SECURITIES AND EXCHANGE COMMISSION
Washington DC 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 quarterly period ended September 30, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
------- -------
Commission file number 1-11516
REMINGTON OIL AND GAS CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 75-2369148
(State or other jurisdiction of) (IRS employer identification no.)
incorporation or organization)
8201 Preston Road, Suite 600, Dallas, Texas 75225-6211
(Address of principal executive offices)
(Zip code)
(214) 210-2650
(Registrant's telephone number, including area code)
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
--- ---
There were 21,481,074 outstanding shares of Common Stock, $0.01 par value, on
November 9, 2000.
Remington Oil and Gas Corporation
Table of Contents
PART I, FINANCIAL INFORMATION 3
ITEM 1. FINANCIAL STATEMENTS 3
Condensed Consolidated Balance Sheets 3
Condensed Consolidated Statements of Income 4
Condensed Consolidated Statements of Cash Flows 5
Notes to Condensed Consolidated Financial Statements 6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS 7
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 13
PART II, OTHER INFORMATION 14
ITEM 1. LEGAL PROCEEDINGS 14
ITEM 2. CHANGES IN SECURITIES 14
ITEM 3. DEFAULTS UPON SENIOR SECURITIES 14
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 14
ITEM 5. OTHER INFORMATION 14
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 14
PART I, FINANCIAL INFORMATION
Item 1. Financial Statements
Remington Oil and Gas Corporation
Condensed Consolidated Balance Sheets
(In thousands, except share data)
September 30, December 31,
Assets 2000 1999
------------- ------------
Current assets (Unaudited)
Cash and cash equivalents $ 25,075 $ 4,356
Restricted cash and cash equivalents 2,592 11,042
Accounts receivable 10,889 6,421
Prepaid expenses and other current assets 2,262 2,054
------------- ------------
Total current assets 40,818 23,873
------------- ------------
Properties
Oil and natural gas properties (successful-
efforts method) 306,503 275,690
Other properties 2,696 2,862
Accumulated depreciation, depletion and
amortization (195,602) (183,971)
------------- ------------
Total properties 113,597 94,581
------------- ------------
Other assets
Cash collateral for Phillips judgment 9,000 -
Other assets 1,633 872
------------- ------------
Total other assets 10,633 872
------------- ------------
Total assets $ 165,048 $ 119,326
============= ============
Liabilities and stockholders' equity
Liabilities
Current liabilities
Accounts payable and accrued liabilities $ 17,702 $ 6,613
Phillips judgment - 18,894
Short-term notes payable and current portion
of long-term notes payable 45 2,635
------------- ------------
Total current liabilities 17,747 28,142
------------- ------------
Other liabilities
Phillips judgment 19,549 -
Long-term accounts payable 3,021 1,598
Notes payable 27,428 27,526
8 1/4% Convertible subordinated notes payable
due in 2002 5,950 5,950
------------- ------------
Total other liabilities 55,948 35,074
------------- ------------
Total Liabilities 73,695 63,216
------------- ------------
Commitments and contingencies (Note 2)
Minority interest in subsidiaries - 56
Stockholders' equity
Preferred stock, $0.01 par value, 25,000,000
shares authorized, shares issued - none - -
Common stock, $0.01 par value, 100,000,000
shares authorized, 21,515,433 shares issued
and 21,481,074 shares outstanding in 2000,
21,491,170 shares issued and 21,285,195 shares
outstanding in 1999 215 213
Additional paid-in capital 45,340 44,273
Retained earnings 45,798 11,568
------------- ------------
Total stockholders' equity 91,353 56,054
------------- ------------
Total liabilities and stockholders' equity $ 165,048 $ 119,326
============= ============
See accompanying Notes to Condensed Consolidated Financial Statements.
Remington Oil and Gas Corporation
Condensed Consolidated Statements of Income
(Unaudited)
(In thousands, except per share amounts)
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ --------------------
2000 1999 2000 1999
-------- --------- --------- ---------
Revenues
Oil sales $ 8,657 $ 5,132 $ 24,348 $ 12,228
Gas sales 13,355 7,089 32,355 15,615
Other income 13,497 828 14,863 2,679
-------- --------- --------- ---------
Total revenues 35,509 13,049 71,566 30,522
-------- --------- --------- ---------
Costs and expenses
Operating costs and expenses 2,143 1,866 7,118 5,418
Net Profits interest expense 213 605 1,271 1,295
Exploration expenses 344 803 1,553 5,958
Depreciation, depletion and amortization 5,465 6,056 14,664 16,316
General and administrative 1,190 1,684 3,888 4,693
Royalty settlement 2,200 - 5,416 -
Interest and financing expense 1,250 988 3,413 3,516
-------- --------- --------- ---------
Total costs and expenses 12,805 12,002 37,323 37,196
-------- --------- --------- ---------
Income (loss) before taxes and minority
interest 22,704 1,047 34,243 (6,674)
-------- --------- --------- ---------
Income tax expense - (305) - (300)
Minority interest in income of subsidiaries - (21) (5) (1)
-------- --------- --------- ---------
Net income (loss) $ 22,704 $ 1,373 $ 34,248 $ (6,373)
======== ========= ========= =========
Basic income (loss) per share $ 1.06 $ 0.06 $ 1.60 $ (0.30)
======== ========= ========= =========
Diluted income (loss) per share $ 0.99 $ 0.06 $ 1.53 $ (0.30)
======== ========= ========= =========
Weighted average shares outstanding (Basic) 21,477 21,268 21,417 21,275
======== ========= ========= =========
Weighted average shares outstanding (Diluted) 23,084 21,368 22,516 21,319
======== ========= ========= =========
See accompanying Notes to Condensed Consolidated Financial Statements.
