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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
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SECURITIES EXCHANGE ACT OF 1934
For the Quarter Ended September 30, 2000
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
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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 October 27, 2000, 167,520,788 shares of Common Stock, par value $0.10 per
share, were outstanding.
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Ocean Energy, Inc.
Index
Page
Number
Part I. Financial Information
Item 1. Unaudited Consolidated Financial Statements
Consolidated Statements of Operations for the Three Months and
Nine Months Ended September 30, 2000 and 1999...................................... 1
Consolidated Balance Sheets - September 30, 2000
and December 31, 1999.............................................................. 2
Consolidated Statements of Cash Flows for the Nine Months
Ended September 30, 2000 and 1999.................................................. 3
Consolidated Statements of Comprehensive Income for the Three
Months and Nine Months Ended September 30, 2000 and 1999 .......................... 4
Notes to Consolidated Financial Statements......................................... 5
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.................................................... 10
Item 3. Quantitative and Qualitative Disclosures about Market Risks............................ 16
Part II. Other Information.......................................................................... 17
Signatures........................................................................................... 18
(i)
Item. 1 Unaudited Consolidated Financial Statements
Ocean Energy, Inc.
Consolidated Statements Of Operations
(Amounts in Thousands, Except Per Share Data)
(Unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------------------- ---------------------------------
2000 1999 2000 1999
--------------- --------------- --------------- ----------------
Revenues......................................................$ 261,089 $ 214,393 $ 743,586 $ 516,293
Costs of Operations:
Operating expenses......................................... 57,330 54,672 172,040 165,278
Depreciation, depletion and amortization................... 76,886 85,615 229,918 233,732
Impairment of oil and gas properties....................... - - - 28,500
General and administrative................................. 6,231 4,955 21,303 18,038
--------------- --------------- --------------- ----------------
140,447 145,242 423,261 445,548
--------------- --------------- --------------- ----------------
Operating Profit.............................................. 120,642 69,151 320,325 70,745
Other (Income) Expense:
Interest expense........................................... 19,756 30,410 57,850 86,601
Merger and integration costs............................... - 3,176 3,273 43,828
Interest income and other.................................. (915) (269) (1,747) (383)
--------------- --------------- --------------- ----------------
Income (Loss) Before Income Taxes............................. 101,801 35,834 260,949 (59,301)
Income Tax Expense (Benefit).................................. 43,932 6,404 114,609 (9,269)
--------------- --------------- --------------- ----------------
Income (Loss) from Continuing Operations...................... 57,869 29,430 146,340 (50,032)
Loss from Discontinued Operations, Net of
Income Taxes............................................... - (625) - (78)
--------------- --------------- --------------- ----------------
Net Income (Loss)............................................. 57,869 28,805 146,340 (50,110)
Preferred Stock Dividend...................................... 813 819 2,438 2,456
--------------- --------------- --------------- ----------------
Net Income (Loss) Available to Common Shareholders............$ 57,056 $ 27,986 $ 143,902 $ (52,566)
=============== =============== =============== ================
Earnings (Loss) Per Common Share:
Basic:
Income (Loss) from Continuing Operations................. $ 0.34 $ 0.17 $ 0.86 $ (0.36)
Income from Discontinued Operations...................... - - - -
--------------- --------------- --------------- ----------------
Net Income (Loss)........................................ $ 0.34 $ 0.17 $ 0.86 $ (0.36)
=============== =============== =============== ================
Diluted:
Income (Loss) from Continuing Operations................. $ 0.33 $ 0.16 $ 0.83 $ (0.36)
Income from Discontinued Operations...................... - - - -
--------------- --------------- --------------- ----------------
Net Income (Loss)........................................ $ 0.33 $ 0.16 $ 0.83 $ (0.36)
=============== =============== =============== ================
Weighted Average Number of Common Shares
Outstanding:
Basic.................................................... 167,125 166,680 167,061 145,670
=============== =============== =============== ================
Diluted.................................................. 177,035 170,629 176,448 145,670
=============== =============== =============== ================
See accompanying Notes to Consolidated Financial Statements.
1
Ocean Energy, Inc.
