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Securities And Exchange Commission
Washington, D.C. 20549
Form 10-Q
(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Quarter Ended March 31, 2000
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission file number: 1-8094
Ocean Energy, Inc.
(Exact name of registrant as specified in its charter)
Texas 74-1764876
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1001 Fannin, Suite 1600, Houston, Texas 77002-6714
(Address of principal executive offices) (Zip code)
(713) 265-6000
(Registrant's telephone number, including area code)
None
(Former name,former address and former fiscal
year, if changed since last report)
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 .
As of May 9, 2000, 167,499,666 shares of Common Stock, par value $0.10 per
share, were outstanding.
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Ocean Energy, Inc.
Index
Page
Number
Part I. Financial Information
Item 1. Unaudited Consolidated Financial Statements
Consolidated Statements of Operations for the Three Months
Ended March 31, 2000 and 1999....................................... 1
Consolidated Balance Sheets - March 31, 2000
and December 31, 1999............................................... 2
Consolidated Statements of Cash Flows for the Three Months
Ended March 31, 2000 and 1999....................................... 3
Consolidated Statements of Comprehensive Income
for the Three Months Ended March 31, 2000 and 1999 ................. 4
Notes to Consolidated Financial Statements......................... 5
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.................................12
Item 3. Quantitative and Qualitative Disclosures about Market Risks.........19
Part II. Other Information.................................................19
Signatures..................................................................21
(i)
Item. 1 Unaudited Consolidated Financial Statements
Ocean Energy, Inc.
Consolidated Statements Of Operations
(Amounts in Thousands, Except Per Share Data)
(Unaudited)
Three Months Ended March 31,
---------------------------------------
2000 1999
----------------- ------------------
Revenues.................................................................. $ 246,068 $ 105,694
Costs of Operations:
Operating expenses..................................................... 56,820 45,160
Depreciation, depletion and amortization............................... 80,080 58,608
Impairment of oil and gas properties................................... - 28,500
General and administrative............................................. 9,122 4,576
----------------- ------------------
146,022 136,844
----------------- ------------------
Operating Profit (Loss)................................................... 100,046 (31,150)
Other (Income) Expense:
Interest expense....................................................... 19,228 25,170
Merger and integration costs........................................... 3,273 40,652
Interest income and other.............................................. (739) (483)
----------------- ------------------
21,762 65,339
----------------- ------------------
Income (Loss) Before Income Taxes......................................... 78,284 (96,489)
Income Tax Expense (Benefit).............................................. 35,306 (15,438)
----------------- ------------------
Net Income (Loss)......................................................... 42,978 (81,051)
Preferred Stock Dividends................................................. 813 801
----------------- ------------------
Net Income (Loss) Available to Common Shareholders........................ $ 42,165 $ (81,852)
================= ==================
Earnings (Loss) Per Common Share:
Basic.................................................................. $ 0.25 $ (0.79)
================= ==================
Diluted................................................................ $ 0.25 $ (0.79)
================= ==================
Weighted Average Number of Common Shares Outstanding:
Basic.................................................................. 167,031 103,192
================= ==================
Diluted................................................................ 174,550 103,192
================= ==================
See accompanying Notes to Consolidated Financial Statements.
1
Ocean Energy, Inc.
Consolidated Balance Sheets
(Amounts in Thousands, Except Share Data)
(Unaudited)
March 31, December 31,
2000 1999
------------------ ------------------
Assets
Current Assets:
Cash and cash equivalents............................................ $ 72,889 $ 64,889
Accounts receivable, net............................................. 167,130 170,034
Inventories.......................................................... 30,231 28,723
Prepaid expenses and other........................................... 30,295 26,304
------------------ ------------------
Total Current Assets............................................... 300,545 289,950
Property, Plant and Equipment, at cost, full cost method for oil and gas:
Evaluated oil and gas properties..................................... 3,839,477 3,706,288
Unevaluated oil and gas properties excluded from amortization........ 495,296 507,197
Other................................................................ 86,173 84,410
------------------ ------------------
4,420,946 4,297,895
Accumulated Depreciation, Depletion and Amortization.................... (2,264,472) (2,094,885)
------------------ ------------------
2,156,474 2,203,010
Deferred Income Taxes................................................... 205,276 233,406
Other Assets............................................................ 54,166 56,777
------------------ ------------------
Total Assets............................................................ $ 2,716,461 $ 2,783,143
================== ==================
Liabilities And Shareholders' Equity
Current Liabilities:
Accounts and notes payable........................................... $ 224,889 $ 275,629
Accrued interest payable............................................. 17,396 41,119
Accrued liabilities.................................................. 19,467 51,542
Current maturities of long-term debt................................. 11,119 13,651
------------------ ------------------
Total Current Liabilities.......................................... 272,871 381,941
Long-Term Debt.......................................................... 1,306,765 1,333,410
Other Noncurrent Liabilities and Deferred Revenue....................... 146,357 120,097
Commitments and Contingencies...........................................
Shareholders' Equity:
Preferred stock, $1.00 par value; authorized 10,000,000 shares; issued
50,000 shares...................................................... 50 50
Common stock, $0.10 par value; authorized 230,000,000 shares; issued
167,492,463 and 166,979,981 shares, respectively................... 16,749 16,699
Additional paid-in capital........................................... 1,488,523 1,484,688
Accumulated deficit.................................................. (505,052) (547,216)
Other................................................................ (9,802) (6,526)
------------------ ------------------
Total Shareholders' Equity......................................... 990,468 947,695
------------------ ------------------
Total Liabilities and Shareholders' Equity.............................. $ 2,716,461 $ 2,783,143
================== ==================
See accompanying Notes to Consolidated Financial Statements.
