 1996 includes the results of operations from these properties prior to their sale on March 28, 1996. During 1996, these properties produced 349,500 Bbls of oil and 1,927,000 Mcf of gas. The Company received an average price of $19.55 per Bbl and $1.95 per Mcf from such production or $10.6 million in total revenues. Total production costs associated with these properties were $3.3 million ($4.92 per equivalent Bbl) and depletion expense was $3.9 million ($5.84 per equivalent Bbl).
The wholly-owned subsidiary sold to Phillips Petroleum International Investment Company, Bridge Oil Timor Sea, Inc. has a wholly owned subsidiary, Bridge Oil Timor Sea Pty Ltd., which owns a 22.5% interest in the ZOCA 91-13 permit in the offshore Bonaparte Basin in the Zone of Cooperation between Australia and Indonesia.
NOTE R. Impairment of Long-Lived Assets
The Company adopted SFAS 121 in 1995. The Company undertook to review its oil and gas properties for impairment earlier than required by SFAS 121 (adoption was required for fiscal years beginning after December 15, 1995) as a result of the continuation of depressed commodity prices and to eliminate any uncertainty associated with the magnitude of the noncash charge for impairment of its oil and gas properties under SFAS 121. In order to determine whether an impairment had occurred, the Company estimated the expected future cash flows of its oil and gas properties and compared such future cash flows to the carrying amount of the oil and gas properties to determine if the carrying amount was recoverable. For those oil and gas properties for which the carrying amount exceeded the estimated future cash flows, an impairment was determined to exist; therefore, the Company adjusted the carrying amount of those oil and gas properties to their fair value as determined by discounting their expected future cash flows at a discount rate commensurate with the risks involved in the industry. As a result of this process and an evaluation of unproven oil and gas properties, the Company recognized noncash pre-tax charges of $129.7 million ($84.3 million after tax) related to its oil and gas properties during 1995. The Company also recognized a noncash pre-tax charge of $748,000 ($486,000 after tax) related to a natural gas processing facility in 1995.
NOTE S. Income Taxes
Income tax provision (benefit) and amounts separately allocated were as follows: Year ended December 31, 1996 1995 1994 ------- -------- ------- (in thousands) Income (loss) before extraordinary item......... $60,100 $(45,900) $(6,500) Extraordinary gain (loss)....................... - 2,300 (350) Benefit arising from exercise of stock options.. (2,200) (600) (300) Change in cumulative translation adjustment..... - (550) 500 ------ ------- ------ $57,900 $(44,750) $(6,650) ====== ======= ======
PARKER & PARSLEY PETROLEUM COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1996, 1995 and 1994
Income tax provision (benefit) attributable to income (loss) before extraordinary item consists of the following: Year ended December 31, 1996 1995 1994 -------- -------- -------- (in thousands) Current: U.S. federal....................... $ 300 $ (1,000) $ 150 State and local.................... - - 150 ------- ------- ------- 300 (1,000) 300 ------- -------- ------- Deferred: U.S. federal....................... 51,700 (35,500) (1,650) Foreign (primarily Australia)...... 8,100 (9,400) (5,150) ------- -------- ------- 59,800 (44,900) (6,800) ------- -------- ------- Total................................ $ 60,100 $(45,900) $ (6,500) ======= ======= =======
Income (loss) before income taxes, extraordinary item consists of the following: Year ended December 31, 1996 1995 1994 -------- --------- -------- (in thousands) Income (loss) before income taxes, extraordinary item and cumulative effect of accounting change: U.S. federal............................ $121,680 $(118,871) $ (3,664) Foreign (primarily Australia)........... 78,668 (31,136) (16,827) ------- -------- -------- $200,348 $(150,007) $ (20,491) ======= ======== ========
Reconciliations of the U.S. federal statutory rate to the Company's effective rate for income (loss) before extraordinary item are as follows:
1996 1995 1994 ------ ------- -------
U.S. federal statutory tax rate.................. 35.0% (35.0%) (35.0%) Disposition of foreign subsidiaries.............. (6.9%) - - Amortization of foreign permanent differences.... - 3.1% 1.8% Rate differential on foreign operations.......... .4% (.1%) 1.3% Other............................................ 1.5% 1.4% .2% ----- ------ ------ Consolidated effective tax rate.................. 30.0% (30.6%) (31.7%) ===== ====== ======
The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities were as follows: December 31, 1996 1995 --------- --------- (in thousands) Deferred tax assets: Net operating loss carryforwards................ $ 23,704 $ 70,882 Alternative minimum tax credit carryforwards.... 4,005 6,760 Other accrued liabilities....................... 3,306 7,485 Compensation, principally due to accrual for financial reporting purposes.................. 2,579 - Other, net...................................... 1,831 1,051 -------- -------- Total gross deferred tax assets............... 35,425 86,178 -------- -------- Deferred tax liabilities: Oil and gas properties, principally due to differences in basis and depletion and the deduction of intangible drilling costs for tax purposes................................... 88,790 86,530 Long-term debt, principally due to early extinguishment for book purposes............... - 2,313 Other, net...................................... 35 1,035 -------- -------- Total gross deferred tax liabilities.......... 88,825 89,878 -------- -------- Net deferred tax liability.................... $ (53,400) $ (3,700) ======== ========
PARKER & PARSLEY PETROLEUM COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1996, 1995 and 1994
A valuation allowance is provided when it is more likely than not that some portion of the deferred tax assets will not be realized. Based on expectations for the future and the availability of certain tax planning strategies that would generate taxable income to realize the net tax benefits, if implemented, management has determined that taxable income of the Company will more likely than not be sufficient to fully utilize available carryforwards prior to their ultimate expiration.
