UNITED STATES
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 quarterly period ended March 31, 1998
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 1-10537
NUEVO ENERGY COMPANY
---------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 76-0304436
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
1331 Lamar, Suite 1650, Houston, Texas 77010
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code 713/652-0706
Not Applicable
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 May 13, 1998, the number of outstanding shares of the Registrant's common
stock was 20,255,637.
NUEVO ENERGY COMPANY
INDEX
PAGE
NUMBER
------
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements
Condensed Consolidated Balance Sheets:
March 31, 1998 (Unaudited) and December 31, 1997
(Restated)................................................... 3
Condensed Consolidated Statements of Operations (Unaudited):
Three months ended March 31, 1998 and
March 31, 1997 (Restated).................................... 5
Condensed Consolidated Statements of Cash Flows (Unaudited):
Three months ended March 31, 1998 and
March 31, 1997 (Restated).................................... 6
Notes to Condensed Consolidated Financial Statements
(Unaudited)................................................... 8
ITEM 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations................... 13
PART II. OTHER INFORMATION..................................... 23
2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
NUEVO ENERGY COMPANY
CONDENSED CONSOLIDATED BALANCE SHEETS
(AMOUNTS IN THOUSANDS)
ASSETS
March 31, 1998 December 31, 1997
--------------- ------------------
(Unaudited) (Restated)
CURRENT ASSETS:
Cash and cash equivalents................. $ 4,145 $ 9,208
Accounts receivable....................... 29,071 38,196
Product inventory......................... 635 1,627
Prepaid expenses and other................ 8,021 9,829
---------- ----------
Total current assets.................... 41,872 58,860
---------- ----------
PROPERTY AND EQUIPMENT, AT COST:
Land...................................... 49,469 49,469
Buildings and improvements................ 4,050 5,469
Oil and gas properties (successful
efforts method)......................... 1,032,752 984,273
Pipeline and other facilities............. 4,366 4,304
Gas plant facilities...................... 16,508 15,500
---------- ----------
1,107,145 1,059,015
Accumulated depreciation, depletion and
amortization............................ (349,463) (324,904)
---------- ----------
757,682 734,111
---------- ----------
OTHER ASSETS............................... 11,099 11,315
---------- ----------
$ 810,653 $ 804,286
========== ==========
See accompanying notes to condensed consolidated financial statements.
3
NUEVO ENERGY COMPANY
CONDENSED CONSOLIDATED BALANCE SHEETS - Continued
(AMOUNTS IN THOUSANDS)
LIABILITIES AND STOCKHOLDERS' EQUITY
March 31, 1998 December 31, 1997
--------------- -----------------
(Unaudited) (Restated)
CURRENT LIABILITIES:
Accounts payable..................................................... $ 10,914 $ 17,759
Accrued interest..................................................... 7,482 4,285
Accrued liabilities.................................................. 28,726 23,843
Current maturities of long-term debt................................. 3,716 3,716
-------- --------
Total current liabilities......................................... 50,838 49,603
-------- --------
OTHER LONG-TERM LIABILITIES............................................ 3,494 4,018
LONG-TERM DEBT, NET OF CURRENT MATURITIES.............................. 322,982 305,940
DEFERRED TAXES......................................................... 54 4,986
COMPANY-OBLIGATED MANDATORILY
REDEEMABLE CONVERTIBLE PREFERRED
SECURITIES OF NUEVO FINANCING I........................................ 115,000 115,000
STOCKHOLDERS' EQUITY:
Common stock, $.01 par value, 50,000,000 shares
authorized, 20,243,637 and 20,237,537 shares issued
at March 31, 1998 and December 31, 1997, respectively.............. 202 202
Additional paid-in capital.......................................... 354,428 354,296
Treasury stock, at cost, 492,851
and 497,372 shares, at March 31, 1998
and December 31, 1997, respectively................................ (19,850) (19,929)
Stock held by benefit trust, 49,640
and 45,119 shares, at March 31, 1998
and December 31, 1997, respectively................................ (1,327) (1,244)
Accumulated deficit................................................. (15,168) (8,586)
-------- --------
Total stockholders' equity....................................... 318,285 324,739
-------- --------
$810,653 $804,286
======== ========
See accompanying notes to condensed consolidated financial statements.