2
Ocean Energy, Inc.
Consolidated Statements Of Cash Flows
(Amounts in Thousands)
(Unaudited)
Three Months Ended March 31,
---------------------------------------
2000 1999
----------------- ------------------
Operating Activities:
Net income (loss)...................................................... $ 42,978 $ (81,051)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation, depletion and amortization............................. 80,080 58,608
Impairment of oil and gas properties................................. - 28,500
Deferred income taxes................................................ 28,245 (17,361)
Merger and integration costs not yet paid ........................... - 40,652
Other................................................................ (3,158) 3,309
----------------- ------------------
148,145 32,657
Changes in operating assets and liabilities, net of acquisitions:
Decrease in accounts receivable.................................... 2,904 8,642
Decrease (increase) in inventories, prepaid expenses and other..... (6,168) 20,818
Decrease in accounts and notes payable............................. (30,055) (23,581)
Increase (decrease) in accrued expenses and other.................. (25,181) 37,234
----------------- ------------------
Net Cash Provided by Operating Activities............................ 89,645 75,770
----------------- ------------------
Investing Activities:
Capital expenditures................................................... (123,484) (51,726)
Acquisition costs, net of cash acquired................................ (286) (1,841)
Proceeds from sales of property, plant and equipment................... 90,226 39,564
----------------- ------------------
Net Cash Used in Investing Activities................................ (33,544) (14,003)
----------------- ------------------
Financing Activities:
Proceeds from debt..................................................... 401,289 542,461
Principal payments on debt ............................................ (449,446) (574,983)
Proceeds from sales of common stock.................................... 1,738 -
Deferred debt issue costs.............................................. - (6,370)
Other.................................................................. (1,682) (791)
----------------- ------------------
Net Cash Used in Financing Activities................................ (48,101) (39,683)
----------------- ------------------
Increase In Cash and Cash Equivalents.................................... 8,000 22,084
Cash and Cash Equivalents at Beginning of Period......................... 64,889 10,706
----------------- ------------------
Cash and Cash Equivalents at End of Period............................... $ 72,889 $ 32,790
================= ==================
See accompanying Notes to Consolidated Financial Statements.
3
Ocean Energy, Inc.
Consolidated Statements Of Comprehensive Income
(Amounts in Thousands)
(Unaudited)
Three Months Ended March 31,
---------------------------------------
2000 1999
----------------- ------------------
Net income (loss)...................................................... $ 42,978 $ (81,051)
Other comprehensive income, net of tax:
Foreign currency translation adjustment............................. - 979
----------------- ------------------
Comprehensive income (loss)............................................ $ 42,978 $ (80,072)
================= ==================
See accompanying Notes to Consolidated Financial Statements.
4
Ocean Energy, Inc.
Notes to Consolidated Financial Statements
(Unaudited)
Note 1. Presentation of Financial Information
The consolidated financial statements of Ocean Energy, Inc. ("Ocean", "OEI"
or "the Company"), a Texas corporation, included herein have been prepared,
without audit, pursuant to the rules and regulations of the Securities and
Exchange Commission ("SEC"). Although certain information normally included in
financial statements prepared in accordance with generally accepted accounting
principles has been condensed or omitted, management believes that the
disclosures are adequate to make the information presented not misleading. The
financial statements reflect all normal recurring adjustments that, in the
opinion of management, are necessary for a fair presentation.
On March 30, 1999, Ocean Energy, Inc. ("Old Ocean") merged with and into
Seagull Energy Corporation ("Seagull", the "Merger"). The resulting company was
renamed Ocean Energy, Inc. The merger was treated for accounting purposes as an
acquisition of Seagull by Ocean in a purchase business transaction. As such, the
financial results presented here are those of Ocean Energy, Inc. on a stand
alone basis for the first quarter of 1999 and of the combined company for the
first quarter of 2000.
The accompanying consolidated financial statements of the Company should be
read in conjunction with the consolidated financial statements and notes thereto
included in the Annual Report on Form 10-K for the year ended December 31, 1999.
Property, Plant and Equipment - The Company capitalizes interest expense
and certain employee-related costs that are directly attributable to oil and gas
operations. For the three months ended March 31, 2000 and 1999, the Company
capitalized interest expense in the amount of $12 million and $7 million,
respectively, and certain employee-related costs in the amount of $10 million
and $5 million, respectively.
During the first quarter of 1999, the Company recognized impairments in the
amount of $28.5 million, pre-tax, related primarily to the sale of the Canadian
subsidiary on April 15, 1999.
5
Ocean Energy, Inc.
Notes to Consolidated Financial Statements
(Unaudited)
Earnings Per Share - The following table provides a reconciliation between
basic and diluted earnings (loss) per share (stated in thousands except per
share data):
Net Income (Loss) Weighted Average Earnings (Loss)
Available to Common Common Shares Per Share
Shareholders Outstanding Amount
------------------------ ---------------------- ------------------
>C>
Quarter Ended March 31, 2000:
Basic.................................... $ 42,165 167,031 $ 0.25
Effect of dilutive securities:
Stock options....................... - 4,078
Convertible preferred stock......... 813 3,441
------------------------ ----------------------
Diluted.................................. $ 42,978 174,550 $ 0.25
======================== ======================
Quarter Ended March 31, 1999:
Basic................................... $ (81,852) 103,192 $ (0.79)
Effect of dilutive securities........... - -
------------------------ ----------------------
Diluted................................. $ (81,852) 103,192 $ (0.79)
======================== ======================
Options to purchase 9,401,000 shares of common stock at $10.19 to $36.54
per share were outstanding during the first quarter of 2000 but were not
included in the computation of diluted earnings per share because the options'
exercise prices were greater than the average market price of the common shares.