Consolidated Balance Sheets
(Amounts in Thousands, Except Share Data)
(Unaudited)
September 30, December 31,
2000 1999
----------------- ------------------
Assets
Current Assets:
Cash and cash equivalents.................................................... $ 25,915 $ 64,889
Accounts receivable, net..................................................... 205,158 170,034
Inventories.................................................................. 26,244 28,723
Prepaid expenses and other................................................... 32,108 26,304
----------------- ------------------
Total Current Assets....................................................... 289,425 289,950
Property, Plant and Equipment, at cost, full cost method for oil and gas
properties:
Evaluated oil and gas properties............................................. 4,020,772 3,706,288
Unevaluated oil and gas properties excluded from amortization................ 546,910 507,197
Other........................................................................ 145,619 84,410
----------------- ------------------
4,713,301 4,297,895
Accumulated Depreciation, Depletion and Amortization............................ (2,414,119) (2,094,885)
----------------- ------------------
2,299,182 2,203,010
Deferred Income Taxes........................................................... 167,669 233,406
Other Assets.................................................................... 56,453 56,777
----------------- ------------------
Total Assets.................................................................... $ 2,812,729 $ 2,783,143
================= ==================
Liabilities And Shareholders' Equity
Current Liabilities:
Accounts and notes payable................................................... $ 296,989 $ 275,629
Accrued interest payable..................................................... 17,774 41,119
Accrued liabilities.......................................................... 20,309 65,193
----------------- ------------------
Total Current Liabilities.................................................. 335,072 381,941
Long-Term Debt.................................................................. 1,073,104 1,333,410
Deferred Income Taxes........................................................... 33,981 -
Other Noncurrent Liabilities and Deferred Revenue............................... 275,580 120,097
Commitments and Contingencies................................................... - -
Shareholders' Equity:
Preferred stock, $1.00 par value; authorized 10,000,000 shares;
issued 50,000 shares....................................................... 50 50
Common stock, $.10 par value; authorized 230,000,000 shares; issued 169,614,114
and 166,979,981 shares, respectively....................................... 16,961 16,699
Additional paid-in capital................................................... 1,511,605 1,484,688
Accumulated deficit.......................................................... (403,314) (547,216)
Less - treasury stock, at cost; 2,103,753 and 378,171 shares, respectively... (26,538) (3,114)
Less - Other................................................................. (3,772) (3,412)
----------------- ------------------
Total Shareholders' Equity................................................. 1,094,992 947,695
----------------- ------------------
Total Liabilities and Shareholders' Equity...................................... $ 2,812,729 $ 2,783,143
================= ==================
See accompanying Notes to Consolidated Financial Statements.
2
Ocean Energy, Inc.
Consolidated Statements Of Cash Flows
(Amounts in Thousands)
(Unaudited)
Nine Months Ended September 30,
---------------------------------------
2000 1999
----------------- ------------------
Operating Activities:
Net income (loss)...................................................... $ 146,340 $ (50,110)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation, depletion and amortization............................. 229,918 233,732
Impairment of oil and gas properties................................. - 28,500
Deferred income taxes................................................ 99,833 (24,702)
Noncash merger and integration costs................................. - 21,047
Other................................................................ 9,678 11,674
Changes in operating assets and liabilities, net of acquisitions..... (85,621) (13,211)
----------------- ------------------
Net Cash Provided by Operating Activities............................ 400,148 206,930
----------------- ------------------
Investing Activities:
Capital expenditures of continuing operations.......................... (413,349) (231,976)
Capital expenditures of discontinued operations........................ - (5,040)
Acquisition costs, net of cash acquired................................ (3,036) (2,345)
Proceeds from sales of property, plant and equipment................... 86,125 390,479
Other ................................................................. (2,327) -
----------------- ------------------
Net Cash Provided by (Used in) Investing Activities.................. (332,587) 151,118
----------------- ------------------
Financing Activities:
Proceeds from debt..................................................... 1,043,412 989,999
Principal payments on debt ............................................ (1,291,324) (1,400,823)
Proceeds from sales of common stock.................................... 20,600 2,572
Purchase of treasury stock............................................. (23,401) -
Increase in deferred revenue........................................... 74,947 100,000
Proceeds from conveyances of Section 29 credit properties.............. 69,644 -
Deferred financing costs............................................... - (6,406)
Other.................................................................. (413) (219)
----------------- ------------------
Net Cash Used In Financing Activities................................ (106,535) (314,877)
----------------- ------------------
Increase (decrease) In Cash and Cash Equivalents......................... (38,974) 43,171
Cash and Cash Equivalents at Beginning of Period......................... 64,889 10,706
----------------- ------------------
Cash and Cash Equivalents at End of Period............................... $ 25,915 $ 53,877
================= ==================
See accompanying Notes to Consolidated Financial Statements.
3
Ocean Energy, Inc.
