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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 September 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 November 5, 1997, 63,242,950 shares of Common Stock, par value $0.10 per
share, were outstanding.
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SEAGULL ENERGY CORPORATION AND SUBSIDIARIES
INDEX
PAGE
NUMBER
Part I. Financial Information
Item 1. Unaudited Consolidated Financial Statements
Consolidated Statements of Operations - Three and Nine Months
Ended September 30, 1997 and 1996................................ 3
Consolidated Balance Sheets - September 30, 1997
and December 31, 1996 .......................................... 4
Consolidated Statements of Cash Flows - Nine Months
Ended September 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 ....................................... 13
Part II. Other Information
Item 6. Exhibits and Reports on Form 8-K................................... 20
Signatures.................................................................. 21
-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 Nine Months Ended
September 30, September 30,
-------------------------------- ----------------------------------
1997 1996 1997 1996
--------------- ---------------- ---------------- ----------------
Restated Restated
Revenues:
Oil and gas operations....................... $ 108,543 $ 97,320 $ 338,953 $ 295,051
Alaska transmission and distribution......... 12,112 12,611 63,455 63,744
--------------- ---------------- ---------------- ----------------
120,655 109,931 402,408 358,795
Costs of Operations:
Operations and maintenance................... 39,744 35,551 123,620 105,613
Alaska transmission and distribution
cost of gas sold.......................... 4,557 4,517 28,523 26,974
Exploration charges.......................... 15,217 10,791 31,516 31,253
Depreciation, depletion and amortization..... 42,787 37,238 130,559 113,767
General and administrative................... 4,894 2,634 10,317 10,997
--------------- ---------------- ---------------- ----------------
107,199 90,731 324,535 288,604
--------------- ---------------- ---------------- ----------------
Operating Profit................................ 13,456 19,200 77,873 70,191
Other (Income) Expense:
Interest expense............................. 9,990 10,795 29,985 33,478
Interest income and other.................... (626) (5,232) (1,539) (7,151)
--------------- ---------------- ---------------- ----------------
9,364 5,563 28,446 26,327
--------------- ---------------- ---------------- ----------------
Income Before Income Taxes...................... 4,092 13,637 49,427 43,864
Income Tax Expense.............................. 890 6,179 26,350 21,028
--------------- ---------------- ---------------- ----------------
Net Income...................................... $ 3,202 $ 7,458 $ 23,077 $ 22,836
=============== ================ ================ ================
Earnings Per Common Share....................... $ 0.05 $ 0.12 $ 0.36 $ 0.36
=============== ================ ================ ================
Weighted Average Number of
Common Shares Outstanding.................... 64,349 63,934 64,154 63,828
=============== ================ ================ ================
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)
September 30, December 31,
1997 1996
------------------ ------------------
Assets:
Current Assets:
Cash and cash equivalents............................................... $ 15,755 $ 15,284
Accounts receivable, net................................................ 146,049 193,659
Inventories............................................................. 18,271 12,285
Prepaid expenses and other.............................................. 16,430 6,389
------------------ ------------------
Total Current Assets.................................................. 196,505 227,617
Property, Plant and Equipment - at cost................................... 2,241,442 2,049,356
Accumulated Depreciation, Depletion and Amortization...................... 933,638 804,715
------------------ ------------------
1,307,804 1,244,641
Other Assets.............................................................. 43,968 42,805
------------------ ------------------
Total Assets.............................................................. $ 1,548,277 $ 1,515,063
================== ==================
Liabilities And Shareholders' Equity:
Current Liabilities:
Accounts and note payable............................................... $ 160,679 $ 166,775
Accrued expenses........................................................ 39,758 57,368
Current maturities of long-term debt.................................... 7,097 7,227
------------------ ------------------
Total Current Liabilities............................................. 207,534 231,370
Long-Term Debt............................................................ 604,783 573,455
Other Noncurrent Liabilities.............................................. 64,086 65,428
Deferred Income Taxes..................................................... 33,935 31,021
Redeemable Bearer Shares.................................................. 15,775 16,059
Commitments and Contingencies............................................. - -
Shareholders' Equity:
Common Stock, $.10 par value; authorized 100,000,000 shares;
issued 63,746,140 shares (1997) and 63,073,287 shares (1996).......... 6,375 6,307
Additional paid-in capital.............................................. 490,893 483,118
Retained earnings....................................................... 138,882 115,805
Foreign currency translation adjustment................................. (769) 51
Less - note receivable from employee stock ownership plan............... (4,284) (4,284)
Treasury stock - 601,314 shares (1997) and 361,314 (1996)............... (8,933) (3,267)
------------------ ------------------
Total Shareholders' Equity.............................................. 622,164 597,730
------------------ ------------------
Total Liabilities and Shareholders' Equity................................. $ 1,548,277 $ 1,515,063
================== ==================
See accompanying Notes to Consolidated Financial Statements.
