CONSOLIDATED FINANCIAL STATEMENTS
CONTENTS
PAGE
Selected Financial Data................................................. 23
Management's Discussion and Analysis of Financial Condition
and Results of Operations.......................................... 24
Selected Quarterly Financial Data....................................... 35
Report of Management to Shareholders.................................... 36
Independent Auditors' Report............................................ 37
Consolidated Statements of Operations................................... 38
Consolidated Balance Sheets............................................. 39
Consolidated Statements of Cash Flows................................... 40
Consolidated Statements of Shareholders' Equity......................... 41
Notes to Consolidated Financial Statements.............................. 42
SELECTED FINANCIAL DATA (1)
(Amounts in Thousands Except Per Share Data)
Year Ended December 31,
--------------------------------------------------------------------------------
1997 1996 1995 1994 1993
------------ ------------- ------------- -------------- --------------
Revenues............................... $ 549,367 $ 517,211 $ 406,280 $ 467,579 $ 452,232
Net income (loss) (2).................. 49,130 28,961 (1,738) (4,405) 34,095
Earnings (loss) per share:
Basic............................... 0.78 0.46 (0.03) (0.07) 0.56
Diluted............................. 0.77 0.46 (0.03) (0.07) 0.56
Net cash provided by operating
activities before changes in
operating assets and liabilities.... 249,587 220,543 124,822 182,413 174,697
Net cash provided by
operating activities................ 262,749 258,439 117,727 207,339 139,292
Total assets........................... 1,411,066 1,515,063 1,359,125 1,454,050 1,286,391
Long-term debt......................... 469,017 573,455 557,107 622,080 459,787
Shareholders' equity................... 647,204 597,730 562,621 557,646 567,943
Capital expenditures................... 275,608 213,462 144,101 202,553 137,894
Acquisitions, net of cash acquired..... 17,665 104,420 - 193,859 29,470
Standardized measure of discounted
future net cash flows before taxes.. 1,219,363 2,137,870 1,103,962 865,047 1,022,140
(1) Includes Seagull Energy Canada Ltd. from January 4, 1994 through October 6,
1997.
(2) 1995 includes a non-cash pre-tax charge for the impairment of long-lived
assets of $49 million.
23 Seagull Energy Corporation
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
CONSOLIDATED HIGHLIGHTS
(Amounts in Thousands)
Year Ended December 31,
-----------------------------------------------------
1997 1996 1995
--------------- --------------- ---------------
Revenues:
Oil and gas operations................................................ $ 453,648 $ 419,595 $ 308,510
Alaska transmission and distribution.................................. 95,719 97,616 97,770
--------------- --------------- ---------------
$ 549,367 $ 517,211 $ 406,280
=============== =============== ===============
Operating profit (loss):
Oil and gas operations................................................ $ 106,983 $ 97,192 $ (35,867)
Alaska transmission and distribution.................................. 22,588 25,781 22,896
Corporate............................................................. (19,095) (19,530) (23,798)
--------------- --------------- ---------------
$ 110,476 $ 103,443 $ (36,769)
=============== =============== ===============
Net income (loss).......................................................... $ 49,130 $ 28,961 $ (1,738)
Net cash provided by operating activities before changes in operating
assets and liabilities.................................................. $ 249,587 $ 220,543 $ 124,822
Net cash provided by operating activities.................................. $ 262,749 $ 258,439 $ 117,727
In the last three years, Seagull Energy Corporation ("Seagull" or the
"Company") has made substantial changes in its operational focus. These changes
have resulted in more international operations, a greater component of oil in
Seagull's reserve base, a renewed emphasis on its exploration and production
activities and a strengthening of its balance sheet. These changes were
accomplished through various transactions throughout the three-year period ended
December 31, 1997 - including the sale of its Canadian oil and gas operations,
the merger with Global Natural Resources Inc. ("Global"), the purchase of
additional Egyptian concessions and the sale of substantially all of the
Company's pipeline and gas processing assets.
With these changes and an increase in domestic gas prices, Seagull's net
income improved by $20 million to $49 million in 1997 versus 1996 and cash flow
provided by operating activities before changes in operating assets and
liabilities improved $29 million to $250 million for 1997. The same factors
helped create a $31 million increase in net income (loss) from $(2) million in
1995 to $29 million in 1996 and a $96 million increase in cash flow provided by
operating activities before changes in operating assets and liabilities to $221
million for 1996 over $125 million for 1995. The increase in net income and cash
flow is concentrated in the Oil and Gas Operations ("O&G") segment.
24 Seagull Energy Corporation
OIL AND GAS OPERATIONS
(Amounts in Thousands)
Year Ended December 31,
-----------------------------------------------------------
1997 1996 1995
----------------- ----------------- -----------------
Revenues:
Natural gas................................................... $ 298,223 $ 298,235 $ 219,111
Oil and NGL................................................... 131,096 90,779 48,725
Pipeline and marketing........................................ 24,329 30,581 40,674
----------------- ----------------- -----------------
453,648 419,595 308,510
----------------- ----------------- -----------------
Production operating expenses...................................... 115,713 102,158 85,025
Pipeline and marketing expenses.................................... 28,670 24,091 30,674
Exploration charges................................................ 42,085 50,772 40,223
Depreciation, depletion and amortization........................... 160,197 145,382 139,613
Impairment of long-lived assets.................................... - - 48,842
----------------- ----------------- -----------------
Operating profit (loss)............................................ $ 106,983 $ 97,192 $ (35,867)
================= ================= =================
As discussed previously, the O&G segment's results reflect some significant
changes in the focus of the Company's operations. Revenues from oil production
are now a more significant part of the Company's activities as reflected by
Seagull's expanding operations in Egypt. This growing presence in Egypt and
increases in domestic gas prices over the last three years have helped the O&G
segment's operating profit to grow from $13 million (excluding impairment of $49
million) in 1995 to $107 million in 1997.
The O&G segment showed a $34 million increase in revenues to $454 million
and a $10 million increase in operating profit to $107 million for 1997. This 8%
increase in O&G revenues was principally due to stronger natural gas prices in
nearly all areas of the Company's production operations and increases in
international oil and gas production, excluding Canada which was sold in October
1997.
The effect of stronger gas prices and international liquids production was
partially offset by a decline in oil prices in all areas other than Tatarstan,
particularly Egypt where the price decreased 15% from 1996 to 1997, and a
decrease in pipeline and marketing revenues. The 10% increase in the operating
profit of the O&G segment was primarily a result of the 160% increase in oil
production in Egypt. Increases in Egyptian oil production accounted for over
three quarters of the Company's overall increase in oil production, as Seagull
realized additional contributions from (i) the East Zeit and South Hurghada
concessions, the two concessions purchased in late 1996; (ii) the Qarun
concession, as additional production facilities became operational; and (iii)
the West Abu Gharadig concession, purchased in October 1997. Oil prices in Egypt
declined $3.30 per Bbl to $18.26 per Bbl in 1997 versus $21.56 per Bbl in 1996.
25 Seagull Energy Corporation
In October 1997, the Company sold its Canadian oil and gas operations,
which had revenues of approximately $26 million, $34 million and $29 million and
income (loss) before income taxes of approximately $6 million, $(5) million and
$(11) million for the years ended December 31, 1997, 1996 and 1995,
respectively.
The $111 million increase in revenues for 1996 as compared to 1995 was
primarily the result of increases in domestic natural gas prices, increases in
international oil production and increases in international oil and gas prices.
The increase in domestic natural gas prices from $1.62 per Mcf for 1995 to $2.17
per Mcf for 1996 accounted for approximately $63 million of the overall increase
in revenues. International oil production increased over 1995 as production from
the Qarun concession in Egypt began in November 1995 and the Company purchased
interests in two additional Egyptian concessions in September 1996. Also,
production increased steadily during 1996 from Cote d'Ivoire, where production
began in April 1995. The increases in production in Cote d'Ivoire and Egypt
contributed approximately $35 million of the overall increase in revenues.
Domestic production also increased slightly, providing approximately $6 million
of the overall increase in revenues.
Pipeline and marketing revenues declined to $24 million in 1997 with the
absence of the higher margins created from the high volatility in the natural
gas markets during early 1996, partially offset by an increase in revenues
related to the Company's gas gathering and processing facilities. This increase
in gas gathering and processing revenues was substantially offset by an increase
in the related cost of gas. Pipeline and marketing revenues decreased from $41
million in 1995 to $31 million in 1996, primarily due to the sale of
substantially all of the Company's gas gathering and processing facilities (the
"Pipeline Assets") in September 1995, partially offset by the contribution of
the higher margins realized in 1996. The Pipeline Assets contributed
approximately $18 million in revenues and $6 million in operating profit for
1995.
In late 1995, Seagull initiated a risk management program for a portion of
its equity production and certain third-party marketing activities, utilizing
such derivative financial instruments as futures contracts, options and swaps.
In early 1997, the Company closed substantially all of its derivative financial
instruments related to equity production and focused its risk management efforts
on reducing price and basis risk for its third-party marketing activities.
Seagull accounts for its commodity derivative contracts as hedging activities
and, accordingly, the effect is included in revenues when the commodities are
sold.
The Company recorded $10 million, $9 million and $0.5 million for 1997,
1996 and 1995, respectively, in costs related to equity hedging activities and
$3 million in costs and $0.5 million in income for 1997 and 1996, respectively,
related to third-party marketing activities. By the end of the first quarter of
1997, the Company's equity hedging activities had been substantially reduced,
leaving primarily the 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. The equity hedging costs discussed above include costs related to the
monetary production payment hedges of approximately $3 million and $4 million in
1997 and 1996, respectively. Total equity hedging costs had the effect of
reducing average gas prices by $0.06 per Mcfe
26 Seagull Energy Corporation
for both 1997 and 1996 and $0.004 per Mcfe for 1995. At December 31, 1997, the
Company had open natural gas futures, swaps and option contracts related to its
third-party marketing efforts totaling 6 Bcf and 14 Bcf related to purchases and
sales, respectively, for the period from January through December 1998. At
December 31, 1997, the fair value related to the Company's commodity hedging
activities was $1 million of unrealized costs related to open contracts.
OIL AND GAS REVENUES BY AREA
(Amounts in Thousands)
Year Ended December 31,
-----------------------------------------------------------------
1997 1996 1995
------------------ ------------------ -------------------
Domestic..................................................... $ 290,337 $ 282,508 $ 205,706
Canada (*)................................................... 25,956 34,006 28,849
Egypt........................................................ 61,772 28,126 442
Cote d'Ivoire................................................ 15,995 12,798 4,377
Tatarstan.................................................... 21,558 15,626 16,037
Indonesia and other.......................................... 13,701 15,950 12,425
------------------ ------------------ -------------------
$ 429,319 $ 389,014 $ 267,836
================== ================== ===================
(*) All of the Company's Canadian oil and gas operations were sold in
October 1997.
PRODUCTION AND UNIT PRICE BY AREA
Net Daily Production Unit Price
----------------------------------------------- --------------------------------------------
Year Ended December 31, Year Ended December 31,
----------------------------------------------- --------------------------------------------
1997 1996 1995 1997 1996 1995
------------ ------------- ------------- ---------- -------------- ------------
Gas Sales(1):
Domestic.................. 303 318 311 $ 2.34 $ 2.17 $ 1.62
Canada (2)................ 37 58 60 1.63 1.32 1.07
Cote d'Ivoire............. 6 4 1 1.93 1.77 1.61
Indonesia and other....... 11 12 11 3.18 3.36 2.96
------------ ------------- ------------- ----------- -------------- -----------
357 392 383 $ 2.29 $ 2.08 $ 1.57
============ ============= ============= =========== ============= ===========
Oil and NGL Sales(1):
Domestic................. 4,830 4,264 3,845 $17.60 $19.03 $15.84
Canada (2)............... 665 985 1,092 16.46 16.77 13.01
Egypt 9,268 3,565 67 18.26 21.56 17.97
Cote d'Ivoire............ 1,653 1,395 715 19.34 20.04 15.51
Tatarstan................ 4,143 3,053 2,909 14.26 13.98 15.11
Indonesia and other...... 152 147 125 19.31 19.58 17.38
------------ ------------- ------------- ----------- -------------- -----------
20,711 13,409 8,753 $17.34 $18.50 $15.53
============ ============= ============= =========== ============== ===========
(1) Natural gas is stated in MMcf and $ per Mcf. Oil and NGLs are stated in Bbl
and $ per Bbl.
(2) All of the Company's Canadian oil and gas operations were sold in October
1997.
27 Seagull Energy Corporation
Production operating expenses for 1997 increased approximately $14 million,
primarily due to the increased production associated with the Company's Egyptian
operations and increased domestic operating expenses. This increase in operating
expenses associated with the Company's domestic operations was the primary
reason for the $0.40 per BOE increase in production operating expense per
equivalent unit of production to $3.95 per BOE for 1997. Increased production
taxes as natural gas prices increased, a change in the mix of producing
properties and an increase in transportation expenses were the major
contributing factors to the increase in domestic operating expenses during 1997.
Production operating expenses increased $17 million from 1995 to 1996
principally as a result of the increased production in the United States and
Egypt. However, operating expense per equivalent unit of production for the
Company's E&P activities increased from $3.21 per BOE in 1995 to $3.55 per BOE
in 1996, primarily due to increased domestic transportation expense.
Depreciation, depletion and amortization ("DD&A") expense per equivalent
unit of production increased to $5.42 per BOE in 1997 from $4.98 per BOE in 1996
and combined with the increase in Egyptian production to produce a 10% increase
in DD&A expense for the O&G segment. A change in the mix of the properties being
produced internationally was the primary factor for the increase, partially
offset by a decrease in DD&A expense related to Canadian oil and gas properties.
DD&A expense increased from $140 million in 1995 to $145 million in 1996,
primarily due to increased production discussed above, partially offset by a
decrease in the average DD&A rate per equivalent unit of production from $5.16
per BOE in 1995 to $4.98 per BOE in 1996.
During 1995, the Company recognized a pre-tax, non-cash charge against
earnings of $49 million related to impairment of long-lived assets.
Capital Spending and Oil and Gas Reserves
Exploration and production capital expenditures in 1997 totaled $257
million, up substantially from $200 million in 1996 and $134 million in 1995.
Spending outside North America in 1997 totaled $102 million, of which $42
million was for exploration and $60 million for exploitation. Seagull
participated in the drilling of 54 exploratory wells during 1997, of which 27
were successful. Another 14 wells were in progress at year-end. Of the
successes, 18 were in the U.S., 4 in Egypt, 1 in Cote d'Ivoire, 1 in Tatarstan
and 3 in Canada. In addition, domestic exploitation expenditures picked up
considerably in 1997 and 1996 after being severely curtailed in 1995 due to
depressed U.S. gas prices.
Seagull's program of relatively small domestic producing property
acquisitions initiated in 1996 resulted in the addition of 1.2 MMBOE at a cost
of $7 million in 1997 and 6.2 MMBOE at a cost of $29 million in 1996.
Through drilling and proved property acquisitions, the Company replaced
168% of its production during 1997 at a cost of $5.58 per BOE and 144% of its
production over the three-year period 1995 through 1997 at a cost of $5.73 per
BOE. However, Seagull's proved oil and gas reserves decreased from 258 MMBOE at
year-end 1996 to 217 MMBOE at December 31, 1997, as the sale of the Company's
Canadian properties offset reserve additions realized elsewhere.
