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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 June 30, 1997
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission file number: 1-8094
Seagull Energy Corporation
(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 1700, Houston, Texas 77002-6714
(Address of principal executive offices) (Zip code)
(713) 951-4700
(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 August 1, 1997, 63,175,401 shares of Common Stock, par value
$0.10 per share, were outstanding.
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SEAGULL ENERGY CORPORATION AND SUBSIDIARIES
INDEX
PAGE
Part I. Financial Information NUMBER
Item 1. Unaudited Consolidated Financial Statements
Consolidated Statements of Operations for the Three and
Six Months Ended June 30, 1997 and 1996........................... 3
Consolidated Balance Sheets - June 30, 1997
and December 31, 1996............................................. 4
Consolidated Statements of Cash Flows for the Six Months
Ended June 30, 1997 and 1996...................................... 5
Notes to Consolidated Financial Statements........................ 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations......................................... 11
Part II. Other Information
Item 4. Submission of Matters to a Vote of Security Holders ............. 16
Item 6. Exhibits and Reports on Form 8-K ................................ 18
Signatures................................................................... 19
-2-
Item 1. UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
SEAGULL ENERGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Amounts in Thousands Except Per Share Data)
(Unaudited)
Three Months Ended June 30, Six Months Ended June 30,
--------------------------- ----------------------------
1997 1996 1997 1996
------------ ------------ ------------- -------------
Restated Restated
Revenues:
Oil and gas operations................... $ 105,406 96,586 $ 230,410 $ 197,731
Alaska transmission and distribution..... 16,774 15,703 51,343 51,133
------------ ------------ ------------- -------------
122,180 112,289 281,753 248,864
Costs of Operations:
Operations and maintenance............... 41,005 35,727 83,876 70,062
Alaska transmission and distribution
cost of gas sold....................... 7,244 6,257 23,966 22,457
Exploration charges...................... 7,346 13,732 16,299 20,462
Depreciation, depletion and amortization. 45,661 38,323 87,772 76,529
General and administrative............... 3,113 4,634 5,423 8,363
------------ ------------ ------------- -------------
104,369 98,673 217,336 197,873
------------ ------------ ------------- -------------
Operating Profit........................... 17,811 13,616 64,417 50,991
Other (Income) Expense:
Interest expense......................... 9,585 11,237 19,995 22,683
Interest income and other................ (215) (764) (913) (1,919)
------------ ------------ ------------- -------------
9,370 10,473 19,082 20,764
------------ ------------ ------------- -------------
Income Before Income Taxes................. 8,441 3,143 45,335 30,227
Income Tax Expense......................... 5,820 6,077 25,460 14,849
------------ ------------ ------------- -------------
Net Income (Loss).......................... $ 2,621 $ (2,934) $ 19,875 $ 15,378
============ ============ ============= =============
Earnings (Loss) Per Share.................. $ 0.04 $ (0.05) $ 0.31 $ 0.24
============ ============ ============= =============
Weighted Average Number of Common
Shares Outstanding....................... 63,961 62,592 64,028 63,160
============ ============ ============= =============
See accompanying Notes to Consolidated Financial Statements.
-3-
SEAGULL ENERGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Amounts in Thousands Except Share and Per Share Data)
(Unaudited)
June 30, December 31,
1997 1996
-------------- -------------
ASSETS
Current Assets:
Cash and cash equivalents............................... $ 29,465 $ 15,284
Accounts receivable, net................................ 149,346 193,659
Inventories............................................. 13,638 12,285
Prepaid expenses and other.............................. 15,271 6,389
-------------- -------------
Total Current Assets.................................. 207,720 227,617
Property, Plant and Equipment - at cost................... 2,177,335 2,049,356
Accumulated Depreciation, Depletion and Amortization...... 890,298 804,715
-------------- -------------
1,287,037 1,244,641
Other Assets.............................................. 43,011 42,805
-------------- -------------
Total Assets.............................................. $ 1,537,768 $ 1,515,063
============== =============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts and note payable............................... $ 158,140 $ 166,775
Accrued expenses........................................ 45,028 57,368
Current maturities of long-term debt.................... 7,247 7,227
-------------- -------------
Total Current Liabilities............................. 210,415 231,370
Long-Term Debt............................................ 588,752 573,455
Other Noncurrent Liabilities.............................. 60,348 65,428
Deferred Income Taxes..................................... 42,154 31,021
Redeemable Bearer Shares.................................. 15,837 16,059
Commitments and Contingencies............................. - -
Shareholders' Equity:
Common Stock, $.10 par value; authorized
100,000,000 shares; issued 63,428,219 shares (1997)
and 63,073,287 shares (1996)........................... 6,343 6,307
Additional paid-in capital.............................. 486,594 483,118
Retained earnings....................................... 135,680 115,805
Foreign currency translation adjustment................. (804) 51
Less - note receivable from employee stock
ownership plan......................................... (4,284) (4,284)
Less - 361,314 shares of Common Stock
held in Treasury, at cost.............................. (3,267) (3,267)
-------------- -------------
Total Shareholders' Equity............................ 620,262 597,730
-------------- -------------
Total Liabilities and Shareholders' Equity................ $ 1,537,768 $ 1,515,063
============== =============
See accompanying Notes to Consolidated Financial Statements.