These options expire at various dates through 2010. Options to purchase a
weighted average of 12,737,000 shares of common stock at prices ranging from
$2.11 to $36.54 per share were outstanding during the first quarter of 1999 but
were not included in the computation of diluted loss per share because such
options would have an antidilutive effect on the computation of diluted loss per
share. These options expire at various dates through 2009.
Treasury Stock - The Company follows the average cost method of accounting
for treasury stock transactions.
Accounting Pronouncements - In June 1998, the Financial Accounting
Standards Board ("FASB") issued SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities. This statement establishes standards of
accounting for and disclosures of derivative instruments and hedging activities.
This statement, as amended, is effective for fiscal years beginning after June
15, 2000. While the Company has not yet completed its evaluation of the impact
of this statement, the Company does not believe the statement will have a
significant impact on its results of operations as it expects its current
derivative activities would continue to qualify under hedge accounting.
Note 2. Acquisition and Disposition of Assets
Merger - On March 30, 1999, the shareholders approved the Merger. At the
date of the Merger, assets and liabilities of Old Ocean were recorded based upon
their historical costs, and the assets and liabilities of Seagull were recorded
at their estimated fair market values. As of December 31, 1999, a total purchase
price of $642 million had been allocated to assets and liabilities.
6
Ocean Energy, Inc.
Notes to Consolidated Financial Statements
(Unaudited)
For the first quarter of 1999, Seagull on a stand-alone basis recorded
revenues of $57 million from its oil and gas operations and revenues of $39
million from its Alaskan transmission and distribution subsidiary and had
production of 19,456 barrels of oil per day and 277 MMcf of gas per day.
Disposition of Oil and Gas Assets - On March 31, 2000, the Company
completed the sale of its East Bay Complex receiving net proceeds of
approximately $78 million. The properties consisted of South Pass 24, South Pass
27 and South Pass 39 Fields, located in the Mississippi Delta Region of the Gulf
of Mexico. The East Bay Complex contributed revenues of $23 million and $11
million for the three months ended March 31, 2000 and 1999, respectively, and
had operating profit (loss) of $10 million and $(1) million, respectively. The
proceeds were used to repay amounts outstanding under the Company's existing
credit facilities.
During March 1999, the Company completed sales of its interests in certain
non-core U.S. onshore assets located primarily in the MidContinent, Permian
Basin and Rocky Mountain regions and realized proceeds of $40 million from the
sales. The proceeds were used to repay amounts outstanding under the Company's
existing credit facilities.
Note 3. Supplemental Disclosures of Cash Flow Information
Three Months Ended March 31,
--------------------------------------------------
2000 1999
-------------------- ----------------------
(amounts in thousands)
Cash paid during the period for:
Interest.................................................. $ 41,491 $ 36,254
Income taxes.............................................. 15,087 1,131
The March 30, 1999 Merger was completed through the issuance of common
stock. Therefore, the Merger increased property, plant and equipment by $1.3
billion, debt by $563 million, other liabilities by $200 million, and equity by
$595 million through a non-cash transaction that was not reflected in the
statement of cash flows. The $1.8 million of acquisition costs reflected in
"investing activities" in the statement of cash flows for the three months ended
March 31, 1999, represents the cash expenses paid in connection with the Merger,
less the cash of Seagull on the date of the Merger.
Note 4. Financial Instruments
From time to time, the Company has utilized and expects to continue to
utilize hedging transactions with respect to a portion of its oil and natural
gas production to achieve a more predictable cash flow as well as to reduce its
exposure to price fluctuations. These transactions generally are swaps or price
collars and are entered into with major financial institutions or commodities
trading institutions. Derivative financial instruments are intended to reduce
the Company's exposure to declines in the market price of natural gas and crude
oil. These derivative financial instruments will limit the Company's realized
revenues if market prices exceed the contracted ceiling price and limit losses
if market prices fall below the contracted floor price. As a result, gains and
losses on derivative financial instruments are generally offset by similar
changes in the realized price of natural gas and crude oil. Gains and losses
from these financial instruments are recognized in revenues for the periods to
which the derivative
7
Ocean Energy, Inc.
Notes to Consolidated Financial Statements
(Unaudited)
financial instruments relate. Oil and gas revenues have decreased by $20 million
and $5 million for the three months ended March 31, 2000 and 1999, respectively,
as a result of the derivative contracts and a prepaid crude oil sales contract.
As of March 31, 2000, the Company had hedged approximately 10 MMBbl of oil
and 35 Bcf of natural gas for the remainder of the year. The average price of
hedged production is $21.62 per Bbl for crude oil and $2.75 per Mcf for natural
gas.
Note 5. Supplemental Guarantor Information
Ocean Energy, Inc., a Louisiana corporation and wholly-owned subsidiary of
the Company ("Ocean Louisiana"), has unconditionally guaranteed the full and
prompt performance of the Company's obligations under certain of the notes and
related indentures, including the payment of principal, premium (if any) and
interest. None of the referenced indentures place significant restrictions on a
wholly-owned subsidiary's ability to make distributions to the parent. In order
to provide meaningful financial data relating to the guarantor (i.e., Ocean
Louisiana on an unconsolidated basis), the following condensed consolidating
financial information has been provided following the policies set forth below:
1) The Company accounts for investments in subsidiaries on the cost basis.
Earnings of subsidiaries are therefore not reflected in the related
investment accounts.
2) Certain reclassifications were made to conform all of the financial
information to the financial presentation on a consolidated basis. The
principal eliminating entries eliminate investments in subsidiaries and
intercompany balances.