4
NUEVO ENERGY COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
Three Months Ended March 31,
------------------------------
1998 1997
------------- --------------
(Restated)
REVENUES:
Oil and gas revenues........................................ $ 63,142 $ 90,137
Gas plant revenues.......................................... 828 8,824
Pipeline and other revenues................................. 1,514 1,497
Gain on sale................................................ 1,677 1,361
Interest and other income................................... 500 591
-------- --------
67,661 102,410
-------- --------
COSTS AND EXPENSES:
Lease operating expenses.................................... 33,036 30,759
Gas plant operating expenses................................ 738 7,871
Pipeline and other operating expenses....................... 1,266 1,326
Exploration costs........................................... 1,997 800
Depreciation, depletion and
amortization............................................... 24,782 21,361
General and administrative expenses......................... 5,937 4,140
Outsourcing fees............................................ 2,507 3,119
Interest expense............................................ 6,826 6,745
Dividends on Guaranteed Preferred
Beneficial Interests in Company's
Convertible Debentures (TECONS)............................ 1,653 1,615
Other expense............................................... 228 249
-------- --------
78,970 77,985
-------- --------
(Loss) income before income taxes and
minority interest........................................... (11,309) 24,425
(Benefit) provision for income taxes.......................... (4,727) 9,831
Minority interest............................................. --- (14)
-------- --------
NET (LOSS) INCOME............................................. $ (6,582) $ 14,608
======== ========
EARNINGS PER SHARE:
(Loss)earnings per common share - Basic....................... $ (0.33) $ .73
======== ========
Weighted average common shares outstanding.................... 19,745 20,085
======== ========
(Loss)earnings per common share - Diluted..................... $ (0.33) $ .70
======== ========
Weighted average common and dilutive
potential common shares outstanding.......................... 19,745 20,880
======== ========
See accompanying notes to condensed consolidated financial statements.
5
NUEVO ENERGY COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(AMOUNTS IN THOUSANDS)
Three Months Ended March 31,
----------------------------
1998 1997
--------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES: (Restated)
Net (loss) income............................................................ $ (6,582) $ 14,608
Adjustments to reconcile net (loss) income to
net cash provided by operating activities:..................................
Depreciation, depletion and amortization................................... 24,782 21,361
Gain on sale............................................................... (1,677) (1,361)
Dry hole costs............................................................. --- 573
Amortization of other costs................................................ 364 406
Deferred revenues.......................................................... (703) (950)
Deferred taxes............................................................. (4,907) 9,369
Minority interest.......................................................... --- (14)
Employee stock awards...................................................... --- 646
-------- --------
11,277 44,638
Change in assets and liabilities:
Accounts receivable......................................................... 9,125 (7,974)
Accounts payable and accrued liabilities.................................... 1,235 26,046
Other....................................................................... 2,802 549
-------- --------
NET CASH PROVIDED BY OPERATING ACTIVITIES...................................... 24,439 63,259
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to oil and gas properties.......................................... (48,739) (51,310)
Additions to gas plant facilities............................................ (1,008) (478)
Additions to pipeline and other facilities................................... (540) (249)
Proceeds from sales of properties............................................ 3,611 1,610
-------- --------
NET CASH USED IN INVESTING ACTIVITIES.......................................... (46,676) (50,427)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from borrowings..................................................... 18,000 ---
Payments of long-term debt................................................... (958) (23,128)
Proceeds from issuance of common stock....................................... 132 5,345
-------- --------
NET CASH PROVIDED BY/(USED IN) FINANCING
ACTIVITIES................................................................... 17,174 (17,783)
-------- --------
Net decrease in cash and cash equivalents.................................... (5,063) (4,951)
Cash and cash equivalents at beginning of
period...................................................................... 9,208 13,636
-------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD..................................... $ 4,145 $ 8,685
======== ========
6
NUEVO ENERGY COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS - Continued
(UNAUDITED)
(AMOUNTS IN THOUSANDS)
Three Months Ended March 31,
----------------------------
1998 1997
---------- ---------
(Restated)
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest (net of amounts capitalized) $3,318 $1,864
Income taxes $ 150 $ --
See accompanying notes to condensed consolidated financial statements.
7
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accompanying unaudited condensed consolidated financial statements have
been prepared in accordance with instructions to Form 10-Q and, therefore, do
not include all disclosures required by generally accepted accounting
principles. However, in the opinion of management, these statements include
all adjustments, which are of a normal recurring nature, necessary to present
fairly the financial position at March 31, 1998 and December 31, 1997 and the
results of operations and changes in cash flows for the periods ended March
31, 1998 and 1997. These financial statements should be read in conjunction
with the financial statements and notes to the financial statements in the
1997 Form 10-K of Nuevo Energy Company (the "Company") that was filed with
the Securities and Exchange Commission.
USE OF ESTIMATES
In order to prepare these financial statements in conformity with generally
accepted accounting principles, management of the Company has made a number
of estimates and assumptions relating to the reporting of assets and
liabilities, the disclosure of contingent assets and liabilities and reserve
information (which affects the depletion calculation). Actual results could
differ from those estimates.