Consolidated Statements Of Comprehensive Income
(Amounts in Thousands)
(Unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
--------------------------------- ---------------------------------
2000 1999 2000 1999
----------------- --------------- ---------------- ----------------
Net income (loss).................................... $ 57,869 $ 28,805 $ 146,340 $ (50,110)
Other comprehensive income, net of tax:
Foreign currency translation adjustment........... - - - 10,720
----------------- --------------- ---------------- ----------------
Comprehensive income (loss) ......................... $ 57,869 $ 28,805 $ 146,340 $ (39,390)
================= =============== ================ ================
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") was 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 with the assets and liabilities of Old Ocean
being recorded based upon their historical costs and the assets and liabilities
of Seagull being 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. The Merger, completed through the issuance of common stock,
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. The financial results presented here include those of Ocean Energy,
Inc. on a stand-alone basis for the first quarter of 1999 and of the combined
company thereafter.
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 September 30, 2000 and 1999, the Company
capitalized interest expense in the amount of $11 million and $8 million,
respectively, and certain employee-related costs in the amount of $11 million
and $11 million, respectively. For the nine months ended September 30, 2000 and
1999, the Company capitalized interest expense in the amount of $34 million and
$28 million, respectively, and certain employee-related costs in the amount of
$33 million and $26 million, respectively.
During the first nine months 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)
Available to Weighted Average Earnings (Loss)
Common Common Shares Per Share
Shareholders Outstanding Amount
--------------------- -------------------- ------------------
Quarter Ended September 30, 2000:
Basic................................ $ 57,056 167,125 $ 0.34
Effect of dilutive securities:
Stock options................... - 6,468
Convertible preferred stock..... 813 3,442
--------------------- --------------------
Diluted.............................. $ 57,869 177,035 $ 0.33
===================== ====================
Quarter Ended September 30, 1999:
Basic................................ $ 27,986 166,680 $ 0.17
Effect of dilutive securities:
Stock options................... - 3,949
--------------------- --------------------
Diluted.............................. $ 27,986 170,629 $ 0.16
===================== ====================
Nine Months Ended September 30, 2000:
Basic................................ $ 143,902 167,061 $ 0.86
Effect of dilutive securities:
Stock options................... - 5,945
Convertible preferred stock..... 2,438 3,442
--------------------- --------------------
Diluted.............................. $ 146,340 176,448 $ 0.83
===================== ====================
Nine Months Ended September 30, 1999:
Basic................................ $ (52,566) 145,670 $ (0.36)
Effect of dilutive securities........ - -
--------------------- --------------------
Diluted.............................. $ (52,566) 145,670 $ (0.36)
===================== ====================
Weighted average options to purchase 7,263,000 shares of common stock at
$13.46 to $36.54 per share and 6,667,000 shares of common stock at $14.69 to
$36.54 per share were outstanding during the first nine months and during the
third quarter of 2000, respectively, 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. Weighted average options to purchase 19,517,000
shares of common stock for the nine months ended September 30, 1999 at prices
ranging from $2.11 to $36.54 per share were outstanding 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 from 1999 to 2009. The preferred stock conversion was
also excluded from the computation for the nine months ended September 30, 1999
because of its antidilutive effect. Weighted average options to purchase
10,800,000 shares of common stock at $10.19 to $36.54 per share were outstanding
during the third quarter of 1999 but were not included in the computation of
diluted earnings per share because the options' exercise prices
6
Ocean Energy, Inc.
Notes to Consolidated Financial Statements
(Unaudited)
were greater than the average market price of the common shares. These options
expire at various dates through 2009.
Subsidiary Guarantee - A wholly-owned subsidiary of the Company 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. Other than intercompany
arrangements and transactions, the consolidated financial statements of the
subsidiary are equivalent in all material respects to those of the Company and
therefore are not presented separately.
Treasury Stock - The Company follows the average cost method of accounting
for treasury stock transactions.
Discontinued Operations - During the first nine months of 1999 the Company
operated in Alaska through a division of the Company and a wholly-owned
subsidiary (collectively referred to herein as "ENSTAR"). In July 1999 the
Company committed to a plan to dispose of ENSTAR, and on November 1, 1999 the
Company completed the sale. Prior to the sale the results of operations and net
assets of ENSTAR were reflected as discontinued operations.
Accounting Pronouncements - In June 1998, the Financial Accounting
Standards Board ("FASB") issued Statement of Financial Accounting Standards No.