The standardized measure of discounted future net cash flows before taxes
for Seagull's
28 Seagull Energy Corporation
proved oil and gas reserves, calculated based on Securities and Exchange
Commission criteria, decreased to $1.2 billion at December 31, 1997 compared
with $2.1 billion at the end of 1996. This decrease was primarily the result of
the Canadian sale and lower year-end commodity prices at December 31, 1997
compared to December 31, 1996. Year-end calculations were made using an average
price of $15.41 and $20.99 per Bbl for oil, condensate and NGL and $2.42 and
$3.27 per Mcf for gas for 1997 and 1996, respectively. The Company's average
realized prices for the year ended December 31, 1997 were $17.34 per Bbl for
oil, condensate and NGL and $2.29 per Mcf for gas. The Company's average
realized prices for the month ended January 31, 1998 were $14.47 per Bbl for
oil, condensate and NGL and $2.21 per Mcf for gas. Because the disclosure
requirements for discounted future net cash flows are standardized, significant
changes can occur in these estimates based upon oil and gas prices in effect at
year-end. The above estimates should not be viewed as an estimate of fair market
value. See Note 15 of Notes to Consolidated Financial Statements.
Outlook
At year-end 1997, the Company was producing about 320 MMcf per day of
natural gas and 20,900 Bbl per day of crude oil, condensate and NGL worldwide.
In the United States, Seagull expects to maintain its level of domestic gas
production of about 300 MMcf per day. Internationally, liquids production
increases are anticipated in Egypt, as the first production from the East Beni
Suef concession begins.
The future results of the O&G segment will be affected by the market prices
of oil and natural gas and the Company's degree of exploration success. The
availability of a ready market for oil, natural gas and liquid products in the
future will depend on numerous factors beyond the control of the Company,
including weather, the Company's ability to hire and return skilled personnel,
production of other crude oil, natural gas and liquid products, imports,
marketing of competitive fuels, proximity and capacity of oil and gas pipelines
and other transportation facilities, any oversupply or undersupply of oil, gas
and liquid products, operating hazards attendant to the oil and gas business,
the availability and cost of material and equipment, the regulatory environment
in the domestic and foreign jurisdictions where the Company does business and
other international, regional and political events, none of which can be
predicted with certainty.
29 Seagull Energy Corporation
ALASKA TRANSMISSION AND DISTRIBUTION
(Amounts in Thousands Except Degree Days)
Year Ended December 31,
--------------------------------------------------------
1997 1996 1995
---------------- --------------- ---------------
Revenues................................................................ $ 95,719 $ 97,616 $ 97,770
Cost of gas sold........................................................ 43,684 42,600 46,328
---------------- --------------- ---------------
Gross margin............................................................ 52,035 55,016 51,442
Operations and maintenance expense...................................... 21,079 21,045 20,504
Depreciation, depletion and amortization................................ 8,368 8,190 8,042
---------------- --------------- ---------------
Operating profit........................................................ $ 22,588 $ 25,781 $ 22,896
================ =============== ===============
OPERATING DATA:
Degree days (*)...................................................... 9,727 10,975 9,997
(*) 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 of the
Company ("ENSTAR Alaska") is primarily a function of the weather in the
Anchorage, Alaska area during the winter heating season. Cold weather equates to
higher gas volumes delivered, resulting in increased profits. This relationship
between operating profit and degree days held true in 1997 and 1996 as the
percentage change in operating profit (12% decrease in 1997 versus 1996 and 13%
increase in 1996 versus 1995) was approximately equal to the percentage change
in degree days (11% decrease in 1997 and 10% increase in 1996).
Outlook
ENSTAR Alaska will continue to play a significant role in Seagull's future.
Even though its activities may be somewhat different from the Company's other
O&G-oriented activities, management expects ENSTAR Alaska's stable cash flows
and activities to continue to contribute to Seagull's goals and financial
stability.
Future operating profit for this segment will be affected by weather,
regulatory action and customer growth in ENSTAR Alaska's service area. The 1997
degree days were 6% under the previous 30-year average degree days. The Company
expects customer growth to continue at a modest 2% to 3% rate. During the 1997
summer construction season, approximately 63 miles of new distribution pipelines
were installed to connect some 2,700 new customers (a 3% increase in customers
over 1996).
ENSTAR Alaska purchases all of its natural gas under long-term contracts in
which the price is indexed to changes in the price of crude oil futures
contracts. However, because ENSTAR Alaska's sales prices are adjusted to include
the projected cost of its natural gas, there has been and is expected to be
little or no impact on margins derived from ENSTAR Alaska's gas sales as a
result of fluctuations in commodity prices due to worldwide political events and
changing market conditions.
Currently, ENSTAR Alaska's supply source is confined to the Cook Inlet
area. During 1997, two of the Cook Inlet area's major suppliers filed for
regulatory approval to export certain quantities of gas to overseas LNG markets.
ENSTAR Alaska has filed as an intervenor in these proceedings and is actively
working with regulatory authorities to ensure that the future gas supply needs
of its customers are met.
30 Seagull Energy Corporation
OTHER
After excluding the effects of provisions for litigation ($4.5 million in
1997 for a proposed settlement and $3 million in 1996 covering several minor
settlements), general and administrative expenses decreased from $14.4 million
in 1996 to $11.6 million in 1997. This decrease in general and administrative
expenses from 1996 to 1997 was primarily due to a decrease in certain expenses
due to efficiencies realized as a result of the Global merger and a decline in
expenses associated with compensation plans that are tied directly to the market
price of Seagull's common stock. In November 1997, the Company, NorAm Gas
Transmission Company and Arkansas Western Gas Company signed a settlement
proposal regarding the litigation discussed in Note 14 of Notes to the
Consolidated Financial Statements. As a result of the settlement proposal, the
Company recorded a pre-tax charge of approximately $4.5 million.
In the second quarter of 1995, the Company initiated a workforce reduction
and consolidation with the savings reflected in lower operating expenses. As
part of this action, Seagull recorded one-time pre-tax charges of $8 million in
general and administrative expenses. General and administrative expenses
increased approximately $4 million to $17 million in 1996 as compared to 1995,
excluding the $8 million charge for workforce reduction and consolidation, as a
result of an increase in incentive compensation expenses and the Company's
expanding international operations.
Interest expense declined from $53 million in 1995 and $45 million in 1996
to $39 million for 1997 through utilization of the proceeds from the sale of the
Company's Canadian operations in late 1997 and Pipeline Assets in late 1995 to
repay amounts outstanding under the Company's existing credit facilities.
Interest cost capitalized as property, plant and equipment amounted to
approximately $7 million, $3 million and $1 million in 1997, 1996 and 1995,
respectively.
As discussed earlier, the Company and Global completed a merger in October
1996, which was accounted for as a pooling-of-interests. As a result of the
merger, expenses of $10 million ($9 million after taxes) representing investment
banking fees, legal, accounting and other expenses were recorded.
Gain on sales of assets is primarily comprised of pre-tax gains of
approximately $12 million related to the 1997 sale of the Company's Canadian oil
and gas operations and $82 million related to the 1995 sale of the Pipeline
Assets.
Seagull's effective tax rate for 1997 of 43% decreased from the effective
tax rate of 47% for 1996 primarily due to an income tax benefit associated with
the gain on the sale of the Company's Canadian operations. With the increase in
the Company's international activities with their associated higher effective
tax rates, Seagull's 1997 effective tax rate had been expected to increase.
However substantial increases in domestic O&G income before taxes kept the
domestic to international proportion of income before taxes (and therefore the
effective tax rate before the sale of the Company's Canadian operations)
unchanged. In 1996, the increasing proportion of international operations, and
an increase in income before taxes, did lead to an increase in income tax
expense from $3 million in 1995 to $26 million in 1996.
31 Seagull Energy Corporation
LIQUIDITY AND CAPITAL RESOURCES
CAPITAL EXPENDITURES AND ACQUISITIONS
(Amounts in Thousands)
Year Ended December 31,
---------------------------------------------------------
1997 1996 1995
------------------ ----------------- -----------------
Capital Expenditures:
Exploration and production:
Lease acquisitions................................................ $ 23,141 $ 12,986 $ 18,000
Exploration....................................................... 95,681 77,774 46,575
Development....................................................... 137,806 108,763 69,260
------------------ ----------------- -----------------
256,628 199,523 133,835
Other oil and gas operations......................................... 885 228 441
------------------- ----------------- -----------------
Total oil and gas operations...................................... 257,513 199,751 134,276
Alaska transmission and distribution................................. 9,607 9,287 7,611
Corporate............................................................ 8,488 4,424 2,214
------------------- ----------------- -----------------
$ 275,608 $ 213,462 $ 144,101
=================== ================= ================
Acquisitions........................................................... $ 17,665 $ 104,420 $ -
=================== ================= ================
Seagull's long-term goal is to grow its reserve base and its crude oil and
natural gas production capacity while maintaining a strong balance sheet. The
Company seeks a balanced approach of growing through its drilling efforts
complemented by strategic acquisitions of additional oil and gas assets in its
core operating areas. This desire to grow more through drilling has led the
Company in the last few years to broaden its exploration focus beyond the Gulf
Coast offshore area where Seagull originally concentrated its exploration
efforts. Seagull also has endeavored to bring more balance to its mix of crude
oil and natural gas assets, thereby lessening its dependence upon natural gas
and increasing (i) the percentage of crude oil represented in the Company's
total portfolio of proved reserves, (ii) its capacity to produce those reserves,
and (iii) the international orientation of its reserve base. To these ends, the
Company completed two business combinations in 1996 that reflect this shift in
strategy - the purchase of two Egyptian concessions from Exxon Corporation and
the stock-for-stock Global merger. These combinations brought a substantial
number of exploratory prospects to the Company, complementing its large
portfolio of long-lived domestic natural gas producing properties and a large,
stable cash flow base generated from oil and gas sales and its non-exploration
and production activities. These combinations also increased the Company's
ability to generate
32 Seagull Energy Corporation
growth through its drilling efforts over the next several years in both its
proved reserves and its crude oil and natural gas production capacity.
Seagull's capital expenditures increased by $62 million to $276 million for
1997 versus almost $214 million in 1996. Of this amount, exploration and
production capital expenditures in 1997 totaled $257 million, up substantially
from $200 million in 1996 and $134 million in 1995. Spending outside North
America totaled $103 million, of which $43 million was for exploration and $60
million for exploitation.
DATA FROM GRAPHICS
(In Millions)
1998 Plan for E&P Expenditures of $257 Million
Domestic........................................................................$151
Egypt.............................................................................94
Other.............................................................................12
1997 Actual E&P Expenditures of $257 Million
Domestic........................................................................$141
Egypt.............................................................................83
Canada............................................................................13
Other.............................................................................20
1996 Actual E&P Expenditures of $200 Million
Domestic........................................................................$140
Egypt.............................................................................33
Canada............................................................................15
Other.............................................................................12
Plans for 1998 call for capital expenditures of approximately $274 million,
including about $257 million in E&P. Seagull anticipates spending approximately
$154 million for development, $22 million for lease acquisitions and $81 million
will be devoted to exploration. Of this total, about $106 million is expected to
be spent outside the U.S. The 1998 capital program anticipates about 60
exploratory wells, of which approximately half would be drilled in the U.S.
LIQUIDITY
Combined with the Company's long-term goal to grow its reserve base through
its drilling efforts and complementary strategic acquisitions, a strong balance
sheet is also a specific objective of management. To that end, Seagull reduced
its borrowings under existing bank facilities in 1997 by $133 million with a
portion of the proceeds from the sale of the Company's Canadian operations and
in 1995 by $143 million with the proceeds from the sale of the Pipeline Assets
and the Section 29 Properties. At December 31, 1997, there were no balances
outstanding under the Company's $500 million credit facility and the Company's
debt to capitalization ratio was 42%, compared with 49% at December 31, 1996.
With this stronger balance sheet in place, management believes that the Company
is well positioned to achieve its reserve growth and production capacity
objectives even in times when declining commodity prices result in lower cash
flows from operations.
On September 30, 1997, Seagull issued $150 million of senior notes (the
"1997 Senior Notes") at a public offering price of 99.544% of face value. The
1997 Senior Notes have a coupon of 7.5% and mature September 15, 2027. The 1997
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 1997 Senior Notes
represent unsecured obligations of the Company and rank pari passu with all
other unsecured, unsubordinated obligations of the Company.
The Company also has a $500 million revolving credit facility ("Revolving
Credit Facility"). During 1997, the Company amended and restated the Revolving
Credit Facility to, among other things, change the maturity date to December 31,
2002, reduce stated interest rate margins and remove, or modify, various
financial covenants. At December 31, 1997, there were no amounts borrowed under
the Revolving Credit Facility, however standby letters of credit totaling
approximately $19 million were outstanding. See Notes 4 and 6 of Notes to
Consolidated Financial Statements for additional information relating to
acquisitions and debt.
The Company has money market facilities with two U.S. banks with a combined
maximum commitment of $100 million. These lines of cred-
33 Seagull Energy Corporation
it bear interest at rates made available by the banks at their option and may be
canceled at either Seagull's or the banks' option. There were no amounts
outstanding under these money market facilities at December 31, 1997.
ENVIRONMENTAL
To date, compliance with applicable environmental and safety regulations by
the Company has not required any significant capital expenditures or materially
affected its business or earnings. The Company believes it is in substantial
compliance with environmental and safety regulations and foresees no material
expenditures in the future; however, the Company is unable to predict the impact
that compliance with future regulations may have on capital expenditures,
earnings and competitive position.
YEAR 2000
Historically, most computer systems (including microprocessors embedded
into field equipment and other machinery) utilized software that processed
transactions using two digits to represent the year of the transaction (i.e., 97
represents the year 1997). This software (including software built into embedded
microprocessors) requires modification to properly process dates beyond December
31, 1999 (the "Year 2000 Issue"). In the first quarter of 1997, the Company
completed its assessment of the Year 2000 Issue and determined that
modifications or replacements of a portion of its software were required. The
Company's Year 2000 remediation was substantially complete at December 31, 1997.
The Company utilized both internal and external resources to reprogram, or
replace, and test the software for Year 2000 Issue modifications. To date, the
Company has incurred and expensed approximately $300,000 related to the
assessment and remediation of the Year 2000 Issue. The Company presently
believes that, as a result of these modifications to existing software and
conversions to new software, the Year 2000 Issue will not have a material
adverse effect attributable to the Company's systems.
The Company has initiated formal communications with all of its significant
suppliers and large customers to determine the extent to which the Company is
vulnerable to those third parties' potential failure to remediate their own Year
2000 Issue. However, there can be no guarantee that the systems of other
companies, on which the Company's systems rely, will be timely converted, or
that a failure to convert by another company, or a conversion that is
incompatible with the Company's systems, would not have a material adverse
effect on the Company.
ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 130, "Reporting Comprehensive Income." This statement establishes standards
for reporting and display of comprehensive income and its components in the
Company's financial statements. Comprehensive income includes all changes in the
Company's equity except investments by and distributions to owners and includes,
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
selected infor-
34 Seagull Energy Corporation
mation about operating segments to be included 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's. 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.
