UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
Quarterly Report Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
For the Quarter Ended June 30, 1999 Commission File No. 1-5591
PENNZENERGY COMPANY
(Exact name of registrant as specified in its charter)
Delaware 74-1597290
(State or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification No.)
Pennzoil Place, P.O. Box 4616
Houston, Texas 77210-4616
(Address of principal executive offices)
Registrant's telephone number, including area code: (713) 546-
6000
Indicate by check mark whether the registrant; (1) has filed
all reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to
file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X . No .
Number of shares outstanding of each class of stock, as of
latest practicable date, July 31, 1999:
Common stock, par value $0.83-1/3 per share, 48,004,379
shares.
Preferred stock, par value $1.00 per share, 1,500,000
shares.
2
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
PENNZENERGY COMPANY
CONDENSED CONSOLIDATED STATEMENT OF INCOME
(UNAUDITED)
Three Months Ended Six Months Ended
June 30 June 30
---------------------------- ----------------------------
1999 1998 1999 1998
----------- ----------- ----------- -----------
(Expressed in thousands except per share amounts)
REVENUES
Natural gas sales $ 81,456 $ 93,674 $ 150,884 $ 187,494
Crude oil, condensate and natural gas liquids sales 57,961 55,395 103,846 115,456
Investment and other income, net 55,955 18,794 67,119 37,277
----------- ----------- ----------- -----------
Total revenues $ 195,372 $ 167,863 $ 321,849 $ 340,227
COSTS AND EXPENSES
Operating expense 44,139 52,026 90,782 104,749
General and administrative expense 10,705 7,278 19,676 16,126
Depreciation, depletion and amortization 63,309 54,387 131,450 109,984
Exploration expense 12,803 19,220 25,921 31,895
Taxes, other than income 7,367 7,897 14,268 15,859
Interest charges, net 31,250 40,242 61,811 79,429
----------- ----------- ----------- -----------
INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE INCOME TAX 25,799 (13,187) (22,059) (17,815)
Income tax provision (benefit) 9,939 (7,189) (9,174) (12,165)
----------- ----------- ----------- -----------
INCOME (LOSS) FROM CONTINUING OPERATIONS 15,860 (5,998) (12,885) (5,650)
INCOME FROM DISCONTINUED OPERATIONS, NET OF TAX - 14,826 - 24,137
----------- ----------- ----------- -----------
NET INCOME (LOSS) 15,860 8,828 (12,885) 18,487
Preferred stock dividends 2,434 757 4,868 757
----------- ----------- ----------- -----------
NET INCOME (LOSS) AVAILABLE TO
COMMON SHAREHOLDERS $ 13,426 $ 8,071 $ (17,753) $ 17,730
=========== =========== =========== ===========
BASIC AND DILUTED INCOME (LOSS) PER SHARE
Continuing operations $ 0.28 $ (0.14) $ (0.37) $ (0.13)
Discontinued operations $ - $ 0.31 $ - $ 0.50
----------- ----------- ----------- -----------
TOTAL BASIC AND DILUTED INCOME (LOSS) PER SHARE $ 0.28 $ 0.17 $ (0.37) $ 0.37
=========== =========== =========== ===========
AVERAGE SHARES OUTSTANDING
Basic 47,958 47,695 47,923 47,643
=========== =========== =========== ===========
Diluted 48,078 47,695 47,923 47,643
=========== =========== =========== ===========
END OF PERIOD SHARES OUTSTANDING 47,990 47,727 47,990 47,727
=========== =========== =========== ===========
DIVIDENDS PER COMMON SHARE $ 0.0625 $ 0.25 $ 0.1250 $ 0.50
=========== =========== =========== ===========
<FN>
<F1>
See Notes to Condensed Consolidated Financial Statements.
</FN>
3
PART I. FINANCIAL INFORMATION - continued
PENNZENERGY COMPANY
CONDENSED CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
(UNAUDITED)
Three Months Ended Six Months Ended
June 30 June 30
---------------------- ------------------------
1999 1998 1999 1998
---------- ---------- ----------- -----------
(Expressed in thousands)
NET INCOME (LOSS) $ 15,860 $ 8,828 $ (12,885) $ 18,487
Unrealized gains on marketable securities, net of tax 28,653 (1,902) 55,037 (1,501)
Foreign currency translation adjustment and other (133) (2,142) (252) (3,017)
---------- --------- ----------- -----------
28,520 (4,044) 54,785 (4,518)
---------- --------- ----------- -----------
COMPREHENSIVE INCOME $ 44,380 $ 4,784 $ 41,900 $ 13,969
========== ========= =========== ===========
<FN>
<F1>
See Notes to Condensed Consolidated Financial Statements.