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SEAGULL ENERGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in Thousands)
(Unaudited)
Nine Months Ended
September 30,
----------------------------------
1997 1996
--------------- -----------------
Operating Activities:
Net income............................................................... $ 23,077 $ 22,836
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation, depletion and amortization............................... 130,559 113,767
Amortization of deferred financing costs............................... 1,629 2,362
Deferred income taxes.................................................. 2,914 11,020
Dry hole expense....................................................... 13,844 14,137
Other.................................................................. 549 (2,021)
--------------- -----------------
172,572 162,101
Changes in operating assets and liabilities, net of acquisitions:
Decrease in short-term liquid investments............................ - 5,010
Decrease in accounts receivable...................................... 47,596 31,480
Decrease (increase) in inventories, prepaid expenses and other....... (16,706) 4,742
Decrease in accounts payable......................................... (12,151) (10,959)
Decrease in accrued expenses and other............................... (15,378) (7,462)
--------------- -----------------
Net Cash Provided By Operating Activities................................ 175,933 184,912
Investing Activities:
Capital expenditures..................................................... (205,564) (135,946)
Acquisitions, net of cash acquired....................................... (7,421) (100,153)
Proceeds from sales of property, plant and equipment..................... 1,191 5,879
--------------- -----------------
Net Cash Used In Investing Activities.................................... (211,794) (230,220)
Financing Activities:
Proceeds from debt....................................................... 695,297 272,559
Principal payments on debt .............................................. (656,858) (218,106)
Proceeds from sales of common stock...................................... 5,586 4,000
Purchase of treasury stock............................................... (5,667) -
Other.................................................................... (1,998) (1,677)
--------------- -----------------
Net Cash Provided By Financing Activities................................ 36,360 56,776
Effect of exchange rate changes on cash.................................... (28) (8)
--------------- -----------------
Increase In Cash And Cash Equivalents.................................... 471 11,460
Cash And Cash Equivalents At Beginning Of Period........................... 15,284 21,477
--------------- -----------------
Cash And Cash Equivalents At End Of Period................................. $ 15,755 $ 32,937
=============== =================
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 September 30, 1997, and the results of
its operations and cash flows for the three and nine months ended September 30,
1997 and 1996. All adjustments made are of a normal, recurring nature. The
results of operations for the three and nine months ended September 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 $8.3 million and $7.7
million related to commodity hedging activities for the nine months ended
September 30, 1997 and 1996, respectively, and $0.6 million and $0.4 million for
-6-
SEAGULL ENERGY CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
Note 1. Presentation of Financial Information
the third 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 11 MMcf per day through December 1998.
From time to time, the Company has entered into various financial
instruments, such as interest rate swaps and interest rate lock agreements, to
manage the impact of changes in interest rates. To qualify as a hedge, these
instruments must correlate to anticipated future changes in interest rates such
that the Company's exposure to the effects of interest rate changes is reduced.