Remington Oil and Gas Corporation
Condensed Consolidated Statements of Cash Flows
(Unaudited)
(In thousands)
Nine Months Ended
September 30,
2000 1999
--------- ---------
Cash flow provided by operations
Net income (loss) $ 34,248 $ (6,373)
Adjustments to reconcile net income
Depreciation, depletion and amortization 14,664 16,316
Amortization of deferred charges 210 712
Dry hole costs 736 4,699
Minority interest in income of subsidiaries (5) (1)
Royalty settlement 3,216 -
Stock issued to directors and employees for
compensation 122 117
(Gain) on sale of properties (12,632) (195)
Changes in working capital
(Increase) in accounts receivable (4,475) (3,199)
Decrease in prepaid expenses and other current
assets 412 749
Increase in accounts payable and accrued liabilities 10,846 2,164
(Increase) in restricted cash (550) (2,042)
--------- ---------
Net cash flow provided by operations 46,792 12,947
--------- ---------
Cash from investing activities
Payments for capital expenditures (36,583) (19,504)
Proceeds from property sales 15,212 274
--------- ---------
Net cash (used in) investing activities (21,371) (19,230)
--------- ---------
Cash from financing activities
Proceeds from note payable 1,790 30,628
Debt issuance costs for line of credit - (528)
Payments on notes payable and long-term accounts
payable (6,489) (37,093)
Stock options exercised 15 -
Dividends paid to minority stockholders of
subsidiaries (18) (60)
--------- ---------
Net cash (used in) financing activities (4,702) (7,053)
--------- ---------
Net increase (decrease) in cash and cash equivalents 20,719 (13,336)
Cash and cash equivalents at beginning of period 4,356 19,018
--------- ---------
Cash and cash equivalents at end of period $ 25,075 $ 5,682
========= =========
See accompanying Notes to Condensed Consolidated Financial Statements.
Note 1. Accounting Policies and Basis of Presentation
Remington Oil and Gas Corporation is an independent oil and gas exploration
and production company incorporated in Delaware. Our oil and gas properties
are located in three areas - offshore Gulf of Mexico, Mississippi/Alabama,
and onshore Gulf Coast.
We prepared these financial statements according to the instructions for Form
10-Q. Therefore, the financial statements do not include all disclosures
required by generally accepted accounting principles. However, we have
recorded all transactions and adjustments necessary to fairly present the
financial statements included in this Form 10-Q. The adjustments made are
normal and recurring. The following notes describe only the material changes
in accounting policies, account details or financial statement notes during
the first nine months of 2000. Please read these financial statements and
notes to the financial statements together with the audited financial
statements and notes to financial statements in our 1999 Form 10-K. The
income statements for the three and nine months ended September 30, 2000,
cannot necessarily be used to project results for the full year.
New Accounting Standards
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133 "Accounting for Derivative Instruments
and Hedging Activities." As amended, the statement is effective for all
fiscal years beginning after June 15, 2000 (January 1, 2001 for us). SFAS No.
133 requires that derivatives be reported on the balance sheet at fair value.
If the derivative is not designated as a hedging instrument, changes in fair
value must be recognized in the income statement in the period of change. If
the derivative is designated as a hedge and to the extent such hedge is
determined to be effective, changes in fair value are either offset by the
change in fair value of the asset or liability (if applicable) or reported as
a component of other comprehensive income in the period of change, and
subsequently recognized in the income statement when the offsetting hedged
transaction occurs. The definition of derivatives has also been expanded to
include contracts that require physical delivery of oil and gas if the
contract allows for net cash settlement. Currently we do not utilize any
derivative instruments that fall under the criteria defined in the accounting
standard. Accordingly, we do not expect the adoption of SFAS No. 133 to have
a material effect on our reported financial statements or disclosures.