CHANGE IN ACCOUNTING PRINCIPLE
Effective January 1, 1998, the Company elected to convert from the full cost
method to the successful efforts method of accounting for its investments in
oil and gas properties. The Company believes that the successful efforts
method of accounting is preferable, as it will provide a fair presentation of
the Company's development activities in its core California business and the
drilling success of its selective exploration activities, and reflect an
impairment in the carrying value of its oil and gas properties only when
there has been a permanent decline in their fair value. Accordingly, the
December 31, 1997 condensed consolidated balance sheet and the condensed
consolidated statements of operations and cash flows for the three months
ended March 31, 1997 have been restated to conform with successful efforts
accounting. The effect, after tax, was to reduce December 31, 1997 retained
earnings by $64.1 million. For the statement of operations for the three
months ended March 31, 1997, the effect of the accounting change was to
increase net income by $.9 million, or $.04 per common share--basic and
diluted. Had the Company not converted to the successful efforts method, the
results of operations for the three months ended March 31, 1998 would have
included a pre-tax full cost ceiling write down of approximately $250.0
million. The impact of this change in accounting method in 1998 is not
practicable to determine.
COMPREHENSIVE INCOME
The Company adopted Statement of Financial Accounting Standards No. 130,
"Reporting Comprehensive Income", effective January 1, 1998.
8
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
Comprehensive income includes net income and all changes in an enterprise's
other comprehensive income including, among other things, foreign currency
translation adjustments, and unrealized gains and losses on certain
investments in debt and equity securities. The implementation of this
statement had no impact on the Company as there are no differences between
comprehensive income (loss) and net income (loss) for the periods presented.
RECLASSIFICATIONS
Certain reclassifications of prior year amounts have been made to conform to
the current presentation.
2. PROPERTY AND EQUIPMENT
The Company utilizes the successful efforts method of accounting for its
investments in oil and gas properties. Under successful efforts, oil and gas
lease acquisition costs and intangible drilling costs associated with
exploration efforts that result in the discovery of proved reserves and costs
associated with development drilling, whether or not successful, are
capitalized when incurred. When a property is sold, ceases to produce or is
abandoned, a gain or loss is recognized.
Unproved leasehold costs are capitalized pending the results of exploration
efforts. Significant unproved leasehold costs are reviewed periodically and
a loss is recognized to the extent, if any, that the cost of the property has
been impaired. Exploration costs, including geological and geophysical
expenses, exploratory dry holes and delay rentals, are charged to expense as
incurred.
Costs of productive wells, developmental dry holes and productive leases are
capitalized and depleted on a unit-of-production basis over the life of the
remaining proved reserves. Capitalized drilling costs are depleted on a
unit-of-production basis over the life of the remaining proved developed
reserves. Estimated costs (net of salvage value) of site remediation are
computed by the Company's independent reserve engineers and are included when
calculating depreciation and depletion using the unit-of-production method.
The Company reviews proved oil and gas properties on a depletable unit basis
whenever events or circumstances indicate that the carrying value of those
assets may not be recoverable. 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 is recognized. Fair value, on
a depletable unit basis, is estimated to be the present value of expected
future net revenues computed by application of estimated future oil and gas
prices, production, and expenses, as determined by management, over the
economic life of the reserves. No such impairment was recognized during the
three months ended March 31, 1998 or 1997.
Interest costs associated with non-producing leases and exploration and major
development projects are capitalized until the related properties are
evaluated and are subject to depletion. The capitalization rates are
9
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
based on the Company's weighted average cost of funds used to finance
expenditures.
Environmental expenditures that relate to current or future revenues are
expensed or capitalized, as appropriate. Expenditures that relate to an
existing 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.
3. INDUSTRY SEGMENT INFORMATION
The Company's operations are concentrated primarily in two segments; the
exploration and production of oil and natural gas and gas plant, pipeline and
gas storage operations.
For the Three Months Ended
--------------------------
March 31, March 31,
1998 1997
-------- --------
Sales to unaffiliated customers: (Restated)
Oil and gas............................... $ 63,142 $ 90,137
Gas plant, pipelines and other(1)......... 2,342 10,321
-------- --------
Total sales................................ 65,484 100,458
Other revenues............................ 2,177 1,952
-------- --------
Total revenues............................. $ 67,661 $102,410
======== ========
Operating profit before income taxes:
Oil and gas............................... $ 5,544 $ 39,675
Gas plant, pipelines and other(1)......... (16) 197
-------- --------
5,528 39,872
Unallocated corporate expenses............. 8,358 7,087
Interest expense........................... 6,826 6,745
Dividends on TECONS........................ 1,653 1,615
-------- --------
(Loss) income before income taxes and
minority interest......................... $(11,309) $ 24,425
======== ========
Depreciation, depletion and amortization:
Oil and gas............................... $ 24,242 $ 20,264
Gas plant, pipelines and other(1)......... 354 927
-------- --------
$ 24,596 $ 21,191
======== ========
(1) The Company's non-core gas gathering, pipeline and gas storage assets were
reclassified to assets held for sale (other current assets) as of December
31, 1997, consistent with the Company's intention to dispose of these
assets during 1998. Until these assets are sold, the Company will continue
to record the associated revenues and expenses, but will no longer
depreciate these assets.
