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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTER ENDED JUNE 30, 1998
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission file number: 1-8094
SEAGULL ENERGY CORPORATION
(Exact name of registrant as specified in its charter
TEXAS 74-1764876
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1001 FANNIN, SUITE 1700, HOUSTON, TEXAS 77002-6714
(Address of principal executive offices) (Zip code)
(713) 951-4700
(Registrant's telephone number, including area code)
None
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X . No .
As of July 31, 1998, 63,058,384 shares of Common Stock, par value $0.10 per
share, were outstanding.
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SEAGULL ENERGY CORPORATION AND SUBSIDIARIES
INDEX
PAGE
NUMBER
PART I. FINANCIAL INFORMATION
Item 1. Unaudited Consolidated Financial Statements
Consolidated Statements of Operations for the Three and
Six Months Ended June 30, 1998 and 1997....................... 1
Consolidated Balance Sheets - June 30, 1998
and December 31, 1997......................................... 2
Consolidated Statements of Cash Flows for the Six Months
Ended June 30, 1998 and 1997.................................. 3
Consolidated Statements of Comprehensive Income for
the Three and Six Months Ended June 30, 1998 and 1997......... 4
Notes to Consolidated Financial Statements.................... 5
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................... 9
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders......... 15
Item 6. Exhibits and Reports on Form 8-K............................ 15
SIGNATURES ............................................................... 16
(i)
ITEM 1. UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
SEAGULL ENERGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Amounts in Thousands Except Per Share Data)
(Unaudited)
Three Months Ended June 30, Six Months Ended June 30,
-------------------------------- -------------------------------
1998 1997 1998 1997
--------------- -------------- --------------- --------------
Revenues:
Oil and gas operations........................... $ 86,104 $ 105,406 $ 176,553 $ 230,410
Alaska transmission and distribution............ 17,425 16,774 49,301 51,343
-------------- -------------- -------------- -------------
103,529 122,180 225,854 281,753
Costs of Operations:
Operations and maintenance...................... 38,501 41,005 78,381 83,876
Alaska transmission and distribution
cost of gas sold.............................. 7,343 7,244 22,106 23,966
Exploration charges............................. 8,178 7,346 18,296 16,299
Depreciation, depletion and amortization........ 40,876 45,661 80,855 87,772
General and administrative...................... 3,056 3,113 6,440 5,423
-------------- -------------- -------------- -------------
97,954 104,369 206,078 217,336
-------------- -------------- -------------- -------------
Operating Profit................................... 5,575 17,811 19,776 64,417
Other (Income) Expense:
Interest expense................................ 9,305 9,585 17,852 19,995
Interest income and other....................... (1,669) (215) (2,201) (913)
-------------- -------------- -------------- -------------
7,636 9,370 15,651 19,082
-------------- -------------- -------------- -------------
Income (Loss) Before Income Taxes.................. (2,061) 8,441 4,125 45,335
Income Tax Expense (Benefit)....................... (1,010) 5,820 2,021 25,460
-------------- -------------- -------------- -------------
Net Income (Loss).................................. $ (1,051) $ 2,621 $ 2,104 $ 19,875
============== ============== ============== =============
Earnings (Loss) Per Share:
Basic........................................... $ (0.02) $ 0.04 $ 0.03 $ 0.32
============== ============== ============== =============
Diluted......................................... $ (0.02) $ 0.04 $ 0.03 $ 0.31
============== ============== ============== =============
Weighted Average Number of Common
Shares Outstanding:
Basic......................................... 63,052 63,007 63,036 62,897
============== ============== ============== =============
Diluted....................................... 63,052 63,627 63,480 63,632
============== ============== ============== =============
See accompanying Notes to Consolidated Financial Statements.