Note 2. Contingencies
Phillips Petroleum Litigation
Our litigation with Phillips Petroleum Company is a material contingency. We
have included a complete discussion of this contingency in "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
under the topic "Phillips Petroleum Litigation" on pages 9 and 10 of this
Form 10-Q. Please read this discussion carefully.
When the trial court in the Phillips case first rendered its decision in
August of 1998, we recorded the judgment as a current liability based on the
expectation that, despite the appeals filed in the case, the trial court's
decision would stand, and that final disposition of the case would transpire
within a reasonable period. Subsequent events have proven that our timing
estimates were optimistic. After reviewing all circumstances of the Phillips
litigation to date, management has determined that, in all likelihood, the
appeals process will continue through all possible appellate actions in the
State of Louisiana and possibly continue beyond that to the federal level.
We believe that it is highly unlikely that these processes will be completed
within one year. Accordingly, the liability styled "Phillips judgment" no
longer falls within the accounting definition of a current liability because
the liability will not require the use of current assets to extinguish. In
reaching this conclusion, we rely on our legal counsel who have informed us
that it may be a number of years before the judgment finally becomes payable.
Accordingly, we have reclassified the Phillips judgment to a non-current
liability. In order to afford consistent treatment to related matters, we
have also reclassified to a non-current asset the $9.0 million cash deposit
that is pledged as collateral for the suspensive appeal bond in the case.
Minerals Management Service Issues
During the first three quarters of 2000, we have settled with the Minerals
Management Service on the TETCO issue and have reached an agreement in
principle to settle the pipeline tariff issue and the exchange agreement
issue. We have included a complete discussion of this contingency in
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" under the topic "Minerals Management Service (MMS) Issues" on
page 11 of this Form 10-Q. Please read this discussion carefully.
Note 3. Income per Common Share
The following table sets forth the calculation of basic and diluted income
per common share:
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ -------------------
2000 1999 2000 1999
-------- -------- -------- ---------
(In thousands except per share amounts)
Net income (loss) available for basic income
per share $ 22,704 $ 1,373 $ 34,248 $ (6,373)
Interest expense on the Notes (net of tax) 80 - 240 -
-------- -------- -------- ---------
Net income (loss) available for diluted income
per share $ 22,784 $ 1,373 $ 34,488 $ (6,373)
======== ======== ======== =========
Basic income (loss) per share $ 1.06 $ 0.06 $ 1.60 $ (0.30)
======== ======== ======== =========
Diluted income (loss) per share $ 0.99 $ 0.06 $ 1.53 $ (0.30)
======== ======== ======== =========
Weighted average
Total common shares for basic income (loss)
per share 21,477 21,268 21,417 21,275
Dilutive stock options outstanding (treasury
stock method) 1,066 100 558 44
Shares assumed issued by conversion of the
Notes 541 - 541 -
-------- -------- -------- ---------
Total common shares for diluted income (loss)
per share 23,084 21,368 22,516 21,319
======== ======== ======== =========
Potential increase to net income for diluted
income per share
Interest expense on Notes (net of tax) $ - $ 80 $ - $ 501
Potential issues of common stock for diluted
income per share
Weighted average stock options outstanding - 1,253 - 1,261
Weighted average warrant outstanding 200 300 200 300
Weighted average shares issued assuming
conversion of Notes - 541 - 1,135
Note: Assumed conversion of the Notes was anti-dilutive for both periods im 1999.
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
The following discussion will assist in the understanding our financial
position and results of operations. The information below should be read in
conjunction with the financial statements, the related notes to financial
statements, and our Form 10-K for the year ended December 31, 1999.
Our discussion contains both historical and forward-looking information. We
assess the risks and uncertainties about our business, long-term strategy,
and financial condition before we make any forward-looking statements, but we
cannot guarantee that our assessment is accurate or that our goals and
projections can or will be met. Statements concerning results of future
exploration, exploitation, development, and acquisition expenditures, as well
as revenue, expense, reserve levels, and the outcome of litigation, are
forward-looking statements. We make assumptions about commodity prices,
drilling results, production costs, administrative expenses, and interest
costs that we believe are reasonable based on currently available information
of known facts and trends.
This discussion is primarily an update to the Management's Discussion and
Analysis of Financial Condition and Results of Operations included in the
1999 Form 10-K which we recommend you read.
Our long-term strategy is to increase shareholder value by economically
increasing reserves, production, and cash flow on an annual basis. At the
same time, we believe it is important to maintain a strong balance sheet by
keeping our total debt at a manageable level. We will balance our capital
expenditures, financed primarily by operating cash flow and bank debt, among
exploration, development, and acquisitions.
Liquidity and Capital Resources
On September 30, 2000, our current assets exceeded our current liabilities by
$23.1 million. From December 31, 1999, to September 30, 2000, our current
assets increased by $16.9 million. The increase relates to an increase in
cash from the sale of certain South Texas properties during the third quarter
and an increase in accounts receivable because of increased production and
prices.