</FN>
4
PART I. FINANCIAL INFORMATION - continued
PENNZENERGY COMPANY
CONDENSED CONSOLIDATED BALANCE SHEET
(UNAUDITED)
June 30, December 31,
1999 1998
------------- -------------
(Expressed in thousands)
ASSETS
Current assets
Cash and cash equivalents $ 11,980 $ 20,439
Receivables 83,795 71,553
Crude oil and natural gas inventories 3,583 4,818
Materials and supplies 12,869 12,354
Deferred income tax 10,300 10,300
Other current assets 6,385 8,955
------------- -------------
Total current assets 128,912 128,419
Property, plant and equipment, net 1,616,916 1,658,734
Marketable securities and other investments 684,598 598,462
Other assets 23,680 31,471
------------- -------------
TOTAL ASSETS $ 2,454,106 $ 2,417,086
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Accounts payable and accrued liabilities $ 95,046 $ 127,495
Interest accrued 24,738 26,093
Other current liabilities 25,383 24,889
------------- -------------
Total current liabilities 145,167 178,477
------------- -------------
Long-term debt
Exchangeable debentures 740,361 739,258
Other long-term debt 822,652 797,951
------------- -------------
Total long-term debt 1,563,013 1,537,209
------------- -------------
Deferred income tax 187,257 167,253
Other liabilities 94,881 99,362
------------- -------------
TOTAL LIABILITIES 1,990,318 1,982,301
------------- -------------
COMMITMENTS AND CONTINGENCIES
MINORITY INTEREST 38,399 43,696
SHAREHOLDERS' EQUITY 425,389 391,089
------------- -------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 2,454,106 $ 2,417,086
============= =============
<FN>
<F1>
See Notes to Condensed Consolidated Financial Statements.
</FN>
5
PART I. FINANCIAL INFORMATION - continued
PENNZENERGY COMPANY
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
Six Months Ended June 30
---------------------------------
1999 1998
----------- -----------
(Expressed in thousands)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $ (12,885) $ 18,487
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Depreciation, depletion and amortization 131,450 109,984
Dry holes and impairments 3,146 12,353
Deferred income tax (9,140) (7,114)
Income from discontinued operations, net of tax - (24,137)
Gain on sales of assets (52,247) (4,296)
Other non-cash items 3,945 8,071
Changes in operating assets and liabilities (45,764) (66,054)
----------- -----------
Net cash provided by operating activities 18,505 47,294
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures (92,378) (246,696)
Purchases of marketable securities and other
investments, net (140) (1,706)
Proceeds from sales of assets 57,994 34,954
Other investing activities 1,495 (20,627)
----------- -----------
Net cash used in investing activities (33,029) (234,075)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Issuance of notes payable, net 24,516 82,342
Debt repayments - (818,000)
Proceeds from issuance of debt - 790,000
Proceeds from issuance of Preferred Stock - 147,000
Dividends paid (13,293) (23,828)
Other financing activities (5,158) 5,192
----------- -----------
Net cash provided by financing activities 6,065 182,706
----------- -----------
NET CASH PROVIDED BY DISCONTINUED OPERATIONS - 7,422
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (8,459) 3,347
CASH AND CASH EQUIVALENTS, beginning of period 20,439 9,462
----------- -----------
CASH AND CASH EQUIVALENTS, end of period $ 11,980 $ 12,809
=========== ===========
<FN>
<F1>
See Notes to Condensed Consolidated Financial Statements.
</FN>
6
PART I. FINANCIAL INFORMATION - continued
PENNZENERGY COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(1) General -
The condensed consolidated financial statements included
herein have been prepared by PennzEnergy Company ("PennzEnergy")
without audit and should be read in conjunction with the
financial statements and the notes thereto included in
PennzEnergy's latest annual report. The foregoing financial
statements include only normal recurring accruals and all
adjustments which PennzEnergy considers necessary for a fair
presentation. Certain prior period items have been reclassified
in the condensed consolidated financial statements in order to
conform with the current year presentation.
(2) Discontinued Operations -
On December 30, 1998, PennzEnergy, formerly named Pennzoil
Company, distributed to its shareholders (the "Spin-off") 47.8
million shares of common stock of its wholly owned subsidiary
Pennzoil-Quaker State Company ("Pennzoil-Quaker State"),
representing all of the shares of Pennzoil-Quaker State owned by
PennzEnergy.
Accordingly, Pennzoil-Quaker State's results of operations
are shown net of tax as discontinued operations in PennzEnergy's
condensed consolidated statement of income for periods presented
prior to the Spin-off. After-tax income from discontinued
operations, taxes on income from discontinued operations, and
revenues related to discontinued operations for the quarter ended
June 30, 1998 were $ 14.8 million, $10.3 million and $464.6
million, respectively. For the six months ended June 30, 1998,
after-tax income from discontinued operations, taxes on income
from discontinued operations, and revenues related to
discontinued operations were $24.1 million, $17.5 million, and
$838.1 million, respectively.
(3) New Accounting Standards -
In March 1998, the American Institute of Certified Public
Accountants issued Statement of Position ("SOP") No. 98-1,
"Accounting for the Costs of Computer Software Developed or
Obtained for Internal Use." The adoption of SOP No. 98-1 on
January 1, 1999 did not have a material impact on PennzEnergy's
results of operations.