8
Ocean Energy, Inc.
Notes to Consolidated Financial Statements
(Unaudited)
Supplemental Condensed Consolidating Statements of Operations
For the Three Months Ended March 31, 2000 and 1999
(Amounts in Thousands)
Unconsolidated
--------------------------------------------------------------
Guarantor Non-Guarantor
2000 OEI Subsidiary Subsidiaries Consolidated OEI
------------------ -------------------- ------------------- ------------------
Revenues........................... $ - $ 92,422 $ 153,646 $ 246,068
Costs of Operations:
Operations and maintenance...... - 19,753 37,067 56,820
Depreciation, depletion and
amortization................. 1,583 22,472 56,025 80,080
General and administrative...... 9,122 - - 9,122
------------------ -------------------- ------------------- ------------------
Operating Profit (Loss)............ (10,705) 50,197 60,554 100,046
Interest Expense................... 18,985 - 243 19,228
Merger and integration costs....... 3,273 - - 3,273
Interest Income and Other.......... 448 14 (1,201) (739)
------------------ -------------------- ------------------- ------------------
Income (Loss) Before Taxes......... (33,411) 50,183 61,512 78,284
Income Tax Provision (Benefit)..... (12,195) 18,317 29,184 35,306
------------------ -------------------- ------------------- ------------------
Net Income (Loss).................. $ (21,216) $ 31,866 $ 32,328 $ 42,978
================== ==================== =================== ==================
1999
Revenues........................... $ - $ 48,800 $ 56,894 $ 105,694
Costs of Operations:
Operations and maintenance...... - 24,469 20,691 45,160
Depreciation, depletion and
amortization.................. - 30,328 28,280 58,608
Impairment of oil and gas
properties.................... - - 28,500 28,500
General and administrative...... - 4,330 246 4,576
------------------ -------------------- ------------------- ------------------
Operating Loss..................... - (10,327) (20,823) (31,150)
Interest Expense................... 14,484 12,477 (1,791) 25,170
Merger and integration costs....... - 40,652 - 40,652
Interest Income and Other.......... (1) (3,487) 3,005 (483)
------------------ -------------------- ------------------- ------------------
Loss Before Taxes.................. (14,483) (59,969) (22,037) (96,489)
Income Tax Provision (Benefit)..... (27,716) 9,041 3,237 (15,438)
------------------ -------------------- ------------------- ------------------
Net Income (Loss).................. $ 13,233 $ (69,010) $ (25,274) $ (81,051)
================== ==================== =================== ==================
9
Ocean Energy, Inc.
Notes to Consolidated Financial Statements
(Unaudited)
Supplemental Condensed Consolidating Balance Sheets
At March 31, 2000 and December 31, 1999
(Amounts in Thousands)
Unconsolidated
--------------------------------------------------
Guarantor Non-Guarantor Eliminating Consolidated
March 31, 2000 OEI Subsidiary Subsidiaries Entries OEI
-------------- --------------- --------------- --------------- ---------------
Assets
Current Assets................ $ 6,290 $ 68,202 $ 226,053 $ - $ 300,545
Intercompany Investments...... 2,433,929 (78,317) (33,537) (2,322,075) -
Property, Plant and Equipment,
Net........................ 21,935 520,493 1,614,046 - 2,156,474
Other Assets.................. 51,232 187,392 20,818 - 259,442
-------------- --------------- --------------- --------------- ---------------
Total Assets.................. $ 2,513,386 $ 697,770 $ 1,827,380 $(2,322,075) $ 2,716,461
============== =============== =============== =============== ===============
Liabilities and Shareholders' Equity
Current Liabilities........... $ 81,794 $ 107,396 $ 83,681 $ - $ 272,871
Long-Term Debt................ 1,297,992 - 8,773 - 1,306,765
Other Liabilities............. 116,249 11,390 18,718 - 146,357
Shareholders' Equity.......... 1,017,351 578,984 1,716,208 (2,322,075) 990,468
-------------- --------------- --------------- --------------- ---------------
Total Liabilities and
Shareholders' Equity....... $ 2,513,386 $ 697,770 $ 1,827,380 $(2,322,075) $ 2,716,461
============== =============== =============== =============== ===============
December 31, 1999
Assets
Current Assets................ $ 3,266 $ 60,340 $ 226,344 $ - $ 289,950
Intercompany Investments...... 2,498,760 (167,761) (8,925) (2,322,074) -
Property, Plant and Equipment,
Net....................... 22,630 586,164 1,594,216 - 2,203,010
Other Assets.................. 72,943 187,393 29,847 - 290,183
-------------- --------------- --------------- --------------- ---------------
Total Assets.................. $ 2,597,599 $ 666,136 $ 1,841,482 $(2,322,074) $ 2,783,143
============== =============== =============== =============== ===============
Liabilities and Shareholders' Equity
Current Liabilities........... $ 131,041 $ 107,628 $ 143,272 $ - $ 381,941
Long-Term Debt................ 1,324,811 - 8,599 - 1,333,410
Other Liabilities............. 102,976 11,390 5,731 - 120,097
Shareholders' Equity.......... 1,038,771 547,118 1,683,880 (2,322,074) 947,695
-------------- --------------- --------------- --------------- ---------------
Total Liabilities and
Shareholders' Equity....... $ 2,597,599 $ 666,136 $ 1,841,482 $(2,322,074) $ 2,783,143
============== =============== =============== =============== ===============
10
Ocean Energy, Inc.