Cash flow from operations for the nine months ended September 30, 2000,
before changes in working capital increased by $25.3 million, or 166%,
compared to the prior year primarily because of increased oil and gas
revenues. Gas sales increased by $16.7 million, or 107%, and oil sales
increased by $12.1 million, or 99%. The increase in gas sales relates to
increased production ($8.9 million) and gas prices ($7.8 million) and the
increase in oil revenues relates primarily to higher oil prices.
During the first nine months of 2000, we incurred capital expenditures
totaling $36.6 million. The capital expenditures included drilling 10
successful exploration wells in the Gulf of Mexico and 5 successful wells in
Mississippi and 12 in South Texas. During the remainder of 2000, we will
continue to incur costs to build and install 2 platforms, complete 7 offshore
wells and drill approximately 14 additional wells. For the remainder of the
year, we forecast capital requirements of approximately $31.6 million for the
drilling and completion of these wells and for fourth quarter geological and
geophysical costs. We expect that our cash, cash flow from operations, and
available bank line of credit will be adequate to fund the capital budget for
the remainder of this year.
In July 2000, we sold certain non-operated producing properties located in
Nueces, Starr, and Victoria Counties, Texas, for approximately $17.1 million
effective as of May 1, 2000. We recorded a $12.5 million gain from the sale.
We will deploy the cash received from the sale of these properties to our
operated projects in the Gulf of Mexico and new property acquisitions.
Our current bank line of credit has a borrowing base of $35.0 million. The
bank reviews the borrowing base semi-annually and may increase or decrease
the borrowing base relative to a redetermined estimate of proved oil and gas
reserves. Our oil and gas properties are pledged as collateral for the
increased new line of credit. Additionally, we have agreed not to pay
dividends. In September 2000, the bank agreed to extend the final maturity
date from March 1, 2003, to March 1, 2004, and the availability date from
October 1, 2000, to October 1, 2001. We cannot borrow additional funds after
the availability date. In addition, on that date, the revolving credit loans
convert to term loans, which must be amortized in equal quarterly principal
payments through the final maturity date unless the agreement is amended. On
September 30, 2000, we had $7.6 million of unused borrowing base available on
the line of credit.
Phillips Petroleum Litigation - Louisiana Action
In 1977, Phillips Petroleum Company assigned its interest in South Pass 89,
offshore Louisiana, to OKC Limited Partnership, predecessor to Remington Oil
and Gas Corporation. The assignment was accomplished through a farmout
agreement in which Phillips retained a 33% net profits interest. Phillips
had obtained, through a predecessor corporation, the lease, which only
granted rights to oil and gas from production, from the Minerals Management
Service. Paragraph IV of the farmout states that Phillips' net profits shall
be "thirty-three percent (33%) of one-fourth (1/4) of eight-eighths (8/8)" of
production. Paragraph IV (a) states that Phillips "shall look exclusively to
the oil, gas, condensate, and other hydrocarbons, ... produced from the
subject lease for the satisfaction and realization of the net profits
interest." Subparagraph IV (d) (4) states the net profits account shall be
credited with "an amount equal to the proceeds of all judgments and claims
collected on account of its ownership of the subject lease." Subparagraph
IV (d) (5) states the net profits account shall be credited with "an amount
equal to all monies and things of value received by or inuring to the benefit
by virtue of its ownership interest in the subject lease" of Remington. The
interpretation of Paragraph IV and its subparagraphs has been the primary
subject of the current litigation between Phillips and us. Our claim, upheld
by the trial court, is that Phillips can look only to actual production for
satisfaction of the net profits interest according to the clear language of
Paragraph IV. It is our position that Subparagraphs IV (d) (4) and (5)
merely define types of production to be credited to the net profits account.
Phillips claims that Subparagraph IV (a) which limits Phillips interest to
oil and gas produced from the lease should be ignored and that Subparagraphs
IV (d) (4) and (5) should stand alone which they claim would entitle Phillips
to any amounts received by us regardless of whether they represent revenues
from or associated with production from the lease. We believe that if
Phillips, as drafter of the farmout agreement, intended Subparagraphs IV (d)
(4) and (5) to be so controlling, no reference to production would have been
necessary in the farmout.
The litigation involves three issues related to the interpretation of
Paragraph IV and its subparagraphs - the TETCO issue, the Pipeline Tariff
issue, and the Overriding Royalty issue detailed below.