In June 1998, the Financial Accounting Standards Board
("FASB") issued Statement of Financial Accounting Standards
("SFAS") No. 133, "Accounting for Derivative Instruments and
Hedging Activities." SFAS No. 133 establishes accounting and
reporting standards requiring that every derivative instrument be
recorded in the balance sheet as either an asset or liability
measured at its fair value. Changes in fair value must be
recognized currently in earnings unless specific hedge accounting
criteria are met. Accounting for qualifying hedges allows
derivative gains and losses to offset related results on the
hedged item in the income statement, and requires a company to
formally document, designate, and assess the effectiveness of
transactions that receive hedge accounting. SFAS No. 133 is
currently expected to be effective for fiscal years beginning
after June 15, 2000 and early adoption is permitted. The effect
of adopting SFAS No. 133 has not been determined, but is not
expected to have a material impact on PennzEnergy's financial
position or results of operations.
(4) Proposed Merger with Devon Energy Corporation -
On May 19, 1999, PennzEnergy entered into an Amended and
Restated Agreement and Plan of Merger (the "Merger Agreement")
with Devon Energy Corporation ("Devon"). Under the terms of the
Merger Agreement, PennzEnergy and Devon will engage in a business
combination transaction in which PennzEnergy will merge into a
"new" Devon Energy Corporation ("New Devon"), incorporated in
Delaware, and Devon will become a wholly owned subsidiary of New
7
PART I. FINANCIAL INFORMATION - continued
Devon. As a result of the transaction, each share of Devon
common stock will be converted into one share of common stock of
New Devon and each share of PennzEnergy common stock will be
converted into 0.4475 shares of common stock of New Devon.
PennzEnergy shareholders will own approximately 31 percent of the
combined company and Devon shareholders will own approximately 69
percent. The percentages will be reduced if New Devon completes
a planned public offering of $300 million to $500 million of
newly issued shares of New Devon common stock.
The transaction is subject to approval by majority vote of
the outstanding shares of both companies and other customary
closing conditions. PennzEnergy has received notice of the early
termination of the Hart-Scott-Rodino waiting period. The merger
is currently expected to be consumated during the third quarter
of 1999.
(5) Debt -
PennzEnergy has two series of exchangeable debentures. Each
4.90% Debenture and 4.95% Debenture is exchangeable into 9.3283
shares of Chevron Corporation ("Chevron") common stock, matures
on August 15, 2008 and is not callable until August 15, 2000. The
4.90% Debentures and the 4.95% Debentures are exchangeable at the
option of the holders at any time prior to maturity, unless
previously redeemed, for shares of Chevron common stock. In lieu
of delivering Chevron common stock, PennzEnergy may, at its
option, pay to any holder an amount in cash equal to the market
value of the underlying Chevron common stock to satisfy the
exchange request. Changes in the fair value of the 4.90%
Debentures and the 4.95% Debentures associated with fluctuations
in the price of Chevron common stock will be recorded in income
if and when the market value of the underlying Chevron common
stock exceeds $107.20 per share.
PennzEnergy's $200 million of 9.625% Debentures due November
1999 and $24.5 million borrowed under variable-rate credit
arrangements are classified as long-term debt based upon
availability of committed long-term credit facilities to
refinance such amounts and PennzEnergy's intent to maintain such
commitments in excess of one year.
(6) Earnings Per Share -
Earnings per share computations to reconcile basic and
diluted income (loss) from continuing operations consist of the
following:
Three Months Ended Six Months Ended
June 30 June 30
---------------------- ------------------------
1999 1998 1999 1998
---------- ---------- ----------- -----------
(Expressed in thousands except per share amounts)
Income (loss) from continuing operations $ 15,860 $ (5,998) $ (12,885) $ (5,650)
Less: Preferred stock dividends 2,434 757 4,868 757
---------- ---------- ----------- -----------
Income (loss) from continuing operations available to
common shareholders $ 13,426 $ (6,755) $ (17,753) $ (6,407)
========== ========== =========== ===========
Basic weighted average shares outstanding 47,958 47,695 47,923 47,643
Effect of dilutive securities (1):
Options - - - -
Awards 120 - - -
---------- ---------- ----------- -----------
Diluted weighted average shares outstanding 48,078 47,695 47,923 47,643
========== ========== =========== ===========
Income (loss) per share from continuing operations:
Basic $ 0.28 $ (0.14) $ (0.37) $ (0.13)
========== ========== =========== ===========
Diluted $ 0.28 $ (0.14) $ (0.37) $ (0.13)
========== ========== =========== ===========
8
PART I. FINANCIAL INFORMATION - continued
<FN>
<F1> A weighted average number of options to purchase 4,657,108
shares of common stock were outstanding for the three months
ended June 30, 1999 but were not included in the computation
of diluted income per share because the options' exercise
prices were greater than the average market price of the
common shares. A weighted average number of options to
purchase 3,542,744 shares of common stock and awards of
147,422 shares of common stock were outstanding for the
three months ended June 30, 1998 but were not included in
the computation of diluted loss per share because these
options and awards would result in an antidilutive per share
amount. A weighted average number of options to purchase
4,653,413 and 3,575,784 shares of common stock and awards of
122,166 and 147,612 shares of common stock were outstanding
for the six months ended June 30, 1999 and 1998,
respectively, but were not included in the computation of
diluted loss per share because these options and awards
would result in an antidilutive per share amount.