Notes to Consolidated Financial Statements
(Unaudited)
Supplemental Condensed Consolidating Statements of Cash Flows
For the Three Months Ended March 31, 2000 and 1999
(Amounts in Thousands)
Unconsolidated
----------------------------------------------------------
Guarantor Non-Guarantor
2000 OEI Subsidiary Subsidiaries Consolidated OEI
------------------ ----------------- ----------------- ------------------
Cash Flows from Operating
Activities:
Net Income (Loss)............... $ (21,216) $ 31,866 $ 32,328 $ 42,978
Adjustments to reconcile net
income (loss) to net cash from
operating activities.......... 26,670 22,472 56,025 105,167
Changes in assets and liabilities (22,675) (8,093) (27,732) (58,500)
------------------ ----------------- ----------------- ------------------
Net Cash Provided by (Used in)
Operating Activities............ (17,221) 46,245 60,621 89,645
Cash Flows Provided by (Used in)
Investing Activities............ (888) 43,199 (75,855) (33,544)
Cash Flows Provided by (Used in)
Financing Activities............ 16,557 (89,444) 24,786 (48,101)
------------------ ----------------- ----------------- ------------------
Net Increase (Decrease) in Cash and
Cash Equivalents................ (1,552) - 9,552 8,000
Cash and Cash Equivalents:
Beginning of Period............. 1,552 - 63,337 64,889
------------------ ----------------- ----------------- ------------------
End of Period................... $ - $ - $ 72,889 $ 72,889
================== ================= ================= ==================
1999
Cash Flows from Operating Activities
Net Income (Loss)............... $ 13,233 $ (69,010) $ (25,274) $ (81,051)
Adjustments to reconcile net
Income (Loss) to net cash from
operating activities.......... (27,262) 69,613 71,357 113,708
Changes in assets and liabilities 14,793 34,908 (6,588) 43,113
------------------ ----------------- ----------------- ------------------
Net Cash Provided by Operating
Activities...................... 764 35,511 39,495 75,770
Cash Flows Used in Investing
Activities...................... - (9,124) (4,879) (14,003)
Cash Flows Used In Financing
Activities...................... (764) (26,387) (12,532) (39,683)
------------------ ----------------- ----------------- ------------------
Net Increase in Cash and Cash
Equivalents..................... - - 22,084 22,084
Cash and Cash Equivalents:
Beginning of Period............. - - 10,706 10,706
------------------ ----------------- ----------------- ------------------
End of Period................... $ - $ - $ 32,790 $ 32,790
================== ================= ================= ==================
11
Ocean Energy, Inc.
Item 2. Management's Discussion And Analysis Of Financial Condition And Results
Of Operations
The following discussion is intended to assist in understanding the
Company's financial position, results of operations and cash flows for the
quarters ended March 31, 2000 and 1999.
On March 30, 1999, Ocean Energy, Inc. ("Old Ocean") merged with and into
Seagull Energy Corporation ("Seagull", the "Merger"). In conjunction with the
Merger, Seagull amended its Articles of Incorporation to change its name to
Ocean Energy, Inc. The merger was treated for accounting purposes as an
acquisition of Seagull by Ocean in a purchase business transaction. As such, the
financial results presented here are those of Ocean Energy, Inc. on a
stand-alone basis for the first quarter of 1999 and of the combined company for
the first quarter of 2000.
The Company's accompanying unaudited consolidated financial statements and
the notes thereto and the consolidated financial statements and notes thereto
included in the Annual Report on Form 10-K for the year ended December 31, 1999
contain detailed information that should be referred to in conjunction with the
following discussion.
Results Of Operations
(Amounts in Thousands)
Three Months Ended March 31,
---------------------------------------
2000 1999
----------------- -----------------
Oil and gas operations:
Revenues:
Natural gas......................................................... $ 93,385 $ 47,024
Oil and NGL......................................................... 152,683 58,670
----------------- ----------------
246,068 105,694
----------------- ----------------
Operating expenses.................................................... 56,820 45,160
Depreciation, depletion and amortization.............................. 78,498 57,171
Impairment of oil and gas properties.................................. - 28,500
----------------- ----------------
Operating profit (loss)............................................. 110,750 (25,137)
Corporate............................................................. (10,704) (6,013)
----------------- ----------------
Total operating profit (loss)...................................... $ 100,046 $ (31,150)
================= ================
With the Merger, the Company gained new operations in Egypt, Russia and
Indonesia and expanded its operations in the U.S. and Cote d'Ivoire. These
expanded operations, combined with the recovery of world crude oil and natural
gas prices which began during the second quarter of 1999, resulted in a $140
million increase in revenues during the first quarter of 2000. For the first
quarter of 1999, Seagull on a stand-alone basis recorded revenues of $57 million
from its oil and gas operations and revenues of $39 million from its Alaskan
transmission and distribution subsidiary and had production of 19,456 barrels of
oil per day and 277 MMcf of gas per day. During the first quarter of 1999 the
Company recorded impairments of oil and gas properties in the amount of $28.5
million related to the sale of the Canadian subsidiary on April 15, 1999. These
factors combined to improve total operating profit by $131 million for the first
quarter of 2000 compared to the first quarter of 1999.
12
Ocean Energy, Inc.
Item 2. Management's Discussion And Analysis Of Financial Condition And Results
Of Operations
Oil and Gas Operations
Revenues - Natural gas revenues almost doubled for the three months ended
March 31, 2000, totaling $93 million as compared to $47 million for the three
months ended March 31, 1999. This increase is primarily due to production from
properties acquired in the Merger and to higher average gas prices realized
during the period. The average realized price for natural gas increased 46% to
$2.46 per Mcf in the first quarter of 2000 as compared to $1.68 in the first
quarter of 1999. Daily natural gas production for the first quarter of 2000 was
417 MMcf, an increase of 34% over 1999 volumes due primarily to the acquisition
of producing properties in the Merger, partially offset by the sale of the
Canadian subsidiary in the first quarter of 1999 and by the sale of certain
other non-core producing properties during 1999.