-4-
SEAGULL ENERGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in Thousands)
(Unaudited)
Six Months Ended
June 30,
---------------------
1997 1996
--------- ----------
Operating Activities:
Net income................................................... $ 19,875 $ 15,378
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation, depletion and amortization................... 87,772 76,529
Amortization of deferred financing costs................... 1,215 1,755
Deferred income taxes...................................... 11,336 5,683
Dry hole expense........................................... 3,401 9,308
Other...................................................... 350 94
---------- --------
123,949 108,747
Changes in operating assets and
liabilities, net of acquisitions:
Decrease in short-term investments....................... - 5,011
Decrease in accounts receivable.......................... 44,096 10,765
Decrease (Increase) in inventories, prepaid
expenses and other...................................... (9,685) 5,779
Decrease in accounts and note payable.................... (16,688) (4,011)
Decrease in accrued expenses and other................... (15,678) (904)
---------- ---------
Net Cash Provided By Operating Activities............. 125,994 125,387
Investing Activities:
Capital expenditures......................................... (137,348) (75,268)
Acquisitions, net of cash acquired........................... (821) (25,669)
Proceeds from sales of property, plant and equipment......... 1,156 1,082
---------- ---------
Net Cash Used In Investing Activities................. (137,013) (99,855)
Financing Activities:
Proceeds from debt........................................... 368,003 135,560
Principal Payments on debt................................... (344,007) (153,132)
Proceeds from sales of common stock.......................... 2,798 3,848
Other........................................................ (1,530) (2,218)
---------- ---------
Net Cash Provided By (Used In) Financing Activities... 25,264 (15,942)
Effect of exchange rate changes on Cash........................ (64) 138
---------- ---------
Increase In Cash And Cash Equivalents................. 14,181 9,728
Cash And Cash Equivalents At Beginning Of Period............... 15,284 21,477
---------- ---------
Cash And Cash Equivalents At End Of Period................... $ 29,465 $ 31,205
=========== =========
See accompanying Notes to Consolidated Financial Statements.
-5-
SEAGULL ENERGY CORPORATION AND SUBSIDIARIES
Notes To Consolidated Financial Statements
(Unaudited)
Note 1. Presentation of Financial Information
Merger with Global Natural Resources Inc. -- On October 3, 1996, the
shareholders of Seagull Energy Corporation and Subsidiaries (the "Company" or
"Seagull") and Global Natural Resources Inc. ("Global") approved a merger of a
wholly owned subsidiary of Seagull into Global (the "Global Merger"). Pursuant
to the Global Merger, each share of Global common stock was converted into 0.88
shares of Seagull common stock with approximately 26.3 million shares issued to
the shareholders of Global. The Global Merger was accounted for as a pooling of
interests. Accordingly, the financial statements for 1996 have been restated to
combine the results of Seagull and Global.
In the opinion of management, the unaudited consolidated financial
statements presented herein contain all adjustments necessary to present fairly
the financial position of Seagull as of June 30, 1997, and the results of its
operations and cash flows for the three and six months ended June 30, 1997 and
1996. All adjustments made are of a normal, recurring nature. The results of
operations for the three and six months ended June 30, 1997 and 1996 are not
necessarily indicative of the results to be expected for the full year.
The financial information presented herein should be read in
conjunction with the consolidated financial statements and notes included in the
Company's Annual Report on Form 10-K for the year ended December 31, 1996.
Certain reclassifications have been made to the 1996 financial
information to conform to the presentation used in 1997.
Derivative Financial Instruments -- The Company enters into a variety
of commodity derivative financial instruments (futures contracts, price swaps
and options) only for non-trading purposes as a hedging strategy to manage
commodity prices associated with oil and gas sales and to reduce the impact of
price fluctuations. To qualify as a hedge, these instruments must correlate to
anticipated future production such that the Company's exposure to the effects of
price changes is reduced. The Company uses the hedge or deferral method of
accounting for these instruments and, as a result, gains and losses on commodity
derivative financial instruments are generally offset by similar changes in the
realized prices of the commodities. Income and costs related to these hedging
activities are recognized in oil and gas revenues when the commodities are
produced. Any realized income and costs that are deferred at the balance sheet
date and any margin accounts for futures contracts are included as net current
assets. While commodity derivative financial instruments are intended to reduce
the Company's exposure to declines in the market price of oil and natural gas,
the commodity derivative financial instruments may limit the Company's gain from
increases in those market prices.
The Company recorded as a reduction of revenues $7.7 million and $7.3
million related to commodity hedging activities for the six months ended June
30, 1997 and 1996, respectively, and as a reduction of revenues $0.2 million and
$3.8 million for the second quarter of 1997 and 1996, respectively. While
substantially all commodity hedges for equity production were settled by
-6-
SEAGULL ENERGY CORPORATION AND SUBSIDIARIES
Notes To Consolidated Financial Statements
(Unaudited)
March 31, 1997, the Company has commodity hedges in place as required by the
monetary production payment (related to the 1995 sale of the Company's
Section 29 tax credit-bearing properties) for approximately 12 MMcf per day
through December 1998.
From time to time, the Company has entered into interest rate swap
agreements to manage the impact of changes in interest rates. The differential
interest to be paid or received is accrued as interest rates change and is
recognized over the life of the agreements as a component of interest expense.