</FN>
(7) Acquisitions and Divestitures -
On June 30, 1999 PennzEnergy sold approximately 38,200 acres
of land, timber, and mineral rights located in Pennsylvania and
New York to Seneca Resources Corporation, Highland Land and
Minerals, Inc. and Patterson Lumber Company, Inc. and received
cash proceeds of $49.5 million. These sales resulted in an after-
tax gain of $29.8 million. Additional cash proceeds of $3.9
million from additional sales of land and timber were received in
July 1999 resulting in an after-tax gain of $2.3 million.
(8) Related Party Transactions -
As a result of the Spin-off, PennzEnergy and Pennzoil-Quaker
State have an arrangement to share certain corporate
administrative services for a period of up to one year after the
date of the Spin-off. Fees are paid based upon actual costs of
providing these services.
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
Results of Operations
PennzEnergy reported net income of $15.9 million for the
second quarter of 1999 and a net loss of $12.9 million, for the
six months ended June 30, 1999, compared to net income of $8.8
million and $18.5 million, respectively for the quarter and six
months ended June 30, 1998. After preferred dividends, basic
earnings per share for the second quarter and six months ended
June 30, 1999 were $.28 per share and a loss of $.37 per share,
respectively. Basic earnings per share for the quarter and six
months ended June 30, 1998 were $.17 per share and $.37 per
share, respectively, and included $14.8 million, or $.31 per
share and $24.1 million, or $.50 per share, respectively, of
income from discontinued operations. Reference is made to Note 2
of Notes to Condensed Consolidated Financial Statements.
Excluding discontinued operations, the increase in pretax
income for the quarter ended June 30, 1999 compared to the same
period in 1998 is primarily due to a gain on the sale of assets,
higher realized liquids prices and lower interest expense which
were partially offset by lower dividend income, higher
depreciation, depletion and amortization ("DD&A") rates, lower
production volumes and lower realized gas prices. The decrease
in pretax income for the six months ended June 30, 1999 compared
to the same period in 1998 is primarily due to lower realized gas
and liquids prices, lower production volumes, higher DD&A rates
and lower dividend income which were partially offset by a gain
on the sale of assets and lower interest expense.
9
PART I. FINANCIAL INFORMATION - continued
Natural gas price realizations averaged $1.99 per thousand
cubic feet ("Mcf") and $1.83 per Mcf, respectively, for the
quarter and six months ended June 30, 1999, compared to $2.12 per
Mcf and $2.09 per Mcf, respectively, for the same periods in
1998. Liquids price realizations averaged $13.31 per barrel and
$11.32 per barrel for the quarter and six months ended June 30,
1999, compared to $11.00 per barrel and $11.70 per barrel,
respectively, for the same periods in 1998. Natural gas volumes
produced for sale were 446.9 million cubic feet ("MMcf") per day
and 453.3 MMcf per day, respectively, for the quarter and six
months ended June 30, 1999, compared to 481.8 MMcf per day and
490.6 MMcf per day, respectively, for the same periods in 1998.
Liquids production volumes were 47.8 thousand barrels ("Mbbls")
per day and 50.7 Mbbls per day, respectively, for the quarter and
six months ended June 30, 1999, compared to 55.3 Mbbls per day
and 54.5 Mbbls per day, respectively, for the same periods in
1998.
The decrease in production volumes for the quarter and six
months ended June 30, 1999 compared to the same periods in 1998
is primarily due to production declines offshore at West Cameron
580. On a barrel of oil equivalent ("boe") basis, production
declined from 135,600 boe per day and 136,300 boe per day for the
second quarter and six months ended June 30, 1998, respectively,
to 122,300 boe per day and 126,200 boe per day for the second
quarter and six months ended June 30, 1999, respectively.
On June 30, 1999, PennzEnergy sold approximately 36,300
acres of land, timber and mineral rights located in Pennsylvania
and New York to Seneca Resources Corporation and Highland Land
and Minerals, Inc. and received proceeds of $47.5 million. Also
in June, PennzEnergy sold approximately 1,900 acres of land and
timber located in Pennsylvania to Patterson Lumber Company, Inc.,
and received cash proceeds of $2.0 million. These sales resulted
in an after-tax gain of $29.8 million. Additional proceeds from
sales of land and timber were received in July 1999 totaling
approximately $3.9 million. These July sales resulted in an after-
tax gain of $2.3 million.