1
SEAGULL ENERGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Amounts in Thousands Except Share Data)
(Unaudited)
JUNE 30, 1998 December 31, 1997
------------------ ---------------------
ASSETS:
Current Assets:
Cash and cash equivalents......................................... $ 15,094 $ 45,654
Accounts receivable, net.......................................... 133,948 147,442
Inventories....................................................... 17,616 13,635
Prepaid expenses and other........................................ 13,802 16,240
------------------ ---------------------
Total Current Assets............................................ 180,460 222,971
Property, Plant and Equipment - at cost............................. 2,284,310 2,053,683
Accumulated Depreciation, Depletion and Amortization................ 988,929 908,849
------------------ ---------------------
1,295,381 1,144,834
Other Assets........................................................ 43,256 43,261
------------------ ---------------------
Total Assets........................................................ $ 1,519,097 $ 1,411,066
================== =====================
LIABILITIES AND SHAREHOLDERS' EQUITY:
Current Liabilities:
Accounts and note payable......................................... $ 161,379 $ 159,138
Accrued expenses.................................................. 32,953 47,625
Current maturities of long-term debt.............................. 7,117 7,097
------------------ ---------------------
Total Current Liabilities....................................... 201,449 213,860
Long-Term Debt...................................................... 566,914 469,017
Other Noncurrent Liabilities........................................ 51,950 51,168
Deferred Income Taxes............................................... 33,225 14,126
Redeemable Bearer Shares............................................ 15,620 15,691
Commitments and Contingencies....................................... - -
Shareholders' Equity:
Common Stock, $.10 par value; authorized 100,000,000 shares;
issued 63,915,150 shares (1998) and 63,877,442 shares (1997).... 6,392 6,388
Additional paid-in capital........................................ 494,533 493,829
Retained earnings................................................. 167,039 164,935
Less - note receivable from employee stock ownership plan......... (3,067) (2,990)
Less - 861,314 shares of Common Stock held in Treasury, at cost... (14,958) (14,958)
------------------ ---------------------
Total Shareholders' Equity...................................... 649,939 647,204
------------------ ---------------------
Total Liabilities and Shareholders' Equity......................... $ 1,519,097 $ 1,411,066
================== =====================
See accompanying Notes to Consolidated Financial Statements.
2
SEAGULL ENERGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in Thousands)
(Unaudited)
Six Months Ended June 30,
------------------------------------------
1998 1997
------------------- -------------------
OPERATING ACTIVITIES:
Net income............................................................... $ 2,104 $ 19,875
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation, depletion and amortization............................... 80,855 87,772
Amortization of deferred financing costs............................... 978 1,215
Deferred income taxes.................................................. (5,479) 11,336
Dry hole expense....................................................... 6,154 3,401
Other.................................................................. 229 350
------------------- -------------------
84,841 123,949
Changes in operating assets and liabilities, net of acquisitions:
Decrease in accounts receivable...................................... 16,426 44,096
Increase in inventories, prepaid expenses and other.................. (2,486) (9,685)
Decrease in accounts and notes payable............................... (19,556) (16,688)
Decrease in accrued expenses and other............................... (14,984) (15,678)
------------------- -------------------
Net Cash Provided By Operating Activities................................ 64,241 125,994
INVESTING ACTIVITIES:
Capital expenditures..................................................... (112,605) (137,348)
Acquisitions of oil and gas properties, net of cash acquired............. (101,554) (821)
Acquisitions of other assets and liabilities, net of cash acquired....... (1,337) -
Proceeds from sales of property, plant and equipment..................... 463 1,156
------------------- -------------------
Net Cash Used In Investing Activities.................................... (215,033) (137,013)
FINANCING ACTIVITIES:
Proceeds from debt....................................................... 241,555 368,003
Principal payments on debt .............................................. (122,044) (344,007)
Proceeds from sales of common stock...................................... 556 2,798
Other.................................................................... 165 (1,530)
------------------- -------------------
Net Cash Provided By Financing Activities................................ 120,232 25,264
Effect of exchange rate changes on cash.................................... - (64)
------------------- -------------------
Increase (Decrease) In Cash And Cash Equivalents......................... (30,560) 14,181
Cash And Cash Equivalents At Beginning Of Period........................... 45,654 15,284
------------------- -------------------
Cash And Cash Equivalents At End Of Period................................. $ 15,094 $ 29,465
=================== ===================
See accompanying Notes to Consolidated Financial Statements.
3
SEAGULL ENERGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Amounts in Thousands)
(Unaudited)
Three Months Ended June 30, Six Months Ended June 30,
----------------------------- ----------------------------
1998 1997 1998 1997
--------------- -------------- -------------- -------------
$ (1,051) $ 2,621 $ 2,104 $ 19,875
Net income (loss)....................................