Currently, Seagull has no open interest rate swap agreements.
Accounting Pronouncements -- In February 1997, the Financial Accounting
Standards Board (the "FASB")issued Statement of Financial Accounting Standards
("SFAS") No. 128, Earnings per Share. This statement establishes standards for
computing and presenting earnings per share and requires, among other things,
dual presentation of basic and diluted earnings per share on the face of the
statement of operations. The statement is effective for financial statements for
periods ending after December 15, 1997. The Company will adopt SFAS No. 128 by
December 31, 1997 and does not expect the adoption to have a material impact on
its calculation of earnings per share.
The following represents the pro forma effect on earnings per share as
though SFAS No. 128 were adopted effective January 1, 1997:
EARNINGS PER SHARE (UNAUDITED)
(Amounts in Thousands Except Per Share Data)
Three Months Ended Six Months Ended
June 30, June 30,
------------------------------ -----------------------------
1997 1996 1997 1996
-------------- ------------- ------------- --------------
Restated Restated
Net income (loss)................................ $ 2,621 $(2,934) $19,875 $15,378
As Reported:
Earnings (loss) per share ..................... $ 0.04 $ (0.05) $ 0.31 $ 0.24
Weighted average number of common
shares outstanding........................... 63,961 62,592 64,028 63,160
Pro Forma:
Earnings (loss) per share:
Basic...................................... $ 0.04 $ (0.05) $ 0.32 $ 0.25
Diluted.................................... $ 0.04 $ (0.05) $ 0.31 $ 0.24
Weighted average number of common
shares outstanding:
Basic...................................... 63,007 62,627 62,897 62,488
Diluted.................................... 64,295 62,627 64,423 64,602
-7-
SEAGULL ENERGY CORPORATION AND SUBSIDIARIES
Notes To Consolidated Financial Statements
(Unaudited)
In June 1997, the FASB issued SFAS No. 130, Reporting Comprehensive
Income. This statement establishes standards for reporting and display of
comprehensive income and its components in a full set of financial statements.
Comprehensive income includes all changes in a company's equity, including,
among other things, foreign currency translation adjustments, notes receivable
from employee stock ownership plans and deferred gains (losses) on hedging
activities. In June 1997, the FASB also issued SFAS No. 131, Disclosures about
Segments of an Enterprise and Related Information. This statement establishes
standards for reporting information about operating segments in annual financial
statements and requires that enterprises report selected information about
operating segments in interim reports issued to shareholders. Both of these
statements are effective for financial statements for periods beginning after
December 15, 1997. As both SFAS No. 130 and 131 establish standards for
reporting and display, the Company does not expect the adoption of these
statements to have a material impact on its financial condition or results of
operations.
Note 2. Supplemental Disclosures of Cash Flow Information
Six Months Ended June 30,
----------------------- ---- ----------------------
(Amounts in Thousands) 1997 1996
----------------------- ----------------------
Cash paid during the period for: Restated
Interest, net of amount capitalized................................. $20,913 $21,528
Income taxes........................................................ $13,377 $ 9,481
Note 3. Long-Term Debt
On June 17, 1997, the Company amended and restated its U.S. and
Canadian revolving credit facilities (the "Credit Facilities") to increase the
"Borrowing Base" from $550 million to $650 million, extend the maturity date
from December 31, 2002 to May 31, 2004 and reduce stated interest rate margins.
At June 30, 1997, the maximum commitment under the Credit Facilities was $550
million with immediately available unused commitments of approximately $250
million. The Credit Facilities bear interest, at Seagull's option, at various
market-sensitive rates plus an applicable margin or a competitive bid rate. The
amount of senior indebtedness the Company is permitted to incur under the
provisions of the Credit Facilities is subject to a "Borrowing Base" based on
the proved reserves of the Company's Oil and Gas Operations segment and the
financial performance of the Company's other business segments.
-8-
SEAGULL ENERGY CORPORATION AND SUBSIDIARIES
Notes To Consolidated Financial Statements
(Unaudited)
Note 4. Canadian Properties
In June 1997, the Company announced that it had retained an investment
banking firm to assist the Company in exploring strategic alternatives regarding
its Canadian operating subsidiary, Seagull Energy Canada Ltd. The Company's
Canadian operations contributed $18.4 million and $15.9 million in revenue and
$2.3 million and $(2.3) million in income (loss) before taxes for the six months
ended June 30, 1997 and 1996, respectively. At June 30, 1997, the Company's
Canadian operations had assets less associated liabilities of $104 million.
Note 5. Commitments and Contingencies
Royalty Litigation -- Increasingly, royalty owners under oil and gas
leases are challenging valuation methodology and post-production deductions used
by producers. These cases have arisen because of the manner in which oil and gas
producers such as Seagull have begun to provide services that had previously
been provided by the interstate gas pipelines prior to the "unbundling" of gas
services. For example, in 1996, Seagull was sued in Anne K. Barnaby, et al. v.
Seagull Mid-South, Inc. This case is pending in state court of Latimer County,
Oklahoma. In this case, the plaintiffs seek additional royalties based upon the
deduction by Seagull of post-production costs, such as those related to
gathering, compression, dehydration and treating. In addition, the plaintiffs
have questioned the sales price used by Seagull as a basis for calculating
royalty to the extent that sales were made to Seagull's gas marketing
subsidiary. While Seagull intends to vigorously defend this case, the Company
cannot predict the outcome of these matters.