Operating costs, including corporate overhead, averaged
$5.59 per boe and $5.46 per boe for the quarter and six months
ended June 30, 1999 compared to $5.44 per boe and $5.54 per boe
for the quarter and six months ended June 30, 1998. Total
operating and general and administrative expenses were $5.0
million lower in the second quarter of 1999 than in the second
quarter of 1998, and $12.0 million lower for the six months ended
June 30, 1999 as compared to the same period last year. The
reductions in each of these periods were primarily due to lower
offshore workover and platform repair expenses.
DD&A rates increased from $4.41 per boe and $4.46 per boe,
respectively, for the quarter and six months ended June 30, 1998
to $5.69 per boe and $5.75 per boe, respectively, for the same
periods in 1999. These increases were primarily due to negative
oil and gas proved reserve revisions at year-end 1998.
Capital expenditures for the second quarter of 1999 were $41
million, $89 million below the second quarter of 1998. For the
six months ended June 30, 1999, capital expenditures totaled $92
million, $154 million below the same period in 1998. The
decrease in capital expenditures during 1999 was primarily a
result of lower domestic offshore and international spending in
response to lower commodity prices.
Onshore domestically, PennzEnergy is currently focused on
accelerating exploration and development of its assets in south
Louisiana, south Texas and the Raton Basin while working to
preserve capital and reduce overall risk. At the same time
PennzEnergy is emphasizing low-cost, low-risk production and
reserves enhancement on its developed properties.
In south Louisiana at the Patterson and Redfish Point
fields, production began on two successful exploration wells
completed in the second quarter of 1999. Production from the
Patterson exploration well was temporarily interrupted due to
mechanical problems while producing 15.0 gross MMcf per day, but
is currently back on line unloading 5.2 gross MMcf per day and 70
gross barrels of condensate per day. The recently drilled
Redfish Point well continues to produce 3.3 gross MMcf per day
and 850 gross barrels of condensate per day. PennzEnergy holds a
50% working interest in each of these wells. A third exploratory
well, funded 100% by a third party and drilled in Plaquemines
10
PART I. FINANCIAL INFORMATION - continued
Parish, resulted in a dry hole. An additional exploration well
at the Patterson field was spudded in August 1999. Acquisition
of 3-D seismic is nearing completion on PennzEnergy's Quarantine
Bay field area with delivery expected in the fourth quarter of
1999. Recent seismic trades and acquisitions will increase
PennzEnergy's total 3-D seismic database in south Louisiana to
574 square miles.
In south Texas, PennzEnergy is currently drilling a new
fault block on its Haynes lease in Zapata County, upthrown to the
new Haynes JRS field, established in 1998. Exploration wildcats
are also underway in Refugio and Zapata Counties. In the central
Texas Wilcox Trend, 3-D seismic is currently being shot and will
be delivered later this year covering PennzEnergy's 23,000 acre
Ray Ranch area in Bee, Goliad and Karnes counties.
In the Carthage-Bethany area of northeast Texas, PennzEnergy
is currently operating a three-rig drilling program. PennzEnergy
spudded 11 development wells during the first quarter of 1999 and
another 11 during the second quarter. An additional 13
development wells are scheduled for the remainder of the year.
All of the wells drilled in this area during the first six months
of 1999 have been successful.
On March 22, 1999, PennzEnergy announced a joint venture with
Sonat Exploration, Inc. ("Sonat") to develop the mineral
interests underlying the Vermejo Park Ranch in the Raton Basin of
northeast New Mexico and southern Colorado. PennzEnergy will
initially hold a 25% working interest in the joint venture but
will increase its working interest to 50% as the project
progresses. PennzEnergy will also retain a 25% royalty interest.
Sonat will bear all pipeline-related capital expenditures and
will pay up to $10 million to PennzEnergy in progress bonuses.
The joint venture will initially be operated by Sonat with
PennzEnergy taking over operations as its working interest
increases. PennzEnergy and Sonat expect to drill a minimum of 35
wells in 1999, eight of which were spudded in the second quarter.
The joint venture currently expects to drill a minimum of 80
wells in 2000 and 150 wells per year thereafter, until the
project is complete. Initial pipeline construction is scheduled
for completion in the third quarter of 1999. The coal bed
methane reserve potential on PennzEnergy's acreage is estimated
to be at least one trillion cubic feet of recoverable gas
reserves. Initial production is expected to begin in late August
and increase to a 1999 exit rate of approximately 5.0 gross MMcf
per day, restricted by third party pipeline and processing
constraints. PennzEnergy currently holds a before payout working
interest of 25% with a 42.75% net revenue interest.
Offshore domestically, PennzEnergy is working to lower
overall capital costs and operating expenses. PennzEnergy also
plans to remain active in offshore lease sales and acquiring
seismic data in order to build an inventory of prospects for the
future.
PennzEnergy has started development of the Garden Banks 161
discovery as a two-well subsea facility in 972 feet of water.
PennzEnergy holds a 35% working interest and is operator of the
block. Production is expected in the fourth quarter of 1999. A
third party will fund a portion of PennzEnergy's share of the
development expenses. A Minerals Management Service decision on
a royalty relief application is pending.