Oil revenues reached $153 million for the three months ended March 31,
2000, an increase of 160% over revenues of $59 million for the three months
ended March 31, 1999. This increase is the result of production from properties
acquired in the Merger and an increase in the average realized oil price during
the period. The average realized price for oil increased by almost $13.00 per
barrel to $22.99 for the first quarter of 2000 compared to $10.04 for the first
quarter of 1999. Daily oil production increased 12% to 73 MBbl for the first
quarter of 2000 as compared to 65 MBbl for the first quarter of 1999.
Oil and gas revenues for the quarters ended March 31, 2000 and 1999, have
decreased by $20 million and $5 million, respectively, as a result of derivative
contracts and a prepaid crude oil sales contract.
13
Ocean Energy, Inc.
Item 2. Management's Discussion And Analysis Of Financial Condition And Results
Of Operations
Operating Data
Net Daily Natural Gas Production (1) Net Daily Oil and NGL Production (1)
Three Months Ended March 31, Three Months Ended March 31,
----------------------------------------- ------------------------------------------
2000 1999 2000 1999
----------------- ----------------- ----------------- ------------------
Production:
Domestic................... 374.3 251.5 32,808 39,811
Equatorial Guinea.......... - - 21,300 19,400
Cote d'Ivoire.............. 32.5 23.5 4,568 4,489
Egypt...................... .6 - 9,446 -
Other International(2)..... 9.4 36.0 4,873 1,233
----------------- ----------------- ----------------- ------------------
Total......................... 416.8 311.0 72,995 64,933
================= ================= ================= ==================
Average Prices:
Domestic.................. $ 2.43 $ 1.65 $ 27.85 $ 11.03
Equatorial Guinea......... $ - $ - $ 26.35 $ 11.28
Cote d'Ivoire............. $ 2.01 $ 1.83 $ 23.74 $ 9.88
Egypt..................... $ 5.06 $ - $ 26.16 $ -
Other International(2).... $ 3.35 $ 1.54 $ 18.36 $ 11.10
Weighted Average.......... $ 2.42 $ 1.65 $ 26.30 $ 11.03
Weighted Average
Prices
including Hedging
Activities and Prepaid $ 2.46 $ 1.68 $ 22.99 $ 10.04
Crude Oil Sales Contract..
(1) Natural gas is stated in MMcf and $ per Mcf. Oil and NGL are stated in Bbl
and $ per Bbl.
(2) Other International includes primarily Russia and Indonesia in 2000 and
Canada in 1999.
Operating Expenses - Operating expenses per BOE remained relatively
unchanged at $4.38 per BOE for the first quarter of 2000 compared to $4.30 per
BOE for the first quarter of 1999. Total operating expenses increased $12
million, or 27%, to $57 million for the three months ended March 31, 2000 from
$45 million for the comparable 1999 period. This increase is attributable to a
23% increase in production volumes from the acquisition of additional producing
properties in the Merger, as well as from increased production from existing
properties, partially offset by the property sales discussed earlier.
Depreciation, Depletion and Amortization Expense - Total depreciation,
depletion and amortization (DD&A) expense for oil and gas operations increased
37%, to $78 million for the three months ended March 31, 2000, from $57 million
for the comparable 1999 period primarily due to increased production. DD&A
expense per BOE related to oil and gas operations rose $0.61, or 11%, to $6.05
per BOE for the quarter ended March 31, 2000, from $5.44 per BOE for the
comparable period in 1999. The higher DD&A expense per BOE for the first quarter
of 2000 is primarily attributable to the effects of the Merger and property
sales on the geographic mix of production.
14
Ocean Energy, Inc.
Item 2. Management's Discussion And Analysis Of Financial Condition And Results
Of Operations
Impairment of Oil and Gas Properties - During the first quarter of 1999 the
Company recorded an impairment of oil and gas properties of $28.5 million
related primarily to the sale of the Canadian subsidiary.
General and Administrative Expenses - General and administrative expenses
increased $4 million, or 80%, to $9 million for the three months ended March 31,
2000 from $5 million in the comparable 1999 period. Approximately $3 million of
this increase is due to expense relating to compensation plans that are tied
directly to the market price of the Company's common stock.
Other
Interest Expense - Interest expense decreased 24%, or $6 million, to $19
million for the three months ended March 31, 2000 from $25 million in the
comparable 1999 period. This decrease is the result of the Company's debt
reduction program undertaken subsequent to the Merger in 1999 and to the
increase in the amount of interest capitalized during the first quarter of 2000
($12 million in 2000 as opposed to $7 million in 1999) due to the increase in
the level of capital expenditures.
Merger and Integration Costs - Merger and integration costs of $3 million
relating primarily to severance costs were recorded in the first quarter of
2000. Costs of $41 million were recorded in the first quarter of 1999 and
consisted primarily of Old Ocean's severance costs ($21 million), the write-off
of certain costs relating to Old Ocean's information technology system ($14
million) and compensation expense related to the vesting of Old Ocean's
restricted stock ($6 million).
Income Tax Expense (Benefit) - Income tax expense of $35 million was
recognized for the three months ended March 31, 2000, compared to a benefit of
$15 million for the three months ended March 31,1999. The change is primarily
the result of three factors: (i) significant improvement in operating results;
(ii) changes in the nature of deferred tax assets and liabilities due to the
Merger and subsequent asset sales; and (iii) the relative significance of
international operating results and taxes to the Company's total results.