At December 31, 1996, the Company had net operating loss carryforwards ("NOLs") for U.S. federal income tax purposes of $67.7 million, which are available to offset future regular taxable income, if any. Additionally, the Company has alternative minimum tax net operating loss carryforwards ("AMT NOLs") of $15.2 million, which are available to reduce future alternative minimum taxable income, if any. These carryforwards expire as follows:
Expiration Date NOLs AMT NOLs --------------- -------- -------- (in thousands)
December 31, 2006........................... $ 22,798 $ 4,195 December 31, 2009........................... 28,558 9,667 December 31, 2010........................... 16,368 1,364 ------- ------- $ 67,724 $ 15,226 ======= =======
As discussed in Note B, certain subsidiaries that are consolidated for financial reporting purposes are not eligible to be included in the Company's consolidated U.S. federal income tax return, and separate provisions for income taxes have been determined for these entities or groups of entities. As a result, approximately $35 million of the NOLs and all of the AMT NOLs are limited in use to specific entities or groups of entities. In addition, $22.9 million and $4.2 million of the NOLs and AMT NOLs, respectively, are further subject to limitations under Section 382 of the Internal Revenue Code. The Company believes the utilization of its NOLs and AMT NOLs subject to the Section 382 limitations is limited in each taxable year to approximately $11.4 million.
The tax returns and the amount of taxable income or loss are subject to examination by U.S. federal, state and foreign taxing authorities. Current and estimated tax payments of $970,000, $93,000 and $5 million were made in 1996, 1995 and 1994, respectively.
NOTE T. Operations by Geographic Area
The Company operates in one industry segment. During 1996, the Company did not have significant operations in geographic areas other than the United States. Information about the Company's operations for the years ended December 31, 1995 and 1994 by different geographic areas is shown below. During these years, the Company did not have any significant operations or separately identifiable assets other than those from the United States and Australia.
PARKER & PARSLEY PETROLEUM COMPANY
UNAUDITED SUPPLEMENTARY INFORMATION Years ended December 31, 1996, 1995 and 1994
Capitalized Costs December 31, 1996 1995 ---------- ---------- (in thousands) Oil and Gas Properties: Proved oil and gas properties $1,419,051 $1,450,290 Unproved property 7,331 14,574 --------- --------- 1,426,382 1,464,864 Less accumulated depletion (424,594) (383,825) --------- --------- Net capitalized costs for oil and gas properties $1,001,788 $1,081,039 ========= =========
Costs Incurred for Oil and Gas Producing Activities
PARKER & PARSLEY PETROLEUM COMPANY
UNAUDITED SUPPLEMENTARY INFORMATION Years ended December 31, 1996, 1995 and 1994
PARKER & PARSLEY PETROLEUM COMPANY
UNAUDITED SUPPLEMENTARY INFORMATION Years ended December 31, 1996, 1995 and 1994
Reserve Quantity Information
The estimates of the Company's proved oil and gas reserves, which are located principally in the United States, are based on evaluations audited by independent petroleum engineers with respect to the Company's major properties and prepared by the Company's engineers with respect to all other properties. Reserves were estimated in accordance with guidelines established by the U.S. Securities and Exchange Commission and the Financial Accounting Standards Board, which require that reserve estimates be prepared under existing economic and operating conditions with no provision for price and cost escalations except by contractual arrangements. The United States reserve estimates for 1996 utilize an oil price of $24.55 per Bbl (reflecting adjustments for oil quality and gathering and transportation costs) and a gas price of $3.97 per Mcf (reflecting adjustments for BTU content, gathering and transportation costs and gas processing and shrinkage).
Oil and gas reserve quantity estimates are subject to numerous uncertainties inherent in the estimation of quantities of proved reserves and in the projection of future rates of production and the timing of development expenditures. The accuracy of such estimates is a function of the quality of available data and of engineering and geological interpretation and judgment. Results of subsequent drilling, testing and production may cause either upward or downward revision of previous estimates. Further, the volumes considered to be commercially recoverable fluctuate with changes in prices and operating costs. The Company emphasizes that reserve estimates are inherently imprecise and that estimates of new discoveries are more imprecise than those of currently producing oil and gas properties. Accordingly, these estimates are expected to change as additional information becomes available in the future.
PARKER & PARSLEY PETROLEUM COMPANY
UNAUDITED SUPPLEMENTARY INFORMATION Years ended December 31, 1996, 1995 and 1994
PARKER & PARSLEY PETROLEUM COMPANY
UNAUDITED SUPPLEMENTARY INFORMATION Years ended December 31, 1996, 1995 and 1994
Standardized Measure of Discounted Future Net Cash Flows
The standardized measure of discounted future net cash flows is computed by applying year-end prices of oil and gas (with consideration of price changes only to the extent provided by contractual arrangements) to the estimated future production of proved oil and gas reserves less estimated future expenditures (based on year-end costs) to be incurred in developing and producing the proved reserves, discounted using a rate of 10% per year to reflect the estimated timing of the future cash flows. Future income taxes are calculated by comparing discounted future cash flows to the tax basis of oil and gas properties plus available carryforwards and credits and applying the current tax rates to the difference.