NorAm Litigation -- Seagull also was sued in NorAm Gas Transmission
Co., et al. v. Seagull Mid-South, Inc. The case relates to Seagull's termination
of a 1956 gas contract which provided for the sale of gas by Seagull from
certain wells in the Aetna Field in Arkansas for approximately $0.16 per Mcf.
NorAm Gas Transmission ("NorAm") has sought a declaratory judgment that the gas
contract remains in effect with respect to these wells or, in the alternative,
money damages. Since the termination by Seagull of the gas contract, Seagull has
been selling the gas in question on the spot market. Seagull believes that it
had reasonable grounds for terminating the gas contract. NorAm has also sought a
declaratory judgment to the effect that certain additional wells in the Aetna
Field (including any new wells) would be subject to the $0.16 per Mcf price (the
"Additional Well Claim"). If NorAm were successful with the Additional Well
Claim, Seagull's operations in the Aetna Field would be materially affected in
an adverse manner. The current estimate of potential loss in these matters
ranges from zero to $91 million plus attorneys' fees. The NorAm case is
currently scheduled for trial in late 1997 in District Court in Harris County,
Texas. While Seagull intends to vigorously defend this case, the Company cannot
determine the outcome of this case.
Gulf Coast Vacuum Site -- In 1993, the Environmental Protection Agency
("EPA") notified the Company that a subsidiary was a potentially responsible
party ("PRP") at the Gulf Coast Vacuum Services Superfund Site the "GCV Site")
in Vermilion Parish, Louisiana. Based upon the Company's investigation of this
-9-
SEAGULL ENERGY CORPORATION AND SUBSIDIARIES
Notes To Consolidated Financial Statements
(Unaudited)
claim, the Company believes that the basis for its alleged liability is a series
of transactions between the Company's subsidiary and the operator of the GCV
Site that occurred during 1979 and 1980. While the EPA's cleanup cost
estimate of the GCV Site is in the range of $17 million, the Company believes
that its liability is unlikely to be material to its financial condition,
results of operations or cash flows because of the large number of PRPs at the
GCV Site and the relative amount of contamination, if any, that may have been
caused at the GCV Site by the disposal of wastes by the Company during 1979 and
1980.
Caddo Natural Gas Company Site -- The Company was notified by the
Louisiana Department of Environmental Quality on March 20, 1996, that one of the
Company's wholly owned subsidiaries is a PRP in a state Superfund site known as
the Caddo Natural Gas Company Site. This site is reported to be contaminated
with low levels of PCB, an additive used in lubricating oils prior to the 1980s.
During the first quarter of 1997, the Company signed a settlement agreement
whereby Seagull would pay a portion of the cleanup costs for the Caddo Natural
Gas Company Site. Seagull's share of the cleanup costs is expected to be
approximately $150,000.
Comstock Mill Site -- On February 21, 1996, the United States
Department of Interior Bureau of Land Management ("BLM") sent a letter to
Houston Oil & Minerals Corporation ("HO&M"), a wholly owned subsidiary of
Seagull, requesting HO&M to prepare and submit a plan for sampling and analyzing
groundwater at a former mining operation located near Virginia City, Nevada (the
"Comstock Mill Site"). The basis for the BLM's request was the alleged operation
of the Comstock Mill Site by HO&M between 1978 and 1982. Pursuant to an
indemnity provision in the stock purchase agreement by which Seagull acquired
HO&M in 1988 (the "HO&M Purchase Agreement"), Seagull tendered the BLM's letter
to Tenneco Inc. ("Tenneco") with a demand for indemnity and notified the BLM
that Tenneco would respond to the BLM letter on behalf of HO&M. The BLM has also
indicated that Tenneco and HO&M might be required to address cyanide
contamination of groundwater at the Comstock Mill Site by separate action of the
Nevada Division of Environmental Protection. Seagull believes that any liability
associated with the Comstock Mill Site is the responsibility of Tenneco or its
successors in liability pursuant to the HO&M Purchase Agreement.
Other -- The Company is a party to other ongoing litigation in the
normal course of business. Management regularly analyzes current information
and, as necessary, provides accruals for probable liabilities on the eventual
disposition of these matters. While the outcome of lawsuits or other proceedings
against the Company cannot be predicted with certainty, management believes that
the effect on its financial condition, results of operations and cash flows, if
any, will not be material.
-10-
SEAGULL ENERGY CORPORATION AND SUBSIDIARIES
Item 2. Managements Discussion and Analysis of Financial Condition and
Results of Operations
The following discussion is intended to assist in an understanding of
the Company's financial position and results of operations for each of the
periods indicated. The Company's accompanying unaudited financial statements and
the notes thereto and the consolidated financial statements and notes included
in the Company's Annual Report on Form 10-K for the year ended December 31, 1996
contain detailed information that should be referred to in conjunction with the
following discussion.