TETCO - We entered into a gas purchase agreement with TETCO in 1982
dedicating our gas from South Pass 89 to TETCO for specified prices. In
1989, TETCO sued us in order to get a judicial blessing of their
termination of this high priced gas contract. In November of 1990, we
settled with TETCO and received $69.6 million to "settle all causes of
action, claims and controversies between them pertaining to the
Litigation." Furthermore, we agreed to a new contract price for gas
sold to TETCO in exchange for its agreement to drop its legal challenges
to the gas contract. TETCO also paid us an additional $5.4 million
(over and above the $69.6 million) for past production which we credited
to the net profits account. This payment has not been subject to any
litigation. In May of 1991, we allocated $5.8 million of the $69.6
million as production to the net profits account. Phillips claims the
remaining $63.8 million should have been credited to the net profits
account. After a three week trial in 1997, the Louisiana trial court
ruled that we should have credited $41.2 million to the net profits
account as proceeds from production and thus owed an additional $9.3
million plus interest to Phillips. As part of its ruling, the trial
court supported our claim that Phillips must only look to actual
production for its net profits interest and that the remaining $28.4
million of the TETCO payment was for settlement of Remington's
counterclaims against TETCO. Phillips appealed this ruling and on
January 5, 2000, the Court of Appeal, Fourth Circuit, State of
Louisiana, overturned the trial court and held that the full $69.6
million should be allocated to the net profits account based on
Phillips' contention that all proceeds of all judgments and claims must
be included regardless of whether they related to production or to the
lease. The Court of Appeal granted our motion for rehearing on this
matter, and oral argument is scheduled for November 15, 2000.
Pipeline Tariff - The farmout agreement allows transportation costs to
be charged to the net profits account. Initially, Marathon constructed
and operated the oil pipeline from the South Pass complex to Venice,
Louisiana, and charged us a tariff of $2.75 per barrel for
transportation. This tariff was charged to the net profits account with
no complaint from Phillips from inception of production in 1982 until
1989. In 1985, CKB Petroleum, Inc. purchased an interest in the
pipeline and entered into a 20-year transportation agreement with us for
$2.75 per barrel to transport all of our oil. All liabilities associated
with the pipeline interest were assumed by CKB Petroleum, Inc. and
Cloyce Box, individually. Before CKB Petroleum could purchase its
interest, Phillips was given the right to purchase the interest under a
preferential right clause of the pipeline operating agreement, but
declined to do so. In the litigation, Phillips claimed that we should
charge not what we paid to CKB Petroleum, Inc. for transportation but
only a lesser amount which Phillips claimed was our "actual cost" of
transportation. The trial court dismissed this claim. The appellate
court reversed the trial court and awarded Phillips $7.3 million plus
interest. In reaching its decision, the appellate court incorrectly
contended that we owned the pipeline. In fact, we did not purchase the
pipeline interest until December of 1998. The Court of Appeal granted
our motion for rehearing on this issue, and oral argument is scheduled
for November 15, 2000.
Overriding Royalty - Phillips claims that in months when no net profits
are achieved, its net profits interest reverts to an overriding
royalty. We claim that once net profits are achieved, Phillips' net
profits interest does not revert to an overriding royalty position until
cumulative net profits are depleted. The trial court ruled in Phillips
favor and awarded Phillips $1.6 million plus interest. We appealed this
issue, but the appellate court upheld the trial court's ruling. We
believe that both the trial court and the appellate court are wrong on
this issue, and we will continue to appeal on this issue.
The total judgment awarded by the trial court in 1998 including interest was
$18.0 million. We recorded an $18.0 million charge to income in the third
quarter of 1998 and continue to accrue interest on this liability each
quarter. The present total liability is $19.5 million. The appellate court
ruling of January 2000, if it stands, would change this liability to
approximately $56.3 million including interest through September 30, 2000.
The Court of Appeal has granted our motion for rehearing, and oral argument
is scheduled for November 15, 2000. Because we believe that it is probable
that the decision of the appellate court will not stand, we have not recorded
any additional contingent liability in our financial statements. Statement
of Financial Accounting Standards No. 5 entitled "Accounting for
Contingencies" requires that when a loss contingency exists, it be accrued if
it is reasonably estimable and it is probable that an unfavorable outcome
will occur. In reaching our conclusion, we rely on our legal counsel who
have informed us that in their opinion the appellate court incorrectly
applied the law and made erroneous findings of fact in reversing the trial
court's judgment. They have further advised us that in their opinion it is
as likely as not that the Court of Appeal's errors will be corrected on
rehearing or on appeal to the Louisiana Supreme Court.