Other comprehensive income, net of tax:
Foreign currency translation adjustment........... - 341 - (855)
--------------- -------------- -------------- -------------
Comprehensive income (loss).......................... $ (1,051) $ 2,962 $ 2,104 $ 19,020
============== ============ ============== ============
See accompanying Notes to Consolidated Financial Statements.
4
SEAGULL ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1. PRESENTATION OF FINANCIAL INFORMATION
In the opinion of management, the unaudited consolidated financial
statements presented herein contain all adjustments necessary to present fairly
the financial position of Seagull Energy Corporation and Subsidiaries (the
"Company" or "Seagull") as of June 30, 1998, and the results of its operations
and cash flows for the three and six months ended June 30, 1998 and 1997. All
adjustments made are of a normal, recurring nature. The results of operations
for the three and six months ended June 30, 1998 and 1997 are not necessarily
indicative of the results to be expected for the full year.
The financial information presented herein should be read in conjunction
with the consolidated financial statements and notes included in the Company's
Annual Report on Form 10-K for the year ended December 31, 1997.
Comprehensive Income -- Effective January 1, 1998, the Company adopted
Financial Accounting Standards Board ("FASB") Statement of Financial Accounting
Standard ("SFAS") No. 130, "Reporting Comprehensive Income." This statement
established 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 those resulting from investments by
and distributions to owners.
Earnings Per Share -- The following table provides a reconciliation between
basic and diluted earnings (loss) per share (stated in thousands except per
share data):
Weighted Average Earnings (Loss)
Common Shares Per-Share
Net Income (Loss) Outstanding Amount
-------------------- ---------------------- -------------------
QUARTER ENDED JUNE 30, 1998:
BASIC..................................... $ (1,051) 63,052 $ (0.02)
EFFECT OF DILUTIVE STOCK OPTIONS.......... - -
-------------------- ----------------------
DILUTED................................... $ (1,051) 63,052 $ (0.02)
==================== ======================
Quarter Ended June 30, 1997:
Basic..................................... $ 2,621 63,007 $ 0.04
Effect of dilutive stock options.......... - 620
-------------------- ----------------------
Diluted................................... $ 2,621 63,627 $ 0.04
==================== ======================
SIX MONTHS ENDED JUNE 30, 1998:
BASIC..................................... $ 2,104 63,036 $ 0.03
EFFECT OF DILUTIVE STOCK OPTIONS.......... - 444
-------------------- ----------------------
DILUTED................................... $ 2,104 63,480 $ 0.03
==================== ======================
Six Months Ended June 30, 1997:
Basic..................................... $ 19,875 62,897 $ 0.32
Effect of dilutive stock options.......... - 735
-------------------- ----------------------
Diluted................................... $ 19,875 63,632 $ 0.31
==================== ======================
5
SEAGULL ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Weighted average options to purchase 2,817,546, 1,756,099 and 1,827,369
shares of common stock at $17.38 to $26.38 per share were outstanding during the
first half of 1998, the first half of 1997 and the second quarter of 1997,
respectively, but were not included in the computation of earnings per diluted
share because the options' exercise prices were greater than the average market
price of the common shares. Outstanding options expire at various dates from
2003 to 2008. The effect of the assumed exercise of stock options as of the
beginning of the second quarter of 1998 has an anti-dilutive effect on the
computation of loss per diluted share for the period. Therefore, weighted
average options to purchase 4,476,368 shares of common stock at $5.89 to $26.38
per share have not been included in the weighted average number of common shares
outstanding for the second quarter of 1998.
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 $0.5 million and $8 million for the six months ended
June 30, 1998 and 1997, respectively, in costs related to equity hedging
activities, including costs related to the monetary production payment hedges of
approximately $0.5 million and $1 million in 1998 and 1997, respectively. By the
end of the first quarter of 1997, the Company's equity hedging activities had
been substantially reduced, leaving primarily the commodity hedges of
approximately 11 MMcf per day through December 1998, which were required by the
monetary production payment (related to the 1995 sale of the Company's Section
29 tax credit-bearing properties). For the second quarter of 1998 and 1997, all
of the Company's equity hedging costs of $0.3 million and $0.2 million,
respectively, related to the monetary production payment hedges. The Company
also recorded hedging costs related to third-party marketing activities of $1.5
million and $0.2 million for the six months ended June 30, 1998 and 1997,
respectively, and $1 million and none for the second quarter of 1998 and 1997,
respectively.