Liquidity and Capital Resources
Liquidity - With the Merger, the Company had incurred nearly $2 billion in
debt as of March 31, 1999. One of management's goals for 1999 was the reduction
of these high debt levels. Using proceeds from asset sales and from a prepaid
crude oil sales contract, debt was reduced to $1.3 billion at the end of 1999.
As of March 31, 2000, the Company's debt was $1.3 billion.
Concurrent with the closing of the Merger on March 30, 1999, the Company
entered into new credit facilities (the "Credit Facilities") which combined the
existing credit facilities of both Old
15
Ocean Energy, Inc.
Item 2. Management's Discussion And Analysis Of Financial Condition And Results
Of Operations
Ocean and Seagull. As of March 31, 2000, the Credit Facilities consist of a $500
million five-year revolving facility and a renewable $200 million 364-day
facility. The Credit Facilities bear interest, at the Company's option, at a
competitive bid or LIBOR or prime rates plus applicable margins ranging from
zero to 1.7%. As of March 31, 2000, borrowings outstanding against the Credit
Facilities totaled $275 million, and Letters of Credit totaled $45 million,
leaving $380 million of available credit.
The Company's debt to total capitalization ratio has decreased to 57% at
March 31, 2000, from 58% at December 31, 1999, and 68% at March 31, 1999.
Effects of Leverage - The Company has outstanding indebtedness of
approximately $1.3 billion as of March 31, 2000. The Company's level of
indebtedness has several important effects on its future operations, including
(i) a substantial portion of the Company's cash flow from operations must be
dedicated to the payment of interest on its indebtedness and will not be
available for other purposes, (ii) the covenants contained in the various
indentures require the Company to meet certain financial tests, and contain
other restrictions that limit the Company's ability to borrow additional funds
or to dispose of assets and may affect the Company's flexibility in planning
for, and reacting to, changes in its business, including possible acquisition
activities and (iii) the Company's ability to obtain additional financing in the
future for working capital, expenditures, acquisitions, general corporate or
other purposes may be impaired.
Capital Expenditures
(Amounts in Thousands)
Three Months Ended March 31,
-------------------------------------------
2000 1999
------------------ ------------------
Oil and Gas Operations:
Leasehold acquisitions............................................. $ 15,424 $ 3,899
Exploration costs.................................................. 48,757 8,991
Development costs.................................................. 56,973 36,019
------------------ ------------------
121,154 48,909
Corporate............................................................ 2,330 2,817
------------------ ------------------
Total Capital Expenditures........................................... $ 123,484 $ 51,726
================== ==================
The Company's capital expenditure budget for 2000 is expected to be
approximately $500 million (excluding proved property acquisitions). Actual
capital spending may vary from the capital expenditure budget. The Company will
evaluate its level of capital spending throughout the year based upon drilling
results, commodity prices, cash flows from operations and property acquisitions.
The Company makes, and will continue to make, substantial capital
expenditures for the acquisition, exploration, development, production and
abandonment of its oil and natural gas
16
Ocean Energy, Inc.
Item 2. Management's Discussion And Analysis Of Financial Condition And Results
Of Operations
reserves. The Company has historically funded its expenditures from cash flows
from operating activities, bank borrowings, sales of equity and debt securities,
sales of non-strategic oil and natural gas properties, sales of partial
interests in exploration concessions and project finance borrowings. The Company
intends to finance capital expenditures for the year 2000 primarily with funds
provided by operations.
The ability of the Company to satisfy its obligations and fund planned
capital expenditures will be dependent upon its future performance. Such future
performance is subject to many conditions that are beyond the Company's control,
particularly oil and gas prices, and the Company's ability to obtain additional
debt and equity financing, if necessary. The Company currently expects that its
cash flow from operations and availability under the Credit Facilities will be
adequate to execute its business plan for the year 2000. However, no assurance
can be given that the Company will not experience liquidity problems from time
to time or on a long-term basis. If the Company's cash flow from operations and
availability under the Credit Facilities are not sufficient to satisfy its cash
requirements, there can be no assurance that additional debt or equity financing
will be available to meet its requirements.
Accounting Pronouncements
In June 1998, the FASB issued SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities. This statement establishes standards of
accounting for and disclosures of derivative instruments and hedging activities.
This statement, as amended, is effective for fiscal years beginning after June
15, 2000. While the Company has not yet completed its evaluation of the impact
of this statement, the Company does not believe the statement will have a
significant impact on its results of operations as it expects that its current
derivative activities would continue to qualify under hedge accounting.
Environmental
Compliance with applicable environmental and safety regulations by the
Company has not required any significant capital expenditures or materially
affected its business or earnings. The Company believes it is in substantial
compliance with environmental and safety regulations and foresees no material
expenditures in the future; however, the Company is unable to predict the impact
that compliance with future regulations may have on capital expenditures,
earnings and competitive position.
Defined Terms
Natural gas is stated herein in thousand cubic feet ("Mcf"), million cubic
feet ("MMcf") or billion cubic feet ("Bcf"). Oil, condensate and natural gas
liquids ("NGL") are stated in barrels ("Bbl"), thousand barrels ("MBbl"), or
million barrels ("MMBbl"). Oil, condensate and NGL are converted to gas at a
ratio of one barrel of liquids per six Mcf of gas, based on relative energy
17
Ocean Energy, Inc.
Item 2. Management's Discussion And Analysis Of Financial Condition And Results
Of Operations
content. MMBOE, MBOE and BOE represent one million barrels, one thousand barrels
and one barrel of oil equivalent, respectively, with six Mcf of gas converted to
one barrel of liquid.
Forward-Looking Statements May Prove Inaccurate
This document includes forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, Section 21E of the Securities
Exchange Act of 1934 and the Private Securities Litigation Reform Act of 1995.