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 thousands of 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. MMBOE, MBOE and BOE represent one million, one thousand and one barrel
of oil equivalent, respectively, with six Mcf of gas converted to one barrel of
liquid.
SELECTED QUARTERLY FINANCIAL DATA
Summarized quarterly financial data is as follows (amounts in thousands
except per share data):
Quarter Ended
------------------------------------------------------------------------------------------------
March 31 June 30 September 30 December 31
-------------------- ------------------- ---------------------- ----------------------
1997:
Revenues....................... $ 159,573 $ 122,180 $ 120,655 $ 146,959
Operating Profit............... $ 46,606 $ 17,811 $ 13,456 $ 32,603
Net Income..................... $ 17,254 $ 2,621 $ 3,202 $ 26,053 (2)
Earnings per Share:
Basic........................ $ 0.27 $ 0.04 $ 0.05 $ 0.41
Diluted(1)................... $ 0.27 $ 0.04 $ 0.05 $ 0.41
1996:
Revenues....................... $ 136,575 $ 112,289 $ 109,931 $ 158,416
Operating Profit............... $ 37,375 $ 13,616 $ 19,200 $ 33,252
Net Income (Loss).............. $ 18,312 $ (2,934) $ 7,458 $ 6,125 (3)
Earnings (Loss) per Share:
Basic........................ $ 0.29 $ (0.05) $ 0.12 $ 0.10
Diluted(1)................... $ 0.29 $ (0.05) $ 0.12 $ 0.10
(1) Quarterly earnings (loss) per common share may not total to the full year
per share amount, as the weighted average number of shares outstanding for each
quarter fluctuated as a result of the assumed exercise of stock options.
(2) Includes $12 million pre-tax gain on sale of Canadian oil and gas
operations.
(3) Includes $10 million pre-tax merger expenses relating to the Global merger.
35 Seagull Energy Corporation
REPORT OF MANAGEMENT TO SHAREHOLDERS
The management of Seagull Energy Corporation is responsible for the
preparation and integrity of financial statements and related data in this
Annual Report, whether audited or unaudited. The financial statements were
prepared in conformity with generally accepted accounting principles and include
certain estimates and judgments which management believes are reasonable under
the circumstances.
Management is responsible for and maintains a system of internal accounting
controls that is sufficient to provide reasonable assurance that assets are
safeguarded against loss or unauthorized use and that financial records are
reliable for preparing financial statements, as well as to prevent and detect
fraudulent financial reporting. The internal control system is supported by
written policies and procedures and the employment of trained, qualified
personnel. The Company has an internal auditing staff which reviews the adequacy
of the internal accounting controls and compliance with them. Management has
considered the recommendations of the internal auditing staff and KPMG Peat
Marwick LLP concerning the Company's system of internal controls and has
responded appropriately to those recommendations.
The accompanying consolidated financial statements of Seagull Energy
Corporation and Subsidiaries as of December 31, 1997 have been audited by KPMG
Peat Marwick LLP, independent certified public accountants, and their report is
included herein. Their audits were made in accordance with generally accepted
auditing standards and included a review of the system of internal controls to
the extent considered necessary to determine the audit procedures required to
support their opinion on the consolidated financial statements.
The Board of Directors, through its Audit Committee composed exclusively of
outside directors, meets periodically with representatives of management, the
internal auditing staff and the independent auditors to ensure the existence of
effective internal accounting controls and to ensure that financial information
is reported accurately and timely with all appropriate disclosures included. The
independent auditors and the internal auditing staff have full and free access
to, and meet with, the Audit Committee, with and without management present.
/s/ Barry J. Galt
Barry J. Galt
Chairman and
Chief Executive Officer
/s/ William L. Transier
William L. Transier
Senior Vice President and
Chief Financial Officer
/s/ Gordon L. McConnell
Gordon L. McConnell
Vice President and Controller
January 28, 1998
36 Seagull Energy Corporation
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders
Seagull Energy Corporation:
We have audited the accompanying consolidated balance sheets of Seagull
Energy Corporation and Subsidiaries as of December 31, 1997 and 1996, and the
related consolidated statements of operations, shareholders' equity and cash
flows for each of the years in the three-year period ended December 31, 1997.
These consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Seagull
Energy Corporation and Subsidiaries as of December 31, 1997 and 1996, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 1997 in conformity with generally accepted
accounting principles.
/s/ KPMG Peat Marwick LLP
Houston, Texas
January 28, 1998
37 Seagull Energy Corporation
CONSOLIDATED STATEMENTS OF OPERATIONS
(Amounts in Thousands Except Per Share Amounts)
Year Ended December 31,
---------------------------------------------------
1997 1996 1995
-------------- --------------- ---------------
Revenues:
Oil and gas operations............................ $ 453,648 $ 419,595 $ 308,510
Alaska transmission and distribution.............. 95,719 97,616 97,770
-------------- --------------- ---------------
549,367 517,211 406,280
-------------- --------------- ---------------
Costs of Operations:
Operations and maintenance........................ 165,462 147,294 136,203
Alaska transmission and distribution cost of gas
sold............................................ 43,684 42,600 46,328
Exploration charges............................... 42,085 50,772 40,223
Depreciation, depletion and amortization.......... 171,516 155,669 149,685
Impairment of long-lived assets................... - - 48,842
General and administrative........................ 16,144 17,433 21,768
-------------- --------------- ---------------
438,891 413,768 443,049
-------------- --------------- ---------------
Operating Profit (Loss)............................... 110,476 103,443 (36,769)
Other (Income) Expense:
Interest expense.................................. 38,533 44,842 52,978
Merger expenses................................... - 9,982 -
Gain on sales of assets, net...................... (11,311) (1,088) (83,388)
Interest income and other......................... (2,946) (5,149) (7,403)
-------------- --------------- ---------------
24,276 48,587 (37,813)
-------------- --------------- ---------------
Income Before Income Taxes............................ 86,200 54,856 1,044
Income Tax Expense.................................... 37,070 25,895 2,782
-------------- --------------- ---------------
Net Income (Loss)..................................... $ 49,130 $ 28,961 $ (1,738)
============== =============== ===============
Earnings (Loss) Per Share:
Basic............................................. $ 0.78 $ 0.46 $ (0.03)
============== =============== ===============
Diluted........................................... $ 0.77 $ 0.46 $ (0.03)
============== =============== ===============
Weighted Average Number of Common
Shares Outstanding:
Basic.......................................... 63,022 62,584 62,107
============== =============== ===============
Diluted........................................ 63,791 63,552 62,107
============== =============== ===============
See accompanying Notes to Consolidated Financial Statements.
38 Seagull Energy Corporation
CONSOLIDATED BALANCE SHEETS
(Amounts in Thousands Except Share and Per Share Data)
December 31,
------------------------------------
1997 1996
--------------- ----------------
ASSETS
Current Assets:
Cash and cash equivalents......................................... $ 45,654 $ 15,284
Accounts receivable, net.......................................... 147,442 193,659
Inventories....................................................... 13,635 12,285
Prepaid expenses and other........................................ 16,240 6,389
--------------- ----------------
Total Current Assets........................................... 222,971 227,617
Property, Plant and Equipment:
Oil and gas properties (successful efforts method)................ 1,742,725 1,750,784
Utility plant..................................................... 246,670 238,091
Other............................................................. 64,288 60,481
--------------- ----------------
2,053,683 2,049,356
Accumulated Depreciation, Depletion and Amortization.................. 908,849 804,715
--------------- ----------------
1,144,834 1,244,641
Other Assets.......................................................... 43,261 42,805
--------------- ----------------
Total Assets.......................................................... $ 1,411,066 $ 1,515,063
=============== ================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts and note payable......................................... $ 159,138 $ 166,775
Accrued expenses.................................................. 47,625 57,368
Current maturities of long-term debt.............................. 7,097 7,227
--------------- ----------------
Total Current Liabilities...................................... 213,860 231,370
Long-Term Debt........................................................ 469,017 573,455
Other Noncurrent Liabilities.......................................... 51,168 65,428
Deferred Income Taxes................................................. 14,126 31,021
Redeemable Bearer Shares.............................................. 15,691 16,059
Commitments and Contingencies......................................... - -
Shareholders' Equity:
Common Stock, $.10 par value; authorized 100,000,000
shares; issued 63,877,442 in 1997 and 63,073,287 in 1996....... 6,388 6,307
Additional paid-in capital........................................ 493,829 483,118
Retained earnings................................................. 164,935 115,805
Foreign currency translation adjustment........................... - 51
Less: note receivable from employee stock
ownership plan................................................. (2,990) (4,284)
Less: treasury stock, at cost; 861,314 shares in 1997
and 361,314 shares in 1996..................................... (14,958) (3,267)
--------------- ----------------
Total Shareholders' Equity............................................ 647,204 597,730
--------------- ----------------
Total Liabilities and Shareholders' Equity............................ $ 1,411,066 $ 1,515,063
=============== ================
See accompanying Notes to Consolidated Financial Statements.
39 Seagull Energy Corporation
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in Thousands)
(Unaudited)
Year Ended December 31,
----------------------------------------------
1997 1996 1995
-------------- ------------- --------------
Operating Activities:
Net income (loss)............................................................... $ 49,130 $ 28,961 $ (1,738)
Adjustments to reconcile net income (loss) to net cash provided by
operating activities:
Depreciation, depletion and amortization..................................... 171,516 155,669 149,685
Impairment of long-lived assets.............................................. - - 48,842
Amortization of deferred financing costs..................................... 2,037 2,969 3,429
Deferred income taxes........................................................ 9,418 8,701 (16,292)
Dry hole expense............................................................. 20,062 23,671 22,153
Gains on sale of assets, net................................................. (11,311) (1,088) (83,388)
Other........................................................................ 8,735 1,660 2,131
-------------- ------------- --------------
249,587 220,543 124,822
Changes in operating assets and liabilities, net of acquisitions:
Decrease in short-term liquid investments.................................. - 5,014 28,538
Decrease (increase) in accounts receivable................................. 39,211 (53,531) (21,721)
Decrease (increase) in inventories, prepaid expenses and other............. (10,797) 9,731 1,793
Increase (decrease) in accounts payable.................................... 9,779 53,281 (15,551)
Increase (decrease) in accrued expenses and other.......................... (25,031) 23,401 (154)
-------------- ------------- --------------
Net Cash Provided By Operating Activities..................................... 262,749 258,439 117,727
Investing Activities:
Capital expenditures............................................................ (275,608) (213,462) (144,101)
Acquisitions of oil and gas properties.......................................... (17,665) (90,867) -
Acquisitions of other assets and liabilities, net of cash acquired.............. - (13,553) -
Proceeds from sale of assets, net............................................... 186,494 10,557 107,960
-------------- ------------- --------------
Net Cash Used In Investing Activities......................................... (106,779) (307,325) (36,141)
Financing Activities:
Proceeds from debt.............................................................. 821,097 407,738 668,815
Principal payments on debt...................................................... (938,554) (368,754) (737,473)
Proceeds from sales of common stock............................................. 7,422 4,401 2,241
Purchase of treasury stock...................................................... (11,691) - -
Other.......................................................................... (3,846) (1,051) (3,957)
-------------- ------------- --------------
Net Cash Provided By (Used In) Financing Activities........................... (125,572) 42,334 (70,374)
Effect of exchange rate changes on cash............................................ (28) 359 (48)
-------------- ------------- --------------
Increase (Decrease) In Cash and Cash Equivalents................................ 30,370 (6,193) 11,164
Cash and Cash Equivalents at Beginning of Year..................................... 15,284 21,477 10,313
-------------- ------------- --------------
Cash and Cash Equivalents at End of Year........................................... $ 45,654 $ 15,284 $ 21,477
============== ============= ==============
See accompanying Notes to Consolidated Financial Statements.
40 Seagull Energy Corporation
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(Amounts in Thousands)
Foreign Note
Additional Currency Receivable
Common Paid-in Retained Translation From Treasury
Stock Capital Earnings Adjustment ESOP Stock Total
---------- ------------- ------------- ------------ ----------- ------------- -------------
January 1, 1995............... $ 6,577 $ 493,578 $ 88,582 $ (2,684) $(5,502) $ (22,902) $ 557,649
Net loss for the period.... - - (1,738) - - - (1,738)
Exercise of employee
stock options........... 21 2,220 - - - - 2,241
Foreign currency
translation adjustment.. - - - 3,073 - - 3,073
Repayment of ESOP note..... - - - - 580 - 580
Other...................... - 579 - - - 237 816
---------- ------------- ------------- ------------ ----------- ------------- -------------
December 31, 1995............. 6,598 496,377 86,844 389 (4,922) (22,665) 562,621
Net income for the period.. - - 28,961 - - - 28,961
Retirement of treasury
stock pursuant to the
Global Merger........... (335) (19,021) - - - 19,356 -
Exercise of employee
stock options........... 44 4,357 - - - - 4,401
Foreign currency
translation adjustment.. - - - (338) - - (338)
Repayment of ESOP note .... - - - - 638 - 638
Other...................... - 1,405 - - - 42 1,447
---------- ------------- ------------- ------------ ----------- ------------- -------------
December 31, 1996............. 6,307 483,118 115,805 51 (4,284) (3,267) 597,730
Net income for the period.. - - 49,130 - - - 49,130
Purchase of treasury stock. - - - - - (11,691) (11,691)
Exercise of employee
stock options........... 81 7,341 - - - - 7,422
Foreign currency
translation adjustment.. - - - (51) - - (51)
Repayment of ESOP note .... - - - - 1,294 - 1,294
Other...................... - 3,370 - - - 3,370
---------- ------------- ------------- ------------ ----------- ------------- -------------
December 31, 1997............. $ 6,388 $ 493,829 $ 164,935 $ - $(2,990) $ (14,958) $ 647,204
========== ============= ============= ============ =========== ============= =============
See accompanying Notes to Consolidated Financial Statements.
41 Seagull Energy Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION
Seagull Energy Corporation (the "Company" or "Seagull") is an international
oil and gas company engaged in exploration and development activities in the
United States, Egypt, Cote d'Ivoire, Indonesia and the Russian Republic of
Tatarstan. It also transports, distributes and markets natural gas, liquids
products and petrochemicals.
Merger with Global Natural Resources Inc. -- On October 3, 1996, the
shareholders of Seagull and Global Natural Resources Inc. ("Global") approved a
merger of a wholly owned subsidiary of Seagull into Global (the "Global
Merger"), with each share of Global common stock converted into 0.88 shares of
Seagull common stock. The Global Merger was accounted for as a pooling of
interests.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
General -- The accompanying consolidated financial statements of Seagull
have been prepared according to generally accepted accounting principles and
pursuant to the rules and regulations of the Securities and Exchange Commission.
These accounting principles require the use of estimates, judgments and
assumptions that affect the reported amounts of assets and liabilities as of the
date of the financial statements and revenues and expenses during the reporting
period. Actual results could differ from those estimates. Certain
reclassifications have been made in the 1996 and 1995 financial statements to
conform to the presentation used in 1997.
Consolidation -- The accompanying consolidated financial statements include
the accounts of Seagull Energy Corporation and its majority-owned entities. All
significant intercompany transactions have been eliminated.
Regulation -- The Company operates in Alaska through a division of the
Company and a wholly owned subsidiary (collectively referred to herein as
"ENSTAR Alaska"). ENSTAR Alaska is subject to regulation by the Alaska Public
Utilities Commission ("APUC"), which has jurisdiction over, among other things,
rates, accounting procedures and standards of service.