No matter the outcome on rehearing, we believe that it is likely that either
one or both parties will appeal to the Louisiana Supreme Court. Such an
appeal to the Supreme Court will be due as early as 30 days after the Court
of Appeal rules. The Louisiana Supreme Court has 120 days to determine
whether it will review the case. If the Supreme Court determines that it will
take the case, it will, in all probability, be several months before the case
is heard and a decision rendered. Once the Supreme Court announces its
decision on the suit, various issues will be remanded to the trial court to
determine how much, if any, we owe as a result of the decision. Since the
issues are complex and involve interconnected transactions occurring as early
as 1977, it may take several months or longer to resolve and determine the
exact payment amount. When the litigation is concluded and the amount, if
any, of our liability is finally determined, we intend to use a combination
of cash, debt financing, and/or property sales to fulfill the amount of any
judgment. We believe that there will be sufficient time from a final
determination by the appellate court of last resort and the remand to the
trial court to allow us to make provision for any required payment. Final
resolution of this matter through the courts may take up to several years.
Currently, we have $9 million in restricted cash set aside for this
litigation. If the complete Court of Appeal opinion is upheld, the company
would owe Phillips an estimated additional $47.3 million over the amount of
restricted capital. Because of the uncertain nature of this contingent
liability, both as to amount and timing as discussed above, we do not intend
at this time to set aside any additional funds. This decision may be
reevaluated as circumstances change.
Phillips Petroleum Litigation - Collin County Texas Action
In August of 1998, we terminated the TETCO gas contract and received $49.8
million. Phillips has claimed that this full $49.8 million payment should be
credited to the net profits agreement. Litigation on this issue was
initiated in Collin County, Texas, and subsequently stayed pending the
resolution of all the appeals in Phillips Louisiana suit. If the trial court
opinion stating that Phillips can only look to production for its net profits
interest is upheld, we anticipate this case will be dismissed. If the
Louisiana Court of Appeal opinion is upheld, we will have to litigate whether
the entire amount of the buyout must be credited to the net profits interest.
Liability on this claim would be $16.4 million plus statutory interest until
the date of payment. The trial and appeals regarding this issue could take
at least an additional two years to resolve once the current Louisiana
litigation is concluded.
Mineral Management Service (MMS) Issues
MMS is the grantor of all leases in the federal waters offshore Louisiana.
When production is established, MMS collects a 16.67% royalty from all
hydrocarbons produced from the lease. After a routine audit of Remington's
royalty payments, MMS issued orders to pay additional royalty on three
separate claims regarding our South Pass 89 lease complex. The orders to pay
involved the TETCO issue, the Pipeline Tariff issue and the Exchange
Agreement issue as detailed below:
TETCO - MMS initially claimed that the full 1990 TETCO payment of $69.6
million should be subject to royalty of 16.67%. This is identical to
Phillips' demand that this $69.6 million payment should all have been
allocated to their net profits account as detailed above. After a
review of the facts, MMS concluded, as did the trial court in the
Phillips litigation, that $41.2 million of the $69.6 million should have
been allocated to production and thus royalty was due on that amount.
This claim was settled for $4.8 million in additional royalties.
Because of this agreement, we recorded a $3.2 million expense in the
first quarter net of Phillips' net profits interest.
In the settlement agreement, MMS agreed no royalty would be due on the
$49.8 million termination payment received from TETCO by us in July of
1998, as it was not from production. Phillips, in the Collin County,
Texas, action on the same matter, claims that this payment should be
allocated to the net profits agreement as detailed above.
Pipeline Tariff - MMS has claimed that since CKB Petroleum, Inc. was an
affiliated entity of the company, we could not charge MMS our actual
cost of $2.75 per barrel for transportation of their oil, but could only
charge the operator's actual operating charges to CKB Petroleum. We
documented to the MMS that $2.75 per barrel was the actual cost to us
and our public shareholders, that costs to CKB Petroleum were
significantly more than the operating charges from the pipeline
operator, and that the $2.75 per barrel was approved by FERC.
Exchange Agreement - MMS claimed underpayment of royalty since 1998 on
certain oil sold from South Pass 89 complex through exchange agreements.
This underpayment claim arises from a rule change by MMS in 1998. We
began crediting MMS with the value of the exchanges in May of 1999 as
set pursuant to their new rule. Phillips was paid net profits on these
exchange agreements.
We have agreed in principle with the MMS to settle these last two issues
concurrently for a total payment by Remington of $2.2 million. The settlement
is subject to final government approval. This $2.2 million is reflected as
an expense in the third quarter of 2000. A related reduction of approximately
$421,000 in the net profits expense partially offset this charge. Of the
$2.2 million, we have allocated approximately $1.4 million as applicable to
the exchange agreement issue and the remainder as applicable to the pipeline
tariff issue.
Results of Operations
We recorded net income for the first nine months of 2000 of $34.2 million, or
$1.60 per share before dilution and $1.53 per share after dilution, compared
to a loss for the first nine months of 1999 of $6.4 million or $0.30 per
share. For the three months ended September 30, 2000, we recorded net income
of $22.7 million, or $1.06 per share before dilution and $0.99 per share
after dilution, compared to a net income of $1.4 million or $0.06 per share
for the same period in 1999. The increase in net income results from an
increase in total gas production, an increase in the average price for both
oil and gas, a gain on the sale of certain South Texas properties, and a
reduction in dry hole cost. The following table reflects the increase or
decrease in oil and gas sales revenue due to the changes in prices and
volumes.