RESULTS OF OPERATIONS
CONSOLIDATED HIGHLIGHTS
(Amounts in Thousands Except Per Share Amounts)
Three Months Ended Six Months Ended
June 30, June 30,
------------------------------- ------------------------------
1997 1996 1997 1996
-------------- ------------- ------------- --------------
Revenues: Restated Restated
Oil and gas operations......................... $105,406 $ 96,586 $230,410 $197,731
Alaska transmission and distribution........... 16,774 15,703 51,343 51,133
-------------- ------------- ------------- --------------
$122,180 $112,289 $281,753 $248,864
============== ============= ============= ==============
Operating Profit:
Oil and gas operations......................... $ 19,681 $ 16,721 $ 58,760 $ 46,599
Alaska transmission and distribution........... 1,971 2,023 12,437 13,767
Corporate...................................... (3,841) (5,128) (6,780) (9,375)
-------------- ------------- ------------- --------------
$ 17,811 $ 13,616 $ 64,417 $ 50,991
============== ============= ============= ==============
Net income (loss)................................ $ 2,621 $ (2,934) $ 19,875 $ 15,378
Earnings (loss) per share........................ $ 0.04 $ (0.05) $ 0.31 $ 0.24
Weighted average number of common
shares outstanding............................. 63,961 62,592 64,028 63,160
Net cash provided by operating
activities before changes in
operating assets and liabilities............... $ 50,836 $ 46,209 $123,949 $108,747
Net cash provided by operating
activities..................................... $ 52,479 $ 73,254 $125,994 $125,387
Net income increased $5.6 million and $4.5 million, respectively for
the three and six months ended June 30, 1997 versus the prior year. These
increases were primarily due to the increase in operating profit and decrease in
interest expense, which were partially offset by an increase in income taxes.
The increase in operating profit was primarily due to significant increases in
international oil production and decreases in dry hole expense and general and
administrative expense. The six months ended June 30, 1997 also benefits from
increases in domestic and Canadian natural gas prices.
-11-
SEAGULL ENERGY CORPORATION AND SUBSIDIARIES
Item 2. Managements Discussion and Analysis of Financial Condition and
Results of Operations
OIL AND GAS OPERATIONS
(Amounts in Thousands)
Three Months Ended Six Months Ended
June 30, June 30,
---------------------------------- ----------------------------------
1997 1996 1997 1996
--------------- --------------- --------------- ---------------
Revenues: Restated Restated
Natural gas............................. $ 68,219 $73,158 $153,719 $145,826
Oil and NGL............................. 32,411 17,559 63,234 34,444
Pipeline and marketing.................. 4,776 5,869 13,457 17,461
--------------- --------------- --------------- ---------------
105,406 96,586 230,410 197,731
--------------- --------------- --------------- ---------------
E&P operating expenses.................... 29,241 24,529 59,124 47,984
Pipeline and marketing
expenses................................ 6,289 5,813 13,980 11,251
Exploration charges....................... 7,346 13,732 16,299 20,462
Depreciation, depletion and
amortization............................ 42,849 35,791 82,247 71,435
--------------- -------------- --------------- ---------------
Operating profit........................ $ 19,681 $16,721 $ 58,760 $ 46,599
=============== =============== =============== ===============
With the purchase of two Egyptian concessions from units of Exxon
Corporation (the "Esso Suez Acquisition") in September 1996, and the October
1996 merger with Global Natural Resources Inc., Seagull's operations gained both
a significant international component and an increase in oil production as a
percentage of the total production. The $3 million and $12 million increases in
the operating profit of the Oil and Gas Operations ("O&G") segment for the
second quarter and the first half of 1997, respectively, were principally due to
the resulting five-fold increase in oil production in Egypt. Increases in
Egyptian oil production accounted for just over $13 million and $23 million of
the total increase in revenue for the second quarter and the six months of 1997,
respectively, as Seagull realized contributions from the East Zeit concession,
one of two concessions purchased in the Esso Suez Acquisition, and as additional
production facilities became operational at the Company's Qarun concession. The
six months ended June 30, 1997 also benefited from a 12% increase in domestic
natural gas prices.
The domestic natural gas price increase from $2.07 per Mcf for the six
months ended June 30, 1996 to $2.32 per Mcf for the first half of 1997 accounted
for approximately $16 million of the overall increase in natural gas revenue.
Additionally, the $0.44 per Mcf increase in Canadian natural gas prices over the
same period accounted for approximately $4 million of the overall increase in
revenue. Ultimately, U.S. and Canadian natural gas revenues increased only $7
million for the first half of 1997 as the increase related to higher prices was
partially offset by lower production and Canadian royalties increasing in
tandem with prices. This lower production was principally the result of normal
production declines from developed properties combined with the impact of
substantially lower development expenditures in late 1994 and all of 1995.
Natural gas revenues decreased $5 million from the second quarter of 1996 to
1997 primarily as a result of lower domestic gas prices and lower production due
to the reasons discussed above.
-12-
SEAGULL ENERGY CORPORATION AND SUBSIDIARIES
Item 2. Managements Discussion and Analysis of Financial Condition and
Results of Operations
The Company recorded as a reduction of revenues $7.7 million and $7.3
million related to commodity hedging activities for the six months ended June
30, 1997 and 1996, respectively, and as a reduction of revenues $0.2 million and
$3.8 million for the second quarter of 1997 and 1996, respectively. While
substantially all commodity hedges for equity production were settled by March
31, 1997, the Company has commodity hedges in place as required by the monetary
production payment (related to the 1995 sale of the Company's Section 29 tax
credit-bearing properties) for approximately 12 MMcf per day through December
1998.