Cash Equivalents -- The Company considers all highly liquid investments
with a maturity of three months or less when purchased to be cash equivalents.
Inventories -- Materials and supplies are valued at the lower of average
cost or market value (net realizable value).
Oil And Gas Properties -- The Company uses the successful efforts method of
accounting for its oil and gas operations whereby acquisition costs and
exploratory drilling costs related to properties with proved reserves and all
development costs including development dry holes are capitalized. Under this
method, all costs to acquire mineral interest in oil and gas properties, to
acquire production sharing contracts with foreign governments, to drill and
equip exploratory wells which find proved reserves and to drill and equip
development wells are capitalized. Exploratory charges, including
42 Seagull Energy Corporation
exploratory dry holes, geological and geophysical costs, delay rentals and
technical support, are expensed as incurred. Other internal costs related to oil
and gas activities are generally expensed as operations and maintenance expense
or exploration charges. Unproved leaseholds with significant acquisition costs
are assessed periodically, on a property-by-property basis, and a loss is
recognized to the extent, if any, that the cost of the property has been
impaired. Unproved leaseholds whose acquisition costs are not individually
significant are aggregated, and the portion of such costs estimated to
ultimately prove nonproductive, based on experience, are amortized over an
average holding period. As unproved leaseholds are determined to be productive,
the related costs are transferred to proved leaseholds. Capitalized costs are
depleted using the unit-of-production method based upon estimates of proved oil
and gas reserves on a depletable unit basis. Estimated costs (net of salvage
value) of dismantling and abandoning oil and gas production facilities are
computed by the Company's engineers and included when calculating depreciation
and depletion using the unit-of-production method. The total estimated future
dismantlement and abandonment cost being amortized as of December 31, 1997 was
approximately $26 million.
The Company performs a review for impairment of proved oil and gas
properties on a depletable unit basis when circumstances suggest there is a need
for such a review. For each depletable unit determined to be impaired, an
impairment loss equal to the difference between the carrying value and the fair
value of the depletable unit will be recognized. Fair value, on a depletable
unit basis, is estimated to be the present value of expected future cash flows
computed by applying estimated future oil and gas prices, as determined by
management, to estimated future production of oil and gas reserves over the
economic lives of the reserves. As a result of the impairment review, the
Company recognized a non-cash pre-tax charge against income in 1995 of $46
million related to oil and gas properties. No impairment charges were recorded
during 1996 and 1997.
Interest cost capitalized as property, plant and equipment amounted to
approximately $7 million, $3 million and $1 million in 1997, 1996 and 1995,
respectively.
Other Property, Plant And Equipment -- Depreciation of the utility plant,
gas gathering pipeline facility, gas processing plant and other property is
computed principally using the straight-line method over their estimated useful
lives, which vary from 3 to 33 years.
Utility plant facilities are subject to APUC regulation. When utility
facilities are disposed of or otherwise retired, the original cost of the
facilities, plus cost of retirement, less salvage value, is charged to
accumulated depreciation.
The Company groups and evaluates other property, plant and equipment for
impairment based on the ability to identify separate cash flows generated
therefrom. As a result of the impairment review, the Company recognized a
pre-tax non-cash charge against income in 1995 of $3 million for impairment of
other property, plant and equipment. No impairment charges were recorded during
1996 and 1997.
Maintenance, repairs and renewals are charged to operations and maintenance
expense except that renewals which extend the life of the property are
capitalized.
Environmental Liabilities -- Environmental expenditures that relate to
current or future revenues are expensed or capitalized as appropriate.
Expenditures that relate to an existing
43 Seagull Energy Corporation
condition caused by past operations, and do not contribute to current or future
revenue generation, are expensed. Liabilities are recorded when environmental
assessments and/or clean-ups are probable, and the costs can be reasonably
estimated. Generally, the timing of these accruals coincides with the Company's
commitment to a formal plan of action.
Treasury Stock -- The Company follows the average cost method of accounting
for treasury stock transactions.
Revenue Recognition -- The Company records oil and natural gas revenue
following the entitlement method of accounting for production, in which any
excess amount received above the Company's share is treated as a liability. If
less than the Company's entitlement is received, the underproduction is recorded
as an asset.
ENSTAR Alaska's operating revenues are based on rates authorized by the
APUC which are applied to customers' consumption of natural gas. ENSTAR Alaska
records unbilled revenue, including amounts to be billed under a purchased gas
adjustment clause, at the end of each accounting period.
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 hedges, these instruments must highly 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. Income and costs on commodity derivative financial instruments that
are closed before the hedged production occurs are also deferred until the
production month originally hedged. In the event of a loss of correlation
between changes in oil and gas reference prices under a commodity derivative
financial instrument and actual oil and gas prices, income or costs are
recognized currently to the extent the financial instrument has not offset
changes in actual oil and gas prices. 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 also limit the Company's gain from increases in those market
prices.
The Company recorded $10 million, $9 million and $0.5 million for 1997,
1996 and 1995, respectively, in costs related to equity hedging activities and
$3 million in costs and $0.5 million in income for 1997 and 1996, respectively,
related to third-party marketing activities. By the end of the first quarter of
1997, the Company's equity hedging activities had been substantially reduced,
leaving primarily the 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. The equity hedging costs discussed above include costs related to the
monetary production payment hedges of
44 Seagull Energy Corporation
approximately $3 million and $4 million in 1997 and 1996, respectively. Total
equity hedging costs had the effect of reducing average gas prices by $0.06 per
Mcfe for both 1997 and 1996 and $0.004 per Mcfe for 1995. At December 31, 1997,
the Company had open natural gas futures, swaps and option contracts related to
its third-party marketing efforts totaling 6 Bcf and 14 Bcf related to purchases
and sales, respectively, for the period from January through December 1998. At
December 31, 1997, the fair value related to the Company's commodity hedging
activities was $1 million of unrealized costs related to open contracts.
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 highly 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. The Company recorded no costs related to interest rate
hedging activities during 1997 and $1.7 million and $0.6 million for 1996 and
1995, respectively.
Income Taxes -- The Company uses the liability method of accounting for
income taxes under which deferred tax assets and liabilities are recognized for
the estimated future tax consequences attributable to differences between the
financial statement carrying amounts of existing assets and liabilities and
their respective tax bases. Deferred tax assets and liabilities are measured
using enacted tax rates in effect for the year in which those temporary
differences are expected to be recovered or settled. The effect on deferred tax
assets and liabilities of a change in tax rates is recognized as part of the
provision for income taxes in the period that includes the enactment date.
Foreign Currency Translation -- The functional currency for the Company's
Canadian operations was the applicable local currency. Translation from Canadian
dollars to U. S. dollars was performed for balance sheet accounts using exchange
rates in effect at the balance sheet date and for revenue and expense accounts
using primarily a weighted average exchange rate during the period. Adjustments
resulting from such translation were included as a separate component of
shareholders' equity. Deferred income taxes were not provided on translation
adjustments because any unremitted income from Seagull's foreign operations was
considered to be permanently invested. The Company's Canadian operations were
sold in October 1997 (see Note 4).
The U.S. dollar is the functional currency for all other foreign
operations, as predominantly all transactions in those operations are
denominated in U.S. dollars.
Stock-Based Compensation -- The Company accounts for stock-based
compensation under the intrinsic value method. Under this method, the Company
records no compensation expense for stock options granted when the exercise
price of options granted is equal to the fair market value of Seagull's common
stock on the day of grant.
45 Seagull Energy Corporation
Earnings Per Share -- Effective December 31, 1997, the Company adopted
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. In
accordance with SFAS No. 128, earnings per share and weighted average shares
outstanding have been restated to conform to this statement for all periods
presented.
The following table provides a reconciliation between basic and diluted
earnings (loss) per share (stated in thousands except per share data):
Weighted Average
Common Shares Per-Share
Net Income (Loss) Outstanding Amount
-------------------- --------------------- ----------------
Year Ended December 31, 1997:
Basic earnings per share ........................... $ 49,130 63,022 $ 0.78
Effect of dilutive stock options.................... - 769
-------------------- ---------------------
Diluted earnings per share ......................... $ 49,130 63,791 $ 0.77
==================== =====================
Year Ended December 31, 1996:
Basic earnings per share ........................... $ 28,961 62,584 $ 0.46
Effect of dilutive stock options.................... - 968
-------------------- ---------------------
Diluted earnings per share ......................... $ 28,961 63,552 $ 0.46
==================== =====================
Year Ended December 31, 1995:
Basic loss per share ............................... $ (1,738) 62,107 $(0.03)
Effect of dilutive stock options.................... - -
-------------------- ---------------------
Diluted loss per share ............................. $ (1,738) 62,107 $(0.03)
==================== =====================
Options to purchase 1,610,100 and 1,685,500 shares of common stock at
$21.13 to $26.38 per share were outstanding during 1997 and 1996, respectively,
but were not included in the computation of diluted earnings per share because
the options' exercise prices were greater than the average market price of the
common shares. These options, which expire at various dates from 2003 to 2007,
remained outstanding at the end of 1997 and 1996. At December 31, 1995, options
to purchase 4,501,920 shares of common stock were outstanding but not included
in the computation of diluted loss per share because the effect of the assumed
exercise of these stock options as of the beginning of the year would have an
antidilutive effect on the computation of diluted loss per share. These options
had exercise prices ranging from $5.89 to $26.38 and expire at various dates
through 2005.
Concentrations Of Market Risk -- The future results of the oil and gas
operations segment will be affected by the market prices of oil and natural gas.
The availability of a ready market for natural gas, oil and liquid products in
the future will depend on numerous factors beyond the control of the Company,
including weather, production of other natural gas, crude oil and liquid
products, imports, marketing of competitive fuels, proximity and capacity of oil
and gas pipelines and other transportation facilities, any oversupply or
undersupply of gas, oil and liquid products, the regulatory environment and
other
46 Seagull Energy Corporation
regional and political events, none of which can be predicted with certainty.
The Company operates in various phases of the oil and natural gas industry
with sales to resellers such as pipeline companies and local distribution
companies as well as to end-users such as commercial businesses, industrial
concerns and residential consumers. The Company's receivables include amounts
due from purchasers of oil and gas production and amounts due from joint venture
partners for their respective portions of operating expense and exploration and
development costs. The Company believes that no single customer or joint venture
partner exposes the Company to significant credit risk. While certain of these
customers and joint venture partners are affected by periodic downturns in the
economy in general or in their specific segment of the natural gas or oil
industry, the Company believes that its level of credit-related losses due to
such economic fluctuations has been and will continue to be immaterial to the
Company's results of operations in the long term. Trade receivables are
generally not collateralized; however, the Company analyzes customers' and joint
venture partners historical credit positions prior to extending credit. The
Company had one customer, the Egyptian national oil company ("EGPC") with 11%,
who accounted for more than 10% of total revenues during 1997.
The Company has a significant portion of its operations in various
geographic areas of the world. The Company's activities in these areas are
subject to the usual risks associated with international operations, including
political and economic uncertainties, risks of cancellation or unilateral
modification of agreements, operating restrictions, currency repatriation
restrictions, expropriation, export restrictions, the imposition of new taxes
and the increase of existing taxes, inflation, foreign exchange fluctuations and
other risks arising out of international government sovereignty over areas in
which the operations are conducted. The Company has endeavored to protect itself
against political and commercial risks inherent in these operations. There is no
certainty that the steps taken by the Company will provide adequate protection.
Concentrations Of Credit Risk -- Derivative financial instruments that
hedge the price of oil and natural gas and interest rates are generally executed
with major financial or commodities trading institutions which expose the
Company to acceptable levels of market and credit risks and may at times be
concentrated with certain counterparties or groups of counterparties. Although
notional amounts are used to express the volume of these contracts, the amounts
potentially subject to credit risk, in the event of non-performance by the
counterparties, are substantially smaller. The credit worthiness of
counterparties is subject to continuing review and full performance is
anticipated.
Accounting Pronouncements -- In June 1997, the Financial Accounting
Standards Board ("FASB") issued SFAS No. 130, "Reporting Comprehensive Income."
This statement establishes standards for reporting and display of comprehensive
income and its components in the Company's financial statements. Comprehensive
income includes all changes in the Company's equity except investments by and
distributions to owners and includes, 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
47 Seagull Energy Corporation
financial statements and requires selected information about operating segments
be included 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 Nos. 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.
3. SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Supplemental disclosures of cash flow information (stated in thousands) are as
follows:
Year Ended December 31,
------------------------------------------------------------
1997 1996 1995
------------------ ----------------- ---------------
Cash paid during the year for:
Interest, net of amount capitalized.............................. $34,947 $44,033 $46,804
Income taxes..................................................... $25,684 $12,046 $14,074
4. ACQUISITION AND DISPOSITION OF ASSETS
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. Seagull realized approximately $185
million of net sales proceeds and recognized a pre-tax gain of approximately $12
million in the fourth quarter of 1997. The sales proceeds were used to repay
existing long-term debt, including all U.S. and Canadian bank debt, and for
general corporate purposes.
The Company's operations in Canada consisted of oil and gas exploration and
production activities through interests in fields located in Alberta, Canada
with proved reserves of approximately 60 million barrels of oil equivalents at
the date of the sale. The Company's Canadian operations contributed
approximately $26 million, $34 million and $29 million in revenue and $6
million, $(5) million and $(11) million in income (loss) before taxes for the
years ended December 31, 1997, 1996 and 1995, respectively.
The following table presents the unaudited pro forma results (stated in
thousands except per share data) of Seagull as though the disposition of Seagull
Canada had occurred on January 1, 1996:
UNAUDITED PRO FORMA INFORMATION
Year Ended December 31,
------------------------------------------------------
1997 1996
---------------------- -----------------------
Revenues ................................................................... $523,411 $483,395
Net income.................................................................. 36,520 39,168
Basic earnings per share.................................................... 0.58 0.63
Diluted earnings per share.................................................. 0.57 0.62
48 Seagull Energy Corporation
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.
Purchase of Egyptian Concessions -- In September 1996, Seagull purchased
interests in two Egyptian concessions from units of Exxon Corporation for a net
purchase price of approximately $74 million in cash financed through additional
borrowings under Seagull's revolving credit facility. The transaction was
accounted for as a purchase. The Company acquired a 100% working interest in
both the East Zeit oil producing concession in the offshore Gulf of Suez and the
South Hurghada exploratory concession located onshore on the coast of the Gulf
of Suez approximately 250 miles southeast of Cairo.
Sale of Pipeline Assets -- In September 1995, the Company and three other
sellers completed the sale of their disparate interests in 19 natural gas
gathering systems and a gas processing plant (the "Pipeline Assets"). From its
share of the proceeds, Seagull realized a one-time, pre-tax gain of
approximately $82 million recorded in the third quarter of 1995. For the year
ended December 31, 1995, the Pipeline Assets contributed approximately $18
million to the revenues and $6 million to the operating profit of the Oil and
Gas Operations segment.
Sale of Section 29 Properties -- In September 1995, the Company sold
certain Internal Revenue Code Section 29 Tax Credit-bearing gas properties (the
"Section 29 Properties") to an investment group which includes a Seagull
subsidiary and two financial investors. For accounting purposes, the Company has
treated the sale as a non-recourse monetary production payment reflected in
long-term debt on the balance sheet (see Note 6).