At June 30, 1998, the Company had open natural gas futures, swaps and
option contracts related to its equity and third-party marketing hedging
activities totaling 20 Bcf related to purchases and 33 Bcf related to sales for
the period from July 1998 through July 1999. At June 30, 1998, the fair value
related to the Company's commodity hedging activities was $0.1 million of costs
related to open contracts.
6
SEAGULL ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Accounting Pronouncements -- In June 1997, the FASB 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 information about
operating segments be included in interim reports issued to shareholders. In
February 1998, the FASB issued SFAS No. 132, "Employers' Disclosures about
Pensions and Other Postretirement Benefits." This statement establishes
standards for disclosure for pensions and other postretirement benefits in
annual financial statements. These statements are effective for financial
statements for periods beginning after December 15, 1997. As both SFAS Nos. 131
and 132 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.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." This statement establishes standards of
accounting for and disclosures of derivative instruments and hedging activities.
This statement is effective for fiscal years beginning after June 15, 1999. The
Company has not yet determined the impact of this statement on the Company's
financial condition or results of operations.
NOTE 2. ACQUISITIONS
On June 1, 1998, the Company completed the purchase of the stock of BRG
Petroleum, Inc. ("BRG"), a closely held private company, and the assets of BRG's
limited partnerships and programs for $103 million in cash, excluding cash
acquired of $2 million and noncash deferred tax liabilities of $25 million. The
Company funded this acquisition through existing credit facilities.
The following table presents the unaudited pro forma results of Seagull as
though the acquisition of the acquired assets had occurred on January 1, 1998:
PRO FORMA INFORMATION
(Amounts in Thousands Except Per Share Data)
SIX MONTHS ENDED
JUNE 30, 1998
-----------------
Revenues................................................ $234,525
Net income.............................................. 1,081
Basic earnings (loss) per share......................... 0.02
Diluted earnings (loss) per share....................... 0.02
7
SEAGULL ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
The unaudited pro forma information does not purport to be indicative of
actual results, if the acquisition of the BRG assets had been in effect for the
period indicated, or of future results.
NOTE 3. SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
(Amounts in Thousands)
Six Months Ended June 30,
--------------------------
1998 1997
------------ ----------
Cash paid during the period for:
Interest, net of amount capitalized...... $16,204 $20,913
Income taxes............................. $ 8,628 $13,377
NOTE 4. COMMITMENTS AND CONTINGENCIES
Year 2000 Issue -- 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 requires
modification to properly process dates beyond December 31, 1999 (the "Year 2000
Issue"). During 1997, the Company utilized both internal and external resources
to reprogram, or replace, and test software for necessary modifications
identified in its assessment of the Year 2000 Issue. By December 31, 1997, the
Company's Year 2000 remediation was substantially complete and approximately
$300,000 had been expensed related to this assessment and remediation. The
Company presently believes that, as a result of these efforts, the Year 2000
Issue will not have a material adverse effect on the Company's operations.
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.
Other -- The Company is a party to 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.
8
SEAGULL ENERGY CORPORATION AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion is intended to assist in an understanding of the
Company's financial position and results of operations for each of the periods
indicated. The Company's accompanying unaudited financial statements and the
notes thereto and the consolidated financial statements and notes included in
the Company's Annual Report on Form 10-K for the year ended December 31, 1997
contain detailed information that should be referred to in conjunction with the
following discussion.