EXPLORATION AND PRODUCTION OPERATING DATA
(Amounts in thousands except per unit data)
Three Months Ended June 30,
------------------------------------------------------------------------------------------------
Revenues Net Daily Production Unit Price
1997 1996 1997 1996 1997 1996
------------ ------------- ------------ ------------- ------------ -------------
Restated Restated Restated
Gas Sales (1):
Domestic............ $57,696 $63,339 310.7 327.8 2.04 2.12
Canada ............. 6,217 5,818 51.1 53.1 1.34 1.20
Cote d'Ivoire....... 922 720 5.7 4.6 1.78 1.70
Indonesia........... 3,365 3,281 10.3 10.8 3.58 3.33
Other ............. 19 - 0.2 - 0.99 -
------------ ------------- ------------ ------------- ------------ ------------
$68,219 $73,158 378.0 396.3 1.98 2.03
============ ============= ============ ============= ============ ============
Oil and NGL Sales(2):
Domestic............ $ 8,181 $ 7,029 5,085 4,180 17.68 18.48
Canada ............. 1,134 1,297 857 975 14.54 14.62
Egypt............... 14,610 2,869 9,241 1,634 17.37 19.30
Cote d'Ivoire....... 2,084 2,248 1,264 1,376 18.12 17.95
Tatarstan........... 6,081 3,861 5,139 2,884 13.00 14.71
Indonesia........... 298 249 149 145 22.00 18.90
Other ............. 23 6 16 5 16.02 11.74
------------ ------------- ------------ ------------- ----------- -------------
$32,411 $17,559 21,751 11,199 16.37 17.23
============ ============= ============ ============= =========== =============
(1) Net Daily Production in MMcf per day; Unit Price in $ per Mcf.
(2) Net Daily Production in Bbl per day; Unit Price in $ per Bbl.
-13-
SEAGULL ENERGY CORPORATION AND SUBSIDIARIES
Item 2. Managements Discussion and Analysis of Financial Condition and
Results of Operations
EXPLORATION AND PRODUCTION OPERATING DATA
(Amounts in thousands except per unit data)
Six Months Ended June 30,
------------------------------------------------------------------------------------------------
Revenues Net Daily Production Unit Price
1997 1996 1997 1996 1997 1996
------------- --------------- ----------- ------------- ---------- -------------
Restated Restated Restated
Gas Sales (1):
Domestic............ $128,569 $123,924 306.7 328.7 2.32 2.07
Canada ............. 15,707 13,188 49.6 55.4 1.75 1.31
Cote d'Ivoire....... 1,745 1,415 5.3 4.5 1.83 1.71
Indonesia........... 7,659 7,299 12.0 12.1 3.53 3.30
Other ............. 39 - 0.2 - 1.00 -
------------- --------------- ----------- ------------- ---------- -------------
$153,719 $145,826 373.8 400.7 2.28 2.00
============= =============== =========== ============= ========== =============
Oil and NGL Sales(2):
Domestic............ $ 15,043 $ 14,215 4,383 4,447 18.96 17.57
Canada ............. 2,677 2,670 867 979 17.06 14.98
Egypt............... 28,588 4,957 8,555 1,432 18.46 19.01
Cote d'Ivoire....... 4,847 5,060 1,356 1,504 19.75 18.49
Tatarstan........... 11,264 7,066 4,281 2,795 14.54 13.89
Indonesia........... 764 461 203 134 20.75 18.83
Other ............. 51 15 16 7 17.71 12.77
------------- --------------- ----------- ------------- ---------- -------------
$ 63,234 $ 34,444 19,661 11,298 17.77 16.75
============= =============== =========== ============= ========== =============
(1) Net Daily Production in MMcf per day; Unit Price in $ per Mcf.
(2) Net Daily Production in Bbl per day; Unit Price in $ per Bbl.
E&P operating expenses per BOE increased for the second quarter from
$3.49 in 1996 to $3.79 in 1997 and from $3.38 for the six months ended June 30,
1996 to $3.99 in 1997 as a result of (i) increased domestic production taxes as
natural gas prices increased, (ii) increased domestic workover expenses, and
(iii) higher average operating costs per BOE at the East Zeit concession as
compared to the Company's other operations.
Exploration charges decreased 47% and 20% for the quarter and the six
months ended June 30, 1997, respectively, principally due to decreases in dry
hole costs of approximately $5.4 million and $5.9 million, respectively.
The increase in E&P depreciation, depletion and amortization ("DD&A")
expense of $0.53 per BOE for the first half of 1997 combined with the increase
in Egyptian production to produce 20% and 16% increases in DD&A expense for the
O&G segment for the three and six months ended June 30, 1997, respectively. A
change in the mix of the properties being produced domestically and a higher
DD&A rate for the East Zeit concession as compared to the Company's other
operations were the primary factors involved in the increase in the DD&A rate
per equivalent unit of production.