The Company uses the hedge or deferral method of accounting for these
instruments and, as a result, gains and losses on these financial instruments
are generally offset by similar changes in the realized interest rate. 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 or interest rate lock
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:
-7-
SEAGULL ENERGY CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
EARNINGS PER SHARE
(Amounts in Thousands Except Per Share Data)
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------------ -----------------------------
1997 1996 1997 1996
-------------- ------------- ------------- --------------
Restated Restated
As Reported:
Earnings per share.............................. $ 0.05 $ 0.12 $ 0.36 $ 0.36
Weighted average number of common
shares outstanding............................ 64,349 63,934 64,154 63,828
Pro Forma:
Earnings per share:
Basic......................................... $ 0.05 $ 0.12 $ 0.37 $ 0.37
Diluted....................................... $ 0.05 $ 0.12 $ 0.36 $ 0.35
Weighted average number of common
shares outstanding:
Basic......................................... 63,160 62,666 62,986 62,547
Diluted....................................... 64,765 64,460 64,562 64,556
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. 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.
-8-
SEAGULL ENERGY CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
(Amounts in Thousands)
Note 2. Supplemental Disclosure of Cash Flow Information
Nine Months Ended September 30,
----------------------------------------------------
1997 1996
----------------------- ----------------------
Cash paid during the period for: Restated
Interest, net of amount capitalized........................ $ 35,801 $ 38,660
Income taxes............................................... 20,305 13,247
Note 3. Long-Term Debt
On September 30, 1997, Seagull issued $150 million Senior Notes offered at
a public offering price of 99.544% of face value. The Senior Notes have a coupon
of 7.5% and mature September 15, 2027. The Senior Notes are not redeemable prior
to maturity and are not subject to any sinking fund. The net proceeds of
approximately $146 million were used to repay existing debt and for general
corporate purposes. The Senior Notes represent unsecured obligations of the
Company and rank pari passu with all other unsecured, unsubordinated obligations
of the Company. The Senior Notes contain conditions and restrictive provisions
including, among other things, restrictions on additional indebtedness by the
Company and its subsidiaries and entering into sale and leaseback transactions.
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 September
30, 1997, the maximum commitment under the Credit Facilities was $550 million
with immediately available unused commitments of approximately $366 million. The
Credit Facilities bear interest, at Seagull's option, at various
market-sensitive rates plus an applicable margin or a competitive bid rate. At
September 30, 1997 and 1996, the average interest rates under the Credit
Facilities were 5.6% and 6.1%, respectively. 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. See Note 5 for further discussion.
Note 4. 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 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,
-9-
SEAGULL ENERGY CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
(Amounts in Thousands)
Note 2. Supplemental Disclosure of Cash Flow Information
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 "NorAm Litigation"). 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 Co. ("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"). See Note 5 for
discussion of a Settlement Proposal. If NorAm would have been successful with
the Additional Well Claim, Seagull's operations in the Aetna Field would have
been materially affected in an adverse manner. Prior to the Settlement Proposal,
the estimate of potential loss in these matters ranged from zero to $91 million
plus attorneys' fees.
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
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.
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
-10-
SEAGULL ENERGY CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
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.
Note 5. Subsequent Events
Sale of Canadian Oil and Gas Properties -- On October 6, 1997, Seagull sold
its Canadian oil and gas subsidiary, Seagull Energy Canada Ltd. ("Seagull
Canada"), to Rio Alto Exploration Ltd. ("Rio Alto"). The economic effective date
for the disposition is July 1, 1997 (the "Effective Date"). Seagull realized
approximately $185 million of sales proceeds. Seagull will recognize a pre-tax
gain of approximately $12 million in the fourth quarter of 1997. The Company
applied the sales proceeds to repay existing long-term debt, including all of
its U.S. and Canadian bank debt. As a result of the sale of Seagull Canada, the
Company terminated the Canadian component of the Credit Facilities, thereby
lowering the maximum commitment to $450 million, and reduced the Borrowing Base
to $550 million.
The Company's operations in Canada consisted of oil and gas exploration and
production activities through interests in fields located in Alberta, Canada. As
of December 31, 1996, the Company's proved reserves in Canada totaled
approximately 42.7 million barrels of oil equivalents representing 17% of the
Company's reserves. The Company's Canadian operations contributed $26 million
and $23 million in revenue and $5.5 million and $(3.9) million in income (loss)
before taxes for the nine months ended September 30, 1997 and 1996,
respectively. At September 30, 1997, the Company's Canadian operations had
assets less associated liabilities of $106 million.