10
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
4. EMPLOYEE STOCK PURCHASE PLAN
Effective March 1, 1998, the Company adopted an Employee Stock Purchase Plan
(ESPP). The ESPP is a benefit plan that allows Nuevo employees to purchase
Nuevo common stock through payroll deductions at a purchase price equal to
85% of the fair market value of the common stock on the last day of the month
in which contributions are withheld. Fair market value is defined as the
closing price on the last day of the month on which shares were traded. The
Company's obligation under the ESPP is the remaining 15% of the purchase
price of shares purchased by employees. Participating employees may elect to
withdraw or sell shares of stock after the expiration of one year from the
purchase date.
5. CONTINGENCIES
The Company has been named as a defendant in the Gloria Garcia Lopez and
Husband, Hector S. Lopez, Individually, and as successors to Galo Land &
Cattle Company v. Mobil Producing Texas & New Mexico, et al. in the 79th
Judicial District Court of Brooks County, Texas. The plaintiffs allege: i)
underpayment of royalties and claim damages, on a gross basis, of $27.7
million plus $26.2 million in interest for the period from 1985 to date; ii)
that their production was improperly commingled with gas produced from an
adjoining lease, resulting in damages, including interest of $40.8 million
(gross); and iii) numerous other claims that may result in unspecified
damages. Nuevo's working interest in these properties is 20%. The Company,
along with the other defendants in this case, denies these allegations and is
vigorously contesting these claims. Management does not believe that the
final outcome of this matter will have a material adverse impact on the
Company's operating results, financial condition or liquidity.
The Company has been named as a defendant in certain other lawsuits
incidental to its business. Management does not believe that the outcome of
such litigation will have a material adverse impact on the Company's
operating results or financial condition. However, these actions and claims
in the aggregate seek substantial damages against the Company and are subject
to the inherent uncertainties in any litigation. The Company is defending
itself vigorously in all such matters.
In connection with their respective acquisitions of two subsidiaries owning
interests in the Yombo field offshore West Africa (each a "Congo
subsidiary"), the Company and a wholly-owned subsidiary of CMS NOMECO Oil &
Gas Co. ("CMS") agreed with the seller not to claim certain tax losses
incurred by such subsidiaries prior to the acquisitions. Pursuant to the
agreement, the Company and CMS may be liable to the seller for the recapture
of these tax losses utilized by the seller in years prior to the acquisitions
if certain triggering events occur. A triggering event will not occur,
however, if a subsequent purchaser enters into certain agreements specified
in the consolidated return regulations intended to ensure that such losses
will not be claimed. The Company's potential direct liability could be as
much as $50.0 million if a triggering event with respect to the Company
occurs, and the Company believes that CMS's
11
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
liability (for which the Company would be jointly liable with an
indemnification right against CMS) could be as much as $67.0 million. The
Company does not expect a triggering event to occur with respect to it or CMS
and does not believe the agreement will have a material adverse effect upon
the Company.
The Company's international investments involve risks typically associated
with investments in emerging markets such as an uncertain political,
economic, legal and tax environment and expropriation and nationalization of
assets. In addition, if a dispute arises in its foreign operations, the
Company may be subject to the exclusive jurisdiction of foreign courts or may
not be successful in subjecting foreign persons to the jurisdiction of the
United States. The Company attempts to conduct its business and financial
affairs so as to protect against political and economic risks applicable to
operations in the various countries where it operates, but there can be no
assurance that the Company will be successful in so protecting itself. A
portion of the Company's investment in the Republic of Congo in West Africa
("Congo") is insured through political risk insurance provided by the
Overseas Private Investment Corporation ("OPIC"). The Company is currently
investigating its options for political risk insurance in the Republic of
Ghana in West Africa ("Ghana").
6. SUBSEQUENT EVENTS
In April 1998, the Company acquired a third party's interest in the Yombo
field in the Congo for $7.8 million. Such acquisition increased the
Company's net working interest in the Congo from 43.75% to 50.0%.
Effective May 5, 1998, the borrowing base on the Company's credit facility
with a bank group led by NationsBank of Texas, N.A., was increased from
$330.0 million to $380.0 million.
12
NUEVO ENERGY COMPANY
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Forward Looking Statements
This document includes "forward looking statements" within the meaning of
Section 27A of the Securities Act of 1933, as amended (the "Securities Act"),
and Section 21E of the Securities Exchange Act of 1934 ("Exchange Act"). All
statements other than statements of historical facts included in this
document, including without limitation, statements under "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
regarding the Company's financial position, estimated quantities and net
present values of reserves, business strategy, plans and objectives of
management of the Company for future operations and covenant compliance, are
forward-looking statements. Although the Company believes that the
assumptions upon which such forward-looking statements are based are
reasonable, it can give no assurances that such assumptions will prove to
have been correct. Important factors that could cause actual results to
differ materially from the Company's expectations ("Cautionary Statements")
are disclosed below and elsewhere in this document. All subsequent written
and oral forward-looking statements attributable to the Company or persons
acting on its behalf are expressly qualified by the Cautionary Statements.