Discounted future cash flow estimates like those shown below are not intended to represent estimates of the fair value of oil and gas properties. Estimates of fair value should also consider probable reserves, anticipated future oil and gas prices, interest rates, changes in development and production costs and risks associated with future production. Because of these and other considerations, any estimate of fair value is necessarily subjective and imprecise.
PARKER & PARSLEY PETROLEUM COMPANY
UNAUDITED SUPPLEMENTARY INFORMATION Years ended December 31, 1996, 1995 and 1994
PARKER & PARSLEY PETROLEUM COMPANY
UNAUDITED SUPPLEMENTARY INFORMATION Years ended December 31, 1996, 1995 and 1994
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None
PART III
ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required in response to this item is set forth in the Company's definitive proxy statement for the annual meeting of stockholders to be held in 1997 and is incorporated herein by reference.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION
The information required in response to this item is set forth in the Company's definitive proxy statement for the annual meeting of stockholders to be held in 1997 and is incorporated herein by reference.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required in response to this item is set forth in the Company's definitive proxy statement for the annual meeting of stockholders to be held in 1997 and is incorporated herein by reference.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required in response to this item is set forth in the Company's definitive proxy statement for the annual meeting of stockholders to be held in 1997 and is incorporated herein by reference.
PART IV.
ITEM 14.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
Listing of Financial Statements and Exhibits
Financial Statements
The following consolidated financial statements of the Company are included in "Item 8. Financial Statements and Supplementary Data":
Independent Auditors' Report Consolidated Balance Sheets as of December 31, 1996 and 1995 Consolidated Statements of Operations for the years ended December 31, 1996, 1995 and 1994 Consolidated Statements of Stockholders' Equity for the years ended December 31, 1996, 1995 and 1994 Consolidated Statements of Cash Flows for the years ended December 31, 1996, 1995 and 1994 Notes to Consolidated Financial Statements Unaudited Supplementary Information
All other statements and schedules for which provision is made in the applicable accounting regulations of the Securities and Exchange Commission have been omitted because they are not required under related instructions or are inapplicable, or the information is shown in the financial statements and related notes.
Exhibits
Exhibit Number Description
2.1 - Agreement of Sale and Purchase dated June 6, 1994, between the Company and PG&E Resources Company (incorporated by reference to Exhibit 2.1 to the Company's Current Report on Form 8-K dated June 6, 1994, Commission File No. 1-10695).
2.2 - Offer by Parker & Parsley Petroleum Australia Pty Limited to Acquire all of the Ordinary Shares in Bridge Oil Limited (incorporated by reference to Exhibit 2.2 to the Company's Current Report on Form 8-K dated June 6, 1994, Commission File No. 1-10695).
3.1 - Restated Certificate of Incorporation of the Company (incorporated by reference to Exhibit 3.1 to the Company's Registration Statement on Form S-4 dated December 31, 1990, Registration No. 33-38436).
3.2 - Restated By-laws of the Company (incorporated by reference to Exhibit 3.2 to the Company's Registration Statement on Form S-4 dated December 31, 1990, Registration Statement No. 33-38436).
4.1 - Form of Certificate of Common Stock, par value $.01 per share, of the Company (incorporated by reference to Exhibit 4.2 to the Company's Registration Statement on Form S-4 dated December 31, 1990, Registration No. 33-38436).
4.2 - Rights Agreement of the Company (incorporated by reference to Exhibit 4.1 to the Company's Current Report on Form 8-K dated February 19, 1991, Commission File No. 1-10695).
4.3 - First Amendment to Rights Agreement of the Company, dated as of March 18, 1994 (incorporated by reference to Exhibit 4.4A to the Company's Registration Statement on Form S-3 dated June 24, 1994, Registration No. 33-79920).
4.4 - Certificate of Designations of Series A Convertible Preferred Stock of the Company, dated March 24, 1994 (incorporated by references to Exhibit 4.4B to the Company's Registration Statement on Form S-3 dated June 24, 1994, Registration No. 33-79920).
Exhibit Number Description
-- - Indentures relating to $50,000,000 principal amount of 8-1/2% Convertible Subordinated Debentures due 2005 of Dorchester Master Limited Partnership ($3,762,000 million principal amount of which were outstanding and held by nonaffiliates at December 31, 1996) and $100,000,000 principal amount of 9-1/2% Senior Notes due 2000 of Bridge Oil (U.S.A.) Inc. ($2,063,000 principal amount of which were outstanding at December 31, 1996) have been omitted pursuant to Item 601(b)(4)(iii)(A) of Regulation S-K. The Company hereby agrees to furnish a copy of such indenture to the Securities and Exchange Commission upon request.
-- - Indenture (the "Indenture") relating to $150,000,000 principal amount of 8-7/8% Senior Notes Due 2005 of the Company and to $150,000,000 principal amount of 8-1/4% Senior Notes Due 2007 of the Company (incorporated by reference to Exhibit 4.1 to the Company's Current Report on Form 8-K dated April 12, 1995, Commission File No. 1-10695).
-- - Form of 8-7/8% Senior Notes Due 2005 dated as of April 12, 1995, in the aggregate principal amount of $150,000,000, together with Officers' Certificate dated April 12, 1995, establishing the terms of the 8-7/8% Senior Notes Due 2005 pursuant to the Indenture (incorporated by reference to Exhibit 4.2 to the Company's Quarterly Report on Form 10-Q for the period ended June 30, 1995, Commission File No. 1-10695).