133 ("SFAS 133"), Accounting for Derivative Instruments and Hedging Activities,
and in June 2000, the FASB issued SFAS No. 138, Accounting for Certain
Derivative Instruments and Certain Hedging Activities, an amendment of FASB
Statement No. 133. These statements establish accounting and reporting standards
requiring that derivative instruments (including certain derivative instruments
embedded in other contracts) be recorded in the balance sheet as either an asset
or liability measured at fair value and that changes in the derivative's fair
value be recognized currently in earnings unless specific hedge accounting
criteria are met. Special accounting for qualifying hedges allows a derivative's
gains and losses to offset related results of hedging activities, and requires
that a company must formally document, designate, and assess the effectiveness
of transactions that receive hedge accounting.
The Company will adopt SFAS 133 effective January 1, 2001. Upon adoption,
the Company will record its derivative instruments, which currently consist of
the derivative financial instruments discussed in Note 4, at fair market value,
as assets or liabilities in the Company's Consolidated Balance Sheet, based on
quoted market values and the Company's portfolio of derivative instruments as of
January 1, 2001. The Company at this time is unable to predict the market values
that will exist for its derivative instruments on January 1, 2001. Any
transition adjustment resulting from adoption will be reported either in net
income or in other comprehensive income, as appropriate, as the cumulative
effect of a change in accounting principle. Subsequent to adoption, the Company
will adjust the carrying values of the derivative instruments to fair market
value on an ongoing basis. The Company is currently completing its evaluation of
the impact of these statements and believes the statements will not have a
7
Ocean Energy, Inc.
Notes to Consolidated Financial Statements
(Unaudited)
significant impact on its results of operations as it expects its current
derivative activities will continue to qualify under hedge accounting. However,
the adoption of SFAS 133 and the ongoing valuation of the Company's portfolio of
derivative instruments could add an element of volatility to the Company's
financial position and other comprehensive income measured under generally
accepted accounting principles due to the marking to market of the derivative
instruments.
Note 2. Major Transactions
Conveyances of Section 29 Credit Properties - In September 2000, the
Company conveyed certain Internal Revenue Code Section 29 Tax Credit-bearing
properties to a trust for approximately $70 million, which was recorded in other
noncurrent liabilities and deferred revenue. As part of the transaction, the
trust is required to hedge 85% of its estimated gas production through
approximately December 31, 2005, depending upon actual production. Although the
Company is not a party to the financial instrument, under SFAS 133 this
transaction is determined to be an embedded derivative financial instrument.
Deferred Revenue - In September 2000, the Company entered into a
market-sensitive prepaid natural gas sales agreement to deliver approximately
53,500 Mcf of natural gas per day beginning in January 2002 through December
2003. In exchange for the natural gas to be provided, the Company received an
advance payment of approximately $75 million. In addition, to the extent that
for any month in which natural gas deliveries are made under the agreement, the
index price, as defined, exceeds $2.50 MMbtu, the purchaser will make payments
to the Company equal to the difference, if any, between the index price and
$2.50 times the delivery quantity for that month. The obligation associated with
the future delivery of the natural gas has been recorded as deferred revenue and
is included in other noncurrent liabilities and deferred revenue. The deferred
revenue will be amortized into revenue as scheduled deliveries of natural gas
are made.
Disposition of East Bay - In March 2000, the Company completed the sale of
its East Bay Complex receiving net proceeds of approximately $78 million. The
properties were located in the Mississippi Delta Region of the Gulf of Mexico.
The East Bay Complex contributed revenues of $23 and $40 million for the first
quarter of 2000 and the first nine months of 1999, respectively, and had
operating profit of $10 million and $2 million, respectively.
Disposition of Canadian Subsidiary - In April 1999, the Company completed a
sale of its Canadian oil and gas assets, realizing net proceeds of $68 million.
The Canadian assets disposed of contributed revenues of $7 million, and had an
operating loss of $21 million (including impairment) for the nine months ended
September 30, 1999.
Proceeds from these transactions were used primarily to repay amounts
outstanding under the Company's existing credit facilities.
8
Ocean Energy, Inc.
Notes to Consolidated Financial Statements
(Unaudited)
Note 3. Supplemental Disclosures of Cash Flow Information
Nine Months Ended September 30,
-------------------- ------ ----------------------
2000 1999
-------------------- ----------------------
(amounts in thousands)
Cash paid during the period for:
Interest.................................................. $ 76,874 $ 84,429
Income taxes.............................................. $ 25,220 $ 11,607
Note 4. Financial Instruments
From time to time, the Company has utilized and expects to continue to
utilize derivative financial instruments 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 instruments 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. As a result, gains and losses on derivative financial instruments
are generally offset by similar changes in the realized prices of natural gas
and crude oil. Gains and losses from these financial instruments are recognized
in revenues for the periods to which the derivative financial instruments
relate.