5. OTHER NONCURRENT ASSETS
Other noncurrent assets (stated in thousands) include the following:
December 31,
-------------------------------------
1997 1996
---------------- ---------------
Oil, gas and marketing imbalances............................................................ $ 27,428 $ 24,673
Deferred financing costs..................................................................... 10,437 10,935
Other........................................................................................ 5,396 7,197
---------------- ---------------
$ 43,261 $ 42,805
================ ===============
49 Seagull Energy Corporation
Oil, Gas and Marketing Imbalances -- As discussed in Note 2, the Company
records oil and gas revenues following the entitlement method of accounting for
production. The Company records revenue from gas marketing sales net of the cost
of gas and third-party delivery fees, with any resulting imbalances recorded as
a current receivable or payable. The Company's oil, gas and marketing imbalance
assets and liabilities (stated in thousands) were as follows:
December 31,
-------------------------------------------------------------------------------
1997 1996
--------------------------------------- -------------------------------------
Volume Volume
Amount (Bcfe) Amount (Bcfe)
---------------- ---------------- ---------------- ---------------
Assets:
Current........................................ $ 13,117 6.5 $ 17,650 9.8
Noncurrent..................................... 27,428 16.8 24,673 15.9
---------------- ---------------- ---------------- ---------------
$ 40,545 23.3 $ 42,323 25.7
================ ================ ================ ===============
Liabilities:
Current........................................ $ 8,009 5.5 $ 12,060 6.5
Noncurrent..................................... 16,405 10.4 20,047 13.4
---------------- ---------------- ---------------- ---------------
$ 24,414 15.9 $ 32,107 19.9
================ ================ ================ ===============
Deferred Financing Costs -- Deferred financing costs represent financing
costs incurred in connection with the execution of various debt facilities
entered into or securities issued by the Company. These costs are capitalized
and amortized to interest expense over the life of the related debt.
6. DEBT
Money Market Facilities -- Seagull has money market facilities with two
U.S. banks with a combined maximum commitment of $100 million. These facilities
bear interest at rates made available by the banks at their discretion (7.5% at
December 31, 1996) and may be canceled at either Seagull's or the banks'
discretion. At December 31, 1997 and 1996, the total amounts outstanding under
the money market facilities of none and $17 million, respectively, were
classified as a current liability and included in accounts and notes payable
since it was Seagull's intent to repay these amounts within the following year.
Long-term debt (stated in thousands) for 1997 and 1996 was as follows:
December 31,
-----------------------------------------
1997 1996
------------------ -----------------
Revolving credit.................................................................... $ - $236,620
1997 Senior notes................................................................... 150,000 -
1993 Senior notes................................................................... 100,000 100,000
1993 Senior subordinated notes...................................................... 150,000 150,000
Monetary production payment......................................................... 25,384 34,378
ENSTAR Alaska:
Unsecured industrial development bonds.......................................... 9,305 10,230
Other unsecured notes........................................................... 44,158 50,460
------------------ -----------------
478,847 581,688
Less: Current maturities........................................................... 7,097 7,227
Unamortized debt discount.................................................... 2,733 1,006
------------------ -----------------
$ 469,017 $573,455
================== =================
50 Seagull Energy Corporation
Revolving Credit -- The Company has a $500 million revolving credit
facility ("Revolving Credit Facility"). During 1997, the Company amended and
restated the Revolving Credit Facility to, among other things, change the
maturity date to December 31, 2002, reduce stated interest rate margins and
remove, or modify, various financial covenants. At December 31, 1997, there were
no amounts borrowed under the Revolving Credit Facility and $481 million of the
unused commitment was immediately available. The Revolving Credit Facility bears
interest, at Seagull's option, at LIBOR or prime rates plus applicable margins,
ranging from none to 0.45% or competitive bid rates. Actual interest rates
varied from 3.7% to 6.3% at December 31, 1996.
The Revolving Credit Facility contains certain covenants and restrictive
provisions, including limitations on the incurrence of additional debt or liens,
the declaration or payment of dividends and the repurchase or redemption of
capital stock and the maintenance of certain financial ratios. Under the most
restrictive of these provisions, approximately $344 million was available for
payment of cash dividends on common stock or to repurchase common stock as of
December 31, 1997.
1997 Senior Notes -- On September 30, 1997, Seagull issued $150 million of
senior notes (the "1997 Senior Notes") offered at a public offering price of
99.544% of face value. The 1997 Senior Notes have a coupon of 7.5% paid
semiannually and mature September 15, 2027. The 1997 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 1997 Senior Notes represent unsecured
obligations of the Company and rank pari passu with all other unsecured,
unsubordinated obligations of the Company. The 1997 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.
1993 Senior and Senior Subordinated Notes -- In July 1993, Seagull sold
$100 million of senior notes (the "1993 Senior Notes") and $150 million of
senior subordinated notes (the "1993 Senior Subordinated Notes") (collectively
the "1993 Notes"). The 1993 Senior Notes bear interest at 7 7/8% per annum, are
not redeemable prior to maturity or subject to any sinking fund and mature on
August 1, 2003. The 1993 Senior Subordinated Notes bear interest at 8 5/8% per
annum, are not subject to any sinking fund and mature on August 1, 2005. On or
after August 1, 2000, the 1993 Senior Subordinated Notes are redeemable at the
option of the Company, in whole or in part, at redemption prices declining from
102.59% in 2000 to 100.00% in 2003 and thereafter (expressed as a percentage of
principal amount), plus accrued interest to the redemption date. The 1993 Notes
were issued at par and interest is paid semiannually.
The 1993 Notes represent unsecured obligations of the Company. The 1993
Senior Notes rank pari passu with senior indebtedness of the Company while the
1993 Senior Subordinated Notes are subordinate in right of payment to all
existing and future senior indebtedness of the Company. The 1993 Notes contain
conditions and restrictive provisions including, among other things,
restrictions on additional indebtedness by the Company and by its subsidiaries,
the right of
51 Seagull Energy Corporation
each note holder to have the notes repurchased by the Company at 101% of the
principal amount upon a change in control, as well as restrictions on the
incurrence of secured debt and entering into sale and leaseback transactions.
Monetary Production Payment -- In September 1995, the Company sold the
Section 29 Properties for approximately $46 million in net proceeds. The
transaction was recorded as a monetary production payment for accounting
purposes. The investors receive the operating cash flow from the properties,
less funds required for working capital purposes, and are expected to recoup
their investment plus their required after-tax rate of return by 2000. Seagull's
pre-tax effective interest rate is currently estimated to be approximately 4%.
ENSTAR Alaska -- All long-term debt of ENSTAR Alaska is issued by a wholly
owned subsidiary of Seagull in the form of senior unsecured notes. These senior
unsecured notes bear interest at various fixed rates ranging from 7.75% to 12.8%
with principal payments due 1998 through 2009. These senior unsecured notes of
the subsidiary provide for restrictions on dividends, additional borrowings and
purchases, redemptions or retirements of shares of capital stock, other than in
stock of the subsidiary. Under the most restrictive provisions of these
financing arrangements, ENSTAR Alaska had approximately $12 million available
for the making of restricted investments, restricted stock payments and
restricted subordinated debt payments as of December 31, 1997.
Interest Rate Swap Agreements -- The Company periodically enters into
interest rate swap agreements to manage the impact of changes in interest rates.
At December 31, 1997, the Company had no outstanding interest rate swaps in
place. At December 31, 1996, the Company had outstanding interest rate swaps
with a notional amount of $100 million whereby the Company paid a floating
interest rate and received a fixed interest rate ranging from 5.43% to 5.635%.
These interest rate swaps expired on January 31, 1997 and did not have a
material impact on the Company's results of operations or cash flow for 1997.
Annual Maturities -- At December 31, 1997, the Company's aggregate annual
maturities of long-term debt are $7 million, $7 million, $9 million, $9 million
and $3 million for the years 1998, 1999, 2000, 2001 and 2002, respectively.
7. OTHER NONCURRENT LIABILITIES
Other noncurrent liabilities (stated in thousands) include the following:
December 31,
-------------------------------------
1997 1996
----------------- ---------------
Oil, gas and marketing imbalances (see Note 5)............................................... $ 16,405 $20,047
Refundable customer advances for construction................................................ 11,940 11,567
Other........................................................................................ 22,823 33,814
----------------- ---------------
$ 51,168 $65,428
================= ===============
Refundable Customer Advances for Construction -- Refundable customer
advances for construction represent customer deposits received by ENSTAR Alaska
for construction of main extensions refundable either wholly or in part over a
period not to exceed 10 years.
52 Seagull Energy Corporation
8. FAIR VALUE OF FINANCIAL INSTRUMENTS
The estimated fair value of financial instruments has been determined by
the Company using available market information and valuation methodologies
described below. Considerable judgment is required in interpreting market data
to develop the estimates of fair value. The use of different market assumptions
or valuation methodologies may have a material effect on the estimated fair
value amounts. The estimated fair values of the Company's financial instruments
(stated in thousands) are summarized as follows:
December 31,
------------------------------------------------------------------------------------
1997 1996
------------------------------------- ------------------------------------------
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
----------------- ---------------- -------------------- ------------------
Assets:
Cash and cash equivalents................. $ 45,654 $ 45,654 $ 15,284 $ 15,284
Liabilities:
Refundable customer advances
and deposits.......................... (14,725) (11,880) (14,075) (11,405)
Debt...................................... (476,114) (497,382) (580,682) (589,815)
Redeemable bearer shares....................... (15,691) NA (16,059) NA
Derivative transactions:
Payable for interest rate swaps........... - - - (107)
Commodity hedging instruments:
In a receivable position.................. - 278 (42) 247
In a payable position..................... (287) (1,219) (291) (10,798)
Cash And Cash Equivalents -- The carrying amount approximates fair value
because of the short maturity of these instruments.
Refundable Customer Advances And Deposits -- The fair value is based on
discounted cash flow analyses utilizing a discount rate of 8.5% and 8.25% at
December 31, 1997 and 1996, respectively, with monthly payments ratably over the
estimated period of deposit or advance refunding.
Debt -- The fair value of the 1993 Notes, 1997 Senior Notes and ENSTAR
Alaska debt is estimated based on quoted market prices for the same or similar
issues. The fair value of the monetary production payment is estimated using
discounted cash flow analyses utilizing a discount rate of approximately 4% at
December 31, 1997 and 1996. The carrying amount of all other debt approximates
fair value because these instruments bear interest at rates tied to current
market rates.
Redeemable Bearer Shares -- The fair value is not determinable because
reductions in the outstanding balance are on demand only to the extent necessary
to redeem bearer shares presented for exchange until July 2008 with any
remaining balance reverting to the Company. The Company is not able to determine
when the bearer shares will be presented or how many will be presented.
Interest Rate Swap Agreements -- The fair values are obtained from the
financial institutions that are counterparties to the transactions. These values
represent the estimated amount the Company would pay or receive to terminate the
agreements, taking into consideration
53 Seagull Energy Corporation
current interest rates and the current creditworthiness of the counterparties.
Seagull's interest rate swap agreements were off balance sheet transactions and,
accordingly, no respective carrying amounts for these transactions were included
in the accompanying consolidated balance sheets as of December 31, 1996.
Commodity Related Transactions -- The fair value of the company's commodity
hedging instruments is the estimated amount the Company would receive or pay to
settle the applicable commodity hedging instrument at the reporting date, taking
into account the difference between New York Mercantile Exchange ("NYMEX")
prices or index prices at year-end and the contract price of the commodity
hedging instrument. Certain of the Company's commodity hedging instruments,
primarily swaps and options, are off balance sheet transactions and,
accordingly, no respective carrying amounts for these instruments were included
in the accompanying consolidated balance sheets as of December 31, 1997 and
1996.
9. REDEEMABLE BEARER SHARES
In 1983, the Company became the successor issuer to Global Natural
Resources PLC, a United Kingdom company, pursuant to the terms of a Scheme of
Arrangement (the "Arrangement") under Section 206 of the English Companies Act.
The effect of the Arrangement was to move the domicile of the parent company to
the United States from the United Kingdom.
Under the terms of the Arrangement, 24,270,876 common shares of Global were
registered in the name of Hambros Trust ("Trust Shares"). The Trust Shares were
held for the owners of bearer share warrants issued by Global Natural Resources
PLC. The Arrangement provided that Trust Shares not claimed by July 26, 1988 be
sold by the Trust and the sale proceeds together with earned interest used to
satisfy subsequent claims by the holders of bearer share warrants. Holders of
bearer shares were entitled to receive at their election either cash or Global
shares on a share-for-share basis until July 1993 and only cash thereafter.
In August 1993, Global received approximately $19 million, the remaining
cash held by the Trust, in the form of an interest-free loan. The loan is
repayable on demand only to the extent necessary to redeem bearer share warrants
presented for exchange until July 2008. Each bearer share warrant presented
during this period will be redeemed for $6.66. As of December 31, 1997 and 1996,
there were 2,418,868 and 2,463,008 outstanding bearer share warrants,
respectively. The loan is secured by a letter of credit issued under the
Revolving Credit Facility. During 1997 and 1996 there were no drawings under the
letter of credit. In July 2008, the obligation of the Company to holders of
bearer share warrants will cease, the interest-free loan will terminate, and any
remaining cash will revert to the Company and be accounted for as an increase in
additional paid-in capital.
54 Seagull Energy Corporation
10. SHAREHOLDERS' EQUITY
The following table reflects the activity in shares of the Company's Common
Stock and Treasury Stock during the three years ended December 31, 1997:
1997 1996 1995
------------------ ----------------- ----------------
Common Stock Outstanding:
Shares at beginning of year...................................... 63,073,287 65,983,199 65,767,743
Exercise of employee stock options............................... 804,155 449,256 215,104
Executive incentive compensation................................. - 3,000 -
Retirement of treasury stock pursuant to Global Merger - (3,361,185) -
Other............................................................ - (983) 352
------------------ ----------------- ----------------
Shares at end of year............................................ 63,877,442 63,073,287 65,983,199
================== ================= ================
Treasury Stock Outstanding:
Shares at beginning of year...................................... 361,314 3,729,823 3,759,425
Acquisition of treasury stock.................................... 500,000 - -
Issuance of treasury stock to 401(k) plan........................ - (7,324) (11,602)
Executive incentive compensation................................. - - (18,000)
Retirement of treasury stock pursuant to Global Merger - (3,361,185) -
------------------ ----------------- ---------------
Shares at end of year............................................ 861,314 361,314 3,729,823
================== ================= ===============
Preferred Stock -- The Company is authorized to issue 5,000,000 shares of
preferred stock, par value $1.00 per share, in one or more series. There were no
shares issued or outstanding as of December 31, 1997 and 1996.
Preferred Share Purchase Rights -- Seagull has a Share Purchase Rights Plan
to protect the Company's shareholders from coercive or unfair takeover tactics.