-11-
SEAGULL ENERGY CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
The following table presents the unaudited pro forma results of Seagull as
though the disposition of Seagull Canada had occurred on January 1, 1996:
PRO FORMA INFORMATION
(Amounts in Thousands Except Per Share Data)
Three Months Ended Nine Months Ended
September 30, September 30,
----------------------------------- --------------------------------
1997 1996 1997 1996
----------------- ---------------- --------------- ---------------
Restated Restated
Revenues....................................... $113,083 $102,670 $376,452 $335,676
Net income..................................... 3,773 9,782 24,917 30,060
Earnings per share............................. 0.06 0.15 0.39 0.47
The unaudited pro forma information does not purport to be indicative of
actual results, if the disposition of Seagull Canada had been in effect for the
periods indicated, or of future results.
NorAm Litigation Settlement -- On November 10, 1997, the Company and NorAm
signed a Settlement Proposal that could lead to a final settlement and
resolution of the NorAm Litigation discussed in Note 4. The Settlement Proposal
is contingent upon the negotiation and execution of the gas contract and other
final settlement documentation no later than December 15, 1997. The Settlement
Proposal calls for a cash payment to NorAm upon execution of the gas contract
described below and other final settlement documentation. Under the terms of the
proposed long-term gas sales contract, Seagull will deliver 6,800 MMBtu per day
of natural gas to NorAm over a five-year period at an initial price of $0.53 per
MMBtu. As a result of this subsequent event and assuming the Settlement Proposal
is ultimately executed under its existing terms, the Company will record in the
fourth quarter a charge to net income of approximately $2.7 million ($0.04 per
share).
-12-
Item 2. SEAGULL ENERGY CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
(Unaudited)
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 Nine Months Ended
September 30, September 30,
------------------------------- ------------------------------
1997 1996 1997 1996
-------------- ------------- ------------- --------------
Restated Restated
Revenues:
Oil and gas operations........................ $ 108,543 $ 97,320 $ 338,953 $ 295,051
Alaska transmission and distribution.......... 12,112 12,611 63,455 63,744
-------------- ------------- ------------- --------------
$ 120,655 $ 109,931 $ 402,408 $ 358,795
============== ============= ============= ==============
Operating Profit:
Oil and gas operations........................ $ 18,603 $ 21,134 $ 77,363 $ 67,733
Alaska transmission and distribution.......... 548 1,225 12,985 14,992
Corporate..................................... (5,695) (3,159) (12,475) (12,534)
-------------- ------------- ------------- --------------
$ 13,456 $ 19,200 $ 77,873 $ 70,191
============== ============= ============= ==============
Net income....................................... $ 3,202 $ 7,458 $ 23,077 $ 22,836
Earnings per share............................... $ 0.05 $ 0.12 $ 0.36 $ 0.36
Weighted average number of common
shares outstanding............................ 64,349 63,934 64,154 63,828
Net cash provided by operating activities before
changes in operating assets and liabilities.. $ 48,623 $ 53,354 $ 172,572 $ 162,101
Net cash provided by operating activities........ $ 49,939 $ 59,525 $ 175,933 $ 184,912
Revenues increased approximately $11 million, or 10%, and $44 million, or
12%, respectively for the three and nine months ended September 30, 1997 versus
the prior year. These increases were primarily due to the increases in
international oil and gas revenues. The nine months ended September 30, 1997
also benefited from a 9% increase in domestic and 31% increase in Canadian
natural gas prices.
Operating profit for the nine months of 1997 increased by nearly $8
million, or 11%, over 1996 primarily due to the increased international
production, partially offset by a decrease in operating profit from the
Company's Alaska transmission and distribution segment. For the third quarter,
while operating profit related to international exploration and production
("E&P") activities increased, total operating profit decreased by approximately
-13-
Item 2. SEAGULL ENERGY CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
(Unaudited)
$6 million through increases in dry hole expenses and general and administrative
("G&A") expenses associated with compensation plans that are tied directly to
the market price of Seagull's common stock.