Capital Resources and Liquidity
Since the formation of the Company, management's strategy has been to
purchase and develop producing oil and gas properties, participate in gas
processing, gas gathering and pipeline investments and to participate
selectively in exploration activities. The Company's primary source of
capital has been operating cash flows, debt and bank financing, private and
public placements of equity, property divestitures and joint ventures with
industry participants. Net cash provided by operating activities was $24.4
million and $63.3 million for the three months ended March 31, 1998 and 1997,
respectively. The Company invested $50.7 million and $51.5 million in oil and
gas properties for the three months ended March 31, 1998 and 1997,
respectively. As of March 31, 1998, the Company also had unused commitments
under the revolving credit line of $170.0 million, subject to borrowing base
determination. Effective May 5, 1998, the borrowing base on the Company's
credit facility was increased from $330.0 million to $380.0 million. The
Company had unused commitments under the revolving credit line of $185.0
million as of May 5, 1998.
In February 1998, the Company sold its 48.5% interest in the Richfield Gas
Storage facility ("Richfield"). The Company's interest in Richfield was
reclassified to current assets as an asset held for sale as of December 31,
1997, at which time the Company recorded an impairment on this asset. No gain
or loss was recognized on this sale in 1998.
On May 6, 1998, the Company announced that it is considering the disposition
of certain of its East Texas natural gas properties. Proved reserves
associated with these properties totaled approximately 275.0 billion cubic
feet equivalent at January 1, 1998. While management believes that a sale of
these assets is likely to occur before the end of 1998, the final decision to
sell any assets will be subject to management's satisfaction with the
valuation received.
13
NUEVO ENERGY COMPANY
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
Also on May 6, 1998, the Company announced that it intends to offer for sale
$100.0 million of senior subordinated notes that will mature in 2008 through
a Rule 144A offering to qualified institutional buyers. Nuevo intends to use
the proceeds to reduce the outstanding balance under its revolving credit
facility. The notes offered will not be registered under the U.S. Securities
Act of 1933 and may not be offered or sold in the United States absent
registration or an applicable exemption from registration requirements.
Coinciding with the proposed offering will be a consent solicitation to amend
certain key terms of the Company's existing 9 1/2% Senior Subordinated Notes
due 2006 ("9 1/2% Notes"), in order to conform the 9 1/2% Notes to the terms
of the new offering, thereby restoring the Company's capacity to make certain
restricted payments.
The Company believes its cash flow from operations and available financing
sources are sufficient to meet its obligations as they become due and to
finance its exploration and development programs.
Capital Expenditures
The Company has identified substantial development and exploitation
opportunities for 1998, which it believes offer meaningful opportunities to
grow reserves and increase production. The Company anticipates spending an
additional $73.0 million on development activities during the remainder of
1998, primarily in California and the Congo.
The Company also has an active and growing exploration program targeting
high-potential reserve opportunities in the Republic of Ghana in West Africa
("Ghana"), California and the onshore Gulf Coast region. The Company
anticipates spending an additional $29.0 million during 1998 on exploration
projects.
Due to lower average realized oil prices in the first quarter of 1998, the
Company revised its capital spending plans for the remainder of the year.
Originally, the Company planned to spend $150.0 million on development
projects in 1998. The development budget was reduced to $112.0 million,
affecting those projects with projected rates of return expected to fall
below acceptable threshold levels assuming the continuation of current low
oil prices. Management believes that all of these development projects will
ultimately be undertaken once oil prices return to historic norms. In
addition, the exploration budget was reduced from $47.0 million to $39.0
million, representing plans to drill 20 exploratory wells instead of the 25
wells originally planned. The remaining five exploration projects will be
deferred until 1999.
14
NUEVO ENERGY COMPANY
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
Exploration and Development Activities
During the first three months of 1998, the Company drilled or participated in
approximately 53 wells. Following is a description of significant
exploration and development activity during the first three months of 1998.
Exploration Activity
The Company logged four exploratory wells in the first quarter of 1998. In
California, the Company drilled the Twisselman 6-14 in the Monument Junction
field. Additionally, at Cymric, the McKittrick Front 700 well was logged
through the Point of Rocks formation. Testing of the Point of Rocks will be
done in three stages prior to putting the entire section on production. Test
results should be available in the second quarter of 1998. At Four Isle Dome
in Louisiana, the Company logged two wells, the B-1 sidetrack well and the
B-2 well. Completion procedures on these wells are currently in progess, and
test results should be available in the second quarter of 1998.
Internationally, the Company completed its interpretation of new seismic data
at East Cape Three Points offshore Ghana. Additional seismic work will need
to be done, especially in the deepwater to evaluate all of the prospects.
The Company is currently participating in exploration activity in the
Monument Junction field in California, Carmichael Dome in Mississippi, and at
Four Isle Dome and Weeks Island in Louisiana.