Under this Plan, each outstanding share and each share of Common Stock
subsequently issued has attached to it one Right, exercisable at $30.75, subject
to certain adjustments. In December 1997, the Company amended the Share Purchase
Rights Plan whereby, in the event a person or group acquires 10% or more of the
outstanding Common Stock, or in the event the Company is acquired in a merger or
other business combination or 50% or more of the Company's consolidated assets
or earning power is sold, each Right entitles the holder to purchase $30.75
worth of shares of Common Stock of the Company or of the acquiring company, as
the case may be, for half of the then-current, per-share market prices. The
Rights, under certain circumstances, are redeemable at the option of Seagull's
Board of Directors at a price of $0.01 per Right, within 10 days (subject to
extension) following the day on which the acquiring person or group exceeds the
10% threshold. If any person or group acquires 10% or more (but less than 50%)
of the Company's outstanding common stock, the Board may, at its option, issue
common stock in exchange for all or part of the outstanding and exercisable
Rights (other than Rights owned by such person or group which would become null
and void) at an exchange ratio of one share of common stock for each two shares
of common stock for which each Right is then exercisable, subject to adjustment.
The Rights expire on March 22, 1999.
55 Seagull Energy Corporation
11. BENEFIT PLANS
Stock Option Plans -- The Company currently has various stock option plans.
The stock options become exercisable over a three to six year period and all
options expire 10 years after the date of grant. At December 31, 1997,
approximately 0.8 million shares of Common Stock were available for grant.
Information relating to stock options is summarized as follows:
1997 1996 1995
---------------------------------- --------------------------------- -----------------------------------
Weighted Average Weighted Weighted
Exercise Average Exercise Average Exercise
Price Price Price
Shares Per Share Shares Per Share Shares Per Share
-------------- ------------------- ------------- ------------------- -------------- -------------------
Balance outstanding -
Beginning of year........ 4,746,792 $ 16.15 4,501,920 $ 14.67 4,065,084 $ 14.52
Granted................ 983,200 $ 19.13 844,000 $ 21.79 766,640 $ 16.08
Exercised.............. (809,764) $ 9.16 (449,256) $ 9.80 (215,104) $ 10.40
Forfeited.............. (321,976) $ 21.33 (149,872) $ 22.36 (114,700) $ 25.59
-------------- ------------------- ------------- ------------------- -------------- -------------------
Balance outstanding -
End of year.............. 4,598,252 $ 17.63 4,746,792 $ 16.15 4,501,920 $ 14.67
============== =================== ============= =================== ============== ===================
Options exercisable -
End of year.............. 2,355,972 $ 14.97 2,417,492 $ 11.19 2,265,809 $ 10.02
============== =================== ============= =================== ============== ===================
The weighted average fair value of stock options granted during 1997, 1996
and 1995 was $9.28, $10.77 and $8.36 per share, respectively. The fair value of
each option grant is estimated on the date of grant using the Black-Scholes
options-pricing model. The model assumed expected volatility of 44%, 43% and
41%, weighted average risk-free interest rates of 6.3%, 6.5% and 6.1%, for
grants in 1997, 1996 and 1995, respectively, and an expected life of three years
after the vesting term. As Seagull has not declared dividends since it became a
public entity, no dividend yield was used. Actual value realized, if any, is
dependent on the future performance of Seagull Common Stock and overall stock
market conditions. There is no assurance the value realized by an optionee will
be at or near the value estimated by the Black-Scholes model.
Information relating to stock options outstanding at December 31, 1997 is
summarized as follows:
Options Outstanding Options Exercisable
-------------------- --------------------- --------------------- ----------------------------------------------
Weighted
Number Outstanding Weighted Average Average Weighted
Range of at December 31, Remaining Exercise Price Number Exercisable Average Exercise
Exercise Prices 1997 Contractual Life Per Share at December 31, 1997 Price Per Share
-------------------- ------------------- ----------------- --------------------- ---------------------
$ 5.89 - $ 9.45 961,084 2 years $ 8.05 921,660 $ 7.99
$ 9.46 - $18.00 1,114,768 5 years $14.54 680,512 $13.19
$18.01 - $21.49 924,300 9 years $18.84 26,400 $19.13
$21.50 - $25.50 1,120,100 8 years $24.21 400,200 $24.49
$25.51 - $26.38 478,000 5 years $26.38 327,200 $26.38
-------------------- ------------------- ----------------- --------------------- ---------------------
$ 5.89 - $26.38 4,598,252 6 years $17.63 2,355,972 $14.97
==================== =================== ================= ===================== =====================
56 Seagull Energy Corporation
The majority of Seagull's options must be granted at the fair market value
of Seagull's Common Stock on the New York Stock Exchange on the date of grant.
The remaining stock options may have an exercise price not less than 50% of the
fair market value of Seagull's Common Stock on the date of grant. All
outstanding options, other than 44,000 granted by Global in 1993, were issued at
the fair market value of Seagull's Common Stock. Accordingly as discussed in
Note 2 for the years ending December 31, 1997, 1996 and 1995, no compensation
expense relating to these options is recognized in the Company's results of
operations. Had compensation cost for the Company's stock option plans been
determined based on the fair value at the grant dates for awards made after
December 31, 1994 under those plans, the Company's net income (loss) and
earnings (loss) per share would have been restated to the pro forma amounts
(stated in thousands except per-share data) indicated below:
Year Ended December 31,
----------------------------------------------------------------------------
1997 1996 1995
-------------------- --------------------- ----------------------
Net income (loss) As reported......... $49,130 $28,961 $(1,738)
Pro forma........... 44,641 26,429 (2,443)
Earnings (loss) per share:
Basic As reported......... 0.78 0.46 (0.03)
Pro forma........... 0.71 0.42 (0.04)
Diluted As reported......... 0.77 0.46 (0.03)
Pro forma........... 0.70 0.42 (0.04)
Under the provisions of SFAS No. 123, the pro forma disclosures above
include only the effects of stock options granted by Seagull subsequent to
December 31, 1994. During this initial phase-in period, the pro forma
disclosures as required by SFAS No. 123 are not representative of the effects on
reported net income for future years as options vest over several years and
additional awards are generally made each year.
Profit Sharing Plans -- ENSTAR Alaska has trusteed profit sharing plans for
salaried employees and union employees. Annual contributions for each plan are
determined by the Company's Board of Directors pursuant to formulae which
contain minimum contribution requirements. Profit sharing expense was
approximately $0.3 million, $0.4 million and $0.3 million for 1997, 1996 and
1995, respectively, and is included in operations and maintenance expenses.
Thrift Plans -- The Company has various thrift plans which are qualified
employee savings plans in accordance with the provisions of Section 401(k) of
the Internal Revenue Code of 1986, as amended. Company contributions to these
plans (collectively, the "Thrift Plans") were approximately $2 million for each
of the years 1997, 1996 and 1995. The Thrift Plans' costs are included in
operations and maintenance expenses and general and administrative expenses.
One of the Thrift Plans, the Employees 401(k) Savings Plan ("ESP"), was a
defined contribu-
57 Seagull Energy Corporation
tion plan which covered substantially all of Global's U.S. employees. Employees'
contributions were matched by the Company with treasury shares of common stock.
The Company recorded expense of approximately $0.1 million in both of the years
1996 and 1995 relating to its contributions of 7,324 and 11,602 shares,
respectively, of common stock to the ESP. Subsequent to December 31, 1996,
contributions to the ESP were suspended and those employees eligible to
contribute to the ESP prior to the Global Merger were eligible to contribute to
the Seagull Thrift Plan.
Defined Benefit Plans -- The Company has an unfunded retirement plan which
provides for supplemental benefits to certain officers and key employees. As of
December 31, 1997, only one person was designated to participate in such plan.
Total expenses of the plan were approximately $0.2 million for each of the years
1997, 1996 and 1995. The retirement plan's costs are included in general and
administrative expenses.
ENSTAR Alaska has two defined benefit retirement plans which cover
salaried, clerical and operating employees. Determination of benefits for the
salaried employees is based upon a combination of years of service and final
monthly compensation. Benefits for operating employees are based solely on years
of service. ENSTAR Alaska's policy is to fund the minimum contributions required
by applicable regulations. The net pension costs are included in operations and
maintenance expenses.
Global sponsored a defined benefit pension plan which covered substantially
all of Global's U.S. employees. The plan provided benefits based on the
employee's years of service and compensation during the years immediately
preceding retirement. Global made annual contributions to the plan to comply
with the minimum funding provisions of the Employee Retirement Income Security
Act. The plan investments consisted primarily of common equities and fixed
income securities. During 1997, the Company terminated this defined benefit
pension plan and participants were paid the present value of their accrued
benefits. Termination of this plan did not have a material effect on Seagull's
financial position or results of operations.
58 Seagull Energy Corporation
The following table (stated in thousands) details the components of pension
income and expense, the funded status of the Company's plans, amounts recognized
in the Company's consolidated balance sheets and major assumptions used to
determine these projected benefit obligations. Certain assumptions are based on
factors, such as interest rates and long-term rates of return on investments,
which are subject to change due to forces beyond the Company's control. Changes
in the various assumptions utilized could have a significant effect on the
amounts reported.
December 31,
---------------------------------------
1997 1996
----------------- ----------------
Actuarial present value of benefit obligations:
Vested benefit obligation........................................................... $ (11,896) $ (16,242)
================= ================
Accumulated benefit obligation...................................................... $ (11,955) $ (16,278)
================= ================
Projected benefit obligation for services rendered to date.............................. $ (13,623) $ (17,740)
Plan assets at fair value, primarily listed stocks and
corporate and U. S. bonds........................................................... 13,859 15,520
----------------- ----------------
Plan assets at fair value in excess of (less than) projected benefit
obligation.........
236 (2,220)
Unrecognized prior service cost......................................................... 80 91
Unrecognized net (gain) loss............................................................ (1,045) 753
Unrecognized net obligation arising out of the initial application of
SFAS No. 87, amortized over 15 years to 18 years ................................... 309 394
----------------- ----------------
Accrued pension cost.................................................................... $ (420) $ (982)
================= ================
Net pension cost includes the following components:
Service cost-benefits earned during the period...................................... $ 479 $ 1,025
Interest cost on projected benefit obligation....................................... 901 1,212
Actual return on plan assets ....................................................... (3,320) (2,605)
Net amortization and deferral....................................................... 2,578 1,835
----------------- ----------------
Net periodic pension cost............................................................... $ 638 $ 1,467
================= ================
Assumptions:
Discount rate....................................................................... 7% 7%
Rate of increase in future compensation............................................. 3% 2%
Expected long-term rate of return on plan assets.................................... 8% 8%
Employee Stock Ownership Plan -- On November 15, 1989, the Company formed
the Seagull Employee Stock Ownership Plan (the "ESOP") for the benefit of the
non-Alaskan employees of the Company. The ESOP borrowed from the Company $8
million at an interest rate of 10 percent per annum to be repaid in twelve equal
annual installments of principal and interest. The ESOP used the borrowed funds
and the 1989 contributions from the Company to purchase 948,150 shares of Common
Stock at $8.438 per share from Seagull's treasury. The purchase price was based
upon the closing price of the Common Stock on the New York Stock Exchange on the
date the ESOP was formed.
The promissory note has been and will be funded entirely by contributions
from Seagull. Such contributions, included in operations and
59 Seagull Energy Corporation
maintenance expenses and administrative expenses, were approximately $1.3
million in 1997 and $0.6 million in both 1996 and 1995.
Postretirement Medical Plan -- ENSTAR Alaska has a postretirement medical
plan which covers all of its salaried employees. Determination of benefits is
based upon a combination of the retiree's age and years of service at
retirement. The Company accrues for such benefits during the years the plan
participants render service. Expenses related to the postretirement medical plan
of $0.2 million, $0.3 million and $0.2 million in 1997, 1996 and 1995,
respectively, are included in operations and maintenance expenses.
12. INCOME TAXES
The income (loss) before income taxes and the components of income tax
expense (benefit) (stated in thousands) for each of the years ended December 31,
1997, 1996 and 1995 were as follows:
1997 1996 1995
----------------- ------------------ ------------------
Income (loss) before income taxes:
Domestic......................................................... $ 43,530 $ 38,200 $ 6,841
Foreign.......................................................... 42,670 16,656 (5,797)
----------------- ------------------ ------------------
$ 86,200 $ 54,856 $ 1,044
================= ================== ==================
Current income tax expense (benefit):
Federal......................................................... $ 3,503 $ (643) $ 6,236
Foreign......................................................... 22,899 17,737 9,376
State........................................................... 1,250 100 3,462
----------------- ------------------ -------------------
Total current................................................ 27,652 17,194 19,074
----------------- ------------------ -------------------
Deferred income tax expense (benefit):
Federal......................................................... 5,787 7,605 (13,570)
Foreign......................................................... 3,893 815 (1,935)
State........................................................... (262) 281 (787)
----------------- ------------------ -------------------
Total deferred............................................... 9,418 8,701 (16,292)
----------------- ------------------ ------------------
Income tax expense.................................................. $ 37,070 $ 25,895 $ 2,782
================= ================== ==================
In addition to the income tax expense detailed above, the Company had
income tax benefits, related to the tax effect of compensation expense, of $3
million, $1 million and $0.4 million for each of the years ended December 31,
1997, 1996 and 1995, respectively, which were recorded in paid-in capital.
Seagull also had current income tax receivables of $2 million and $1 million at
December 31, 1997 and 1996, respectively.
60 Seagull Energy Corporation
The provision for income taxes (stated in thousands) for each of the years
ended December 31, 1997, 1996 and 1995 was different than the amount computed
using the federal statutory rate (35%) for the following reasons:
1997 1996 1995
---------------- ---------------- ---------------
Amount computed using the statutory rate.................................. $ 30,170 $ 19,200 $ 365
Increase (reduction) in taxes resulting from:
Utilization of Internal Revenue Code Section 29 credits................ (81) (171) (3,096)
State income taxes, net of federal income tax benefits................. 642 248 1,739
Taxation of foreign operations, net of
federal income tax benefits.......................................... 6,209 13,613 8,494
Decrease in deferred tax asset valuation allowance..................... - (8,430) (6,194)
Adjustments to beginning-of-the-year tax bases
per the 1995 tax returns and effects of IRS exam..................... - -
(1,385)
Other.................................................................. 130 1,435 2,859
---------------- ---------------- ---------------
Income tax expense........................................................ $ 37,070 $ 25,895 $ 2,782
================ ================ ===============
The net decrease in the valuation allowance for the year ended December 31,
1996 of approximately $8 million included $6 million related to the utilization
in 1996 of net operating losses. The remaining change for 1996 and the change
for 1995 are related to management's belief that, due to events occurring in the
year of change, it is more likely than not such deferred tax assets, for which a
valuation allowance had previously been established, will be realized.