RESULTS OF OPERATIONS
CONSOLIDATED HIGHLIGHTS
(Amounts in Thousands)
Three Months Ended Six Months Ended
June 30, June 30,
------------------------------- -----------------------------------
1998 1997 1998 1997
-------------- ------------- -------------- ---------------
Revenues:
Oil and gas operations....................... $ 86,104 $ 105,406 $ 176,553 $ 230,410
Alaska transmission and distribution......... 17,425 16,774 49,301 51,343
-------------- ------------- -------------- ---------------
$ 103,529 $ 122,180 $ 225,854 $ 281,753
-------------- ------------- -------------- ---------------
Operating Profit:
Oil and gas operations....................... $ 6,835 $ 19,681 $ 15,766 $ 58,760
Alaska transmission and distribution......... 2,749 1,971 12,290 12,437
Corporate.................................... (4,009) (3,841) (8,280) (6,780)
-------------- ------------- -------------- ---------------
$ 5,575 $ 17,811 $ 19,776 $ 64,417
============== ============= ============== ===============
Net income (loss).............................. $ (1,051) $ 2,621 $ 2,104 $ 19,875
Net cash provided by operating
activities before changes in
operating assets and liabilities............. $ 39,781 $ 50,836 $ 84,841 $ 123,949
Net cash provided by operating
activities................................... $ 31,238 $ 52,479 $ 64,241 $ 125,994
Revenues decreased $19 million and $56 million, respectively, and operating
profit declined $12 million and $45 million, respectively, for the three and six
month periods ending June 30, 1998 versus the same periods of 1997 principally
due to three factors: (i) significant decreases in worldwide oil prices, (ii)
declines in domestic gas production and (iii) the sale of the Company's Canadian
oil and gas operations in October 1997. The effect of these three factors was
partially offset by higher oil production from the Company's Egyptian operations
for both the three and six months ended June 30, 1998 and an increase in
domestic oil volumes in the first half of 1998 compared to the same period in
1997. Net income (loss) decreased from $3 million for the second quarter of 1997
to $(1) million for the same period in 1998 and declined from $20 million for
the six months of 1997 compared to $2 million for the first half of 1998 due to
the lower commodity prices discussed above.
9
SEAGULL ENERGY CORPORATION AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OIL AND GAS OPERATIONS
(Amounts in Thousands)
Three Months Ended June 30, Six Months Ended June 30,
------------------------------------- ----------------------------------
1998 1997 1998 1997
---------------- ---------------- -------------- ---------------
Revenues:
Natural gas............................... $ 57,757 $ 68,219 $ 118,317 $ 153,719
Oil and NGL............................... 22,390 32,411 46,675 63,234
Pipeline and marketing.................... 5,957 4,776 11,561 13,457
---------------- ---------------- -------------- ---------------
86,104 105,406 176,553 230,410
---------------- ---------------- -------------- ---------------
Production operating expenses............... 26,866 29,241 54,310 59,124
Pipeline and marketing expenses............. 6,429 6,289 13,415 13,980
Exploration charges......................... 8,178 7,346 18,296 16,299
Depreciation, depletion and amortization.... 37,796 42,849 74,766 82,247
---------------- ---------------- -------------- ---------------
Operating profit.......................... $ 6,835 $ 19,681 $ 15,766 $ 58,760
================ ================ =============== ===============
The decline in commodity prices was the significant factor in the 65% and
73% decreases in operating profit for the Oil and Gas Operations ("O&G") segment
to $7 million and $16 million for the three and six months ended June 30, 1998,
respectively. Domestic natural gas prices realized by the Company decreased 8%
from $2.32 per Mcf in the first half of 1997 to $2.14 per Mcf for the same
period in 1998. This price decrease and a 6% decrease in domestic gas production
combined to create an $18 million decrease in domestic natural gas revenues.
Worldwide oil prices realized by the Company showed a significant decrease of
31%, from $17.77 per Bbl in 1997's first half to $12.19 per Bbl in 1998. While
declining oil prices were the primary factor for the decrease in oil revenues,
this was partially offset by a 23% increase in oil production in the U.S. and
Egypt as Seagull realized additional contributions from several new domestic
wells and two Egyptian concessions - Qarun, where additional facilities became
operational during mid-1997, and West Abu Gharadig, which was purchased in late
1997. For the second quarter of 1998, domestic gas prices realized by the
Company increased $0.10 per Mcf over the 1997 quarter's $2.04 per Mcf. However,
domestic gas production and worldwide oil prices reflected the same trends as
the first half of 1998.
In addition, 1998 reflects the absence of the Company's Canadian operations
which were sold in October 1997. These Canadian operations contributed
approximately $7 million and $18 million in revenues and $(0.2) million and $4
million in operating profit (loss) for the three and six months ended June 30,
1997, respectively.