Net income for the nine months ended September 30, 1997 was unchanged from
1996 as decreases in other income, such as gains on sales of property, plant and
equipment and distributions from investments, and an increase in income taxes
nearly offset the increase in operating profit. Net income for the third quarter
of 1997 decreased approximately $4 million from the prior year as a result of
the decreases in operating profit and in other income, such as gains on sales of
property, plant and equipment and distributions from investments, partially
offset by a decrease in income tax expense.
Oil and Gas Operations
(Amounts in Thousands)
Three Months Ended Nine Months Ended
September 30, September 30,
--------------------------------- ----------------------------------
1997 1996 1997 1996
--------------- -------------- --------------- ---------------
Restated Restated
Revenues:
Natural gas............................ $ 70,374 $ 71,467 $ 224,093 $ 217,293
Oil and NGL............................ 32,986 20,259 96,220 54,703
Pipeline and marketing................. 5,183 5,594 18,640 23,055
--------------- -------------- -------------- ---------------
108,543 97,320 338,953 295,051
--------------- -------------- -------------- ---------------
E&P operating expenses.................... 27,967 24,701 87,091 72,685
Pipeline and marketing expenses........... 6,860 6,017 20,840 17,268
Exploration charges....................... 15,217 10,791 31,516 31,253
Depreciation, depletion and amortization.. 39,896 34,677 122,143 106,112
--------------- -------------- -------------- ---------------
Operating profit....................... $ 18,603 $ 21,134 $ 77,363 $ 67,733
=============== ============== ============== ===============
With the purchase of two Egyptian concessions from units of Exxon
Corporation 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 $10 million increase in the operating profit of the Oil and Gas
Operations ("O&G") segment for the first nine months of 1997 was principally due
to the resulting five-fold increase in oil production in Egypt. Increases in
Egyptian oil production accounted for just over $14 million and $39 million of
the total increase in revenue for the third quarter and the nine months of 1997,
respectively, as Seagull realized contributions from the East Zeit concession,
one of two concessions purchased from Exxon Corporation, and as additional
production facilities became operational at the Company's Qarun concession. The
increase in revenue due to increased Egyptian production was partially offset by
a decline in oil prices for both the three and nine months ended September 30,
1997 versus 1996. The nine months ended September 30, 1997 also benefited from a
9% increase in domestic natural gas prices.
-14-
Item 2. SEAGULL ENERGY CORPORATION AND SUBSIDIARIES
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
(Unaudited)
EXPLORATION AND PRODUCTION OPERATING DATA
(Amounts in thousands except per unit data)
Three Months Ended September 30,
------------------------------------------------------------------------------------------------
Revenues Net Daily Production Unit Price
----------------------------- ----------------------------- ----------------------------
1997 1996 1997 1996 1997 1996
------------ ------------- ------------ ------------- ----------- --------------
Gas Sales (1): Restated Restated Restated
Domestic............ $ 60,453 $ 61,370 299.4 312.6 2.19 2.13
Canada.............. 6,254 5,818 49.2 57.5 1.38 1.10
Cote d'Ivoire....... 1,131 581 7.0 3.5 1.77 1.79
Indonesia........... 2,519 3,698 7.6 11.7 3.58 3.43
Other............... 17 - 0.1 - 1.07 -
------------ ------------- ------------ ------------- ----------- --------------
$ 70,374 $ 71,467 363.3 385.3 2.11 2.02
============ ============= ============ ============= =========== ==============
Oil and NGL Sales(2):
Domestic............ $ 8,040 $ 7,288 5,292 4,163 16.52 19.04
Canada.............. 1,318 1,443 932 1,011 15.37 15.51
Egypt............... 16,309 5,225 9,838 2,680 18.02 21.19
Cote d'Ivoire....... 1,839 2,273 1,146 1,258 17.44 19.64