At Ship Shoal 198, Halliburton Energy Services funded and
drilled one new well and recompleted three existing wells under a
production development agreement with PennzEnergy. The current
incremental gas rate associated with this program is 19 net MMcf
per day.
Drilling operations have been completed on the Shell-
operated Garden Banks 127/128 Enchilada/Chimichanga field. Both
the A-8 and A-9 wells were successfully completed in 1999 and are
currently testing at gross rates of 4.2 MMcf per day and 19.8
MMcf per day, respectively. Total gross production from the
field is currently 90.3 MMcf per day and 3,500 barrels of liquids
per day. PennzEnergy holds a 20% working interest in this
subsalt field in 670 feet of water.
PennzEnergy is continuing development at the West Cameron
580 field with the drilling of the A-4 well. The projected total
depth of this well was reached in early August. The well should
be completed and on production by October 1. Expected initial
11
PART I. FINANCIAL INFORMATION - continued
production is estimated at 30 gross MMcf per day. PennzEnergy
currently holds an 80% working interest.
PennzEnergy recently completed the drilling of the West
Cameron 533 A-10 well. This well was completed in a 600 foot
horizontal section in the 1,500 foot sand and is currently
producing 13 net MMcf per day. The success of this horizontal
well has led to additional opportunities in the West Cameron
533/534 area and additional drilling is being planned for the
fourth quarter of 1999.
Internationally, in May, PennzEnergy (30% working interest)
was named as operator of Block BSeal 4 in the Sergipe-Alagoas
Basin offshore Brazil. PennzEnergy began a 380 square kilometer 3-
D seismic acquisition program in July in preparation to drill a
commitment exploratory well in 2000.
In Egypt, the development plan for North July field (100%
working interest) was submitted to the Egyptian General Petroleum
Corporation ("EGPC") in June and approved in July 1999. The
joint operating company, Fanar Petroleum Company ("Fanpetco"),
consisting of PennzEnergy and EGPC was formed in July. A
platform usage agreement was signed with BP/Amoco in July to
route the production from North July field through their
facilities on the "July 10" platform. On the West Beni Suef
concession, PennzEnergy is continuing its seismic acquisition
program with the first exploratory well planned for early 2000.
PennzEnergy relinquished its interest in the West Feiran
concession, which resulted in an impairment charge of $1.7
million in the second quarter of 1999.
Offshore Qatar, PennzEnergy (75% working interest) completed
the acquisition of 200 square kilometers of 3-D seismic on the
Block 8 concession in April. The seismic data will be
interpreted this year and a commitment exploratory well is
planned for 2000.
In the second quarter, PennzEnergy drilled five appraisal
wells in Lake Maracaibo, Venezuela. Two of the wells were in
block B2X-70/80 (45% working interest) and three wells were on
block B2X-68/79 (54% working interest). Each of the wells
encountered the primary B2X formation as anticipated and two of
the wells tested deeper sections with unsatisfactory results.
Two additional appraisal wells were drilled in July, with all the
appraisal wells on production by the end of the third quarter.
At the end of the second quarter, net production in Venezuela
averaged 3,000 barrels of oil per day.
The Azerbaijan International Operating Company ("AIOC"), in
which PennzEnergy has a 4.8% carried interest, exported an
average of 84,000 barrels of oil per day for the second quarter.
Daily oil production at Azeri-Chirag-Gunashli ("ACG") field
averaged 92,000 barrels per day for the quarter. Oil production
is expected to average approximately 100,000 barrels per day for
the rest of 1999, limited by the lack of facilities to evacuate
all of the gas produced at ACG. PennzEnergy received $1.3
million in additional net payment for reimbursement of past costs
associated with a gas utilization project for the Gunashli field
in the second quarter. These proceeds were recorded as a gain on
sale.
Other
PennzEnergy's investment and other income, net for the
quarter and six months ended June 30, 1999 includes dividend
income of $4.3 million and $8.6 million, respectively, from its
investment in Chevron common stock compared to $10.9 million and
$21.8 million, respectively, for the quarter and six months ended
June 30, 1998. In 1998, PennzEnergy sold or exchanged
approximately 10.7 million shares of Chevron common stock in
conjunction with an exchange offer for its exchangeable
debentures.
Net interest expense for the quarter and six months ended
June 30, 1999 totaled $31.3 million and $61.8 million,
respectively, compared to $40.2 million and $79.4 million,
respectively, for the same periods in 1998. The decrease in
interest expense was primarily due to the reduction of debt
associated with the early extinguishment of 6.5% and 4.75%
exchangeable debentures and the spin-off of Pennzoil-Quaker State
in 1998.
12
PART I. FINANCIAL INFORMATION - continued
Capital Resources and Liquidity
Cash Flow. As of June 30, 1999, PennzEnergy had cash and
cash equivalents of $12.0 million. During the six months ended
June 30, 1999, cash and cash equivalents decreased $8.5 million.
PennzEnergy's cash flow from operations before changes in
operating assets and liabilities and cash exploration expense
totaled $87.0 million for the six months ended June 30, 1999,
compared to $132.9 million for the six months ended June 30,
1998.