-14-
SEAGULL ENERGY CORPORATION AND SUBSIDIARIES
Item 2. Managements Discussion and Analysis of Financial Condition and
Results of Operations
ALASKA TRANSMISSION AND DISTRIBUTION
(Amounts in Thousand Except Per Unit Data)
Three Months Ended Six Months Ended
June 30, June 30,
----------------------------- -----------------------------
1997 1996 1997 1996
------------ ------------- ------------ -------------
Revenues.......................................... $16,774 $15,703 $51,343 $51,133
Cost of gas sold.................................. 7,244 6,257 23,966 22,457
------------ ------------- ------------ -------------
Gross margin.................................... 9,530 9,446 27,377 28,676
Operations and maintenance expense................ 5,475 5,385 10,772 10,827
Depreciation, depletion and amortization.......... 2,084 2,038 4,168 4,082
------------ ------------- ------------ -------------
Operating profit................................ $1,971 $ 2,023 $12,437 $13,767
============ ============= ============ =============
OPERATING DATA:
Degree days (1)................................. 1,571 1,470 5,291 5,823
Volumes (Bcf):
Gas sold...................................... 3.8 4.0 12.6 14.4
Gas transported............................... 4.9 4.6 11.2 9.9
------------ ------------- ------------ -------------
Combined...................................... 8.7 8.6 23.8 24.3
============ ============= ============ =============
Margins ($ per Mcf):
Gas sold...................................... 1.86 1.84 1.71 1.68
Gas transported............................... 0.50 0.45 0.51 0.47
Combined...................................... 1.09 1.10 1.15 1.18
(1) A measure of weather severity calculated by subtracting the mean
temperature for each day from 650 degrees fahrenheit. More degree days equate to
colder weather.
Operating profit of the Alaska transmission and distribution segment
(ENSTAR Natural Gas Company, a division of the Company, and Alaska Pipeline
Company, a wholly owned subsidiary, (collectively referred to herein as "ENSTAR
Alaska")) for the six months ended June 30, 1997 decreased slightly from the
1996 period primarily as a result of lower volumes due to warmer weather in the
utility's service area and a slight decrease in ENSTAR Alaska's combined margin.
This segment's business is seasonal with approximately 65% of its
revenues earned in the first and fourth quarters of each year.
OTHER
General and administrative expenses decreased for both the three and
six months ended June 30, 1997 in comparison to 1996 primarily due to
efficiencies being realized from the Global Merger and decreased expenses
associated with compensation plans that are tied directly to the closing price
of Seagull's common stock. The Company's effective tax rate increased from
-15-
SEAGULL ENERGY CORPORATION AND SUBSIDIARIES
Item 2. Managements Discussion and Analysis of Financial Condition and
Results of Operations
49.1% for the first half of 1996 to 56.2% for the first half of 1997 primarily
due to the higher effective tax rates associated with the Company's
expanding international operations.
LIQUIDITY AND CAPITAL RESOURCES
CAPITAL EXPENDITURES
(Amounts in Thousands)
Three Months Ended Six Months Ended
June 30, June 30,
---------------------------------- ---------------------------------
1997 1996 1997 1996
--------------- --------------- -------------- --------------
Restated Restated
Exploration and production:
Leasehold.............................. $12,482 $ 3,384 $ 13,315 $ 5,347
Exploration............................ 23,740 21,589 45,577 30,255
Development............................ 40,979 21,479 70,750 35,019
--------------- --------------- -------------- --------------
77,201 46,452 129,642 70,621
Pipeline and marketing................... 8 - 45 -
--------------- --------------- -------------- --------------
Oil and gas operations................. 77,209 46,452 129,687 70,621
Alaska transmission and distribution.....
2,046 2,169 3,451 3,347
Corporate................................ 2,666 731 4,210 1,300
--------------- --------------- -------------- --------------
$81,921 $49,352 $137,348 $75,268
=============== =============== ============== ==============
Seagull's capital expenditure program was designed to be consistent
with the Company's strategic objectives to achieve a greater balance between
additions from exploration, development and acquisitions than in preceding years
and grow oil and gas deliverability in 1998. To further meet those objectives,
in July 1997, Seagul's Board of Directors approved an increase in the capital
expenditures budget of $36 million to a total of $287 million, including just
over $270 million in E&P. More than 43% of this spending is targeted outside the
United States. As drilling activities increased substantially to meet these
objectives for 1997, E&P capital expenditures increased primarily in the
Company's domestic, Egyptian and Ivorian areas of operations.
On June 17, 1997, the Company amended and restated the Credit
Facilities to increase the "Borrowing Base" from $550 million to $650 million,
extend the maturity date from December 31, 2002 to May 31, 2004 and reduce
stated interest rate margins. At June 30, 1997, the maximum commitment under the
Credit Facilities was $550 million with immediately available unused commitments
of approximately $250 million. The Credit Facilities bear interest, at Seagull's
option, at various market-sensitive rates plus an applicable margin or a
competitive bid rate. The amount of senior indebtedness the Company is permitted
to incur under the provisions of the Credit Facilities is subject to a
"Borrowing Base" based on the proved reserves of the
-16-
SEAGULL ENERGY CORPORATION AND SUBSIDIARIES
Item 2. Managements Discssion and Analysis of Financial Condition and
Results of Operations
Company's O&G segment and the financial performance of the Company's other
business segments.
Management believes that the Company's internally generated funds and
bank borrowing capabilities will be sufficient to finance current and forecasted
operations.