Tatarstan........... 5,276 3,529 4,113 3,102 13.94 12.37
Indonesia........... 190 495 94 266 22.01 20.26
Other............... 14 6 9 5 15.49 10.64
------------ ------------- ------------ ------------- ----------- ------------
$ 32,986 $ 20,259 21,424 12,485 16.74 17.64
============ ============= ============ ============= =========== ============
Nine Months Ended September 30,
-------------------------------------------------------------------------------------------------
Revenues Net Daily Production Unit Price
----------------------------- ----------------------------- -----------------------------
1997 1996 1997 1996 1997 1996
------------ ------------- ------------ ------------- ----------- --------------
Gas Sales (1): Restated Restated Restated
Domestic............ $ 189,022 $ 185,294 304.2 323.3 2.28 2.09
Canada.............. 21,961 19,006 49.5 56.1 1.63 1.24
Cote d'Ivoire....... 2,876 1,996 5.8 4.2 1.81 1.74
Indonesia........... 10,178 10,997 10.6 12.0 3.54 3.34
Other............... 56 - 0.2 - 1.02 -
------------ ------------- ------------ ----- -------- ----------- --------------
$ 224,093 $ 217,293 370.3 395.6 2.22 2.00
============ ============= ============ ============= =========== ==============
Oil and NGL Sales(2):
Domestic............ $ 23,083 $ 21,503 4,689 4,351 18.03 18.04
Canada.............. 3,995 4,113 889 991 16.46 15.16
Egypt............... 44,897 10,182 8,987 1,851 18.30 20.07
Cote d'Ivoire....... 6,686 7,333 1,285 1,421 19.06 18.83
Tatarstan........... 16,540 10,595 4,224 2,898 14.34 13.34
Indonesia........... 954 956 166 178 20.99 19.55
Other............... 65 21 15 7 17.18 12.08
------------ ------------- ------------ ------------- ----------- --------------
$ 96,220 $ 54,703 20,255 11,697 17.40 17.07
============ ============= ============ ============= =========== ==============
(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.
-15-
Item 2. SEAGULL ENERGY CORPORATION AND SUBSIDIARIES
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
(Unaudited)
The domestic natural gas price increase from $2.09 per Mcf for the nine
months ended September 30, 1996 to $2.28 per Mcf for the first nine months of
1997 accounted for approximately $16 million of the overall increase in natural
gas revenue. Additionally, the $0.39 per Mcf increase in Canadian natural gas
prices over the same period accounted for approximately $5 million of the
overall increase in revenue. Ultimately, U.S. and Canadian natural gas revenues
increased only $7 million for the first nine months 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. On October 6, 1997, Seagull sold all of its Canadian oil
and gas properties. See Note 5 to the Unaudited Consolidated Financial
Statements for additional discussion.
The Company recorded as a reduction of revenues $8.3 million and $7.7
million related to commodity hedging activities for the nine months ended
September 30, 1997 and 1996, respectively, and $0.6 million and $0.4 million for
the third 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.
E&P operating expenses per BOE increased for the third quarter from $3.50
in 1996 to $3.71 in 1997 and from $3.42 for the nine months ended September 30,
1996 to $3.89 in 1997 as a result of (i) increased domestic production taxes,
(ii) increased domestic lease operating and workover expenses, and (iii)
increased lease operating expenses in Tatarstan.
Exploration charges increased 41% for the third quarter of 1997 compared to
1996 principally due to increases in dry hole costs associated with increased
drilling activities.
The increase in E&P depreciation, depletion and amortization ("DD&A")
expense from $4.92 per BOE for the first nine months of 1996 to $5.41 per BOE
for the first nine months of 1997 combined with the increase in Egyptian
production to produce a 15% increase in DD&A expense for the O&G segment for
both the three and nine months ended September 30, 1997, respectively. A change
in the mix of the properties being produced internationally was the primary
factors for the increase, partially offset by a decrease in DD&A expense related
to Canadian oil and gas properties.