Debt Instruments and Repayments. Borrowings under
PennzEnergy's variable-rate credit arrangements totaled $24.5
million as of June 30, 1999, all of which has been classified as
long-term debt along with $200 million of 9.625% Debentures due
November 1999 based upon the availability of committed long-term
credit facilities to refinance such amounts and PennzEnergy's
intent to maintain such commitments in excess of one year.
PennzEnergy had no outstanding borrowings under its $500 million
committed revolving credit facility at June 30, 1999. The
revolving credit facility contains covenants relating to liens,
sales of assets and mergers and consolidations, subsidiary
indebtedness, acquisitions and leverage. PennzEnergy is
currently in compliance with these covenants in its revolving
credit facility.
Derivative Instruments. During April 1999, PennzEnergy
entered into swaps to hedge 18,000 barrels of crude oil per day
for May and June 1999 at an average of $17.26 per barrel and
$17.15 per barrel, respectively. In addition, PennzEnergy
entered into swaps to hedge approximately 165 MMcf of natural gas
per day for May and June 1999 at an average of $2.21 per Mcf and
$2.25 per Mcf, respectively. PennzEnergy also entered into
collar transactions for 19 MMcf per day of natural gas for May
and June 1999. The collar transactions fixed a minimum natural
gas price of $2.16 per Mcf for the two month period and a maximum
price of $2.30 per Mcf and $2.38 per Mcf for May and June 1999,
respectively. As a result of these transactions, PennzEnergy's
revenues were reduced by $1.8 million in the second quarter of
1999. PennzEnergy does not currently have any of its future oil
and gas production hedged. PennzEnergy did not hedge any of its
crude oil or natural gas production in the first quarter of 1999.
Year 2000
PennzEnergy has completed a review of its key computer
systems and identified a number of systems that would be affected
by the year 2000 compliance issue. PennzEnergy is undertaking or
has completed conversions or upgrades of these non-compliant
financial, operating, human resources, payroll and seismic data
systems. The only conversions and upgrades remaining are for a
division order report, a petroleum reserves data extract program,
and a billing system for a retail gas operation, which are
targeted for completion by the first of October 1999 or sooner,
after compliant upgrades are received from the vendors. A vendor-
supplied seismic dataset containing land and contract information
will be converted from a two-digit to a four-digit year when the
dataset is available as a four-digit year from the vendor, now
scheduled for November 1999. Validation testing of financial
support systems such as tax reporting and reconciliation systems
will be completed by the end of August 1999. Upgrades and
standardization to network, infrastructure, desktop and
communications systems to make these assets compliant were
completed in the second quarter of 1999 following the release of
compliant updates from the vendors. International as well as
domestic sites were included in these assessments. The
assessment and remediation of specialized hardware and software
unique to an international location was completed by the end of
the second quarter of 1999 for all locations with the exception
of a drilling information system for one country. An upgrade to
this system was deferred until November 1999 due to scheduled
operational activity. The only system replacements that have
been accelerated to remedy non-compliance are some of the
PennzEnergy voicemail systems and security systems. No major
information technology ("IT") projects have been deferred due to
year 2000 compliance issues. The validation phase that consists
of testing mission-critical and significant systems was
13
PART I. FINANCIAL INFORMATION - continued
essentially completed by June 1999, with the exception of the
geoscience systems, the retail gas billing system, and financial
support systems mentioned above. Contingency planning started
for the IT systems during the first quarter of 1999 and includes
backup, standby and storage service solutions to reduce the
impact of critical service providers.
PennzEnergy also completed a comprehensive inventory,
assessment, and renovation of systems and devices with embedded
chips in the exploration, production and non-production
facilities. The exploration and production facilities consist of
offshore platforms, onshore installations, gas plants, regional
pipelines and a natural gas retail distribution operation. These
facilities, which include the processing, storage, and movement
of oil and natural gas, have the greatest inherent risk of
production curtailment since embedded chip systems control and
monitor these processes. Several of PennzEnergy's onshore
exploration and production facilities had non-compliant metering
and control equipment. These deficiencies have been addressed by
upgrading or replacing the non-compliant portion of mission-
critical equipment. This effort was completed by the end of July
1999. Non mission-critical production equipment that may have
non-compliant components is being replaced with compliant
components during normal maintenance and repair outages that
occur through 1999. If, for any reason, these systems do not
receive maintenance prior to the millennium or are still found to
be non-compliant after the millennium, they will be operated in a
manual mode until further renovation and testing is completed.
In addition, all currently compliant control systems that have
potential for environmental, safety, or business interruption
impact will be tested during scheduled maintenance. The majority
of this type of production equipment is used to monitor and
control production only. Nevertheless, operation of these
systems would still be reduced or discontinued if a component is
found to be non-compliant in order to prevent safety and
environmental problems. Contingency planning is also underway to
provide alternatives in the event these systems are partially or
completely inoperable. Spare components are being tested to
ensure compliant systems remain compliant through the maintenance
process.