The significant components of deferred income tax expense (benefit) (stated
in thousands) attributable to income from continuing operations for the years
ended December 31, 1997, 1996 and 1995 were as follows:
1997 1996 1995
--------------- ---------------- --------------
Deferred tax expense (benefit) (exclusive of the effects of other
components listed below)................................................ $ 9,418 $ 17,131 $ (10,098)
Decrease in deferred tax asset valuation allowance........................... - (8,430) (6,194)
--------------- ---------------- --------------
$ 9,418 $ 8,701 $ (16,292)
=============== ================ ==============
61 Seagull Energy Corporation
The tax effects of temporary differences (stated in thousands) that gave
rise to significant portions of the deferred tax liabilities and deferred tax
assets as of December 31, 1997, 1996 and 1995 were as follows:
1997 1996 1995
---------------- --------------- --------------
Deferred tax liabilities:
Property, plant and equipment, due to
differences in depreciation, depletion and amortization................... $ 49,815 $ 66,242 $ 50,783
Other....................................................................... 456 583 197
---------------- --------------- --------------
Deferred tax liabilities........................................................ 50,271 66,825 50,980
---------------- --------------- --------------
Deferred tax assets:
Minimum tax credit carryforwards............................................ (16,352) (15,972) (18,950)
Investment tax credit carryforwards (expiring in 1999 and 2000)............. (1,462) (1,851) (1,682)
Net operating loss carryforwards............................................ - (1,727) (7,129)
Capital loss carryback...................................................... (2,847) - -
Deferred compensation/retirement related
items accrued for financial reporting purposes............................ (5,390) (5,464) (4,349)
Contingent considerations................................................... (4,897) (5,018) (651)
Notes receivable............................................................ (5,262) (6,209) (5,333)
Other....................................................................... (4,364) (3,636) (3,178)
---------------- --------------- --------------
Deferred tax assets............................................................. (40,574) (39,877) (41,272)
Less - valuation allowance...................................................... - - 8,430
---------------- --------------- --------------
Net deferred tax assets......................................................... (40,574) (39,877) (32,842)
Less - reclassification to current deferred..................................... 4,429 4,073 5,239
---------------- --------------- --------------
Non-current deferred tax assets................................................. (36,145) (35,804) (27,603)
---------------- --------------- --------------
Net non-current deferred tax liabilities........................................ $ 14,126 $ 31,021 $ 23,377
================ =============== ==============
62 Seagull Energy Corporation
13. BUSINESS SEGMENTS
Information on the Company's operations by business segment (stated in
thousands) is summarized as follows:
Year ended December 31,
-----------------------------------------------------------------
1997 1996 1995
------------------- ------------------- ------------------
Revenues:
Oil and gas operations..................................... $ 453,648 $ 419,595 $ 308,510
Alaska transmission and distribution....................... 95,719 97,616 97,770
------------------- ------------------- ------------------
$ 549,367 $ 517,211 $ 406,280
=================== =================== ==================
Operating Profit (Loss):
Oil and gas operations(*).................................. $ 106,983 $ 97,192 $ (35,867)
Alaska transmission and distribution....................... 22,588 25,781 22,896
Corporate.................................................. (19,095) (19,530) (23,798)
------------------- ------------------- ------------------
$ 110,476 $ 103,443 $ (36,769)
=================== =================== ==================
Depreciation, Depletion And Amortization:
Oil and gas operations(*).................................. $ 160,197 $ 145,382 $ 188,455
Alaska transmission and distribution....................... 8,368 8,190 8,042
Corporate.................................................. 2,951 2,097 2,030
------------------- ------------------- ------------------
$ 171,516 $ 155,669 $ 198,527
=================== =================== ==================
Identifiable Assets:
Oil and gas operations..................................... $ 1,161,108 $ 1,267,481 $ 1,118,216
Alaska transmission and distribution....................... 184,422 189,867 189,081
Corporate.................................................. 65,536 57,715 51,828
------------------- ------------------- ------------------
$ 1,411,066 $ 1,515,063 $ 1,359,125
=================== =================== ==================
Capital Expenditures:
Oil and gas operations:
Leasehold................................................. $ 23,141 $ 12,986 $ 18,000
Exploration............................................... 95,681 77,774 46,575
Development............................................... 137,806 108,763 69,260
------------------- ------------------- ------------------
256,628 199,523 133,835
Other oil and gas operations.............................. 885 228 441
------------------- ------------------- ------------------
Total oil and gas operations.......................... 257,513 199,751 134,276
Alaska transmission and distribution........................ 9,607 9,287 7,611
Corporate................................................... 8,488 4,424 2,214
------------------- ------------------- ------------------
$ 275,608 $ 213,462 $ 144,101
=================== =================== ==================
Acquisitions, Net of Cash Acquired:
Acquisitions of oil and gas properties..................... $ 17,665 $ 90,867 $ -
Acquisitions of other assets and liabilities............... - 13,553 -
------------------- ------------------- ------------------
$ 17,665 $ 104,420 $ -
=================== =================== ==================
(*) Includes $49 million relating to the impairment of long-lived assets
for the year ended December 31, 1995.
63 Seagull Energy Corporation
Identifiable assets (stated in thousands) by geographic area are summarized as
follows:
Year ended December 31,
-----------------------------------------------------------
1997 1996 1995
---------------- ---------------- ---------------
United States........................................................ $1,157,186 $1,138,619 $1,074,787
Canada............................................................... - 200,352 211,040
Egypt................................................................ 190,321 119,680 11,003
Cote d'Ivoire........................................................ 35,519 28,854 33,167
Tatarstan............................................................ 25,051 21,152 21,120
Indonesia............................................................ 2,956 3,487 4,237
Other(*)............................................................. 33 2,919 3,771
---------------- ---------------- ---------------
$1,411,066 $1,515,063 $1,359,125
================ ================ ===============
(*) Other includes Argentina, Malaysia, Turkey and the United Kingdom.
14. COMMITMENTS AND CONTINGENCIES
Lease Commitments -- The Company leases certain office space and equipment
under operating lease arrangements which contain renewal options and escalation
clauses. Future minimum rental payments under these leases range between $2
million and $3 million in each of the years 1998-2002, and total $7 million for
all subsequent years. Total rental expense under operating leases was
approximately $3 million for each of the three years ended December 31, 1997.
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,
the plaintiffs seek additional royalties based upon the alleged deduction by
Seagull of post-production costs, such as those related to transportation,
compression, dehydration and treating. In addition, the plaintiffs have
questioned the sales price used by Seagull as a basis for calculating royalties
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") and Arkansas Western Gas
Company ("AWG") have 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 and AWG have 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 and AWG were successful with the
65 Seagull Energy Corporation
Additional Well Claim, Seagull's operations in the Aetna Field would be
materially affected in an adverse manner. By mid - 1997, the plaintiffs had
alleged losses in these matters of approximately $90 million plus attorney's
fees.
In November 1997, the Company , NorAm and AWG signed a Settlement Proposal
that ultimately could lead to a final settlement and resolution of the NorAm
Litigation discussed above. The Settlement Proposal calls for Seagull to make a
cash payment to deliver gas under a five-year gas sales contract. As a result of
this Settlement Proposal, the Company recorded in the fourth quarter of 1997 a
one-time pre-tax charge of approximately $4.5 million, included in general and
administrative expenses.
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
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.
65 Seagull Energy Corporation
15. SUPPLEMENTAL OIL AND GAS INFORMATION (Unaudited)
Capitalized Costs Relating to Oil and Gas Producing Activities (amounts in
thousands)
United Cote
States Canada (*) Egypt d'Ivoire Tatarstan Indonesia Other Total
---------- ---------- -------- -------- --------- --------- ----- ----------
At December 31, 1997:
Proved . . . . . . . . . . . . $1,421,004 $ - $174,702 $ 45,343 $ 22,500 $ 3,962 $ - $1,667,511
Unproved. . . . . . . . . . . . 52,449 - 22,101 664 - - - 75,214
---------- ---------- -------- -------- --------- --------- ------ ----------
1,473,453 - 196,803 46,007 22,500 3,962 - 1,742,725
Accumulated depreciation,
depletion and amortization 732,627 - 28,769 15,835 8,810 3,042 - 789,083
---------- ---------- -------- -------- --------- --------- ------ ----------
$ 740,826 $ - $168,034 $ 30,172 $ 13,690 $ 920 $ - 953,642
========== ========== ======== ======== ========= ========= ====== ==========
At December 31, 1996:
Proved . . . . . . . . . . . . $1,312,448 239,323 98,407 $ 32,648 $ 17,056 $ 3,962 $ - $1,703,844
Unproved . . . . . . . . . . . 33,959 2,525 5,584 664 - - 4,208 46,940
---------- --------- -------- -------- --------- --------- ------ ----------
1,346,407 241,848 103,991 33,312 17,056 3,962 4,208 1,750,784
Accumulated depreciation,
depletion and amortization 620,602 49,561 7,442 6,245 4,979 2,911 1,441 693,181
---------- --------- -------- -------- --------- --------- ------ ----------
$ 725,805 $192,287 $ 96,549 $ 27,067 $ 12,077 $ 1,051 $2,767 $1,057,603
========== ========= ======== ======== ========= ========= ====== ==========
(*) All of the Company's Canadian oil and gas operations were sold in October
1997.
Costs Incurred in Oil and Gas Property Acquisition, Exploration and Development
Activities (amounts in thousands)
United Cote
States Canada (*) Egypt d'Ivoire Tatarstan Indonesia Other Total
---------- ---------- -------- -------- --------- --------- ----- ----------
Year ended December 31, 1997:
Acquisition costs:
Proved. . . . . . . . . . . . . $ 7,382 $ 54 $ 4,542 $ - $ - $ - $ - $ 11,978
Unproved. . . . . . . . . . . . 21,886 595 6,285 53 - - 9 28,828
Exploration costs. . . . . . . . . 51,058 2,999 38,086 3,357 181 - - 95,681
Development costs. . . . . . . . . 68,059 9,749 43,900 10,801 5,297 - - 137,806
---------- --------- ------- -------- --------- --------- ------ ----------
$ 148,385 $ 13,397 $92,813 $14,211 $ 5,478 $ - $ 9 $ 274,293
========== ========= ======= ======== ========= ========= ====== ==========
Year ended December 31, 1996:
Acquisition costs:
Proved. . . . . . . . . . . . . $ 29,102 $ 1,000 $56,051 $ - $ - $ - $ - $ 86,153
Unproved. . . . . . . . . . . . 10,371 862 5,584 782 - - 101 17,700
Exploration costs. . . . . . . . . 64,066 3,332 6,934 2,823 - - 619 77,774
Development costs. . . . . . . . . 65,309 10,992 25,176 3,255 4,031 - - 108,763
---------- --------- ------- ------- --------- --------- ------ ----------
$ 168,848 $ 16,186 $93,745 $ 6,860 $ 4,031 $ - $ 720 $ 290,390
========== ========= ======= ======== ========= ========= ====== ==========
Year ended December 31, 1995:
Acquisition costs:
Proved. . . . . . . . . . . . . $ 3,193 $ 553 $ - $ - $ - $ - $ - $ 3,746
Unproved. . . . . . . . . . . . 13,036 873 13 126 - - 206 14,254
Exploration costs. . . . . . . . . 38,762 764 3,412 (29) 312 - 3,354 46,575
Development costs. . . . . . . . . 39,669 2,507 4,792 18,359 3,933 - - 69,260
---------- --------- ------- ------- --------- --------- ------ ----------
$ 94,660 $ 4,697 $ 8,217 $18,456 $ 4,245 $ - $3,560 $ 133,835
========== ========= ======= ======== ========= ========= ====== ==========
(*) All of the Company's Canadian oil and gas operations were sold in October
1997.
66 Seagull Energy Corporation
Results of Operations for Oil and Gas Producing Activities (amounts in
thousands) (1)
United Cote
States Canada (*) Egypt d'Ivoire Tatarstan Indonesia Other Total
---------- ---------- -------- -------- --------- --------- ------- ----------
Year Ended December 31, 1997:
Revenues . . . . . . . . . . . . . $ 290,337 $ 25,956 $ 61,772 $ 15,995 $ 21,558 $ 13,551 $ 150 $ 429,319
Operating expense (3). . . . . . . 75,692 8,541 11,701 3,864 13,994 - 1,921 115,713
Exploration charges. . . . . . . . 31,259 2,193 2,553 3,218 (48) - 2,910 42,085
DD&A (4) . . . . . . . . . . . . . 116,257 7,595 21,615 9,641 3,093 131 273 158,605
Income tax expense (5) . . . . . . 23,495 4,156 11,763 2,474 811 7,589 - 50,288
--------- --------- -------- -------- --------- --------- ------- ----------
Results of activities. . . . . . . $ 43,634 $ 3,471 $ 14,140 $ (3,202) $ 3,708 $ 5,831 $(4,954) $ 62,628
========== ========= ======== ======== ========= ========= ======= ==========
Year Ended December 31, 1996:
Revenues . . . . . . . . . . . . . $ 282,508 $ 34,006 $ 28,126 $ 12,798 $ 15,626 $ 15,892 $ 58 $ 389,014
Operating expense (3). . . . . . . 68,409 13,889 5,806 2,673 11,364 - 17 102,158
Exploration charges. . . . . . . . 36,098 4,295 2,725 5,401 (133) - 2,386 50,772
DD&A (4) . . . . . . . . . . . . . 110,989 17,114 7,416 4,151 2,830 131 878 143,509
Income tax expense (5) . . . . . . 23,047 1,375 5,579 2,158 541 8,899 - 41,599
--------- --------- -------- -------- --------- --------- ------- ----------
Results of activities. . . . . . . $ 43,965 $ (2,667) $ 6,600 $ (1,585) $ 1,024 $ 6,862 $(3,223) $ 50,976
========== ========= ======== ======== ========= ========= ======= ==========
Year Ended December 31, 1995:
Revenues . . . . . . . . . . . . . $ 205,706 $ 28,849 $ 442 $ 4,377 $ 16,037 $ 12,418 $ 7 $ 267,836
Operating expense (3). . . . . . . 61,784 12,934 56 1,400 8,872 - (21) 85,025
Exploration charges. . . . . . . . 26,156 2,866 2,086 471 367 - 8,277 40,223
DD&A (4) . . . . . . . . . . . . . 113,430 18,046 136 2,106 2,111 131 536 136,496
Impairment of oil and gas
properties. . . . . . . . . . . 46,122 - - - - - - 46,122
Income tax expense (benefit)(5). (20,776) (2,233) - 832 1,066 6,953 - (14,158)
--------- --------- --------- --------- --------- --------- ------- ----------
Results of activities. . . . . . . $ (21,010) $ (2,764) $ (1,836) $ (432) $ 3,621 $ 5,334 $(8,785) $ (25,872)
========== ========= ========= ========= ========= ========= ======= ==========
(1) Excludes revenues and expenses associated with pipeline and marketing
activities, interest expense and general corporate expenses. Revenues and
expenses associated with pipeline and marketing activities are directly
related to Oil and Gas Operations with regard to segment reporting as
defined in SFAS No. 14, Financial Reporting for Segments of a Business
Enterprise, but are not part of Disclosures about Oil and Gas Producing
Activities as defined by SFAS No. 69.
(2) All of the Company's Canadian oil and gas operations were sold in October
1997.
(3) Operating expense represents cost incurred to operate and maintain wells
and related equipment and facilities. These costs include, among other
things, repairs and maintenance, labor, materials, supplies, property
taxes, insurance, severance taxes, transportation costs and all overhead
expenses directly related to oil and gas producing activities.
(4) DD&A represents depreciation, depletion and amortization.
(5) Income tax expense (benefit) is calculated by applying the statutory tax
rate to operating profit then adjusting for any applicable permanent tax
differences or tax credits or allowances.