All statements other than statements of historical fact included in this
document, including, without limitation, statements regarding the financial
position, business strategy, production and reserve growth and other plans and
objectives for the future operations of the Company are forward-looking
statements.
Although the Company believes that such forward-looking statements are
based on reasonable assumptions, it can give no assurance that its expectations
will in fact occur. Important factors could cause actual results to differ
materially from those in the forward-looking statements. Forward-looking
statements are subject to risks and uncertainties and include information
concerning general economic conditions and possible or assumed future results of
operations of the Company, estimates of oil and gas production and reserves,
drilling plans, future cash flows, anticipated capital expenditures, the
Company's realization of its deferred tax assets, the level of future
expenditures for environmental costs, and management's strategies, plans and
objectives as set forth herein.
When used in this document, the words "believes," "expects," "anticipates,"
"intends" or similar expressions are intended to identify such forward-looking
statements. The following important factors, in addition to those discussed
elsewhere in this document could affect the future results of the energy
industry in general and could cause results to differ materially from those
expressed in such forward-looking statements:
- - Risks incident to the drilling and operation of oil and gas wells;
- - Future production and development costs;
- - The effect of existing and future laws and regulatory actions;
- - The political and economic climate in the foreign jurisdictions
in which the Company conducts oil and gas operations;
- - The effect of changes in commodity prices, hedging activities and
conditions in the capital markets; and
- - Competition from others in the energy industry.
18
Ocean Energy, Inc.
Item 3. Quantitative and Qualitative Disclosures About Market Risks
To mitigate a portion of its exposure to fluctuations in commodity prices,
the Company has entered into various derivative financial instruments for its
oil and natural gas production for the remainder of 2000 and for 2001. See Note
4 to the Company's Consolidated Financial Statements for a discussion of hedging
activities during the first quarter of 2000. To calculate the potential effect
of the derivative contracts on revenues, the Company applies the average NYMEX
oil and gas strip prices for the remainder of 2000 and for 2001 to the quantity
of the Company's oil and gas production hedged as of March 31, 2000. Using this
calculation, the estimated potential effect of the derivatives contracts is an
approximate $29 million net decrease in revenues for the remainder of the year
2000 and an approximate $14 million net decrease for 2001. Assuming a 10%
decrease in oil and gas prices, the potential effect of the derivatives
contracts would be an approximate $1 million increase in revenues for the
remainder of 2000 and an approximate $3 million decrease for 2001. Assuming a
10% increase in oil and gas prices, the potential effect of the derivatives
contracts would be an approximate $60 million decrease in revenues for the
remainder of 2000 and an approximate $25 million decrease for 2001.
The Company also evaluated the potential effect that reasonably possible
near term changes in interest rates may have on the Company's Credit Facilities.
Debt outstanding under the Credit Facilities represents approximately 21% of the
Company's total debt as of March 31, 2000 and is the only floating rate debt.
Based upon the balances outstanding as of March 31, 2000 and assuming no changes
in the amount of debt outstanding, the potential effect on annual interest
expense of a 10% increase or decrease in interest rates is approximately $2
million.
Part II. Other Information
Item 4. Submission of Matters to a Vote of Security Holders
None during the first quarter of 2000.
19
Ocean Energy, Inc.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
* 4.1 First Amendment to Revolving Credit Agreement, dated as of February 29, 2000, by and among the
Company, Bank of America, N.A. as Syndication Agent, Bank One, Texas, N.A., as Documentation Agent,
Societe Generale, Southwest Agency and Bank of Montreal, as Managing Agents, The Chase Manhattan
Bank, as Auction Administrative Agent, and Chase Bank of Texas, National Association, as
Administrative Agent.
* 4.2 First Amendment to 364-Day Credit Agreement, dated as of February 29, 2000, by and among the
Company, Credit Suisse First Boston as Administrative Agent, Credit Suisse First Boston as Auction
Administrative Agent, Bank of America, N.A. as Syndication Agent, and Chase Bank of Texas, National
Association, as Documentation Agent.
* 27.1 Financial Data Schedule.
* Filed herewith.
(b) Reports on Form 8-K: On February 23, 2000, the Company filed a Current
Report on Form 8-K dated February 23, 2000 containing the Company's current
estimates of its operating statistics for the year ended December 31, 2000.
The item reported in such Current Report was Item 5 (Other Events).
20
Signatures
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.
Ocean Energy, Inc.
By: /s/ William L. Transier
William L. Transier
Executive Vice President and
Chief Financial Officer
(Principal Financial Officer)
Date: May 12, 2000
By: /s/ Gordon L. McConnell
Gordon L. McConnell
Vice President and Controller
(Principal Accounting Officer)
Date: May 12, 2000
21
OCEAN ENERGY, INC.
INDEX TO EXHIBITS
* 4.1 First Amendment to Revolving Credit Agreement, dated as of February 29, 2000, by and among the
Company, Bank of America, N.A. as Syndication Agent, Bank One, Texas, N.A., as Documentation Agent,
Societe Generale, Southwest Agency and Bank of Montreal, as Managing Agents, The Chase Manhattan
Bank, as Auction Administrative Agent, and Chase Bank of Texas, National Association, as
Administrative Agent.
* 4.2 First Amendment to 364-Day Credit Agreement, dated as of February 29, 2000, by and among the
Company, Credit Suisse First Boston as Administrative Agent, Credit Suisse First Boston as Auction
Administrative Agent, Bank of America, N.A. as Syndication Agent, and Chase Bank of Texas, National
Association, as Documentation Agent.
* 27.1 Financial Data Schedule.
* Filed herewith.
22