As of September 30, 2000 and based on NYMEX oil and gas strip prices at
that date, the Company's derivative financial instruments were as follows:
Crude Oil Natural Gas
----------------------------------- ------------------------------------
Daily Average Daily
Production Hedged Production Average
Period (Bbl) Price (Mcf) Hedged Price
- --------------------------------------- --------------- --------------- --------------- ----------------
Fourth Quarter, 2000........ 25,000 $ 22.17 115,000 $ 2.95
First Six Months, 2001...... 15,000 $ 21.53 - -
Subsequent to September 30, 2000 the Company acquired put options that
placed a $25.00 per Bbl floor price on 20,000 Bbl per day and a $4.00 per Mcf
floor price on 100,000 Mcf per day during 2001.
9
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 each of
the periods indicated.
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. As such, the financial results presented here
include those of Ocean Energy, Inc. on a stand-alone basis for the first quarter
of 1999 and of the combined company thereafter.
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 Nine Months Ended
September 30, September 30,
--------------------------------- -------------------------------
2000 1999 2000 1999
-------------- -------------- -------------- -------------
Oil and gas operations:
Revenues:
Natural gas............................ $ 137,416 $ 101,908 $ 337,402 $ 236,914
Oil and NGL............................ 123,673 112,485 406,184 279,379
-------------- -------------- -------------- -------------
261,089 214,393 743,586 516,293
-------------- -------------- -------------- -------------
Operating expenses....................... 57,330 54,672 172,040 165,278
Depreciation, depletion and amortization. 75,226 83,323 225,093 227,623
Impairment of oil and gas properties..... - - - 28,500
-------------- -------------- -------------- -------------
Operating profit ........................ 128,533 76,398 346,453 94,892
Corporate................................... (7,891) (7,247) (26,128) (24,147)
-------------- -------------- -------------- -------------
Total operating profit .................. $ 120,642 $ 69,151 $ 320,325 $ 70,745
============== ============== ============== =============
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. In
addition, the Company sold more than $700 million of non-core assets during 1999
and $86 million during the first nine months of 2000 as part of its debt
reduction program. The Company's expanded operations, offset by property sales,
combined with the continued escalation of world crude oil and natural gas prices
which began during the second quarter of 1999 and has continued into 2000,
resulted in a $227 million increase in revenues during the first nine months of
2000 and a $47 million increase for the current quarter compared to the same
periods of 1999. During the first nine months of 1999, the Company recorded
impairments of oil and gas properties in the amount of $28.5 million related
primarily to the sale of the Canadian subsidiary on April 15, 1999. These
factors combined to improve total operating profit by $250 million for the first
nine months of 2000 and by $51 million for the third quarter of 2000 compared to
the same periods of 1999. For the first quarter
10
Ocean Energy, Inc.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
Of Operations
of 1999, prior to the Merger, Seagull on a stand-alone basis recorded revenues
of $57 million from its oil and gas operations and had production of 19,456
barrels of oil per day and 277 MMcf of gas per day.
Revenues - Natural gas revenues increased $100 million, or 42%, to $337
million for the nine months ended September 30, 2000, from $237 million for the
nine months ended September 30, 1999. Gas revenues increased $35 million, or
34%, to $137 million for the third quarter of 2000 as compared to $102 million
for the third quarter of 1999. These increases are primarily due to higher
average gas prices realized during the period, offset by the effects of property
sales as discussed below. The average realized price for natural gas increased
52% to $3.06 per Mcf for the first nine months of 2000 as compared to $2.01 for
the first nine months of 1999 and increased 55% to $3.65 per Mcf for the third
quarter of 2000 compared to $2.36 per Mcf for the third quarter of 1999. Daily
natural gas production for the first nine months of 2000 was 403 MMcf as
compared to 431 MMcf per day for the first nine months of 1999. Daily production
decreased 13% from 1999 volumes for the third quarter of 2000 to 409 MMcf due
primarily to property sales.