-- - Form of 8-1/4% Senior Notes Due 2007 dated as of August 22, 1995, in the aggregate principal amount of $150,000,000, together with Officers' Certificate dated August 22, 1995, establishing the terms of the 8-1/4% Senior Notes Due 2007 pursuant to the Indenture (incorporated by reference to Exhibit 1.2 to the Company's Current Report on Form 8-K dated August 17, 1995, Commission File No. 1-10695).
10.1+ - Parker & Parsley Petroleum Company Long-term Incentive Plan dated February 19, 1991 (incorporated by reference to Exhibit 4.1 to the Company's Registration Statement on Form S-8, Registration No. 33-38971).
10.2+ - First Amendment to the Parker & Parsley Petroleum Company Long-term Incentive Plan dated August 23, 1991 (incorporated by reference to Exhibit 10.2 to the Company's Registration Statement on Form S-1 dated February 28, 1992, Registration No. 33-46082).
10.3+ - Amended and Restated Indemnification Agreement, dated as of February 15, 1995, between the Company and Scott D. Sheffield, together with a schedule identifying substantially identical agreements between the Company and each of the Company's other directors and Named Executive Officers and setting forth the material details in which those agreements differ from the Amended and Restated Indemnification Agreement filed (incorporated by reference to Exhibit 10.4 to the Company's Annual Report on Form 10-K for the year ended December 31, 1994, Commission File No. 1-10695).
10.4+ - Agreement of Partnership of P&P Employees 89-B Conv., L.P. (formerly P&P Employees 89-B GP), dated October 31, 1989, among Parker & Parsley, Ltd. and the Investor Partners (as defined therein, which includes individuals who are directors and executive officers of the Company), together with a schedule identifying substantially identical documents and setting forth the material details in which those documents differ from the foregoing document (incorporated by reference to Exhibit 10.50 to the Company's Registration Statement on Form S-4 dated December 31, 1990, Registration No. 33-38436).
10.5+ - Amendment to Agreement of Partnership of P&P Employees 89-B GP, dated May 31, 1990, among Parker & Parsley, Ltd. and the Investor Partners (as defined therein, which includes individuals who are directors and executive officers of the Company), together with a schedule identifying substantially identical documents and setting forth the material details in which those documents differ from the foregoing document (incorporated by reference to Exhibit 10.51 to the Company's Registration Statement on Form S-4 dated December 31, 1990, Registration No. 33-38436).
Exhibit Number Description
10.6+ - Schedule identifying additional documents substantially identical to the Amendment to Agreement of Partnership of P&P Employees 89-B GP included as Exhibit 10.5 and setting forth the material details in which those documents differ from that document (incorporated by reference to Exhibit 10.52 to the Company's Registration Statement on Form S-1 dated February 28, 1992, Registration No. 33-46082).
10.7+ - Agreement of Partnership of P&P Employees 90 Spraberry Private Development GP, dated October 16, 1990, among Parker & Parsley, Ltd., James D. Moring, and the General Partners (as defined therein, which includes individuals who are directors and executive officers of the Company), and form of Amendment to Agreement of Partnership of P&P Employees 90 Spraberry Private Development GP, together with a schedule identifying substantially identical documents and setting forth the material details in which those documents differ from the foregoing document (incorporated by reference to Exhibit 10.52 to the Company's Registration Statement on Form S-4 dated December 31, 1990, Registration No. 33-38436).
10.8+ - Amendment to Agreement of Partnership of Parker & Parsley 90-A GP, dated February 19, 1991, among Parker & Parsley Development Company and the Investor Partners (as defined therein, which includes individuals who are directors and executive officers of the Company), together with a schedule identifying substantially identical documents and setting forth the material details in which those documents differ from the foregoing document (incorporated by reference to Exhibit 10.58 to the Company's Registration Statement on Form S-1 dated February 28, 1992, Registration No. 33-46082).
10.9+ - Agreement of Partnership of P&P Employees 91-A, GP, dated September 30, 1991, among Parker & Parsley Development Company, James D. Moring and the General Partners (as defined therein, which includes individuals who are directors and executive officers of the Company), together with a schedule identifying substantially identical documents and setting forth the material details in which those documents differ from the foregoing document (incorporated by reference to Exhibit 10.61 to the Company's Registration Statement on Form S-1 dated February 28, 1992, Registration No. 33-46082).
10.10+ - Development Drilling Program Agreement of Parker & Parsley 91-A Development Drilling Program, dated September 30, 1991, among Parker & Parsley Development Company, the P&P Employee Participants (as defined therein, which includes individuals who are directors and executive officers of the Company), P&P Employees 91-A, GP, and Parker & Parsley 91-A, L.P., together with a schedule identifying substantially identical documents and setting forth the material details in which those documents differ from the foregoing document (incorporated by reference to Exhibit 10.63 to the Company's Registration Statement on Form S-1 dated February 28, 1992, Registration No. 33-46082).
10.11+ - Development Drilling Program Agreement dated August 1, 1989, among Parker & Parsley, Ltd., Parker & Parsley Development Partners L.P., certain key employees of Parker & Parsley, Ltd. (which includes individuals who are directors and executive officers of the Company) and related persons, P&P Employees 89-A GP, Parker & Parsley 89-A GP, and Parker & Parsley 89-A, L.P., together with a schedule identifying substantially identical documents and setting forth the material details in which those documents differ from the foregoing document (incorporated by reference to Exhibit 10.56 to the Company's Registration Statement on Form S-4 dated December 31, 1990, Registration No. 33-38436).