-16-
Item 2. SEAGULL ENERGY CORPORATION AND SUBSIDIARIES
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
(Unaudited)
Alaska Transmission and Distribution
(Amounts in Thousand Except Per Unit Data)
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------------------- ----------------------------
1997 1996 1997 1996
-------------- -------------- ------------ ------------
Revenues........................................ $ 12,112 $ 12,611 $ 63,455 $ 63,744
Cost of gas sold................................ 4,557 4,517 28,523 26,974
-------------- -------------- ------------ ------------
Gross margin................................. 7,555 8,094 34,932 36,770
Operations and maintenance expense.............. 4,917 4,833 15,689 15,660
Depreciation, depletion and amortization........ 2,090 2,036 6,258 6,118
-------------- -------------- ------------ ------------
Operating profit............................. $ 548 $ 1,225 $ 12,985 $ 14,992
============== ============== ============ ============
OPERATING DATA:
Degree days (1).............................. 762 948 6,053 6,771
(1) A measure of weather severity calculated by subtracting the mean
temperature for each day from 65 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 three and nine month periods ended September 30, 1997 declined
from the comparable 1996 periods primarily as the warmer weather led to a
decrease in volumes.
This segment's business is seasonal with approximately 65% of its sales
made in the first and fourth quarters of each year.
-17-
Item 2. SEAGULL ENERGY CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
(Unaudited)
LIQUIDITY AND CAPITAL RESOURCES
Capital Expenditures
(Amounts in Thousands)
Three Months Ended Nine Months Ended
September 30, September 30,
---------------------------------- ---------------------------------
1997 1996 1997 1996
--------------- --------------- -------------- --------------
Restated Restated
Exploration and production:
Leasehold............................. $ 2,786 $ 4,420 $ 16,101 $ 9,767
Exploration........................... 29,304 18,535 74,881 48,790
Development........................... 30,359 33,118 101,109 68,137
--------------- --------------- -------------- --------------
62,449 56,073 192,091 126,694
Pipeline and marketing................... 162 - 207 -
--------------- --------------- -------------- --------------
Oil and gas operations................ 62,611 56,073 192,298 126,694
Alaska transmission and distribution..... 3,081 3,458 6,532 6,805
Corporate................................ 2,524 1,147 6,734 2,447
--------------- --------------- -------------- --------------
$ 68,216 $ 60,678 $ 205,564 $ 135,946
=============== =============== ============== ==============
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, Seagull'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 and Egyptian 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 September 30, 1997, the maximum commitment under the Credit
Facilities was $550 million with immediately available unused commitments of
approximately $366 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 O&G segment and
the financial performance of the Company's other business segments. On September
30, 1997, Seagull issued $150 million Senior Notes offered at a public offering
price of 99.54% of face value. The Senior Notes have a coupon of 7.5% and mature
-18-
Item 2. SEAGULL ENERGY CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
(Unaudited)
September 15, 2027. The Senior Notes are not redeemable prior to maturity and
are not subject to any sinking fund. The net proceeds of approximately $146
million were used to repay existing debt and for general corporate purposes. The
Senior Notes represent unsecured obligations of the Company and rank pari passu
with all other unsecured, unsubordinated obligations of the Company. The Senior
Notes contain conditions and restrictive provisions including, among other
things, restrictions on additional indebtedness by the Company and its
subsidiaries and entering into sale and leaseback transactions.
On October 6, 1997, Seagull sold its Canadian oil and gas subsidiary,
Seagull Energy Canada Ltd. ("Seagull Canada"), to Rio Alto Exploration Ltd.
("Rio Alto"). The economic effective date for the disposition is July 1, 1997
(the "Effective Date"). Seagull realized approximately $185 million of sales
proceeds, net of selling expenses. Seagull will recognize a pre-tax gain of
approximately $12 million in the fourth quarter of 1997. The Company applied the
sales proceeds to repay existing long-term debt, including all of its U.S. and
Canadian bank debt. As a result of the sale of Seagull Canada, the Company
terminated the Canadian component of the Credit Facilities, thereby lowering the
maximum commitment to $450 million and reduced the Borrowing Base to $550
million.
Management believes that the Company's internally generated funds and bank
borrowing capabilities will be sufficient to finance current and forecasted
operations.
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 acutal results to differ materially from those in the forward looking
statements include the resolution of various litigation matters discussed
earlier, 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.
-19-
SEAGULL ENERGY CORPORATION AND SUBSIDIARIES
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
3.1 Bylaws of the Company as amended through March 7, 1997 (incorporated
by reference to Exhibit 4.9 to Form S-3 filed with the Securities and
Exchange Commission on September 18, 1997).