Oil revenues reached $406 million for the nine months ended September 30,
2000, an increase of $127 million, or 46%, over revenues of $279 million for the
nine months ended September 30, 1999. For the third quarter of 2000, oil
revenues increased $12 million, or 11%, to $124 million for 2000 compared to
$112 million for the third quarter of 1999. These increases are the result of an
increase in the average realized oil price during the period, offset by the
effects of property sales as discussed below. The average realized price for oil
increased 60% to $22.16 for the first nine months of 2000 compared to $13.84 for
the same period in 1999. The average realized oil price increased to $21.24 for
the third quarter of 2000 compared to $15.74 for the third quarter of 1999.
Daily oil production decreased 10%, to 66,887 Bbl for the first nine months of
2000 as compared to 73,965 Bbl for the same period in 1999. For the third
quarter of 2000, daily oil production decreased 19%, to 63,285 Bbl as compared
to 77,674 Bbl for the third quarter of 1999 primarily due to property sales.
During 1999 and the first quarter of 2000, the Company sold various
non-core oil and gas assets as part of its debt reduction program as follows:
Net Daily Production
Nine Months Ended
September 30, 1999
------------------------------------------
Oil and NGL Gas
Asset Date of Sale (Bbl) (MMcf)
- ---------------------------------------------- ---------------- ------------------- -------------------
Canadian subsidiary........................ April 1999 469 14
Arkoma Basin assets (acquired
primarily in Merger)................... August 1999 - 56
Gulf of Mexico assets...................... August 1999 2,212 6
East Bay assets............................ March 2000 7,727 20
------------------- -------------------
Total reduction in daily production
associated with property sales.......... 10,408 96
=================== ===================
11
Ocean Energy, Inc.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
Of Operations
Operating Data
Three Months Ended Nine Months Ended
September 30, September 30,
--------------------------- ---------------------------
2000 1999 2000 1999
------------ ------------- ------------- -------------
Net Daily Natural Gas Production (MMcf):
Domestic......................................... 386 428 368 382
Cote d'Ivoire.................................... 14 34 25 30
Other International.............................. 9 8 10 19
------------ ------------- ------------- -------------
Total............................................ 409 470 403 431
============ ============= ============= =============
Average Natural Gas Prices ($ per Mcf) (1):
Domestic......................................... $ 4.09 $ 2.38 $ 3.30 $ 2.03
Cote d'Ivoire.................................... $ 2.02 $ 1.77 $ 2.19 $ 1.73
Other International.............................. $ 3.92 $ 2.44 $ 3.62 $ 1.74
Weighted Average................................. $ 4.01 $ 2.34 $ 3.24 $ 2.00
Average Natural Gas Prices including
Hedging Activities ($ per Mcf)..................... $ 3.65 $ 2.36 $ 3.06 $ 2.01
Net Daily Oil and NGL Production (Bbl):
Domestic......................................... 25,206 36,522 27,737 38,340
Equatorial Guinea................................ 21,053 20,774 21,277 19,902
Cote d'Ivoire.................................... 3,433 5,046 4,001 4,839
Egypt ........................................... 8,837 10,729 9,099 7,447
Other International.............................. 4,756 4,603 4,773 3,437
------------ ------------- ------------- -------------
Total............................................ 63,285 77,674 66,887 73,965
============ ============= ============= =============
Average Oil and NGL Prices ($ per Bbl) (1):
Domestic......................................... $ 26.05 $ 18.99 $ 25.42 $ 15.07
Equatorial Guinea................................ $ 25.75 $ 21.69 $ 26.46 $ 16.11
Cote d'Ivoire.................................... $ 28.53 $ 20.24 $ 25.23 $ 16.56
Egypt............................................ $ 27.60 $ 20.06 $ 26.97 $ 17.70
Other International.............................. $ 22.68 $ 12.92 $ 19.19 $ 9.88
Weighted Average................................. $ 26.05 $ 19.58 $ 25.51 $ 15.47
Average Oil and NGL Prices including
Hedging Activities ($ per Bbl)..................... $ 21.24 $ 15.74 $ 22.16 $ 13.84
Wells Drilled:
Gross............................................ 99 103 234 206
Net.............................................. 64 70 133 125
Success Rate..................................... 79% 74% 79% 78%
(1) All price information excludes the results of hedging activities, unless
otherwise stated.