10.12+ - Amendment to Development Drilling Program Agreement, dated February 19, 1991, amending the Development Drilling Program Agreement included as Exhibit 10.11, together with a schedule identifying substantially identical documents and setting forth the material details in which those documents differ from the foregoing document (incorporated by reference to Exhibit 10.66 to the Company's Registration Statement on Form S-1 dated February 28, 1992, Registration No. 33-46082).
10.13+ - Amendment to Agreement of Partnership of P&P Employees 90 Spraberry Private Development GP, dated April 22, 1991, among the Partners (as defined therein, which includes individuals who are directors and executive officers of the Company ) (incorporated by reference to Exhibit 10.67 to the Company's Registration Statement on Form S-1 dated February 28, 1992, Registration No. 33-46082).
Exhibit Number Description
10.14+ - Agreement of Limited Partnership of Parker & Parsley 1992 Direct Investment Program, Ltd., dated as of July 24, 1992, among Parker & Parsley Development Company, as managing general partner, and certain key employees of the Company (including individuals who are directors and executive officers of the Company), as non-managing general partners and limited partners (incorporated by reference to Exhibit 10.57 to the Company's Annual Report on Form 10-K for the year ended December 31, 1993, Commission File No. 1-10695).
10.15+ - Agreement of Limited Partnership of Parker & Parsley 1993 Direct Investment Program, Ltd., dated as of January 1, 1993, among Parker & Parsley Development Company, as managing general partner, and certain key employees of the Company (including individuals who are directors and executive officers of the Company), as non-managing general partners and limited partners (incorporated by reference to Exhibit 10.49 to the Company's Annual Report on Form 10-K for the year ended December 31, 1993, Commission File No. 1-10695).
10.16+ - Agreement of Limited Partnership of Parker & Parsley 1994 Direct Investment Program, Ltd., dated as of January 1, 1994, among Parker & Parsley Development Company, as managing general partner, and certain key employees of the Company (including individuals who are directors and executive officers of the Company), as non-managing general partners and limited partners (incorporated by reference to Exhibit 10.20 to the Company's Annual Report on Form 10-K for the year ended December 31, 1994, Commission File No. 1-10695).
10.17+ - Forms of Stock Acquisition Loan Agreements entered into as of June 15, 1995, between the Company and the officers identified on Schedule I thereto, providing for the Company's loans to such officers of the amounts respectively identified on Schedule I thereto, for the purpose of acquiring the Company's Common Stock, par value $0.01 per share (incorporated by reference to Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q for the period ended June 30, 1995, Commission File No. 1-10695).
10.18+ - Severance Agreement dated as of January 1, 1996 between the Company and Scott D. Sheffield, together with a schedule identifying substantially identical agreements between the Company and each of the other Named Executive Officers identified on Schedule I for the purpose of defining the payment of certain benefits upon the termination of the officer's employment under certain circumstances (incorporated by reference to the Company's Annual Report on Form 10-K for the year ended December 31, 1995, Commission File No. 1-10695).
10.19+ - Omnibus Amendment to Nonstatutory Stock Option Agreements, included as part of the Long-term Incentive Plan, dated as of November 16, 1995, between the Company and Named Executive Officers identified on Schedule I setting forth additional details relating to the Long-term Incentive Plan (incorporated by reference to the Company's Annual Report on Form 10-K for the year ended December 31, 1995, Commission File No. 1-10695).
10.20+ - Parker & Parsley Petroleum Company Annual Bonus Program for Key Employees dated July 13, 1992 (incorporated by reference to Exhibit 4.1 to the Company's Registration Statement on Form S-8, Registration No. 33-49612).
10.21+ - Registration of additional shares under Parker & Parsley Petroleum Company's Long-term Incentive Plan dated April 14, 1992 (incorporated by reference to the Company's Registration Statement on Form S-8, Registration No. 33-47168).
10.22+ - Parker & Parsley Petroleum Company Non-Employee Director Equity Compensation Plan dated May 26, 1994 (incorporated by reference to Exhibit 4.4 to the Company's Registration Statement on Form S-8, Registration No. 33-79480).
Exhibit Number Description
10.23P - Credit Facility Agreement, dated as of July 31, 1996, between Parker & Parsley Petroleum Company as Borrower and NationsBank of Texas, N.A., as Administrative Agent, and CIBC Inc. as Documentation Agent, and Bank of America National Trust and Savings Association, The Chase Manhattan Bank, First Union National Bank of North Carolina, Morgan Guaranty Trust Company of New York and Wells Fargo Bank, N.A., as Co-Agents and the other lenders signatory thereto (incorporated by reference to Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q for the period ended September 30, 1996, Commission File No.1 -10695).
21.1* - Subsidiaries of the registrant.
23.1* - Consent of KPMG Peat Marwick LLP
23.2* - Consent of Netherland, Sewell & Associates, Inc.
- ---------------
* Filed herewith + Executive Compensation Plan or Arrangement previously filed pursuant to Item 14(c). P In accordance with Rule 202 of Regulation S-T, this Exhibit was filed in paper pursuant to a continuing hardship exemption.
Reports on Form 8-K
No current report on Form 8-K was filed by the Company during the fourth quarter of 1996.