Development Activity
During the first three months of 1998, the Company participated in several
oil and gas development projects. These projects include workovers,
recompletions, development drilling, secondary and tertiary recovery
operations and other production enhancement techniques to maximize current
production and the ultimate recovery of reserves. The Company has identified
in excess of 1,300 exploitation projects on its existing properties which it
believes offer meaningful opportunities to grow reserves and increase
production, irrespective of acquisition or exploration successes.
In California, the Company has continued successful development drilling at
Midway Sunset and Cymric. During the first three months of 1998, the Company
increased Midway Sunset production by 500 net barrels of oil per day and
Cymric production by 400 net barrels of oil per day, with the use of triple
completion technology. The Company's Hopkins area redevelopment efforts in
the Belridge field, which was an abandoned steamflood, is now producing over
900 net barrels of oil per day from a combination of both vertical and
horizontal producers. Also during the first quarter of 1998, the Company
drilled eight wells in the Monument Junction field, bringing current volumes
to over 3,600 net barrels of oil equivalent per day. The Company utilized
frac-pac technology for the third time in offshore
15
NUEVO ENERGY COMPANY
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
California at Santa Clara. This third completion is producing at a rate of
over 700 net barrels of oil per day.
In East Texas, the Company continued a two rig drilling program in the
Oakhill field that began in July 1996. Through the first quarter of 1998,
the Company drilled 38 wells with initial test rates averaging over 2.0 net
Mmcf of gas per day. Also in East Texas, the Company sold its interest in
the Coke field for $1.9 million, recognizing a gain of $1.7 million. At
Weeks Island, the Company completed the Provost Cyr #7 well in January 1998.
The well tested at rates of over 1,800 net barrels of oil per day and 1.0 net
Mmcf of gas per day from two horizons.
Financing Activities
Gas Balancing
It is customary in the industry for various working interest partners to sell
more or less than their entitled share of natural gas. The settlement or
disposition of gas balancing positions is not anticipated to adversely impact
the financial condition of the Company in the near term.
Derivative Financial Instruments
The Company utilizes derivative financial instruments to reduce its exposure
to changes in the market price of natural gas and crude oil. Commodity
derivatives utilized as hedges include futures and swap contracts, which are
used to hedge natural gas, and option contracts, which are used to hedge oil.
Natural gas basis swaps are sometimes used to hedge the basis differential
between the derivative financial instrument index price and the natural gas
field price. In order to qualify as a hedge, price movements in the
underlying commodity derivative must be highly correlated with the hedged
commodity. Settlement of gains and losses on price swap contracts are
realized monthly, generally based upon the difference between the contract
price and the average closing New York Mercantile Exchange ("NYMEX") price
and are reported as a component of oil and gas revenues and operating cash
flows in the period realized.
Gains and losses on option and futures contracts that qualify as a hedge of
firmly committed or anticipated purchases and sales of oil and gas
commodities are deferred on the balance sheet and recognized in income and
operating cash flows when the related hedged transaction occurs. Premiums
paid on option contracts are deferred in other assets and amortized into oil
and gas revenues over the terms of the respective option contracts. Gains or
losses attributable to the termination of a derivative financial instrument
are deferred on the balance sheet and recognized in revenue when the hedged
crude oil and natural gas is sold. There were no such deferred gains or
losses at March 31, 1998 or December 31, 1997. Gains or losses on derivative
financial instruments that do not qualify as a hedge are recognized in income
currently.
16
NUEVO ENERGY COMPANY
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
As a result of hedging transactions, oil and gas revenues were increased by
$0.1 million in the first quarter of 1998 and reduced by $1.8 million in the
first quarter of 1997.
17
NUEVO ENERGY COMPANY
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
Contingencies
The Company has been named as a defendant in the Gloria Garcia Lopez and
Husband, Hector S. Lopez, Individually, and as successors to Galo Land &
Cattle Company v. Mobil Producing Texas & New Mexico, et al. in the 79th
Judicial District Court of Brooks County, Texas. The plaintiffs allege: i)
underpayment of royalties and claim damages, on a gross basis, of $27.7
million plus $26.2 million in interest for the period from 1985 to date; ii)
that their production was improperly commingled with gas produced from an
adjoining lease, resulting in damages, including interest of $40.8 million
(gross); and iii) numerous other claims that may result in unspecified
damages. Nuevo's working interest in these properties is 20%. The Company,
along with the other defendants in this case, denies these allegations and is
vigorously contesting these claims. Management does not believe that the
final outcome of this matter will have a material adverse impact on the
Company's operating results, financial condition or liquidity.
The Company has been named as a defendant in certain other lawsuits
incidental to its business. Management does not believe that the outcome of
such litigation will have a material adverse impact on the Company's
operating results or financial condition. However, these actions and claims
in the aggregate seek substantial damages against the Company and are subject
to the inherent uncertainties in any litigation. The Company is defending
itself vigorously in all such matters.