Operating Expenses - Total operating expenses increased $7 million, or 4%,
to $172 million for the nine months ended September 30, 2000 compared to $165
million for the comparable 1999 period. Operating expenses per BOE were $4.68
per BOE for the first nine months of 2000 compared to $4.15 per BOE for the
comparable 1999 period. Approximately $0.39, or 74%, of the increase per BOE is
attributable to increases in production taxes, which relate to the higher
realized oil and gas prices. For the third quarter of 2000 total operating
expenses remained
12
Ocean Energy, Inc.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
Of Operations
relatively flat at $57 million compared to $55 million for the
third quarter of 1999, while operating expenses per BOE were $4.74 per BOE for
the third quarter of 2000 compared to $3.81 per BOE for the third quarter of
1999. The increase in third quarter operating expenses per BOE is also due
primarily to the increase in production taxes.
Depreciation, Depletion and Amortization Expense - Total depreciation,
depletion and amortization ("DD&A") expense for oil and gas operations decreased
$3 million to $225 million for the nine months ended September 30, 2000 from
$228 million for the same period in 1999. DD&A expense for oil and gas
operations decreased $8 million to $75 million for the third quarter of 2000
compared to $83 million for the third quarter of 1999 primarily due to decreased
production during the third quarter of 2000. DD&A expense per BOE related to oil
and gas operations rose 7% to $6.13 per BOE for the nine months ended September
30, 2000, from $5.72 per BOE for the comparable period in 1999. DD&A per BOE was
$6.22 per BOE for the third quarter of 2000 as compared to $5.81 per BOE for the
third quarter of 1999. The higher DD&A expense per BOE for both the first nine
months and the third quarter of 2000 is primarily attributable to the effects of
property sales and the geographic mix of production.
General and Administrative Expenses - General and administrative expenses
increased $3 million to $21 million for the nine months ended September 30, 2000
from $18 million for the comparable 1999 period. This increase is due primarily
to an increase in 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 $29 million, or 33%, to $58
million for the nine months ended September 30, 2000 from $87 million in the
comparable 1999 period. Interest expense for the third quarter of 2000 decreased
$10 million to $20 million from $30 million for 1999, also a 33% decrease. These
substantial decreases are 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 nine months of 2000 ($34 million in 2000
as opposed to $28 million in 1999) and during the third quarter of 2000 ($11
million in 2000 as opposed to $8 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 nine months of
2000. Costs of $44 million were recorded in the first nine months of 1999 and
consisted primarily of Old Ocean's severance costs ($24 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 $115 million was
recognized for the nine months ended September 30, 2000 compared to an income
tax benefit of $9 million for the nine months ended September 30, 1999. This
change is primarily the result of three factors: (i)
13
Ocean Energy, Inc.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
Of Operations
significant improvement in operating results; (ii) changes in the nature of
deferred tax assets and liabilities due to asset sales and prepaid crude oil and
natural gas sales; and (iii) the relative significance of international
operating results and taxes to the Company's total results.
Liquidity And Capital Resources
Liquidity - As a result of the Merger, the Company had nearly $2 billion in
long-term debt as of March 31, 1999. One of management's goals has been the
reduction of these high debt levels, leading to a debt to total capitalization
ratio of 54% by the end of 2000. With a debt to total capitalization ratio of
49% at September 30, 2000, the Company exceeded its target ratio of 54% and
expects continued improvement through year-end. The improvement in the debt to
total capialization ratio was achieved and long-term debt was reduced to $1.1
billion at September 30, 2000 with cash flows attributable to asset sales,
prepaid oil and gas sales, higher commodity prices and disciplined capital
spending.
Concurrent with the closing of the Merger on March 30, 1999, the Company
entered credit facilities (the "Credit Facilities"), which combined the existing
credit facilities of both Old Ocean and Seagull. As of September 30, 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 LIBOR or prime rates plus applicable margins ranging
from zero to 1.7% or at a competitive bid. Due to the substantial repayments
made during the third quarter of 2000, borrowings outstanding against the Credit
Facilities have been reduced from $225 million at June 30, 2000 to $40 million
at September 30, 2000. Letters of Credit totaled $45 million at September 30,
2000, leaving $615 million of available credit.
Capital Expenditures
(Amounts in Thousands)
Three Months Ended Nine Months Ended
September 30, September 30,
--------------------------------- -----------------------------------
2000 1999 2000 1999
-------------- -------------- --------------- ---------------
Oil and Gas Operations:
Leasehold acquisitions............... $ 16,420 $ 4,336 $ 45,418 $ 16,907
Exploration costs................... 49,432 34,375 133,407 84,220
Development costs................... 94,028 42,913 226,292 119,126
-------------- -------------- --------------- ---------------
159,880 81,624 405,117 220,253
Corporate............................. 2,121 6,270 8,232 11,723
-------------- -------------- --------------- ---------------
Total Continuing Operations........... 162,001 87,894 413,349 231,976
Discontinued Operations............ - 2,869 - 5,040
-------------- -------------- --------------- ---------------
Total Capital Expenditures............ $ 162,001 $ 90,763 $ 413,349 $237,016
============== ============== =============== ===============
During the first nine months of 2000 the Company drilled 234 gross wells,
133 net wells, with a success rate of 79%. During the third quarter of 2000 the
Company drilled 99 gross wells, 64 net wells, also with a success rate of 79%.