Exhibits
The exhibits to this Report required to be filed pursuant to Item 14(c) are listed under "Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K - Listing of Financial Statements and Exhibits - Exhibits" above and in the "Index to Exhibits" attached hereto.
Financial Statement Schedules
No financial statement schedules are required to be filed as part of this Report or are inapplicable.
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.
PARKER & PARSLEY PETROLEUM COMPANY
Date: March 10, 1997 By: /s/ Scott D. Sheffield ---------------------------------- Scott D. Sheffield, President
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
Signature Title Date --------- ----- ----
/s/ Scott D. Sheffield Chairman of the Board, President, March 10, 1997 - --------------------------- Chief Executive Officer and Scott D. Sheffield Director (principal executive officer)
/s/ Mel Fischer Executive Vice President and March 10, 1997 - --------------------------- Director Mel Fischer
/s/ R. Hartwell Gardner Director March 10, 1997 - --------------------------- R. Hartwell Gardner
/s/ James L. Houghton Director March 10, 1997 - --------------------------- James L. Houghton
/s/ Jerry P. Jones Director March 10, 1997 - --------------------------- Jerry P. Jones
/s/ Charles E. Ramsey, Jr. Director March 10, 1997 - --------------------------- Charles E. Ramsey, Jr.
/s/ Arthur L. Smith Director March 10, 1997 - --------------------------- Arthur L. Smith
/s/ Edward O. Vetter Director March 10, 1997 - --------------------------- Edward O. Vetter
/s/ Michael D. Wortley Director March 10, 1997 - --------------------------- Michael D. Wortley
/s/ Steven L. Beal Senior Vice President and March 10, 1997 - --------------------------- Chief Financial Officer Steven L. Beal (principal financial and accounting officer)
INDEX TO EXHIBITS
Exhibit Number Description Page
2.1 - Agreement of Sale and Purchase dated June 6, 1994, between the Company and PG&E Resources Company (incorporated by reference to Exhibit 2.1 to the Company's Current Report on Form 8-K dated June 6, 1994, Commission File No. 1-10695).
2.2 - Offer by Parker & Parsley Petroleum Australia Pty Limited to Acquire all of the Ordinary Shares in Bridge Oil Limited (incorporated by reference to Exhibit 2.2 to the Company's Current Report on Form 8-K dated June 6, 1994, Commission File No. 1-10695).
3.1 - Restated Certificate of Incorporation of the Company (incorporated by reference to Exhibit 3.1 to the Company's Registration Statement on Form S-4 dated December 31, 1990, Registration No. 33-38436).
3.2 - Restated By-laws of the Company (incorporated by reference to Exhibit 3.2 to the Company's Registration Statement on Form S-4 dated December 31, 1990, Registration Statement No. 33-38436).
4.1 - Form of Certificate of Common Stock, par value $.01 per share, of the Company (incorporated by reference to Exhibit 4.2 to the Company's Registration Statement on Form S-4 dated December 31, 1990, Registration No. 33-38436).
4.2 - Rights Agreement of the Company (incorporated by reference to Exhibit 4.1 to the Company's Current Report on Form 8-K dated February 19, 1991, Commission File No. 1-10695).
4.3 - First Amendment to Rights Agreement of the Company, dated as of March 18, 1994 (incorporated by reference to Exhibit 4.4A to the Company's Registration Statement on Form S-3 dated June 24, 1994, Registration No. 33-79920).
4.4 - Certificate of Designations of Series A Convertible Preferred Stock of the Company, dated March 24, 1994 (incorporated by reference to Exhibit 4.4B to the Company's Registration Statement on Form S-3 dated June 24, 1994, Registration No. 33-79920).
-- - Indentures relating to $50,000,000 principal amount of 8-1/2% Convertible Subordinated Debentures due 2005 of Dorchester Master Limited Partnership ($3,762,000 million principal amount of which were outstanding and held by nonaffiliates at December 31, 1996) and $100,000,000 principal amount of 9-1/2% Senior Notes due 2000 of Bridge Oil (U.S.A.) Inc. ($2,063,000 principal amount of which were outstanding at December 31, 1996) have been omitted pursuant to Item 601(b)(4)(iii)(A) of Regulation S-K. The Company hereby agrees to furnish a copy of such indenture to the Securities and Exchange Commission upon request.
-- - Indenture (the "Indenture") relating to $150,000,000 principal amount of 8-7/8% Senior Notes Due 2005 of the Company and to $150,000,000 principal amount of 8-1/4% Senior Notes Due 2007 of the Company (incorporated by reference to Exhibit 4.1 to the Company's Current Report on Form 8-K dated April 12, 1995, Commission File No. 1-10695).
Exhibit Number Description Page
-- - Form of 8-7/8% Senior Notes Due 2005 dated as of April 12, 1995, in the aggregate principal amount of $150,000,000, together with Officers' Certificate dated April 12, 1995, establishing the terms of the 8-7/8% Senior Notes Due 2005 pursuant to the Indenture (incorporated by reference to Exhibit 4.2 to the Company's Quarterly Report on Form 10-Q for the period ended June 30, 1995, Commission File No. 1-10695).
-- - Form of 8-1/4% Senior Notes Due 2007 dated as of August 22, 1995, in the aggregate principal amount of $150,000,000, together with Officers' Certificate dated August 22, 1995, establishing the terms of the 8-1/4% Senior Notes Due 2007 pursuant to the Indenture (incorporated by reference to Exhibit 1.2 to the Company's Current Report on Form 8-K dated August 17, 1995, Commission File No. 1-10695).