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ -----------------
2000 1999 2000 1999
-------- ------- ------- -------
(In thousands, except prices)
Oil production volume (Bbls) 311 290 924 908
Oil sales revenue $ 8,657 $ 5,132 $24,348 $12,228
Price per barrel $ 27.84 $ 17.70 $ 26.35 $ 13.47
Increase (decrease) in oil sales revenue due to:
Change in prices $ 2,941 $11,695
Change in production volume 584 425
------- -------
Total increase (decrease) in oil sales revenue $ 3,525 $12,120
======= =======
Gas production volume (Mcf) 3,192 2,882 9,522 6,903
Gas sales revenue $13,355 $ 7,089 $32,355 $15,615
Price per Mcf $ 4.18 $ 2.46 $ 3.40 $ 2.26
Increase in gas sales revenue due to:
Change in prices $ 4,957 $ 7,869
Change in production volume 1,309 8,871
------- -------
Total increase in gas sales revenue $ 6,266 $16,740
======= =======
Oil production increased slightly when compared to the same periods in 1999
because of increased production from Mississippi and Alabama partially offset
by lower oil production from the Gulf of Mexico. Oil production from
Mississippi and Alabama increased by 51,000 barrels, or 88%, during the third
quarter of 2000 and by 136,000 barrels, or 82% for the first nine months of
2000. The average oil price increased by 57% during the third quarter of 2000
compared to the prior year third quarter and by 96% for the first nine months
of 2000 compared to the same period in 1999.
Gas production increased by 11% during the third quarter of 2000 compared to
the third quarter of 1999 primarily from gas produced from the Gulf of
Mexico. Total gas production for the first nine months of 2000 increased by
38% primarily from the Gulf of Mexico and South Texas. Gas production from
the Gulf of Mexico increased by 237,000 Mcf, or 10%, during the third quarter
of 2000 and by 1.6 Bcf, or 28% for the first nine months of 2000. The average
gas price increased by 70% during the third quarter of 2000 compared to the
third quarter of 1999 and by 50% during the first nine months of 2000
compared to 1999.
Operating expenses increased during the three and nine months ended September
30, 2000, compared to the same period in 1999, primarily because of the
increased number of producing properties and a $1.3 million workover on West
Cameron block 170 charged to expense during the second quarter of 2000. Net
profits expense for the third quarter of 2000 decreased because of additional
charges for the portion of the MMS settlement allocated to South Pass block
89.
Exploration expense decreased by $459,000 during the third quarter of 2000
and by $4.4 million during the first nine months of 2000 primarily because of
lower dry hole costs in the current year. Depreciation, depletion, and
amortization expense decreased by $591,000 during the third quarter of 2000
and by $1.7 million during the first nine months of 2000 compared to the same
periods in the prior year primarily as a result of our lower finding costs
per unit during the last three years.
General and administrative expenses decreased during the third quarter by
$494,000 compared to the third quarter of 1999. During the first nine months
of 2000, general and administrative expenses decreased by $805,000 when
compared to the first nine months of 1999. The decrease primarily relates to
lower legal expense for both periods. During this year, we reached two
separate accords with the Minerals Management Service concerning the
underpayment of oil and gas royalties. The first agreement reached in May
2000, concerned additional royalties due on the settlement of a 1990 gas
sales contract. Because of this agreement, we recorded an expense of $3.2
million in the first quarter of 2000. As to the second accord, we reached an
agreement in principle in October 2000 to settle the issues concerning oil
transportation charges and oil exchange contracts for $2.2 million.
Interest and financing expense increased by $262,000 during the third quarter
of 2000, compared to the third quarter of 1999 reflecting the recent
increases in interest rates. During the first nine months of 2000, interest
and financing expense decreased slightly because we recorded additional
expense in 1999 when we accelerated the amortization of the offering costs on
the 81/4% Convertible Subordinated Notes after we purchased approximately 85%
of the outstanding notes in February 1999. Partially offsetting the decrease
is an increase in interest and financing expense due to higher interest
rates.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
Our market risk sensitive instrument at September 30, 2000, is a revolving
line of credit from a bank. At September 30, 2000, the unpaid principal
balance under the line was $27.4 million. The interest rate on this debt is
sensitive to market fluctuations, however, we do not believe that significant
fluctuations in the market rate of interest have a material effect on our
consolidated financial position, results of operations, or cash flow from
operations.