PennzEnergy has contacted and continues to monitor key
suppliers, banks, customers and other unaffiliated companies that
have business relationships with PennzEnergy to assess their year
2000 compliance programs. PennzEnergy could be adversely
affected by the failure of these unaffiliated companies to
adequately address the year 2000 issue. This assessment includes
activities such as face-to-face meetings, reviews of year 2000
readiness and co-operative testing. Contingency planning will be
included in this assessment to identify arrangements to mitigate
the impact of disruptions from outside sources. This process is
targeted for completion by the end of September 1999. In
addition, PennzEnergy has implemented internal procedures to
respond cooperatively to inquiries from regulatory agencies and
other businesses about its year 2000 program.
As with most companies, PennzEnergy anticipates more issues
arising from international business partners, especially in the
banking, utility, shipping and governmental segments. PennzEnergy
has reviewed all banking relationships in international
locations. In addition, PennzEnergy is actively involved in a
joint industry effort through the American Petroleum Institute to
collectively address the readiness of their common business
partners such as utilities and governmental agencies, and to
share approaches to solving the specific problems of each
international location.
If these steps are not completed successfully in a timely
manner, PennzEnergy's operations and financial performance could
be adversely affected through disruptions in operations. Costs
associated with such disruptions currently cannot be estimated.
Both incremental historical and estimated future costs
related to the year 2000 issue are not expected to be material to
the financial results of PennzEnergy for several reasons. Most
of the renovation is being accomplished with upgrades to existing
software that is under maintenance contracts. The implementation
of the major IT systems was not accelerated to remedy year 2000
problems. Independent quality assurance services and tools are
being used to assure the reliability of the assessment and costs.
14
PART I. FINANCIAL INFORMATION - continued
These services will be supplemented with PennzEnergy resources.
Costs for all year 2000 activities are estimated to be less than
$5 million. This estimate does not include PennzEnergy's
potential share of year 2000 costs that may be incurred by
partnerships and joint ventures in which the company participates
but is not the operator.
PennzEnergy's existing contingency plan will be modified to
address year 2000 issues by August 1999. It will be re-evaluated
in the fourth quarter of 1999, using the latest information
available for infrastructure services such as utilities.
Adjustments to this plan will be made based on this information.
PennzEnergy's year 2000 program was essentially completed by
July 31, 1999, with the exception of the geoscience systems, the
retail gas billing system, the validation of the financial
support systems, the land and contract data conversion, and
contingency planning. Readers are cautioned that forward-looking
statements contained in this year 2000 update should be read in
conjunction with the company's disclosures under the heading:
"Forward-Looking Statements - Safe Harbor Provisions."
Forward-Looking Statements - Safe Harbor Provisions
This quarterly report on Form 10-Q of PennzEnergy for the
quarter ended June 30, 1999 contains certain forward-looking
statements within the meaning of Section 27A of the Securities
Act of 1933, as amended, and Section 21E of the Securities
Exchange Act of 1934, as amended, which are intended to be
covered by the safe harbors created thereby. To the extent that
such statements are not recitations of historical fact, such
statements constitute forward-looking statements which, by
definition, involve risks and uncertainties. Where, in any
forward-looking statements, PennzEnergy expresses an expectation
or belief as to future results or events, such expectation or
belief is expressed in good faith and believed to have a
reasonable basis, but there can be no assurance that the
statement of expectation or belief will result or be achieved or
accomplished.
The following are factors that could cause actual results or
events to differ materially from those anticipated, and include
but are not limited to: general economic, financial and business
conditions; commodity prices for natural gas and crude oil; the
effect of weather on natural gas demand and consumption;
competition for international drilling rights; the costs of
exploration and development of petroleum reserves; exploration
risks; political risks impacting exploration and development;
unanticipated environmental liabilities; changes in and
compliance with governmental regulations; changes in tax laws;
and the cost and effects of legal proceedings.
15
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
(a) Annual Meeting of Shareholders
May 6, 1999
(c) Proposals For Against Withheld Abstain
[S] [C] [C] [C] [C]
Election of Directors
Robert A. Mosbacher, Jr. 41,215,545 - 974,654 -
Terry L. Savage 41,219,621 - 970,578 -
Robert B. Weaver 41,215,371 - 974,828 -
Approval of Appointment of
Arthur Andersen LLP
As Independent Public
Accountants 41,804,488 294,361 - 91,350
Amendment of the Restated
Certificate of Incorporation 28,768,209 1,219,492 - 100,451
16
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits -
3 Certificate of Amendment to the Restated
Certificate of Incorporation, as amended through
May 6, 1999
27 Financial Data Schedule
(b) Reports -
No reports on Form 8-K were filed during the quarter for
which this report was filed.
17
SIGNATURE
Pursuant to the requirements of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be
signed on its behalf by the undersigned thereunto duly
authorized.
PENNZENERGY COMPANY
Registrant
S/N Malcolm R. Rae
Malcolm R. Rae
Controller
August 12, 1999