10.1+ - Parker & Parsley Petroleum Company Long-term Incentive Plan dated February 19, 1991 (incorporated by reference to Exhibit 4.1 to the Company's Registration Statement on Form S-8, Registration No. 33-38971).
10.2+ - First Amendment to the Parker & Parsley Petroleum Company Long-term Incentive Plan dated August 23, 1991 (incorporated by reference to Exhibit 10.2 to the Company's Registration Statement on Form S-1 dated February 28, 1992, Registration No. 33-46082).
10.3+ - Amended and Restated Indemnification Agreement, dated as of February 15, 1995, between the Company and Scott D. Sheffield, together with a schedule identifying substantially identical agreements between the Company and each of the Company's other directors and Named Executive Officers and setting forth the material details in which those agreements differ from the Amended and Restated Indemnification Agreement filed (incorporated by reference to Exhibit 10.4 to the Company's Annual Report on Form 10-K for the year ended December 31, 1994, Commission File No. 1-10695).
10.4+ - Agreement of Partnership of P&P Employees 89-B Conv., L.P. (formerly P&P Employees 89-B GP), dated October 31, 1989, among Parker & Parsley, Ltd. and the Investor Partners (as defined therein, which includes individuals who are directors and executive officers of the Company), together with a schedule identifying substantially identical documents and setting forth the material details in which those documents differ from the foregoing document (incorporated by reference to Exhibit 10.50 to the Company's Registration Statement on Form S-4 dated December 31, 1990, Registration No. 33-38436).
10.5+ - Amendment to Agreement of Partnership of P&P Employees 89-B GP, dated May 31, 1990, among Parker & Parsley, Ltd. and the Investor Partners (as defined therein, which includes individuals who are directors and executive officers of the Company), together with a schedule identifying substantially identical documents and setting forth the material details in which those documents differ from the foregoing document (incorporated by reference to Exhibit 10.51 to the Company's Registration Statement on Form S-4 dated December 31, 1990, Registration No. 33-38436).
Exhibit Number Description Page
10.6+ - Schedule identifying additional documents substantially identical to the Amendment to Agreement of Partnership of P&P Employees 89-B GP included as Exhibit 10.5 and setting forth the material details in which those documents differ from that document (incorporated by reference to Exhibit 10.52 to the Company's Registration Statement on Form S-1 dated February 28, 1992, Registration No. 33-46082).
10.7+ - Agreement of Partnership of P&P Employees 90 Spraberry Private Development GP, dated October 16, 1990, among Parker & Parsley, Ltd., James D. Moring, and the General Partners (as defined therein, which includes individuals who are directors and executive officers of the Company), and form of Amendment to Agreement of Partnership of P&P Employees 90 Spraberry Private Development GP, together with a schedule identifying substantially identical documents and setting forth the material details in which those documents differ from the foregoing document (incorporated by reference to Exhibit 10.52 to the Company's Registration Statement on Form S-4 dated December 31, 1990, Registration No. 33-38436).
10.8+ - Amendment to Agreement of Partnership of Parker & Parsley 90-A GP, dated February 19, 1991, among Parker & Parsley Development Company and the Investor Partners (as defined therein, which includes individuals who are directors and executive officers of the Company), together with a schedule identifying substantially identical documents and setting forth the material details in which those documents differ from the foregoing document (incorporated by reference to Exhibit 10.58 to the Company's Registration Statement on Form S-1 dated February 28, 1992, Registration No. 33-46082).
10.9+ - Agreement of Partnership of P&P Employees 91-A, GP, dated September 30, 1991, among Parker & Parsley Development Company, James D. Moring and the General Partners (as defined therein, which includes individuals who are directors and executive officers of the Company), together with a schedule identifying substantially identical documents and setting forth the material details in which those documents differ from the foregoing document (incorporated by reference to Exhibit 10.61 to the Company's Registration Statement on Form S-1 dated February 28, 1992, Registration No. 33-46082).
10.10+ - Development Drilling Program Agreement of Parker & Parsley 91-A Development Drilling Program, dated September 30, 1991, among Parker & Parsley Development Company, the P&P Employee Participants (as defined therein, which includes individuals who are directors and executive officers of the Company), P&P Employees 91-A, GP, and Parker & Parsley 91-A, L.P., together with a schedule identifying substantially identical documents and setting forth the material details in which those documents differ from the foregoing document (incorporated by reference to Exhibit 10.63 to the Company's Registration Statement on Form S-1 dated February 28, 1992, Registration No. 33-46082).
Exhibit Number Description Page
10.11+ - Development Drilling Program Agreement dated August 1, 1989, among Parker & Parsley, Ltd., Parker & Parsley Development Partners L.P., certain key employees of Parker & Parsley, Ltd. (which includes individuals who are directors and executive officers of the Company) and related persons, P&P Employees 89-A GP, Parker & Parsley 89-A GP, and Parker & Parsley 89-A, L.P., together with a schedule identifying substantially identical documents and setting forth the material details in which those documents differ from the foregoing document (incorporated by reference to Exhibit 10.56 to the Company's Registration Statement on Form S-4 dated December 31, 1990, Registration No. 33-38436).