In connection with their respective acquisitions of two subsidiaries owning
interests in the Yombo field offshore West Africa (each a "Congo
subsidiary"), the Company and a wholly-owned subsidiary of CMS NOMECO Oil &
Gas Co. ("CMS") agreed with the seller not to claim certain tax losses
incurred by such subsidiaries prior to the acquisitions. Pursuant to the
agreement, the Company and CMS may be liable to the seller for the recapture
of these tax losses utilized by the seller in years prior to the acquisitions
if certain triggering events occur. A triggering event will not occur,
however, if a subsequent purchaser enters into certain agreements specified
in the consolidated return regulations intended to ensure that such losses
will not be claimed. The Company's potential direct liability could be as
much as $50.0 million if a triggering event with respect to the Company
occurs, and the Company believes that CMS's liability (for which the Company
would be jointly liable with an indemnification right against CMS) could be
as much as $67.0 million. The Company does not expect a triggering event to
occur with respect to it or CMS and does not believe the agreement will have
a material adverse effect upon the Company.
The Company's international investments involve risks typically associated
with investments in emerging markets such as an uncertain political,
economic, legal and tax environment and expropriation and nationalization of
assets. In addition, if a dispute arises in its foreign operations, the
Company may be subject to the exclusive jurisdiction of foreign courts or may
not be successful in subjecting foreign persons to the jurisdiction of the
United States. The Company attempts to conduct its business and
18
NUEVO ENERGY COMPANY
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
financial affairs so as to protect against political and economic risks
applicable to operations in the various countries where it operates, but
there can be no assurance that the Company will be successful in so
protecting itself. A portion of the Company's investment in the Congo is
insured through political risk insurance provided by OPIC. The Company is
currently investigating its options for political risk insurance in Ghana.
Change in Accounting Principle
Effective January 1, 1998, the Company elected to convert from the full cost
method to the successful efforts method of accounting for its investments in
oil and gas properties. The Company believes that the successful efforts
method of accounting is preferable, as it will provide a fair presentation of
the Company's development activities in its core California business and the
drilling success of its selective exploration activities, and reflect an
impairment in the carrying value of its oil and gas properties only when
there has been a permanent decline in their fair value. Accordingly, the
December 31, 1997 condensed consolidated balance sheet and the condensed
consolidated statements of operations and cash flows for the three months
ended March 31, 1997 have been restated to conform with successful efforts
accounting. The effect, after tax, was to reduce December 31, 1997 retained
earnings by $64.1 million. For the statement of operations for the three
months ended March 31, 1997, the effect of the accounting change was to
increase net income by $.9 million, or $.04 per common share basic and
diluted. Had the Company not converted to the successful efforts method, the
results of operations for the three months ended March 31, 1998 would have
included a pre-tax full cost ceiling write down of approximately $250.0
million. The impact of this change in accounting method in 1998 is not
practicable to determine.
Recent Accounting Pronouncement
The Company adopted Statement of Financial Accounting Standards No. 130,
"Reporting Comprehensive Income", effective January 1, 1998. Comprehensive
income includes net income and all changes in an enterprise's other
comprehensive income including, among other things, foreign currency
translation adjustments, and unrealized gains and losses on certain
investments in debt and equity securities. The implementation of this
statement had no impact on the Company as there are no differences between
comprehensive income (loss) and net income (loss) for the periods presented.
Year 2000
The Company's technical services provider, Torch Energy Advisors Inc.
("Torch"), plans to upgrade all major financial and administrative
information systems to ensure that they are Year 2000 compliant and is
currently in the process of assessing the potential impact that the Year 2000
issue will have on the Company's operational information systems.
Information technology services are provided to the Company by Torch under an
administrative services agreement. Torch is approaching the Year 2000
project in three steps: 1) awareness and assessment, 2) conversion or
19
NUEVO ENERGY COMPANY
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
implementation and 3) validation and testing. Management does not believe
that costs incurred to address the Year 2000 issue with respect to its
financial and administrative systems will have a material impact on the
Company's future financial results or operations. However, at this time, the
Company is uncertain as to the impact that the Year 2000 issue will have on
its operational information systems and as to how the Company will be
indirectly affected by the impact that the Year 2000 issue will have on the
companies with which it conducts business.
20
NUEVO ENERGY COMPANY
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
Results of Operations (Three months ended March 31, 1998, and 1997)
The following table sets forth certain operating information of the Company
(inclusive of the effect of crude oil and natural gas price swaps) for the
periods presented:
Three Months
Ended March 31, %
--------------- Increase/
1998 1997 (Decrease)
------ ------ -----------
Production:
Oil and condensate (MBBLS)........... 4,528 4,148 9%
Natural gas (MMCF)................... 8,619 8,954 (4%)
Natural gas liquids (MBBLS).......... 45 63 (29%)
Average Sales Price:
Oil and condensate................... $10.02 $16.46 (39%)
Natural gas.......................... $ 1.97 $ 2.18 (10%)
Average unit production cost(1) per BOE... $ 5.50 $ 5.39 2%
(1) Costs incurred to operate and maintain wells and related equipment and
facilities, including ad valorem and severance taxes.