PART II, OTHER INFORMATION
Item 1. Legal Proceedings
Incorporated herein by reference is the discussion of litigation set forth in
Part I, Item 1, Notes to the Financial Statements - Note 2. Contingencies of
this Form 10-Q.
Item 2. Changes in Securities
None
Item 3. Defaults upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
2.0++ Agreement and Plan of Merger dated as of June 22, 1998, by and
between Remington Oil and Gas Corporation and S-Sixteen Holding Company.
3.1* Certificate of Incorporation, as amended.
3.2### Certificate of Amendment of Certificate of Incorporation of Box
Energy Corporation.
3.2.1++ Certificate of Amendment of Certificate of Incorporation of
Remington Oil and Gas Corporation.
3.3+++ By-Laws as amended.
4.1* Form of Indenture Box Energy Corporation to United States Trust
Company of New York, Trustee, dated December 1, 1992, 81/4% Convertible
Subordinated Notes due December 1, 2002.
10.1* Farmout Agreement with Aminoil USA, Inc., effective May 1, 1977,
dated May 9, 1977.
10.2* Transportation Agreement with CKB Petroleum, Inc. dated March 1,
1985, as amended on April 19, 1989.
10.3* Agreement of Compromise and Amendment to Farmout Agreement, dated
July 3, 1989.
10.4** Pension Plan of Box Energy Corporation, effective April 16, 1992.
10.5# First Amendment to the Pension Plan of Box Energy Corporation
dated December 16, 1993.
10.6## Second Amendment to the Pension Plan of Box Energy Corporation
dated December 31, 1994.
10.7*** Amended and Restated Promissory Note between Box Energy
Corporation and Box Brothers Holding Company.
10.8*** Amended and Restated Pledge Agreement between Box Energy
Corporation and Box Brothers Holding Company.
10.9*** Agreement by and between Box Energy Corporation and James A. Watt.
10.10### Box Energy Corporation Severance Plan.
10.11+ Box Energy Corporation 1997 Stock Option Plan (as amended June 17,
1999).
10.12### Box Energy Corporation Non-Employee Director Stock Purchase Plan
10.13~ Form of Employment Agreement effective September 30, 1999, by and
between Remington Oil and Gas Corporation and two executive officers.
10.14~ Form of Employment Agreement effective September 30, 1999, by and
between Remington Oil and Gas Corporation and an executive officer.
10.15~~ Employment Agreement effective January 31, 2000, by and between
Remington Oil and Gas Corporation and James A. Watt.
27.1 Financial Data Schedule.
(b) No Forms 8-K were filed during the quarter ended June 30, 2000.
- ------------
* Incorporated by reference to the Company's Registration Statement
on Form S-2 (file number 33-52156) filed with the Commission and effective on
December 1, 1992.
** Incorporated by reference to the Company's Form 10-K (file number
0-19967) for the fiscal year ended December 31, 1992, filed with the
Commission and effective on or about March 30, 1993.
# Incorporated by reference to the Company's Form 10-K (file number
0-19967) for the fiscal year ended December 31, 1993, filed with the
Commission and effective on or about March 30, 1994.
## Incorporated by reference to the Company's Form 10-K (file number
0-19967) for the fiscal year ended December 31, 1994, filed with the
Commission and effective on or about March 30, 1995.
+ Incorporated by reference to the Company's Form 10-Q (file number
1-11516) for the fiscal quarter ended June 30, 1999, filed with the
Commission and effective on or about August 13, 1999.
*** Incorporated by reference to the Company's Form 10-Q (file number
1-11516) for the fiscal quarter ended June 30, 1997, filed with the
Commission and effective on or about August 12, 1997.
### Incorporated by reference to the Company's Form 10-K (file number
1-11516) for the fiscal year ended December 31, 1997, filed with the
Commission and effective on or about March 30, 1998.
++ Incorporated by reference to the Company's Registration Statement
on Form S-4 (file number 333-61513) filed with the Commission and effective
on November 27, 1998.
+++ Incorporated by reference to the Company's Form 10-K (file number
1-11516) for the fiscal year ended December 31, 1998, filed with the
Commission and effective on or about March 30, 1999.
~ Incorporated by reference to the Company's Form 10-Q (file number
1-11516) for the fiscal quarter ended September 30, 1999, filed with the
Commission and effective on or about November 12, 1999.
~~ Incorporated by reference to the Company's Form 10-K (file number
1-11516) for the fiscal year ended December 31, 1999, filed with the
Commission and effective on or about March 30, 2000.
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.
REMINGTON OIL AND GAS CORPORATION
Date: November 10, 2000 By: /s/ James A. Watt
----------------- -------------------------------------
James A. Watt
President and Chief Executive Officer
Date: November 10, 2000 By: /s/ J. Burke Asher
----------------- -------------------------------------
J. Burke Asher
Vice President/Finance