Pipeline and marketing revenues declined $2 million for the first half of
1998 due to a decrease in third party marketing margins and revenues related to
the Company's gas gathering and processing facilities. This decrease in gas
gathering and processing revenues was substantially offset by a decrease in the
related cost of gas.
10
SEAGULL ENERGY CORPORATION AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
EXPLORATION AND PRODUCTION OPERATING DATA
Three Months Ended June 30, Six Months Ended June 30,
-------------------------------------------------------------------------------------------------------
Net Daily Production Unit Price Net Daily Production Unit Price
1998 1997 1998 1997 1998 1997 1998 1997
----------- ------------- ----------- ----------- ------------- ------------- ----------- -------------
Gas Sales(1):
Domestic............. 281.9 310.7 $ 2.14 $ 2.04 286.8 306.7 $ 2.14 $ 2.32
Canada(2) ........... - 51.1 - 1.34 - 49.6 - 1.75
Cote d'Ivoire........ 9.5 5.7 1.64 1.78 9.9 5.3 1.57 1.83
Indonesia............ 7.7 10.3 1.92 3.58 9.7 12.0 2.46 3.53
Other................ 1.1 0.2 1.39 0.99 0.8 0.2 1.34 1.00
----------- ------------- ----------- ----------- ------------- ------------- ----------- -------------
300.2 378.0 $ 2.11 $ 1.98 307.2 373.8 $ 2.13 $ 2.28
=========== ============= =========== =========== ============= ============= =========== =============
Oil and NGL Sales(1):
Domestic............. 5,078 5,085 $ 11.29 $ 17.68 5,066 4,383 $ 12.44 $ 18.96
Canada(2)............ - 857 - 14.54 - 867 - 17.06
Egypt................ 11,081 9,241 12.75 17.37 10,794 8,555 12.95 18.46
Cote d'Ivoire........ 1,102 1,264 14.04 18.12 1,101 1,356 12.19 19.75
Tatarstan............ 3,985 5,139 7.51 13.00 3,989 4,281 9.56 14.54
Indonesia............ 128 149 15.42 22.00 201 203 17.03 20.75
Other................ 7 16 12.70 16.02 8 16 12.65 17.71
----------- ------------- ----------- ----------- ------------- ------------- ----------- -------------
21,381 21,751 $ 11.51 $ 16.37 21,159 19,661 $ 12.19 $ 17.77
=========== ============= =========== =========== ============= ============= =========== =============
(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.
While production expenses decreased by $2 million to $27 million for the second
quarter of 1998 and by $5 million to $54 million for the first half of 1998,
production expenses per equivalent unit of production increased to $4.13 per Boe
versus $3.79 per Boe in the second quarter of 1998 and 1997, respectively, and
to $4.15 per Boe versus $3.99 per Boe for the first six months of 1998 and 1997,
respectively. While the overall amount of production expenses decreased due to
the absence of the Company's Canadian operations, production expenses per
equivalent unit of production increased slightly due to increases in lease
operating expenses in the Company's domestic operations.
Exploration charges increased $2 million for the first half of 1998 over
1997 principally due to increased dry hole costs offset by the absence of
exploration charges related to Canada.
The decrease in E&P depreciation, depletion and amortization ("DD&A")
expense to $37 million and $74 million for the three and six months ended June
30, 1998, respectively, from $42 million and $81 million for the prior year
periods is primarily due to the decrease in domestic gas production and the sale
of the Company's Canadian operations, partially offset by increased oil
production in the U.S. and Egypt. The DD&A expense per equivalent unit of
production for oil and gas producing activities increased slightly to $5.65 per
Boe from $5.49 per Boe for the first half of 1998 and 1997, respectively.