Revenues
Oil and gas revenues for the three months ended March 31, 1998 were $63.1
million, or 30% lower than oil and gas revenues of $90.1 million for the same
period in 1997. This decrease is primarily due to lower realized oil prices in
the first quarter of 1998, which were partially offset by increased production
in the first quarter of 1998.
Gas plant revenues of approximately $0.8 million and $8.8 million are reflected
in the three months ended March 31, 1998 and 1997, respectively. The 91%
decrease in gas plant revenues is due to the sale of the Company's interest in
the Benedum Plant System in May 1997.
Gain on sale for the three months ended March 31, 1998 was $1.7 million. Such
gain was recognized in connection with the sale of the Company's interest in the
Coke field in Chapel Hill, Texas. Gain on sale for the three months ended March
31, 1997 was $1.4 million, which relates to the sale of the Company's interest
in Second Bayou, Weeks Island, Louisiana.
Expenses
Lease operating expenses for the three months ended March 31, 1998 totaled $33.0
million, or 7% higher than $30.8 million for the three months ended March 31,
1997. Lease operating expenses per barrel of oil equivalent were $5.50 in the
first quarter of 1998, compared to $5.39 in the same period in 1997. Such
increases are primarily due to poor weather conditions in the first quarter of
1998 in California that caused landslides and power outages, which resulted in
$2.3 million of incremental, unusual costs and contributed to decreased
production.
21
NUEVO ENERGY COMPANY
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
Gas plant operating expenses were $0.7 million for the three months ended March
31, 1998 as compared to $7.9 million for the three months ended March 31,
1997.The 91% decrease in gas plant expenses in 1998 compared to 1997 is due to
the sale of the Company's interest in the Benedum Plant System in May 1997.
Exploration costs, including geological and geophysical ("G&G") costs, dry hole
costs and delay rentals, were $2.0 million and $.8 million for the three months
ended March 31, 1998 and 1997, respectively. Exploration costs for the three
months ended March 31, 1998 included $1.9 million of G&G related to activity in
Ghana. Exploration costs for the three months ended March 31, 1997 included $.6
million of dry hole costs, $.1 million of delay rentals and $.1 million of G&G.
Depreciation, depletion and amortization of $24.8 million for the three months
ended March 31, 1998 reflects a 16% increase from $21.4 million in the same
period in 1997, due primarily to increased production volumes.
General and administrative expenses, together with outsourcing fees, totaled
$8.4 million and $7.3 million in the three months ended March 31, 1998 and 1997,
respectively. The 15% increase is due primarily to non-recurring costs
associated with outside engineering conversion costs and consulting studies
associated with the upcoming renegotiation of the Company's outsourcing
agreements.
Net (Loss) Income
A net loss of $6.6 million, ($.33) per common share - basic and diluted, was
generated for the three months ended March 31, 1998, as compared to net income
of $14.6 million, $.73 per common share - basic and $.70 per common share -
diluted, in the same period in 1997.
22
NUEVO ENERGY COMPANY
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None.
ITEM 2. CHANGES IN SECURITIES
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At the annual meeting of the stockholders of the Company, held on
May 13, 1998, the following matters were voted on with the
following results:
(1) Robert W. Shower and Charles M. Elson were elected as Class
I directors with a total of 15,964,310 and 15,964,878 shares
voting in favor, respectively, and 70,206 and 69,638 shares
withheld authority, respectively. Douglas L. Foshee, Thomas
D. Barrow and Isaac Arnold, Jr. were elected as Class II
Directors with a total of 15,965,199 shares voting in favor
and 69,317 shares withheld authority. David Ross was elected
as a Class III director with a total of 15,965,199 shares
voting in favor and 69,317 shares withheld authority.
(2) The Stockholders approved a proposal to ratify the selection
of KPMG Peat Marwick LLP as the Company's independent
auditors for the year ending December 31, 1998, with a total
of 16,064,843 shares voting in favor, a total of 4,881
shares voting against and a total of 14,592 shares
abstaining.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a. Exhibits
Exhibit 27 - Financial Data Schedule
b. Reports on Form 8-K.
None
23
NUEVO ENERGY COMPANY
PART II. OTHER INFORMATION (CONTINUED)
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.
NUEVO ENERGY COMPANY
--------------------
(Registrant)
Date: May 15, 1998 By: /s/ Douglas L. Foshee
----------------------- ----------------------------
Douglas L. Foshee
President and Chief Executive
Officer
Date: May 15, 1998 By: /s/ Robert M. King
------------------------ ------------------------------
Robert M. King
Senior Vice President and
Chief Financial Officer
24