10.12+ - Amendment to Development Drilling Program Agreement, dated February 19, 1991, amending the Development Drilling Program Agreement included as Exhibit 10.11, together with a schedule identifying substantially identical documents and setting forth the material details in which those documents differ from the foregoing document (incorporated by reference to Exhibit 10.66 to the Company's Registration Statement on Form S-1 dated February 28, 1992, Registration No. 33-46082).
10.13+ - Amendment to Agreement of Partnership of P&P Employees 90 Spraberry Private Development GP, dated Apri l 22, 1991, among the Partners (as defined therein, which includes individuals who are directors and executive officers of the Company) (incorporated by reference to Exhibit 10.67 to the Company's Registration Statement on Form S-1 dated February 28, 1992, Registration No. 33-46082).
10.14+ - Agreement of Limited Partnership of Parker & Parsley 1992 Direct Investment Program, Ltd., dated as of July 24, 1992, among Parker & Parsley Development Company, as managing general partner, and certain key employees of the Company (including individuals who are directors and executive officers of the Company), as non-managing general partners and limited partners (incorporated by reference to Exhibit 10.57 to the Company's Annual Report on Form 10-K for the year ended December 31, 1993, Commission File No. 1-10695).
10.15+ - Agreement of Limited Partnership of Parker & Parsley 1993 Direct Investment Program, Ltd., dated as of January 1, 1993, among Parker & Parsley Development Company, as managing general partner, and certain key employees of the Company (including individuals who are directors and executive officers of the Company), as non-managing general partners and limited partners (incorporated by reference to Exhibit 10.49 to the Company's Annual Report on Form 10-K for the year ended December 31, 1993, Commission File No. 1-10695).
10.16+ - Agreement of Limited Partnership of Parker & Parsley 1994 Direct Investment Program, Ltd., dated as of January 1, 1994, among Parker & Parsley Development Company, as managing general partner, and certain key employees of the Company (including individuals who are directors and executive officers of the Company), as non-managing general partners and limited partners (incorporated by reference to Exhibit 10.20 to the Company's Annual Report on Form 10-K for the year ended December 31, 1994, Commission File No. 1-10695).
Exhibit Number Description Page
10.17+ - Forms of Stock Acquisition Loan Agreements entered into as of June 15, 1995, between the Company and the officers identified on Schedule I thereto, providing for the Company's loans to such officers of the amounts respectively identified on Schedule I thereto, for the purpose of acquiring the Company's Common Stock, par value $0.01 per share (incorporated by reference to Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q for the period ended June 30, 1995, Commission File No. 1-10695).
10.18+ - Severance Agreement dated as of January 1, 1996 between the Company and Scott D. Sheffield, together with a schedule identifying substantially identical agreements between the Company and each of the other Named Executive Officers identified on Schedule I for the purpose of defining the payment of certain benefits upon the termination of the officer's employment under certain circumstances (incorporated by reference to the Company's Annual Report on Form 10-K for the year ended December 31, 1995, Commission File No. 1-10695).
10.19+ - Omnibus Amendment to Nonstatutory Stock Option Agreements, included as part of the Long-term Incentive Plan, dated as of November 16, 1995, between the Company and Named Executive Officers identified on Schedule I setting forth additional details relating to the Long-term Incentive Plan (incorporated by reference to the Company's Annual Report on Form 10-K for the year ended December 31, 1995, Commission File No. 1-10695).
10.20+ - Parker & Parsley Petroleum Company Annual Bonus Program for Key Employees dated July 13, 1992 (incorporated by reference to Exhibit 4.1 to the Company's Registration Statement on Form S-8, Registration No. 33-49612).
10.21+ - Registration of additional shares under Parker & Parsley Petroleum Company's Long-term Incentive Plan dated April 14, 1992 (incorporated by reference to the Company's Registration Statement on Form S-8, Registration No. 33-47168).
10.22+ - Parker & Parsley Petroleum Company Non-Employee Director Equity Compensation Plan dated May 26, 1994 (incorporated by reference to Exhibit 4.4 to the Company's Registration Statement on Form S-8, Registration No. 33-79480).
10.23P - Credit Facility Agreement, dated as of July 31, 1996, between Parker & Parsley Petroleum Company as Borrower and NationsBank of Texas, N.A., as Administrative Agent, and CIBC Inc. as Documentation Agent, and Bank of America National Trust and Savings Association, The Chase Manhattan Bank, First Union National Bank of North Carolina, Morgan Guaranty Trust Company of New York and Wells Fargo Bank. N.A., as Co-Agents and the other lenders signatory thereto (incorporated by reference to Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q for the period ended September 30, 1996, Commission File No.1 -10695).
Exhibit Number Description Page
21.1* - Subsidiaries of the registrant 73
23.1* - Consent of KPMG Peat Marwick LLP 75
23.2* - Consent of Netherland, Sewell & Associates, Inc. 76
- ---------------
* Filed herewith + Executive Compensation Plan or Arrangement filed herewith pursuant to Item 14(c). P In accordance with Rule 202 of Regulation S-T, this Exhibit was filed in paper pursuant to a continuing hardship exemption.
Reports on Form 8-K
No current report on Form 8-K was filed by the Company during the fourth quarter of 1996.
Exhibits
The exhibits to this Report required to be filed pursuant to Item 14(c) are listed under "Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K - Listing of Financial Statements and Exhibits - Exhibits" above and in the "Index to Exhibits" attached hereto.
Financial Statement Schedules
No financial statement schedules are required to be filed as part of this Report or are inapplicable.