14
Ocean Energy, Inc.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
Of Operations
During the second quarter, the Company's Board of Directors approved a $50
million increase to the Company's capital expenditure budget for 2000 to
approximately $550 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 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 remaining 2000
capital expenditures primarily with funds provided by operations.
Accounting Pronouncements
In June 1998, the FASB issued SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities ("SFAS 133"), and in June 2000, the FASB
issued SFAS No. 138, Accounting for Certain Derivative Instruments and Certain
Hedging Activities, an amendment of FASB Statement No. 133. These statements
establish standards of accounting for and disclosures of derivative instruments
and hedging activities and are effective for fiscal years beginning after June
15, 2000. The Company will adopt SFAS 133 effective January 1, 2001. See Note 1
to the Company's Consolidated Financial Statements for a discussion of the
expected impact of SFAS 133 on the Company's financial position and results of
operations.
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") or million
cubic feet ("MMcf"). Oil, condensate and natural gas liquids ("NGL") are stated
in barrels ("Bbl). 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 content. BOE
represents one barrel of oil equivalent with six Mcf of gas converted to one
barrel of liquid.
15
Ocean Energy, Inc.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
Of Operations
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 those 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;
- - Competition from others in the energy industry; and
- - Effects of implementation of SFAS 133 on the Company's financial position
and results of operations.
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
16
Ocean Energy, Inc.
Statements for a discussion of hedging activities during the first nine months
of 2000. To calculate the potential effect of the derivative financial
instruments 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 September 30, 2000. The following table
shows the estimated potential effect of the derivative financial instruments on
revenues for the periods for which the hedges are in effect (in thousands):
Estimated Increase Estimated Increase Estimated Increase
(Decrease) in Revenues (Decrease) in Revenues (Decrease) in Revenues
at Current with 10% Decrease in with 10% Increase in
Period Prices Prices Prices
- --------------------------------- ------------------------ ------------------------- ------------------------
Fourth Quarter, 2000......... $ (45,000) $ (32,000) $ (57,000)
Year 2001.................... (23,000) (15,000) (31,000)
Part II. Other Information
Item 4. Submission of Matters to a Vote of Security Holders
None during the third quarter of 2000.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
*#10.1 First Amendment to Ocean Energy, Inc. Supplemental Benefit Plan dated September 29, 2000.
*#10.2 Ocean Energy, Inc. Excess Benefit Plan dated September 29, 2000.
*#10.3 First Amendment to Executive Supplemental Retirement Plan Membership Agreement by and between the
Company and James T. Hackett effective as of June 26, 2000.
*#10.4 Employment Agreement by and between the Company and John D. Schiller dated July 20, 2000.
* 27.1 Financial Data Schedule.
* Filed herewith.
# Identifies management contracts and compensatory plans or arrangements.
17
Ocean Energy, Inc.
(b) Reports on Form 8-K:
On October 25, 2000, the Company filed a Current Report on Form 8-K dated
October 25, 2000 containing the Company's revised estimates of its
operating statistics for the fourth quarter and year ended December 31,
2000. The item reported in such Current Report was Item 9. Regulation FD
Disclosure.
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: November 2, 2000
By: /s/Gordon L. McConnell
Gordon L. McConnell
Vice President and Controller
(Principal Accounting Officer)
Date: November 2, 2000
18
Ocean Energy, Inc.
EXHIBIT INDEX
*#10.1 First Amendment to Ocean Energy, Inc. Supplemental Benefit Plan dated September 29, 2000.
*#10.2 Ocean Energy, Inc. Excess Benefit Plan dated September 29, 2000.
*#10.3 First Amendment to Executive Supplemental Retirement Plan Membership Agreement by and between the
Company and James T. Hackett effective as of June 26, 2000.
*#10.4 Employment Agreement by and between the Company and John D. Schiller dated July 20, 2000.
* 27.1 Financial Data Schedule.
* Filed herewith.
# Identifies management contracts and compensatory plans or arrangements.
19