11
SEAGULL ENERGY CORPORATION AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
ALASKA TRANSMISSION AND DISTRIBUTION
(Amounts in Thousand Except Operating Data)
Three Months Ended June 30, Six Months Ended June 30,
---------------------------------- -------------------------------------
1998 1997 1998 1997
--------------- ------------- ---------------- ----------------
Revenues.................................. $ 17,425 $ 16,774 $ 49,301 $ 51,343
Cost of gas sold.......................... 7,343 7,244 22,106 23,966
--------------- ------------- ---------------- ----------------
Gross margin............................ 10,082 9,530 27,195 27,377
Operations and maintenance expense ....... 5,206 5,475 10,656 10,772
Depreciation, depletion and amortization.. 2,127 2,084 4,249 4,168
--------------- ------------- ---------------- ----------------
Operating profit........................ $ 2,749 $ 1,971 $ 12,290 $ 12,437
=============== ============= ================ ================
OPERATING DATA:
Degree days (1)......................... 1,585 1,571 5,282 5,291
(1) A measure of weather severity calculated by subtracting the mean
temperature for each day from 65 degrees Fahrenheit. More degree days
equate to colder weather.
Operating profit of the Alaska transmission and distribution segment for
the second quarter of 1998 increased from the 1997 period primarily as a result
of increased gross margin due to a change in the mix of customers.
This segment's business is seasonal with approximately 65%-70% of its sales
made in the first and fourth quarters of each year.
12
SEAGULL ENERGY CORPORATION AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
LIQUIDITY AND CAPITAL RESOURCES
CAPITAL EXPENDITURES AND ACQUISITIONS
(Amounts in Thousands)
Three Months Ended June 30, Six Months Ended June 30,
---------------------------------- --------------------------------------
1998 1997 1998 1997
--------------- --------------- --------------- ----------------
Exploration and production:
Leasehold.............................. $ 2,816 $ 13,426 $ 4,424 $ 14,259
Exploration............................ 11,796 22,796 32,334 44,633
Development............................ 34,847 40,979 66,910 70,750
--------------- --------------- --------------- ----------------
49,459 77,201 103,668 129,642
Pipeline and marketing................... 661 8 1,217 45
--------------- --------------- --------------- ----------------
Oil and gas operations................. 50,120 77,209 104,885 129,687
Alaska transmission and distribution..... 2,465 2,046 4,004 3,451
Corporate................................ 1,886 2,666 3,716 4,210
--------------- --------------- --------------- ----------------
$ 54,471 $ 81,921 $ 112,605 $ 137,348
=============== =============== =============== ================
Acquisitions............................. $ 127,092 $ 720 $ 127,469 $ 821
=============== =============== =============== ================
Seagull's capital expenditure program is designed to fulfill the Company's
goals of growing its reserve base and production capacity. Capital expenditures,
excluding acquisitions, decreased by nearly $25 million for the first half of
1998 over 1997 as expenditures declined domestically and because of the sale of
the Company's Canadian operations with expenditures of $8 million in the first
half of 1997, partially offset by increased expenditures related to the
Company's Egyptian operations.
The Company has a revolving credit facility (the "Credit Facility") with a
maximum commitment of $500 million. At June 30, 1998, there was $100 million
borrowed under the Credit Facility and $359 million of the unused commitment was
immediately available.
The 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 $266 million was available for
payment of cash dividends on common stock or to repurchase common stock as of
June 30, 1998.
On June 1, 1998, the Company completed the purchase of the BRG and its
related partnership interests for $103 million in cash, excluding cash acquired
of $2 million and noncash deferred tax liabilities of $25 million. The Company
funded this acquisition through its existing credit facility.
13
SEAGULL ENERGY CORPORATION AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The assets acquired include proved oil and gas reserves of 102 billion
cubic feet of natural gas equivalents ("Bcfe"). BRG operated approximately 70
percent of 600 currently producing oil and gas wells in approximately 140
fields. Daily production from the properties net to the combined BRG interests
averaged approximately 18 million cubic feet of gas and 400 barrels of oil and
natural gas liquids in 1997. The most significant of these assets are
concentrated in East Texas, primarily in Freestone, Upshur, Rusk and Nacogdoches
counties.
Management believes the Company's internally generated funds and bank
borrowing capabilities will be sufficient to finance current and forecasted
operations, including capital expenditures.
In March 1998, Seagull announced it may include some of its less strategic
E&P properties located away from its various core assets in a package of
properties to be liquidated later in 1998.
DEFINED TERMS
Natural gas is stated herein in billion cubic feet ("Bcf"), million cubic
feet ("MMcf") or thousand cubic feet ("Mcf"). Oil, condensate and natural gas
liquids ("NGL") are stated in barrels ("Bbl") or thousand barrels ("MBbl").