In June 1997, the Company announced that it had retained an investment
banking firm to assist the Company in exploring strategic alternatives regarding
its Canadian operating subsidiary, Seagull Energy Canada Ltd.
Defined Terms
Natural gas is stated herein in billion cubic feet ("Bcf"), million
cubic feet ("MMcf") or thousand cubic feet ("Mcf"). Oil, condensate and natural
gas liquids ("NGL") are stated in barrels ("Bbl") or thousand barrels ("MBbl").
MMcfe and Mcfe represent the equivalent of one million and one thousand cubic
feet of natural gas, respectively. 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. MBOE and BOE represent one thousand barrels of oil equivalent and one
barrel of oil equivalent, respectively, with six Mcf of gas converted to one
barrel of liquid.
Forward Looking Statements
Item 2 of this document includes forward looking statements within the
meaning of Section 27A of the Securities Act of 1933, as amended, and Section
21E of the Securities Exchange Act of 1934, as amended. Although Seagull
believes that its expectations are based upon reasonable assumptions, it can
give no assurance that its goals will be achieved. Important factors that could
cause actual results to differ materially from those in the forward looking
statements include the resolution of various litigation matters discussed
earlier, the result of the Company's search for strategic alternatives for its
Canadian properties, political developments in foreign countries, federal and
state regulatory developments, the timing and extent of changes in commodity
prices, the timing and extent of success in discovering, developing and
producing or acquiring oil and gas reserves and conditions of the capital and
equity markets during the periods covered by the forward looking statements.
-17-
SEAGULL ENERGY CORPORATION AND SUBSIDIARIES
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
At the Annual Meeting of Shareholders of the Company held on May 13,
1997, the shareholders voted to elect one director (Milton Carroll) to serve
until the 1999 Annual Meeting of Shareholders and five directors to serve until
the 2000 Annual Meeting of Shareholders, adopt an amendment to the Seagull
Energy Corporation Bylaws to increase the permitted number of directors and
amend the classified Board provisions and ratify the selection of KPMG Peat
Marwick LLP as independent auditors of the Company for the fiscal year ended
December 31, 1997. Votes cast were as follows:
Broker
For Against Non-Votes Abstained
--------------- -------------- --------------- -------------
Election as a Director of the Company of:
Milton Carroll.....................................52,483,683 - - 5,847,677
J. Evans Attwell...................................52,499,723 - - 5,831,637
Richard J. Burgess.................................52,486,375 - - 5,844,985
Barry J. Galt......................................52,495,608 - - 5,835,752
Dee S. Osborne.....................................52,499,439 - - 5,831,921
Sidney R. Petersen.................................52,488,143 - - 5,843,217
Adoption of the Amendment to the Bylaws..............48,675,515 9,589,023 - 66,822
Ratification of Selection of KPMG Peat
Marwick LLP as Independent Auditors for
1997................................................58,023,971 269,676 - 37,713
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
*4.1 Credit Agreement, U.S. $450 million Revolving Credit and Competitive
Bid Facility, dated June 17, 1997, among Seagull Energy Corporation,
The Chase Manhattan Bank, Individually and as Agent, and the other
Banks signatory hereto.
*4.2 Credit Agreement, U.S. $100 million Revolving Credit Facility, dated
June 17, 1997, among Seagull Energy Canada Ltd. and The Chase
Manhattan Bank of Canada, Individually and as Arranger and
Administrative Agent, The Bank of Nova Scotia, Individually and as
Paying Agent and Co-Agent, Canadian Imperial Bank of Commerce,
Individually and as Co-Agent, and the other Banks signatory hereto.
*#10.1 1997 Executive Incentive Plan.
*27.1 Financial Data Schedule.
(b) Reports on Form 8-K:
None.
- ---------------
* Filed herewith.
# Identifies management contracts and compensatory plans or arrangements.
-18-
SEAGULL ENERGY CORPORATION AND SUBSIDIARIES
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.
SEAGULL ENERGY CORPORATION
By: /s/ William L. Transier, Senior Vice President
and Chief Financial Officer
(Principal Financial Officer)
Date: August 8, 1997
By: /s/ Gordon L.McConnell, Vice President and
Controller (Principal Accounting Officer)
Date: August 8, 1997
-19-
SEAGULL ENERGY CORPORATION AND SUBSIDIARIES
EXHIBIT INDEX
EXHIBIT PAGE
NUMBER DESCRIPTION NUMBER
- ---------------- ------------------------------------------------------------------------------ --------------
*4.1 Credit Agreement, U.S. $450 million Revolving Credit and
Competitive Bid Facility, dated June 17, 1997, among
Seagull Energy Corporation, The Chase Manhattan Bank,
Individually and as Agent, and the other Banks signatory
hereto.
*4.2 Credit Agreement, U.S. $100 million Revolving Credit
Facility, dated June 17, 1997, among Seagull Energy Canada
Ltd. and The Chase Manhattan Bank of Canada, Individually
and as Arranger and Administrative Agent, The Bank of Nova
Scotia, Individually and as Paying Agent and Co-Agent,
Canadian Imperial Bank of Commerce, Individually and as
Co-Agent, and the other Banks signatory hereto.
*#10.1 1997 Executive Incentive Plan.
*27.1 Financial Data Schedule.
- ----------------
* Filed herewith.
# Identifies management contracts and compensatory plans or arrangements.