67 Seagull Energy Corporation
Reserve Quantity Information - Thousand Equivalent Barrels of Proved Reserves (MBOE)
United Cote Indonesia
States Canada (2) Egypt d'Ivoire Tatarstan and Other Total
----------- ------------ ------------ ------------ ------------ ------------ -----------
January 1, 1997 . . . . . . . . . . 155,847 42,682 25,965 5,132 16,338 11,993 257,957
Revisions of previous estimates . (1,744) 8,896 3,752 978 (3,155) 18 8,745
Extensions and discoveries. . . . 14,150 11,105 7,796 219 4,784 - 38,054
Purchases of reserves in place. . 1,157 - 1,171 - - - 2,328
Sales of reserves in place. . . . (666) (60,189) - - - - (60,855)
Production. . . . . . . . . . . . (20,195) (2,494) (3,383) (978) (1,512) (717) (29,279)
----------- ------------ ------------ ------------ ------------ ------------ -----------
December 31, 1997 (1). . . . . . . . 148,549 - 35,301 5,351 16,455 11,294 216,950
=========== ============ ============ ============ ============ ============ ===========
January 1, 1996 . . . . . . . . . . 153,794 45,816 8,151 6,521 15,570 13,300 243,152
Revisions of previous estimates . 4,021 (2,713) 386 (900) 651 (518) 927
Extensions and discoveries. . . . 12,769 5,261 1,798 263 1,234 - 21,325
Purchases of reserves in place. . 6,217 288 16,935 - - - 23,440
Sales of reserves in place. . . . (20) (2,075) - - - - (2,095)
Production. . . . . . . . . . . . (20,934) (3,895) (1,305) (752) (1,117) (789) (28,792)
----------- ------------ ------------ ------------ ------------ ------------ -----------
December 31, 1996 (1). . . . . . . . 155,847 42,682 25,965 5,132 16,338 11,993 257,957
=========== ============ ============ ============ ============ ============ ===========
January 1, 1995 . . . . . . . . . . 158,848 48,714 3,520 5,282 13,157 14,397 243,918
Revisions of previous estimates . 3,515 363 4,656 118 1,497 (396) 9,753
Extensions and discoveries . . . 11,242 1,054 - 1,416 1,978 - 15,690
Purchases of reserves in place. . 1,254 323 - - - - 1,577
Sales of reserves in place. . . . (748) (563) - - - - (1,311)
Production . . . . . . . . . . . (20,317) (4,075) (25) (295) (1,062) (701) (26,475)
----------- ------------ ------------ ------------ ------------ ------------ -----------
December 31, 1995 (1). . . . . . . . 153,794 45,816 8,151 6,521 15,570 13,300 243,152
=========== ============ ============ ============ ============ ============ ===========
Proved developed reserves (MBOE):
December 31, 1997 . . . . . . . . 126,439 - 20,706 4,004 10,919 11,294 173,362
December 31, 1996 . . . . . . . . 127,871 37,150 14,502 3,092 10,806 9,528 202,949
December 31, 1995 . . . . . . . . 122,918 40,787 265 3,623 9,176 10,652 187,421
(1) At December 31, 1997, 1996 and 1995, approximately 12,963 MBOE, 14,072 MBOE
and 14,733 MBOE, respectively, were dedicated to the monetary production
payment.
(2) All of the Company's Canadian oil and gas operations were sold in October
1997.
The reserve volumes presented are estimates only and should not be
construed as being exact quantities. These reserves may or may not be recovered
and may increase or decrease as a result of future operations of the Company and
changes in economic conditions.
68 Seagull Energy Corporation
United Cote Indonesia
States Canada (3) Egypt d'Ivoire Tatarstan and Other Total
------------- ------------ ------------ ------------ ------------ ------------ ------------
Reserve Quantity Information - Proved Oil Reserves (Mbbl)
January 1, 1997 . . . . . . . . . . 19,885 3,725 25,724 1,525 16,338 1,125 68,322
Revisions of previous estimates . (487) 2,137 3,708 263 (3,155) 5 2,471
Extension and discoveries . . . . 754 969 7,783 27 4,784 - 14,317
Purchases of reserves in place. . 204 - 1,171 - - - 1,375
Sales of reserves in place. . . . (52) (6,588) - - - - (6,640)
Production. . . . . . . . . . . . (1,763) (243) (3,383) (603) (1,512) (56) (7,560)
------------- ------------ ------------ ------------ ------------ ------------ ------------
December 31, 1997 (1) . . . . . . . 18,541 - 35,003 1,212 16,455 1,074 72,285
============= ============ ============ ============ ============ ============ ============
January 1, 1996 . . . . . . . . . . 20,163 3,667 7,918 3,010 15,570 1,153 51,481
Revisions of previous estimates . (800) (47) 384 (1,038) 651 23 (827)
Extension and discoveries . . . . 1,656 916 1,792 64 1,234 - 5,662
Purchases of reserves in place. . 429 21 16,935 - - - 17,385
Sales of reserves in place. . . . (2) (471) - - - - (473)
Production . . . . . . . . . . . (1,561) (361) (1,305) (511) (1,117) (51) (4,906)
------------- ------------ ------------ ------------ ------------ ------------ ------------
December 31, 1996 (1) . . . . . . . 19,885 3,725 25,724 1,525 16,338 1,125 68,322
============= ============ ============ ============ ============ ============ ============
January 1, 1995 . . . . . . . . . . 15,481 4,051 3,520 2,210 13,157 1,066 39,485
Revisions of previous estimates . 4,000 (164) 4,423 72 1,497 132 9,960
Extension and discoveries . . . . 1,382 258 - 989 1,978 - 4,607
Purchases of reserves in place. . 781 74 - - - - 855
Sales of reserves in place. . . . (78) (153) - - - - (231)
Production. . . . . . . . . . . . (1,403) (399) (25) (261) (1,062) (45) (3,195)
------------- ------------ ------------ ------------ ------------ ------------ ------------
December 31, 1995 (1) . . . . . . . 20,163 3,667 7,918 3,010 15,570 1,153 51,481
============= ============ ============ ============ ============ ============ ============
Reserve Quantity Information - Proved Gas Reserves (Mmcf)
January 1, 1997 . . . . . . . . . . 815,781 233,744 1,447 21,644 - 65,217 1,137,833
Revisions of previous estimates . (7,548) 40,558 256 4,287 - 72 37,625
Extension and discoveries . . . . 80,372 60,817 83 1,149 - - 142,421
Purchases of reserves in place. . 5,717 - - - - - 5,717
Sales of reserves in place. . . . (3,681) (321,609) - - - - (325,290)
Production. . . . . . . . . . . . (110,595) (13,510) - (2,245) - (3,965 (130,315)
------------- ------------ ------------ ------------ ------------ ------------ ------------
December 31, 1997 (2) . . . . . . . 780,046 - 1,786 24,835 - 61,324 867,991
============= ============ ============ ============ ============ ============ ============
January 1, 1996 . . . . . . . . . . 801,797 252,892 1,399 21,066 - 72,892 1,150,046
Revisions of previous estimates . 28,925 (15,994) 13 828 - (3,246) 10,526
Extension and discoveries . . . . 66,678 26,071 35 1,195 - - 93,979
Purchases of reserves in place. . 34,729 1,603 - - - - 36,332
Sales of reserves in place. . . . (110) (9,625) - - - - (9,735)
Production. . . . . . . . . . . . (116,238) (21,203) - (1,445) - (4,429) (143,315)
------------- ------------ ------------ ------------ ------------ ------------ ------------
December 31, 1996 (2) . . . . . . . 815,781 233,744 1,447 21,644 - 65,217 1,137,833
============= ============ ============ ============ ============ ============ ============
January 1, 1995 . . . . . . . . . . 860,209 267,980 - 18,432 - 79,990 1,226,611
Revisions of previous estimates . (2,908) 3,159 1,399 278 - (3,165) (1,237)
Extension and discoveries . . . . 59,157 4,773 - - - - 63,930
Purchases of reserves in place. . 2,840 1,494 - 2,559 - - 6,893
Sales of reserves in place. . . . (4,019) (2,457) - - - - (6,476)
Production. . . . . . . . . . . . (113,482) (22,057) - (203) - (3,933) (139,675)
------------- ------------ ------------ ------------ ------------ ------------ ------------
December 31, 1995 (2) . . . . . . . 801,797 252,892 1,399 21,066 - 72,892 1,150,046
============= ============ ============ ============ ============ ============ ============
(1) At December 31, 1997, 1996 and 1995, includes approximately 2,079 Mbbl,
2,248 Mbbl and 2,281 Mbbl, respectively, of oil dedicated to the monetary
production payment.
(2) At December 31, 1997, 1996 and 1995, includes approximately 65,306 MMcf,
70,914 MMcf and 74,713 MMcf, respectively, of gas dedicated to the monetary
production payment.
(3) All of the Company's Canadian oil and gas operations were sold in October
1997.
69 Seagul Energy Corporation
Reserve Quantity Information - Proved Developed Reserves
United Cote Indonesia
States Canada (*) Egypt d'Ivoire Tatarstan and Other Total
------------- ------------ ------------ ------------ ------------ ------------ -----------
Proved developed oil reserves (Mbbl):
December 31, 1997 . . . . . . . 14,406 - 20,452 866 10,919 1,074 47,717
December 31, 1996 . . . . . . . 12,855 2,913 14,336 1,035 10,806 936 42,881
December 31, 1995 . . . . . . . 11,205 3,196 265 1,720 9,176 1,022 26,584
Proved developed gas reserves (MMcf):
December 31, 1997 . . . . . . . 672,195 - 1,522 18,826 - 61,324 753,867
December 31, 1996 . . . . . . . 690,095 205,422 993 12,344 - 51,554 960,408
December 31, 1995 . . . . . . . 670,277 225,544 - 11,415 - 57,777 965,013
(*) All of the Company's Canadian oil and gas operations were sold in October
1997.
The Company's standardized measure of discounted future net cash flows as
of December 31, 1997 and 1996 and changes therein for each of the years 1997,
1996 and 1995 are provided based on the present value of future net revenues
from proved oil and gas reserves estimated by independent petroleum engineers in
accordance with guidelines established by the Securities and Exchange
Commission. These estimates were computed by applying appropriate year-end
prices for oil and gas to estimated future production of proved oil and gas
reserves over the economic lives of the reserves and assuming continuation of
existing operating conditions. Year-end 1997 calculations were made using prices
of $15.41 per Bbl and $2.42 per Mcf for oil and gas, respectively. The Company's
average realized prices for the year ended December 31, 1997 were $17.34 per Bbl
and $2.29 per Mcf for oil and gas, respectively. Seagull's average prices for
the month ended January 31, 1998 were $14.47 per Bbl and $2.21 per Mcf for oil
and gas, respectively. Because the disclosure requirements are standardized,
significant changes can occur in these estimates based upon oil and gas prices
in effect at year-end. The following estimates should not be viewed as an
estimate of fair market value. Income taxes are computed by applying the
statutory income tax rate in the jurisdiction to the net cash inflows relating
to proved oil and gas reserves less the tax bases of the properties involved and
giving effect to appropriate net operating loss carryforwards, tax credits and
allowances relating to such properties.
70 Seagull Energy Corporation
Standardized Measure of Discounted Future Net Cash Flows (amounts in thousands)
United Cote Indonesia
States Canada (*) Egypt d'Ivoire Tatarstan and Other Total
-------------- ----------- ------------ ----------- ------------- ------------ ----------
December 31, 1997:
Future cash inflows . . . . . . . $2,174,296 $ - $ 576,178 $ 67,976 $ 227,401 $ 169,394 $3,215,245
Future development costs. . . . . (140,603) - (122,066) (6,661) (33,395) - (302,725)
Future production costs . . . . . (552,878) - (156,970) (19,048) (103,453) (40,248) (872,597)
-------------- ----------- ------------ ----------- ------------- ------------ ----------
Future net cash flows before
income taxes . . . . . . . . . 1,480,815 - 297,142 42,267 90,553 129,146 2,039,923
10% annual discount . . . . . . . (606,449) - (93,567) (11,239) (42,846) (66,459) (820,560)
-------------- ----------- ------------ ----------- ------------- ------------ ----------
Discounted future net cash flows
before income taxes. . . . . . 874,366 - 203,575 31,028 47,707 62,687 1,219,363
Discounted income taxes . . . . . (165,620) - (70,935) (8,028) (12,664) (29,673) (286,920)
-------------- ----------- ------------ ----------- ------------- ------------ ----------
Standardized measure of dis-
counted future net cash flows . $ 708,746 $ - $ 132,640 $ 23,000 $ 35,043 $ 33,014 $ 932,443
============== =========== ============ =========== ============= ============ ==========
December 31, 1996:
Future cash inflows . . . . . . . $3,489,097 $ 481,159 $ 604,613 $ 80,526 $ 266,304 $ 229,497 $5,151,196
Future development costs. . . . . (169,240) (20,487) (115,639) (15,529) (30,896) - (351,791)
Future production costs . . . . . (712,881) (129,313) (122,697) (17,700) (121,137) (41,640) (1,145,368)
-------------- ----------- ------------ ----------- ------------- ----------- -----------
Future net cash flows before
income taxes . . . . . . . . . 2,606,976 331,359 366,277 47,297 114,271 187,857 3,654,037
10% annual discount . . . . . . . (1,086,947) (153,161) (114,772) (11,121) (54,171) (95,995) (1,516,167)
-------------- ----------- ------------ ----------- ------------- ----------- -----------
Discounted future net cash flows
before income taxes. . . . . . 1,520,029 178,198 251,505 36,176 60,100 91,862 2,137,870
Discounted income taxes . . . . . (383,032) (63,079) (75,306) (5,072) (18,236) (48,623) (593,348)
-------------- ----------- ------------ ----------- ------------- ----------- -----------
Standardized measure of dis-
counted future net cash flows . $1,136,997 $ 115,119 $ 176,199 $ 31,104 $ 41,864 $ 43,239 $1,544,522
============== =========== ============ =========== ============= =========== ===========
(*) All of the Company's Canadian oil and gas operations were sold in October
1997.
Principal Sources of Change in the Standardized Measure of Discounted Future Net
Cash Flows (amounts in thousands)
Year Ended December 31,
----------------------------------------------------
1997 1996 1995
--------------- --------------- ---------------
Beginning of year. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1,544,522 $ 861,351 $ 728,303
Revisions of previous quantity estimates less related costs . . . . . . . . . 58,132 3,825 54,287
Extensions and discoveries less related costs . . . . . . . . . . . . . . . . 196,358 209,860 163,131
Purchases of reserves in place. . . . . . . . . . . . . . . . . . . . . . . . 12,082 219,510 11,967
Sales of reserves in place. . . . . . . . . . . . . . . . . . . . . . . . . . (212,125) (6,593) (5,238)
Net changes in future prices and production costs . . . . . . . . . . . . . . (811,501) 785,928 166,325
Development costs incurred during the period . . . . . . . . . . . . . . . . 137,806 108,763 69,260
Sales of oil and gas produced, net of production costs. . . . . . . . . . . . (313,606) (299,702) (196,123)
Accretion of discount . . . . . . . . . . . . . . . . . . . . . . . . . . . . 213,787 110,396 86,151
Net changes in income taxes . . . . . . . . . . . . . . . . . . . . . . . . . 306,428 (350,738) (105,655)
Changes in production, timing and other . . . . . . . . . . . . . . . . . . . (199,440) (98,078) (111,057)
--------------- --------------- ---------------
(612,079) 683,171 133,048
--------------- --------------- ---------------
End of Year. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 932,443 $1,544,522 $ 861,351
=============== =============== ===============
71 Seagull Energy Corporation