MMcfe and Mcfe represent the equivalent of one million and one thousand cubic
feet of natural gas, respectively. Oil, condensate and NGL are converted to gas
at a ratio of one barrel of liquids per six Mcf of gas, based on relative energy
content. MMBoe, MBoe and Boe represent one million barrels, one thousand barrels
and one barrel of oil equivalent, respectively, with six Mcf of gas converted to
one barrel of liquid.
FORWARD LOOKING STATEMENTS
Item 2 of this document includes forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934, as amended. Although Seagull believes that such
forward-looking statements are based upon reasonable assumptions, it can give no
assurance that its expectations will in fact occur. Important factors that could
cause actual results to differ materially from those in the forward-looking
statements include, but are not limited to, political developments in foreign
countries, federal and state regulatory developments, the timing and extent of
changes in commodity prices, the timing and extent of success in discovering,
developing and producing or acquiring oil and gas reserves, the availability of
skilled personnel, materials and equipment, operating hazards attendant to the
industry, and conditions of the capital and equity markets during the periods
covered by the forward-looking statements, as well as the other factors
discussed in Seagull's Annual Report on Form 10-K for the year ended December
31, 1997.
14
SEAGULL ENERGY CORPORATION AND SUBSIDIARIES
PART II. OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At the Annual Meeting of Shareholders of the Company held on May 13, 1998,
the shareholders voted to elect four directors to serve until the 2001 Annual
Meeting of Shareholders, approve the Seagull Energy Corporation 1998 Omnibus
Stock Plan and ratify the appointment of KPMG Peat Marwick LLP as independent
auditors of the Company for the fiscal year ended December 31, 1998. Votes cast
were as follows:
Broker
For Against Non-Votes Abstained
--------------- -------------- --------------- -------------
Election as a Director of the Company of:
Richard J. Burgess.......................... 51,267,754 - - 1,035,072
Thomas H. Cruikshank........................ 51,264,657 - - 1,038,169
Robert F. Vagt.............................. 51,305,014 - - 997,812
R.A. Walker................................. 51,271,186 - - 1,031,640
Approval of 1998 Omnibus Stock Plan............. 41,508,052 10,565,159 50,000 179,615
Ratification of Selection of KPMG Peat
Marwick LLP as Independent Auditors for
1998........................................ 51,935,016 295,366 - 72,444
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
*3.1 Articles of Incorporation of the Company, as amended, and that certain
Statement of Resolution Establishing Series of Shares of Series B Junior
Participating Preferred Stock of Seagull Energy Corporation filed
March 21, 1989 with the Secretary of State of the State of Texas.
*#10.1 1998 Omnibus Stock Plan.
*27.1 Financial Data Schedule.
(b) Reports on Form 8-K: On June 4, 1998, the Company filed a current Report
on Form 8-K dated June 1, 1998 with respect to Seagull's acquisition of
BRG. The items reported in such Current Report were Item 2 (Acquisition
or Disposition of Assets) and Item 7 (Financial Statements and
Exhibits).
* Filed herewith.
# Identifies management contracts and compensatory plans or arrangements.
15
SEAGULL ENERGY CORPORATION AND SUBSIDIARIES
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SEAGULL ENERGY CORPORATION
By: /s/ William L.Transier
William L. Transier, Senior Vice
President and Chief Financial
Officer (Principal Financial Officer)
Date: August 6,1998
By: /s/ Gordon L. McConnell
Gordon L. McConnell, Vice President
and Controller (Principal Accounting
Officer)
Date: August 6, 1998
16
EXHIBIT INDEX
EXHIBIT PAGE
NUMBER DESCRIPTION NUMBER
- ---------------- ------------------------------------------------------------------------------ --------------
*3.1 Articles of Incorporation of the Company, as amended, and that certain
Statement of Resolution Establishing Series of Shares of Series B Junior
Participating Preferred Stock of Seagull Energy Corporation filed
March 21, 1989 with the Secretary of State of the State of Texas.
*#10.1 1998 Omnibus Stock Plan.
*27.1 Financial Data Schedule.
- ----------------
* Filed herewith.
# Identifies management contracts and compensatory plans or arrangements.