*4.1 Note Agreement dated May 14, 1992 by and among Alaska Pipeline Company
and each of the purchasers thereto (including forms of notes and other
exhibits thereto) and Inducement Agreement of even date therewith by
and among Seagull and Aid Association of Lutherans, The Equitable Life
Assurance Society of the United States, Equitable Variable Life Insurance
Company, Provident Life & Accident Insurance Company and Teachers
Insurance & Annuity Association of America (including exhibits thereto).
4.2 Terms Agreement and the resolutions of adopted by the Chairman of the
Board of Directors related to Exhibit 4.3 (incorporated by reference to
Exhibit 2.3 to Form 8-K filed with the Securities and Exchange
Commission on October 17, 1997).
4.3 Form of Senior Indenture among the Company and The Bank of New York,
as Trustee (incorporated by reference to Exhibit 2.4 to Form 8-K filed
with the Securities and Exchange Commission on October 17, 1997).
*#10.1 Seagull Energy Corporation 1993 Nonemployee Directors' Stock Option Plan,
including forms of agreements, as amended.
*#10.2 Seagull Energy Corporation 1993 Stock Option Plan, as amended.
*#10.3 Consulting Agreement between Robert Vagt and Seagull Energy Corporation.
*27.1 Financial Data Schedule.
______________
* Filed herewith.
# Identifies management contracts and compensatory plans or arrangements.
(b) Reports on Form 8-K:
On September 18, 1997, the Company filed a current report on Form 8-K dated
September 11, 1997 with respect to Seagull's disposition of its Canadian oil and
gas operations. The items reported in such current report were Item 5 (Other
Events) and Item 7 (Financial Statements and Exhibits).
-20-
SEAGULL ENERGY CORPORATION AND SUBSIDIARIES
On October 17, 1997, the Company filed a current report on Form 8-K dated
October 6, 1997 with respect to Seagull's disposition of its Canadian oil and
gas operations. The items reported in such current report were Item 2
(Acquisition or Disposition of Assets), Item 5 (Other Events) and Item 7
(Financial Statements and Exhibits).
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
William L. Transier
Senior Vice President and
Chief Financial Officer
(Principal Financial Officer)
Date: November 13, 1997
By: /s/ Gordon L. McConnell
Gordon L. McConnell, Vice President
and Controller
(Principal Accounting Officer)
Date: November 13, 1997
-21-
EXHIBIT INDEX
EXHIBIT PAGE
NUMBER NUMBER
3.1 Bylaws of the Company as amended through March 7, 1997
(incorporated by reference to Exhibit 4.9 to Form S-3 filed
with the Securities and Exchange Commission on September
18, 1997).
*4.1 Note Agreement dated May 14, 1992 by and among Alaska Pipeline
Company and each of the purchasers thereto (including forms of
notes and other exhibits thereto) and Inducement Agreement
of even date therewith by and among Seagull and Aid Asso-
ciation of Lutherans, The Equitable Life Assurance Society
of the United States, Equitable Variable Life Insurance
Company, Provident Life & Accident Insurance Company and
Teachers Insurance & Annuity Association of America (including
exhibits thereto).
4.2 Terms Agreement and the resolutions of adopted by the Chairman
of the Board of Directors related to Exhibit 4.3 (incorporated
by reference to Exhibit 2.3 to Form 8-K filed with the
Securities and Exchange Commission on October 17, 1997).
4.3 Form of Senior Indenture among the Company and The Bank of
New York, as Trustee (incorporated by reference to Exhibit 2.4
to Form 8-K filed with the Securities and Exchange Commission
on October 17, 1997).
*#10.1 Seagull Energy Corporation 1993 Nonemployee Directors' Stock
Option Plan, including forms of agreements, as amended.
*#10.2 Seagull Energy Corporation 1993 Stock Option Plan, as amended.
*#10.3 Consulting Agreement between Robert Vagt and Seagull Energy
Corporation.
*27.1 Financial Data Schedule.
______________
* Filed herewith.
# Identifies management contracts and compensatory plans or arrangements.